<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LINEO, INC.
(Name of issuer in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7371 87-0617792
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
390 SOUTH 400 WEST
LINDON, UTAH 84042
(801) 426-5001
(Address and telephone number of principal executive offices
and principal place of business)
BRYAN W. SPARKS
PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
390 SOUTH 400 WEST
LINDON, UTAH 84042
(801) 426-5001
(Name, address and telephone number of agent for service)
--------------------------
COPIES OF ALL COMMUNICATIONS TO BE SENT TO:
<TABLE>
<S> <C>
LAURA A. BERTIN, ESQ. LAURIE A. SMILEY, ESQ.
MICHAEL J. ERICKSON, ESQ. REED W. TOPHAM, ESQ.
MARK F. WORTHINGTON, ESQ. MARC S. MARCHIEL, ESQ.
Summit Law Group, PLLC Stoel Rives LLP
1505 Westlake Avenue North, Suite 300 600 University Street, Suite 3600
Seattle, Washington 98109 Seattle, Washington 98101
(206) 281-9881 (206) 624-0900
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
--------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING 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 computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act. Includes proceeds from
the sale of shares which the Underwriters have the option to purchase to
cover over-allotments, if any.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 18, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
Shares
[LOGO]
Common Stock
-----------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is expected to be
between $ and $ per share. We have applied to list our common
stock on The Nasdaq Stock Market's National Market under the symbol "LNEO."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotment of shares.
Investing in the common stock involves risks. See "Risk Factors" on page 8.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Lineo
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
Lehman Brothers
Dain Rauscher Wessels
Wit SoundView
The date of this prospectus is , 2000.
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 8
SPECIAL NOTE ABOUT FORWARD-LOOKING
STATEMENTS.......................... 18
USE OF PROCEEDS....................... 18
DIVIDEND POLICY....................... 18
CAPITALIZATION........................ 19
DILUTION.............................. 20
SELECTED ACTUAL AND PRO FORMA
FINANCIAL DATA...................... 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 23
BUSINESS.............................. 32
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
MANAGEMENT............................ 42
RELATED-PARTY TRANSACTIONS............ 49
PRINCIPAL STOCKHOLDERS................ 53
DESCRIPTION OF CAPITAL STOCK.......... 53
SHARES ELIGIBLE FOR FUTURE SALE....... 56
UNDERWRITING.......................... 58
NOTICE TO CANADIAN RESIDENTS.......... 60
LEGAL MATTERS......................... 61
EXPERTS............................... 61
WHERE TO FIND ADDITIONAL DOCUMENTS.... 61
INDEX TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS... P-1
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY BE ACCURATE ONLY
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION THAT WE PRESENT MORE FULLY
ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY.
UNLESS OTHERWISE STATED, INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF
THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
LINEO, INC.
We provide a broad range of embedded operating system products and services
through a combination of our experience with embedded operating systems,
expertise in Linux operating systems and involvement in the open source
community. Our embedded Linux technologies and services enable microprocessor
companies and original equipment manufacturers to quickly and cost-effectively
develop, optimize and integrate unique embedded systems that feature high
functionality, performance and reliability and ease of use. We also develop and
license complete customized embedded system solutions for our customers
according to their specifications. We sell our Linux products and services to
original equipment manufacturers such as Bast, Inc., CIS Technology, Inc.,
DaiShin Information & Communications Co. and MiTAC International Corp. To
further promote our technologies, we have also entered into strategic
relationships with microprocessor companies such as Hitachi, Ltd., Motorola
Computer Group and Samsung Electro-Mechanics Co., Ltd.
Rapid technological advancements have dramatically increased the number,
type and capabilities of products and systems that enable organizations and
individuals to collaborate, access information and conduct business more
effectively. This proliferation is largely fueled by innovations in
microprocessors, which are hidden, or embedded, in a variety of products and
systems. These advancements in microprocessor technology have created demand for
robust, reliable and powerful embedded operating systems to manage the
interaction between the various hardware and software components. Historically,
most companies seeking embedded operating systems have either used internal
resources to develop their own or have purchased proprietary operating systems
from third parties.
Open source operating systems have emerged as a compelling alternative to
internally developed and third-party proprietary operating systems. The term
open source applies to software that can be copied, modified and distributed
without any associated fee and few restrictions. Popular open source software is
continuously maintained and improved by worldwide communities of developers who
share information, code and suggestions, primarily over the Internet. Linux has
emerged as the leading open source operating system, enjoying acceptance by both
commercial and academic communities due to its high performance and stability,
low cost and broad developer support. Until recently, the growth in the use of
Linux operating systems has primarily been in the server and desktop computer
markets. Microprocessor companies are now promoting, and original equipment
manufacturers are now adopting, Linux in the embedded systems market. However,
many of these manufacturers have limited experience working with Linux, and may
lack developers with the specialized skills and relationships in the open source
community necessary to identify and take advantage of the many enhancements and
extensions to Linux that are continuously under development.
We design our embedded Linux operating systems to address the requirements
of the embedded products and systems market. Our offerings are designed to be
adaptable to performance, memory and storage capacity limitations, support a
broad range of hardware devices and allow for rapid development and deployment
of products.
Our products include Embedix Linux, Embedix Software Development Kit and
Embedix Browser. Embedix Linux, a combination of open source Linux and
internally developed technologies, is a powerful and reliable Linux operating
system that is designed specifically for embedded products and systems. We have
enhanced and extended open source Linux with new technologies and advancements
to enable embedded systems developers to adapt Linux to a wide range of highly
customized embedded products and systems. Embedix Software Development Kit,
expected to begin commercial shipment in
3
<PAGE>
June 2000, is a package of our proprietary software and open source development
tools designed to help systems developers accelerate the design, development,
error detection and correction, implementation and maintenance of their embedded
systems. Embedix Browser is our proprietary compact, Linux-based graphical Web
browser for embedded products and systems that interact with the Internet. In
addition, we provide comprehensive professional Embedix Services to our embedded
systems customers. These services include customized engineering, education and
technical support services.
Our objective is to become the leading provider of embedded operating system
products and services. We intend to enhance our technology leadership by
developing technologies internally and by acquiring proprietary technologies or
other companies. We are currently implementing this strategy and have recently
acquired six companies with technologies complementary to our own. We also
intend to continue developing strategic relationships with microprocessor
companies and original equipment manufacturers to promote our offerings and plan
our future product development. We plan to continue expanding sales efforts
internationally by growing our internal sales force and through additional
strategic acquisitions. We will also continue to enhance our operating system
solutions by incorporating additional software products of independent software
vendors.
We began operations as a part of Caldera, Inc. in July 1996. We were
incorporated as a separate entity in the State of Utah in August 1998 as Caldera
Thin Clients, Inc., changed our name to Lineo, Inc. in July 1999 and
reincorporated in the State of Delaware in January 2000. Our principal executive
offices are located at 390 South 400 West, Lindon, Utah 84042, and our telephone
number is (801) 426-5001. Our World Wide Web address is www.lineo.com.
Information on our Web site does not constitute a part of this prospectus.
--------------
LINEO-TM-, LINEO PARTNER CONNECT-TM-, the Lineo logo and EMBEDIX-TM- are our
trademarks. We will continue to pursue registration of these and other marks.
This prospectus also contains trademarks and trade names of other companies.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered...................... shares
Common stock to be outstanding after this
offering................................ shares
Use of proceeds........................... For general corporate purposes, including working
capital. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol.... LNEO
</TABLE>
The number of outstanding shares after this offering above is based on:
- 20,148,985 shares of our common stock outstanding on April 30, 2000;
- issuance of 1,333,333 shares of our common stock, 83,334 shares of our
Series C preferred stock and 1,430,482 shares of our Series D preferred
stock in connection with the acquisition of material businesses subsequent
to April 30, 2000; and
- automatic conversion of all Series A, Series B and Series C preferred
stock outstanding on April 30, 2000 and the Series C and Series D
preferred stock issued subsequent to April 30, 2000 into
16,763,813 shares of our common stock upon completion of this offering.
This number excludes the following:
- 4,583 shares issued subsequent to April 30, 2000 upon exercise of
outstanding stock options;
- 1,786,326 shares issuable upon exercise of stock options outstanding on
April 30, 2000 at a weighted average exercise price of $1.71 per share,
excluding 4,583 shares issued subsequent to April 30, 2000 upon exercise
of stock options, and 1,266,396 shares issuable upon exercise of stock
options granted subsequent to April 30, 2000 through May 15, 2000 at a
weighted average exercise price of $3.20 per share; and
- 1,277,373 shares reserved for future issuance under our stock option plan.
5
<PAGE>
SUMMARY ACTUAL AND PRO FORMA FINANCIAL DATA
The following financial data should be read in conjunction with "Selected
Actual and Pro Forma Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Unaudited Pro Forma
Condensed Consolidated Financial Statements and related Notes and our
Consolidated Financial Statements and related Notes included elsewhere in this
prospectus.
Our actual operating results for the six months ended April 30, 2000 include
the operating results of Zentropic Computing, LLC, which we acquired on
April 3, 2000, for the period from the acquisition date through April 30, 2000.
The unaudited pro forma statement of operations data for the fiscal year ended
October 31, 1999 and the six months ended April 30, 2000:
- give effect to our acquisitions of Zentropic, United System
Engineers, Inc., or USE, Fireplug Computers Inc., Inup S.A., Moreton Bay
Ventures Pty Ltd and RT-Control, Inc. as if they had occurred on
November 1, 1998; and
- reflect the amortization of goodwill and other intangibles related to the
acquisitions, as well as adjustments for acquired in-process research and
development in connection with the Zentropic acquisition and intercompany
transactions.
The unaudited pro forma balance sheet data as of April 30, 2000 give effect
to the acquisitions as if they occurred on April 30, 2000, except for Zentropic,
which is included in our historical April 30, 2000 balance sheet. The unaudited
pro forma balance sheet data:
- reflect the issuance of 1,333,333 shares of our common stock,
83,334 shares of our Series C preferred stock, 1,430,482 shares of our
Series D preferred stock and options to purchase 673,596 shares of our
common stock in connection with the acquisitions; and
- give effect to the automatic conversion of our Series A, Series B and
Series C preferred stock outstanding on April 30, 2000 and the Series C
and Series D preferred stock issued subsequent to April 30, 2000 into
16,763,813 shares of our common stock upon completion of this offering.
The pro forma as adjusted data as of April 30, 2000 give effect to the pro
forma adjustments, as well as to the receipt of the proceeds from this offering,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses.
The unaudited pro forma financial data are presented for illustrative
purposes only and are not necessarily indicative of the operating results or
financial position that would have resulted if these acquisitions had been in
effect during the periods presented or of future operating results.
6
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31,
PERIOD FROM --------------------------------------------
JULY 23, 1996 1999
(INCEPTION) TO ----------------------
OCTOBER 31, 1996 1997 1998 ACTUAL PRO FORMA
----------------- -------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenue....................... $ 62 $ 945 $ 1,376 $ 2,801 $ 4,640
Cost of revenue............... 67 247 361 185 1,380
Gross margin.................. (5) 698 1,015 2,616 3,260
Loss from operations.......... (49) (827) (2,005) (891) (9,731)
Net loss...................... (61) (877) (2,186) (1,054) (9,950)
Basic and diluted net loss per
common share................ $(0.00) $(0.05) $ (0.12) $ (0.06) $ (0.47)
Basic and diluted weighted
average common shares
outstanding................. 18,000 18,000 18,000 18,000 21,079
Basic and diluted supplemental
pro forma net loss per
common share................ $ (0.44)
Basic and diluted supplemental
pro forma weighted average
common shares outstanding... 22,592
<CAPTION>
SIX MONTHS ENDED APRIL 30,
---------------------------------------
1999 2000
----------- -------------------------
ACTUAL ACTUAL PRO FORMA
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenue....................... $ 806 $ 1,751 $ 2,814
Cost of revenue............... 37 84 838
Gross margin.................. 769 1,667 1,976
Loss from operations.......... (1,033) (4,287) (8,724)
Net loss...................... (1,076) (4,103) (8,515)
Basic and diluted net loss per
common share................ $ (0.06) $ (0.21) $ (0.38)
Basic and diluted weighted
average common shares
outstanding................. 18,000 19,660 22,478
Basic and diluted supplemental
pro forma net loss per
common share................ $ (0.30)
Basic and diluted supplemental
pro forma weighted average
common shares outstanding... 28,277
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, 2000
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
(IN
THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $30,464 $30,355 $
Working capital............................................. 31,284 30,407
Total assets................................................ 41,202 62,021
Long-term liabilities....................................... 115 936
Total stockholders' equity.................................. 39,511 57,514
</TABLE>
7
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. ANY OF THE
FOLLOWING RISKS COULD HARM OUR BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION AND COULD RESULT IN A COMPLETE LOSS OF YOUR INVESTMENT.
RISKS RELATED TO OUR OPERATIONS
OUR LIMITED OPERATING HISTORY AND THE RECENT FOCUS OF OUR BUSINESS STRATEGY ON
LINUX-BASED PRODUCTS MAY MAKE IT DIFFICULT FOR YOU TO EVALUATE AN INVESTMENT IN
OUR COMPANY.
We began operations as a separate entity in September 1998 and consequently
have only a limited operating history on which you can rely in evaluating an
investment in our company. Moreover, prior to January 1999, the focus of our
business was on our embedded disk operating system, or DR DOS. In January 1999,
we began focusing our strategy on developing embedded operating systems based on
Linux and other open source technologies and commercially released the first
version of our embedded Linux operating system in January 2000. Nonetheless, to
date, a significant portion of our revenue has been generated from sales of DR
DOS. We expect to generate substantially all of our future revenue from sales of
our Linux-based operating systems and related products and services. As a
result, we believe that our financial history to date is not indicative of our
future performance.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE
FORESEEABLE FUTURE.
We have incurred losses since our inception. At April 30, 2000, we had an
accumulated deficit of $10.2 million. We expect to continue to incur losses for
at least the next 15 months as we incur significant expenses in connection with
developing our products, hiring and training employees and building awareness of
our brand. If our revenue declines or grows at a slower rate than we anticipate,
or if our expenses exceed our expectations or cannot be adjusted to respond to
slower revenue growth, we may not be able to achieve or sustain profitability or
generate positive cash flow within our expected timeframe, if at all.
WE MAY NOT BE ABLE TO INTEGRATE OUR RECENT ACQUISITIONS SUCCESSFULLY, WHICH
COULD ADVERSELY IMPACT OUR OPERATING RESULTS.
Since March 2000, we have acquired six companies. We may not successfully
integrate the operations, technologies and personnel of these acquired
companies. Specifically, we may experience difficulty in integrating acquired
technologies with our Embedix products. Moreover, we may have difficulty
retaining key technical and managerial personnel from the acquired companies. In
addition, there may be a disruption in our business because of the allocation of
resources necessary to integrate these companies and the resulting diversion of
management's attention. Further, these acquisitions may have a negative impact
on our business and financial condition as we are required to assume their
ongoing expenses and liabilities.
IF WE ARE UNABLE TO IMPLEMENT APPROPRIATE SYSTEMS, PROCEDURES AND CONTROLS, WE
MAY NOT BE ABLE TO OFFER OUR SERVICES AND GROW OUR BUSINESS AS CURRENTLY
ANTICIPATED.
Our ability to offer our products and services and grow our business as
currently anticipated requires an effective planning and management process.
Since July 1999, we have significantly increased the size of our operations.
This growth has placed, and we expect that any future growth we experience will
continue to place, a significant strain on our management, systems and
resources. Our key personnel have limited experience managing this type of
growth. In addition, five of our ten executive officers have only recently
joined us, and they have limited experience working together as a team to date,
which may make it more difficult for them to manage our growth. To manage growth
effectively,
8
<PAGE>
we will need to continue to implement or update our operational and financial
systems, procedures and controls. Any failure to manage this growth could harm
our business.
WE EXPECT TO ENGAGE IN FUTURE ACQUISITIONS, WHICH COULD HARM OUR OPERATING
RESULTS, DILUTE OUR STOCKHOLDERS AND CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT
LIABILITIES.
In addition to our recent acquisitions, as part of our business strategy we
expect to continue to make investments in or acquire complementary companies,
products or technologies. If we acquire a company, we could have difficulty
integrating that company's technologies or products into our operations or
integrating and retaining its key personnel. These difficulties could disrupt
our ongoing business, distract our management and employees and increase our
expenses. Furthermore, we may issue equity securities to pay for any future
acquisitions, which could be dilutive to our existing stockholders. We may also
incur debt, assume contingent liabilities or incur charges associated with
amortization of goodwill and other assets in connection with future
acquisitions, which could harm our operating results.
OUR REVENUE MAY DECREASE IF WE LOSE ANY OF OUR SIGNIFICANT CUSTOMERS.
There are a limited number of original equipment manufacturers with a
significant share of the embedded system market. Because of their strong market
position, these original equipment manufacturers are typically able to secure
favorable terms, including favorable pricing, in their technology licensing and
service agreements. If we are not able to secure contracts on profitable terms
with these original equipment manufacturers, our operating results may suffer.
Moreover, the loss of any significant customer could cause our revenue to
decline. Historically, a relatively small number of customers have accounted for
a significant portion of our total revenue. In the fiscal year ended
October 31, 1999, our three largest customers accounted for 48% of our total
revenue, with Sun Microsystems, Inc. accounting for 23%, Brooktrout Inc.
accounting for 13% and Symbol Technologies, Inc. accounting for 12%. In the six
months ended April 30, 2000, our seven largest customers accounted for 77% of
our total revenue, with DaiShin accounting for 34%. We anticipate that sales of
our products and services to relatively few customers will continue to account
for a significant portion of our total revenue. We generally do not enter into
long-term purchase commitments with our significant customers. Therefore, these
customers could cease purchasing our products and services with limited notice
and with little or no penalty.
WE MAY EXPERIENCE QUARTERLY FLUCTUATIONS IN OUR REVENUE AND RESULTS OF
OPERATIONS, WHICH COULD RESULT IN VOLATILITY IN OUR STOCK PRICE.
Our quarterly revenue and results of operations may vary significantly in
the future due to a number of factors, many of which are outside of our control.
Factors that may affect our quarterly results include:
- the development, introduction, competitive pricing and market acceptance
of our products and services as well as those of our competitors;
- adverse changes in general economic conditions, such as recessions, that
could affect capital expenditures and recruiting efforts in the software
industry in general and specifically in the embedded operating systems
market;
- our ability to forecast revenue accurately, which is constrained by our
limited operating experience selling our embedded Linux-based products and
services;
- changes in the length of our sales cycle due to factors such as our
customers' budgetary constraints and changing product evaluation
processes;
9
<PAGE>
- our ability to integrate and retain the additional personnel, operations,
technologies and products of the six companies we recently acquired;
- acceptance of Linux as a viable embedded operating system alternative to
other competing operating systems;
- the development and maintenance of our strategic relationships with
microprocessor and original equipment manufacturers and independent
software vendors;
- the difficulties associated with attracting, retaining and training key
personnel; and
- our ability to manage our anticipated growth and expansion.
If our quarterly operating results fluctuate due to these or any other factors,
we may not meet the expectations of public market analysts or investors, and the
price of our common stock could decline.
RISKS RELATED TO LINUX AND OUR INTELLECTUAL PROPERTY
IF THE LINUX OPERATING SYSTEM DOES NOT CONTINUE TO GAIN MARKET ACCEPTANCE, WE
MAY NOT BE ABLE TO GENERATE REVENUE AND OUR BUSINESS COULD FAIL.
We expect that substantially all of our future revenue will be derived from
sales of Linux-based embedded operating systems and related products and
professional services. The Linux operating system has only recently begun to
gain broad market acceptance, and its use has been mostly limited to servers,
desktop computers, Internet infrastructure applications and scientific research
environments. Our success depends on the continued and increased rate of
adoption of Linux in these and other markets, and especially the market for
embedded operating systems, and the continued development of Linux-compatible
products, applications and utilities. If this does not occur, our business will
suffer. Moreover, if multiple incompatible versions of Linux are developed,
customers may become less likely to purchase Linux products, and our sales could
suffer.
OUR BUSINESS MODEL, WHICH RELIES ON A COMBINATION OF OPEN SOURCE SOFTWARE AND
PROPRIETARY TECHNOLOGIES, IS UNPROVEN.
Our business model relies on a combination of open source software,
proprietary technologies and commercial products. We know of no company that has
built a profitable business based on open source software. In addition, because
Linux is open source software, customers may be unwilling to pay royalties to
license our Linux-based products. By incorporating open source software in our
offerings, we cannot provide our customers with the same or similar warranties
on products and services that customers of proprietary systems may typically
receive. In addition, by developing products based on proprietary technology
that is not freely available, we may alienate the open source community. Because
we rely on our relationships within the open source community, negative reaction
to our use of the Linux operating system could harm our reputation, impair our
ability to capitalize on the development efforts of the open source community,
diminish our brand and harm our business.
OUR ABILITY TO INTRODUCE NEW PRODUCTS OR PRODUCT ENHANCEMENTS WOULD BE IMPAIRED
IF LINUX DEVELOPERS DO NOT CONTINUE TO ENHANCE THE SOURCE CODE OF LINUX AND
DEVELOP LINUX-BASED UTILITIES AND APPLICATIONS.
As open source software, the Linux source code is open to the public and can
be copied, modified and distributed without an associated fee. Our success
depends in part on the continued efforts of the open source development
community to enhance the source code of Linux and Linux-based utilities and
applications to make Linux compatible for use across multiple software and
hardware platforms. If Linus Torvalds, the initial developer of Linux, and other
third-party developers fail to further develop or improve the functionality of
Linux or to introduce new open source software or software
10
<PAGE>
enhancements, our ability to market our existing and future Linux products and
services would suffer. In this event, we may be forced to rely to a greater
extent on our own development efforts or the development efforts of third-party
consultants, which would significantly increase our costs.
WE COULD BE PREVENTED FROM SELLING OR DEVELOPING OUR PRODUCTS IF THE GNU GENERAL
PUBLIC LICENSE AND SIMILAR LICENSES ARE NOT ENFORCEABLE OR IF WE ARE DEEMED TO
BE IN VIOLATION OF THESE LICENSES.
The Linux-based components of our products have been developed and licensed
under the GNU General Public License and similar licenses. These licenses state
that any program licensed under them may be liberally copied, used, modified and
distributed freely, so long as all modifications are also freely made available
and licensed under the same conditions. We know of no instance in which a party
has challenged the validity of these licenses or in which these licenses have
been interpreted in a legal proceeding. To date, compliance with these licenses
has been voluntary. It is possible that a court would hold one or more of these
licenses to be unenforceable. Any ruling by a court that these licenses are not
enforceable, or that the Linux operating system may not be liberally copied,
modified or distributed freely, would have the effect of preventing us from
selling or developing our Linux products and services, unless we are able to
negotiate a license to use the software. Any licenses could be expensive, which
could impair our ability to price our offerings competitively.
Moreover, it is possible that a party may argue that the GNU General Public
License places restrictions on the types of fees that can be charged in
connection with the distribution and licensing of derivative Linux programs.
Because some of our products include both open source and proprietary
technologies, we charge our customers a fee to license our products from us.
These fees could be deemed to be a violation of the GNU General Public License,
which could result in the termination of this license. Without this license, we
could be subject to claims for infringement of copyrights and other intellectual
property rights covered by the GNU General Public License, which could subject
us to damages and impact our ability to market our existing and future
Linux-based products.
WE ARE VULNERABLE TO CLAIMS THAT OUR PRODUCTS INFRINGE THIRD-PARTY INTELLECTUAL
PROPERTY RIGHTS, PARTICULARLY BECAUSE OUR PRODUCTS ARE COMPRISED OF MANY
DISTINCT SOFTWARE COMPONENTS DEVELOPED BY A BROAD COMMUNITY OF INDEPENDENT
PARTIES.
We may be exposed to future litigation based on claims that our products
infringe the intellectual property rights of others. This risk is magnified by
the fact that a significant portion of the software code in our products is
developed by a community of independent parties over whom we exercise no
supervision or control and who might not have the same financial resources as us
to pay damages to a successful litigant. Claims of infringement could require us
to re-engineer our products or seek to obtain licenses from third parties in
order to continue offering our products. Moreover, we have agreed in many cases
to provide our customers with protection from third-party infringement claims.
An adverse legal decision affecting our intellectual property, or the use of
significant resources to defend against this type of claim, could place a
significant strain on our financial resources and harm our reputation.
FAILURE TO ADEQUATELY PROTECT INTELLECTUAL PROPERTY RIGHTS THAT ARE KEY TO OUR
BUSINESS COULD RESULT IN SIGNIFICANT HARM TO OUR OPERATING RESULTS.
Although our Embedix platform is based on open source Linux, many aspects of
our products include intellectual property that is proprietary to us. Our
success depends significantly on our ability to protect our trademarks, trade
secrets and the internally developed proprietary technologies contained in our
products. We rely on a combination of patent, copyright, trademark and trade
secret laws and on confidentiality and other contractual provisions to protect
our proprietary rights. These measures afford only limited protection. Effective
intellectual property protection may not be available in every country in which
we intend to offer our products and services. Our means of protecting our
proprietary rights
11
<PAGE>
and technologies in the United States or abroad may not be adequate, and
competitors may independently develop similar technologies or unauthorized
parties may copy aspects of our products or obtain and use trade secrets or
other information that we regard as proprietary. In addition, a third party
could attempt to interpret the GNU General Public License in a manner that could
put the protection of our intellectual property at risk because of the
interaction between our intellectual property and the intellectual property
covered by the GNU General Public License. Moreover, because we rely in part on
open source intellectual property, we may find it necessary to defend the open
source community from attempts by others to misappropriate, whether by patent,
copyright or otherwise, technology which belongs to the open source community.
Legal proceedings to enforce our intellectual property rights or the rights of
the open source community could be burdensome and expensive and involve a high
degree of uncertainty. These legal proceedings may also divert management's
attention from our core business. If we do not enforce and protect intellectual
property rights important to our business, our business may be harmed.
BECAUSE WE DO NOT OWN THE LINUX TRADEMARK, WE MAY BE PROHIBITED FROM USING IT IN
CONNECTION WITH OUR PRODUCTS, WHICH COULD DAMAGE OUR BRAND AWARENESS.
We use the term "Linux" in our advertising and marketing materials, in our
product documentation and for other commercial uses. Mr. Torvalds owns the Linux
trademark, however, and we do not have any ownership of, or contractual right to
use, this trademark. If the Linux trademark is invalidated through legal action,
or if we are otherwise prohibited from using it, our reputation and brand
awareness could suffer. Also, the use by others of the Linux trademark could
lead to confusion about the source, quality, reputation and dependability of
Linux in general, which could negatively affect the market for Linux products.
RISKS RELATED TO COMPETITION WITHIN OUR INDUSTRY
WE FACE INTENSE COMPETITION IN THE EMBEDDED OPERATING SYSTEMS MARKET, WHICH MAY
RESULT IN PRICE REDUCTIONS AND LOWER PROFIT MARGINS.
The market for embedded operating systems products and services is becoming
increasingly competitive. Failure to compete successfully with current or
potential competitors would harm our business. We face competition from:
- our current and potential customers' internal research and development
departments that may seek to develop their own proprietary embedded
operating systems;
- established companies that have developed proprietary embedded operating
systems, such as Mentor Graphics Corporation, Microsoft Corporation,
Microware Systems Corporation, Palm Computing, Inc., QNX Software
Systems Ltd., Sun Microsystems, Inc., Symbian, PLC and Wind River
Systems, Inc.;
- companies that have developed, or may in the future develop, Linux
embedded operating systems, such as Caldera Systems, Inc.,
Coollogic, Inc., Information Storage Devices, Inc., LynuxWorks, Inc.,
MontaVista Software, Inc., Red Hat Software, Inc., SuSE Inc. and
TurboLinux Inc.; and
- companies that have developed Web browsers, such as Microsoft, Netscape
Communications Corporation and Spyglass, Inc. (which recently announced
its merger with OpenTV, Inc.).
Many of these competitors are larger companies that have greater financial
resources, more established direct and indirect sales channels and greater name
recognition than we do. These companies also have larger and more established
service organizations to support these products and operating systems. These
companies may be able to leverage their existing organizations and provide a
wider offering of products and higher levels of support on a more cost-effective
basis than we can. In
12
<PAGE>
addition, these companies may be able to undertake more extensive promotional
activities, adopt more aggressive pricing policies and offer more attractive
terms to their customers than we can. Any pricing pressures or loss of potential
customers resulting from our failure to compete effectively would reduce our
revenue.
Furthermore, because Linux distributions can be downloaded from the Internet
for free or purchased at a nominal cost, modified and resold with few
restrictions, some traditional barriers to market entry are minimized.
Accordingly, it is possible that new competitors or alliances among existing
competitors may emerge and acquire significant market share. In addition, to the
extent that competing proprietary operating systems companies make their source
code available to the public, software developers will be able to customize
these systems and solutions more quickly and easily than if these technologies
remain proprietary, which could harm our ability to compete.
IF WE DO NOT INTRODUCE NEW OR UPDATED PRODUCTS AND SERVICES IN A TIMELY MANNER,
OUR OFFERINGS MAY BECOME OBSOLETE, AND OUR OPERATING RESULTS WILL SUFFER.
The embedded operating systems market is characterized by rapid
technological change, frequent new product enhancements, uncertain product life
cycles, changes in customer demands and evolving industry standards. Our
products could be rendered obsolete if products based on new technologies are
introduced or new industry standards emerge. Moreover, computing environments
are inherently complex, and, as a result, we cannot accurately estimate the life
cycles of our products. New products and product enhancements can require long
development and testing periods, which requires us to hire and retain
increasingly scarce, technically competent personnel. Significant delays in new
product releases or significant problems in installing or implementing new
products could seriously damage our business.
In addition, our future success depends upon our ability to enhance existing
products, develop and introduce new products, satisfy customer requirements and
achieve market acceptance. This process is made more challenging by the fact
that much of the software development for our products is done by the open
source community, and we must work with a large number of developers who are not
our employees in this process. We may not be able to successfully identify new
product opportunities and develop and bring new products to market in a timely
and cost-effective manner. Moreover, we may be required to license technologies
from third parties to remain competitive, which could increase our expenses and
harm our operating results.
OTHER RISKS RELATED TO OUR BUSINESS
WE FACE OPERATIONAL AND FINANCIAL RISKS AS WE MAINTAIN AND EXPAND OUR
INTERNATIONAL OPERATIONS, ANY OF WHICH COULD HARM OUR RESULTS OF OPERATIONS.
In the six months ended April 30, 2000, over 65% of our revenue was
generated from customers located outside the United States, principally in South
Korea and Taiwan. As we maintain and expand our international operations, we
face a number of challenges, including:
- difficulties in managing and administering a globally-dispersed business;
- fluctuations in exchange rates that may negatively affect our operating
results;
- difficulties in collecting accounts receivable resulting in longer
collection periods;
- compliance with a wide variety of foreign laws and regulatory environments
with which we have limited familiarity;
- protecting our trademarks and other intellectual property due to the
uncertainty of laws and enforcement in certain countries relating to the
protection of intellectual property rights;
13
<PAGE>
- seasonality in business activity in certain parts of the world, which
could negatively impact the operating results of our foreign operations;
- multiple and possibly overlapping tax structures, which could reduce the
financial performance of our foreign operations;
- changes in import and export duties and quotas, which could affect the
competitive pricing of our products and services and reduce our market
share in some countries; and
- economic or political instability in some international markets, including
political instability in South Korea and Taiwan, the threat of hostilities
in Taiwan and economic fluctuations in other Asian markets, which could
negatively affect our operating results, especially given the
concentration of our customers in this region.
THE LOSS OF KEY EMPLOYEES OR OUR INABILITY TO ATTRACT, TRAIN AND RETAIN OTHER
QUALIFIED PERSONNEL COULD HARM OUR BUSINESS.
Our products and technologies are complex, and we depend upon the continued
services of our existing software engineering personnel and executive
management, especially Bryan Sparks, our president, chief executive officer and
chairman of the board. Although we have employment agreements with Mr. Sparks
and a limited number of our key software engineering personnel, their employment
may nonetheless be terminated by them or us at any time. The loss of Mr. Sparks
or any of our key software engineering personnel, especially to a competitor,
could adversely affect our business, slow our product development and diminish
our brand identity. We depend on our ability to attract, train and retain
qualified personnel, specifically those with management, Linux and embedded
systems development skills. Competition for such personnel is intense,
particularly for qualified developers of Linux and embedded systems. We may not
be able to attract, train or retain additional qualified personnel in the
future, which could require us to use outside contractors, a more costly
alternative.
OUR PRODUCTS MAY CONTAIN DEFECTS THAT COULD BE COSTLY TO CORRECT, DELAY MARKET
ACCEPTANCE OF OUR PRODUCTS AND EXPOSE US TO LITIGATION.
Despite testing by us and our customers, errors may be found in our
products. A portion of the software code in our products is developed by
independent parties over whom we exercise no supervision or control. If errors
are discovered, we may have to make significant capital expenditures to
eliminate them and yet may not be able to correct them in a timely manner, if at
all. Errors and failures in our products could result in a loss of, or delay in,
market acceptance of our products and could damage our reputation. Failures in
our products could also cause system failures, including failures in critical
business systems, and our customers may assert common law warranty or other
claims for substantial damages against us. Our insurance policies may not
provide sufficient coverage to adequately limit our exposure to these types of
claims. These claims, even if unsuccessful, could be costly and time consuming
to defend.
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<PAGE>
WE MAY NOT BE ABLE TO RAISE SUFFICIENT FUNDS TO EXECUTE OUR BUSINESS STRATEGY.
We believe that the net proceeds from this offering, together with our
current cash and cash equivalents, will be sufficient to fund our current
working capital and capital expenditure requirements for at least the next
15 months. We may need to raise additional funds, however, to support more rapid
expansion, respond to competitive pressures, acquire complementary businesses or
technologies or respond to unanticipated developments. Additional funding may
not be available to us in amounts, or on terms, acceptable to us. If sufficient
funds are not available or are not available on acceptable terms, our ability to
fund our expansion, execute our strategy, take advantage of acquisition
opportunities, develop or enhance our services or products, or otherwise respond
to competitive pressures would be significantly limited.
RISKS RELATED TO THIS OFFERING
A SMALL NUMBER OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US AND THEIR
INTERESTS MAY CONFLICT WITH THOSE OF OUR OTHER STOCKHOLDERS.
Our executive officers, directors and principal stockholders holding more
than 5% of our common stock, consisting of 9 persons and the several entities
affiliated with these persons, together hold approximately 61.1% of our
outstanding common stock before this offering and will together hold % of
our outstanding common stock after completion of this offering. As a result,
these stockholders, if they act together, will be able to control our management
and affairs and all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions.
Moreover, of these stockholders, Mr. Yarro beneficially holds 46.7% of our
outstanding common stock, or % after this offering, and Mr. Noorda
beneficially holds 44.4% of our outstanding common stock, % after this
offering. The concentration of ownership among our existing stockholders may
have the effect of delaying or preventing a change in our control and might
reduce the market price of our common stock.
IT MIGHT BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.
Certain provisions of our certificate of incorporation and Delaware law may
discourage, delay or prevent a change in our control or a change in our
management even if doing so would be beneficial to our stockholders. Our board
of directors has the authority under our certificate of incorporation to issue
preferred stock without stockholder approval with rights superior to the rights
of the holders of common stock. As a result, preferred stock could be issued
quickly and easily with terms calculated to delay or prevent a change in control
of our company or make removal of our management more difficult. In addition, as
of the first annual meeting of stockholders following the closing of this
offering, our board of directors will be divided into three classes. The
directors in each class will serve for three-year terms, one class being elected
each year by our stockholders. This system of electing and removing directors
may tend to discourage a third party from making a tender offer or otherwise
attempting to obtain control of our company because it generally makes it more
difficult for stockholders to replace a majority of our directors.
AN ACTIVE TRADING MARKET MAY NOT DEVELOP FOR OUR SHARES, WHICH MAY HAVE A
NEGATIVE IMPACT ON THE PRICE OF OUR COMMON STOCK AND INHIBIT YOUR ABILITY TO
SELL YOUR SHARES AT A PROFIT OR AT ALL.
Prior to this offering, investors could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after the offering. The initial public offering price will be
determined by negotiations between us and the representatives of the
underwriters. The market price of our common stock may decline below the initial
public offering price after this offering.
15
<PAGE>
THE MARKET FOR OUR SHARES OF COMMON STOCK MAY EXPERIENCE EXTREME PRICE AND
VOLUME FLUCTUATIONS, WHICH COULD RESULT IN LEGAL CLAIMS AGAINST US.
The market price of our common stock may fluctuate significantly in response
to a number of factors, some of which are beyond our control, including:
- variations in quarterly operating results;
- changes in market valuations of technology companies, especially companies
focusing on embedded systems;
- our or our competitors' announcements of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- additions or departures of key personnel;
- active "day" trading in our stock;
- future issuances of our capital stock or the effect of the substantial
number of shares that will be eligible for sale in the public market in
the future; and
- changes in financial estimates by public market analysts.
In the past, securities class action litigation has often been brought against
companies following periods of volatility in the market price of their common
stock. In the future, we may be the target of similar litigation. Such claims,
even if unsuccessful, could result in substantial costs and divert management's
attention and resources.
OUR MANAGEMENT WILL HAVE BROAD DISCRETION IN THE USE OF THE PROCEEDS OF THIS
OFFERING, AND OUR FAILURE TO APPLY SUCH FUNDS EFFECTIVELY COULD HARM OUR
BUSINESS.
We have not designated any specific use for the net proceeds from this
offering. We intend to use the net proceeds primarily for general corporate
purposes, including working capital. In addition, we may use a portion of the
proceeds for potential acquisitions. Management will have significant
flexibility in applying the net proceeds of the offering. Our failure to apply
such funds effectively could harm our business.
THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE FUTURE
MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect the market price of the
common stock. As additional shares of our common stock become available for
resale in the public market, the supply of our common stock will increase, which
could decrease the price of our common stock. The number of shares of common
stock available for sale in the public market is limited by restrictions under
the federal securities laws and under agreements that some of our stockholders,
directors and employees have entered into with the
16
<PAGE>
underwriters. The following table shows the timing of when shares outstanding on
May 15, 2000 first become eligible for resale in the public market:
<TABLE>
<CAPTION>
NUMBER OF SHARES COMMENT
--------------------- ---------------------------------
<S> <C> <C>
- - upon effectiveness of this
prospectus..................... - Freely tradable shares sold in
this offering
- - 90 days after date of this
prospectus..................... 669,905 - Shares eligible for sale under
Rules 144 and 701 and not
previously registered on
Form S-8 or locked up
- - 181 days after date of this
prospectus..................... 18,000,000 - Freely tradable upon expiration
of lock-up agreements, subject to
the provisions of Rule 144
- - at various times thereafter
upon expiration of one-year
holding periods................ 19,580,809 - Freely tradable, subject to the
provisions of Rule 144
</TABLE>
17
<PAGE>
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "could," "expects,"
"plans," "intends," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology. These statements involve known and unknown risks, uncertainties and
factors, including those listed under "Risk Factors," that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot and do not guarantee future results, levels of activity,
performance or achievements.
This prospectus also contains citations to industry sources on which our
market projections are based. These projections are based in part on assumptions
about technological developments and preferences of microprocessor companies and
original equipment manufacturers, among other things, and are subject to change
due to a number of factors, including economic and market conditions,
technological advancements and changes in customer preferences. As a result, we
cannot assure you that these market projections will actually be realized.
USE OF PROCEEDS
We expect to receive approximately $ million in net proceeds from the
sale of shares of common stock in this offering, or $ if the
underwriters exercise their over-allotment option in full, based upon an assumed
initial public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses.
We expect to use the net proceeds from this offering for general corporate
purposes, including working capital. Pending such uses, we intend to invest the
net proceeds of this offering in investment grade, interest-bearing securities.
We may also use a portion of the net proceeds to acquire additional businesses,
products and technologies that we believe will complement our current or future
business. We have no specific agreements or commitments to do so, however, and
are not currently engaged in any negotiations with respect to any acquisition.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not anticipate paying any cash dividends in the
foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of April 30, 2000:
- on an actual basis;
- on a pro forma basis to reflect: (1) issuance of 1,333,333 shares of our
common stock, 83,334 shares of our Series C preferred stock, 1,430,482
shares of our Series D preferred stock and options to purchase 673,596
shares of our common stock in connection with the acquisition of material
businesses subsequent to April 30, 2000 and (2) automatic conversion of
all Series A, Series B and Series C preferred stock outstanding on
April 30, 2000 and the Series C and Series D preferred stock issued
subsequent to April 30, 2000 into 16,763,813 shares of our common stock
upon completion of this offering; and
- on a pro forma as adjusted basis to reflect the pro forma adjustments, as
well as the sale of shares of common stock in this offering at
an assumed initial public offering price of $ per share,
after deducting estimated underwriting discounts and commissions and
estimated offering expenses.
The capitalization information set forth in the table below is qualified by
and should be read in conjunction with our Consolidated Financial Statements and
related Notes, the Unaudited Pro Forma Condensed Consolidated Financial
Statements and related Notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
APRIL 30, 2000
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
(IN THOUSANDS)
Long-term debt, net of current maturities................... $ -- $ 821 $ 821
-------- ------- -------
Stockholders' equity:
Preferred stock, $0.001 par value: 30,000,000 shares
authorized (actual, pro forma and pro forma as
adjusted); 15,249,997 shares outstanding (actual); no
shares outstanding (pro forma and pro forma as
adjusted)............................................... 15 -- --
Common stock, $0.001 par value: 100,000,000 shares
authorized (actual, pro forma and pro forma as
adjusted); 20,148,985 shares outstanding (actual);
38,246,131 outstanding (pro forma); shares
outstanding (pro forma as adjusted)..................... 20 38
Additional paid-in capital................................ 52,612 72,673
Deferred compensation..................................... (2,911) (2,911)
Accumulated deficit....................................... (10,225) (12,286)
-------- ------- -------
Total stockholders' equity.............................. 39,511 57,514
-------- ------- -------
Total capitalization.................................. $ 39,511 $58,335 $
======== ======= =======
</TABLE>
The share information in this table does not include the following:
- 4,583 shares issued subsequent to April 30, 2000 upon exercise of
outstanding stock options;
- 1,786,326 shares issuable upon exercise of stock options outstanding on
April 30, 2000 at a weighted average price of $1.71 per share, excluding
4,583 shares issued subsequent to April 30, 2000 upon exercise of stock
options, and 1,266,396 shares issuable upon exercise of stock options
granted subsequent to April 30, 2000 through May 15, 2000 at a weighted
average price per share of $3.20 per share; and
- 1,277,373 shares reserved for future issuance under our stock option plan.
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<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share of
our common stock and the pro forma as adjusted net tangible book value per share
of our common stock after this offering. At April 30, 2000, our pro forma net
tangible book value was $32.6 million, or $0.85 per share of common stock. We
calculate pro forma net tangible book value per share by dividing the pro forma
net tangible book value, which equals total assets less intangible assets and
total liabilities, by the number of pro forma outstanding shares of common
stock.
After giving effect to the sale of the shares of common stock in this
offering at an assumed initial public offering price of $ per share, less
estimated underwriting discounts and commissions and estimated offering
expenses, our pro forma as adjusted net tangible book value at April 30, 2000
would have been $ million, or $ per share. This represents an
immediate increase in the pro forma as adjusted net tangible book value of
$ per share to existing stockholders and an immediate dilution of $
per share to new investors, or approximately % of the assumed offering price
of $ per share.
The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share......... $
Pro forma net tangible book value per share at April 30,
2000.................................................. $ 0.85
Increase per share attributable to new investors........
--------
Pro forma as adjusted net tangible book value per share
after this offering...................................
--------
Dilution per share to new investors..................... $
</TABLE>
The following table shows on a pro forma as adjusted basis at April 30,
2000, after giving effect to the conversion of all outstanding preferred stock
as of April 30, 2000 and shares of preferred stock issued subsequent to
April 30, 2000 into 16,763,813 shares of common stock upon completion of this
offering, the number of shares of common stock purchased from us, the aggregate
effective cash consideration paid to us and the average price paid per share by
existing stockholders and by new investors purchasing common stock in this
offering, before deducting estimated underwriting discounts and commissions and
estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................... 38,246,131 % $66,380,977 % $1.81
New investors............................ $
---------- ---- ----------- ----
Total.................................. 100% 100%
========== ==== =========== ====
</TABLE>
The above computations assume no exercise of options after April 30, 2000.
The number of shares outstanding at April 30, 2000 excludes 1,790,909 shares of
common stock issuable upon exercise of options outstanding as of April 30, 2000,
having a weighted average exercise price of $1.71 per share, and
1,266,396 shares issuable upon exercise of stock options granted subsequent to
April 30, 2000 through May 15, 2000 having a weighted average price of $3.20 per
share. To the extent the option holders exercise these outstanding options, or
any options we grant in the future, or the underwriters exercise their
over-allotment option, there will be further dilution to new investors. For a
more detailed discussion of our stock option plan and outstanding options to
purchase common stock, see Note 6 of Notes to our Consolidated Financial
Statements.
20
<PAGE>
SELECTED ACTUAL AND PRO FORMA FINANCIAL DATA
You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Unaudited Pro Forma Condensed Consolidated Financial Statements
and related Notes and our Consolidated Financial Statements and related Notes
included elsewhere in this prospectus. The statements of operations data for the
fiscal years ended October 31, 1997, 1998 and 1999 and the balance sheet data as
of October 31, 1998 and 1999 are derived from, and are qualified by reference
to, the audited Consolidated Financial Statements and related Notes included in
this prospectus. The statement of operations data for the period from July 23,
1996 (inception) to October 31, 1996 and the balance sheet data as of
October 31, 1996 and 1997 are derived from unaudited financial statements not
included in this prospectus. The statements of operations data for the six
months ended April 30, 1999 and 2000 and the balance sheet data as of April 30,
2000 are derived from unaudited financial statements included in this
prospectus.
Our actual operating results for the six months ended April 30, 2000 include
the operating results of Zentropic, which we acquired on April 3, 2000, for the
period from the acquisition date through April 30, 2000. The unaudited pro forma
statement of operations data for the fiscal year ended October 31, 1999 and the
six months ended April 30, 2000:
- give effect to our acquisitions of Zentropic, USE, Fireplug, Inup, Moreton
Bay and RT-Control as if they had occurred on November 1, 1998; and
- reflect the amortization of goodwill and other intangibles related to the
acquisitions, as well as adjustments for acquired in-process research and
development in connection with the Zentropic acquisition and intercompany
transactions.
The unaudited pro forma balance sheet data as of April 30, 2000 give effect
to the acquisitions as if they occurred on April 30, 2000, except for Zentropic,
which is included in our historical April 30, 2000 balance sheet. The unaudited
pro forma balance sheet data:
- reflect the issuance of 1,333,333 shares of our common stock,
83,334 shares of our Series C preferred stock, 1,430,482 shares of our
Series D preferred stock and options to purchase 673,596 shares of our
common stock in connection with the acquisitions; and
- give effect to the automatic conversion of our Series A, Series B and
Series C preferred stock outstanding on April 30, 2000 and the Series C
and Series D preferred stock issued subsequent to April 30, 2000 into
16,763,813 shares of our common stock upon completion of this offering.
The pro forma as adjusted data as of April 30, 2000 give effect to the pro
forma adjustments, as well as to the receipt of the proceeds from this offering,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses.
The unaudited pro forma financial data are presented for illustrative
purposes only and are not necessarily indicative of the operating results or
financial position that would have resulted if these acquisitions had been in
effect during the periods presented or of future operating results.
21
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
PERIOD FROM --------------------------------------------
JULY 23, 1996 1999
(INCEPTION) TO ----------------------
OCTOBER 31, 1996 1997 1998 ACTUAL PRO FORMA
----------------- -------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue......................... $ 62 $ 945 $ 1,376 $ 2,801 $ 4,640
Cost of revenue................. 67 247 361 185 1,380
------- ------- ------- ------- --------
Gross margin (deficit).......... (5) 698 1,015 2,616 3,260
------- ------- ------- ------- --------
Operating expenses:
Research and development...... -- 655 1,357 1,304 1,784
Sales and marketing........... 13 663 1,024 729 1,036
General and administrative.... 31 207 639 1,224 2,664
Non-cash stock-related
compensation*............... -- -- -- 250 382
Amortization of goodwill and
other intangibles........... -- -- -- -- 7,125
Acquired in-process research
and development............. -- -- -- -- --
------- ------- ------- ------- --------
Total operating expenses.... 44 1,525 3,020 3,507 12,991
------- ------- ------- ------- --------
Loss from operations............ (49) (827) (2,005) (891) (9,731)
Other income (expense), net..... (12) (50) (181) (163) (236)
------- ------- ------- ------- --------
Loss before income taxes........ (61) (877) (2,186) (1,054) (9,967)
Benefit for income taxes........ -- -- -- -- 17
------- ------- ------- ------- --------
Net loss........................ $ (61) $ (877) $(2,186) (1,054) $ (9,950)
======= ======= ======= ======= ========
Basic and diluted net loss per
common share.................. $ (0.00) $ (0.05) $ (0.12) $ (0.06) $ (0.47)
======= ======= ======= ======= ========
Basic and diluted weighted
average common shares
outstanding................... 18,000 18,000 18,000 18,000 21,079
======= ======= ======= ======= ========
Basic and diluted supplemental
pro forma net loss per common
share (unaudited)............. $ (0.44)
========
Basic and diluted supplemental
pro forma weighted average
common shares outstanding
(unaudited)................... 22,592
========
<CAPTION>
SIX MONTHS ENDED APRIL 30,
---------------------------------------
1999 2000
----------- -------------------------
ACTUAL ACTUAL PRO FORMA
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue......................... $ 806 $ 1,751 $ 2,814
Cost of revenue................. 37 84 838
------- ----------- -------
Gross margin (deficit).......... 769 1,667 1,976
------- ----------- -------
Operating expenses:
Research and development...... 786 1,736 1,968
Sales and marketing........... 321 1,098 1,419
General and administrative.... 695 1,108 2,288
Non-cash stock-related
compensation*............... -- 1,046 1,462
Amortization of goodwill and
other intangibles........... -- 166 3,563
Acquired in-process research
and development............. -- 800 --
------- ----------- -------
Total operating expenses.... 1,802 5,954 10,700
------- ----------- -------
Loss from operations............ (1,033) (4,287) (8,724)
Other income (expense), net..... (43) 45 19
------- ----------- -------
Loss before income taxes........ (1,076) (4,242) (8,705)
Benefit for income taxes........ -- 139 190
------- ----------- -------
Net loss........................ $(1,076) $ (4,103) $(8,515)
======= =========== =======
Basic and diluted net loss per
common share.................. $ (0.06) $ (0.21) $ (0.38)
======= =========== =======
Basic and diluted weighted
average common shares
outstanding................... 18,000 19,660 22,478
======= =========== =======
Basic and diluted supplemental
pro forma net loss per common
share (unaudited)............. $ (0.30)
=======
Basic and diluted supplemental
pro forma weighted average
common shares outstanding
(unaudited)................... 28,277
=======
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30, 2000
----------------------------------------------- -------------------------
1996 1997 1998 1999 ACTUAL PRO FORMA
----------- ----------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 5 $ 44 $ 117 $ 68 $ 30,464 $30,355
Working capital (deficit)........................... 31 (380) (1,354) (2,157) 31,284 30,407
Total assets........................................ 521 363 465 1,134 41,202 62,021
Long-term liabilities............................... -- -- -- -- 115 936
Total stockholders' equity (deficit)................ 364 (129) (1,184) (1,983) 39,511 57,514
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, 1999 APRIL 30, 2000
------------------------------- -------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
-------------- -------------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
(*) NON-CASH STOCK-RELATED COMPENSATION HAS BEEN EXCLUDED
FROM THE FOLLOWING EXPENSES:
Research and development.............................. $ 16 $ 60 $ 67 $ 156
Sales and marketing................................... 26 85 23 117
General and administrative............................ 208 237 956 1,189
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES AND THE PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES, INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. SEE "SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS" FOR MORE
INFORMATION ABOUT THESE STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS."
OVERVIEW
We provide a broad range of embedded operating system products and services
through a combination of our experience with embedded operating systems,
expertise in Linux operating systems and involvement in the open source
community. Our offerings enable microprocessor companies and original equipment
manufacturers to develop and optimize unique embedded systems and integrate
those systems into their products.
We began operations as part of Caldera, Inc. in July 1996 when Caldera
purchased assets relating to a disk operating system, known as DR DOS. Caldera
marketed DR DOS technology primarily as an embedded operating system for
microprocessors to be used in products and systems other than desktop personal
computers. In August 1998, we were incorporated as a separate entity, and in
September 1998, Caldera transferred to us licensing rights and assets relating
to the DR DOS and embedded system businesses. At the same time, Caldera
transferred certain assets not related to those businesses to a separate entity,
Caldera Systems.
Starting in January 1999, we began focusing our strategy on developing
embedded operating systems based on Linux. We commercially released the first
version of our embedded Linux operating system, Embedix Linux, in January 2000.
Since March 2000, we have acquired businesses with technologies that are
complementary to our own, including Zentropic, USE, Fireplug, Inup, Moreton Bay
and RT-Control. In connection with these acquisitions, we issued an aggregate of
3,078,559 shares of our common stock, 1,513,816 shares of our preferred stock
and paid an aggregate of $1.3 million, including direct expenses of
approximately $418,000. We also granted to employees of the acquired companies
options to purchase an aggregate of 673,596 shares of common stock at a weighted
average exercise price of $2.82 per share. With these acquisitions, we currently
have established development groups both domestically and in Australia, Canada,
France, Japan, Taiwan and the United Kingdom.
SOURCES OF REVENUE
Historically, we have generated revenue primarily from licenses of DR
DOS-based embedded operating systems. With the commercial release of the first
version of Embedix Linux in January 2000, we began generating revenue from
licenses of Linux-based products and the provision of related professional
services. Sales of our Linux-based products and services accounted for 69% of
total revenue in the six months ended April 30, 2000. We expect that the
majority of our future revenue will be derived from the licensing of our
embedded Linux operating system and related software products, in particular
Embedix Browser. A relatively small number of customers account for a
significant portion of our total revenue. Sales to our seven largest customers
accounted for approximately 77% of total revenue in the six months ended
April 30, 2000, with DaiShin accounting for approximately 34% of total revenue.
During that same period, no other customer accounted for more than 10% of total
revenue. Through fiscal 2001, we expect that revenue from our ten largest
customers will continue to account for a majority of our revenue.
We market and sell our operating system and related software products and
services both domestically and internationally. Revenue from sales to customers
outside the United States
23
<PAGE>
represented 68% of our total revenue in the six months ended April 30, 2000. To
date, all revenue transactions have been denominated in U.S. dollars. We expect
revenue from sales to customers outside the United States to remain a
significant percentage of our total revenue in the future.
We generate a majority of our revenue from licenses of our operating system
and related software products to original equipment manufacturers. We recognize
this revenue when an agreement has been executed, the product has been
delivered, no significant implementation obligations remain, the fee is fixed
and determinable and collection is probable. Through April 30, 2000, some of our
license agreements were bundled with maintenance and support services. Because
we had not established the necessary vendor specific objective evidence until
the second quarter of fiscal 2000, we could not recognize separately the service
revenue. Accordingly, revenue for these licenses was deferred and recognized
over the term of the support and maintenance services. As we have now
established this evidence, we intend to unbundle service revenue components on
our future contracts and to report separately service revenue in the future. We
had no material service revenue in the six months ended April 30, 2000.
We have recently begun to give our customers the option of entering into
separate service contracts for maintenance and support. We recognize revenue
from maintenance and support services over the term of the agreement. If
maintenance and support services offered in connection with a software license
agreement are provided for a period of one year or less, the estimated cost of
the services is insignificant and there is no commitment to provide upgrades or
enhancements, we recognize this service revenue upon our delivery of the
software and accrue the estimated costs of providing these services. If the
service period is greater than one year, or if upgrades or enhancements are
included, we defer the revenue and recognize it either over the period that the
services are to be provided or when no significant performance obligations
remain.
In addition, we have recently begun to enter into engineering and training
contracts with our customers. Under our engineering contracts, we offer custom
engineering services to customers purchasing our embedded operating system, or
we may develop and license a complete custom embedded software solution at a
customer's request. Under our training contracts, we offer instructor-led
training to provide developers access to information and resources to assist
with design and implementation. We recognize revenue from engineering and
training services as the services are performed.
RECENT ACQUISITIONS AND PRO FORMA RESULTS OF OPERATIONS
From April 3, 2000 to May 12, 2000, we acquired six businesses with
technologies that are complementary to our own. Each acquisition was accounted
for using purchase accounting.
On April 3, 2000, we acquired Zentropic for total consideration of
$6.7 million, consisting of 1,745,226 shares of our common stock, and including
$112,000 in costs directly associated with the acquisition. Zentropic provides
Linux software for industrial and other time-sensitive applications, that it
refers to as real-time technology. Zentropic is headquartered in Herndon,
Virginia and also has an engineering office located in the United Kingdom. For
the fiscal year ended October 31, 1999, Zentropic had revenue of approximately
$85,000 and an operating loss of approximately $752,000. For the period from
November 1, 1999 to April 2, 2000, Zentropic had revenue of approximately
$256,000 and an operating loss of approximately $390,000. As of April 3, 2000,
Zentropic had assets of approximately $276,000 and liabilities of approximately
$160,000. The value assigned to the in-process research and development acquired
in the Zentropic acquisition of $800,000 was determined by an independent
valuation which included, but was not limited to, an analysis of estimating the
costs to develop the purchased in-process research and development into
commercially viable products, the market for the developed products and
technologies, and discounting the resulting net cash flows related to these
projects and technologies. The valuation was based upon assumptions management
24
<PAGE>
believed to be reasonable at the time of the valuation. However, the underlying
assumptions used to estimate expected revenue, development costs or
profitability, or the events associated with such projects, may not transpire as
estimated. At the date of the acquisition of Zentropic, management estimated
that the acquired in-process research and development projects of Zentropic were
approximately 60% complete and that an additional $150,000 would be required to
develop these projects and technologies to commercial viability. At the date of
the acquisition, the acquired in-process research and development had not yet
reached technological feasibility and had no alternative future uses.
On May 1, 2000, we acquired all of the outstanding capital stock of USE, in
connection with which we paid approximately $373,000 in cash, including $50,000
in estimated costs directly associated with the acquisition. We also granted to
employees of USE options to purchase 682,335 shares of common stock at an
exercise price of $3.00 per share. USE is a custom systems engineering company
and is based in Shiojiri, Nagano, Japan. For the year ended December 31, 1999,
USE had revenue of $1.5 million and an operating loss of approximately $509,000.
For the six months ended March 31, 2000, USE had revenue of approximately
$764,000 and an operating loss of approximately $557,000. As of March 31, 2000,
USE had assets of $1.4 million and liabilities of $2.1 million.
On May 1, 2000, we acquired all of the outstanding capital stock of
Fireplug, in connection with which we issued 69,998 shares of our Series D
convertible preferred stock and paid approximately $581,000 in cash, including
$81,000 in estimated costs directly associated with the acquisition. We also
granted to employees of Fireplug options to purchase 62,220 shares of our common
stock at an exercise price of $1.50 per share. Fireplug develops embedded Linux
network systems and tools and is based in Vancouver, Canada. For the year ended
December 31, 1999, Fireplug had revenue of approximately $145,000 and an
operating loss of approximately $33,000. For the six months ended March 31,
2000, Fireplug had revenue of approximately $128,000 and an operating loss of
approximately $110,000. As of March 31, 2000, Fireplug had assets of
approximately $51,000 and liabilities of approximately $122,000.
On May 1, 2000, we acquired all of the outstanding capital stock of Inup, in
connection with which we issued 1,333,333 shares of our common stock and 83,334
shares of our Series C preferred stock and paid approximately $60,000 in cash,
including $50,000 in estimated costs directly associated with the acquisition.
Inup develops Linux-based software that compensates for hardware failures and is
based in Saint-Ouen, France. For the year ended December 31, 1999, Inup had
revenue of approximately $8,000 and an operating loss of approximately $125,000.
For the six months ended March 31, 2000, Inup had revenue of approximately
$8,000 and an operating loss of approximately $306,000. As of March 31, 2000,
Inup had assets of approximately $776,000 and liabilities of approximately
$139,000.
On May 10, 2000, we acquired all of the outstanding capital stock of Moreton
Bay, in connection with which we issued 956,315 shares of our Series D preferred
stock and paid approximately $60,000 in cash, including $50,000 in estimated
costs directly associated with the acquisition. We also granted to employees of
Moreton Bay options to purchase 209,474 shares of our common stock at an
exercise price of $3.00 per share. Moreton Bay develops embedded virtual private
network solutions for Internet appliances and provides engineering development
services for the Motorola ColdFire microprocessor platform. Moreton Bay is based
in Brisbane, Australia and has a sales and service office in San Jose,
California. Prior to the acquisition, Moreton Bay transferred the assets,
liabilities and operations of one of its unrelated product lines to a separate
legal entity. For the year ended October 31, 1999, the acquired operations of
Moreton Bay had no revenue and an operating loss of approximately $200,000. For
the six months ended April 30, 2000, the acquired operations of Moreton Bay had
revenue of approximately $27,000 and an operating loss of approximately
$230,000. As of April 30, 2000, Morton Bay had assets of approximately $609,000
and liabilities of approximately $151,000.
On May 12, 2000, we acquired all of the outstanding capital stock of
RT-Control, in connection with which we issued 404,169 shares of our Series D
preferred stock and paid approximately $90,000 in
25
<PAGE>
cash, including $75,000 in estimated costs directly associated with the
acquisition. We also granted to employees of RT-Control options to purchase
16,667 shares of our common stock at an exercise price of $1.50 per share.
RT-Control was the principal developer of the mcLinux version of Linux for
microcontrollers and is based in Toronto, Canada. For the period from its
inception (June 30, 1999) to December 31, 1999, RT-Control had revenue of
approximately $67,000 and an operating loss of approximately $96,000. For the
six months ended March 31, 2000, RT-Control had revenue of approximately $79,000
and an operating loss of approximately $246,000. As of March 31, 2000,
RT-Control had assets of approximately $130,000 and liabilities of approximately
$206,000.
The unaudited pro forma condensed consolidated statements of operations for
the fiscal year ended October 31, 1999 and for the six months ended April 30,
2000 are included elsewhere in this prospectus and reflect our acquisitions of
Zentropic, USE, Fireplug, Inup, Moreton Bay, and RT-Control as if these
transactions had occurred on November 1, 1998. Pro forma revenues were
$4.6 million in the fiscal year ended October 31, 1999 and $2.8 million in the
six months ended April 30, 2000. Pro forma losses from operations were
$9.7 million in the fiscal year ended October 31, 1999 and $8.7 million in the
six months ended April 30, 2000. The pro forma statements of operations reflect
the amortization of goodwill and other intangibles related to the acquisitions
and adjustments for acquired in-process research and development as part of the
Zentropic acquisition and intercompany transactions. Pro forma amortization of
goodwill and other intangibles was $7.1 million in the fiscal year ended
October 31, 1999 and $3.6 million in the six months ended April 30, 2000.
Acquired in-process research and development expense in connection with the
Zentropic acquisition on April 3, 2000 was $800,000 in the six months ended
April 30, 2000, and is not included in the pro forma results of operations for
that period. Intercompany revenue, net of the cost of that revenue, between
Zentropic and us prior to the acquisition was approximately $118,000 in the six
months ended April 30, 2000, and is not included in the pro forma results of
operations for that period.
HISTORICAL RESULTS OF OPERATIONS
We have included a discussion of our results of operations for the fiscal
years ended October 31, 1997, 1998 and 1999 and the six months ended April 30,
1999 and 2000. As a result of focusing our strategy on Linux-based embedded
systems starting in January 1999, commercially releasing the first version of
Embedix Linux in January 2000 and our six recent acquisitions, we believe that
period-to-period comparisons of our historical results are not indicative of our
future performance.
COMPARISON OF THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000
REVENUE AND COST OF REVENUE
REVENUE. Revenue increased 117% from approximately $806,000 in the six
months ended April 30, 1999 to $1.8 million in the six months ended April 30,
2000. This increase was due to additional licensing revenue from the sale of our
Linux-based operating system and related software products. We began selling
Linux-based products and services in the six months ended April 30, 2000, and
those sales accounted for 69% of total revenue in that period. We believe that
sales of our Linux-based operating system and related software products and
services will represent an increasing portion of our total revenue.
COST OF REVENUE. Cost of revenue consists of our costs of production,
fulfillment and shipment of our operating system software products, as well as
salaries, benefits and related expenses of systems engineers. Also included in
cost of revenue are any royalties paid to third parties for inclusion of their
software products in our product offerings. Cost of revenue was approximately
$37,000 in the six months ended April 30, 1999 and approximately $84,000 in the
six months ended April 30, 2000. This increase was due to additional costs
associated with an increase in the number of customer support personnel together
with increased costs of production, fulfillment and shipping. As we begin to
report
26
<PAGE>
service revenue separately, we will report the costs associated with those
services separately as well. As our service offerings increase in the future, we
expect total cost of revenue as a percentage of total revenue to increase.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses consist of
payroll and related expenses for software engineers, technical writers and
quality assurance and management personnel and the costs of materials used by
these employees in the development of new or enhanced product offerings. We
expense all of our research and development costs as they are incurred. Research
and development expenses were approximately $786,000 in the six months ended
April 30, 1999 and $1.7 million in the six months ended April 30, 2000. This
increase was due to our hiring of additional research and development personnel
in connection with the development of our Linux-based products and services. We
believe that a significant level of investment in Linux-based product
development and other research and development initiatives will be required as
we integrate and complete the development of the technologies we recently
acquired. Accordingly, we expect research and development expenses to continue
to increase in absolute dollars.
SALES AND MARKETING. Sales and marketing expenses consist of salaries,
commissions and related expenses for personnel engaged in marketing, sales and
sales support functions, as well as costs associated with trade shows,
advertising and promotional activities. Sales and marketing expenses were
approximately $321,000 in the six months ended April 30, 1999 and $1.1 million
in the six months ended April 30, 2000. This increase was due to our hiring of
additional sales and marketing personnel and increased expenses incurred in
connection with our branding efforts following the commercial release of our
Embedix Linux product in January 2000. We intend to continue to expand our sales
and marketing activities, both domestically and internationally, to increase
market awareness and sales of our products and services. Accordingly, we expect
our sales and marketing expenses to continue to increase in absolute dollars.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
professional fees, salaries and related costs for accounting, administrative,
finance, human resources, information systems and legal personnel, as well as
expenses associated with implementing and expanding our internal information and
management reporting systems. General and administrative expenses were
approximately $695,000 in the six months ended April 30, 1999 and $1.1 million
in the six months ended April 30, 2000. This increase was due to our hiring of
additional general and administrative personnel and additional expenses
associated with improving our corporate infrastructure. We expect general and
administrative expenses to continue to increase in absolute dollars as we add
administrative personnel to support our business expansion.
NON-CASH STOCK-RELATED COMPENSATION. Non-cash stock-related compensation
reflects the amortized portion of the difference between the deemed fair market
value of the common stock for accounting purposes and the sales price or
exercise price of the stock or stock options as of the date of sale or grant.
Deferred compensation is presented as a reduction of stockholders' equity and is
amortized over the vesting period of the applicable options. In connection with
stock option grants, we recorded deferred compensation of $3.0 million in the
six months ended April 30, 2000. We amortized approximately $157,000 of deferred
compensation in the six months ended April 30, 2000 and recorded $825,000 of
compensation expense related to the sale of our common stock to our officers.
There were no non-cash stock-related compensation amounts in the six months
ended April 30, 1999. Based on option grant activity through May 15, 2000, we
expect to expense $1.1 million of deferred compensation in the remainder of
fiscal 2000, $1.8 million in fiscal 2001, approximately $886,000 in fiscal 2002,
approximately $434,000 in fiscal 2003 and approximately $108,000 in fiscal 2004.
27
<PAGE>
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles occurs when the purchase price of an acquired company
exceeds the net assets and any in-process research and development costs. Our
acquisition of Zentropic on April 3, 2000 resulted in $6.0 million of goodwill
and other intangibles, which is being amortized over the expected lives of the
assets, ranging from two to five years. We recorded amortization expense of
approximately $166,000 for the six months ended April 30, 2000.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Acquired in-process research
and development expense relates to the portion of the purchase price of an
acquired company that is attributable to in-process technology that has not
reached the requirements of technological feasibility at the closing date. In
connection with our acquisition of Zentropic on April 3, 2000 we expensed
$800,000 of acquired in-process research and development in the six months ended
April 30, 2000.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income from our
cash investments offset by interest expense on borrowings. Other expense, net
was approximately $43,000 in the six months ended April 30, 1999, and other
income, net was approximately $45,000 in the six months ended April 30, 2000.
The net increase was due to an increase in interest income of approximately
$91,000 as a result of increased cash balances, offset by an increase in
interest expense of approximately $9,000. On April 30, 2000, we repaid all
outstanding principal and interest due under a borrowing arrangement with one of
our principal stockholders, The Canopy Group. This repayment resulted in a
decreased borrowing level in the six months ended April 30, 2000 compared to the
same period in 1999.
INCOME TAX BENEFIT
In connection with the acquisition of Zentropic, we recorded a deferred
income tax liability of approximately $717,000 related to acquired intangible
assets that are not deductible for income tax purposes and we reduced the
valuation allowance on our deferred income tax assets as of the date of the
acquisition by approximately $575,000. As a result of the remaining deferred
income tax liability of approximately $142,000, we recorded a benefit for income
taxes of approximately $134,000 during the six months ended April 30, 2000
principally due to the net operating loss generated from the date of the
Zentropic acquisition through April 30, 2000. See Note 7 of Notes to our
Consolidated Financial Statements.
COMPARISON OF THE FISCAL YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999
REVENUE AND COST OF REVENUE
REVENUE. Revenue increased from approximately $945,000 in fiscal 1997, to
$1.4 million in fiscal 1998, to $2.8 million in fiscal 1999. Historically, we
generated revenue primarily from licenses of DR DOS-based embedded operating
systems. The increase in revenue in each year was due to increased market
acceptance of these products.
COST OF REVENUE. Cost of revenue was approximately $248,000 in fiscal 1997,
approximately $361,000 in fiscal 1998 and approximately $185,000 in fiscal 1999.
As a percentage of total revenue, these costs were 26% in each of fiscal 1997
and fiscal 1998 and 7% in fiscal 1999. The increase in absolute dollars from
fiscal 1997 to fiscal 1998 was due to additional costs incurred as a result of
additional license sales. During each of fiscal 1997 and fiscal 1998, cost of
revenue included the amortization expense associated with the acquisition of the
DR DOS assets. The decrease from fiscal 1998 to fiscal 1999 was due to these
amounts being fully amortized at the end of fiscal 1998.
28
<PAGE>
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses were
approximately $655,000 in fiscal 1997, $1.4 million in fiscal 1998 and
$1.3 million in fiscal 1999. The increase from fiscal 1997 to fiscal 1998 was
due to our hiring of software developers and quality assurance personnel to
expand our DR DOS offerings and to support development and testing activities.
This increase was also the result of the separation of our business from
Caldera. The decrease from fiscal 1998 to fiscal 1999 was due to our decreased
spending on DR DOS-based development offsetting any increases in research and
development costs associated with Linux-based products.
SALES AND MARKETING. Sales and marketing expenses were approximately
$663,000 in fiscal 1997, $1.0 million in fiscal 1998 and approximately $729,000
in fiscal 1999. The increase from fiscal 1997 to fiscal 1998 was due to
additional expenditures related to selling and marketing DR DOS-based products
and the separation of our business from Caldera. The decrease from fiscal 1998
to fiscal 1999 was due to our decreased spending on selling and marketing DR
DOS-based products offsetting any increases in costs associated with selling and
marketing Linux-based products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
approximately $208,000 in fiscal 1997, approximately $640,000 in fiscal 1998 and
$1.2 million in fiscal 1999. The increase from fiscal 1997 to fiscal 1998 was
due to significant costs incurred in connection with our separation from
Caldera. The increase from fiscal 1998 to fiscal 1999 was due to the hiring of
additional administrative, executive and finance personnel.
NON-CASH STOCK-RELATED COMPENSATION. In connection with grants of stock
options to employees and directors, we recorded approximately $311,000 of
deferred compensation in the last six months of fiscal 1999, of which
approximately $250,000 was expensed. We did not grant any options, and had no
deferred stock compensation, in fiscal 1997 or 1998.
OTHER INCOME (EXPENSE), NET
Other expense, net, which consists principally of interest expense, was
approximately $50,000 in fiscal 1997, approximately $181,000 in fiscal 1998 and
approximately $163,000 in fiscal 1999. The increase from fiscal 1997 to fiscal
1998 was the result of increased borrowings to fund the carved-out operations of
Caldera. Subsequent to our incorporation in August 1998, we funded our
operations through borrowings from Canopy. The decrease from fiscal 1998 to
fiscal 1999 was due to an overall reduction in borrowings resulting from the
separation of our business from Caldera.
LIQUIDITY AND CAPITAL RESOURCES
Since our establishment as a separate entity in August 1998, we have funded
our operations primarily through loans from Canopy and through sales of our
common and preferred stock. As of April 30, 2000, we had $30.5 million of cash.
This represents an increase of $30.4 million over October 31, 1999. Our working
capital at April 30, 2000 was $31.3 million compared to a working capital
deficit of $2.2 million at October 31, 1999.
The increase in cash and working capital from October 31, 1999 is primarily
a result of the sale of our common and preferred stock and the exercise of stock
options. During the six months ended April 30, 2000, we received proceeds of:
- $1.2 million from the sale of 1,500,000 shares of our common stock at a
purchase price of $0.80 per share;
- $532,000 from the exercise of outstanding stock options;
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- $3.7 million from the sale of 2,500,000 shares of Series A Class 2
preferred stock at a purchase price of $1.50 per share;
- $14.5 million from the sale of 4,833,331 shares of Series B preferred
stock at a purchase price of $3.00 per share; and
- $17.5 million from the sale of 2,916,666 shares of Series C preferred
stock at a purchase price of $6.00 per share, including a $1.5 million
stock subscription receivable, which was paid subsequent to April 30,
2000.
During the six months ended April 30, 2000, we used approximately
$2.5 million of the proceeds from these stock sales to repay in full a
convertible promissory note and accrued interest payable to Canopy.
Net cash used in operating activities during the six months ended April 30,
2000 was $1.7 million. Cash used in operating activities was primarily
attributed to the net loss of $4.1 million during that period, offset by
non-cash expenses associated with acquired in-process research and development
of $800,000, amortization of intangible assets of approximately $166,000 and
amortization of deferred compensation of $1.0 million. Net cash used in
operating activities was approximately $185,000 in fiscal 1997, $1.2 million in
fiscal 1998 and $1.8 million in fiscal 1999. Cash used in operating activities
was primarily attributed to the net loss of approximately $877,000 in fiscal
1997, $2.2 million in fiscal 1998 and $1.1 million in fiscal 1999, each offset
by non-cash expenses and changes in working capital.
Our investing activities have historically consisted of purchases of
equipment. Purchases of equipment totaled approximately $108,000 in fiscal 1997,
approximately $72,000 in fiscal 1998, approximately $190,000 in fiscal 1999 and
approximately $284,000 in the six months ended April 30, 2000. During the six
months ended April 30, 2000, we sold office equipment for $75,000. In addition,
during the second quarter of fiscal 2000, we purchased Zentropic, acquiring net
assets of approximately $116,000, including cash of approximately $113,000.
Subsequent to April 30, 2000, we acquired net assets of approximately
$335,000, including cash of $1.1 million, from USE, Fireplug, Inup, Moreton Bay
and Rt-Control. In connection with the acquisition of USE we assumed aggregate
loans payable of $1.9 million, of which $1.1 million is a current liability. The
loans bear interest that is payable monthly, at rates ranging from 2.3% to 3.2%.
The aggregate purchase price for these acquisitions consisted of 1,333,333
shares of our common stock, 83,334 shares of our Series C preferred stock,
1,430,482 shares of our Series D preferred stock, options to purchase 673,596
shares of our common stock and cash of $1.2 million, including approximately
$306,000 in estimated costs directly associated with the acquisitions.
We currently anticipate that we will continue to experience significant
increases in our operating expenses for the foreseeable future as we enter new
markets for our products and services, increase research and development
activities and sales and marketing activities, develop new distribution channels
and broaden our professional service capabilities. Our operating expenses will
consume a material amount of our capital resources, including a portion of the
net proceeds of this offering. We believe that the net proceeds of this
offering, together with our existing cash, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 15 months. Although we believe that we will be able to meet our
anticipated cash needs after that time from cash generated from operations and
do not currently anticipate the need to raise additional capital, if we do seek
to raise additional capital, additional financing may not be available on
acceptable terms, if at all. We currently intend to use the net proceeds of this
offering for general corporate purposes and working capital. We may also use a
portion of the net proceeds to acquire additional businesses, products and
technologies that we believe will complement our current or future business,
although we have no specific plans, agreements or commitments to do so, and are
not currently engaged in any
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negotiations for any acquisition. Pending these uses, we will invest the net
proceeds of this offering in government securities and other short-term,
investment grade, interest-bearing instruments.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as a part
of a hedge transaction and, if it is, the type of hedge transaction. This
statement is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. We do not use derivative instruments, therefore the
adoption of this statement will not have any effect on our results of operations
or financial position.
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101, or
SAB No. 101, "Revenue Recognition in Financial Statements." This pronouncement
summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. We are required to
adopt SAB No. 101 during the first quarter of fiscal year 2001. Although
management is currently evaluating the impact, if any, of SAB No. 101,
management does not presently believe it will have a material impact on our
results of operations, financial position or liquidity.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of Accounting Principles Board Opinion No. 25,"
or APB No. 25. This interpretation clarifies the definition of employee for
purposes of applying APB No. 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. This interpretation is effective July 1, 2000, but some conclusions
in this interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. To the extent that this interpretation
covers events occurring during the period after December 15, 1998 or
January 12, 2000, but before the effective date of July 1, 2000, the effects of
applying this interpretation are recognized on a prospective basis from July 1,
2000. Although we are currently evaluating the impact, if any, of this
interpretation, we do not presently believe it will have a material impact on
our results of operations, financial position or liquidity.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
As we maintain and expand our international operations, our financial
results will be affected by factors such as changes in foreign currency rates or
weak economic conditions in foreign markets. Because all of our revenue is
currently denominated in U.S. dollars, a strengthening of the dollar could make
our products and services less competitive in international markets.
With our recent acquisitions of Zentropic, USE, Fireplug, Inup, Moreton Bay
and RT-Control, we currently have operations both domestically and in Australia,
Canada, France, Japan, Taiwan and the United Kingdom. To date, foreign currency
fluctuations have had little effect on our business. In the future, more of our
sales transactions may be denominated in local currencies. As we expand
operations internationally, we will continue to evaluate our foreign currency
exposures and risks and develop appropriate hedging or other strategies to
manage those risks. We have not revised our current business practices or
modified any of our products to conform to Europe's conversion to the euro.
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BUSINESS
OVERVIEW
We provide a broad range of embedded operating system products and services
through a combination of our experience with embedded operating systems,
expertise in Linux operating systems and involvement in the open source
community. Our offerings enable microprocessor companies and original equipment
manufacturers to develop and optimize unique embedded operating systems and
integrate those technologies into their products and systems. We also develop
and license complete customized embedded systems solutions for our customers
according to their specifications. Our products and services are designed to
reduce the time and expense associated with the development of embedded systems
and to assist our customers in creating systems that feature high functionality,
performance and reliability and ease of use.
We offer embedded Linux operating system solutions, called Embedix,
including an operating system, a software development kit and a compact
graphical Web browser. Our products feature proprietary extensions of the Linux
open source software. In addition, we offer comprehensive professional services,
or Embedix Services, including customized engineering, training and technical
support services. We sell our Linux products and services to original equipment
manufacturers such as Bast, CIS Technology, DaiShin and MiTAC International. To
further promote our technologies, we have also entered into strategic
relationships with microprocessor companies such as Hitachi, Motorola and
Samsung.
INDUSTRY BACKGROUND
Rapid technological advancements have dramatically increased the number,
type and capabilities of products and systems that enable organizations and
individuals to collaborate, access information and conduct business more
effectively. This proliferation is largely fueled by innovations in
microprocessors, which are hidden, or embedded, in a variety of products and
systems. Complex tasks, such as Internet access, network traffic routing and
graphics display, require a high level of computing power, which is currently
delivered by 16-, 32- and 64-bit embedded microprocessors. Based on information
provided by an industry research firm, worldwide unit shipments of 16-, 32- and
64-bit embedded microprocessors will grow from approximately 390 million in 1998
to approximately 1.2 billion in 2003. Products and systems containing embedded
microprocessors play a role in virtually every aspect of modern life and
include:
- Internet and communications infrastructure equipment such as routers,
modems and switches;
- consumer-oriented devices such as personal digital assistants, smart
cellular phones, entertainment systems, Internet-enabled television
set-top boxes, home automation systems, automated teller machines and
Internet kiosks;
- retail business products such as handheld point-of-sale terminals, bar
code scanners, smart cash registers, credit card readers and other systems
that provide real-time inventory tracking and automate procurement
processes;
- transportation-related systems such as automobile and aviation navigation
and safety systems; and
- industrial control and automation systems such as manufacturing equipment
and components as well as maintenance and repair machinery.
Microprocessors require an operating system to manage the interaction
between various hardware and software components. The growth in products and
systems with embedded microprocessors has created demand for more robust,
reliable and customizable embedded operating systems that are adaptable to
product memory and storage limitations. In addition, as the development of
embedded
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operating systems has significantly increased in complexity, software developers
often require specialized software tools to customize and integrate these
embedded operating systems.
Many original equipment manufacturers use internal resources to develop
their own operating systems for their embedded microprocessor projects. We
believe that these internal development efforts have generally not proven to be
cost-effective, in part because the programmers of these systems may not possess
the requisite operating system expertise. Alternatively, manufacturers seeking
more sophisticated operating systems for their embedded microprocessors have
purchased proprietary operating systems from third parties. However, because of
the proprietary nature of these operating systems, they typically cannot be
easily and cost-effectively customized to meet the unique requirements of
specific embedded systems. In addition, both internally developed and
third-party proprietary operating systems are frequently designed for use with a
limited set of applications and devices, and, as a result, we believe the
companies that create these proprietary systems have largely been unable to
achieve cost-saving economies of scale in production. Because many of these
operating systems were originally created several years ago, and are therefore
based on earlier microprocessor technology, the ability of companies using these
operating systems to take full advantage of increasing microprocessor
functionality may be limited. Further, because the companies that create these
proprietary operating systems may be limited by the cost, expertise and
availability of the developers that they employ, it is difficult for them to
keep pace with innovations in microprocessor technology.
Open source operating systems have emerged as a compelling alternative to
internally developed or third-party proprietary operating systems. The term open
source applies to software that can be copied, modified and distributed without
any associated fee and with few restrictions. As such, the source code for these
operating systems is open to the public and can be customized for a specific
application or use. The growth of the Internet has greatly increased the scale
and efficiency of open source software development through the availability of
collaborative technologies such as e-mail lists, news groups and Web sites.
Popular open source software is continuously maintained and improved by
worldwide communities of developers who share information, code and suggestions,
primarily over the Internet, increasing the frequency of software releases and
the speed of feature development and error correction.
Linux has emerged as the leading open source operating system, enjoying
acceptance by both commercial and academic communities due to its high
performance and stability, low cost and broad developer support. Until recently,
the growth in the use of the Linux operating system has primarily been in the
server and desktop computer markets. Microprocessor companies are now promoting,
and original equipment manufacturers are now adopting, Linux in the embedded
systems market. However, many of these manufacturers have only limited
experience working with Linux, and may lack developers with the specialized
skills and relationships in the open source community necessary to identify and
take advantage of the many enhancements and extensions to Linux that are
continuously under development.
In addressing the increased complexity and functionality of products and
systems with embedded microprocessors, microprocessor and original equipment
manufacturers are faced with a number of challenges. As a result, we believe
that there is a significant market opportunity for an embedded operating system
that:
- is powerful, reliable and full-featured, yet minimizes product memory and
storage requirements;
- can easily be customized across a variety of platforms to support a broad
range of hardware devices;
- allows for rapid development and deployment of the original equipment
manufacturer's products, thereby reducing time-to-market;
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- provides increased functionality, connectivity and performance, including
real-time capabilities, consistent with ongoing technological innovation;
- is supported by a broad developer base; and
- is complemented by a sophisticated set of development tools to enable
integration, support services and value-added applications.
THE LINEO SOLUTION
We provide a broad range of embedded operating system software products and
services through a combination of our experience with embedded operating
systems, expertise in Linux operating systems and involvement in the open source
community. Our offerings enable microprocessor companies and original equipment
manufacturers to develop and optimize unique embedded systems and integrate
those technologies into their products. We also develop and license complete
customized embedded systems for our customers according to their specifications.
Our products and services are designed to reduce the time and expense associated
with the development of embedded systems and to assist our customers in creating
systems with greater functionality, enhanced performance, improved reliability
and greater ease of use as compared to currently available internally developed
or third-party proprietary systems. The key benefits of our solution include:
FULL-FEATURED EMBEDDED OPERATING SYSTEM. Embedix Linux, our embedded Linux
operating system, not only provides the capabilities currently offered by
existing embedded operating systems but also leverages the numerous advantages
of Linux. Our proprietary process for identifying and customizing modular
components of Linux enables the development of unique, reliable, full-featured
embedded Linux variations with reduced memory and storage requirements and
attributes appropriate for each customer's needs. In addition, our experience
and long-standing relationships with the open source community allow us to
combine its broad development and support resources with our internal expertise
to fix errors and develop enhancements to our Linux-based products across
various platforms in a quick and cost-effective manner.
BROAD PLATFORM COMPATIBILITY. We work closely with microprocessor companies
and original equipment manufacturers in developing our embedded Linux operating
system solutions. As a result, these solutions are designed to operate on a
broad range of embedded system platforms and meet diverse functionality
requirements. Each embedded system has its own spectrum of performance, size and
memory requirements. We offer solutions appropriate for products and systems
ranging from small industrial components, to handheld consumer devices, to large
networking infrastructure equipment.
VALUE-ADDED DEVELOPMENT TOOLS AND APPLICATIONS. Our Embedix Software
Development Kit, or SDK, is a package of proprietary software development tools
designed to facilitate the design, development, error detection and correction,
implementation and maintenance of embedded systems. Embedix SDK has been
released as a beta version and is being tested by several of our key customers.
We currently expect to begin commercial shipments of Embedix SDK in June 2000.
We also offer our Embedix Linux customers our proprietary Embedix Browser, a
compact, Linux-based graphical Web browser that provides a user interface for
embedded products and systems that interact with the Internet. In addition, by
incorporating third-party software applications from independent software
vendors into our products, we can expand the functionality and features of
products and systems that include our operating system.
PROFESSIONAL ENGINEERING AND SUPPORT SERVICES. We offer our original
equipment manufacturer customers and microprocessor companies a broad range of
engineering, implementation, deployment and support services. Our engineers have
significant experience with embedded systems, participate actively in the Linux
community and contribute enhancements and additions to the Linux open source
technology. In addition, we offer professional engineering, training and
education services and technical
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support. Because we leverage the expertise of the extensive open source
community, we believe that our services enable our customers to reduce their
cost to implement, maintain and support embedded systems.
THE LINEO STRATEGY
Our objective is to become the leading provider of embedded operating system
software products and services. To achieve this objective, we are implementing
the following strategies:
ENHANCE OUR TECHNOLOGY LEADERSHIP AND MARKET AWARENESS. We intend to
continue to introduce technology that is compatible with existing embedded
operating system software and to develop solutions specific to selected vertical
markets. To support this effort, we plan both to develop technologies internally
and to acquire proprietary technologies or other companies. For example, we are
currently developing an extension to our Embedix Linux that is designed to
enable applications originally written to run on Microsoft's Windows CE
operating system to be modified, or ported, to run on our Embedix Linux
operating system. In addition, through acquisitions, we have acquired a number
of other technologies such as hard real-time operating system technology,
proprietary high-availability extensions to Linux and Linux technology for
microcontrollers. We also intend to enhance our brand awareness and increase the
demand for our products through targeted advertising and will continue our
active involvement in, and support of, the open source community to further
enhance our reputation as one of the leading providers of embedded Linux
solutions.
CONTINUE TO DEVELOP STRATEGIC RELATIONSHIPS WITH MICROPROCESSOR
COMPANIES. We intend to expand our strategic relationships with microprocessor
companies to establish our brand of Linux-based software and services with the
customers of these companies. We plan to continue to develop close relationships
with microprocessor companies through our research and development efforts and
by educating the employees of these companies about our products so that they
may promote our products and be able to provide more comprehensive solutions to
their customers. Through these relationships, we intend to further enhance our
understanding of microprocessor and embedded circuit board configurations and to
continue to understand future technology developments.
EXPAND STRATEGIC RELATIONSHIPS WITH ORIGINAL EQUIPMENT MANUFACTURERS. We
intend to continue to develop, strengthen and expand our relationships with
original equipment manufacturers of products and systems that require embedded
operating systems. By establishing close relationships with these manufacturers,
we are better able to understand their future product development plans. Through
these collaborative efforts, original equipment manufacturers can help ensure
that their future products will have embedded Linux operating system support and
we are able to integrate their requirements into our future product plans.
EXPAND SALES EFFORTS INTERNATIONALLY. We intend to continue to expand our
sales efforts internationally by growing our internal sales force and through
additional strategic acquisitions. We believe that as the proliferation of
digital consumer devices and other electronic products and systems continues,
significant international demand for our embedded operating system solutions
will develop. We currently have a sales or marketing presence in Australia,
Canada, France, Japan, Taiwan and the United Kingdom.
CONTINUE TO EXPAND OUR OFFERINGS BY INCORPORATING PRODUCTS FROM INDEPENDENT
SOFTWARE VENDORS AND DEVELOPING A LIBRARY OF EMBEDDED OPERATING SYSTEM
SOLUTIONS. We will continue to enhance the value of our operating system
solutions by incorporating additional software products of independent software
vendors. As part of our independent software vendor program, software vendors
may include their products within our embedded software development kit,
allowing us to introduce our customers to the benefits of these products when
they are used in the embedded environment with our operating system. Original
equipment manufacturers may incorporate these third-party technologies into
their products under licenses obtained through us, for which we receive
royalties, or under licenses obtained directly
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from the software vendors. In addition, our experience in providing professional
support services to our customers enables us to maintain a library of common
problems and their resolutions. We intend to continue to develop this library to
be used in conjunction with our development tools and integrated in future
products.
PRODUCTS AND SERVICES
We offer a wide range of embedded Linux technologies and services to enable
our customers to develop, optimize and implement embedded products and systems.
SOFTWARE PRODUCTS
Our embedded Linux products, called Embedix, includes Embedix Linux, Embedix
SDK and Embedix Browser.
Embedix Linux Logo
Embedix Linux is a powerful and reliable Linux operating system that is
designed specifically for embedded products and systems. Embedix Linux is a
combination of open source Linux and internally developed technologies. We have
enhanced and extended open source Linux, traditionally designed for
desktop/server implementation, with new technologies and advancements to enable
developers and original equipment manufacturers to utilize Linux within highly
customized embedded products and systems. We have developed a proprietary
process for identifying and modifying Linux source code modules, which allows us
to assemble and integrate a full-feature set of customizable components. By
separating Linux into components, our customers can use those specific
components that their unique embedded system products and systems require. We
believe this decreases costs by allowing customers to build a wide range of
embedded products and systems that use less memory and less storage.
Embedix Linux not only provides the features currently offered by existing
proprietary embedded operating systems, but it also leverages the numerous
advantages of open source software development. We are able to combine the broad
development and support resources of the Linux open source community with our
own engineering expertise to develop enhancements across various platforms
quickly and cost-effectively. Further, we test the components that we provide
both individually and as an integrated whole to maintain the quality of our
products.
Embedix SDK Logo
Embedix SDK is a package of proprietary software and open source development
tools designed to help microprocessor companies and original equipment
manufacturers accelerate the design, development, error detection and
correction, implementation and maintenance of embedded systems. Embedix SDK has
been released as a beta version and is being tested by several of our key
customers. We currently expect to begin commercial shipment of Embedix SDK in
June 2000.
Embedix SDK provides developers with an assortment of tools designed to
manage the complex tasks of building and configuring an embedded Linux operating
system. It will allow system developers to construct customized versions of
Embedix Linux for a range of microprocessors and add specialized functions and
services such as Internet protocol routing and mobile computing. Further,
Embedix SDK allows the customization process to be automated to reduce the
possibility of defects and to enhance duplication efforts.
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One of the key features of Embedix SDK is the "Target Wizard," a tool that
provides information about available system options and the effect that each
component and configuration will have on the resulting product or system. It
also identifies and shows interdependencies among different components, enabling
our customers to select those software components necessary to achieve the
functions and capabilities of their unique embedded systems and products,
thereby decreasing memory and storage requirements and reducing time to market.
Through our independent software vendor program, we will include in Embedix
SDK a variety of third-party Linux-based software applications and components.
These third-party technologies enable our original equipment manufacturer
customers to enhance their embedded systems with features such as voice
command-and-control, embedded databases and network management tools. Original
equipment manufacturers can incorporate these third-party technologies into
their products under licenses obtained through us, for which we receive
royalties, or under licenses obtained directly from the software vendors. We
test and certify these independent software vendors' technologies for
interoperability with Embedix, providing our customers with a single source of
compatible embedded system operating systems, components and third-party
software technologies.
Embedix Browser Logo
The Embedix Browser is a compact, Linux-based graphical Web browser that
provides a user interface for embedded products and systems that interact with
the Internet. The Embedix Browser can be easily customized and has low memory
and storage requirements. Because it has low system resource requirements and is
easily adapted to meet diverse customer needs, it is well suited for a number of
products and systems, including handheld devices, set-top boxes, kiosks and
point-of-sale terminals.
Embedix PDA Logo
We are currently developing Embedix Personal Digital Assistant, or PDA.
Embedix PDA is being designed as an extension to our Embedix Linux to enable
applications that were originally written to run on Microsoft's Windows CE
operating system to be modified, or ported, to run on our Embedix Linux
operating system. We currently intend to release a commercial version of Embedix
PDA in the first calendar quarter of 2001.
OTHER TECHNOLOGIES
In addition to our embedded Linux technologies and products, we continue to
sell our embedded disk operating system, called DR DOS. Although we no longer
actively develop DR DOS, this technology is sufficient for some embedded system
requirements, and we continue to sell this technology to original equipment
manufacturers that request it or who extend existing DR DOS contracts with us.
SERVICES
We provide comprehensive professional services, or Embedix Services, to our
embedded systems customers, including customized engineering, training and
technical support services. As of May 15, 2000, we employed approximately 33
professional services personnel. Our professional services personnel have
significant experience with embedded systems, participate actively in the open
source community and contribute enhancements and additions to the Linux open
source technology. We
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believe that our services enable our customers to reduce their cost to
implement, maintain and support their embedded systems.
ENGINEERING. We offer custom engineering services to those embedded systems
customers that require assistance. Alternatively, we may develop and license a
complete custom embedded system solution at a customer's request. We typically
offer these services on a per-project basis, although we also may offer these
services on a time-and-expense basis. Each project is reviewed by our research
and development, product marketing and sales groups to determine whether we
should include the resulting custom technology development in our future product
line. Our contracts for custom work generally provide that all intellectual
property resulting from the work is either owned by us or is contributed to the
open source community.
EDUCATION. We recently began offering instructor-led training on our
products to assist with design and implementation of embedded products and
systems. We intend to also offer Web-based and computer-based training programs
in the future.
TECHNICAL SUPPORT. We provide technical support by e-mail, over the
telephone and onsite at our customer locations worldwide. We are also
implementing a database to capture our experience from prior projects. Our
customers will have access to the database through our Web site. In addition,
our products include comprehensive online documentation and support materials. A
basic level of technical support is provided complimentary to our customers via
the Web and e-mail, and fee-based support options are also available.
TECHNOLOGY
Our technology is based on a combination of open source software code and
internally developed and third-party proprietary technology. Embedix Linux is
designed to operate on various microprocessor platforms and is currently
available for the Intel and Intel-compatible x86 and Motorola PowerPC platforms.
We are developing customized versions of Embedded Linux for additional
microprocessors including:
- various ARM microprocessor cores;
- Hitachi SuperH microprocessors;
- various MIPS microprocessor designs; and
- Motorola's ColdFire, DragonBall and MCORE microprocessors.
Key features of Embedix Linux include industry-standard communication protocols
for accessing the Internet as well as routing and multi-tasking capabilities.
Another key feature of Embedix Linux is that it has execute-in-place
capabilities from read-only memory, which conserves memory resources, thus
lowering the cost of an embedded product or system.
Embedix SDK consists of a combination of proprietary and open source
software tools and utilities that allows an engineer to custom configure
Embedded Linux to the specific requirements of an embedded product or system. It
also allows developers to create and modify applications in a wide variety of
computer languages, including C, C++, Java and other scripting languages, and to
incorporate third-party applications. Key features of Embedix SDK include a
complete Linux development platform, graphical configuration tools and
integrated development environment, and other tools for writing software code
and applications.
Embedix Browser, our proprietary Internet browser, runs in conjunction with
Embedix Linux. Embedix Browser is compatible with industry-standard Web-based
programming protocols and Javascript support and features a customizable user
interface and automatic software updates. It also includes television output
software to support Internet set-top boxes and standard encryption
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technologies to enable secure electronic commerce transactions. Original
equipment manufacturers can also pre-configure Embedix Browser for specific
service providers to provide their customers with quicker and easier Internet
access.
As a result of our recent acquisitions, we are currently integrating hard
real-time capabilities into our Embedix product line. Hard real-time allows
applications to schedule time-critical tasks and obtain guaranteed response
times. Hard real-time capabilities are critical to many embedded systems
markets, including markets for medical, avionics and industrial control systems.
We are also integrating high-availability embedded Linux technologies into our
Embedix product line for high-end hardware and software systems.
High-availability solutions are critical to embedded systems featuring
significantly limited down-time tolerance, including telecommunications,
aerospace and financial services systems.
STRATEGIC RELATIONSHIPS
INDEPENDENT SOFTWARE VENDOR PROGRAM
As part of our independent software vendor program, which we call Lineo
Partner Connect, software vendors may include their products within our embedded
software development kit, allowing us to introduce our customers to the benefits
of these products when they are used in the embedded environment with our
operating systems. Current participants in this program include Jabber, Inc.,
NewMonics Inc. and Solid Information Technology. Original equipment
manufacturers may incorporate these third-party technologies into their products
under licenses obtained through us, for which we receive royalties, or under
licenses obtained directly from the software vendors. Through this program, we
believe that we are able to increase the appeal of our products and services by
acting as a single source of Linux-based applications and components. As a
result, our customers may streamline the complexity of their licensing
requirements and reduce the time-to-market for any specific solution. At the
same time, under this program, the independent software vendors benefit by
expanding their marketing channels to a range of original equipment
manufacturers.
MICROPROCESSOR COMPANIES
We have entered into a variety of strategic relationships with
microprocessor companies to establish our brand of Linux products and services
to the customers of these companies. Through these relationships, we intend to
further enhance our understanding of microprocessor embedded circuit board
configurations and their future technology developments. Currently, we have
relationships with Hitachi, MIPS Technologies, Inc., Motorola and Samsung. We
intend to develop strategic relationships with additional microprocessor
companies.
CUSTOMERS
Our primary customers for our Linux products and services are original
equipment manufacturers. As of April 30, 2000, we had generated revenue from
licenses of our Linux products and services to several original equipment
manufacturers, such as Bast, CIS Technology, DaiShin, and MiTAC International.
In the fiscal year ended October 31, 1999, our three largest customers
accounted for 48% of our total revenue, with Sun Microsystems accounting for
23%, Brooktrout accounting for 13% and Symbol Technologies accounting for 12%.
In the six months ended April 30, 2000, our seven largest customers accounted
for 77% of our total revenue, with DaiShin accounting for 34%.
SALES AND MARKETING
We market our Linux products and services to original equipment
manufacturers through our direct sales force. We have a sales or marketing
presence both domestically and in Australia, Canada,
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<PAGE>
France, Japan, Taiwan and the United Kingdom. Key elements of our sales and
marketing strategy include direct advertising, event marketing, active public
relations, customer and strategic alliance partner programs, co-marketing
programs and a comprehensive Web site.
We are also currently developing indirect sales channels, including
third-party distributors and systems integrators. We believe that these
additional channels will further increase our brand awareness and promote the
development of Linux-based software applications and solutions for embedded
systems. We intend to use these channels to educate engineers on the benefits of
our products.
RESEARCH AND DEVELOPMENT
As of May 15, 2000, we had 108 software engineers engaged in research and
development. We have invested and will continue to invest in the development of
innovative new product features and technologies in response to the evolving
market for embedded Linux operating systems and input from original equipment
manufacturer customers and microprocessor companies. Our engineers have
significant experience with embedded systems, participate actively in the Linux
community and contribute enhancements and additions to the Linux open source
technology. We believe our contributions to the Linux community will facilitate
the development of industry standards and encourage industry cooperation. We
also analyze and incorporate the development and support efforts of the Linux
open source community into our products on a continual basis.
COMPETITION
The market for embedded operating systems products and services is becoming
increasingly competitive. We compete principally on the basis of the following:
- product performance and functionality;
- price;
- quality of support and customer services;
- breadth of embedded platform support;
- availability of third-party software applications;
- time-to-market;
- relationships with original equipment manufacturers and microprocessor
companies;
- distribution penetration; and
- technical and financial resources.
Although we believe we compete favorably in each of these areas, failure to
compete successfully in any of these areas against current or potential
competitors could harm our business. We face competition from:
- our current and potential customers' internal research and development
departments that may seek to develop their own proprietary embedded
operating systems;
- established companies that have developed proprietary embedded operating
systems, such as Mentor Graphics, Microsoft, Microware Systems, Palm
Computing, QNX Software Systems, Sun Microsystems, Symbian and Wind River
Systems;
- companies that have developed, or may in the future develop, embedded
Linux operating systems, such as Caldera Systems, Coollogic, Information
Storage Devices, LynuxWorks, MontaVista Software, Red Hat, SuSE and
TurboLinux; and
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<PAGE>
- companies that have developed Web browsers, such as Microsoft, Netscape
and Spyglass.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Intellectual property is critical to our success. Although our Embedix
platform is based on open source Linux, many aspects of our products are based
on intellectual property that is proprietary to us. This proprietary technology
includes software development tools and other development resources to configure
and implement Embedix Linux. We have also developed a graphical development
environment that facilitates the creation and customization of embedded Linux
solutions, and we have a proprietary Linux-based browser specifically for
embedded systems. We take steps to protect our intellectual property rights
through copyright, trademark and trade secret laws and contractual
confidentiality arrangements. At the same time, because we rely in part on open
source intellectual property, we may find it necessary to defend the open source
community from attempts by others to misappropriate, whether by copyright or
otherwise, technology which belongs to the open source community.
We generally enter into confidentiality or noncompete agreements with our
employees, consultants and corporate partners and generally control access to
and distribution of our technologies, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
our processes or technologies. The steps we have taken may not prevent
misappropriation of our processes or technologies, particularly in foreign
countries where the laws or law enforcement may not protect our proprietary
rights as fully as in the United States. We have licensed, and may license in
the future, elements of our trademarks, trade dress and similar proprietary
right to third parties. While we attempt to ensure that the quality of our brand
is maintained by these third parties, they may take actions that could harm the
value of our proprietary rights or reputation.
EMPLOYEES
As of May 15, 2000, we had 200 employees, excluding independent contractors
and other temporary employees, including 119 employees in engineering, 43
employees in sales and marketing and 38 employees in general and administrative
services. Of these employees, 128 were in the United States, 15 were in
Australia, 14 were in Canada, 7 were in France, 25 were in Japan, 6 were in
Taiwan and 5 were in the United Kingdom. In addition, from time to time, we
employ temporary employees and consultants. None of our employees is represented
by a labor union, and we consider our relations with our employees to be good.
FACILITIES
Our principal executive office is located in Lindon, Utah, where we sublease
a total of 20,000 square feet under two separate leases, with one lease expiring
in February 2002 and the other expiring in March 2001. We also lease office
space in Brighton, United Kingdom; Brisbane, Australia; Herndon, Virginia;
Nagano, Japan; Saint-Ouen, France; San Jose, California; Seattle, Washington;
Taipei, Taiwan; Toronto, Ontario, Canada and Vancouver, British Columbia,
Canada. We believe that our existing facilities are adequate for our current
requirements and that additional space can be obtained on commercially
reasonable terms to meet our future requirements.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information regarding our executive
officers, directors and key employees as of May 15, 2000:
<TABLE>
<CAPTION>
NAME OF EXECUTIVE OFFICER OR DIRECTOR AGE POSITION
- ------------------------------------- -------- ------------------------------------------
<S> <C> <C>
Bryan W. Sparks........................... 38 Chairman of the Board, President and Chief
Executive Officer
Gregory C. Hill........................... 50 Senior Vice President, Chief Financial
Officer and Treasurer
Timothy R. Bird........................... 37 Senior Vice President, Chief Technology
Officer
Matthew R. Harris......................... 39 Senior Vice President, Business
Development, Secretary and General Counsel
Bradley J. Walters........................ 35 Senior Vice President, Sales
Raymond J. Noorda......................... 75 Director
Ralph J. Yarro III........................ 35 Director
John R. Egan.............................. 42 Director
William P. Barnett........................ 41 Director
NAME OF KEY EMPLOYEE
- ------------------------------------------
Kim D. Clark.............................. 41 Vice President, Engineering
Lyle S. Ball.............................. 31 Vice President, Communications
Nathan S. Hatch........................... 37 Vice President, Marketing
Allan C. Smart............................ 40 Vice President, Professional Services
Christy A. Omohundro...................... 40 Vice President, Human Resources and
Integration
</TABLE>
BRYAN W. SPARKS, has been our chairman of the board, president and chief
executive officer since our incorporation in August 1998. Prior to that,
Mr. Sparks was president and chief executive officer of Caldera, Inc., an
operating systems company and predecessor of us and Caldera Systems, Inc., which
he founded in January 1995. From 1986 to 1994, Mr. Sparks was employed at
Novell, Inc., a network solutions company, holding a variety of engineering and
management positions during his tenure there. Mr. Sparks received a bachelor's
degree in computer science from Brigham Young University. He is also a member of
the board of directors of Edgemail Technologies, Inc., a provider of high
performance Web-based server technology.
GREGORY C. HILL has been our senior vice president, chief financial officer
and treasurer since January 2000. Prior to joining us, Mr. Hill was an
independent financial consultant and, before that, the chief financial officer
of Sensorium Software, Incorporated, a business intelligence software company,
from December 1997 to June 1998. From July 1995 to May 1997, Mr. Hill served as
the corporate treasurer of Quark, Inc., a developer of professional desktop
publishing applications. From July 1993 to July 1995, Mr. Hill was vice
president and treasurer of Tyco Toys, Inc., a publicly held toy and
entertainment company. Mr. Hill received a bachelor's degree in humanities and
science from the Massachusetts Institute of Technology and a master's degree in
business administration from Harvard Business School.
TIMOTHY R. BIRD has been our senior vice president, chief technology officer
since May 1999. Prior to joining us, from July 1995 to September 1998, Mr. Bird
was a senior developer at Caldera, Inc., where he worked on numerous open source
Linux projects. From January 1988 to July 1995, Mr. Bird was a software engineer
at Novell. Mr. Bird became a lead engineer at Novell in November 1991.
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Mr. Bird is the co-author of "Special Edition: Using OpenLinux" by MacMillan
Publishing. Mr. Bird received both his bachelor's and master's degrees in
computer science from Brigham Young University.
MATTHEW R. HARRIS has been our senior vice president, business development,
secretary and general counsel since January 2000. Prior to joining us, from
March 1997 to January 2000, Mr. Harris was a founding partner at Summit Law
Group, PLLC, a Seattle-based law firm. From October 1992 to March 1997,
Mr. Harris was an attorney at Heller Ehrman White and McAuliffe, a San
Francisco-based law firm. Prior to that time, Mr. Harris was a law clerk to the
Honorable Eugene Wright, United States Court of Appeals for the Ninth Circuit.
From 1983 to 1988, Mr. Harris worked as a software development engineer.
Mr. Harris received a bachelor's degree in business administration from the
University of Washington and a juris doctorate from the University of Michigan
Law School.
BRADLEY J. WALTERS has been our senior vice president, sales since
July 1999. Prior to joining us, Mr. Walters worked at Caldera, Inc. from
November 1997 to July 1999 as a regional sales manager and then director of
sales. From May 1996 to November 1997, Mr. Walters worked as a regional sales
manager at Engineering Geometry Systems, a computer aided design and
manufacturing software company. Prior to that, from February 1996 to May 1996,
Mr. Walters was employed at TurboLinux Inc., formerly Pacific HiTech, Inc., a
distributor of Linux software, where he was the director of marketing and sales.
From October 1995 to February 1996, Mr. Walters served as an independent
consultant for sales of retail software. Prior to that, from April 1994 to
October 1995, Mr. Walters was employed with LearnFrame, Inc., formerly known as
Pinnacle Multimedia Inc., an online employment training and education company,
where he was director of sales and later vice president. Mr. Walters received an
associate's degree from Ricks College.
RAYMOND J. NOORDA has served as a member of our board of directors since our
incorporation in August 1998. Mr. Noorda currently serves as chairman of the
board of directors of MTI Technology Corporation, a data storage and management
company, and The Canopy Group, Inc., a holding company that beneficially owns
44.4% of our outstanding common stock prior to this offering, and is a member of
the board of directors of Caldera Systems. From 1983 to 1994, Mr. Noorda served
as president, chief executive officer and chairman of the board of Novell. He
received a bachelor's degree in electrical engineering from the University of
Utah.
RALPH J. YARRO III has served as a member of our board of directors since
our incorporation in August 1998. Mr. Yarro has served as the president and
chief executive officer of The Canopy Group since April 1995 and currently
serves as chairman of the board of directors of Caldera Systems. Mr. Yarro also
is a member of the board of directors of MTI Technology Corporation. Mr. Yarro
received a bachelor's degree in political science from Brigham Young University.
JOHN R. EGAN has served as a member of our board of directors since
January 2000. He currently serves as a managing partner of Egan-Managed Capital,
a venture capital firm that owns 6.1% of our outstanding common stock prior to
this offering, a position he has held since February 1997. Mr. Egan is also a
member of the board of directors of Caldera Systems, EMC Corporation, a provider
of storage-related hardware, software and service products, and several private
technology companies. From April 1983 to September 1998, Mr. Egan has served in
various capacities at EMC Corporation, including responsibility for developing
and managing EMC's sales force and most recently as an executive vice president.
He received a bachelor's degree in computer science from Boston College.
WILLIAM P. BARNETT has served as a member of our board of directors since
March 2000. Mr. Barnett is currently an associate professor at the Stanford
Graduate School of Business, a position he has held since July 1991. Prior to
joining Stanford, from 1988 to 1991, Mr. Barnett was an assistant professor of
management at the University of Wisconsin at Madison. He received his bachelor's
degrees in economics and political science and his Ph.D. in business
administration from the University of California, Berkeley.
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<PAGE>
KIM D. CLARK has been our vice president, engineering since March 2000.
Prior to joining us, Mr. Clark worked at Novell, from September 1988 to
March 2000, in a variety of positions, most recently as the director of
engineering. While at Novell, Mr. Clark was also responsible for the engineering
team developing the NetWare operating system. Mr. Clark received a bachelor's
degree in electrical engineering from Utah State University.
LYLE S. BALL has been our vice president, communications since our
incorporation in August 1998. Prior to joining us, from November 1995 to
April 1998, Mr. Ball was the director of communications at Caldera, Inc. From
June 1993 to October 1995, Mr. Ball worked at Novell as a corporate
communications manager. Mr. Ball received a bachelor's degree in business
communications from Brigham Young University.
NATHAN S. HATCH has been our vice president, marketing since March 2000.
Prior to joining us, from June 1998 to March 2000 Mr. Hatch served as enterprise
accounts marketing manager at Novell, Inc. From June 1996 to April 1998,
Mr. Hatch served as director and then vice president of marketing at Caldera,
Inc. From December 1995 to June 1996, Mr. Hatch was the director of marketing at
Allen Communications, a multimedia software company, and from March 1988 to
November 1995, Mr. Hatch was the marketing manager for UNIX products at
WordPerfect, which was acquired by Novell. Mr. Hatch received a bachelor's
degree in business management from the University of Phoenix.
ALLAN C. SMART has been our vice president, professional services since
March 2000, and prior to that was our director of business development since
September 1999. Prior to joining us, from September 1998 to September 1999,
Mr. Smart served as director, education services at Caldera Systems, Inc. From
July 1995 to September 1998, Mr. Smart served as director, technical services at
Caldera, Inc. Mr. Smart received a bachelor's degree in computer science from
Utah State University and a master's degree in business administration from the
Marriott School of Management at Brigham Young University.
CHRISTY A. OMOHUNDRO has been our vice president, human resources and
integration since April 2000. Prior to joining us, from April 1998 to April
2000, Ms. Omohundro was the director of regulatory policy at Puget Sound Energy,
an electric and gas utility corporation. From April 1997 to April 1998, Ms.
Omohundro was the vice president, client services at Bright Horizons, formerly
known as CorporateFamily Solutions, a work/life consulting firm. Prior to that,
Ms. Omohundro was employed by Puget Sound Energy as director of strategic
planning from February 1997 to April 1997 and as director of rates from February
1995 to February 1997. Ms. Omohundro received her bachelor's degree in
accounting and liberal arts from Spring Hill College and her master's degree in
business administration from Vanderbilt University.
BOARD OF DIRECTORS
We currently have authorized five directors. Currently all directors hold
office until the next annual meeting of stockholders or until their successors
are duly elected, and will continue to do so following the completion of this
offering. However, our certificate of incorporation will provide that as of the
first annual meeting of stockholders after the completion of this offering, our
board of directors will be divided into three classes, each with staggered
three-year terms. As a result, only one class of directors will be elected at
each annual meeting of our stockholders, with the other classes continuing for
the remainder of their respective three-year terms. Prior to completion of this
offering, we intend to increase the size of our board to seven directors and
appoint two additional independent directors.
COMMITTEES
Our board of directors currently has an audit committee and a compensation
committee. The audit committee consists of Messrs. Barnett, Egan and Yarro, and
Mr. Barnett currently serves as its chairman. The audit committee makes
recommendations to our board of directors regarding the
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<PAGE>
selection of independent auditors, reviews the scope of audit and other services
by our independent auditors, reviews the accounting principles and auditing
practices and procedures to be used for our financial statements and reviews the
results of our audits. The compensation committee consists of Messrs. Barnett
and Egan. The compensation committee reviews and approves the compensation and
benefits for our executive officers, grants stock options under our stock option
plan and makes recommendations to our board of directors on compensation
matters.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between any member of our board of
directors or compensation committee and any member of the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.
In January 2000, we entered into a stock purchase and sale agreement with
Caldera Systems, Inc. to purchase 1,250,000 shares of Caldera Systems' common
stock in exchange for 3,238,437 shares of our common stock. One of the members
of our compensation committee, Mr. Egan, is a member of the board of directors
of Caldera Systems.
In February 2000, we sold 2,000,000 shares, out of a total of 2,500,000
shares, of Series A Class 2 preferred stock at a per share price of $1.50 to
Egan-Managed Capital, L.P. for aggregate consideration of $3.0 million, and in
March 2000, we sold 326,667 shares, out of a total of 4,833,331 shares, of
Series B preferred stock at a per share price of $3.00 to Egan-Managed Capital
for aggregate consideration of $980,000. Mr. Egan is a managing partner of
Egan-Managed Capital, which holds 6.1% of our outstanding common stock prior to
this offering.
In connection with the sale of the preferred stock, Egan-Managed Capital,
along with other investors, were granted registration rights, and we may
therefore become obligated to effect a registration under the Securities Act of
1933 of shares of common stock held by these investors upon the conversion of
the preferred stock. See "Description of Capital Stock" on page 53 for a more
complete explanation of these registration rights.
We have also granted to each of Mr. Barnett, one of the members of our
compensation committee, and Egan-Managed Capital, on behalf of Mr. Egan, options
to purchase up to 80,000 shares of common stock at exercise prices of $0.80 and
$1.50 per share, respectively, under our stock option plan.
COMPENSATION
Our directors are reimbursed for expenses incurred in connection with
attending board and committee meetings but are not otherwise compensated for
their services as board members.
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<PAGE>
EXECUTIVE OFFICERS
Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors and
officers.
COMPENSATION
The following table sets forth information concerning compensation for
services rendered to us in all capacities during the fiscal year ended
October 31, 1999 by our chief executive officer and all of our other executive
officers who earned or received salary and bonus in fiscal 1999 in excess of
$100,000.
<TABLE>
<CAPTION>
ANNUAL LONG TERM ALL OTHER
COMPENSATION COMPENSATION COMPENSATION
------------------- ------------ ----------------------
SECURITIES HEALTH LIFE AND
UNDERLYING INSURANCE DISABILITY
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (#S) PREMIUMS PREMIUMS
- --------------------------- -------- -------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Bryan W. Sparks .......................... $121,218 $4,800 600,000 $6,674 $360
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Timothy R. Bird .......................... 101,863 4,000 55,000 6,322 308
SENIOR VICE PRESIDENT, CHIEF TECHNOLOGY
OFFICER
Bradley J. Walters ....................... 103,675 2,343 70,000 6,176 203
SENIOR VICE PRESIDENT, SALES
</TABLE>
OPTION GRANTS IN FISCAL YEAR 1999
The following table sets forth certain information with respect to stock
options granted to each of our named executive officers during the fiscal year
ended October 31, 1999. All options granted to these executive officers in the
last fiscal year were granted under our stock option plan. In connection with
the rules of the Securities and Exchange Commission, also shown below is the
potential realizable value over the term of the option, the period from the
grant date to the expiration date, based on assumed rates of stock appreciation
of 5% and 10%, compounded annually. These amounts are mandated by the Securities
and Exchange Commission and do not represent our estimate of future stock price.
Actual gains, if any, on stock option exercises will depend on the future
performance of our common stock. In fiscal year 1999, we granted options to
acquire up to an aggregate of 955,700 shares of our common stock to employees
and directors.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF
PERCENT OF TOTAL STOCK PRICE APPRECIATION
NUMBER OF OPTIONS GRANTED EXERCISE FOR OPTION TERM
SECURITIES UNDERLYING TO EMPLOYEES PRICE EXPIRATION -------------------------
NAME OPTIONS GRANTED # IN FISCAL 1999 PER SHARE DATE 5% ($) 10% ($)
- ---- --------------------- ---------------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Bryan W. Sparks...... 600,000 62.8% $0.80 9/23/09 $776,576 $1,429,938
Timothy R. Bird...... 55,000 5.8 0.80 9/23/09 71,186 131,078
Bradley J. Walters... 70,000 7.3 0.80 9/23/09 90,601 166,826
</TABLE>
AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END OPTION VALUES
None of our named executive officers exercised any options in fiscal 1999.
With respect to our named executive officers, the following table sets forth
information concerning exercisable and unexercisable options held as of
October 31, 1999. The "Value of Unexercised In-the-Money Options at
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<PAGE>
October 31, 1999" is based upon an assumed initial public offering price of $
per share minus the per share exercise price multiplied by the number of shares
underlying the options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT OCTOBER 31, 1999 OCTOBER 31, 1999 ($)
----------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Bryan W. Sparks................................ 600,000 -- --
Timothy R. Bird................................ 14,895 40,105
Bradley J. Walters............................. 18,958 51,042
</TABLE>
EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
Our board of directors adopted and our stockholders approved our stock
option plan in June 1999. As of May 15, 2000, we had reserved a total of
5,000,000 shares of common stock for issuance under the stock option plan. The
stock option plan provides for the granting to our employees, including officers
and directors, of incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986 and for the granting to employees, consultants
and non-employee directors of nonstatutory stock options. If an optionee would
have the right in any calendar year to exercise for the first time incentive
stock options for shares having an aggregate fair market value, determined for
each share as of the date the option to purchase the shares was granted, in
excess of $100,000, any such excess options shall be treated as nonstatutory
stock options. Unless terminated earlier by our board of directors, the plan
will terminate in June 2009. As of May 15, 2000, options to purchase 3,052,722
shares of common stock were outstanding under this plan and 669,905 shares had
been issued upon exercise of options.
The stock option plan may be administered by our board of directors or by a
committee appointed by our board and is currently administered by our
compensation committee. The plan administrator determines the terms of each
option granted under the stock option plan, including the number of shares
subject to an option, exercise price, vesting schedule and duration. The
exercise price of all incentive stock options granted under the stock option
plan cannot be less than the fair market value of the common stock on the date
of grant and, in the case of incentive stock options granted to holders of more
than 10% of our voting power, not less than 110% of the fair market value.
Generally, options granted under the stock option plan have a term of ten years,
vest over a four-year period and are nontransferable. Payment of the exercise
price of options may be made in cash or other consideration as determined by the
plan administrator.
Our board of directors has the authority to amend or terminate the stock
option plan as long as such action does not adversely affect any outstanding
options and provided that stockholder approval for any amendments to the stock
option plan shall be obtained to the extent required by applicable law.
401(k) PLAN
In May 2000 our board of directors ratified the adoption of a tax-qualified
employee savings and retirement plan for eligible U.S. employees, which is
currently sponsored by The Canopy Group, one of our principal stockholders.
Eligible employees may elect to defer a percentage of their eligible
compensation in the 401(k) plan, subject to the statutorily prescribed annual
limit. We make matching contributions on behalf of all participants in the
401(k) plan in the amount equal to one-half of the first 6% of an employee's
contributions. Matching contributions are subject to a vesting schedule; all
other contributions are at all times fully vested. We intend the 401(k) plan to
qualify under Sections 401(k) and 501 of the Internal Revenue Code so that
contributions by employees or us to the
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<PAGE>
401(k) plan, and income earned, if any, on plan contributions, are not taxable
to employees until withdrawn from the 401(k) plan, and so that we will be able
to deduct our contributions when made. The trustee of the 401(k) plan, at the
direction of each participant, invests the assets of the 401(k) plan in any of a
number of investment options.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
In May 2000, we entered into an employment agreement with Mr. Sparks for a
term of 24 months, subject to renewal thereafter. Under his employment
agreement, Mr. Sparks is entitled to receive an annual salary of $150,000, as
adjusted from time to time, and is eligible to receive bonuses as determined by
us. If Mr. Sparks is terminated without cause, as defined in his employment
agreement, he is entitled to receive his salary for a period of 12 months.
Mr. Sparks has agreed not to compete, directly or indirectly, with us during his
employment and for a period of 12 months thereafter.
We currently do not have any employment agreements with any of our other
executive officers. Our stock option plan provides that in the event a third
party acquires us through the purchase of all or substantially all of our
assets, a merger or other business combination, unless otherwise provided in
applicable stock option agreements, the unexercised portion of outstanding
options will vest and become immediately exercisable unless the options are
assumed by the third party or are replaced with comparable options.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
Our certificate of incorporation limits the liability of directors and
officers to the fullest extent currently permitted by Delaware law or as it may
be amended in the future. Consequently, subject to Delaware law, no director
will be personally liable to us or our stockholders for monetary damages
resulting from his conduct as our director, except liability for:
- acts or omissions involving intentional misconduct or knowing violations
of law;
- unlawful distributions; or
- transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally entitled.
Our certificate of incorporation also provides that we shall indemnify any
individual made a party to a proceeding because that individual is or was one of
our directors or officers and shall advance or reimburse reasonable expenses
incurred by such individual in advance of the final disposition of the
proceeding to the fullest extent permitted by applicable law. Any repeal of or
modification to our certificate of incorporation may not adversely affect any
right of any of our directors who is or was a director at the time of such
repeal or modification.
We intend to enter into indemnification agreements with each of our officers
and directors. In addition, our bylaws provide that we shall indemnify our
directors and officers and may indemnify our employees and agents to the fullest
extent permitted by law. Finally, we intend to purchase and maintain a liability
insurance policy, pursuant to which our directors and officers will be
indemnified against liability they may incur for serving in their capacities as
our directors and officers. We believe that the indemnification and limitation
of liability provisions in our certificate of incorporation, bylaws,
indemnification agreements and the liability insurance policy will facilitate
our ability to continue to attract and retain qualified individuals to serve as
our directors and officers.
To the extent the provisions of our certificate of incorporation, bylaws or
indemnification agreements provide for indemnification of directors for
liabilities arising under the Securities Act, those provisions are, in the
opinion of the Securities and Exchange Commission, against public policy as
expressed in the Securities Act and are therefore unenforceable.
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RELATED-PARTY TRANSACTIONS
TECHNOLOGY
In September 1998, we entered into a DR DOS License Agreement with Caldera,
Inc., a company founded by Mr. Sparks, our president, chief executive officer
and chairman of the board.
In December 1999, we entered into a Technology Assignment Agreement with The
Canopy Group with respect to software technology.
SALES OF COMMON STOCK
In fiscal 1998 and 1999, we borrowed an aggregate of $2,290,000 from The
Canopy Group, of which approximately $337,000 was repaid in January 2000 and the
balance of approximately $1,953,000 was repaid in March 2000. Two of our
directors, Messrs. Noorda and Yarro, are members of The Canopy Group, which
holds approximately 44.4% of our outstanding common stock prior to completion of
this offering.
In December 1999, we sold 750,000 shares of common stock at a per share
price of $0.80 to each of MRH Investments, LLC and Dry Canyon Holdings, LLC. One
of our executive officers, Mr. Harris, is a member of MRH Investments, and
Mr. Sparks is a member of Dry Canyon Holdings.
In January 2000, we entered into a stock purchase and sale agreement with
Caldera Systems to purchase 1,250,000 shares of Caldera Systems' common stock in
exchange for 3,238,437 shares of our common stock. Three of our directors,
Messrs. Egan, Noorda and Yarro, are also members of the board of directors of
Caldera Systems. Caldera Systems holds approximately 13.1% of our outstanding
common stock prior to completion of this offering.
SALES OF PREFERRED STOCK
In February 2000, we sold an aggregate of 7,500,000 shares of Series A
preferred stock at a per share price of $1.50 to four investors. Three of the
purchasers of Series A preferred stock included:
- The Canopy Group, which exchanged 5,000,000 shares of our common stock for
5,000,000 shares of Series A Class 1 preferred stock pursuant to a
recapitalization agreement between us and The Canopy Group.
- Dry Canyon Holdings, which purchased 166,667 shares of Series A Class 2
preferred stock for total consideration of $250,000.
- Egan-Managed Capital, L.P., which purchased 2,000,000 shares of Series A
Class 2 preferred stock for total consideration of $3,000,000. One of our
directors, Mr. Egan, is a managing partner of Egan-Managed Capital, which
holds 6.1% of our outstanding common stock prior to this offering.
In March 2000, we sold 326,667 shares, out of a total of 4,833,331 shares,
of Series B preferred stock at a per share price of $3.00 to Egan-Managed
Capital.
In April 2000, we sold 83,333 shares, out of a total of 3,000,000 shares, of
Series C preferred stock at a per share price of $6.00 to Angel Partners. One of
our directors, Mr. Yarro, is president, chairman and a trustee of Angel
Partners.
In connection with the sale of the preferred stock, the investors, other
than Dry Canyon Holdings, were granted registration rights, and we may therefore
become obligated to effect a registration under the Securities Act of 1933 of
shares of common stock held by these investors upon the conversion of the
preferred stock. See "Description of Capital Stock" on page 53 for a more
complete description of these registration rights.
49
<PAGE>
STOCK OPTIONS
We granted options to purchase shares of common stock to the following
executive officers and directors on the date, for the number of shares and with
an exercise price indicated opposite each person's name:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME GRANT DATE UNDERLYING OPTION EXERCISE PRICE
- ---- ---------- ----------------- --------------
<S> <C> <C> <C>
Bryan W. Sparks...................................... 09/24/99 600,000 $0.80
04/25/00 160,000 $3.00
Gregory C. Hill...................................... 12/30/99 200,000 $0.80
Timothy R. Bird...................................... 09/24/99 55,000 $0.80
Matthew R. Harris.................................... 12/30/99 150,000 $0.80
Bradley J. Walters................................... 09/24/99 70,000 $0.80
Ralph J. Yarro III................................... 09/24/99 60,000 $0.80
02/29/00 20,000 $1.50
Egan-Managed Capital, L.P.*.......................... 02/29/00 80,000 $1.50
William P. Barnett................................... 02/29/00 80,000 $0.80
</TABLE>
- ------------------------
* On behalf of one of our directors, Mr. Egan.
OTHER MATTERS
Our 401(k) plan is currently sponsored by The Canopy Group.
The Canopy Group is a venture capital company that invests primarily in
start-up technology companies that encourage the adoption, deployment and
promotion of Linux. The Canopy Group currently holds equity interests in
companies in fields including data storage and protection, Linux operating
systems, data satellites, universal voice messaging and electronic commerce. We
have entered into transactions with a number of these companies and the Canopy
Group including with respect to product sales and purchases, joint insurance
coverage and rent. See Note 9 of Notes to our Consolidated Financial Statements.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of May 15, 2000, and as adjusted to reflect the
sale of the common stock offered hereby, by:
- each stockholder known by us to own beneficially more than 5% of our
outstanding common stock;
- each of our directors;
- each of our named executive officers; and
- all current executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. For purposes of calculating the number of
shares beneficially owned by a stockholder and the percentage ownership of that
stockholder, shares of common stock subject to options that are currently
exercisable or exercisable within 60 days of May 15, 2000 by that stockholder
are deemed outstanding. These options are listed below under the heading "Number
of Shares Underlying Options" and are not treated as outstanding for the purpose
of computing the percentage ownership of any other stockholder. Percentage
ownership is based 38,250,714 shares of common stock outstanding on May 15, 2000
and shares outstanding upon completion of this offering.
Unless otherwise noted below, the address for each stockholder below is: c/o
Lineo, Inc., 390 South 400 West Lindon, Utah 84042. Unless otherwise noted, we
believe that each of the stockholders has sole investment and voting power with
respect to the common stock indicated, except to the extent shared by spouses
under applicable law.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING
SHARES -------------------
NUMBER OF UNDERLYING BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OPTIONS OFFERING OFFERING
- ------------------------------------ ---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Ralph J. Yarro III(1)................................. 17,843,886 60,000 46.7% %
Raymond J. Noorda(2).................................. 17,010,585 -- 44.4
The Canopy Group, Inc.(3) ............................ 17,010,585 -- 44.4
240 West Center Street
Orem, UT 84057
Caldera Systems, Inc.(4) ............................. 5,000,000 -- 13.1
240 West Center Street
Orem, UT 84057
Dry Canyon Holdings, LLC.............................. 3,147,441 -- 8.2
Bryan W. Sparks(5).................................... 3,147,441 -- 8.2
Egan-Managed Capital, L.P. ........................... 2,326,667 -- 6.1
c/o Michael H. Shanahan
30 Federal Street
Boston, MA 02110
John R. Egan(6)....................................... 2,326,667 -- 6.1
Bradley J. Walters.................................... 23,532 8,750 *
Timothy R. Bird....................................... 19,479 5,729 *
William P. Barnett.................................... -- -- --
All executive officers and directors as a group
(9 persons)(7)...................................... 23,361,005 74,479 61.1
</TABLE>
- ------------------------
* Less than 1%
51
<PAGE>
(1) Includes 12,010,585 shares of common stock held by The Canopy Group, of
which Mr. Yarro is the president and chief executive officer, 5,000,000
shares of common stock held by Caldera Systems, of which Mr. Yarro is
chairman of the board of directors, and 83,333 shares of common stock held
by Angel Partners, of which Mr. Yarro is president, chairman and a trustee.
Mr. Yarro disclaims beneficial ownership of the shares owned by The Canopy
Group, Caldera Systems and Angel Partners.
(2) Includes 12,010,585 shares of common stock held by The Canopy Group, of
which Mr. Noorda is chairman and a member of the board of directors, and
5,000,000 shares of common stock held by Caldera Systems, of which
Mr. Noorda is a member of the board of directors. Mr. Noorda disclaims
beneficial ownership of the shares owned by The Canopy Group and Caldera
Systems, except to the extent of his pecuniary interest therein.
(3) Includes 5,000,000 shares of common stock held by Caldera Systems, of which
The Canopy Group is a majority stockholder.
(4) Includes 1,761,563 shares of common stock acquired from The Canopy Group in
May 2000.
(5) Includes 3,147,441 shares of common stock held by Dry Canyon Holdings, LLC,
of which Mr. Sparks is a member.
(6) Includes 2,326,667 shares of common stock held by Egan-Managed Capital, of
which Mr. Egan is a managing partner. Mr. Egan disclaims beneficial
ownership of the shares owned by Egan-Managed Capital, except to the extent
of his pecuniary interest therein.
(7) Includes 750,000 shares of common stock held by MRH Investments, LLC, of
which Matthew R. Harris is a member. See also footnotes 1, 2, 5 and 6 above.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, we will be authorized to issue up to
100,000,000 shares of common stock, $0.001 par value, and 30,000,000 shares of
preferred stock, $0.001 par value. The following summary of certain provisions
of our common stock and preferred stock is not complete and may not contain all
the information you should consider before investing in the common stock. This
description is subject to and qualified in its entirety by provisions of our
certificate of incorporation and bylaws, which are included as exhibits to the
registration statement of which this prospectus is a part, and by provisions of
applicable Delaware law.
COMMON STOCK
As of May 15, 2000, assuming conversion of all outstanding shares of
preferred stock, there were 38,250,714 shares of common stock outstanding that
were held of record by 176 stockholders. After giving effect to the sale of
common stock offered in this offering, there will be shares of common
stock outstanding, assuming no exercise of outstanding stock options. As of
May 15, 2000, there were outstanding options to purchase a total of
3,052,722 shares of common stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
granted to any outstanding shares of preferred stock, the holders of common
stock are entitled to receive ratably only those dividends our board of
directors declares out of funds legally available for the payment of dividends
as well as any other distributions to the stockholders.
If we are liquidated, dissolved or wound-up, the holders of common stock are
entitled to share pro rata all of our assets remaining after payment of our
liabilities and liquidation preferences of any then-outstanding shares of
preferred stock. Holders of common stock have no preemptive rights or rights to
convert their common stock into any other securities. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and non-assessable, and the shares of common
stock to be issued in this offering will be fully paid and non-assessable.
PREFERRED STOCK
Upon completion of this offering, all outstanding shares of preferred stock
will be converted into 16,763,813 shares of common stock. Thereafter, pursuant
to our certificate of incorporation, our board of directors will have the
authority, without further action by the stockholders, to issue up to 30,000,000
shares of preferred stock in one or more series and to fix the relative
designations, powers, preferences and privileges of the preferred stock, any or
all of which may be greater than the rights of the common stock. Our board of
directors, without stockholder approval, can issue preferred stock with voting,
conversion or other rights that could adversely affect the voting power and
other rights of the holders of common stock. Preferred stock could thus be
issued quickly with terms that could delay or prevent a change in control of us
or make removal of our management more difficult. Additionally, the issuance of
preferred stock may decrease the market price of the common stock and may
adversely affect the voting and other rights of the holders of common stock. We
have no present plans to issue any preferred stock.
53
<PAGE>
REGISTRATION RIGHTS
After this offering, the holders of 15,166,664 shares of common stock will
be entitled to rights with respect to the registration of those shares under the
Securities Act pursuant to an investor rights agreement among those holders and
us dated February 17, 2000, as amended. Under the terms of this agreement, if we
propose to register any of our securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, the holders of these shares are entitled to notice of the
registration and to include their shares of common stock in the registration at
our expense. Additionally, the holders of these shares are entitled to demand
registration rights pursuant to which they may require us to file a registration
statement under the Securities Act at our expense with respect to their shares
of common stock. Further, the holders of these shares may require us to file
additional registration statements on Form S-3 at our expense. All of these
registration rights are subject to the right of the underwriters of an offering
to limit the number of shares included in such registration. These registration
rights terminate when the holder can transfer his or her registrable shares
pursuant to Rule 144. Holders of these registration rights have entered into
lock-up agreements and waived their registration rights until 180 days following
the closing of this offering.
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW
Our board of directors, without stockholder approval, has the authority
under our certificate of incorporation to issue preferred stock with rights
superior to the rights of the holders of common stock. As a result, preferred
stock could be issued quickly and easily, could adversely affect the rights of
holders of common stock and could be issued with terms calculated to delay or
prevent a change in control of us or make removal of our management more
difficult. In addition, as of the first annual meeting of stockholders following
the closing of this offering, our board of directors will be divided into three
classes. The directors in each class will serve for three-year terms, one class
being elected each year by our stockholders, and directors can only be removed
for cause. This system of electing and removing directors may tend to discourage
a third party from making a tender offer or otherwise attempting to obtain
control of our company because it generally makes it more difficult for
stockholders to replace a majority of the directors.
Upon completion of this offering, our certificate of incorporation will also
permit the stockholders to adopt, amend or repeal our bylaws only upon the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of voting stock entitled to vote at an election of directors. In addition,
directors will be removable for cause only by stockholders holding a majority of
the then outstanding shares of stock entitled to vote. Vacancies on the board of
directors resulting from death, resignation, removal or other reason shall be
filled by a majority of the directors then in office, even if less than a
quorum.
Upon completion of this offering, our bylaws will require that all
stockholder actions must be effected at a duly called annual or special meeting
and not by a consent in writing. Our bylaws will not permit stockholders to call
a special meeting. In addition, our bylaws will establish an advance notice
procedure for matters to be brought before an annual or special meeting of our
stockholders, including the election of directors. Business permitted to be
conducted at any annual meeting or special meeting of stockholders will be
limited to business properly brought before the meeting. Our bylaws will also
provide that we will indemnify officers and directors against losses that they
may incur in investigations and legal proceedings resulting from their services
to us, which may include services in connection with takeover defense measures.
These provisions may have the effect of preventing changes in our management.
In addition, section 203 of the Delaware General Corporation Law prohibits
certain "business combination" transactions between a Delaware corporation and
any "interested stockholder" owning
54
<PAGE>
15% or more of the corporation's outstanding voting stock for a period of three
years after the date on which such stockholder became an interested stockholder,
unless:
- the board of directors approves, prior to such date, either the proposed
business combination or the proposed acquisition of stock which resulted
in the stockholder becoming an interested stockholder;
- upon consummation of the transaction in which the stockholder becomes an
interested stockholder, the interested stockholder owned at least 85% of
those shares of the voting stock of the corporation which are not held by
the directors, officers or certain employee stock plans; or
- on or subsequent to the date on which such stockholder became an
interested stockholder, the business combination with the interested
stockholder is approved by the board of directors and also approved at a
stockholders' meeting by the affirmative vote of the holders of at least
two-thirds of the outstanding shares of the corporation's voting stock
other than shares held by the interested stockholder.
Under Delaware law, a "business combination" includes a merger, asset sale
or other transaction resulting in a financial benefit to the interested
stockholder. Section 203 does not apply, however, to those stockholders who own
15% or more of our voting stock prior to this offering.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C. The transfer agent's address is 520 Pike Street,
Suite 1220, Seattle, Washington 98101, and its telephone number is
(206) 292-3795.
NATIONAL MARKET LISTING
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "LNEO."
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have shares of common
stock outstanding, assuming no exercise of options after May 15, 2000. Of these
shares, the shares sold in this offering will be freely tradable in the
public market without restriction under the Securities Act, unless such shares
are held by our "affiliates," as that term is defined in Rule 144 under the
Securities Act.
The remaining 38,250,714 shares of common stock that will be outstanding
after this offering will be restricted shares because they were sold in private
transactions in reliance on exemptions from registration under the Securities
Act. The following table shows the timing of when shares outstanding on May 15,
2000 first become eligible for resale in the public market:
<TABLE>
<CAPTION>
NUMBER OF SHARES COMMENT
--------------------- ---------------------------------
<S> <C> <C>
- - upon effectiveness of this
prospectus..................... - Freely tradable shares sold in
this offering
- - 90 days after the date of this
prospectus..................... 669,905 - Shares eligible for sale under
Rules 144 and 701 and not
previously registered on Form
S-8 or locked up
- - 181 days after the date of this
prospectus..................... 18,000,000 - Freely tradable upon expiration
of lock-up agreements, subject to
the provisions of Rule 144
- - at various times thereafter
upon expiration of one-year
holding periods................ 19,580,809 - Freely tradable, subject to the
provisions of Rule 144
</TABLE>
S-8 REGISTRATION STATEMENTS
As of May 15, 2000, there were a total of 3,052,722 shares of common stock
subject to outstanding options under our stock option plan. Following
effectiveness of this offering, we intend to file a registration statement on
Form S-8 under the Securities Act to register certain of the shares of common
stock issued or reserved for future issuance under our stock option plan. After
the effective date of the registration statement on Form S-8, shares purchased
upon exercise of options granted pursuant to our stock option plan generally
would be available for resale in the public market without restriction.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year would be entitled to sell in any three-month period
up to the greater of:
- 1% of the then-outstanding shares of common stock, or approximately
shares immediately after this offering; and
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
56
<PAGE>
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about us.
RULE 701
Any of our employees, directors, officers, consultants or advisors who
purchased shares from us in connection with a written stock or option plan
before the effective date of this offering is entitled to rely on the resale
provisions of Rule 701, subject to the lock-up agreements described above. In
general, Rule 701 permits non-affiliates to sell their Rule 701 shares 90 days
after the effectiveness of a registration statement relating to a company's
initial public offering without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with the
holding period of Rule 144.
RULE 144(k)
Under Rule 144(k), a person who has not been one of our affiliates during
the preceding 90 days and who has beneficially owned the restricted shares for
at least two years is entitled to sell them without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
LOCK-UP AGREEMENTS
Pursuant to certain "lock-up" agreements, our executive officers, directors
and certain of our other stockholders have agreed not to offer, sell, contract
to sell, announce an intention to sell, pledge or otherwise dispose of, directly
or indirectly, or file with the SEC a registration statement under the
Securities Act relating to, any shares of common stock or securities convertible
into or exchangeable or exercisable for any common stock without the prior
written consent of Credit Suisse First Boston Corporation for a period of
180 days after the date of this prospectus.
57
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Lehman
Brothers Inc., Dain Rauscher Incorporated and Wit SoundView Corporation are
acting as representatives, the following respective numbers of shares of common
stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Lehman Brothers Inc.........................................
Dain Rauscher Incorporated..................................
Wit SoundView Corporation...................................
---------
Total...................................................
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares from us at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us................ $ $ $ $
Expenses payable by us.................. $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We have agreed not to offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file with the SEC a registration
statement under the Securities Act relating to, any shares of our common stock
or securities convertible into or exchangeable or exercisable for any shares of
common stock, or publicly disclose the intention to make any such offer, sale,
pledge, disposition or filing, without the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus.
58
<PAGE>
Our officers, directors and certain of our other stockholders have agreed
that they will not offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same effect, or enter into
swap, hedge or other arrangement that transfers, in whole or part, any of the
economic consequences of ownership of our common stock, whether any such
aforementioned transaction is to be settled by delivery of our common stock or
such other securities, in cash or otherwise, or publicly disclose the intention
to make any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of
180 days after the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of common stock for employees, directors and certain
other person associated with us, who have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in this offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the other
shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "LNEO."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters and will not necessarily reflect the market
price of the common stock following the offering. The principal factors that
will be considered in determining the public offering price will include:
- the information in this prospectus and otherwise available to the
underwriters;
- market conditions for initial public offerings;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- the prospects for our future earnings;
- the present state of our development and our current financial condition;
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies; and
- the general condition of the securities markets at the time of this
offering.
We can offer no assurances that the initial public offering price will
correspond to the price at which the common stock will trade in the public
market subsequent to the offering or that an active trading market for the
common stock will develop and continue after the offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with
Regulation M under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
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<PAGE>
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to cover
syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format will be made available on the Web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to the underwriters
for sale to their online brokerage account holders. Internet distributions will
be allocated by the underwriters that will make Internet distributions on the
same basis as other allocations. Wit Capital Corporation is an online
broker/dealer that has received an allocation of shares of common stock through
its affiliate Wit SoundView Corporation.
In April 2000, DRW Venture Partners L.P., an affiliate of Dain Rauscher
Wessels, one of the representatives, purchased 125,000 shares of our Series C
preferred stock at a purchase price of $6.00 per share for a total purchase
price of $750,000.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
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<PAGE>
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named may
be located outside of Canada and, as a result, it may not be possible for
Canadian purchasers to effect service of process within Canada upon the issuer
or such persons. All or a substantial portion of the assets of the issuer and
such persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against the issuer or such persons in Canada or
to enforce a judgment obtained in Canadian courts against such issuer or persons
outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the SECURITIES ACT (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR # 95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the common stock in this offering will be passed upon for
the company by Summit Law Group, PLLC, Seattle, Washington. Certain legal
matters will be passed upon for the underwriters by Stoel Rives LLP, Seattle,
Washington.
As of the date of this prospectus, Summit Law Group beneficially owns 80,000
shares of our common stock, and certain members of Summit Law Group are
affiliated with both Rainier Investors, LLC, which beneficially holds 86,666
shares of our common stock, and MRH Investments, LLC, which beneficially holds
750,000 shares of our common stock.
EXPERTS
The financial statements and schedules included in this prospectus and
elsewhere in the registration statement, to the extent and for the periods
indicated in their reports, have been audited by Arthur Andersen and
BEFEC - Price Waterhouse, independent public accountants, and are included
herein in reliance upon the authority of said firms as experts in giving said
reports.
WHERE TO FIND ADDITIONAL DOCUMENTS
We have filed with the SEC a registration statement on Form S-1. This
prospectus, which forms a part of the registration statement, does not contain
all the information included in the registration statement. Certain information
is omitted and you should refer to the registration statement and its exhibits.
With respect to references made in this prospectus to any of our contracts or
other documents, such references are not necessarily complete and you should
refer to the exhibits attached to the registration statement for copies of the
actual contract or document. You may read and copy the registration statement,
including exhibits and schedules filed with it, at the SEC's public reference
facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain information on the operation of the SEC's public
reference facilities by calling the SEC at
61
<PAGE>
1-800-SEC-0330. The SEC maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants, such as us, that file electronically with the SEC.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements under the Exchange Act and, in accordance
with this law, will file periodic reports, proxy statements and other
information with the SEC. These periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference facilities and the Web site of the SEC referred to above.
62
<PAGE>
INDEX TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of April 30, 2000......................................... P-3
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended October 31, 1999............ P-4
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the six months ended April 30, 2000........ P-5
Notes to Pro Forma Condensed Consolidated Financial
Statements................................................ P-6
</TABLE>
P-1
<PAGE>
LINEO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements are based on the historical consolidated financial statements of
Lineo, Inc. included elsewhere in this prospectus adjusted to give effect to the
acquisition of Zentropic Computing, LLC ("Zentropic") completed by the Company
on April 3, 2000 and the acquisitions of United System Engineers ("USE"),
Fireplug Computers Inc. ("Fireplug"), Inup S.A. ("Inup"), Moreton Bay Ventures
Pty Ltd ("Moreton Bay") and RT-Control, Inc. ("RT-Control"), completed
subsequent to April 30, 2000. The accompanying unaudited pro forma condensed
consolidated financial statements should be read in conjunction with the audited
financial statements, including the notes thereto, of these entities included
elsewhere in this prospectus. The unaudited pro forma condensed consolidated
financial statements have been prepared using the purchase method of accounting
for the acquisitions.
The unaudited pro forma condensed consolidated balance sheet as of
April 30, 2000 reflects the effect of the Company's acquisition of USE,
Fireplug, Inup, Moreton Bay and RT-Control as if they had occurred on April 30,
2000. The unaudited pro forma condensed consolidated statements of operations
for the year ended October 31, 1999 and the six months ended April 30, 2000
reflect the effect of all of the acquisitions as if they had occurred on
November 1, 1998.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that management believes are reasonable. The
unaudited pro forma condensed consolidated financial statements included in this
prospectus are for illustrative purposes only. Such information does not purport
to represent what the Company's financial position or results of operations
actually would have been had the acquisitions in fact occurred when assumed, nor
is it indicative of actual or future operating results or financial position
that may occur.
P-2
<PAGE>
LINEO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF APRIL 30, 2000
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------------------------------------
LINEO USE FIREPLUG INUP MORETON BAY RT-CONTROL
------------ ----------- ---------- ---------- ----------- ----------
APRIL 30, MARCH 31, MARCH 31, MARCH 31, APRIL 30, MARCH 31, PRO FORMA
2000 2000 2000 2000 2000 2000 ADJUSTMENTS
------------ ----------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash....................... $ 30,464,362 $ 307,000 $ 537 $ 519,815 $214,848 $ 12,229 $(1,164,179)(a)
Accounts receivable, net... 690,631 113,000 25,189 95,259 8,603 331 --
Marketable securities...... -- 499,000 -- -- 271,446 -- --
Other receivables.......... 1,531,236 -- -- -- 48,204 12,905 --
Prepaid expenses and
other.................... 173,960 35,000 -- 5,176 58,613 54,609 --
------------ ----------- --------- --------- -------- --------- -----------
Total current assets..... 32,860,189 954,000 25,726 620,250 601,714 80,074 (1,164,179)
------------ ----------- --------- --------- -------- --------- -----------
Property and equipment,
net...................... 379,999 473,000 25,636 155,877 7,162 49,639 --
Goodwill and other
intangibles, net......... 5,804,109 -- -- -- -- -- 19,071,626 (a)
Other assets............... 2,157,885 19,000 -- -- -- -- (100,000)(b)
------------ ----------- --------- --------- -------- --------- -----------
Total assets............. $ 41,202,182 $ 1,446,000 $ 51,362 $ 776,127 $608,876 $ 129,713 $17,807,447
============ =========== ========= ========= ======== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current
maturities of long-term
debt..................... $ -- $ 1,107,000 $ -- $ -- $ -- $ 1,821 $ --
Accounts payable........... 515,151 -- 27,051 103,681 80,787 21,237 --
Accrued liabilities........ 599,610 120,000 32,157 35,342 49,334 53,506 239,132 (a)
Deferred revenue........... 303,953 18,000 -- -- 20,682 605 --
Related party payables..... 157,755 -- 62,476 -- -- 121,942 (100,000)(b)
------------ ----------- --------- --------- -------- --------- -----------
Total current
liabilities............ 1,576,469 1,245,000 121,684 139,023 150,803 199,111 139,132
------------ ----------- --------- --------- -------- --------- -----------
Deferred income tax
liability.................. 115,059 -- -- -- -- -- --
------------ ----------- --------- --------- -------- --------- -----------
Long-term debt, net of
current maturities......... -- 814,000 -- -- -- 7,286 --
------------ ----------- --------- --------- -------- --------- -----------
Stockholders' equity
(deficit):
Convertible preferred
stock.................... 15,250 -- -- -- -- -- 1,514 (a)
Common stock............... 20,149 781,000 134,074 188,363 -- 181,439 (1,283,543)(a)
Additional paid-in
capital.................. 52,611,663 -- -- 738,577 -- -- 19,322,892 (a)
Retained earnings
(accumulated deficit).... (10,225,164) (1,671,000) (199,394) (252,124) 458,073 (258,045) (138,340)(a)
Accumulated other
comprehensive income
(loss)................... -- 277,000 (5,002) (37,712) -- (78) (234,208)(a)
Deferred compensation...... (2,911,244) -- -- -- -- -- --
------------ ----------- --------- --------- -------- --------- -----------
Total stockholders'
equity (deficit)....... 39,510,654 (613,000) (70,322) 637,104 458,073 (76,684) 17,668,315
------------ ----------- --------- --------- -------- --------- -----------
Total liabilities and
stockholders' equity... $ 41,202,182 $ 1,446,000 $ 51,362 $ 776,127 $608,876 $ 129,713 $17,807,447
============ =========== ========= ========= ======== ========= ===========
<CAPTION>
PRO FORMA
------------
<S> <C>
ASSETS
Current assets:
Cash....................... $ 30,354,612
Accounts receivable, net... 933,013
Marketable securities...... 770,446
Other receivables.......... 1,592,345
Prepaid expenses and
other.................... 327,358
------------
Total current assets..... 33,977,774
------------
Property and equipment,
net...................... 1,091,313
Goodwill and other
intangibles, net......... 24,875,735
Other assets............... 2,076,885
------------
Total assets............. $ 62,021,707
============
LIABILITIES
AND
STOCKHOLDERS'
EQUITY
(DEFICIT)
Current liabilities:
Notes payable and current
maturities of long-term
debt..................... $ 1,108,821
Accounts payable........... 747,907
Accrued liabilities........ 1,129,081
Deferred revenue........... 343,240
Related party payables..... 242,173
------------
Total current
liabilities............ 3,571,222
------------
Deferred income tax
liability.................. 115,059
------------
Long-term debt, net of
current maturities......... 821,286
------------
Stockholders' equity
(deficit):
Convertible preferred
stock.................... 16,764
Common stock............... 21,482
Additional paid-in
capital.................. 72,673,132
Retained earnings
(accumulated deficit).... (12,285,994)
Accumulated other
comprehensive income
(loss)................... --
Deferred compensation...... (2,911,244)
------------
Total stockholders'
equity (deficit)....... 57,514,140
------------
Total liabilities and
stockholders' equity... $ 62,021,707
============
</TABLE>
P-3
<PAGE>
LINEO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------------------------------------------------------
LINEO ZENTROPIC USE FIREPLUG INUP
---------------- ---------------- ----------------- ----------------- -----------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1999 OCTOBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999
---------------- ---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenue.......................... $ 2,800,584 $ 85,474 $1,534,000 $ 144,778 $ 8,355
Cost of revenue.................. 184,857 38,364 1,024,000 88,996 1,785
----------- ---------- ---------- ---------- ----------
Gross margin................. 2,615,727 47,110 510,000 55,782 6,570
----------- ---------- ---------- ---------- ----------
Operating expenses:
Research and development....... 1,303,347 320,828 48,000 -- --
Sales and marketing............ 729,066 249,898 -- 32,382 --
General and administrative..... 1,223,578 150,132 971,000 56,787 131,556
Non-cash stock-related
compensation(*).............. 250,265 78,708 -- -- --
Amortization of goodwill and
other intangibles............ -- -- -- -- --
----------- ---------- ---------- ---------- ----------
Total operating expenses..... 3,506,256 799,566 1,019,000 89,169 131,556
----------- ---------- ---------- ---------- ----------
Loss from operations............. (890,529) (752,456) (509,000) (33,387) (124,986)
Other expense, net............... (163,146) -- (69,000) -- (50)
----------- ---------- ---------- ---------- ----------
Loss before income taxes......... (1,053,675) (752,456) (578,000) (33,387) (125,036)
Income tax (provision) benefit... -- 4,117 (2,000) -- 14,718
----------- ---------- ---------- ---------- ----------
Net loss......................... $(1,053,675) $ (748,339) $ (580,000) $ (33,387) $ (110,318)
=========== ========== ========== ========== ==========
Basic and diluted net loss per
common share................... $ (0.06)
===========
Basic and diluted weighted
average common shares
outstanding.................... 18,000,000 1,745,226 (d) 1,333,333 (d)
=========== ========== ==========
Basic and diluted supplemental
net loss per common share...... $ (0.06)
===========
Basic and diluted supplemental
weighted average common shares
outstanding.................... 18,000,000 1,745,226 (e) 69,998 (e) 1,416,667 (e)
=========== ========== ========== ==========
- ------------------------------
* Non-cash stock-related compensation
has been excluded from the following
expenses:
Research and development..... $ 15,935 $ 850
Sales and marketing.......... 26,376 58,393
General and administrative... 207,954 19,465
<CAPTION>
HISTORICAL
--------------------------------------
MORETON BAY RT-CONTROL
---------------- -------------------
INCEPTION (JUNE 30,
YEAR ENDED 1999) TO PRO FORMA
OCTOBER 31, 1999 DECEMBER 31, 1999 ADJUSTMENTS PRO FORMA
---------------- ------------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue.......................... $ -- $ 66,951 $ -- $ 4,640,142
Cost of revenue.................. -- 42,392 -- 1,380,394
--------- -------- ----------- ------------
Gross margin................. -- 24,559 -- 3,259,748
--------- -------- ----------- ------------
Operating expenses:
Research and development....... 37,839 74,468 -- 1,784,482
Sales and marketing............ 17,114 7,324 -- 1,035,784
General and administrative..... 92,038 38,446 -- 2,663,537
Non-cash stock-related
compensation(*).............. 53,201 -- -- 382,174
Amortization of goodwill and
other intangibles............ -- -- 7,125,248 (c) 7,125,248
--------- -------- ----------- ------------
Total operating expenses..... 200,192 120,238 7,125,248 12,991,225
--------- -------- ----------- ------------
Loss from operations............. (200,192) (95,679) (7,125,248) (9,731,477)
Other expense, net............... -- (2,764) -- (234,960)
--------- -------- ----------- ------------
Loss before income taxes......... (200,192) (98,443) (7,125,248) (9,966,437)
Income tax (provision) benefit... -- -- -- 16,835
--------- -------- ----------- ------------
Net loss......................... $(200,192) $(98,443) $(7,125,248) $ (9,949,602)
========= ======== =========== ============
Basic and diluted net loss per
common share................... $ (0.47)
============
Basic and diluted weighted
average common shares
outstanding.................... 21,078,559
============
Basic and diluted supplemental
net loss per common share...... $ (0.44)
============
Basic and diluted supplemental
weighted average common shares
outstanding.................... 956,315 (e) 404,169 (e) 22,592,375
========= ======== ============
- ------------------------------
* Non-cash stock-related compensa
has been excluded from the foll
expenses:
Research and development..... $ 43,097 $ 59,882
Sales and marketing.......... -- 84,769
General and administrative... 10,104 237,523
</TABLE>
P-4
<PAGE>
LINEO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2000
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------------------------------------------
LINEO ZENTROPIC USE FIREPLUG INUP
-------------- ----------------- -------------- -------------- --------------
SIX MONTHS PERIOD FROM SIX MONTHS SIX MONTHS SIX MONTHS
ENDED NOVEMBER 1, 1999 ENDED ENDED ENDED
APRIL 30, 2000 TO APRIL 2, 2000 MARCH 31, 2000 MARCH 31, 2000 MARCH 31, 2000
-------------- ----------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenue........................ $ 1,751,094 $ 256,491 $ 764,000 $ 128,238 $ 8,355
Cost of revenue................ 84,382 102,035 650,000 35,455 1,785
----------- ---------- --------- --------- ----------
Gross margin............... 1,666,712 154,456 114,000 92,783 6,570
----------- ---------- --------- --------- ----------
Operating expenses:
Research and development..... 1,736,209 81,406 48,000 -- --
Sales and marketing.......... 1,098,284 223,870 -- 72,087 --
General and administrative... 1,108,174 72,108 623,000 16,652 313,025
Non-cash stock-related
compensation(*)............ 1,045,621 167,354 -- 114,500 --
Amortization of goodwill and
other intangibles.......... 165,829 -- -- -- --
Acquired in-process research
and development............ 800,000 -- -- -- --
----------- ---------- --------- --------- ----------
Total operating expenses... 5,954,117 544,738 671,000 203,239 313,025
----------- ---------- --------- --------- ----------
Loss from operations........... (4,287,405) (390,282) (557,000) (110,456) (306,455)
Other income (expense), net.... 45,105 -- (31,000) -- 443
----------- ---------- --------- --------- ----------
Loss before income taxes....... (4,242,300) (390,282) (588,000) (110,456) (306,012)
Income tax (provision)
benefit...................... 139,715 (1,942) (1,000) -- 53,888
----------- ---------- --------- --------- ----------
Net loss....................... $(4,102,585) $ (392,224) $(589,000) $(110,456) $ (252,124)
=========== ========== ========= ========= ==========
Basic and diluted net loss per
common share................. $ (0.21)
===========
Basic and diluted weighted
average common shares
outstanding.................. 19,659,910 1,484,888 (i) 1,333,333 (i)
=========== ========== ==========
Basic and diluted supplemental
net loss per common share.... $ (0.17)
===========
Basic and diluted supplemental
weighted average common
shares outstanding........... 23,945,361 (j) 1,484,888 (k) 69,998 (k) 1,416,667 (k)
=========== ========== ========= ==========
- ------------------------------
* Non-cash stock-related
compensation has been
excluded from the following
expenses:
Research and development... $ 66,931 $ 29,454 $ --
Sales and marketing........ 22,966 94,242 --
General and
administrative........... 955,724 43,658 114,500
<CAPTION>
HISTORICAL
--------------------------------
MORETON BAY RT-CONTROL
--------------- --------------
SIX MONTHS SIX MONTHS
ENDED ENDED PRO FORMA
APRIL 30, 2000 MARCH 31, 2000 ADJUSTMENTS PRO FORMA
--------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue........................ $ 26,558 $ 79,083 $ (200,000)(f) $ 2,813,819
Cost of revenue................ 13,691 32,330 (81,933)(f) 837,745
--------- --------- ----------- -----------
Gross margin............... 12,867 46,753 (118,067) 1,976,074
--------- --------- ----------- -----------
Operating expenses:
Research and development..... 94,456 125,679 (118,067)(f) 1,967,683
Sales and marketing.......... 13,583 11,528 -- 1,419,352
General and administrative... 75,381 80,149 -- 2,288,489
Non-cash stock-related
compensation(*)............ 59,365 75,000 -- 1,461,840
Amortization of goodwill and
other intangibles.......... -- -- 3,396,793 (g) 3,562,622
Acquired in-process research
and development............ -- -- (800,000)(h) --
--------- --------- ----------- -----------
Total operating expenses... 242,785 292,356 2,478,726 10,699,986
--------- --------- ----------- -----------
Loss from operations........... (229,918) (245,603) (2,596,793) (8,723,912)
Other income (expense), net.... -- 4,123 -- 18,671
--------- --------- ----------- -----------
Loss before income taxes....... (229,918) (241,480) (2,596,793) (8,705,241)
Income tax (provision)
benefit...................... -- -- -- 190,661
--------- --------- ----------- -----------
Net loss....................... $(229,918) $(241,480) $(2,596,793) $(8,514,580)
========= ========= =========== ===========
Basic and diluted net loss per
common share................. $ (0.38)
===========
Basic and diluted weighted
average common shares
outstanding.................. 22,478,131
===========
Basic and diluted supplemental
net loss per common share.... $ (0.30)
===========
Basic and diluted supplemental
weighted average common
shares outstanding........... 956,315 (k) 404,169 (k) 28,277,398
========= ========= ===========
- ------------------------------
* Non-cash stock-related
compensation has been
excluded from the following
expenses:
Research and development... $ 59,365 $ -- $ 155,750
Sales and marketing........ -- -- 117,208
General and
administrative........... -- 75,000 1,188,882
</TABLE>
P-5
<PAGE>
LINEO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The unaudited pro forma condensed consolidated financial statements are
based on adjustments to the historical consolidated financial statements of
Lineo, Inc. to give effect to the acquisitions described in Note 2 using the
purchase method of accounting. The unaudited pro forma condensed consolidated
balance sheet assumes the acquisitions of USE, Fireplug, Inup, Moreton Bay and
RT-Control were consummated on April 30, 2000. The unaudited pro forma condensed
consolidated statements of operations assume all acquisitions described in
Note 2 were consummated as of November 1, 1998. The unaudited pro forma
condensed consolidated statements of operations are not necessarily indicative
of results that would have occurred had the acquisitions been consummated as of
November 1, 1998 or that might be attained in the future. The pro forma
condensed consolidated financial statements should be read in conjunction with
the historical consolidated financial statements of the Company, the historical
financial statements of the acquired companies and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.
USE and Inup have not separately classified sales and marketing expenses
from general and administrative expenses in their historical financial
statements. As a result, for purposes of the accompanying unaudited pro forma
condensed consolidated statements of operations the selling, general and
administrative expense of USE and Inup have been classified as general and
administrative expense.
(2) ACQUISITIONS
The following table sets forth the consideration paid in cash, including
estimated direct expenses to be paid in connection with each acquisition, and
through the issuance of shares of common stock, shares of Series C and Series D
convertible preferred stock and options to acquire shares of common stock. For
purposes of computing the estimated purchase price, the value of the common
stock was determined using an estimated fair value of $3.80 per share for the
Zentropic acquisition and a value of $6.00 per share for the shares of Series C
and Series D convertible preferred shares and common shares issued for the
acquisition of all other entities, which represents the estimated fair value
based upon equity transactions with independent parties at or near the dates the
acquisitions were consummated. The estimated fair values of the options to
purchase common stock issued in connection with the acquisitions were determined
using the Black-Scholes option pricing model with the following assumptions:
expected exercise lives of five years, risk free interest rate of 5.65 percent,
expected dividend yield of zero percent and volatility of 60.7 percent. The
estimated purchase price for the acquisitions is based on preliminary estimates
and is subject to certain purchase price adjustments following closing. However,
management does not expect the final purchase price allocation to be
P-6
<PAGE>
LINEO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) ACQUISITIONS (CONTINUED)
materially different from the preliminary allocation nor does it expect there to
be any material post closing adjustments.
<TABLE>
<CAPTION>
OPTIONS TO SHARES OF SHARES OF
PURCHASE SERIES C SERIES D
SHARES OF SHARES OF CONVERTIBLE CONVERTIBLE
COMMON COMMON PREFERRED PREFERRED
CASH STOCK STOCK STOCK STOCK
---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Zentropic.............................. $ 111,867 1,745,226 -- -- --
USE.................................... 372,829 -- 507,335 -- --
Fireplug............................... 581,350 -- 62,220 -- 69,998
Inup................................... 60,000 1,333,333 -- 83,334 --
Moreton Bay............................ 60,000 -- 87,374 -- 956,315
RT-Control............................. 90,000 -- 16,667 -- 404,169
---------- --------- ------- ------ ---------
Total................................ $1,276,046 3,078,559 673,596 83,334 1,430,482
========== ========= ======= ====== =========
</TABLE>
Zentropic was acquired effective April 3, 2000. The acquisitions of USE,
Fireplug, Inup, Moreton Bay and RT-Control are effective subsequent to
April 30, 2000 through May 12, 2000.
Management of the Company anticipates, based on its preliminary analysis,
that the historical carrying value of the acquired companies' assets and
liabilities will approximate fair value. The estimated purchase prices have been
allocated to each of the acquired companies as follows based on preliminary
independent appraisals:
<TABLE>
<CAPTION>
ZENTROPIC USE FIREPLUG INUP MORETON BAY RT-CONTROL TOTAL
---------- ---------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net assets
(liabilities)...... $ 115,765 $ (613,000) $ (70,322) $ 637,104 $ 218,941 $ (76,684) $ 211,804
Deferred income tax
liability.......... (141,977) -- -- -- -- -- (141,977)
Acquired in-process
research and
development........ 800,000 -- -- 800,000 900,000 400,000 2,900,000
Assembled
workforce.......... 610,000 475,000 130,000 210,000 320,000 -- 1,745,000
Core technology...... 1,301,000 466,000 600,000 -- 2,600,000 280,000 5,247,000
Non-competition
agreements......... -- -- 400,000 -- -- -- 400,000
Goodwill............. 4,058,938 2,249,787 254,565 6,912,898 2,138,690 1,995,516 17,610,394
---------- ---------- ---------- ---------- ---------- ---------- -----------
$6,743,726 $2,577,787 $1,314,243 $8,560,002 $6,177,631 $2,598,832 $27,972,221
========== ========== ========== ========== ========== ========== ===========
</TABLE>
The valuation of the in-process research and development included, but was
not limited to, an analysis by independent appraisers of (1) the market for the
acquired companies products and technologies; (2) the completion costs for the
projects; (3) the expected cashflows attributed to the projects; and (4) the
risks associated with achieving such cash flows. The assumptions used in valuing
the in-process research and development were based upon assumptions the Company
believed to be
P-7
<PAGE>
LINEO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) ACQUISITIONS (CONTINUED)
reasonable but which are inherently uncertain and unpredictable. For these
reasons, actual results may vary from projected results.
(3) PRO FORMA ADJUSTMENTS
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET ADJUSTMENTS
(a) In each of the acquisitions, the Company purchased 100 percent of the
outstanding equity of each entity. With respect to Moreton Bay, certain net
assets and operations not acquired were split-out to a separate entity by
Moreton Bay prior to the acquisition and accordingly were carved-out from
Moreton Bay's historical financial statements. This pro forma adjustment as
summarized in the table below reflects the following: (1) the consideration
paid in connection with the acquisitions including the issuance of common
stock, options to purchase common stock, Series C and Series D convertible
preferred stock, and cash payments, (2) the elimination of the acquired
companies historical equity accounts, (3) the impact of the write-off of
acquired in-process research and development on the accumulated deficit, and
(4) the potential repayment obligation of research and development grant
reimbursements totaling $239,132 received by Moreton Bay.
<TABLE>
<CAPTION>
TOTAL PRO
FORMA
USE FIREPLUG INUP MORETON BAY RT-CONTROL ADJUSTMENT
----------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash............... $ (372,829) $ (581,350) $ (60,000) $ (60,000) $ (90,000) $ (1,164,179)
Goodwill and other
intangibles...... 3,190,787 1,384,565 7,122,898 5,058,690 2,275,516 19,032,456
Accrued
liabilities...... -- -- (239,132) -- (239,132)
Convertible
preferred
stock............ -- (70) (84) (956) (404) (1,514)
Common stock....... 781,000 134,074 187,030 -- 181,439 1,283,543
Additional paid-in
capital.......... (2,204,958) (732,823) (7,760,008) (6,116,675) (2,508,428) (19,322,892)
Retained earnings
(accumulated
deficit)......... (1,671,000) (199,394) 547,876 1,358,073 141,955 177,510
Accumulated other
comprehensive
income (loss).... 277,000 (5,002) (37,712) -- (78) 234,208
----------- ---------- ----------- ----------- ----------- ------------
$ -- $ -- $ -- $ -- $ -- $ --
=========== ========== =========== =========== =========== ============
</TABLE>
(b) To eliminate an intercompany advance from Lineo to RT-Control.
P-8
<PAGE>
LINEO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) PRO FORMA ADJUSTMENTS (CONTINUED)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ADJUSTMENTS
YEAR ENDED OCTOBER 31, 1999
(c) To reflect the amortization of goodwill and other intangibles related to the
acquisitions. The amortization periods for intangible assets are as follows:
<TABLE>
<CAPTION>
PERIOD
-----------
<S> <C>
Goodwill.................................................... 3 - 5 years
Core technology............................................. 3 - 5 years
Assembled workforce......................................... 2 - 5 years
Non-competition agreements.................................. 2 years
</TABLE>
(d) Reflects the additional shares of common stock that would have been
outstanding had the acquisition of Zentropic been effective as of
November 1, 1998 and to reflect the shares of common stock issued in
connection with the acquisition of Inup. All other acquisitions were
completed through the issuance of options to purchase common stock and the
issuance of Series C and Series D convertible preferred stock. The options
and preferred stock are considered anti-dilutive and accordingly, have not
been included in the calculation of pro forma weighted average common shares
outstanding.
(e) Reflects the additional shares of common stock to be issued upon conversion
of the preferred shares issued as consideration in connection with the
acquisitions, which will occur upon completion of this offering.
SIX MONTHS ENDED APRIL 30, 2000
(f) To eliminate intercompany revenues and expenses between Lineo and Zentropic
earned and incurred prior to April 3, 2000 (the effective date of the
acquisition).
(g) To reflect the amortization of goodwill and other intangibles related to the
acquisitions.
(h) To eliminate the impact of the acquired in-process research and development
expensed as part of the acquisition of Zentropic.
(i) Reflects the additional shares of common stock that would have been
outstanding had the acquisition of Zentropic been effective as of
November 1, 1998 and to reflect the shares of common stock issued in the
acquisition of Inup. All other acquisitions were completed through the
issuance of options to purchase common stock and the issuance of Series C
and Series D convertible preferred stock. The options and preferred stock
are considered anti-dilutive and accordingly, have not been included in the
calculation of pro forma weighted average common shares outstanding.
(j) Reflects the additional shares of common stock to be issued upon conversion
of the preferred shares outstanding as of April 30, 2000 which will occur
upon completion of this offering.
(k) Reflects the additional shares of common stock to be issued upon conversion
of the preferred shares issued as consideration in connection with the
acquisitions, which will occur upon completion of this offering.
P-9
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
LINEO, INC.
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations and Comprehensive
Loss.................................................... F-5
Consolidated Statements of Stockholders' Equity
(Deficit)............................................... F-6
Consolidated Statements of Cash Flows..................... F-8
Notes to Consolidated Financial Statements................ F-10
ZENTROPIC COMPUTING, LLC
Report of Independent Public Accountants.................. F-30
Consolidated Balance Sheets............................... F-31
Consolidated Statements of Operations and Comprehensive
Loss.................................................... F-32
Consolidated Statements of Members' Capital............... F-33
Consolidated Statements of Cash Flows..................... F-34
Notes to Consolidated Financial Statements................ F-36
UNITED SYSTEM ENGINEERS, INC.
Report of Independent Public Accountants.................. F-44
Balance Sheets............................................ F-45
Statements of Operations and Comprehensive Income
(Loss).................................................. F-46
Statements of Stockholders' Deficit....................... F-47
Statements of Cash Flows.................................. F-48
Notes to Financial Statements............................. F-50
FIREPLUG COMPUTERS INC.
Report of Independent Public Accountants.................. F-62
Balance Sheets............................................ F-63
Statements of Operations and Comprehensive Loss........... F-64
Statements of Stockholders' Deficit....................... F-65
Statements of Cash Flows.................................. F-66
Notes to Financial Statements............................. F-67
INUP
Report of Independent Accountants......................... F-72
Balance Sheets............................................ F-73
Statements of Operations.................................. F-74
Statements of Stockholders' Equity........................ F-75
Statements of Cash Flows.................................. F-76
Notes to Financial Statements............................. F-77
MORETON BAY VENTURES PTY LTD
Report of Independent Public Accountants.................. F-82
Statements of Assets, Liabilities, and Equity (Deficit) of
the Acquired Operations................................. F-83
Statements of Revenue and Expenses and Comprehensive
Loss.................................................... F-84
Statements of Changes in Equity (Deficit) of the Acquired
Operations.............................................. F-85
Statements of Cash Flows.................................. F-86
Notes to Financial Statements............................. F-87
RT-CONTROL, INC.
Report of Independent Public Accountants.................. F-93
Balance Sheets............................................ F-94
Statements of Operations and Comprehensive Loss........... F-95
Statements of Shareholders' Equity (Deficit).............. F-96
Statements of Cash Flows.................................. F-97
Notes to Financial Statements............................. F-98
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Lineo, Inc.:
We have audited the accompanying consolidated balance sheets of Lineo, Inc.
(a Delaware corporation), the carved-out portion of Caldera, Inc. (a Utah
corporation) and their subsidiary as of October 31, 1998 and 1999, and the
related consolidated statements of operations and comprehensive loss,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended October 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Lineo, Inc., the carved-out portion of Caldera, Inc. and their subsidiary as of
October 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 1999 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
May 15, 2000
F-2
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------- APRIL 30,
1998 1999 2000
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash.................................................... $117,058 $ 67,794 $30,464,362
Accounts receivable, net of allowance for doubtful
accounts of approximately $13,000, $68,000 and
$68,000, respectively................................. 135,632 854,796 690,631
Stock subscription receivable........................... -- -- 1,500,000
Related party receivables............................... 29,884 32,116 31,236
Deferred income tax assets.............................. -- -- 107,319
Other current assets.................................... 11,941 5,623 66,641
-------- ---------- -----------
Total current assets.................................. 294,515 960,329 32,860,189
-------- ---------- -----------
Property and equipment:
Computer equipment...................................... 124,934 115,920 382,980
Furniture and fixtures.................................. 55,881 117,897 89,483
Leasehold improvements.................................. -- 5,396 9,306
-------- ---------- -----------
180,815 239,213 481,769
Less accumulated depreciation and amortization.......... (95,610) (65,420) (101,770)
-------- ---------- -----------
Net property and equipment............................ 85,205 173,793 379,999
-------- ---------- -----------
Investment in affiliate................................... -- -- 531,402
-------- ---------- -----------
Intangibles, net of accumulated amortization of
$165,829................................................ -- -- 5,804,109
-------- ---------- -----------
Advances to companies subsequently acquired............... -- -- 578,607
-------- ---------- -----------
Other assets.............................................. 85,000 -- 1,047,876
-------- ---------- -----------
$464,720 $1,134,122 $41,202,182
======== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------- APRIL 30,
1998 1999 2000
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Accounts payable......................................... $ 314,444 $ 65,084 $ 515,151
Accrued liabilities...................................... 142,780 290,579 599,610
Deferred revenue......................................... 782,075 293,155 303,953
Related party payables................................... 5,538 35,745 157,755
Convertible promissory note payable to majority
stockholder and related accrued interest............... 403,542 2,432,387 --
----------- ----------- ------------
Total current liabilities.............................. 1,648,379 3,116,950 1,576,469
----------- ----------- ------------
Deferred income tax liability.............................. -- -- 115,059
----------- ----------- ------------
Commitments and contingencies (Notes 1, 8 and 13)
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 30,000,000 shares
authorized:
Series A Class 1 convertible preferred stock, 5,000,000
shares designated and outstanding as of April 30,
2000................................................. -- -- 5,000
Series A Class 2 convertible preferred stock, 2,500,000
shares designated and outstanding as of April 30,
2000................................................. -- -- 2,500
Series B convertible preferred stock, 4,850,000 shares
designated and 4,833,331 shares outstanding as of
April 30, 2000....................................... -- -- 4,833
Series C convertible preferred stock, 3,000,000 shares
designated and 2,916,666 shares outstanding as of
April 30, 2000....................................... -- -- 2,917
Series D convertible preferred stock, 2,000,000 shares
designated and no shares outstanding................. -- -- --
Common stock, $0.001 par value; 100,000,000 shares
authorized, 18,000,000, 18,000,000 and 20,148,985
shares outstanding, respectively....................... 18,000 18,000 20,149
Additional paid-in capital............................... (719,002) (408,399) 52,611,663
Deferred compensation.................................... -- (60,338) (2,911,244)
Cumulative translation adjustments....................... (4,241) -- --
Accumulated deficit...................................... (478,416) (1,532,091) (10,225,164)
----------- ----------- ------------
Total stockholders' equity (deficit)................... (1,183,659) (1,982,828) 39,510,654
----------- ----------- ------------
$ 464,720 $ 1,134,122 $ 41,202,182
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, SIX MONTHS ENDED APRIL 30,
--------------------------------------- ---------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue...................................... $ 945,414 $ 1,376,209 $ 2,800,584 $ 805,838 $ 1,751,094
Cost of revenue.............................. 247,694 360,727 184,857 36,722 84,382
----------- ----------- ----------- ----------- -----------
Gross margin............................... 697,720 1,015,482 2,615,727 769,116 1,666,712
----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development (exclusive of non-
cash stock-related compensation of
$15,935 in fiscal year 1999 and $66,931
in the six months ended April 30,
2000).................................... 655,122 1,357,190 1,303,347 785,937 1,736,209
Sales and marketing (exclusive of non-cash
stock-related compensation of $26,376 in
fiscal year 1999 and $22,966 in the six
months ended April 30, 2000)............. 662,811 1,023,759 729,066 320,582 1,098,284
General and administrative (exclusive of
non-cash stock-related compensation of
$207,954 in fiscal year 1999 and $955,724
in the six months ended April 30,
2000).................................... 207,084 639,667 1,223,578 695,124 1,108,174
Non-cash stock-related compensation........ -- -- 250,265 -- 1,045,621
Amortization of goodwill and other
intangibles.............................. -- -- -- -- 165,829
Acquired in-process research and
development.............................. -- -- -- -- 800,000
----------- ----------- ----------- ----------- -----------
Total operating expenses................. 1,525,017 3,020,616 3,506,256 1,801,643 5,954,117
----------- ----------- ----------- ----------- -----------
Loss from operations......................... (827,297) (2,005,134) (890,529) (1,032,527) (4,287,405)
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest expense........................... (51,048) (186,904) (138,542) (49,166) (57,769)
Interest income............................ -- 669 14,245 5,761 96,506
Other income (expense), net................ 1,439 5,098 (38,849) -- 6,368
----------- ----------- ----------- ----------- -----------
Other income (expense), net.............. (49,609) (181,137) (163,146) (43,405) 45,105
----------- ----------- ----------- ----------- -----------
Loss before income tax benefit............... (876,906) (2,186,271) (1,053,675) (1,075,932) (4,242,300)
Income tax benefit........................... -- -- -- -- 139,715
----------- ----------- ----------- ----------- -----------
Net loss..................................... $ (876,906) $(2,186,271) $(1,053,675) $(1,075,932) $(4,102,585)
=========== =========== =========== =========== ===========
Basic and diluted net loss per common
share...................................... $ (0.05) $ (0.12) $ (0.06) $ (0.06) $ (0.21)
=========== =========== =========== =========== ===========
Weighted average common shares outstanding... 18,000,000 18,000,000 18,000,000 18,000,000 19,659,910
=========== =========== =========== =========== ===========
Comprehensive loss:
Net Loss................................... $ (876,906) $(2,186,271) $(1,053,675) $(1,075,932) $(4,102,585)
Foreign currency translation adjustments... (11,463) 7,222 4,241 4,241 --
----------- ----------- ----------- ----------- -----------
$ (888,369) $(2,179,049) $(1,049,434) $(1,071,691) $(4,102,585)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED
--------------------- --------------------- PAID-IN DEFERRED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS)
---------- -------- ---------- -------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, October 31,
1996.................... -- $ -- -- $ -- $ -- $ -- $ --
Debt funding and related
accrued interest
applicable to carved-out
operations of Caldera,
Inc..................... -- -- -- -- -- -- --
Foreign currency
translation
adjustment.............. -- -- -- -- -- -- (11,463)
Net loss applicable to
carved-out operations of
Caldera, Inc............ -- -- -- -- -- -- --
---------- ------- ---------- ------- ----------- ----------- --------
Balance, October 31,
1997.................... -- -- -- -- -- -- (11,463)
Debt funding and related
accrued interest
applicable to carved-out
operations of Caldera,
Inc..................... -- -- -- -- -- -- --
Net loss applicable to
carved-out operations of
Caldera, Inc. through
August 31, 1998......... -- -- -- -- -- -- --
Incorporation of Lineo,
Inc. and issuance of
common shares to
Caldera, Inc. in
exchange for certain net
liabilities recorded at
carryover basis......... -- -- 18,000,000 18,000 (719,002) -- --
Foreign currency
translation
adjustment.............. -- -- -- -- -- -- 7,222
Net loss for the period
subsequent to
incorporation........... -- -- -- -- -- -- --
---------- ------- ---------- ------- ----------- ----------- --------
Balance, October 31,
1998.................... -- -- 18,000,000 18,000 (719,002) -- (4,241)
Deferred compensation
related to stock option
grants.................. -- -- -- -- 310,603 (310,603) --
Amortization of deferred
compensation............ -- -- -- -- -- 250,265 --
Foreign currency
translation
adjustment.............. -- -- -- -- -- -- 4,241
Net loss.................. -- -- -- -- -- -- --
---------- ------- ---------- ------- ----------- ----------- --------
Balance, October 31,
1999.................... -- -- 18,000,000 18,000 (408,399) (60,338) --
<CAPTION>
CALDERA, INC.'S
EQUITY
(DEFICIT) IN
ACCUMULATED CARVED-OUT
DEFICIT OPERATIONS
------------ ---------------
<S> <C> <C>
Balance, October 31,
1996.................... $ -- $ 364,189
Debt funding and related
accrued interest
applicable to carved-out
operations of Caldera,
Inc..................... -- 394,816
Foreign currency
translation
adjustment.............. -- --
Net loss applicable to
carved-out operations of
Caldera, Inc............ -- (876,906)
------------ -----------
Balance, October 31,
1997.................... -- (117,901)
Debt funding and related
accrued interest
applicable to carved-out
operations of Caldera,
Inc..................... -- 1,124,754
Net loss applicable to
carved-out operations of
Caldera, Inc. through
August 31, 1998......... -- (1,707,855)
Incorporation of Lineo,
Inc. and issuance of
common shares to
Caldera, Inc. in
exchange for certain net
liabilities recorded at
carryover basis......... -- 701,002
Foreign currency
translation
adjustment.............. -- --
Net loss for the period
subsequent to
incorporation........... (478,416) --
------------ -----------
Balance, October 31,
1998.................... (478,416) --
Deferred compensation
related to stock option
grants.................. -- --
Amortization of deferred
compensation............ -- --
Foreign currency
translation
adjustment.............. -- --
Net loss.................. (1,053,675) --
------------ -----------
Balance, October 31,
1999.................... (1,532,091) --
</TABLE>
F-6
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(CONTINUED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED
--------------------- --------------------- PAID-IN DEFERRED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS)
---------- -------- ---------- -------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Conversion of common
shares to Series A Class
1 convertible preferred
shares and distribution
to majority stockholder
for fair value of
preferred shares issued
in excess of common
shares converted
(unaudited)............. 5,000,000 5,000 (5,000,000) (5,000) 750,000 -- --
Issuance of Series A Class
2 convertible preferred
shares for cash, net of
offering costs of
$47,322 (unaudited)..... 2,500,000 2,500 -- -- 3,700,178 -- --
Issuance of Series B
convertible preferred
shares for cash and
services, net of
offering costs of
$37,751 (unaudited)..... 4,833,331 4,833 -- -- 14,457,416 -- --
Issuance of Series C
convertible preferred
shares for cash and
services, net of
offering costs of $9,996
(unaudited)............. 2,916,666 2,917 -- -- 17,487,083 -- --
Issuance of common shares
in exchange for
investment in Caldera
Systems, Inc. and
distribution to majority
stockholder for fair
value of shares issued
in excess of the
carryover basis of
investment
(unaudited)............. -- -- 3,238,437 3,238 4,368,652 -- --
Issuance of common shares
for cash and services
(unaudited)............. -- -- 1,500,000 1,500 2,023,500 -- --
Issuance of common shares
upon exercise of stock
options (unaudited)..... -- -- 665,322 666 531,592 -- --
Grant of common stock
option by majority
stockholder for services
(unaudited)............. -- -- -- -- 63,374 -- --
Deferred compensation
related to stock option
grants (unaudited)...... -- -- -- -- 3,008,153 (3,008,153) --
Amortization of deferred
compensation
(unaudited)............. -- -- -- -- -- 157,247 --
Issuance of common shares
related to purchase of
Zentropic Computing, LLC
(unaudited)............. -- -- 1,745,226 1,745 6,630,114 -- --
Net loss (unaudited)...... -- -- -- -- -- -- --
---------- ------- ---------- ------- ----------- ----------- --------
Balance, April 30, 2000
(unaudited)............. 15,249,997 $15,250 20,148,985 $20,149 $52,611,663 $(2,911,244) $ --
========== ======= ========== ======= =========== =========== ========
<CAPTION>
CALDERA, INC.'S
EQUITY
(DEFICIT) IN
ACCUMULATED CARVED-OUT
DEFICIT OPERATIONS
------------ ---------------
<S> <C> <C>
Conversion of common
shares to Series A Class
1 convertible preferred
shares and distribution
to majority stockholder
for fair value of
preferred shares issued
in excess of common
shares converted
(unaudited)............. (750,000) --
Issuance of Series A Class
2 convertible preferred
shares for cash, net of
offering costs of
$47,322 (unaudited)..... -- --
Issuance of Series B
convertible preferred
shares for cash and
services, net of
offering costs of
$37,751 (unaudited)..... -- --
Issuance of Series C
convertible preferred
shares for cash and
services, net of
offering costs of $9,996
(unaudited)............. -- --
Issuance of common shares
in exchange for
investment in Caldera
Systems, Inc. and
distribution to majority
stockholder for fair
value of shares issued
in excess of the
carryover basis of
investment
(unaudited)............. (3,840,488) --
Issuance of common shares
for cash and services
(unaudited)............. -- --
Issuance of common shares
upon exercise of stock
options (unaudited)..... -- --
Grant of common stock
option by majority
stockholder for services
(unaudited)............. -- --
Deferred compensation
related to stock option
grants (unaudited)...... -- --
Amortization of deferred
compensation
(unaudited)............. -- --
Issuance of common shares
related to purchase of
Zentropic Computing, LLC
(unaudited)............. -- --
Net loss (unaudited)...... (4,102,585) --
------------ -----------
Balance, April 30, 2000
(unaudited)............. $(10,225,164) $ --
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
OCTOBER 31, APRIL 30,
------------------------------------- -------------------------
1997 1998 1999 1999 2000
--------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
$(1,075,932)
Net loss................................................. $(876,906) $(2,186,271) $(1,053,675) $(4,1
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 191,307 237,635 101,217 66,425 48,216
Amortization of intangibles............................ -- -- -- -- 165,829
Acquired in-process research and development........... -- -- -- -- 800,000
Non-cash stock related compensation.................... -- -- 250,265 -- 1,045,621
Gain on disposition of assets.......................... -- -- -- -- (6,368)
Deferred income tax benefit............................ -- -- -- -- (134,237)
Accrued interest applicable to funding of carved-out
operations of Caldera, Inc........................... 51,048 183,362 -- -- --
Accrued interest on convertible note payable to
majority stockholder................................. -- 3,542 138,845 49,137 57,769
Changes in operating assets and liabilities, net of
effect of acquisition of Zentropic Computing, LLC:
Accounts receivable, net............................. 150,764 (103,896) (719,164) (162,844) 270,216
Related party receivables............................ -- (29,884) (2,232) 13,270 880
Other current assets................................. (36,853) 24,912 6,318 6,286 (47,196)
Other assets......................................... -- (85,000) 85,000 -- (504,061)
Accounts payable..................................... 113,515 200,929 (249,360) (228,962) 403,455
Accrued liabilities.................................. 25,652 117,128 147,799 15,298 303,901
Deferred revenue..................................... 196,817 428,615 (488,920) (89,387) 4,756
Related party payables............................... -- 5,538 30,207 25,026 19,747
--------- ----------- ----------- ----------- -----------
Net cash used in operating activities.............. (184,656) (1,203,390) (1,753,700) (1,381,683) (1,674,057)
--------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment....................... (108,473) (72,342) (189,805) (155,479) (284,424)
Proceeds from sale of property and equipment............. -- -- -- -- 75,000
Advances to companies subsequently acquired.............. -- -- -- -- (578,607)
Net cash acquired in acquisition of Zentropic Computing,
LLC.................................................... -- -- -- -- 1,627
--------- ----------- ----------- ----------- -----------
Net cash used in investing activities.............. (108,473) (72,342) (189,805) (155,479) (786,404)
--------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Borrowings from majority stockholder under convertible
promissory note........................................ -- 400,000 1,890,000 1,890,000 --
Repayment of borrowings from majority stockholder........ -- -- -- -- (2,490,156)
Borrowings from majority stockholder prior to
reorganization......................................... 343,768 941,392 -- -- --
Net proceeds from issuance of preferred stock............ -- -- -- -- 33,614,927
Proceeds from the sale of common stock................... -- -- -- -- 1,200,000
Proceeds from the exercise of common stock options....... -- -- -- -- 532,258
--------- ----------- ----------- ----------- -----------
Net cash provided by financing activities.......... 343,768 1,341,392 1,890,000 1,890,000 32,857,029
--------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash............................ 50,639 65,660 (53,505) 352,838 30,396,568
Foreign currency translation adjustments................... (11,463) 7,222 4,241 4,241 --
Cash, beginning of the period.............................. 5,000 44,176 117,058 117,058 67,794
--------- ----------- ----------- ----------- -----------
Cash, end of the period.................................... $ 44,176 $ 117,058 $ 67,794 $ 474,137 $30,464,362
========= =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
OCTOBER 31, APRIL 30,
------------------------------------- -------------------------
1997 1998 1999 1999 2000
--------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest................................... $ -- $ -- $ -- $ -- $ 200,156
Supplemental schedule of noncash investing and financing
activities:
Acquisition of Zentropic Computing, LLC:
Fair value of assets acquired.......................... $ -- $ -- $ -- $ -- $ 7,045,750
Liabilities assumed.................................... $ -- $ -- $ -- $ -- $ 302,024
Fair value of common stock issued...................... $ -- $ -- $ -- $ -- $ 6,631,859
Issuance of common stock in connection with the
acquisition of certain net assets from Caldera, Inc.
recorded at carryover basis............................ $ -- $ 701,002 $ -- $ -- $ --
Issuance of common stock in exchange for investment in
Caldera Systems, Inc. recorded at carryover basis...... $ -- $ -- $ -- $ -- $ 531,402
Distribution to majority stockholder for fair value of
shares issued in excess of the carryover basis of the
investment in Caldera Systems, Inc..................... $ -- $ -- $ -- $ -- $ 3,840,488
Conversion of 5,000,000 shares of common stock to
5,000,000 shares of Series A Class 1 convertible
preferred stock........................................ $ -- $ -- $ -- $ -- $ 5,000
Distribution to majority stockholder for fair value of
preferred shares issued in excess of common shares
converted.............................................. $ -- $ -- $ -- $ -- $ 750,000
Issuance of Series B and Series C convertible preferred
stock for services..................................... $ -- $ -- $ -- $ -- $ 540,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Lineo, Inc. ("Lineo") was originally incorporated as a Utah corporation on
August 26, 1998 as Caldera Thin Clients, Inc. and was reincorporated as a
Delaware corporation on January 21, 2000. Lineo began operations in July 1996 as
part of Caldera, Inc. ("Caldera").
Prior to July 1996, Caldera was developing and marketing Linux operating
system software and related products for desktop personal computers and servers.
On July 23, 1996, through an asset purchase, Caldera acquired certain rights
related to a DOS-based operating system, which was marketed primarily as an
embedded operating system in non-desktop microprocessors. Caldera continued the
development of the DOS-based operating system for embedded applications. Caldera
subsequently made the strategic determination to separate its two business lines
into separate entities and, effective September 1, 1998, transferred certain of
the assets relating to the DOS-based operating system to Lineo in exchange for
18,000,000 shares of common stock. Also effective September 1, 1998, Caldera
sold certain assets not related to the DOS-based operating system to Caldera
Systems, Inc. ("Caldera Systems"). Prior to the reorganization of Caldera, The
Canopy Group ("Canopy") was the majority shareholder of Caldera and continued to
be the majority shareholder of Lineo and was the sole shareholder of Caldera
Systems.
Since Caldera was the sole shareholder of Lineo, the transfer of the
DOS-based operations from Caldera to Lineo has been treated as a reorganization
of entities under common control with the assets and liabilities reflected at
carry-over basis in a manner similar to a pooling of interests. The accompanying
consolidated financial statements include the carved-out operations of Caldera
related to the DOS-based operations through September 1, 1998.
The revenue of the carved-out operations of Caldera reflect actual revenue
derived from sales of DOS-based operating system products and the expenses of
the carved-out operations reflect actual expenses associated with the DOS-based
business and an allocated portion of common expenses. The allocated common
expenses consist primarily of rent, depreciation, interest and personnel
benefits. Rent, depreciation and personnel benefits were allocated based upon
actual personnel expense. Interest was allocated based upon borrowings related
to the carved-out operations of Caldera. Management believes that the allocation
methods used are reasonable.
Prior to the reorganization, the net losses of Caldera were funded through
loans and equity contributions from Canopy. The funding applicable to the
carved-out operations has been reflected as a component of Caldera Inc.'s Equity
(Deficit) in Carved-out Operations included in the accompanying consolidated
statements of stockholders' equity (deficit). This funding has been offset by
the accumulated losses applicable to the carved-out operations. The resulting
deficit balance as of the date of reorganization, September 1, 1998, of $701,002
has been reflected as a deemed distribution to Caldera and charged to equity.
In connection with the reorganization, Lineo acquired a wholly owned
subsidiary of Caldera, located in England, Caldera (UK) Limited
("Caldera Ltd"), which performed research and development activities. The
operations of Caldera Ltd were terminated in February 1999. As discussed in
Note 13, effective April 3, 2000, Lineo acquired Zentropic Computing, LLC
("Zentropic"), a Virginia limited liability company. Zentropic provides Linux
solutions for time-sensitive processing functions, referred to as real-time
technology. Zentropic's operations are included in the accompanying
F-10
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)
financial statements from the date of the acquisition, April 3, 2000. Lineo, the
carved-out operations of Caldera, Caldera Ltd and Zentropic are collectively
referred to as the "Company."
Historically, the Company developed, marketed and supported DOS-based
operating system products for the embedded systems market. Starting in
January 1999, the Company focused its strategy on developing embedded operating
systems based on Linux. In January 2000, the Company commercially released the
first version of its embedded Linux operating system. The Company sells and
distributes its software products through license agreements principally with
original equipment manufacturers ("OEMs"). These sales occur throughout the
United States and in certain international locations.
The Company is subject to certain risks including the uncertainty of market
acceptance and demand for Linux-based products and services, competition from
larger, more established companies, short product life cycles, the Company's
ability to develop and bring to market new products on a timely basis,
dependence on key employees, the ability to attract and retain additional
qualified personnel and the ability to obtain adequate financing to support
growth.
(2) SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements as of April 30, 2000 and for the
six months ended April 30, 1999 and 2000 have been prepared on the same basis as
the audited financial statements and, in the opinion of management, reflect all
normal recurring adjustments necessary to present fairly the financial
information set forth therein, in accordance with accounting principles
generally accepted in the United States. The results of operations for the six
months ended April 30, 2000 are not necessarily indicative of the results to be
expected for the entire fiscal year ending October 31, 2000.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying consolidated financial
statements for cash, accounts receivable and accounts payable approximate fair
values because of the immediate or short-term maturities of these financial
instruments. The carrying amounts of the Company's debt obligations approximate
fair value based on current interest rates.
F-11
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the carved-out operations of Caldera prior to Lineo's incorporation, Lineo,
Caldera Ltd and Zentropic, after elimination of intercompany accounts and
transactions.
FOREIGN CURRENCY TRANSLATION
For purposes of consolidating the Caldera Ltd operations, the Company
determined the functional currency for the Caldera Ltd operations to be the
British Pound. Accordingly, translation gains and losses are included as a
component of comprehensive loss.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Computer equipment and furniture and fixtures are depreciated
using the straight-line method over the estimated useful life of the asset,
typically three to five years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful life of the
improvement or the remaining term of the lease agreement.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and related accumulated
depreciation and amortization are removed from the accounts and any resulting
gain or loss is recognized in the statement of operations.
CAPITALIZED SOFTWARE COSTS
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," development costs incurred in the research and development
of new software products to be sold, leased or otherwise marketed are expensed
as incurred until technological feasibility in the form of a working model has
been established. Internally generated capitalizable software development costs
have not been material for the years ended October 31, 1997, 1998 and 1999 and
the six months ended April 30, 2000. The Company has charged its software
development costs to research and development expense in the accompanying
consolidated statements of operations.
OTHER ASSETS
As of October 31, 1998, other assets consisted of prepaid software license
fees of $85,000. During the year ended October 31, 1999, as a result of the
Company focusing its strategy on Linux-based products for the embedded market,
the determination was made that the remaining balance of prepaid software
license fees was impaired and was therefore expensed as part of cost of revenue.
As of April 30, 2000, other assets consisted primarily of legal and accounting
fees capitalized in connection with the Company's anticipated initial public
offering and deferred acquisition costs associated with the
F-12
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
subsequent acquisitions discussed in Note 13. Capitalized offering costs will be
netted against the actual offering proceeds and deferred acquisition costs will
be included as part of the total purchase price.
INTANGIBLE ASSETS
Intangible assets include work force, core technology and goodwill
associated with the acquisition of Zentropic (see Note 13). Work force is being
amortized using the straight-line method over a period of two years. Other
intangibles are amortized using the straight-line method over a period of three
years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including intangibles, for
impairment when events or changes in circumstances indicate that the book value
of an asset may not be recoverable. The Company evaluates, at each balance sheet
date, whether events and circumstances have occurred which indicate possible
impairment. The Company uses an estimate of future undiscounted net cash flows
of the related asset or group of assets over the remaining life in measuring
whether the assets are recoverable. As of October 31, 1999 and April 30, 2000,
the Company does not consider any of its long-lived assets to be impaired.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position No. 97-2
("SOP 97-2"), "Software Revenue Recognition." Revenue from the sale of software
is recognized upon delivery of the product when persuasive evidence of an
arrangement exists, the price is fixed or determinable, collection is probable
and no significant post-delivery obligations exist. Certain of the Company's
software sales agreements include post-contract maintenance and support ("PCS")
services. If these PCS services are to be provided for a period of one year or
less, the estimated cost of providing the PCS is insignificant and there is no
commitment to provide upgrades or enhancements, revenue is recognized upon
delivery and the estimated costs of providing the PCS are accrued. If the PCS
services are to be provided for a period greater than one year, or if the PCS
includes upgrades or enhancements, software revenue is deferred and recognized
over the PCS period or deferred until no significant obligations exist. As of
October 31, 1998 and 1999 and April 30, 2000, the Company had deferred revenue
of $782,075, $293,155 and $303,953, respectively.
The Company has historically generated a majority of its revenue from
software products sold directly to OEMs. Through April 30, 2000, some of the
Company's license agreements have included bundled maintenance and support
services. Because the Company had not established the necessary vendor specific
objective evidence until the second quarter of fiscal year 2000, the Company
could not recognize separately the service revenue. Accordingly, revenue for
these licenses was deferred and recognized over the term of the maintenance and
support services.
F-13
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During the six months ended April 30, 2000, the Company has begun to enter
into multiple-element arrangements including software products, maintenance and
support, engineering and training services. In these multiple-element
arrangements, revenue is allocated to each element based on vendor-specific
objective evidence of fair value for each element. Software license revenue
under a multiple-element arrangement is recognized as described above. Service
revenue is recognized as the services are performed. If any services to be
provided are essential to the functionality of the software product, the
software revenue is deferred and recognized over the period the services are
provided.
In December 1998, the AICPA issued Statement of Position No. 98-9
"Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to
Certain Transactions" ("SOP 98-9"). SOP 98-9 amended SOP 97-2 to require
recognition of revenue using a "residual method" in certain circumstances.
SOP 98-9 is effective for transactions entered into by the Company beginning in
its fiscal year 2000. The Company does not believe that the adoption of this
statement will have a material effect on the Company's current revenue
recognition policies.
INCOME TAXES
Prior to January 6, 2000, the Company was not directly subject to income
taxes as the Company's operations were consolidated with those of Caldera for
income tax reporting purposes. The Company was not an income tax reporting
entity nor did it have a tax-sharing agreement with Caldera. As a result,
Caldera allocated no income tax expense or related current or deferred income
tax assets or liabilities to the Company and the liabilities or benefits
attributable to the Company's operations were recorded by Caldera. Had Caldera
allocated income taxes to the Company as if it were a separate taxable entity,
no income tax expense or benefit would have been recorded due to the Company's
net operating loss position and the uncertainty of future realization of any
deferred income tax assets. A full valuation allowance would have been recorded
against the Company's net deferred income tax assets.
On January 6, 2000, as a result of the issuance of common stock by the
Company to Caldera Systems (see Note 5), the Company could no longer be
consolidated with Caldera for income tax reporting purposes and it became a
separate taxable entity. Accordingly, the Company began to account for income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, the Company recognizes a liability or asset for the deferred income tax
consequences of all temporary differences between the income tax bases of assets
and liabilities and their reported amounts in the consolidated financial
statements that will result in taxable or deductible amounts in future years
when the reported amounts of the assets and liabilities are recovered or
settled. These deferred income tax assets or liabilities are measured using the
enacted income tax rates that will be in effect when the differences are
expected to reverse. Deferred income tax assets are reviewed periodically for
recoverability and valuation allowances are provided, as necessary.
CONCENTRATION OF CREDIT RISK
The Company offers credit terms on the sale of its software products to
OEMs and other customers. The Company performs ongoing credit evaluations of its
customers' financial condition and
F-14
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
requires no collateral from its customers. The Company maintains an allowance
for uncollectable accounts receivable based upon the expected collectibility of
all accounts receivable. As of October 31, 1998 and 1999 and April 30, 2000, the
allowance for bad debts was $13,000, $68,000 and $68,000, respectively. As of
October 31, 1999, two customers accounted for approximately 73 percent of the
gross accounts receivable balance. As of April 30, 2000, five customers
accounted for approximately 78 percent of the gross accounts receivable balance.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 establishes new accounting and
reporting standards for companies to report information about derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
This statement is effective for financial statements issued for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect this statement to have a material impact on the Company's results of
operations, financial position or liquidity.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition
in Financial Statements." This pronouncement summarizes certain of the SEC
staff's views in applying generally accepted accounting principles to selected
revenue recognition issues. The Company is required to adopt SAB No. 101 during
the first quarter of fiscal year 2001. Although management is currently
evaluating the impact, if any, of SAB No. 101, management does not presently
believe it will have a material impact on the Company's results of operations,
financial position or liquidity.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of Accounting Principles Board Opinion No. 25
("APB No. 25")." This interpretation clarifies the definition of employee for
purposes of applying APB No. 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. This interpretation is effective July 1, 2000, but certain
conclusions in this interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this interpretation
covers events occurring during the period after December 15, 1998, or
January 12, 2000, but before the effective date of July 1, 2000, the effects of
applying this interpretation are recognized on a prospective basis from July 1,
2000. Although management is currently evaluating the impact, if any, of this
interpretation, management does not presently believe it will have a material
impact on the Company's results of operations, financial position or liquidity.
NET LOSS PER COMMON SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings Per Share", and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic net loss per common share
("Basic EPS") is computed by dividing net loss available
F-15
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to common stockholders by the weighted average number of common shares
outstanding. Diluted net loss per common share ("Diluted EPS") is computed by
dividing net loss by the sum of the weighted average number of common shares and
the dilutive common share equivalents then outstanding.
Common share equivalents consist of shares issuable upon the exercise of
stock options, shares issuable upon the conversion of the convertible note
payable to majority stockholder and related accrued interest, and shares
issuable upon conversion of convertible preferred stock. As of October 31, 1998
and 1999 and April 30, 1999 and 2000, there were 403,542, 3,388,087, 2,342,679
and 17,040,906 outstanding common share equivalents, respectively, that were not
included in the computation of diluted net loss per common share as their effect
would have been anti-dilutive, thereby decreasing the net loss per common share.
There were no common share equivalents outstanding as of October 31, 1997. For
the years ended October 31, 1997 and 1998, the 18,000,000 shares of common stock
issued in the initial capitalization of the Company were treated as outstanding
for the entire period.
(3) CONVERTIBLE PROMISSORY NOTE PAYABLE TO MAJORITY STOCKHOLDER
On September 11, 1998, Lineo and Canopy entered into a Secured Convertible
Promissory Note Agreement (the "Note Agreement") pursuant to which the Company
could borrow up to $2,290,000 to fund ongoing operations. Borrowings under the
Note Agreement accrued interest at a rate of 7.25 percent per year, were due
30 days after demand and were secured by essentially all assets of the Company.
At Canopy's option, borrowings under the Note Agreement, together with accrued
interest thereon, were convertible into shares of the Company's common stock at
$1.00 per share, which was deemed to be equal to or greater than the estimated
fair market value of the Company's common stock on September 11, 1998. Under the
Note Agreement, the Company borrowed $400,000, $1,890,000 during the years ended
October 31, 1998 and 1999, respectively. Additionally, the Company accrued
interest on borrowings under the Note Agreement of $3,542, $138,845 and $57,769
during the years ended October 31, 1998 and 1999 and the six months ended
April 30, 2000, respectively.
On January 12, 2000, the Company repaid $500,000 of principal and interest
under the Note Agreement. Concurrently, the Note Agreement was amended to delete
the conversion provision. No principal or interest was converted to common stock
prior to the deletion of the conversion provision. The Company repaid all
outstanding principal and interest due under the Note Agreement on March 22,
2000 and the Note Agreement was cancelled.
(4) PREFERRED STOCK
The Company's articles of incorporation provide for the issuance of up to
30,000,000 shares of $.001 par value preferred stock in one or more series. The
Company's Board of Directors is authorized, without shareholder approval, to
designate and determine the preferences, limitations and relative rights granted
to or imposed upon any series of preferred stock or increase or decrease the
number of shares constituting any series of preferred stock.
The Company's Board of Directors designated 7,500,000 shares as Series A
Convertible Preferred Stock ("Series A"), 5,000,000 of which were designated as
Series A Class 1 Convertible Preferred Stock
F-16
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(4) PREFERRED STOCK (CONTINUED)
("Series A Class 1") and 2,500,000 of which were designated as Series A Class 2
Convertible Preferred Stock ("Series A Class 2), 4,850,000 shares as Series B
Convertible Preferred Stock ("Series B"), 3,000,000 shares as Series C
Convertible Preferred Stock ("Series C") and 2,000,000 shares as Series D
Convertible Preferred Stock ("Series D").
RIGHTS AND PREFERENCES
The Series A, B and C shares have priority over any other class or series of
outstanding capital stock of the Company with respect to dividend rights and
liquidation, winding up or dissolution rights. The Series D shares rank junior
to the Series A, B and C shares in all respects but have priority over the
common stock of the Company with respect to liquidation, winding up or
dissolution rights. The Series A, B, C and D shares are entitled to receive,
when, as and if declared by the Board of Directors, dividends at the same rate
as dividends are paid with respect to the Company's common stock. In the event
of any voluntary or involuntary liquidation, dissolution or winding up of the
Company, each holder of Series A, B and C shares then outstanding shall be
entitled to receive, on a PARI PASSU basis, out of the assets available for
distribution to stockholders an amount equal to the greater of (i) the sum of
(1) the respective stated value per share plus (2) an amount equal to all unpaid
accruing dividends (whether or not declared) plus (3) any other dividends
declared but unpaid, and (ii) the amount that such holder of Series A, B or C
shares would hold had all Series A, B and C shares been converted to common
immediately prior to the liquidation, dissolution, or winding up after giving
consideration to the amounts to be received by the holders of Series D shares.
In the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Company, each holder of Series D shares then outstanding shall be
entitled to receive out of the assets available for distribution to stockholders
an amount equal to the sum of (1) the respective stated value per share plus
(2) any dividends declared but unpaid. After payment of the full liquidation
preference to the Series A, B, C and D shares and any other preferences payable
to preferred stockholders, any remaining assets of the Company then available
are to be distributed ratably among the holders of Series A, B, C and common
shares.
A share exchange, merger or sale of substantially all of the assets of the
Company, as defined, is to be regarded as a liquidation, dissolution or winding
up of the affairs of the Company and the Series A, B, C and D shares would be
entitled to the preference payment described above.
Each share of Series A, B, C and D is entitled to one vote for each share of
common stock that would be issuable upon conversion of such share.
All but one holder of Series A, B and C shares has certain rights with
respect to registration of the common shares issued or issuable upon conversion
of their shares. Additionally, the holders of Series A, B or C shares have
demand rights that require the Company to use its best efforts to register the
requested shares in accordance with the Securities Exchange Act of 1933. The
Company has agreed to bear all expenses in connection with any registration.
F-17
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(4) PREFERRED STOCK (CONTINUED)
CONVERTIBILITY
Any holder of Series A, B, C or D shares may convert all or any shares of
Series A, B, C or D shares into common stock at any time. Each share of
Series A, B and C automatically converts into common stock (i) immediately prior
to the closing of a firm commitment underwritten public offering of common stock
of the Company at a minimum price of $10 per share and gross proceeds of at
least $15,000,000 (a "Qualified Offering"), (ii) upon approval of at least
two-thirds of the then outstanding shares of the respective series or
(iii) upon the cumulative conversion of at least two-thirds of the then
outstanding shares of the respective series. Each share of Series D
automatically converts into common stock (i) immediately prior to the closing of
a firm commitment underwritten public offering of common stock of the Company at
a minimum price of $7.50 per share and gross proceeds of at least $7,500,000 (a
"Qualified Offering"), (ii) upon a share exchange or merger of the Company into
or with another entity resulting in a change in control or (iii) upon the
approval of at least two-thirds of the then outstanding shares of preferred
stock. Each Series A, B, C and D share initially converts into one share of
common stock. The conversion ratio is adjusted upon the happening of certain
events, including the issuance of additional shares of common stock as a
dividend or other distribution or changes resulting from a stock split.
CONVERSION OF COMMON STOCK INTO SERIES A CLASS 1
On February 17, 2000, the Company entered into a recapitalization agreement
with Canopy whereby 5,000,000 shares of common stock owned by Canopy were
exchanged for 5,000,000 shares of Series A Class 1. In connection with the
exchange, the Company recorded a deemed distribution to Canopy of $750,000
representing the difference between the estimated fair value of the shares of
Series A Class 1 of $1.50 per share based on the offering price of Series A
Class 2 shares and the estimated fair value of the shares of common stock of
$1.35 per share on February 17, 2000.
ISSUANCE OF SERIES A CLASS 2
On February 17, 2000, the Company sold 2,500,000 shares of Series A Class 2
at $1.50 per share for cash proceeds of $3,750,000. The Company incurred $47,322
of direct offering expenses in connection with the sale of the Series A Class 2
shares which have been netted against the total proceeds.
ISSUANCE OF SERIES B
On March 15, 2000, the Company issued 4,833,331 shares of Series B at $3.00
per share for cash proceeds of $14,260,000 and services of $240,000. The Company
incurred $37,751 of direct offering expenses in connection with the sale of the
Series B shares which have been netted against the proceeds.
F-18
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(4) PREFERRED STOCK (CONTINUED)
ISSUANCE OF SERIES C
On April 28, 2000, the Company issued 2,916,666 shares of Series C at $6.00
per share for cash proceeds of $17,199,996 (of which $1,500,000 was received
subsequent to April 30, 2000) and services of $300,000. On May 1, 2000, the
Company issued 83,334 shares of Series C in conjunction with the acquisition of
Inup S.A. (see Note 13). The Company incurred $9,996 of direct offering expenses
in connection with the sale of the Series C shares which have been netted
against the total proceeds.
ISSUANCE OF SERIES D
Subsequent to April 30, 2000, the Company has issued 1,430,482 shares of
Series D in connection with the acquisitions discussed in Note 13.
(5) COMMON STOCK
STOCK SPLIT
On September 24, 1999, the Company's Board of Directors approved a
two-for-one stock split for holders of common stock. This stock split has been
retroactively reflected in the accompanying consolidated financial statements
for all periods presented.
REINCORPORATION AS A DELAWARE CORPORATION
On January 21, 2000, Lineo was reincorporated in Delaware. The
reincorporation was effected by way of a merger with a newly-formed Delaware
subsidiary, and the associated issuance of one share of common stock of the
subsidiary for each share of common stock of the Company held by the
stockholders of record. All share and per share amounts in the accompanying
consolidated financial statements have been adjusted to retroactively reflect
the reincorporation.
COMMON STOCK TRANSACTIONS
As discussed in Note 1, on September 1, 1998, in connection with the initial
capitalization of Lineo, the Predecessor was issued 18,000,000 shares of common
stock in exchange for certain net assets associated with the DOS-based
operations of the Predecessor. The net assets acquired from the Predecessor were
recorded at the Predecessor's carryover basis, which was a deficit of $701,002.
F-19
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(5) COMMON STOCK (CONTINUED)
On December 29, 1999, the Company's Board of Directors authorized the
issuance of 1,500,000 shares of common stock to two officers of the Company at
$0.80 per share. The estimated fair value of the common shares on December 29,
1999 for financial statement purposes was deemed to be $1.35 per share. The
difference between the estimated fair value and the purchase price of $0.55 per
share, or $825,000 in aggregate, has been recorded as non-cash stock-related
compensation expense by the Company.
STOCK EXCHANGE AGREEMENT WITH CALDERA SYSTEMS
On January 6, 2000, the Company and Caldera Systems entered into a stock
purchase and sale agreement. Pursuant to the stock purchase agreement, the
Company agreed to purchase 1,250,000 shares of common stock of Caldera Systems
(approximately 3.5 percent of Caldera Systems' then outstanding common stock) in
exchange for 3,238,437 shares of the Company's common stock.
Because Caldera Systems is also majority owned by Canopy, the investment in
Caldera Systems has been accounted for as a transaction between entities under
common control with the transfer being reflected in the accompanying financial
statements at Caldera Systems' carry over basis. At the date of the agreement,
Caldera Systems had stockholders' equity of approximately $15,113,000, of which
approximately $530,000 relates to the 3.5 percent interest acquired by Lineo.
Accordingly, the investment in Caldera Systems common stock was recorded at
$531,402. Additionally, the Company recorded the estimated fair value of the
shares of its common stock issued to Caldera Systems of $1.35 per share, or
$4,371,890 in aggregate, with the difference between the $4,371,890 and the
$531,402 investment recorded as a deemed distribution to Canopy. The Company
currently intends to hold the shares of Caldera Systems indefinitely.
Subsequent to April 30, 2000, Canopy transferred 1,761,563 shares of the
Company's common stock which were held by Canopy to Caldera Systems. As a result
of this transaction, Caldera Systems currently holds a total of 5,000,000 shares
of the Company's common stock. In management's opinion, the transfer between
Canopy and Caldera Systems was a transaction between stockholders from which the
Company received no benefit.
(6) STOCK OPTION PLAN
THE 1999 STOCK OPTION PLAN
During fiscal year 1999, the Company adopted the 1999 Stock Option Plan (the
"1999 Plan") that provides for the granting of incentive or nonqualified stock
options to purchase shares of common stock. The 1999 Plan is administered by the
compensation committee (the "Committee") of Company's Board of Directors (the
"Board"). Under the 1999 Plan, the Board can grant up to 5,000,000 options to
employees, directors and to such other persons as the Board selects. Options
granted under the 1999 Plan are subject to expiration and vesting terms as
determined by the Board. No options can expire more than ten years from the date
of grant. The exercise price for the options may be paid in cash or, as approved
by the Board, in shares of the Company's common stock valued at fair market
value on
F-20
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(6) STOCK OPTION PLAN (CONTINUED)
the exercise date. As of April 30, 2000, the Board had not authorized the
exercise price of any of the options to be paid in shares of the Company's
common stock.
A summary of stock option activity under the 1999 Plan for the year ended
October 31, 1999 and the six months ended April 30, 2000 is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS PRICE RANGE EXERCISE PRICE
--------- ------------ ----------------
<S> <C> <C> <C>
Balance, October 31, 1998............. -- $ -- $ --
Granted............................... 955,700 0.80 0.80
---------
Balance, October 31, 1999............. 955,700 0.80 0.80
Granted (unaudited)................... 1,500,531 0.80--3.00 1.88
Exercised (unaudited)................. (665,322) 0.80 0.80
---------
Balance, April 30, 2000 (unaudited)... 1,790,909 $ 0.80--3.00 $1.71
=========
</TABLE>
As of October 31, 1999, the 955,700 outstanding options had a remaining
contractual life of ten years and 677,469 of the options were exercisable. As of
April 30, 2000, the 1,790,909 outstanding options had a remaining contractual
life of 9.8 years and 95,171 of the options were exercisable.
As discussed in Note 13, in connection with the acquisitions, subsequent to
April 30, 2000, the Company has granted options to purchase an additional
673,596 shares of common stock at a weighted average exercise price of $2.82 per
share. Additionally, the Company has subsequently granted additional options to
employees as discussed below.
STOCK-BASED COMPENSATION
The Company accounts for its stock options issued to directors, officers and
employees under APB No. 25 and related interpretations. Under APB No. 25,
compensation expense is recognized if an option's exercise price on the
measurement date is below the intrinsic fair value of the Company's common
stock. During the year ended October 31, 1999 and the six months ended
April 30, 2000, the Company granted 955,700 and 1,500,531 options, respectively,
with exercises prices below the estimated fair market value on the measurement
date as determined for financial reporting purposes resulting in $310,603 and
$3,008,153, respectively, in deferred compensation. This deferred compensation
has been recorded as a component of stockholders' equity and will be amortized
as non-cash stock-related compensation over the vesting period of the underlying
stock options. Amortization of deferred compensation amounted to $250,265 for
the year ended October 31, 1999 and $157,247 for the six months ended April 30,
2000.
Between April 30 and May 15, 2000, the Company has granted options to
purchase an additional 652,800 shares of common stock to employees, officers and
directors at a weighted average exercise price per share of $3.85, resulting in
approximately $1,402,100 of additional deferred compensation.
SFAS No. 123 "Accounting for Stock-Based Compensation", requires pro forma
information regarding net loss as if the Company had accounted for its stock
options granted under the fair value
F-21
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(6) STOCK OPTION PLAN (CONTINUED)
method. The fair market value of the stock options is estimated on the date of
grant using the Black-Scholes pricing model with the following weighted-average
assumptions for grants during the year ended October 31, 1999: risk-free
interest rate of 5.65 percent; expected dividend yield of 0 percent; volatility
of 0 percent and an expected exercise life of five years. For purposes of the
pro forma disclosures, the estimated fair market value of the stock options is
amortized over the vesting periods of the respective stock options. The
following is the pro forma disclosure and the related impact on net loss for the
year ended October 31, 1999:
<TABLE>
<S> <C>
Net loss as reported........................................ $(1,053,675)
Pro forma net loss.......................................... (1,205,304)
</TABLE>
(7) INCOME TAXES
As described in Note 2, prior to January 6, 2000, the Company was not
directly subject to income taxes as the Company's operations were consolidated
with those of Caldera for income tax reporting purposes. On January 6, 2000, as
a result of sales of common stock by the Company, the Company could no longer be
consolidated with Caldera for income tax reporting purposes and became a
separate taxable entity.
The loss before income tax benefit consisted of the following components for
the period from January 6, 2000 through April 30, 2000:
<TABLE>
<S> <C>
Domestic U.S. operations.................................... $(2,553,885)
Foreign operations.......................................... (19,849)
-----------
$(2,573,734)
===========
</TABLE>
F-22
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(7) INCOME TAXES (CONTINUED)
The components of the benefit for income taxes for the period from
January 6, 2000 through April 30, 2000 are as follows:
<TABLE>
<S> <C>
Current:
U.S. Federal.............................................. $ --
U.S. State................................................ --
Non-U.S................................................... (5,478)
---------
(5,478)
=========
Deferred:
U.S. Federal.............................................. (608,695)
U.S. State................................................ (100,189)
Non-U.S................................................... --
Increase in valuation allowance........................... 574,647
---------
(134,237)
---------
Total income tax benefit.................................... $(139,715)
=========
</TABLE>
In connection with the acquisition of Zentropic (see Note 13), the Company
recorded a deferred income tax liability of $716,625 related to the acquired
intangible assets other than goodwill that are not deductible for income tax
purposes. As a result of the deferred income tax liability, the Company reduced
the valuation allowance against its deferred income tax assets by $574,647 on
the date of the acquisition. This reduction was included as a component of the
purchase accounting in accordance with SFAS No. 109. The significant components
of the Company's deferred income tax assets and liabilities as of April 30, 2000
are as follows:
<TABLE>
<S> <C>
Deferred income tax assets:
Net operating loss carryforward........................... $ 509,085
Reserves and accrued expenses............................. 107,319
Deferred revenue.......................................... 72,998
---------
Total deferred income tax assets.......................... 689,402
---------
Deferred income tax liabilities:
Non-deductible intangibles................................ (696,719)
Tax depreciation in excess of book........................ (423)
---------
Total deferred income tax liabilities..................... (697,142)
---------
Net deferred income tax liability....................... $ (7,740)
=========
</TABLE>
As of April 30, 2000, the Company had a net operating loss carryforward for
federal income tax reporting purposes totaling approximately $1,358,000, which
expires in 2020.
F-23
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(7) INCOME TAXES (CONTINUED)
The Internal Revenue Code contains provisions that likely could reduce or
limit the availability and utilization of net operating loss carryforwards if
certain changes in ownership have taken place or will take place. The Company
has not performed an analysis to determine whether any such limitations have
occurred.
(8) COMMITMENTS AND CONTINGENCIES
OPERATING AGREEMENTS
The Company leases certain foreign and domestic facilities used in its
operations under operating lease agreements. The aggregate commitments under
non-cancelable operating leases in effect at October 31, 1999 were as follows:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31,
- -----------------------
<S> <C>
2000........................................................ $78,926
2001........................................................ 2,202
-------
$81,128
=======
</TABLE>
The Company incurred expenses of approximately $12,796, $36,466 and $137,536
in connection with operating leases during the years ended October 31, 1997,
1998 and 1999, respectively.
During the six months ended April 30, 2000, the Company has entered into
additional operating lease arrangements for additional facilities. The future
minimum rental payments on this premises for the years ending October 31, 2000,
2001 and 2002 total approximately $283,000, 267,000 and $50,000, respectively.
LEGAL
The Company may become party to certain legal proceedings arising in the
ordinary course of business. Management believes, after consultation with legal
counsel, that as of October 1, 1999 and April 30, 2000, no pending or threatened
legal proceedings exist which would have a material adverse effect on the
Company's financial position, liquidity or results of operations.
(9) RELATED PARTY TRANSACTIONS
CANOPY AND AFFILIATED COMPANIES
A member of the Company's Board of Directors is the president and chief
executive officer and a director of Canopy. Additionally, another director of
the Company is the chairman of Canopy's Board of Directors. As discussed in
Note 1, Canopy was the majority stockholder of Caldera. Canopy advanced $400,000
and $1,890,000 under a secured convertible promissory note agreement during the
years ended October 31, 1998 and 1999, respectively (see Note 3). As discussed
in Note 10, the Company participates in a 401(k) plan sponsored by Canopy.
F-24
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(9) RELATED PARTY TRANSACTIONS (CONTINUED)
The Company has entered into certain transactions with Canopy and other
entities that are majority-owned by Canopy. These transactions consist mainly of
participating in rent, joint insurance coverage and product sales and purchases.
The Company believes that the terms of these related party transactions are no
less favorable than the terms that could have been obtained from an unaffiliated
third party in similar transactions. During the years ended October 31, 1997,
1998 and 1999 and the six months ended April 30, 2000, transactions with these
related parties were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, SIX MONTHS
-------------------------------- ENDED APRIL 30,
1997 1998 1999 2000
-------- -------- ---------- ---------------
<S> <C> <C> <C> <C>
Transactions:
Revenue....................................... $14,717 $ 42,302 $ 106,637 $ --
Purchases..................................... -- -- 1,700 26,246
Rent.......................................... 12,796 12,296 82,174 56,995
Insurance..................................... 2,076 2,321 14,955 5,796
Interest expense.............................. 51,048 186,904 138,542 57,769
Balances:
Convertible note payable together with accrued
interest.................................... -- 403,542 2,432,387 --
Accounts payable.............................. -- 5,538 35,745 51,019
Accounts receivable........................... -- 29,884 32,116 31,236
</TABLE>
The Company's related-party receivables and payables are non-interest
bearing and provide for settlement through cash payments in the normal course of
business.
As a result of an option agreement between Canopy and its chief executive
officer, who is also a director of the Company, the Company has recorded a
one-time compensation charge of $63,374 during the six months ended April 30,
2000. The option agreement, which granted options to purchase Lineo common
shares directly from Canopy was subsequently rescinded. No shares were purchased
under the agreement.
CALDERA SYSTEMS
As discussed in Note 5, in January 2000, the Company acquired an ownership
interest in Caldera Systems. Three members of the Company's Board of Directors
are also directors of Caldera Systems, one of which is also the chairman of the
Board of Directors of Caldera Systems.
ADVANCED SIMULATION TECHNOLOGY, INC.
On April 3, 2000, the Company acquired Zentropic (see Note 13). The former
principal members of Zentropic, who became stockholders of the Company as a
result of the acquisition, are also majority stockholders of Advanced Simulation
Technology, inc. ("ASTi"). Prior to the acquisition, Zentropic and ASTi entered
into an informal agreement whereby ASTi paid substantially all operating
expenses of Zentropic. As of April 3, 2000, Zentropic had a payable of $102,263
to ASTi. During the period from
F-25
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(9) RELATED PARTY TRANSACTIONS (CONTINUED)
acquisition (April 3, 2000) to April 30, 2000, the Company incurred $4,473 in
expenses that were paid by ASTi on behalf of the Company. As of April 30, 2000,
the Company had a related party payable of $106,736 to ASTi.
(10) EMPLOYEE BENEFIT PLANS
The Company has adopted a 401(k) plan sponsored by Canopy in which all
eligible employees are entitled to make pre-tax contributions. All full-time
employees become eligible for participation in the plan once they have reached
the age of 21. Eligible participants are able to contribute up to 15 percent of
annual compensation to the plan, subject to certain IRS limitations. As of
October 31, 1999, the Company has not made any contributions to the plan,
however, the Board of Directors of Canopy has approved a discretionary matching
program allowing the Company to annually match up to 50 percent of each dollar
contributed by employees up to six percent of the employee's salary. This
matching program went in effect beginning January 1, 2000. During the four
months ended April 30, 2000, the Company contributed $17,177 to the plan.
(11) SIGNIFICANT CUSTOMERS
During the years ended October 31, 1997, 1998 and 1999, the Company had
sales to one, one and three customer(s), respectively, that accounted for
74 percent, 22 percent and 48 percent of revenue, respectively. During the six
months ended April 30, 1999 and 2000, the Company has sales to two and one
customer(s), respectively, that accounted for 28 percent and 34 percent of
revenue, respectively. No other customers accounted for more than ten percent of
revenue during the years ended October 31, 1997, 1998 and 1999 and the six
months ended April 30, 1999 and 2000.
(12) SEGMENT INFORMATION
In June 1998, SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information" was issued. SFAS No. 131 establishes disclosures related to
components of a company for which separate financial information is available
and evaluated regularly by the company's chief operating decision makers in
deciding how to allocate resources and in assessing performance. It also
requires segment disclosures about products and services as well as geographic
areas. The Company has determined that it did not have any separately reportable
operating segments as of October 31, 1997, 1998 and 1999 and April 30, 2000.
However, the Company does generate revenue in geographic locations outside of
the United States. Revenue attributable to individual countries based on the
F-26
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(12) SEGMENT INFORMATION (CONTINUED)
location of sales to unaffiliated customers for the years ended October 31,
1997, 1998 and 1999 and the six months ended April 30, 2000 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, SIX MONTHS
---------------------------------- ENDED APRIL 30,
1997 1998 1999 2000
-------- ---------- ---------- ---------------
<S> <C> <C> <C> <C>
United States................................ $895,341 $ 904,722 $2,100,599 $ 536,470
-------- ---------- ---------- ----------
Foreign:
China...................................... 25,000 302,273 272,727 3,500
South Korea................................ -- -- -- 606,075
Taiwan..................................... -- 19,250 64,350 462,600
Other...................................... 25,073 149,964 362,908 124,654
-------- ---------- ---------- ----------
Total foreign............................ 50,073 471,487 699,985 1,196,829
-------- ---------- ---------- ----------
$945,414 $1,376,209 $2,800,584 $1,751,094
======== ========== ========== ==========
</TABLE>
No other individual countries accounted for more than ten percent of revenue
during the years ended October 31, 1997, 1998 and 1999 and the six months ended
April 30, 2000.
(13) ACQUISITIONS
ZENTROPIC
Effective April 3, 2000, the Company, through a wholly owned subsidiary,
acquired 100 percent of the membership interest of Zentropic in exchange for
1,745,226 shares of the Company's common stock. The value of the common shares
was determined using an estimated fair value of $3.80 per share based on the
Company's preferred stock offerings near the date of the acquisition (see
Note 4). The acquisition was accounted for as a purchase and Zentropic's results
of operations have been included in the accompanying April 30, 2000 unaudited
consolidated financial statements from the acquisition date. The purchase price
was allocated as follows, including legal and accounting fees associated with
the acquisition:
<TABLE>
<S> <C>
Current assets.............................................. $ 233,367
Property and equipment...................................... 38,630
Other assets................................................ 3,815
Goodwill.................................................... 4,058,938
Core technology and assembled workforce..................... 1,911,000
Acquired in-process research and development................ 800,000
Current liabilities......................................... (160,047)
Net deferred income tax liability........................... (141,977)
----------
Purchase price.............................................. $6,743,726
==========
</TABLE>
F-27
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(13) ACQUISITIONS (CONTINUED)
The value assigned to acquired in-process research and development was
determined by an independent valuation which included, but was not limited to,
an analysis of estimating the costs to develop the purchased in-process research
and development into commercially viable products, the market for the developed
products and technologies, and discounting the resulting net cash flows related
to these projects and technologies. The valuation was based upon assumptions
management believed to be reasonable at the time of the valuation. However, the
underlying assumptions used to estimate expected revenue, development costs or
profitability, or the events associated with such projects, may not transpire as
estimated. At the date of the acquisition of Zentropic, management estimated
that the acquired in-process research and development projects of Zentropic were
approximately 60 percent complete and that an additional $150,000 would be
required to develop these projects and technologies to commercial viability. At
the date of the acquisition, the acquired in-process research and development
had not yet reached technological feasibility and had no alternative future
uses.
UNITED SYSTEM ENGINEERS
On April 13, 2000, the Company entered into an agreement with United System
Engineers, Inc. ("USE"), a Japanese corporation. USE is a custom systems
engineering company with experience in embedded operating systems. Pursuant to
the agreement, the Company acquired, effective May 1, 2000, all of the
outstanding stock of USE in exchange for $322,829 in cash and options to
purchase 507,335 shares of the Company's common stock. The options have a
vesting period of one year, an exercise price of $3.00 per share and expire ten
years from the date of grant. The acquisition will be accounted for as a
purchase. The excess of the purchase price over the estimated fair value of the
acquired tangible assets will be allocated to goodwill and other intangible
assets.
FIREPLUG COMPUTERS INC.
On May 1, 2000, the Company entered into an agreement with Fireplug
Computers Inc. ("Fireplug"), a Canadian corporation. Fireplug is a developer of
embedded Linux network application software solutions and embedded Linux tools.
Pursuant to the agreement, the Company acquired all of the outstanding stock of
Fireplug in exchange for $500,000 in cash, 69,998 shares of Series D and options
to purchase 62,220 shares of common stock of the Company. The options have a
vesting period of one year, an exercise price of $1.50 per share and expire ten
years from the date of grant. The acquisition will be accounted for as a
purchase. The excess of the purchase price over the estimated fair value of the
acquired tangible assets will be allocated to goodwill and other intangible
assets.
INUP
On May 1, 2000, the Company entered into an agreement with Inup S.A.
("Inup"), a French corporation. Inup develops Linux-based solutions for embedded
devices that provide software backup in the event of hardware failures. Pursuant
to the agreement, the Company acquired all of the outstanding stock of Inup in
exchange for $10,000 in cash, 83,334 shares of Series C and 1,333,333 shares of
common stock of the Company. The acquisition will be accounted for as a
purchase. The
F-28
<PAGE>
LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(13) ACQUISITIONS (CONTINUED)
excess of the purchase price over the estimated fair value of the acquired
tangible assets will be allocated to acquired in-process research and
development, goodwill and other intangible assets.
MORETON BAY VENTURES PTY LTD.
On May 12, 2000, the Company entered into an agreement with Moreton Bay
Ventures Pty Ltd. ("Moreton Bay"), an Australian corporation. Moreton Bay
develops embedded virtual private network solutions for Internet appliances and
provides engineering development for the Motorola ColdFire microprocessor
platform. Moreton Bay's historical operations include two product lines, RAStel
multimodem cards ("RAStel") and NETtel Internet routers ("NETtel"). Pursuant to
the agreement, the Company acquired all of the outstanding stock of Moreton Bay
in exchange for $10,000 in cash, 956,315 shares of Series D and options to
purchase 87,374 shares of the Company's common stock. The options have a vesting
period of one year, an exercise price of $3.00 per share and expire ten years
from the date of grant. The acquisition will be accounted for as a purchase. The
excess of the purchase price over the estimated fair value of the acquired
tangible assets will be allocated to acquired in-process research and
development, goodwill and other intangible assets.
Prior to the acquisition, Moreton Bay transferred the RAStel assets,
liabilities and operations, which the Company did not acquire, to a separate
legal entity.
F-29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Zentropic Computing, LLC:
We have audited the accompanying consolidated balance sheets of Zentropic
Computing, LLC (a Virginia limited liability company), the carved-out portion of
Advanced Simulation Technology, inc. (a Virginia corporation) and their
subsidiary as of October 31, 1998 and 1999, and the related consolidated
statements of operations and comprehensive loss, members' capital and cash flows
for each of the two years in the period ended October 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Zentropic
Computing, LLC, the carved-out portion of Advanced Simulation Technology, inc.
and their subsidiary as of October 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the two years in the period ended
October 31, 1999 in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
April 3, 2000
F-30
<PAGE>
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------- JANUARY 31,
1998 1999 2000
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 63,678 $ 120,037 $ 170,864
Accounts receivable, net of allowance for doubtful
accounts of $0.......................................... -- 25,667 22,500
Value added tax and income tax receivables................ 7,053 4,280 4,945
Prepaid expenses.......................................... 2,426 11,534 16,141
--------- --------- ---------
Total current assets.................................... 73,157 161,518 214,450
--------- --------- ---------
Property and equipment:
Computer equipment........................................ 3,385 10,764 12,752
Furniture and fixtures.................................... 3,059 9,368 9,352
--------- --------- ---------
6,444 20,132 22,104
Less accumulated depreciation............................. (1,084) (6,106) (6,779)
--------- --------- ---------
Net property and equipment.............................. 5,360 14,026 15,325
--------- --------- ---------
Other assets, net........................................... 461 4,345 4,027
--------- --------- ---------
$ 78,978 $ 179,889 $ 233,802
========= ========= =========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable.......................................... $ 36,252 $ 6,810 $ 32,938
Accrued warranty.......................................... -- 5,000 5,000
Deferred revenue.......................................... -- 30,667 10,417
Related party payable..................................... -- 40,580 76,861
--------- --------- ---------
Total current liabilities............................... 36,252 83,057 125,216
--------- --------- ---------
Commitments and contingencies (Notes 1 and 4)
Members' capital:
Contributed capital....................................... 275,669 787,852 955,206
Member capital contributions receivable................... -- (137,900) --
Accumulated comprehensive income (loss)................... 446 96 (39)
Accumulated deficit....................................... (23,910) (271,702) (566,071)
Net deficit of carved-out operations...................... (209,479) (281,514) (280,510)
--------- --------- ---------
Total members' capital.................................. 42,726 96,832 108,586
--------- --------- ---------
$ 78,978 $ 179,889 $ 233,802
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE>
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
----------------------- -------------------------
1998 1999 1999 2000
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Software....................................... $ -- $ 26,141 $ -- $ 7,461
Services....................................... -- 59,333 -- 35,250
--------- --------- --------- ---------
Total revenue................................ -- 85,474 -- 42,711
--------- --------- --------- ---------
Cost of revenue:
Software....................................... -- 20,725 -- 2,687
Services....................................... -- 17,639 -- 10,886
--------- --------- --------- ---------
Total cost of revenue........................ -- 38,364 -- 13,573
--------- --------- --------- ---------
Gross margin................................. -- 47,110 -- 29,138
--------- --------- --------- ---------
Operating expenses:
Research and development (exclusive of non-cash
compensation of $0, $850, $0 and $29,454,
respectively)................................ 208,539 320,828 70,300 76,826
Sales and marketing (exclusive of non-cash
compensation of $0, $58,393, $0 and $94,242,
respectively)................................ 130,314 249,898 57,849 79,700
General and administrative (exclusive of
non-cash compensation of $0, $19,465, $0 and
$43,658, respectively)....................... 90,674 150,132 36,123 71,733
Non-cash compensation.......................... -- 78,708 -- 167,354
--------- --------- --------- ---------
Total operating expenses..................... 429,527 799,566 164,272 395,613
--------- --------- --------- ---------
Loss before income taxes......................... (429,527) (752,456) (164,272) (366,475)
Provision (benefit) for income taxes............. 2,482 (4,117) 4,907 3,479
--------- --------- --------- ---------
Net loss......................................... $(432,009) $(748,339) $(169,179) $(369,954)
========= ========= ========= =========
Comprehensive loss:
Net loss....................................... $(432,009) $(748,339) $(169,179) $(369,954)
Foreign currency translation adjustments....... 446 (350) (454) (135)
--------- --------- --------- ---------
$(431,563) $(748,689) $(169,633) $(370,089)
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
<TABLE>
<CAPTION>
MEMBER CAPITAL ACCUMULATED NET DEFICIT OF
CONTRIBUTED CONTRIBUTIONS COMPREHENSIVE ACCUMULATED CARVED-OUT
CAPITAL RECEIVABLE INCOME (LOSS) DEFICIT OPERATIONS
----------- -------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1997...... $ -- $ -- $ -- $ -- $ --
Member capital contributions... 58,295 -- -- -- --
ASTi funding of carved-out
operations and contribution
to members' capital.......... 217,374 -- -- -- 198,620
Net loss applicable to
carved-out operations........ -- -- -- -- (408,099)
Cumulative translation
adjustment................... -- -- 446 -- --
Net loss....................... -- -- -- (23,910) --
-------- --------- ----- --------- ---------
Balance, October 31, 1998...... 275,669 -- 446 (23,910) (209,479)
Member capital contributions... 361,440 (137,900) -- -- --
ASTi funding of carved-out
operations and contribution
to members' capital.......... 72,035 -- -- -- 428,512
Net loss applicable to
carved-out operations........ -- -- -- -- (500,547)
Issuance of member interests
for services................. 78,708 -- -- -- --
Cumulative translation
adjustment................... -- -- (350) -- --
Net loss....................... -- -- -- (247,792) --
-------- --------- ----- --------- ---------
Balance, October 31, 1999...... 787,852 (137,900) 96 (271,702) (281,514)
ASTi funding of carved-out
operations (unaudited)....... -- -- -- -- 76,589
Net loss applicable to
carved-out operations
(unaudited).................. -- -- -- -- (75,585)
Cash received related to member
capital contributions
receivable (unaudited)....... -- 137,900 -- -- --
Issuance of member interests
for services (unaudited)..... 167,354 -- -- -- --
Cumulative translation
adjustment (unaudited)....... -- -- (135) -- --
Net loss (unaudited)........... -- -- -- (294,369) --
-------- --------- ----- --------- ---------
Balance, January 31, 2000
(unaudited).................. $955,206 $ -- $ (39) $(566,071) $(280,510)
======== ========= ===== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
----------------------- -------------------------
1998 1999 1999 2000
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(432,009) $(748,339) $(169,179) $(369,954)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 7,272 7,007 362 991
Non-cash compensation expense................ -- 78,708 -- 167,354
Changes in operating assets and liabilities,
excluding effects of acquisition:
Accounts receivable........................ 11,527 (25,667) -- 3,167
VAT and income tax receivables............. (6,021) 2,773 (3,932) (665)
Prepaid expenses........................... (2,426) (9,108) (3,794) (4,607)
Accounts payable........................... 24,465 (29,442) (20,512) 26,128
Deferred revenue........................... -- 30,667 -- (20,250)
Accrued warranty........................... -- 5,000 -- --
Related party payable...................... -- 40,580 -- 36,281
--------- --------- --------- ---------
Net cash used in operating activities.... (397,192) (647,821) (197,055) (161,555)
--------- --------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment............. (3,683) (13,688) -- (1,972)
Acquisition of Autospan Limited, net of cash
acquired..................................... (9,692) -- -- --
Purchase of other long-term assets............. (490) (5,869) -- --
--------- --------- --------- ---------
Net cash used in operating activities.... (13,865) (19,557) -- (1,972)
--------- --------- --------- ---------
Cash flows from financing activities:
Members' capital contributions................. 275,669 295,575 72,025 137,900
ASTi funding of carved-out operations not
contributed to members' capital.............. 198,620 428,512 127,288 76,589
--------- --------- --------- ---------
Net cash provided by financing
activities............................. 474,289 724,087 199,313 214,489
--------- --------- --------- ---------
Net increase in cash............................. 63,232 56,709 2,258 50,962
Cumulative translation adjustment................ 446 (350) (454) (135)
Cash, beginning of period........................ -- 63,678 63,678 120,037
--------- --------- --------- ---------
Cash, end of period.............................. $ 63,678 $ 120,037 $ 65,482 $ 170,864
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
OCTOBER 31, JANUARY 31,
-------------------- --------------------
1998 1999 1998 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Cash paid for income taxes....................... $ -- $2,482 $ -- $9,441
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
During fiscal 1998, in connection with the acquisition of Autospan Limited,
Advanced Simulation Technology, inc. received $15,308 of cash, $12,559 of
receivables, $8,920 of equipment and other assets and assumed $11,787 of
accounts payable and accrued liabilities in exchange for $25,000 in cash.
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Zentropic Computing, LLC's subsidiary, Zentropic Computing Ltd ("Ltd"),
began operations in the United Kingdom during November 1994 as Autospan Limited
("Autospan"). Autospan developed and marketed tools, related products and
utilities for real time ("RT") Linux operating system software. Advanced
Simulation Technology, inc. ("ASTi") acquired Autospan on February 1, 1998 for
$25,000 in cash.
Three individuals, together with ASTi, created a separate entity to market
and sell Ltd's tools and products in the United States and certain other
locations. These individuals, together with ASTi, organized Zentropic Computing,
LLC, a Virginia limited liability company doing business as Zentropix
("Zentropix"), and became its founding members on January 5, 1998.
Effective May 12, 1999, ASTi transferred its ownership interest in Ltd to
Zentropix. As a result of the transfer, Ltd became a subsidiary of Zentropix
(collectively referred to as the "Company"). ASTi's majority shareholder was one
of the founding members of Zentropix. Since ASTi was the sole shareholder
of Ltd and together with its majority shareholder was the majority owner of
Zentropix, this transaction has been accounted for as a reorganization of
entities under common control with the assets and liabilities reflected at
carryover basis in a manner similar to a pooling of interests. Subsequent to the
acquisition of Ltd and the reorganization of Zentropix, ASTi has paid
substantially all operating expenses on behalf of the Company (see Note 5).
These expenses were not recorded by the Company. Accordingly, the accompanying
consolidated financial statements include the expenses paid by ASTi on behalf of
the Company during the years ended October 31, 1998 and 1999 and the three
months ended January 31, 2000 (referred to as the carved-out operations of
ASTi).
The expenses of the carved-out portion of ASTi reflect actual direct
expenses associated with the Company's business and an allocated portion of
common expenses. The allocated common expenses consist primarily of facilities
rent and legal and accounting expenses and were allocated based on the
percentage of ASTi payroll expense allocated to the Company. Management believes
that the allocation methods used are reasonable and reflect their best estimate
of the expenses that would have been incurred by the Company as a standalone
entity.
ASTi has funded the net losses of the Company by paying substantially all
operating expenses of the Company. The funding applicable to the carved-out
operations has been reflected as a component of equity entitled "Net Deficit of
Carved-out Operations" in the accompanying consolidated balance sheets. This
funding has been offset by the accumulated losses applicable to the carved-out
operations of ASTi and the contributions to members' capital made by ASTi.
The Company continues to develop, market and support operating system
products primarily for the RT Linux and embedded Linux markets. The Company
sells and distributes its software and related products through license
agreements directly to end-users. These sales occur throughout the United States
and in certain international locations.
The Company is subject to certain risks including the uncertainty of market
acceptance and demand for Linux-related products and services, competition from
larger, more established companies, short product life cycles, the Company's
ability to develop and bring to market new products on a
F-36
<PAGE>
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)
timely basis, dependence on key employees, the ability to attract and retain
additional qualified personnel and the ability to obtain adequate financing to
support growth.
During the years ended October 31, 1998 and 1999 and the three months ended
March 31, 2000, the Company has suffered net losses of $432,009, $748,339 and
$369,954, respectively. As discussed in Note 8, subsequent to March 31, 2000 the
Company has been acquired by Lineo, Inc. ("Lineo") and Lineo has committed to
provide funding to the Company as required.
(2) SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of January 31, 2000 and for
the three months ended January 31, 1999 and 2000 have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
reflect all normal recurring adjustments necessary to present fairly the
financial information set forth therein in accordance with accounting principles
generally accepted in the United States. The results of operations for the three
months ended January 31, 2000 are not necessarily indicative of the results to
be expected for the entire fiscal year ending October 31, 2000.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying consolidated financial
statements for cash, accounts receivable, value added tax and income tax
receivables and accounts payable approximate fair values because of the
immediate or short-term maturities of these financial instruments.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Zentropix, the
carved-out operations of ASTi and their wholly owned subsidiary, Ltd, after
elimination of intercompany accounts and transactions.
FOREIGN CURRENCY TRANSLATION
For purposes of consolidating the operations of Ltd, the Company has
determined the functional currency for Ltd's operations to be the British Pound.
Accordingly, translation gains and losses are included as a component of
comprehensive loss.
F-37
<PAGE>
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Computer equipment and furniture and fixtures are depreciated using the
straight-line method over the estimated useful life of the asset, typically
three years.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statement of operations.
CAPITALIZED SOFTWARE COSTS
In accordance with Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," development costs
incurred in the research and development of new software products to be sold,
leased or otherwise marketed are expensed as incurred until technological
feasibility in the form of a working model has been established. Internally
generated capitalizable software development costs have not been material for
the years ended October 31, 1998 and 1999 and the three months ended
January 31, 2000. The Company has charged its software development costs to
research and development expense in the accompanying consolidated statements of
operations.
OTHER ASSETS
Other assets consist of legal and other direct costs incurred to obtain the
Company's trademarks. The trademarks are being amortized using the straight-line
method over a period of five years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including intangibles, for
impairment when events or changes in circumstances indicate that the book value
of an asset may not be recoverable. The Company evaluates, at each balance sheet
date, whether events and circumstances have occurred which indicate possible
impairment. The Company uses an estimate of future undiscounted net cash flows
of the related asset or group of assets over the remaining life in measuring
whether the assets are recoverable. As of October 31, 1999 and January 31, 2000,
the Company does not consider any of its long-lived assets to be impaired.
REVENUE RECOGNITION
The Company generates revenue from software sold directly to end-users. The
Company also generates service revenue from training fees, consulting fees, and
customer support fees.
F-38
<PAGE>
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position No. 97-2 ("SOP
97-2"), "Software Revenue Recognition." Revenue from the sale of software
products is recognized upon delivery when persuasive evidence of an arrangement
exists, the price is fixed or determinable and collection is probable. Direct
sales to end-users are evidenced by a binding purchase order for the product and
are governed by a license agreement. Generally, the only multiple element
arrangement of the Company's initial software sales are training and technical
support services the Company provides at additional charge to the end-user. None
of the post contract maintenance and support services extend for more than a
year following the date of the sale. These services do not include product
update or upgrade rights. After the initial support period, customers can elect
to enter into separate support agreements. Revenue from the extended support
agreements are deferred and recognized over the period of the contract or as the
services are provided.
If other significant post-delivery vendor obligations exist or if a product
is subject to customer acceptance, revenues are deferred until no significant
obligations remain or acceptance has occurred. To date, the Company has not
shipped any software subject to acceptance terms or subject to other
post-delivery vendor obligations. Additionally, the Company has not recognized
revenue on any contract with customers that may include customer cancellation or
termination clauses that indicate a demonstration period or otherwise incomplete
transaction.
The Company also offers it customers consulting, training and other services
separate from the software sale. This service revenue is recognized as the
services are performed.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist of the following: advertising,
promotional activities, public relations, trade shows and the salaries,
commissions and related expenses of all personnel in the sales process. The
Company expenses the cost of advertising the first time the advertising takes
place. Advertising expenses totaled $0 and $7,990 for the years ended
October 31, 1998 and 1999, respectively, and $0 and $2,921 for the three-month
periods ended January 31, 1999 and 2000, respectively.
INCOME TAXES
Historically, the Company has not recorded any income tax assets or
liabilities related to its United States operations due to its treatment as a
partnership for Federal income tax purposes. However, effective January 15,
2000, the Company elected to be taxed as a corporation rather than a partnership
for Federal income tax purposes. The Company's subsidiary, Ltd, does recognize
income tax assets and liabilities due to its classification as a Private Company
Limited by Shares in the United Kingdom. The Company's policy was to make
distributions to its members in amounts at least equal to the member's income
taxes that were attributable to the net earnings of the Company. Due to its
history of losses in the United States, the Company has not made any
distributions to members for the payment of income taxes.
F-39
<PAGE>
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company offers credit terms on the sale of its software products to its
customers. The Company performs ongoing credit evaluations of its customers'
financial condition and requires no collateral from its customers. The Company
continually evaluates the need for an allowance for uncollectable accounts
receivable based upon the expected collectibility of all accounts receivable. As
of October 31, 1999, two customers accounted for 100 percent of the gross
accounts receivable balance which the Company deemed to be entirely collectible.
During the year ended October 31, 1999, the Company's sales to three
customers accounted for 45, 23 and 19 percent of revenue. No other customer
accounted for more than ten percent of net revenue during the year ended
October 31, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new accounting and
reporting standards for companies to report information about derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
This statement is effective for financial statements issued for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect this statement to have a material impact on the Company's results of
operations, financial position or liquidity.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition
in Financial Statements." This pronouncement summarizes certain of the SEC
staff's views in applying generally accepted accounting principles to selected
revenue recognition issues. The Company is required to adopt SAB No. 101 during
the first quarter of fiscal year 2001. Although management is currently
evaluating the impact, if any, of SAB No. 101, management does not presently
believe it will have a material impact on the Company's results of operations,
financial position or liquidity.
(3) MEMBERS' CAPITAL
CONTRIBUTED CAPITAL
On January 5, 1998, Zentropix was organized with capital of $25,100
contributed by ASTi and three other founding members. During the period from
January 5, 1998 through October 31, 1998, these members contributed an
additional $33,195. On May 12, 1999, additional members were admitted to
Zentropix. Together with the founding members, these members agreed to
contribute additional capital of $336,440. As of October 31, 1999, the Company
had member capital contributions receivable of $137,900. As of January 31, 2000,
all amounts receivable from members had been collected.
As discussed in Note 1, ASTi has funded the net losses of the Company by
paying substantially all operating expenses of the Company. During fiscal 1999,
ASTi and the other members agreed that a
F-40
<PAGE>
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(3) MEMBERS' CAPITAL (CONTINUED)
portion of ASTi's funding would be deemed as contributed capital. During the
years ended October 31, 1998 and 1999, the funding which was deemed to be
contributed capital by the members totaled $217,374 and $72,035, respectively.
TRANSFER OF MEMBER INTERESTS
On May 12, 1999, the Company granted three founding members an additional
5.6 percent interest in the Company for services rendered. The Company valued
this interest at $78,708 based upon the sale of member interests to third
parties for cash at that same date.
On December 7, 1999, three principal members of Zentropix transferred a
portion of their membership interests in Zentropix to four key employees as
compensation for services rendered by the employees. These three principal
members transferred 7.1 percent of the total outstanding membership interest in
the Company to these four employees. In accordance with Interpretation No. 1 to
Accountings Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," the Company recorded the $167,354 estimated fair value related to
the member interests transferred as non-cash compensation expense in the
accompanying statement of operations for the quarter ended January 31, 2000. The
fair value of the member interests transferred was based upon other equity
transactions in fiscal 1999 and fiscal 2000 and in the opinion of management, is
a reasonable estimate of fair value.
(4) COMMITMENTS AND CONTINGENCIES
OPERATING AGREEMENTS
The Company shares its corporate office facilities with ASTi, which pays for
all rent expense associated with corporate facilities. Historically no formal
agreement between ASTi and the Company governed this arrangement. However, after
the merger with Lineo (see Note 8), the Company expects to move its corporate
offices and assume direct responsibility for its rent obligations. A portion of
the rent expense paid by ASTi has been included in the carved-out operations of
ASTi.
The Company leases office space in Brighton, U.K. The current lease expires
in March 2002. The Company is obligated to pay rent of approximately $5,100 per
year plus annual VAT. Rent expense was approximately $800 for the year ended
October 31, 1998 under a prior lease arrangement. Rent expense was approximately
$5,000 (including VAT) for the year ended October 31, 1999 under the current and
prior lease arrangements. Future minimum lease obligations related to this lease
are $5,100 in fiscal 2000, $5,100 in fiscal 2001 and $1,200 in fiscal 2002.
LIMITATION OF MEMBERS' LIABILITY
None of the members are obligated to contribute capital to restore any
negative capital account, nor is any member liable for any of the debts, losses,
liabilities or obligations of the Company beyond such member's capital
contributions as governed by the provisions of the Virginia Limited Liability
Company Act and other applicable laws of the Commonwealth of Virginia.
F-41
<PAGE>
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(5) RELATED PARTY TRANSACTIONS
The Company had an informal agreement whereby ASTi paid substantially all
operating expenses of the Company. The expenses paid on behalf of the Company by
ASTi consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
----------------------- -------------------
1998 1999 1999 2000
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Payroll.............................. $332,551 $446,862 $106,886 $66,766
Contract research and development.... 37,500 -- -- --
Facilities rent...................... 17,795 33,693 8,423 7,500
Legal and accounting fees and other
general operating expenses......... 8,083 17,971 4,493 2,323
Marketing expenses................... 20,065 2,021 505 --
-------- -------- -------- -------
Total expenses..................... $415,994 $500,547 $120,307 $76,589
======== ======== ======== =======
</TABLE>
The Company had a related party payable to ASTi of $40,580 as of
October 31, 1999 and $76,861 at January 31, 2000 related to expenses paid by
ASTi on behalf of the Company. The agreement between ASTi and the Company
relating to these expenses is informal. Consequently, the Company has classified
the related party payable as a current liability.
(6) INCOME TAXES
As described in Note 2, Zentropix was treated as a partnership for Federal
income tax purposes prior to January 15, 2000 at which time it elected to be
treated as a taxable entity. Ltd has been treated as a taxable entity under the
laws of the United Kingdom since it's inception. The carved-out portion of ASTi
was included in the U.S. tax return of ASTi for all periods presented. Had these
carved-out expenses been paid by Zentropix, the tax benefit would have flowed
through to the members and would not have been reflected in the accompanying
financial statements for all periods prior to January 15, 2000.
The net loss before income taxes consisted of the following components:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31 THREE MONTHS
--------------------- ENDED JANUARY 31,
1998 1999 2000
--------- --------- ------------------
<S> <C> <C> <C>
Domestic U.S. operations............................... $(428,380) $(742,434) $(383,804)
Operations of foreign subsidiary, Zentropic Computing
Ltd.................................................. (1,147) (10,022) 17,329
--------- --------- ---------
Net loss before income taxes......................... $(429,527) $(752,456) $(366,475)
========= ========= =========
</TABLE>
The provision (benefit) for income taxes for the years ended October 31,
1998 and 1999 consisted entirely of taxes related to Ltd.
F-42
<PAGE>
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(6) INCOME TAXES (CONTINUED)
The Company determines its deferred tax assets and liabilities based on the
differences between the financial reporting and tax bases of assets and
liabilities. They are measured by applying the enacted tax rates and laws in
effect for the years in which such differences are expected to reverse. As of
January 15, 2000 (the date Zentropix became a taxable entity in the U.S.) the
Company had approximately $6,000 of deferred income tax assets related to
deferred revenue and accruals. As of January 31, 2000, the Company had
approximately $29,000 of deferred income tax assets related to net operating
losses, deferred revenue and accruals. The amount of and ultimate realization of
the deferred income tax assets is dependent, in part, upon the tax laws in
effect, the Company's future earnings, and other future events, the effects of
which cannot be determined. The Company has established a valuation allowance
against its deferred income tax assets because the available objective evidence
creates sufficient uncertainty regarding their realizability.
(7) SEGMENT INFORMATION
In June 1998, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131 establishes disclosures related
to components of a company for which separate financial information is available
and evaluated regularly by a company's chief operating decision makers in
deciding how to allocate resources and in assessing performance. It also
requires segment disclosures about products and services as well as geographic
areas. The Company has determined that it did not have any separately reportable
operating segments as of October 31, 1998 and 1999 and January 31, 2000.
However, the Company does sell software and related services in geographic
locations outside the United States. Revenues attributed to individual countries
based on the location of sales to unaffiliated customers were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, THREE MONTHS
-------------------- ENDED JANUARY 31,
1998 1999 2000
--------- -------- ------------------
<S> <C> <C> <C>
Revenue:
United States............................... $ -- $47,141 $36,461
France...................................... -- 38,333 6,250
--------- ------- -------
Total revenue................................. $ -- $85,474 $42,711
========= ======= =======
</TABLE>
(8) SUBSEQUENT EVENT
On January 21, 2000, the Company signed a letter of intent to merge with
Lineo. The Company agreed to exchange 100 percent of its members' capital for
1,745,226 shares of Lineo's common stock. On March 28, 2000, the Company and
Lineo signed a definitive Agreement and Plan of Merger and on April 3, 2000, the
Company finalized its merger with Lineo in accordance with the terms specified
above.
F-43
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United System Engineers, Inc.:
We have audited the accompanying balance sheets of United System
Engineers, Inc. (a Japanese corporation) as of December 31, 1998 and 1999, and
the related statements of operations and comprehensive income (loss),
stockholders' deficit and cash flows for the years then ended, expressed in
Japanese yen. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United System
Engineers, Inc. as of December 31, 1998 and 1999, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles in the United States of America (see
Note 1).
Also, in our opinion, the amounts translated into U.S. dollars in the
accompanying financial statements have been computed on the basis set forth in
Note 1.
ARTHUR ANDERSEN
Tokyo, Japan
April 14, 2000
F-44
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
THOUSANDS OF YEN
------------------------------------------------------ THOUSANDS OF U.S. DOLLARS
DECEMBER 31, --------------------------
----------------------------------- MARCH 31, DECEMBER 31, MARCH 31,
1998 1999 2000 1999 2000
---------------- ---------------- ---------------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. Y 55,422 Y 40,091 Y 31,430 $ 391 $ 307
Time deposits............................. 9,104 9,124 9,130 89 89
Accounts receivable....................... 14,127 10,979 11,541 107 113
Unbilled revenue.......................... 5,979 13,790 -- 135 --
Prepaid expenses.......................... 12,732 13,857 1,357 135 13
Investment in marketable security......... -- -- 41,990 -- 410
Other current assets...................... 1,160 1,212 2,259 12 22
---------------- ---------------- ---------------- ------- -------
Total current assets.................... 98,524 89,053 97,707 869 954
---------------- ---------------- ---------------- ------- -------
Property and equipment, at cost:
Buildings and improvements................ 99,039 99,039 99,039 967 967
Equipment................................. 17,294 17,793 17,945 174 175
Less accumulated depreciation............. (61,345) (67,275) (68,541) (657) (669)
---------------- ---------------- ---------------- ------- -------
54,988 49,557 48,443 484 473
---------------- ---------------- ---------------- ------- -------
Other assets................................ 2,375 1,994 1,942 20 19
---------------- ---------------- ---------------- ------- -------
Y 155,887 Y 140,604 Y 148,092 $ 1,373 $ 1,446
================ ================ ================ ======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................... Y -- Y 8,500 Y -- $ 83 $ --
Customer advances and deferred revenue.... 193 182 1,839 1 18
Short-term debt........................... 69,735 78,284 81,846 764 799
Current maturities of long-term debt...... 19,920 31,094 31,484 304 308
Accrued vacation payable.................. 5,528 6,191 6,191 60 60
Other accrued liabilities................. 3,780 4,304 1,958 42 19
Income taxes payable...................... 206 206 51 2 --
Other current liabilities................. 2,044 7,903 4,153 78 41
---------------- ---------------- ---------------- ------- -------
Total current liabilities............... 101,406 136,664 127,522 1,334 1,245
---------------- ---------------- ---------------- ------- -------
Long-term debt, net of current maturities... 107,970 76,876 83,440 751 814
---------------- ---------------- ---------------- ------- -------
Commitments and contingencies (Notes 1 and
5)
Stockholders' deficit:
Common stock, Y500 par value per share;
Authorized--160,000 shares;
Outstanding--80,000 shares as of
December 31, 1998, 160,000 shares as of
December 31, 1999 and March 31, 2000.... 40,000 80,000 80,000 781 781
Accumulated deficit......................... (93,489) (152,936) (171,185) (1,493) (1,671)
Accumulated other comprehensive income...... -- -- 28,315 -- 277
---------------- ---------------- ---------------- ------- -------
Total stockholders' deficit............. (53,489) (72,936) (62,870) (712) (613)
---------------- ---------------- ---------------- ------- -------
Y155,887 Y140,604 Y148,092 $ 1,373 $ 1,446
================ ================ ================ ======= =======
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
THOUSANDS OF U.S. DOLLARS
THOUSANDS OF YEN --------------------------
--------------------------------------------------------------------- THREE
YEAR ENDED THREE MONTHS ENDED MONTHS
DECEMBER 31, MARCH 31, YEAR ENDED ENDED
--------------------------------- --------------------------------- DECEMBER 31, MARCH 31,
1998 1999 1999 2000 1999 2000
--------------- --------------- --------------- --------------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Services................... Y 202,408 Y 146,117 Y 34,050 Y 23,101 $1,427 $ 225
Software................... -- 10,990 -- 8,628 107 85
--------------- --------------- --------------- --------------- ------ -----
Total revenue............ Y202,408 Y157,107 Y 34,050 Y 31,729 $1,534 $ 310
Cost of revenue.............. 91,778 104,879 27,716 34,432 1,024 336
--------------- --------------- --------------- --------------- ------ -----
Gross profit (loss)...... 110,630 52,228 6,334 (2,703) 510 (26)
--------------- --------------- --------------- --------------- ------ -----
Operating expenses:
Research and development... 25,560 4,934 4,934 -- 48 --
Selling, general and
administrative........... 82,495 99,506 14,296 13,890 971 136
--------------- --------------- --------------- --------------- ------ -----
Total operating
expenses............... 108,055 104,440 19,230 13,890 1,019 136
--------------- --------------- --------------- --------------- ------ -----
Income (loss) from
operations................. 2,575 (52,212) (12,896) (16,593) (509) (162)
--------------- --------------- --------------- --------------- ------ -----
Other income (expense):
Interest expense, net...... (6,134) (7,119) (1,639) (1,515) (69) (15)
Other income (expense),
net...................... 81 90 55 (90) -- (1)
--------------- --------------- --------------- --------------- ------ -----
Other expense, net....... (6,053) (7,029) (1,584) (1,605) (69) (16)
--------------- --------------- --------------- --------------- ------ -----
Loss before income taxes..... (3,478) (59,241) (14,480) (18,198) (578) (178)
Provision for income taxes... 206 206 51 51 2 --
--------------- --------------- --------------- --------------- ------ -----
Net loss..................... Y (3,684) Y (59,447) Y (14,531) Y (18,249) $ (580) $(178)
=============== =============== =============== =============== ====== =====
Comprehensive income (loss):
Net loss................... Y (3,684) Y (59,447) Y (14,531) Y (18,249) $ (580) $(178)
Unrealized gain on
marketable security...... -- -- -- 28,315 -- 277
--------------- --------------- --------------- --------------- ------ -----
Y (3,684) Y (59,447) Y (14,531) Y 10,066 $ (580) $ 99
=============== =============== =============== =============== ====== =====
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS
----------------------------------------------------- --------------------------
DECEMBER 31,
---------------------------------- MARCH 31, DECEMBER 31, MARCH 31,
1998 1999 2000 1999 2000
--------------- ---------------- ---------------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Common stock:
Beginning balance.................... Y 30,000 Y 40,000 Y 80,000 $ 391 $ 781
Shares issued:
20,000 shares in December 1998..... 10,000 -- -- -- --
80,000 shares in December 1999..... -- 40,000 -- 390 --
--------------- ---------------- ---------------- ------- -------
Ending balance....................... Y 40,000 Y 80,000 Y 80,000 $ 781 $ 781
=============== ================ ================ ======= =======
Accumulated deficit:
Beginning balance.................... Y(89,805) Y (93,489) Y(152,936) $ (913) $(1,493)
Net loss............................. (3,684) (59,447) (18,249) (580) (178)
--------------- ---------------- ---------------- ------- -------
Ending balance....................... Y(93,489) Y(152,936) Y(171,185) $(1,493) $(1,671)
=============== ================ ================ ======= =======
Accumulated other comprehensive income:
Beginning balance.................... Y -- Y -- Y -- $ -- $ --
Unrealized gain on investment in
marketable security................ -- -- 28,315 -- 277
--------------- ---------------- ---------------- ------- -------
Ending balance....................... Y -- Y -- Y 28,315 $ -- $ 277
=============== ================ ================ ======= =======
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS
--------------------------------------------------------------------- ----------------------------
YEAR ENDED THREE MONTHS ENDED THREE MONTHS
DECEMBER 31, MARCH 31, YEAR ENDED ENDED
--------------------------------- --------------------------------- DECEMBER 31, MARCH 31,
1998 1999 1999 2000 1999 2000
--------------- --------------- --------------- --------------- ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................. Y (3,684) Y(59,447) Y(14,531) Y(18,249) $(580) $(178)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities--
Depreciation and
amortization......... 6,144 6,180 1,454 1,266 60 12
Changes in assets and
liabilities--
Accounts
receivable......... 11,420 3,148 (5,025) (562) 31 (6)
Unbilled revenue..... (5,103) (7,811) 5,979 115 (76) 2
Prepaid expenses..... (11,192) (1,125) 11,498 12,500 (11) 122
Other current
assets............. (799) (52) 1,058 (1,047) (1) (10)
Other assets......... (1,319) 131 52 52 1 1
Accounts payable..... (5,882) 8,500 -- (8,500) 83 (83)
Customer advances and
deferred revenue... 54 (11) 14 1,657 -- 17
Accrued vacation
payable............ 908 663 (1) -- 6 --
Other accrued
liabilities........ (2,970) 524 (1,999) (2,346) 5 (23)
Income tax payable... -- -- (155) (155) -- (2)
Other current
liabilities........ (2,813) 5,859 2,950 (3,750) 57 (37)
--------------- --------------- --------------- --------------- ----- -----
Net cash provided by
(used in) operating
activities......... (15,236) (43,441) 1,294 (19,019) (425) (185)
=============== =============== =============== =============== ===== =====
Cash flows from investing
activities:
Purchases of buildings
and improvements, and
equipment.............. (1,529) (499) -- (152) (4) (1)
Increase in time
deposits............... (3,635) (20) (11) (6) -- --
--------------- --------------- --------------- --------------- ----- -----
Net cash used in
investing
activities........... (5,164) (519) (11) (158) (4) (1)
--------------- --------------- --------------- --------------- ----- -----
Cash flows from financing
activities:
Proceeds from long term
debt................... 85,200 -- -- 15,000 -- 146
Repayments of long term
debt................... (22,780) (19,920) (4,800) (8,046) (194) (79)
Increase (decrease) in
short term debt, net... (21,186) 8,549 (600) 3,562 83 35
Sale of common shares.... 10,000 40,000 -- -- 390 --
--------------- --------------- --------------- --------------- ----- -----
Net cash provided by
(used in) financing
activities........... 51,234 28,629 (5,400) 10,516 279 102
=============== =============== =============== =============== ===== =====
Net increase (decrease) in
cash and cash
equivalents.............. 30,834 (15,331) (4,117) (8,661) (150) (84)
Cash and cash equivalents:
Beginning of period...... 24,588 55,422 55,422 40,091 541 391
--------------- --------------- --------------- --------------- ----- -----
End of period............ Y 55,422 Y 40,091 Y 51,305 Y 31,430 $ 391 $ 307
=============== =============== =============== =============== ===== =====
See accompanying notes to financial statements.
</TABLE>
F-48
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS
--------------------------------------------------------------------- ----------------------------
YEAR ENDED THREE MONTHS ENDED THREE MONTHS
DECEMBER 31, MARCH 31, YEAR ENDED ENDED
--------------------------------- --------------------------------- DECEMBER 31, MARCH 31,
1998 1999 1999 2000 1999 2000
--------------- --------------- --------------- --------------- ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Supplemental disclosure of
cash flow information:
Cash paid for interest... Y 7,219 Y 6,959 Y 1,658 Y 1,640 $ 67 $ 16
Cash paid for income
taxes.................. Y 206 Y 206 Y 206 Y 206 $ 2 $ 2
Supplemental schedule of
noncash investing and
financing activities:
Receipt of investment in
marketable security as
payment for services... Y -- Y -- Y -- Y 13,675 $ -- $ 134
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
United System Engineers, Inc. (the "Company") was founded on October 24,
1984. Since its founding, the Company has specialized in providing engineering
and software development services. A majority of the Company's services have
been provided to computer system vendors and integrators in Japan. The Company's
experience has been concentrated in embedded systems development.
In November 1997, the Company began to develop its proprietary Linux-based
server application software product named WebMart. In March 1999, the Company
began to generate revenues from the sale of WebMart directly through the
Company's Internet homepage and is negotiating with other vendors and system
integrators for indirect sales.
The Company's revenues are generated from two sources: contract engineering
services and sales of WebMart, including technical support of WebMart. The
commercial success of WebMart is subject to certain risks including the
uncertainty of market acceptance and life cycles. The Company is yet to recover
the research and development costs of WebMart, which was financed primarily by
bank borrowings.
During the years ended December 31, 1998 and 1999 and the three months ended
March 31, 2000, the Company suffered net losses and as March 31, 2000, the
Company had a working capital deficit of Y71,805,000 ($701,000) and a
stockholders' deficit of Y62,870,000 ($613,000). As discussed in Note 11,
subsequent to March 31, 2000 the Company's shares of common stock have been
acquired by Lineo, Inc. and Lineo, Inc. has committed to provide funding to the
Company as required.
BASIS OF PRESENTING FINANCIAL STATEMENTS
The Company maintains its accounts and prepares its financial statements in
conformity with Japanese income tax laws and accounting practices. However, the
accompanying financial statements differ from those issued for domestic purposes
in Japan. They reflect certain adjustments necessary to present the financial
statements in conformity with accounting principles generally accepted in the
United States of America ("U.S. GAAP"). The principal adjustments necessary to
conform to U.S. GAAP relate to accounting for costs of computer software to be
sold, leased or otherwise marketed, certain accrued liabilities, comprehensive
income and differences related to accounting for income taxes.
The Company's functional currency is the Japanese yen and the accompanying
financial statements are presented in yen. Additionally, as a convenience, the
balance sheets as of December 31, 1999 and March 31, 2000 and the related
statements of operations and comprehensive income (loss), stockholders' deficit
and cash flows for the year and three months then ended are also presented in
U.S. dollars by arithmetically translating all Japanese yen amounts at Y102.40
to US$1, which was the exchange rate at December 31, 1999.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of March 31, 2000 and for the
three months ended March 31, 1999 and 2000 have been prepared on the same basis
as the audited financial statements
F-50
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and, in the opinion of management, reflect all normal recurring adjustments
necessary to present fairly the financial information set forth therein in
accordance with U.S. GAAP. All financial statement disclosures related to the
interim financial statements are unaudited.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
TRANSLATION OF FOREIGN CURRENCIES
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 52, "Foreign Currency Translation", certain transactions
entered into by the Company which are denominated in foreign currencies are
translated into Japanese yen using the prevailing exchange rates as of the
transaction dates. Assets and liabilities denominated in the foreign currencies
are translated using exchange rates in effect at the balance sheet date.
Exchange gains and losses relating to these assets and liabilities are included
in the determination of net income (loss).
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents. Cash equivalents consist principally of amounts in time
deposits.
MARKETABLE SECURITY
The Company's investment in a marketable security has been categorized as
available for sale, as defined by SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Unrealized holding gains and losses
are reflected as a component of stockholders' deficit until realized.
CONCENTRATION OF CREDIT RISK
The Company offers credit terms on the sale of its software products to
certain customers. The Company performs ongoing credit evaluations of its
customers' financial condition and requires no collateral from its customers.
The Company continually evaluates the need for an allowance for uncollectible
accounts receivable based upon the expected collectibility of all accounts
receivable. As of December 31, 1998 and 1999 and March 31, 2000, no allowance
was recognized as the Company deemed its accounts receivable to be entirely
collectible.
DEPRECIATION
Depreciation of buildings and equipment is computed by using the
declining-balance method at rates based on the estimated useful lives of the
assets, which range from 20 to 26 years for buildings (including improvements)
and from two to ten years for equipment. Depreciation expense was
F-51
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Y5,668,000 ($55,000) and Y5,930,000 ($58,000) for the years ended December 31,
1998 and 1999, respectively.
Amortization of intangible assets is computed by using the straight-line
method based on a useful life of five years. Amortization expense was Y459,000
($4,000) and Y250,000 ($2,000) for the years ended December 31,1998 and 1999,
respectively.
REVENUE
Deferred revenue primarily relates to support agreements, which have been
paid for by customers prior to the performance of the related services.
REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2, "Software Revenue Recognition"
("SOP 97-2"). Additionally, in December 1998, the AICPA issued Statement of
Position No. 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition,
With Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amends SOP 97-2 to
require recognition of revenue using a "residual method" in certain
circumstances. The Company has adopted SOP 97-2 and SOP 98-9 for all
transactions entered into during the periods included in the accompanying
financial statements.
The Company generates revenue from software products sold directly to
computer device manufacturers and end-users. The Company also generates services
revenue from engineering, training and customer support fees. Revenue from
contracted engineering services is recognized based upon the percentage
completion method. The Company also provides training services to its customers
and the related revenue is recognized as the services are performed.
Revenue from the sale of software products is recognized upon delivery of
the product when persuasive evidence of an arrangement exists, the price is
fixed or determinable and collection is probable. All sales into the
distribution channel require a binding purchase order. Direct sales to end-users
are evidenced by concurrent payment for the product by transfer of funds and are
governed by a license agreement. The sale of software products does not include
product update or upgrade rights.
If other significant post-delivery vendor obligations exist or if a product
is subject to customer acceptance, revenue is deferred until no significant
obligations remain or acceptance has occurred. To date, the Company has not
shipped any software products subject to acceptance terms or subject to other
post-delivery vendor obligations. Additionally, the Company has not recognized
revenue on any contracts with customers that may include customer cancellation
or termination clauses that indicate a demonstration period or otherwise
incomplete transaction.
The Company also offers its customers training and other services separate
from the software sale. The services are not integral to the functionality of
the software and are available from other vendors. This service revenue is
generally recognized over the period during which the applicable service is to
be performed or on a services-performed basis.
F-52
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED SOFTWARE COSTS
In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," development costs incurred
in the research and development of new software products to be sold, leased or
otherwise marketed are expensed as incurred until technological feasibility in
the form of a working model has been established. Internally generated
capitalizable software development costs have not been material for the years
ended December 31, 1998 and 1999 and the three months ended January 31, 2000.
The Company has charged its software development costs to research and
development expense in the accompanying statements of operations.
INCOME TAXES
The Company recognizes a liability or asset for the deferred tax
consequences of all temporary differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements that will
result in taxable or deductible amounts in future years when the reported
amounts of the assets and liabilities are recovered or settled. These deferred
tax assets or liabilities are measured using the enacted tax rates that will be
in effect when the differences are expected to reverse. Deferred tax assets are
reviewed periodically for recoverability and valuation allowances are provided,
as necessary.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes new accounting and
reporting standards for companies to report information regarding derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
This statement is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (or June 1, 2001 for the Company). The Company
does not expect that SFAS No. 133 will have a material impact on the financial
condition or results of the operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101 ("SAB No. 1"), "Revenue Recognition in
Financial Statements." This pronouncement summarizes certain of the SEC staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. The Company is required to adopt SAB No. 101 during the
second quarter of 2000. Although management is currently evaluating the impact,
if any, of SAB No. 101, management does not presently believe it will have a
material impact on the Company's results of operations, financial position or
liquidity.
(2) MARKETABLE SECURITY
As discussed in Note 5, the Company received 16,833 shares of Caldera
Systems, Inc.'s common stock in exchange for services. This investment has been
classified as an available-for-sale security in
F-53
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(2) MARKETABLE SECURITY (CONTINUED)
the accompanying financial statements. The cost, gross unrealized holding gain,
and estimated fair value of the marketable security as of March 31, 2000 is as
follows:
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
---------------- ------------
<S> <C> <C>
Cost............................................. Y13,675 $134
Gross unrealized holding gain.................... 28,315 276
-------------- ----
Estimated fair value............................. Y41,990 $410
============== ====
</TABLE>
(3) SHORT-TERM AND LONG-TERM DEBT
Short-term debt consisted primarily of short-term bank loans due to banks,
shareholders and directors. The weighted-average annual interest rates
applicable to short-term debt outstanding at December 31, 1998 and 1999, were
2.9 percent and 2.3 percent, respectively. The weighted-average borrowings
during the years ended December 31, 1998 and 1999 were Y82,952,000 ($810,000)
and Y69,055,000 ($674,000), respectively.
F-54
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(3) SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
Long-term debt at December 31, 1998 and 1999, consisted of the following:
<TABLE>
<CAPTION>
THOUSANDS OF YEN
--------------------------------------------------- THOUSANDS OF U.S. DOLLARS
DECEMBER 31, -------------------------
--------------------------------- MARCH 31, DECEMBER 31, MARCH 31,
1998 1999 2000 1999 2000
--------------- --------------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Long-term loan from 82 Bank: interest at
2.8 percent per annum payable monthly,
principal due in monthly installments
through 2003; secured by building;
guaranteed by directors and
stockholder........................... Y 47,216 Y 34,520 Y 31,346 $ 338 $ 306
--------------- --------------- --------------- ----- -----
Long-term loan from Ina Shinkin Bank:
interest at 3.2 percent per annum
payable monthly, principal due in
monthly installments through 2003;
secured by building and time deposit;
guaranteed by directors and
stockholder........................... 68,674 63,370 73,978 619 722
--------------- --------------- --------------- ----- -----
Long-term loan from People's Finance
Corporation: interest at 2.3 percent
per annum payable monthly, principal
due in monthly installments through
2003; secured by building; guaranteed
by directors and stockholder.......... 12,000 10,080 9,600 98 94
--------------- --------------- --------------- ----- -----
Less current maturities................. (19,920) (31,094) (31,484) (304) (308)
--------------- --------------- --------------- ----- -----
Long-term debt.......................... Y107,970 Y 76,876 Y 83,440 $ 751 $ 814
=============== =============== =============== ===== =====
</TABLE>
As is customary in Japan, substantially all bank loans are made under
agreements which provide that the banks may require, under certain conditions,
the borrower to provide collateral or guarantors for its loans.
Lending banks have a right to offset cash deposited with them against any
debt or obligation that becomes due and, in the case of default and certain
other specified events, against all other debt payable to the banks.
The Company paid guarantee fees and pledged a building with a book value of
Y1,896,000 ($18,000) as of December 31, 1999 as security to the credit guarantee
company. Additionally, another building with a book value of Y43,494,000
($424,000) as of December 31, 1999 and a time deposit of Y20,024,000 ($195,000)
are pledged as security to the banks. Furthermore all loans are guaranteed by
the Company's directors and stockholders.
F-55
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(3) SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
Annual maturities of long-term debt as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
YEAR ENDING DECEMBER 31 THOUSANDS OF YEN U.S. DOLLARS
- ----------------------- ---------------- ------------
<S> <C> <C>
2000......................................... Y 31,094 $ 304
2001......................................... 27,744 271
2002......................................... 27,744 271
2003......................................... 21,388 209
--------------- ------
Total........................................ Y107,970 $1,055
=============== ======
</TABLE>
(4) RETIREMENT BENEFIT PLANS
The Company has defined contribution benefit plans, which provide retirement
benefits to qualified employees. The Company makes discretionary contributions
principally based on individual technical skills and experience. The Company's
contributions are expensed as incurred and totaled Y2,472,000 ($24,000) and
Y2,252,000 ($22,000) for the years ended December 31, 1998 and 1999,
respectively.
(5) COMMITMENTS AND CONTINGENCIES
SOFTWARE LOCALIZATION AGREEMENT
On October 1, 1999, the Company entered into an agreement with Caldera
Systems, Inc. ("Caldera") to localize certain of Caldera's software products for
the Japanese market. As consideration, Caldera agreed to pay $250,000 in cash or
issue to the Company shares of Caldera's common stock with a market value of
$202,000, based on Caldera's initial public offering price per share. On
January 4, 2000, the Company and Caldera amended the agreement pursuant to which
Caldera agreed to issue 33,667 shares of common stock to the Company for the
services, of which 16,833 were to be issued immediately for services previously
rendered and the remaining 16,834 are to be issued upon completion of the
localization services.
In the event that the localized software is not accepted by Caldera under
the agreement prior to December 31, 2001, then the Company shall pay $100,000 to
Caldera. However, the Company shall have no obligation to pay such amount if the
localized software is not accepted by Caldera prior to December 31, 2001 because
Caldera unreasonably withheld or delayed such acceptance. Based on the
performance commitment, the date of the amended contract has been determined to
be the measurement date and the estimated fair value of Caldera's common stock
on that date was $269,336, or $8 per share. As of December 31,1999, the Company
recognized Y13,790,000 ($135,000) of revenue based upon the percentage
completion method (see Note 1).
OPERATING LEASE AGREEMENTS
The Company leases land for operating facilities and equipment under
cancelable and non-cancelable operating lease agreements. Rent expense under
these lease agreements amounted to
F-56
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(5) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Y2,432,000 ($23,000) and Y2,084,000 ($20,000) for the years ended December 31,
1998 and 1999, respectively.
As of December 31, 1999, the future minimum lease payments under these
operating leases were as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS
- ------------------------ ---------------- -------------------------
<S> <C> <C>
2000................................ Y 2,052 $ 20
2001................................ 2,052 20
2002................................ 2,052 20
2003................................ 2,052 20
2004................................ 2,052 20
Thereafter.......................... 12,312 120
-------------- ----
Total............................... Y22,572 $220
============== ====
</TABLE>
(6) STOCKHOLDERS' DEFICIT
The Japanese Commercial Code (the "Code") provides that at least one-half of
the issue price of new shares, with a minimum of the par value thereof, be
included in common stock. The issue price is the price determined by the Board
of Directors of a company.
In December 1998 and 1999, the Company issued 20,000 and 40,000 shares of
Common Stock at par value, Y 500 ($4.88) per share. As of December 31, 1999, the
Company had received Y20,000,000 ($195,312) in exchange for 40,000 shares of
common stock to be issued. The shares were not actually issued until
February 2000; however, they have been reflected as issued and outstanding in
the accompanying balance sheet as of December 31, 1999.
At December 31, 1998 and 1999, the Company had an accumulated deficit and
had no amounts legally available for distribution to stockholders.
F-57
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(7) INCOME TAXES
The significant components of the Company's net deferred income tax assets
at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
--------------------------------- ------------
DECEMBER 31,
--------------------------------- DECEMBER 31,
1998 1999 1999
--------------- --------------- ------------
<S> <C> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards.......... Y 36,686 Y 62,882 $ 614
Research and development expenses......... 11,860 -- --
Deferred expenses......................... -- 8,982 87
Accrued vacation pay...................... 2,564 2,569 25
Other..................................... 980 977 9
Deferred revenue.......................... (2,775) (6,245) (60)
Prepaid bonus............................. (5,096) (5,025) (49)
--------------- --------------- -----
Net deferred income tax assets.......... 44,219 64,140 626
Valuation allowance......................... (44,219) (64,140) (626)
--------------- --------------- -----
Net deferred income tax assets.......... Y -- Y -- $ --
=============== =============== =====
</TABLE>
The amount of and ultimate realization of the net deferred income tax assets
is dependent, in part, upon the tax laws in effect, the Company's future
earnings, and other future events, the effects of which cannot be determined.
The Company has established a valuation allowance against its deferred income
tax assets because the available objective evidence creates sufficient
uncertainty regarding their realizability.
Under Japanese tax regulation, the Company can carry forward net operating
losses for five years. The net operating loss carryforwards as of December 31,
1999 will expire as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
YEAR OF EXPIRATION THOUSANDS OF YEN U.S. DOLLARS
- ------------------ ---------------- ------------
<S> <C> <C>
2000......................................... Y 21,455 $ 209
2001......................................... 57,610 563
2004......................................... 72,457 707
--------------- ------
Total........................................ Y151,522 $1,479
=============== ======
</TABLE>
F-58
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(7) INCOME TAXES (CONTINUED)
The differences between the statutory tax rates and the effective tax rates
for the years ended December 31, 1998 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Statutory tax rate.......................................... (49.7)% (46.4)%
Effect of tax rate change................................... 90.7 12.8
Change in valuation allowance............................... (40.8) 33.6
Minimum inhabitant tax...................................... (5.9) (0.3)
Other....................................................... (0.2) --
----- -----
Effective tax rate.......................................... (5.9)% (0.3)%
===== =====
</TABLE>
Effective April 1, 1999, the statutory tax rate was reduced to approximately
41.5 percent and such rate has been used in calculating the future expected tax
effects of temporary differences as of December 31, 1999.
The provision for income taxes in the statements of operations reflects only
the minimum inhabitant tax due to the Company's loss from operations.
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying financial statements for
cash and cash equivalents, time deposits, accounts receivables, short-term debt,
and accounts payable approximate fair values because of the immediate or
short-term maturity of these financial instruments. The carrying amount of the
Company's marketable security also approximates fair value because the
investment has been classified as available for sale and recorded at the quoted
market price.
The estimated fair values of the Company's long-term debt obligations have
been determined based on the present value of future cash flows associated with
each instrument discounted using the current borrowing rate for similar debt of
comparable maturity. As of December 31, 1999, the Company's long-term debt,
which had a carrying amount of Y107,970,000 ($1,055,000), had an estimated fair
value of Y110,525,000 ($1,079,000).
(9) SEGMENT INFORMATION
In June 1998, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued. SFAS 131 establishes disclosures related to
components of a company for which separate financial information is available
and evaluated regularly by a company's chief operating decision makers in
deciding how to allocate resources and in assessing performance. It also
requires segment disclosures about products and services as well as geographic
areas. The Company has determined that it did not have any separately reportable
operating segments as of December 31, 1998 and 1999.
F-59
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(9) SEGMENT INFORMATION (CONTINUED)
However, the Company generates revenue in geographic locations outside of
Japan. Revenue attributable to individual countries based on the location of
sales is as follows:
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS
------------------------------------------------------------------- ---------------------------
YEAR ENDED THREE MONTHS ENDED THREE MONTHS
DECEMBER 31, MARCH 31, YEAR ENDED ENDED
--------------------------------- ------------------------------- DECEMBER 31, MARCH 31,
1998 1999 1999 2000 1999 2000
--------------- --------------- -------------- -------------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Japan....................... Y202,408 Y143,317 Y34,050 Y31,729 $1,399 $ 310
Other countries............. -- 13,790 -- -- 135 --
--------------- --------------- -------------- -------------- ------ -----
Total revenue............. Y202,408 Y157,107 Y34,050 Y31,729 $1,534 $ 310
=============== =============== ============== ============== ====== =====
</TABLE>
Sales to significant customers as a percentage of total revenue are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
CUSTOMER 1998 1999
- -------- -------- --------
<S> <C> <C>
Seiko Epson................................................. 40.0% 44.6%
Mikuni Industry............................................. 9.0 20.3
</TABLE>
(10) RELATED PARTY TRANSACTIONS
The Company's stockholders and directors have made short-term loans to the
Company from time to time. Certain of the loans are non-interest bearing. The
Company has imputed interest on the loans, which has been reflected as
additional capital contributions.
The Company has also agreed to pay consulting fees to certain stockholders
in connection with the Caldera transaction discussed in Note 5.
The following table summarizes the amounts due from (due to) stockholders
and the related interest expense and other transactions as of and for the years
ended December 31, 1998 and 1999, and as of and for the three months ended
March 31, 2000.
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS
-------------------------------------------------- --------------------------
DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
1998 1999 2000 1999 2000
-------------- --------------- --------------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest bearing short-term debt..... Y(8,600) Y(15,550) Y(15,550) $(151) $(151)
Non-interest bearing short-term
debt............................... (3,135) (734) (334) (7) (3)
Consulting fees...................... -- 8,500 -- 83 --
Consulting fees payable.............. -- (8,500) -- (83) --
</TABLE>
F-60
<PAGE>
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(10) RELATED PARTY TRANSACTIONS (CONTINUED)
The weighted average amount of non-interest short-term loans from
stockholders and directors for the years ended December 31, 1998 and 1999 and
for the three months ended March 31, 2000 were as follows:
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS
- ----------------------------------------------------------- ------------------------------
DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
1998 1999 2000 1999 2000
- --------------- --------------- --------------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Y(18,031) Y(14,392) Y(16,083) $(140) $(157)
</TABLE>
(11) SUBSEQUENT STOCK PURCHASE AGREEMENT
On April 13, 2000, the Company's stockholders and Lineo, Inc. ("Lineo")
entered into a stock purchase agreement pursuant to which Lineo agreed to
purchase all of the issued and outstanding capital stock of the Company for
$322,829 of cash and 507,333 options to purchase shares of Lineo common stock at
$3.00 per share. The stock purchase agreement is effective May 1, 2000. In
addition, Lineo agreed to grant 175,000 additional options to purchase shares of
Lineo's common stock to the employees of the Company who will become employees
of Lineo for future services.
F-61
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fireplug Computers Inc:
We have audited the accompanying balance sheets of Fireplug Computers Inc.
(a British Columbia, Canada company) as of December 31, 1998 and 1999, and the
related statements of operations and comprehensive loss, stockholders' deficit
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fireplug Computers Inc. as
of December 31, 1998 and 1999, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN
Vancouver, British Columbia
May 15, 2000
F-62
<PAGE>
FIREPLUG COMPUTERS INC.
BALANCE SHEETS
(U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 2,462 $ 9,334 $ 537
Accounts receivable, net of allowance for doubtful
accounts of $0, $0, and $9,803, respectively............ 304 1,008 25,189
-------- -------- ---------
Total current assets.................................... 2,766 10,342 25,726
-------- -------- ---------
Property and equipment:
Computer equipment........................................ 43,485 50,406 61,924
Furniture and fixtures.................................... 5,394 5,394 8,063
-------- -------- ---------
48,879 55,800 69,987
Less accumulated depreciation............................. (19,944) (40,777) (44,351)
-------- -------- ---------
Net property and equipment.............................. 28,935 15,023 25,636
-------- -------- ---------
$ 31,701 $ 25,365 $ 51,362
======== ======== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 6,714 $ 19,113 $ 27,051
Accrued liabilities....................................... -- 6,103 32,157
Deferred revenue.......................................... -- 3,465 --
Advances from stockholders................................ 72,951 82,015 62,476
-------- -------- ---------
Total current liabilities............................... 79,665 110,696 121,684
-------- -------- ---------
Commitments and contingencies (Note 6)
Stockholders' deficit:
Class C redeemable preferred stock, CDN$1.00 par value;
2,000,000 shares designated, none outstanding........... -- -- --
Class A voting shares, no par value; 2,000,000 shares
designated, 412, 412 and 463 shares outstanding,
respectively............................................ 288 288 134,074
Class B non-voting shares, no par value; 2,000,000 shares
designated, none outstanding............................ -- -- --
Accumulated deficit....................................... (49,930) (83,317) (199,394)
Cumulative translation adjustments........................ 1,678 (2,302) (5,002)
-------- -------- ---------
Total stockholders' deficit............................. (47,964) (85,331) (70,322)
-------- -------- ---------
$ 31,701 $ 25,365 $ 51,362
======== ======== =========
</TABLE>
See accompanying notes to financial statements.
F-63
<PAGE>
FIREPLUG COMPUTERS INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------- -------------------------
1998 1999 1999 2000
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue............................................ $ 33,025 $144,778 $16,618 $ 69,186
Cost of revenue.................................... 34,128 88,996 10,008 24,733
-------- -------- ------- ---------
Gross margin................................... (1,103) 55,782 6,610 44,453
-------- -------- ------- ---------
Operating expenses:
Sales and marketing.............................. 15,052 32,382 6,280 27,794
General and administrative (exclusive of non-cash
stock-related compensation of $114,500 in the
three months ended March 31, 2000)............. 32,003 56,787 5,184 18,236
Non-cash stock related compensation.............. -- -- -- 114,500
-------- -------- ------- ---------
Total operating expenses....................... 47,055 89,169 11,464 160,530
-------- -------- ------- ---------
Net loss........................................... $(48,158) $(33,387) $(4,854) $(116,077)
======== ======== ======= =========
Comprehensive loss:
Net loss......................................... $(48,158) $(33,387) $(4,854) $(116,077)
Foreign currency translation adjustments......... 1,629 (3,980) (788) (2,700)
-------- -------- ------- ---------
$(46,529) $(37,367) $(5,642) $(118,777)
======== ======== ======= =========
</TABLE>
See accompanying notes to financial statements.
F-64
<PAGE>
FIREPLUG COMPUTERS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(U.S. DOLLARS)
<TABLE>
<CAPTION>
CLASS A VOTING CUMULATIVE TOTAL
------------------- ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT DEFICIT ADJUSTMENTS DEFICIT
-------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997.............. 412 $ 288 $ (1,772) $ 49 $ (1,435)
Foreign currency translation
adjustments........................... -- -- -- 1,629 1,629
Net loss................................ -- -- (48,158) -- (48,158)
--- -------- --------- ------- ---------
Balance, December 31, 1998.............. 412 288 (49,930) 1,678 (47,964)
Foreign currency translation
adjustments........................... -- -- -- (3,980) (3,980)
Net loss................................ -- -- (33,387) -- (33,387)
--- -------- --------- ------- ---------
Balance, December 31, 1999.............. 412 288 (83,317) (2,302) (85,331)
Issuance of Class A voting shares for
services (unaudited).................. 43 114,500 -- -- 114,500
Issuance of Class A voting shares upon
conversion of advance from stockholder
(unaudited)........................... 8 19,286 -- -- 19,286
Foreign currency translation adjustments
(unaudited)........................... -- -- -- (2,700) (2,700)
Net loss (unaudited).................... -- -- (116,077) -- (116,077)
--- -------- --------- ------- ---------
Balance, March 31, 2000 (unaudited)..... 463 $134,074 $(199,394) $(5,002) $ (70,322)
=== ======== ========= ======= =========
</TABLE>
See accompanying notes to financial statements.
F-65
<PAGE>
FIREPLUG COMPUTERS INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------ -----------------------------
1998 1999 1999 2000
---------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $(48,158) $(33,387) $(4,854) $(116,077)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation.......................... 19,944 20,833 4,893 3,574
Non-cash stock related compensation... -- -- -- 114,500
Changes in operating assets and
liabilities:
Accounts receivable................. (304) (704) 260 (24,181)
Accounts payable.................... 6,883 12,399 (5,393) 7,938
Accrued liabilities................. -- 6,103 6,737 26,054
Deferred revenue.................... -- 3,465 -- (3,465)
-------- -------- ------- ---------
Net cash provided by (used in)
operating activities............ (21,635) 8,709 1,643 8,343
-------- -------- ------- ---------
Cash flows from investing activities:
Purchase of property and equipment...... -- (6,921) (462) (14,187)
-------- -------- ------- ---------
Cash flows from financing activities:
Advances from stockholders.............. 22,468 9,064 1,558 (253)
-------- -------- ------- ---------
Net increase (decrease) in cash........... 833 10,852 2,739 (6,097)
Foreign currency translation
adjustments............................. 1,629 (3,980) (788) (2,700)
Cash, beginning of period................. -- 2,462 2,462 9,334
-------- -------- ------- ---------
Cash, end of period....................... $ 2,462 $ 9,334 $ 4,413 $ 537
======== ======== ======= =========
Supplemental disclosure of non-cash
investing and financing activities:
Conversion of advance from stockholder
to Class A voting shares.............. $ -- $ -- $ -- $ 19,286
</TABLE>
See accompanying notes to financial statements.
F-66
<PAGE>
FIREPLUG COMPUTERS INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Fireplug Computers Inc. (the "Company") was incorporated under the laws of
British Columbia on April 11, 1997. The Company is a developer of embedded Linux
network application software solutions and embedded Linux tools.
On May 1, 2000, the Company's stockholders entered into an agreement with
Lineo, Inc. ("Lineo"), a United States corporation. Pursuant to the agreement,
Lineo acquired all of the outstanding stock of the Company in exchange for
$500,000 in cash, 69,998 shares of Lineo's series D convertible preferred stock
and options to purchase 62,220 shares of Lineo's common stock. The options have
a vesting period of one year, an exercise price of $1.50 per share and expire
ten years from the date of grant. Lineo has committed to provide funding to the
Company as required.
(2) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of March 31, 2000 and for the
three months ended March 31, 1999 and 2000 have been prepared on the same basis
as the audited financial statements and, in the opinion of management, reflect
all normal recurring adjustments necessary to present fairly the financial
information set forth therein in accordance with accounting principles generally
accepted in the United States. The results of operations for the three months
ended March 31, 2000 are not necessarily indicative of the results to be
expected for the entire year ending December 31, 2000.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying financial statements for
cash, accounts receivable and accounts payable approximate fair values because
of the immediate or short-term maturities of these financial instruments.
FOREIGN CURRENCY TRANSLATION
The Company prepares its statements in Canadian dollars since its functional
currency is the Canadian dollar. As a result of the acquisition discussed in
Note 1, the accompanying financial statements are denominated in U.S. dollars.
The Company has translated its Canadian dollar financial
F-67
<PAGE>
FIREPLUG COMPUTERS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
statements into U.S. dollars using the current method. Under this method,
monetary and non-monetary items are translated at the rate of exchange in effect
at the balance sheet date and revenue and expenses are translated at the average
exchange rate for the periods. Depreciation of assets is translated at the same
exchange rate as the assets to which they relate.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Computer equipment and furniture and fixtures are depreciated
using the straight-line method over the estimated useful life of the asset,
typically three years.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and related accumulated
depreciation and amortization are removed from the accounts and any resulting
gain or loss is recognized in the statement of operations.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are comprised principally of equipment and fixtures. The
Company reviews its long-lived assets for impairment when events or changes in
circumstances indicate that the book value of an asset may not be recoverable.
The Company evaluates, at each balance sheet date, whether events and
circumstances have occurred which indicate possible impairment. The Company uses
an estimate of future undiscounted net cash flows of the related asset or group
of assets over the remaining life in measuring whether the assets are
recoverable. As of December 31, 1999 and March 31, 2000, the Company does not
consider any of its long-lived assets to be impaired.
REVENUE RECOGNITION
The Company generates revenue from engineering services. Revenue is
recognized as services are performed. Amounts received in advance of services
being performed are recorded as deferred revenue.
INCOME TAXES
The Company recognizes a current tax liability or asset for current taxes
payable or refundable and a deferred income tax liability or asset for the
estimated future tax effects of temporary differences between the carrying value
of assets and liabilities for financial reporting and their tax basis and loss
carry forwards to the extent they are realizable. A deferred income tax
valuation allowance is required if it is "more likely than not" that all or a
portion of recorded future tax assets will not be realized.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company offers credit terms on the sale of its consulting services to
its customers. The Company performs ongoing credit evaluations of its customers'
financial condition and requires no
F-68
<PAGE>
FIREPLUG COMPUTERS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
collateral from its customers. The Company continually evaluates the need for an
allowance for uncollectable accounts receivable based upon the expected
collectability of all accounts receivable. As of March 31, 2000, one customer
accounted for 97 percent of gross accounts receivable.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new accounting and
reporting standards for companies to report information about derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
This statement is effective for financial statements issued for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect this statement to have a material impact on the Company's results of
operations, financial position or liquidity.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition
in Financial Statements." This pronouncement summarizes certain of the SEC
staff's views in applying generally accepted accounting principles to selected
revenue recognition issues. The Company is required to adopt SAB No. 101 during
the second quarter of 2000. Although management is currently evaluating the
impact, if any, of SAB No. 101, management does not presently believe it will
have a material impact on the Company's results of operations, financial
position or liquidity.
(3) STOCKHOLDERS' DEFICIT
AUTHORIZED SHARES
The Company's articles of incorporation provide for the issuance of
Class A, B and C shares and sets forth the preferences, limitations and relative
rights granted or imposed upon each class of preferred stock.
Dividends may be declared on the Class A, B and C shares at the discretion
of the Board of Directors.
The Class C shares are redeemable and have priority over Class A and B
shares with respect to liquidation, winding up or dissolution. The Class B
shares have no voting rights.
CLASS A ISSUANCES
During the three months ended March 31, 2000, the Company issued 43 shares
of Class A stock to employees and consultants for services rendered. The
estimated fair value of the Class A shares on the date of issuance was deemed to
be $114,500, based on the consideration paid by Lineo to acquire the Company on
May 1, 2000. The $114,500 has been reflected as non-cash stock-related
compensation in the accompanying statement of operations for the three months
ended March 31, 2000.
During the three months ending March 31, 2000, the Company issued 8 shares
of Class A stock in connection with a conversion of $19,826 of advances from
stockholders (See Note 4).
F-69
<PAGE>
FIREPLUG COMPUTERS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
(4) RELATED PARTY TRANSACTIONS
During the year ended December 31, 1998, certain stockholders of the Company
transferred $48,879 of property and equipment to the Company. The Company
recorded the carry-over basis of these assets as advances from stockholders.
Advances from stockholders represent amounts owed to stockholders for
property and equipment transferred to the Company and for expenses incurred on
behalf of the Company. The advances are non-interest bearing and have no fixed
repayment terms.
During the three months ended March 31, 2000, advances from stockholders of
$19,826 were converted into 8 shares of Class A stock (see Note 3).
(5) INCOME TAXES
The components of the Company's income tax provision computed at the
combined statutory Canadian federal and provincial income tax rate for the years
ended December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Income tax benefit at statutory rates...................... $9,632 $ 6,677
Change in valuation allowance.............................. (9,632) (6,677)
------ -------
$ -- $ --
====== =======
</TABLE>
The deferred income tax assets resulting from differences in the timing of
the recognition of certain income and expense items for income tax and financial
accounting purposes at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Net operating loss carryforwards......................... $ 8,575 $ 12,741
Depreciation............................................. 1,105 3,616
------- --------
9,680 16,357
Less: valuation allowance................................ (9,680) (16,357)
------- --------
Net deferred income taxes................................ $ -- $ --
======= ========
</TABLE>
The ultimate realization of the deferred income tax assets is dependent, in
part, upon the tax laws in effect, the Company's future earnings, and other
future events, the effects of which cannot be determined. The Company has
established a valuation allowance against its deferred income tax assets because
the available objective evidence creates sufficient uncertainty regarding their
realizability.
At December 31, 1999, the Company's net operating loss carryforwards totaled
$64,000 and expire as follows: $43,000 in 2004 and $21,000 in 2005.
F-70
<PAGE>
FIREPLUG COMPUTERS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
(6) COMMITMENTS AND CONTINGENCIES
The Company may become party to certain legal proceedings arising in the
ordinary course of business. Management believes, after consultation with legal
counsel, that as of December 31, 1999 and March 31, 2000, no pending or
threatened legal proceedings exist which would have a material adverse effect on
the Company's financial position, liquidity or results of operations.
F-71
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of INUP S.A.
In our opinion, the accompanying balance sheet and the related statement of
operations, stockholders' equity, and cash flows present fairly, in all material
respects, the financial position of INUP S.A. (a development stage company) (the
"Company") at December 31, 1999, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
THE STATUTORY AUDITOR
Befec -- Price Waterhouse
Member of PricewaterhouseCoopers
Paris, France
April 28, 2000, except as to Notes 3 and 8
which are as of May 1, 2000
F-72
<PAGE>
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 757,603 $ 519,815
Accounts receivable....................................... 62,992 95,259
Prepaid expenses.......................................... 9,666 3,146
Other current assets...................................... 1,623 2,030
--------- ---------
Total current assets.................................... 831,884 620,250
--------- ---------
Property and equipment, net................................. 148,243 155,877
--------- ---------
Total assets............................................ $ 980,127 $ 776,127
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 152,487 $ 103,681
Accrued liabilities....................................... 10,021 35,342
--------- ---------
Total liabilities....................................... 162,508 139,023
--------- ---------
Commitments and contingencies (Note 6)
Stockholders' Equity:
Common stock, $0.25 par value, 750,000 shares authorized,
issued and outstanding.................................. 188,363 188,363
Additional paid-in capital................................ 738,577 738,577
Accumulated other comprehensive (loss) income............. 997 (37,712)
Deficit accumulated during the development stage.......... (110,318) (252,124)
--------- ---------
Total stockholders' equity.............................. 817,619 637,104
--------- ---------
Total liabilities and stockholders' equity.............. $ 980,127 $ 776,127
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(U.S. DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
YEAR ENDED THREE MONTHS (JANUARY 1, 1999)
DECEMBER 31, ENDED MARCH 31, THROUGH
1999 2000 MARCH 31, 2000
------------ --------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenue.......................................... $ 8,355 $ -- $ 8,355
Cost of revenue.................................. 1,785 -- 1,785
--------- --------- ---------
Gross profit................................... 6,570 6,570
Sales, general and administrative expenses....... 131,556 181,469 313,025
--------- --------- ---------
Loss from operations............................. (124,986) (181,469) (306,455)
--------- --------- ---------
Other income (expense)...........................
Interest income (expense)...................... (60) 494 434
Other non-operating income (expense)........... 10 (1) 9
--------- --------- ---------
Other income (expense), net.................. (50) 493 443
--------- --------- ---------
Loss before income taxes......................... (125,036) (180,976) (306,012)
Income tax credit................................ 14,718 39,170 53,888
--------- --------- ---------
Net loss......................................... $(110,318) $(141,806) $(252,124)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
(U.S. DOLLARS)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE OTHER STOCKHOLDERS'
------------------- PAID-IN DEVELOPMENT COMPREHENSIVE EQUITY COMPREHENSIVE
SHARES AMOUNT CAPITAL STAGE INCOME (LOSS) TOTAL LOSS
-------- -------- ---------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock issued for cash
on January 1, 1999 at $0.25
per share................... 32,000 $ 8,037 $ -- -- $ -- $ 8,037 --
Common stock issued for cash
on November 3, 1999 at $1.28
per share................... 718,000 180,326 738,577 -- -- 918,903 --
Comprehensive loss:
Net loss.................... -- -- -- $(110,318) -- (110,318) $(110,318)
Other comprehensive income:
Foreign currency
translation
adjustment.............. -- -- -- -- 997 997 997
Comprehensive loss........ -- -- -- -- -- -- $(109,321)
------- -------- -------- --------- -------- --------- =========
Balances, December 31, 1999... 750,000 188,363 738,577 (110,318) 997 817,619
Comprehensive loss:
Net loss (unaudited)........ -- -- -- (141,806) -- (141,806) $(141,806)
Other comprehensive loss:
Foreign currency
translation adjustment
(unaudited)............. -- -- -- -- (38,709) (38,709) (38,709)
---------
Comprehensive loss
(unaudited)........... -- -- -- -- -- -- $(180,515)
------- -------- -------- --------- -------- --------- ---------
Balances, March 31, 2000
(unaudited)................. 750,000 $188,363 $738,577 $(252,124) $(37,712) $ 637,104
======= ======== ======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE PERIOD FROM
MONTHS INCEPTION
YEAR ENDED ENDED (JANUARY 1, 1999)
DECEMBER 31, MARCH 31, THROUGH
1999 2000 MARCH 31, 2000
------------- ----------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operations:
Net loss............................................ $(110,318) $(141,806) $(252,124)
Adjustments to reconcile net loss to net cash used
in operations:
Depreciation...................................... 11,280 29,680 40,960
Changes in operating assets and liabilities:
Accounts receivable............................. (62,992) (32,267) (95,259)
Prepaid expenses................................ (9,666) 6,520 (3,146)
Other current assets............................ (1,623) (407) (2,030)
Accounts payable................................ 152,487 (48,806) 103,681
Accrued liabilities............................. 10,021 25,321 35,342
--------- --------- ---------
Net cash used in operating activities............. (10,811) (161,765) (172,576)
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment................ (159,523) (37,314) (196,837)
--------- --------- ---------
Net cash used in investing activities............. (159,523) (37,314) (196,837)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock............ 926,940 -- 926,940
--------- --------- ---------
Net cash provided by financing activities......... 926,940 -- 926,940
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents....................................... 997 (38,709) (37,712)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents....................................... 757,603 (237,788) 519,815
Cash and cash equivalents beginning of period....... -- 757,603 --
--------- --------- ---------
Cash and cash equivalents end of period............. $ 757,603 $ 519,815 $ 519,815
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE>
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(U.S. DOLLARS)
1. ORGANIZATION OF THE COMPANY AND NATURE OF OPERATIONS
INUP S.A. ("the Company") was formed on January 1, 1999 pursuant to French
articles of incorporations as SOCIETE A RESPONSABILITE LIMITE (Limited Liability
Company). The Company subsequently changed its corporate structure to that of a
SOCIETE ANONYME (Corporation) on November 30, 1999. The Company seeks to produce
and sell services and products associated with computer systems, electronics and
telecommunications. Specifically, the Company currently aims to produce and sell
suites for embedded and scalable Linux-based computer systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING AND PRESENTATION
The Company maintains its accounting records and prepares its statutory
financial statements in conformity with generally accepted accounting principles
in France. The financial statements and notes are representations of the
Company's management, who is responsible for their integrity and objectivity.
These financial statements have been translated into US Dollars according to
the guidance of Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation" ("SFAS 52") and include certain adjustments, not recorded
in the Company's accounting records, to present these financial statements in
conformity with accounting principles generally accepted in the United States of
America ("U.S. GAAP") and conform to the standards applicable to development
stage companies.
The Company's functional currency is the European Currency Unit ("Euro").
FOREIGN CURRENCY TRANSLATION
Under the provisions of SFAS 52, the accompanying financial statements have
been translated from Euros to US Dollars as follows:
- All assets and liabilities have been translated into US Dollars using the
current exchange rate at the balance sheet date. Equity accounts have been
translated using historical exchange rates.
- Income statement accounts have been translated into US Dollars using the
average exchange rate over the period presented.
- The adjustment from translation of the Company's financial statements into
US Dollars is reported as a separate component of other comprehensive
income.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of March 31, 2000 and for the
three months then ended have been prepared on the same basis as the audited
financial statements and, in the opinion of management, reflect all normal
recurring adjustments necessary to present fairly the financial information set
forth therein in accordance with U.S. GAAP. All financial statement disclosures
related to the interim financial statements are unaudited.
F-77
<PAGE>
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Although the Company was formed on January 1, 1999, the Company's operations
did not begin until the fourth quarter of 1999. Accordingly, there is no
comparative financial information for the three months ended March 31, 1999 to
be included in the accompanying financial statements.
DEVELOPMENT STAGE ENTERPRISE
From the date of inception (January 1, 1999) through December 31, 1999, the
Company was a development stage company, as planned principal operations had not
yet begun to generate significant revenue.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers investments purchased with a maturity period of three
months or less at the date of purchase to be cash equivalents.
REVENUE RECOGNITION
Revenues in 1999 resulted from a one-time resale of acquired software and
consulting services provided by the Company. Through December 31, 1999, and
March 31, 2000 (unaudited), the Company has not recognized revenue from other
product sales.
CONCENTRATION OF CREDIT RISK
The Company primarily places its temporary cash investments with high-credit
quality financial institutions which invest primarily in French Government
securities and commercial paper of prime quality. Cash deposits are held in
financial institutions in France.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable and accounts payable approximate
fair value due to their short maturities.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line
basis over the estimated useful lives of the related assets, generally two to
ten years. Leased assets are amortized on a straight-line basis over the lesser
of the estimated useful life of the asset or the lease term.
F-78
<PAGE>
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Expenditures for maintenance and repairs are charged to operations as incurred;
major expenditures for renewals and betterments are capitalized and depreciated.
When an asset is sold or otherwise disposed of, the cost of the asset and the
related accumulated depreciation are removed from the accounts and the related
gain or loss is recognized in the statement of operations.
Depreciation periods used for property and equipment are as follows:
<TABLE>
<S> <C>
Computer equipment.......................................... 2 years
Furniture and fixtures...................................... 10 years
Leasehold improvements...................................... 10 years
</TABLE>
LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-Lived Assets to be Disposed of," ("SFAS 121").
SFAS 121 requires recognition of impairment of long-lived assets in the event
the net book value of such assets exceeds the future undiscounted cash flows
attributed to such assets.
INCOME TAXES
The Company accounts for income taxes using the liability method which
requires the recognition of deferred tax assets or liabilities for the temporary
differences between the financial reporting and tax bases of the Company's
assets and liabilities and for tax carryforwards at enacted statutory tax rates
in effect for the years in which the differences are expected to reverse. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. In addition, a valuation allowance is
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
ADVERTISING
The Company expenses advertising costs as incurred. For the three-month
period ended March 31, 2000 (unaudited) and for the year ended December 31,
1999, the Company incurred $6,582 and $7,341 of advertising costs, respectively.
INTERNAL USE SOFTWARE COSTS
Effective January 1, 1999, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Through December 31, 1999, the only costs required to be
capitalized under the provisions of this standard relate to purchased software.
F-79
<PAGE>
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB No. 101), which provides guidance on the recognition, presentation and
disclosure of revenues in financial statements. The Company does not expect this
guidance to materially impact the financial statements.
3. LIQUIDITY
The Company incurred a net loss of $110,318 for the year ended December 31,
1999. The Company anticipates revenues generated from its continuing operations
will not be sufficient to fund ongoing operations during the year ending
December 31, 2000. As discussed in Note 8, the Company was acquired by Lineo,
Inc. ("Lineo"). Lineo has represented its intent to fund the on-going operations
of the Company.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
Purchased computer software and equipment................... $138,871 $171,236
Furniture and fixtures...................................... 9,833 11,350
Leasehold improvements...................................... 10,819 14,251
-------- --------
159,523 196,837
Less accumulated depreciation............................... (11,280) (40,960)
-------- --------
$148,243 $155,877
======== ========
</TABLE>
5. INCOME TAXES
The Company is subject to income taxes levied by the governments of France.
As of December 31, 1999, no income taxes have been generated or paid by the
Company. Income tax credits of $14,718 and $39,170 have been earned by the
Company for the year ended December 31, 1999 and for the three months ended
March 31, 2000 (unaudited), respectively, and will be received by the Company in
a future period.
6. COMMITMENTS AND CONTINGENCIES
During the year ended December 31, 1999, the Company entered into a contract
to purchase certain software. Included in the contract are terms that require
the Company to pay royalties of 2% of gross income earned on the sale of
licenses of this software. Furthermore, the Company must pay royalties of 30%
upon the sale of licenses of this software which include the right to modify the
source code. This royalty agreement will terminate on October 19, 2006.
F-80
<PAGE>
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Royalties that the Company is required to pay per the above contract will be
expensed as cost of sales.
Also, as of December 31, 1999, the Company leased office space under a
cancelable operating lease. The contractual term of the lease is nine years,
with a right to cancel at the third and sixth anniversary dates. The portion of
future minimum lease payments required under this lease that are not cancelable
at December 31, 1999, are as follows:
<TABLE>
<S> <C>
2000........................................................ $11,822
2001........................................................ 11,822
2002........................................................ 4,147
-------
Total minimum lease payments................................ $27,791
=======
</TABLE>
7. STOCKHOLDERS' EQUITY
Effective November 30, 1999, the par value of the common stock of the
Company was changed from $25 per share to $0.25 per share. All references to
number of shares and per share amounts have been restated to reflect the effect
of this change.
8. SUBSEQUENT EVENTS
On May 1, 2000, the Company's stockholders and Lineo entered into a stock
purchase agreement pursuant to which Lineo agreed to purchase all of the issued
and outstanding capital stock of the Company for 83,334 shares of the
unregistered Series C convertible preferred stock and 1,333,333 shares of the
unregistered common stock of Lineo and $10,000 of cash.
F-81
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Moreton Bay Ventures Pty Ltd:
We have audited the accompanying statements of assets, liabilities, and
equity (deficit) of the acquired operations of Moreton Bay Ventures Pty Ltd as
of October 31, 1998 and 1999 and the related statements of revenue and expenses
and comprehensive loss, changes in equity (deficit) of the acquired operations
and cash flows for each of the two years in the period ended October 31, 1999.
These statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the United States Securities and
Exchange Commission and, as described in Note 1, are not intended to be a
complete presentation of Moreton Bay Ventures Pty Ltd's assets, liabilities,
revenues, expenses and cash flows.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the acquired operations of
Moreton Bay Ventures Pty Ltd as of October 31, 1998 and 1999, and the results of
its operations and its cash flows for each of the two years in the period ended
October 31, 1999 in conformity with accounting principles generally accepted in
the United States of America.
Also, in our opinion, the amounts translated into U.S. dollars in the
accompanying financial statements have been computed on the basis set forth in
Note 2.
ARTHUR ANDERSEN
Brisbane, Australia
May 12, 2000
F-82
<PAGE>
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
STATEMENTS OF ASSETS, LIABILITIES AND EQUITY (DEFICIT)
OF THE ACQUIRED OPERATIONS
<TABLE>
<CAPTION>
AUSTRALIAN DOLLARS U.S. DOLLARS
--------------------------------- -------------------------
OCTOBER 31,
------------------- APRIL 30, OCTOBER 31, APRIL 30,
1998 1999 2000 1999 2000
-------- -------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash................................... $ -- $ -- $332,427 $ -- $214,848
Accounts receivable.................... -- -- 13,311 -- 8,603
Inventory.............................. -- -- 90,690 -- 58,613
Research grant receivable.............. 17,368 46,378 74,584 29,974 48,204
Marketable security, at fair value..... -- -- 420,000 -- 271,446
-------- -------- -------- -------- --------
Total current assets................. 17,368 46,378 931,012 29,974 601,714
======== ======== ======== ======== ========
Property and equipment:
Computer equipment..................... 17,684 34,930 38,437 22,575 24,842
Furniture and fixtures................. 2,178 6,291 6,291 4,066 4,066
-------- -------- -------- -------- --------
19,862 41,221 44,728 26,641 28,908
Less accumulated depreciation.......... (12,520) (27,418) (33,647) (17,721) (21,746)
-------- -------- -------- -------- --------
Net property and equipment........... 7,342 13,803 11,081 8,920 7,162
-------- -------- -------- -------- --------
$ 24,710 $ 60,181 $942,093 $ 38,894 $608,876
======== ======== ======== ======== ========
LIABILITIES AND EQUITY (DEFICIT) OF THE ACQUIRED OPERATIONS
Current liabilities:
Accounts payable....................... $ -- $ 29,014 $124,999 $ 18,751 $ 80,787
Accrued liabilities.................... 7,078 36,947 76,333 23,879 49,334
Deferred revenue....................... -- -- 32,000 -- 20,682
-------- -------- -------- -------- --------
Total current liabilities............ 7,078 65,961 233,332 42,630 150,803
======== ======== ======== ======== ========
Commitments and contingencies (Notes 1
and 6)
Equity (deficit) of the acquired
operations............................. 17,632 (5,780) 708,761 (3,736) 458,073
-------- -------- -------- -------- --------
$ 24,710 $ 60,181 $942,093 $ 38,894 $608,876
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-83
<PAGE>
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
STATEMENTS OF REVENUE AND EXPENSES AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
AUSTRALIAN DOLLARS U.S. DOLLARS
------------------------------------------------- ------------------------------
YEAR ENDED SIX MONTHS ENDED
OCTOBER 31, APRIL 30, YEAR ENDED SIX MONTHS ENDED
--------------------- ------------------------- OCTOBER 31, APRIL 30,
1998 1999 1999 2000 1999 2000
--------- --------- ----------- ----------- ----------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue....................... $ -- $ -- $ -- $ 41,093 $ -- $ 26,558
Cost of revenue............... -- -- -- 21,184 -- 13,691
--------- --------- -------- --------- --------- ---------
Gross margin.............. -- -- -- 19,909 -- 12,867
--------- --------- -------- --------- --------- ---------
Operating expenses:
General and administrative
(exclusive of non-cash
compensation expense of
AUS$0, AUS$15,633, AUS$0,
AUS$0, US$10,104 and US$0,
respectively)............. 81,964 142,408 76,794 116,634 92,038 75,381
Research and development
(exclusive of non-cash
compensation expense of
AUS$0, AUS$66,683, AUS$0,
AUS$91,854, US$43,097 and
US$59,365,
respectively)............. 81,595 58,547 8,554 146,148 37,839 94,456
Sales and marketing......... -- 26,481 6,972 21,017 17,114 13,583
Non-cash compensation
expense................... -- 82,316 -- 91,854 53,201 59,365
--------- --------- -------- --------- --------- ---------
Total operating expenses.... 163,559 309,752 92,320 375,653 200,192 242,785
--------- --------- -------- --------- --------- ---------
Expenses in excess of
revenue................... $(163,559) $(309,752) $(92,320) $(355,744) $(200,192) $(229,918)
========= ========= ======== ========= ========= =========
Comprehensive loss:
Expenses in excess of
revenue................... $(163,559) $(309,752) $(92,320) $(355,744) $(200,192) $(229,918)
Unrealized loss on
marketable security....... -- -- -- (380,000) -- (245,594)
--------- --------- -------- --------- --------- ---------
$(163,559) $(309,752) $(92,320) $(735,744) $(200,192) $(475,512)
========= ========= ======== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-84
<PAGE>
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
CHANGES IN EQUITY (DEFICIT) OF THE ACQUIRED OPERATIONS
<TABLE>
<CAPTION>
AUSTRALIAN DOLLARS U.S. DOLLARS
----------------------------------------- -----------------------------
YEAR ENDED OCTOBER 31, SIX MONTHS YEAR ENDED SIX MONTHS
----------------------- ENDED APRIL 30, OCTOBER 31, ENDED APRIL 30,
1998 1999 2000 1999 2000
---------- ---------- --------------- ----------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period..... $ -- $ 17,632 $ (5,780) $ 11,396 $ (3,736)
Expenses in excess of revenue.... (163,559) (309,752) (355,744) (200,192) (229,918)
Unrealized loss on marketable
security....................... -- -- (380,000) -- (245,594)
Issuance of stock options by
Moreton Bay Venture Pty Ltd.... -- 82,316 91,854 53,201 59,365
Funding provided by Moreton Bay
Ventures Pty Ltd............... 181,191 204,024 1,358,431 131,859 877,956
--------- --------- ---------- --------- ---------
Balance, end of period........... $ 17,632 $ (5,780) $ 708,761 $ (3,736) $ 458,073
========= ========= ========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-85
<PAGE>
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
AUSTRALIAN DOLLARS U.S. DOLLARS
------------------------------------------------- -----------------------------
YEAR ENDED SIX MONTHS ENDED
OCTOBER 31, APRIL 30, YEAR ENDED SIX MONTHS
--------------------- ------------------------- OCTOBER 31, ENDED APRIL 30,
1998 1999 1999 2000 1999 2000
--------- --------- ----------- ----------- ----------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Expenses in excess of revenue............. $(163,559) $(309,752) $(92,320) $(355,744) $(200,192) $(229,918)
Adjustments to reconcile expenses in
excess of revenue to net cash used in
operating activities:
Depreciation............................ 8,000 14,898 5,085 6,229 9,629 4,025
Non-cash compensation................... -- 82,316 -- 91,854 53,201 59,365
Changes in operating assets and
liabilities:
Accounts receivable................... -- -- -- (13,311) -- (8,603)
Inventory............................. -- -- -- (90,690) -- (58,613)
Research grant receivable............. (17,368) (29,010) 17,368 (28,206) (18,749) (18,230)
Accounts payable...................... -- 29,014 4,670 95,985 18,751 62,036
Accrued liabilities................... 7,078 29,869 16,906 39,386 19,305 25,455
Deferred revenue...................... -- -- -- 32,000 -- 20,682
--------- --------- -------- --------- --------- ---------
Net cash used in operating
activities........................ (165,849) (182,665) (48,291) (222,497) (118,055) (143,801)
--------- --------- -------- --------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment........ (7,979) (21,359) (15,190) (3,507) (13,804) (2,267)
--------- --------- -------- --------- --------- ---------
Cash flows from financing activities:
Funding provided by Moreton Bay Pty Ltd... 173,828 204,024 63,481 558,431 131,859 360,916
--------- --------- -------- --------- --------- ---------
Net increase in cash........................ -- -- -- 332,427 -- 214,848
Cash, beginning of period................... -- -- -- -- -- --
--------- --------- -------- --------- --------- ---------
Cash, end of period......................... $ -- $ -- $ -- $ 332,427 $ -- $ 214,848
========= ========= ======== ========= ========= =========
Supplemental disclosure of non-cash
investing and financing activities:
Allocation of property and equipment by
Moreton Bay Ventures Pty Ltd.......... $ 7,363 $ -- $ -- $ -- $ -- $ --
Issuance of common stock for marketable
security.............................. $ -- $ -- $ -- $ 800,000 $ -- $ 517,040
</TABLE>
See accompanying notes to financial statements.
F-86
<PAGE>
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Moreton Bay Pty Ltd ("Moreton Bay"), incorporated as an Australia
corporation on April 24, 1995, develops embedded virtual private network
solutions for Internet appliances and provides engineering development for the
Motorola ColdFire microprocessor platform. Moreton Bay's historical operations
include two product lines, RAStel multimodem cards ("RAStel") and NETtel
Internet routers ("NETtel"). Moreton Bay LLC, a United States limited liability
corporation, is a wholly owned subsidiary of Moreton Bay.
On May 12, 2000, the Moreton Bay's stockholders entered into an agreement
with Lineo, Inc. ("Lineo"), a United States corporation. Pursuant to the
agreement, Lineo acquired all of the outstanding stock of Moreton Bay in
exchange for US$10,000 in cash, 956,315 shares of series D convertible preferred
stock and options to purchase 87,374 shares of Lineo's common stock. The options
have a vesting period of one year, an exercise price of US$3.00 per share and
expire ten years from the date of grant. Prior to the acquisition, Moreton Bay
transferred the RAStel assets, liabilities and operations, which Lineo did not
acquire, to a separate legal entity.
The accompanying financial statements have been prepared for the purpose of
complying with the rules and regulations of the United States Securities and
Exchange Commission. The accompanying financial statements include Moreton Bay's
NETtel operations (the "Company") acquired by Lineo. The statements of revenue
and expenses reflect the revenue and direct expenses of the NETtel operations
and allocations of common expenses. The common expenses consist primarily of the
cost of shared facilities, employees and certain other costs. Such common
expenses have been allocated to the acquired operations based upon actual usage
or other methods that approximate actual usage. Management believes that the
allocation methods used are reasonable. The accompanying financial information
may not necessarily reflect the financial position, results of operations or
cash flows of the acquired operations in the future, nor what the financial
position, results of operations or cash flows would have been had it been a
separate, stand-alone company throughout the periods presented.
During the years ended October 31, 1998 and 1999 and the six months ended
April 30, 2000, the expenses of the acquired operations exceeded revenue by
AUS$163,559 (US$105,708), AUS$309,752 (US$200,192) and AUS$355,744 (US$229,918),
respectively, and as of April 30, 2000, the acquired operations had equity of of
AUS$708,761 (US$458,073). As discussed above, subsequent to April 30, 2000,
Lineo acquired certain operations of Moreton Bay and Lineo has committed to
provide funding to the Company as required.
(2) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Moreton Bay maintains its accounting records and prepares its financial
statements in accordance with accounting principles generally accepted in
Australia. However, the accompanying financial statements reflect all material
adjustments necessary to present the financial statements in conformity with
accounting principles generally accepted in the United States of America ("U.S.
GAAP").
The Company's functional currency is the Australian dollar and the
accompanying financial statements are presented in Australian dollars.
Additionally, as a convenience, the balance sheets as of
F-87
<PAGE>
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
October 31, 1999 and April 30, 2000 and the related statements of revenue and
expenses, changes in equity (deficit) of the acquired operations and cash flows
for the respective year and six months then ended are also presented in U.S.
dollars by arithmetically translating all Australian dollar amounts at AUS$1 to
US$0.6463, which was the exchange rate at October 31, 1999.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of April 30, 2000 and for the
six months ended April 30, 1999 and 2000 have been prepared on the same basis as
the audited financial statements, and, in the opinion of management, reflect all
normal recurring adjustments necessary to present fairly the financial
information set forth therein in accordance with U.S. GAAP. All financial
statement disclosures related to the interim financial statements are unaudited.
The results of the interim periods are not necessarily indicative of the results
to be expected for the year ending October 31, 2000.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying financial statements for
accounts receivable, research grant receivable and accounts payable approximate
fair values because of the immediate or short-term maturities of these financial
instruments.
RESEARCH AND DEVELOPMENT GRANT
The Company has a research and development grant related to the development
of the NETtel products from AusIndustry, a division of the Australian
government. The grant reimburses the Company for incurred costs. Grant
reimbursements are not recognized until the costs have been incurred and there
is reasonable assurance that the Company will comply with the grant's conditions
and that the reimbursements will be received (see Note 6). The Company has
elected to include reimbursements as a reduction of the related expenses. The
Company recorded grant reimbursements of AUS$17,368 (US$11,225) and AUS$220,049
(US$142,218) during the years ended October 31, 1998 and 1999, respectively, and
AUS$102,848 (US$66,471) and AUS$132,584 (US$85,689) during the six months ended
April 30, 1999 and 2000, respectively.
INVENTORY
Inventories consist primarily of completed products. Inventories are stated
at the lower of cost (using the first-in, first-out method) or market value.
Provisions, when required, are made to reduce excess and obsolete inventories to
their estimated net realizable values. Due to competitive pressures
F-88
<PAGE>
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and technological innovation, it is possible that estimates of net realizable
value could change in the near term.
MARKETABLE SECURITY
The Company's investment in a marketable security has been categorized as
available for sale, as defined by Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Unrealized holding gains and losses are reflected as a component of
equity (deficit) of the acquired operations until realized.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Computer equipment and furniture and fixtures are depreciated using the
straight-line method over the estimated useful life of the asset, typically
three to five years. Expenditures for repairs and maintenance are charged to
expense when incurred. Expenditures for major renewals and betterments that
extend the useful lives of existing equipment are capitalized and depreciated.
On retirement or disposition of property and equipment, the cost and related
accumulated depreciation is removed from the accounts and any resulting gain or
loss is recognized.
CAPITALIZED SOFTWARE COSTS
In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," development costs incurred
in the research and development of new software products to be sold, leased or
otherwise marketed are expensed as incurred until technological feasibility in
the form of a working model has been established. Internally generated
capitalizable software development costs have not been material for the years
ended October 31, 1998 and 1999 and the six months ended April 30, 2000. The
Company has charged its software development costs to research and development
expense in the accompanying statements of revenues and expenses.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the book value of an asset may not be
recoverable. The Company evaluates, at each balance sheet date, whether events
and circumstances have occurred which indicate possible impairment. The Company
uses an estimate of future undiscounted net cash flows of the related asset or
group of assets over the remaining life in measuring whether the assets are
recoverable. As of October 31, 1999 and April 30, 2000, the Company does not
consider any of its long-lived assets to be impaired.
REVENUE RECOGNITION
The accompanying statements of revenue and expenses reflect revenue in
accordance with the American Institute of Certified Public Accountants ("AICPA")
Statement of Position No. 97-2
F-89
<PAGE>
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
("SOP 97-2"), "Software Revenue Recognition." Revenue from the sale of software
has been recognized upon delivery of the product when persuasive evidence of an
arrangement exists, the price is fixed or determinable, collection is probable
and no significant post-delivery obligations exist.
In December 1998, the AICPA issued Statement of Position No. 98-9
"Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to
Certain Transactions" ("SOP 98-9"). SOP 98-9 amended SOP 97-2 to require
recognition of revenue using a "residual method" in certain circumstances. The
Company does not believe that the adoption of this statement will have a
material effect on the Company's current revenue recognition policies.
INCOME TAXES
For all periods presented, the Company was not directly subject to income
taxes as the acquired operations were included with those of Moreton Bay for
income tax reporting purposes. The Company was not an income tax reporting
entity nor did it have a tax-sharing agreement with Moreton Bay. As a result, no
income tax expense or related current or deferred income tax assets or
liabilities have been allocated to the acquired operations and the liabilities
or benefits attributable to the acquired operations were recorded by Moreton
Bay. Had Moreton Bay allocated income taxes to the acquired operations as if it
were a separate taxable entity, no income tax expense or benefit would have been
recorded due to the net operating loss position of the acquired operations and
the uncertainty of future realization of any deferred tax assets. The Company
has recorded a valuation allowance against the net deferred tax assets of the
acquired operations.
EQUITY (DEFICIT) OF ACQUIRED OPERATIONS
Cash remitted to or transferred from Moreton Bay has been reflected as a
decrease or increase in the equity (deficit) of acquired operations.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The acquired operations consist of one segment, NETtel operations.
Substantially all of the acquired assets, liabilities and operations have been
derived from and are located in Australia.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 establishes new accounting and
reporting standards for companies to report information about derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
This statement is effective for financial statements issued for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect this statement to have a material impact on the Company's results of
operations, financial position or liquidity.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition
in Financial Statements." This
F-90
<PAGE>
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
pronouncement summarizes certain of the SEC staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. The
Company is required to adopt SAB No. 101 during the first quarter of fiscal year
2001. Although management is currently evaluating the impact, if any, of SAB
No. 101, management does not presently believe it will have a material impact on
the Company's results of operations, financial position or liquidity.
(3) MARKETABLE SECURITY
On November 12, 1999, Moreton Bay entered into a stock exchange agreement
with Netcomm Ltd ("Netcomm") whereby 206,868 shares of Moreton Bay's common
stock were exchanged for 2,000,000 shares of common stock of Netcomm. The
Company recorded the shares of Netcomm's common stock based upon the quoted
market price on the date of exchange. The cost, gross unrealized loss and fair
value of the marketable security as of April 30, 2000 is as follows:
<TABLE>
<CAPTION>
AUSTRALIAN
DOLLARS U.S. DOLLARS
---------- ------------
<S> <C> <C>
Cost.................................................. $ 800,000 $ 517,040
Gross unrealized loss................................. (380,000) (245,594)
--------- ---------
Fair value............................................ $ 420,000 $ 271,446
========= =========
</TABLE>
(4) STOCK OPTIONS
During the year ended October 31, 1999 and the six months ended April 30,
2000, Moreton Bay agreed to grant options to purchase 26,250 and 20,000 shares
of common stock, respectively, to consultants and an employee of the Company for
services rendered. The committed exercise price is less than the estimated fair
value of Moreton Bay's common stock on the commitment date. Accordingly, the
Company recorded its allocated portion of the estimated expense related to these
option commitments of AUS$82,316 (US$53,201) and AUS$91,854 (US$59,365) during
the year ended October 31, 1999 and the six months ended April 30, 2000,
respectively. As of April 30, 2000, the options had not yet been formally
granted.
(5) RELATED PARTY TRANSACTIONS
As discussed in Note 3, Moreton Bay entered into a share exchange agreement
with Netcomm. Pursuant to the share exchange, Netcomm acquired approximately
20 percent of Moreton Bay's then outstanding common stock and Moreton Bay
acquired approximately 4 percent of Netcomm's then outstanding common stock. The
managing director of Moreton Bay was appointed to Netcomm's Board of Directors
on March 9, 2000.
On November 12, 1999, Moreton Bay entered into a Technology Manufacturing
and Marketing Agreement with Netcomm. This agreement granted Netcomm a
non-exclusive license to use Moreton Bay's licensed intellectual property and
the non-exclusive right to all general development products and software
products developed by or available to Moreton Bay. In consideration for the
rights granted,
F-91
<PAGE>
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(5) RELATED PARTY TRANSACTIONS (CONTINUED)
Netcomm agreed to pay a royalty on Netcomm product sales outside Australia and
New Zealand which incorporate Moreton Bay's intellectual property or products.
To date, no royalties have been received or are due.
On November 12, 1999, Moreton Bay entered into a Contract Manufacturing
agreement with Netcomm. The agreement specified that Netcomm would be the
preferred supplier for Moreton Bay. Transactions under this agreement are
conducted under terms that would be reasonable for entity's dealing at arm's
length in similar circumstances. During the six months ended April 30, 2000,
Moreton Bay purchased no products from Netcomm. As of April 30, 2000, the
Company had no amounts due to Netcomm.
(6) COMMITMENTS AND CONTINGENCIES
OPERATING AGREEMENTS
Rent expense included in the accompanying statements of revenues and
expenses was AUS$8,610 (US$5,565) and AUS$14,225 (US$9,194) for the years ended
October 31, 1998 and 1999, respectively, and AUS$5,675 (US$3,668) and AUS$8,550
(US$5,526) for the six months ended April 30, 1999 and 2000, respectively.
Moreton Bay has entered into non-cancelable operating lease agreements for
premises in the United States with terms of 6 months to 12 months. The future
minimum rental payments under these leases for the years ending October 31, 2000
and 2001 total AUS$31,180 (US$20,152) and AUS$905 (US$585), respectively.
Moreton Bay currently leases its Australian premises on a month-to-month
basis. Current monthly rent is AUS$700 (US$452).
RESEARCH AND DEVELOPMENT GRANT
In October 1998, Moreton Bay was awarded a research and development grant
related to the NETtel products from AusIndustry, a division of the Australian
government. The grant criteria include certain restrictions, including ownership
changes, as defined. If an ownership change is deemed to have occurred, the
grant may be cancelled and proceeds previously received by Moreton Bay may be
required to be repaid. The Company has not determined whether the acquisition by
Lineo will constitute an ownership change. Through April 30, 2000, the Company
has recorded approximately AUS$390,000 (US$239,132) in reimbursements from this
grant. Total funding available under the grant is approximately AUS$614,000
(US$397,000).
LITIGATION
The Company is a party to certain legal proceedings from time to time
arising in the ordinary course of business. Management believes, after
consultation with legal counsel, that as of October 31, 1999 and April 30, 2000,
no pending or threatened legal proceedings exist which would have a material
adverse effect on the Company's financial position, liquidity or results of
operations.
F-92
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RT-Control Inc.:
We have audited the accompanying balance sheet of RT-Control Inc., a Canada
Corporation, as of December 31, 1999 and the related statements of operations
and comprehensive loss, shareholders' equity and cash flows for the period from
inception (June 30, 1999) to December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of RT-Control Inc. as of
December 31, 1999 and the results of its operations and its cash flows for the
period from inception to December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN
Toronto, Canada
May 15, 2000
F-93
<PAGE>
RT-CONTROL INC.
BALANCE SHEETS
(U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31, 2000
----------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 37,860 $ 12,229
Accounts receivable....................................... -- 331
Prepaid expenses.......................................... -- 5,769
Inventory................................................. 21,307 48,840
Goods and services tax recoverable........................ 7,037 12,905
--------- ---------
Total current assets.................................... 66,204 80,074
--------- ---------
Computer and office equipment, net of accumulated
depreciation of $461.................................... -- 49,639
--------- ---------
$ 66,204 $ 129,713
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 36,451 $ 21,237
Accrued liabilities....................................... -- 53,506
Deferred revenue.......................................... -- 605
Advances from shareholders................................ 10,434 21,942
Notes payable to shareholders............................. 11,120 --
Note payable to Lineo, Inc................................ -- 100,000
Current portion of capital lease obligation............... -- 1,821
--------- ---------
Total current liabilities............................... 58,005 199,111
--------- ---------
Capital lease obligation, net of current portion............ -- 7,286
--------- ---------
Shareholders' equity (deficit):
Common shares, no par value, unlimited shares authorized,
291 and 300 shares outstanding, respectively............ 106,439 181,439
Accumulated deficit....................................... (98,443) (258,045)
Cumulative translation adjustment......................... 203 (78)
--------- ---------
Total shareholders equity (deficit)..................... 8,199 (76,684)
--------- ---------
$ 66,204 $ 129,713
========= =========
</TABLE>
See accompanying notes to financial statements.
F-94
<PAGE>
RT-CONTROL INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(U.S. DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS
(JUNE 30, 1999) TO ENDED
DECEMBER 31, 1999 MARCH 31, 2000
------------------ --------------
(UNAUDITED)
<S> <C> <C>
Revenue..................................................... $ 66,951 $ 10,224
Cost of revenue............................................. 42,392 6,455
-------- ---------
Gross margin.............................................. 24,559 3,769
-------- ---------
Operating expenses:
Research and development.................................. 74,468 52,870
General and administrative (exclusive of non-cash
share-related compensation of $0 and $75,000,
respectively)........................................... 38,446 27,690
Sales and marketing....................................... 7,324 6,475
Non-cash share-related compensation....................... -- 75,000
-------- ---------
120,238 162,035
-------- ---------
Loss from operations........................................ (95,679) (158,266)
Interest expense, net..................................... (2,764) (1,336)
-------- ---------
Net loss.................................................... $(98,443) $(159,602)
======== =========
Comprehensive loss:
Net loss.................................................. $(98,443) $(159,602)
Foreign currency translation adjustments.................. 203 (281)
-------- ---------
$(98,240) $(159,883)
======== =========
</TABLE>
See accompanying notes to financial statements.
F-95
<PAGE>
RT-CONTROL INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(U.S. DOLLARS)
<TABLE>
<CAPTION>
COMMON SHARES CUMULATIVE TOTAL
------------------- ACCUMULATED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT DEFICIT ADJUSTMENT EQUITY (DEFICIT)
-------- -------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Issuance of common shares for cash at
inception............................. 291 $ 20 $ -- $ -- $ 20
Contribution of services................ -- 106,419 -- -- 106,419
Foreign currency translation
adjustments........................... -- -- -- 203 203
Net loss................................ -- -- (98,443) -- (98,443)
--- -------- --------- ----- ---------
Balance, December 31, 1999.............. 291 106,439 (98,443) 203 8,199
Issuance of common shares for services
(unaudited)........................... 9 75,000 -- -- 75,000
Foreign currency translation adjustments
(unaudited)........................... -- -- -- (281) (281)
Net loss (unaudited).................... -- -- (159,602) -- (159,602)
--- -------- --------- ----- ---------
Balance, March 31, 2000 (unaudited)..... 300 $181,439 $(258,045) $ (78) $ (76,684)
=== ======== ========= ===== =========
</TABLE>
See accompanying notes to financial statements.
F-96
<PAGE>
RT-CONTROL INC.
STATEMENTS OF CASH FLOWS
(U.S. DOLLARS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION THREE
(JUNE 30, 1999) TO MONTHS ENDED
DECEMBER 31, 1999 MARCH 31, 2000
------------------------- -------------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (98,443) $ (159,602)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation.......................................... -- 461
Contribution of services.............................. 106,419 --
Non-cash share-related compensation................... -- 75,000
Changes in operating assets and liabilities:
Accounts receivable................................. -- (331)
Prepaid expenses.................................... -- (5,769)
Inventory........................................... (21,307) (27,533)
Goods and services tax recoverable.................. (7,037) (5,868)
Accounts payable.................................... 36,451 (15,214)
Accrued liabilities................................. -- 53,506
Deferred revenue.................................... -- 605
------------------------- -------------------------
Net cash provided by (used in) operating
activities........................................ 16,083 (84,745)
------------------------- -------------------------
Cash flows from investing activities:
Purchase of property and equipment........................ -- (40,993)
------------------------- -------------------------
Cash flows from financing activities:
Advances from shareholders................................ 10,434 11,508
Proceeds from (repayments of) notes payable to
shareholders............................................ 11,120 (11,120)
Proceeds from the sale of common shares upon
incorporation........................................... 20 --
Proceeds from note payable to Lineo, Inc.................. -- 100,000
------------------------- -------------------------
Net cash provided by financing activities........... 21,574 100,388
------------------------- -------------------------
Net increase (decrease) in cash and cash equivalents........ 37,657 (25,350)
Foreign currency translation adjustments.................... 203 (281)
Cash and cash equivalents, beginning of period.............. -- 37,860
------------------------- -------------------------
Cash and cash equivalents, end of period.................... $ 37,860 $ 12,229
========================= =========================
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 1,048 $ 907
Supplemental disclosure of noncash investing and financing
activities:
Acquisition of assets under capital lease arrangement..... $ -- $ 9,107
</TABLE>
See accompanying notes to financial statements.
F-97
<PAGE>
RT-CONTROL INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
1. ORGANIZATION AND NATURE OF OPERATIONS
RT-Control Inc. (the "Company") was incorporated under the Canada Business
Corporations Act on June 30, 1999. The Company develops and markets the mcLinux
version of Linux for microcontrollers.
On May 12, 2000, the Company's shareholders entered into an agreement with
Lineo, Inc. ("Lineo"), a United States corporation. Pursuant to the agreement,
Lineo acquired all of the outstanding common shares of RT-Control in exchange
for $15,000 in cash, 404,169 shares of Lineo's series D convertible preferred
stock and options to purchase 16,667 shares of Lineo's common stock. The options
have a vesting period of one year, an exercise price of $1.50 per share and
expire ten years from the date of grant.
During the three months ended March 31, 2000, the Company received $100,000
from Lineo through the issue of a promissory note. The Company received an
additional $100,000 on April 3, 2000 from Lineo under similar terms (see
Note 6). Lineo has committed to provide funding to the Company as required.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of March 31, 2000 and for the
three months then ended have been prepared on the same basis as the audited
financial statements and, in the opinion of management, reflect all normal
recurring adjustments necessary to present fairly the financial information set
forth therein in accordance with accounting principles generally accepted in the
United States. The results of operations for the three months ended March 31,
2000 are not necessarily indicative of the results to be expected for the entire
year ending December 31, 2000.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingencies at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying financial statements for
cash and cash equivalents, accounts receivable, goods and services tax
recoverable, and accounts payable approximate fair values because of the
immediate or short-term maturities of these financial instruments. The
F-98
<PAGE>
RT-CONTROL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
carrying amounts of the Company's debt obligations approximate fair value based
on current interest rates.
FOREIGN CURRENCY TRANSLATION
The Company prepares its statements in Canadian dollars since its functional
currency is the Canadian dollar. As a result of the acquisition discussed in
Note 1, the accompanying financial statements are denominated in U.S. dollars.
As a result, the Company has translated its Canadian dollar financial statements
into U.S. dollars using the current method. Under this method, monetary and
non-monetary items are translated at the rate of exchange in effect at the
balance sheet date and revenue and expenses are translated at the average
exchange rate for the periods. Depreciation of assets is translated at the same
exchange rate as the assets to which they relate.
CASH AND CASH EQUIVALENTS
For purposes of the balance sheet and statement of cash flows, the Company
considers all short-term deposits with original maturities of 90 days or less to
be cash equivalents. Cash equivalents consist of short-term low risk commercial
paper and guaranteed investment certificates.
INVENTORY
Inventory consists primarily of raw materials. Inventory is stated at the
lower of cost (using the first-in, first-out method) or market value.
Provisions, when required, are made to reduce excess and obsolete inventory to
its estimated net realizable value. Due to competitive pressures and
technological innovation, it is possible that estimates of net realizable value
could change in the near term.
RESEARCH AND DEVELOPMENT EXPENSES
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed", development costs incurred in the research and development
of new software products to be sold, leased or otherwise marketed are expensed
as incurred until technological feasibility in the form of a working model has
been established.
Due to continuing technological changes and changing customer needs, the
Company has concluded that it cannot determine technological feasibility of its
various products until the development phase of the project is nearly complete.
The time period during which costs could be capitalized from the point of
reaching technological feasibility until the time of general product release is
very short and, consequently, the amounts that could be capitalized are not
material to the Company's financial position or results of operations.
Therefore, the Company charges all research and development expenses to
operations in the period incurred.
F-99
<PAGE>
RT-CONTROL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company generates revenue from the sale of its products, which primarily
takes place through the Company's internet site.
The Company has recognized software revenue in accordance with the
provisions of Statement of Position No. 97-2, "Software Revenue Recognition"
("SOP 97-2"). Under SOP 97-2, software revenue is recognized upon execution of a
contract and delivery of software, provided that the license fee is fixed and
determinable, no significant production, modification or customization of the
software is required and collection is considered probable by management.
Hardware sales are recognized when title passes, which coincides with
shipment and customer acceptance.
INCOME TAXES
The Company recognizes a current tax liability or asset for current taxes
payable or refundable and a deferred tax liability or asset for the estimated
future tax effects of temporary differences between the carrying value of assets
and liabilities for financial reporting and their tax basis and loss carry
forwards to the extent they are realizable. A deferred tax valuation allowance
is required if it is "more likely than not" that all or a portion of recorded
future tax assets will not be realized.
GOODS AND SERVICES TAX RECOVERABLE
Goods and services tax ("GST") is a Canadian value added tax. GST
recoverable represents input tax credits received by the Company on GST paid or
payable for certain goods and services purchased during the period.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 establishes new accounting and
reporting standards for companies to report information about derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
This statement is effective for financial statements issued for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect this statement to have a material impact on the Company's results of
operations, financial position or liquidity.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition
in Financial Statements." This pronouncement summarizes certain of the SEC
staff's views in applying generally accepted accounting principles to selected
revenue recognition issues. The Company is required to adopt SAB No. 101 during
the second quarter of 2000. Although management is currently evaluating the
impact, if any, of SAB No. 101, management does not presently believe it will
have a material impact on the Company's results of operations, financial
position or liquidity.
F-100
<PAGE>
RT-CONTROL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
3. EQUITY AND RELATED PARTY TRANSACTIONS
During the period ended December 31 1999, certain shareholders and employees
of the Company rendered services without receiving any consideration amounting
to approximately $90,400 and $16,000, respectively. The Company recorded the
fair value of these services as a capital contribution. The fair value of these
services was based on management's estimates.
At December 31, 1999 and March 31, 2000, the Company had advances from
shareholders of $10,434 and $21,942, respectively, representing amounts owed to
shareholders for expenses incurred on behalf of the Company. The advances do not
have any fixed repayment terms and bear interest charges only to the extent the
shareholders incur interest charges.
At December 31, 1999, the Company had $11,120 in notes due to shareholders
representing cash advances made by the shareholders to the Company. The notes
did not carry any fixed repayment terms and bore interest at prime (6.5 percent
at December 31, 1999) plus 3.7 percent. Subsequent to December 31, 1999, the
Company repaid these notes together with the related interest.
On January 27, 2000, the Company issued 261 common shares to its existing
shareholders on a pro-rata basis. This issuance has been accounted for as a
stock split and retroactively reflected in the accompanying financial statements
for all periods presented.
During January 2000, the Company issued 9 common shares to an employee and a
consultant for services rendered. The estimated fair value of the common shares
on the date of issuance was deemed to be $75,000, based on the consideration
paid by Lineo to acquire the Company on May 9, 2000. The $75,000 has been
reflected as non-cash share-related compensation in the accompanying statement
of operations for the three months ended March 31, 2000.
4. INCOME TAXES
The components of the Company's income tax provision computed at the
combined statutory Canadian federal and provincial income tax rate for the
period from inception (June 30, 1999) to December 31, 1999 is as follows:
<TABLE>
<S> <C>
Income tax benefit at statutory
rates.............................. $22,267
Change in valuation allowance........ (22,267)
-------
$ --
=======
</TABLE>
The deferred income tax assets resulting from differences in the timing of
the recognition of certain income and expense items for income tax and financial
accounting purposes at December 31, 1999 are as follows:
<TABLE>
<S> <C>
Net operating loss carryforward...... $ 22,267
Less: valuation allowance............ (22,267)
--------
Net deferred income taxes.......... $ --
========
</TABLE>
F-101
<PAGE>
RT-CONTROL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
4. INCOME TAXES (CONTINUED)
The ultimate realization of the net operating loss carryforward is
dependent, in part, upon the tax laws in effect, the Company's future earnings,
and other future events, the effects of which cannot be determined. The Company
has established a valuation allowance against its net operating loss
carryforward because the available objective evidence creates sufficient
uncertainty regarding its realizability.
At December 31, 1999, the Company's net operating loss carryforward totaled
$98,443 and expires in 2006.
5. COMMITMENTS AND CONTINGENCIES
LEGAL
The Company may become party to certain legal proceedings arising in the
ordinary course of business. Management believes, after consultation with legal
counsel, that as of December 31, 1999 and March 31, 2000, no pending or
threatened legal proceedings exist which would have a material adverse effect on
the Company's financial position, liquidity or results of operations.
LEASES
The Company leases its operating facilities under an operating lease
arrangement. The lease term is 29 months commencing on March 1, 2000. The future
minimum rental payments under the arrangement are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
2000................................. $17,914
2001................................. 23,885
2002................................. 9,952
-------
$51,751
=======
</TABLE>
F-102
<PAGE>
RT-CONTROL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has acquired certain office equipment under a capital lease
agreement. The lease term is for 60 months commencing on April 1, 2000. The
future minimum lease payments on this lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
2000................................. $1,739
2001................................. 2,318
2002................................. 2,318
2003................................. 2,318
2004................................. 2,318
Thereafter........................... 580
------
11,591
Less: amounts representing
interest........................... (2,484)
------
Capital lease obligation............. 9,107
Less: current portion................ (1,821)
------
$7,286
======
</TABLE>
6. NOTE PAYABLE TO LINEO
On February 25, 2000, the Company received proceeds of $100,000 from Lineo
in consideration for issuing an unsecured promissory note. On April 3, 2000, the
Company received an additional $100,000 from Lineo in consideration for issuing
an unsecured promissory note. The notes bear interest at a rate of 7.25 percent
per annum and are due 30 days after demand.
F-103
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
TO LINEO, INC.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Lineo, Inc., the carved-out portion of
Caldera, Inc. and their subsidiary included in this registration statement and
have issued our report thereon dated May 15, 2000. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. Schedule II--Valuation and Qualifying Accounts is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
May 15, 2000
<PAGE>
LINEO, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(A) PERIOD
- -------------------------------------------------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Allowance of doubtful accounts:
Year ended October 31, 1997..................... $ -- $ -- $ -- $ --
Year ended October 31, 1998..................... -- 13,500 -- 13,500
Year ended October 31, 1999..................... 13,500 163,500 (95,168) 68,332
</TABLE>
- ------------------------
(a) Represents write-offs of uncollectable accounts receivable
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the securities being registered. All amounts are estimates
except the Securities and Exchange Commission registration fee, the NASD filing
fee and The Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 15,840
NASD Filing Fee............................................. 6,500
Nasdaq National Market Filing Fee........................... 90,000
Printing Costs.............................................. 200,000
Legal Fees and Expenses..................................... 400,000
Accounting Fees and Expenses................................ 950,000
Directors' and Officers' Insurance Policy Premium........... 525,000
Blue Sky Fees and Expenses.................................. 5,000
Transfer Agent and Registrar Fees........................... 5,000
Miscellaneous............................................... 52,660
----------
Total................................................... $2,250,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The registrant is a Delaware corporation. In its restated certificate of
incorporation, the registrant has adopted the provisions of Section 102(b)(7) of
the Delaware General Corporation Law (the "Delaware Law"), which enables a
corporation in its original certificate of incorporation or an amendment thereto
to eliminate or limit the personal liability of a director for monetary damages
for breach of the director's fiduciary duty, except (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware Law (providing
for liability of directors for unlawful payment of dividends or unlawful stock
purchases or redemptions) or (iv) for any transaction from which a director will
personally receive a benefit in money, property or services to which the
director is not legally entitled. The registrant has also adopted
indemnification provisions in its restated certificate of incorporation and
bylaws pursuant to Section 145 of the Delaware Law, which provides that a
corporation may indemnify any persons, including officers and directors, who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceedings, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation), by reason of the fact that such person was an officer, director,
employee or agent of the corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such officer, director, employee or agent acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to criminal proceedings, had no
reasonable cause to believe that his conduct was unlawful. A Delaware
corporation may indemnify officers or directors in an action by or in the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the
II-1
<PAGE>
defense of any action referred to above, the corporation must indemnify him
against expenses (including attorneys' fees) that such officer or director
actually and reasonably incurred.
The registrant intends to enter into indemnification agreements with each of
the registrant's officers and directors. The Underwriting Agreement
(Exhibit 1.1 hereto) provides for indemnification between the underwriters and
the registrant from and against certain liabilities arising in connection with
the offering which is the subject of this registration statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a description of all securities that the registrant has
sold within the past three years without registering the securities under the
Securities Act:
On September 1, 1998, the registrant issued 18,000,000 shares of its common
stock to Caldera, Inc. in exchange for a contribution of assets. This issuance
was exempt from registration pursuant to 4(2) of the Securities Act.
On December 29, 1999, the registrant sold 1,500,000 shares of its common
stock at a price of $.80 per share to two accredited investors for an aggregate
offering price of $1,200,000. This issuance was exempt from registration
pursuant to 4(2) of the Securities Act.
On February 17, 2000, the registrant sold 2,500,000 shares of its Series A
Class 2 convertible preferred stock at a price of $1.50 per share to three
accredited investors for an aggregate offering price of $3,750,000. This
issuance was exempt from registration pursuant to Rule 506 of Regulation D under
Section 4(2) of the Securities Act.
On February 17, 2000, the registrant exchanged 5,000,000 shares of its
Series A Class 1 convertible preferred stock to one accredited investor in
exchange for 5,000,000 shares of our common stock. This exchange was exempt from
registration pursuant to Rule 506 of Regulation D under Section 4(2) of the
Securities Act.
On March 15, 2000, the registrant sold 4,833,331 shares of its Series B
convertible preferred stock at a price of $3.00 per share to 15 accredited
investors for an aggregate offering price of $14,499,973. This issuance was
exempt from registration pursuant to Rule 506 of Regulation D under
Section 4(2) of the Securities Act.
On April 3, 2000, the registrant issued 1,745,226 shares of its common stock
to 23 individuals pursuant to a merger agreement between the registrant and
Zentropic Computing, LLC, a Virginia limited liability company. This exchange
was exempt from registration pursuant to Rule 506 of Regulation D under
Section 4(2) of the Securities Act.
On April 28, 2000, the registrant sold 3,000,000 shares of its Series C
convertible preferred stock at a price of $6.00 per share to 21 accredited
investors for an aggregate offering price of $18,000,000. This issuance was
exempt from registration pursuant to Rule 506 of Regulation D under
Section 4(2) of the Securities Act.
On May 1, 2000, the registrant issued 69,998 shares of its Series D
convertible preferred stock to five individuals pursuant to a share purchase
agreement between the registrant and certain shareholders of Fireplug
Computers Inc., a British Columbia, Canada company. This transaction was exempt
from registration pursuant to Regulation S and/or Rule 506 of Regulation D under
Section 4(2) of the Securities Act.
On May 1, 2000, the registrant issued 1,333,333 shares of its common stock
to 21 individuals and 83,334 shares of our Series C convertible preferred stock
to one corporate entity pursuant to a stock purchase agreement between the
registrant and certain shareholders of Inup S.A., a French
II-2
<PAGE>
corporation. This transaction was exempt from registration pursuant to
Regulation S and/or Rule 506 of Regulation D under Section 4(2) of the
Securities Act.
On May 10, 2000, the registrant issued 956,315 shares of its Series D
convertible preferred stock to 14 individuals pursuant to a stock purchase
agreement between the registrant and certain shareholders of Moreton Bay
Ventures Pty Ltd, an Australian corporation. This transaction was exempt from
registration pursuant to Regulation S and/or Rule 506 of Regulation D under
Section 4(2) of the Securities Act.
On May 12, 2000, the registrant issued 404,169 shares of its Series D
convertible preferred stock to three individuals pursuant to a stock purchase
agreement between the registrant and certain shareholders of RT-Control, Inc., a
Canadian corporation. This transaction was exempt from registration pursuant to
Regulation S and/or Rule 506 of Regulation D under Section 4(2) of the
Securities Act.
From June 1999 to May 15, 2000, options to purchase 3,722,627 shares of the
registrant's common stock were granted to 136 individuals at a weighted average
exercise price of $2.05 per share. These grants were exempt from registration
pursuant to Rule 701 under the Securities Act.
From June 1999 to May 15, 2000, 669,905 shares of the registrant's common
stock were issued to eight individuals upon the exercise of stock options
granted pursuant to the registrant's stock option plan at a weighted average
exercise price of $0.80 per share. These issuances were exempt from registration
pursuant to Rule 701 under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1# Certificate of Incorporation and all amendments thereto
3.1(a)# Form of Restated Certificate of Incorporation
3.2# Bylaws and all amendments thereto
4.1 See Exhibits 3.1 and 3.2 for provisions defining the rights
of the holders of common stock
5.1* Opinion of Summit Law Group, PLLC regarding legality of
shares
10.1# 1999 Stock Option Plan
10.2# GNU General Public License
10.3#+ OEM License Agreement No. LNO201 (Amended and Restated
3/20/2000) by and between Lineo Inc. and DaiShin
Information and Communications Company dated February 17,
2000
10.4# Stock Purchase and Sale Agreement dated as of January 6,
2000, by and between Lineo, Inc. and Caldera
Systems, Inc.
10.5# DR DOS License Agreement dated as of September 1, 1998, by
and between Caldera, Inc. and Caldera Thin Clients, Inc.
10.6# Technology Assignment Agreement dated as of December 29,
1999, by and between The Canopy Group and Lineo, Inc.
10.7# Recapitalization Agreement dated February 17, 2000, by and
between Lineo, Inc. and The Canopy Group, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
10.8# Form of Lineo, Inc. Series A Stock Purchase Agreement
10.9# Form of Lineo, Inc. Series B Stock Purchase Agreement
10.10# Form of Lineo, Inc. Series C Stock Purchase Agreement
10.11# Stock Purchase Agreement dated as of April 13, 2000, by and
among Lineo, Inc., United System Engineers, Inc., and the
shareholders named therein
10.12# Share Purchase Agreement dated as of May 1, 2000, by and
among Lineo, Inc., Fireplug Computers Inc. and the
shareholders named therein
10.13# Stock Purchase Agreement dated as of May 10, 2000, by and
among Moreton Bay Ventures Pty Ltd, Lineo, Inc. and the
Sellers named therein
10.14# Stock Purchase Agreement dated as of May 1, 2000, by and
among Lineo, Inc., Inup S.A. and the Sellers named therein
10.15# Share Purchase Agreement dated as of May 10, 2000, by and
among Lineo, Inc., RT-Control, Inc. and the Shareholders
named therein
10.16# Form of Lineo, Inc. Investor Rights Agreement
10.17# Form of Lineo, Inc. Amendment No. 1 to Investor Rights
Agreement
10.18# Form of Lineo, Inc. Amendment No. 2 to Investor Rights
Agreement
10.19# Form of Indemnification Agreement
10.20# Sublease dated January 31, 2000 by and between SwitchSoft
Systems, Inc. and Lineo, Inc.
10.21# Sublease 380 South 400 West, Suite C dated February 21, 2000
by and between VPNX.com and Lineo, Inc.
10.22# Employment Agreement dated May 16, 2000 by and between Bryan
W. Sparks and Lineo, Inc.
21.1# Subsidiaries of the registrant
23.1 Consent of Summit Law Group, PLLC (contained in the opinion
filed as Exhibit 5.1 hereto)
23.2# Consent of Arthur Andersen LLP, Independent Public
Accountants
23.3# Consent of Arthur Andersen, Independent Public Accountants
23.4# Consent of Arthur Andersen, Independent Public Accountants
23.5# Consent of Befec -- Price Waterhouse, Independent
Accountants
23.6# Consent of Arthur Andersen, Independent Public Accountants
23.7# Consent of Arthur Andersen, Independent Public Accountants
24.1 Power of Attorney (See Page II-6)
27.1# Financial Data Schedule
</TABLE>
- ------------------------
# Filed herewith
+ Confidential treatment requested
* To be filed by amendment
II-4
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES.
Schedule II -- Valuation and Qualifying Accounts for the Years Ended October
31, 1997, 1998 and 1999
Schedules not listed above have been omitted because they are inapplicable
or the requested information is shown in the consolidated financial statements
of the registrant or related notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding), is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the questions whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be a part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Lindon, State of Utah, on
the 18(th) day of May, 2000.
<TABLE>
<S> <C> <C>
LINEO, INC.
By: /s/ BRYAN W. SPARKS
-----------------------------------------
Bryan W. Sparks
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
</TABLE>
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and
appoints Bryan W. Sparks and Matthew R. Harris, and each of them, with full
power of substitution and resubstitution and full power to act without the
other, as his true and lawful attorney-in-fact and agent to act in his name,
place and stead and to execute in the name and on behalf of each person,
individually and in each capacity stated below, and to file, any and all
amendments to this registration statement, including any and all post-effective
amendments thereto and any registration statement relating to the same offering
as this registration statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing, ratifying and confirming all that said attorneys-in-fact
and agents or any of them or their or his substitute or substitutes may lawfully
do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated below on the 18(th) day of May, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ BRYAN W. SPARKS President, Chief Executive Officer and
------------------------------------------- Chairman of the Board (Principal Executive
Bryan W. Sparks Officer)
/s/ GREGORY C. HILL Senior Vice President, Chief Financial Officer
------------------------------------------- and Treasurer (Principal Financial and
Gregory C. Hill Accounting Officer)
/s/ RAYMOND J. NOORDA
------------------------------------------- Director
Raymond J. Noorda
/s/ RALPH J. YARRO
------------------------------------------- Director
Ralph J. Yarro
/s/ JOHN R. EGAN
------------------------------------------- Director
John R. Egan
/s/ WILLIAM P. BARNETT
------------------------------------------- Director
William P. Barnett
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1# Certificate of Incorporation and all amendments thereto
3.1(a)# Form of Restated Certificate of Incorporation
3.2# Bylaws and all amendments thereto
4.1 See Exhibits 3.1 and 3.2 for provisions defining the rights
of the holders of common stock
5.1* Opinion of Summit Law Group, PLLC regarding legality of
shares
10.1# 1999 Stock Option Plan
10.2# GNU General Public License
10.3#+ OEM License Agreement No. LNO201 (Amended and Restated
3/2/00) by and between Lineo Inc. and DaiShin Information
and Communications Company dated February 17, 2000
10.4# Stock Purchase and Sale Agreement dated as of January 6,
2000, by and between Lineo, Inc. and Caldera
Systems, Inc.
10.5# DR DOS License Agreement dated as of September 1, 1998, by
and between Caldera, Inc. and Caldera Thin Clients, Inc.
10.6# Technology Assignment Agreement dated as of December 29,
1999, by and between The Canopy Group and Lineo, Inc.
10.7# Recapitalization Agreement dated February 17, 2000, by and
between Lineo, Inc. and The Canopy Group, Inc.
10.8# Form of Lineo, Inc. Series A Stock Purchase Agreement
10.9# Form of Lineo, Inc. Series B Stock Purchase Agreement
10.10# Form of Lineo, Inc. Series C Stock Purchase Agreement
10.11# Stock Purchase Agreement dated as of April 13, 2000, by and
among Lineo, Inc., United System Engineers, Inc., and the
shareholders named therein
10.12# Share Purchase Agreement dated as of May 1, 2000, by and
among Lineo, Inc., Fireplug Computers Inc. and the
shareholders named therein
10.13# Stock Purchase Agreement dated as of May 10, 2000, by and
among Moreton Bay Ventures Pty Ltd, Lineo, Inc. and the
Sellers named therein
10.14# Stock Purchase Agreement dated as of May 1, 2000, by and
among Lineo, Inc., Inup S.A. and the Sellers named therein
10.15# Share Purchase Agreement dated as of May 10, 2000, by and
among Lineo, Inc., RT-Control, Inc. and the Shareholders
named therein
10.16# Form of Lineo, Inc. Investor Rights Agreement
10.17# Form of Lineo, Inc. Amendment No. 1 to Investor Rights
Agreement
10.18# Form of Lineo, Inc. Amendment No. 2 to Investor Rights
Agreement
10.19# Form of indemnification agreement
10.20# Sublease dated January 31, 2000 by and between SwitchSoft
Systems, Inc. and Lineo, Inc.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
10.21# Sublease 380 South 400 West, Suite C dated February 21, 2000
by and between VPNX.com and Lineo, Inc.
10.22# Employment Agreement dated May 16, 2000 by and between Bryan
Sparks and Lineo, Inc.
21.1# Subsidiaries of the registrant
23.1 Consent of Summit Law Group, PLLC (contained in the opinion
filed as Exhibit 5.1 hereto)
23.2# Consent of Arthur Andersen LLP, Independent Public
Accountants
23.3# Consent of Arthur Andersen, Independent Public Accountants
23.4# Consent of Arthur Andersen, Independent Public Accountants
23.5# Consent of Befec -- Price Waterhouse, Independent
Accountants
23.6# Consent of Arthur Andersen, Independent Public Accountants
23.7# Consent of Arthur Andersen, Independent Public Accountants
24.1 Power of Attorney (See Page II-6)
27.1# Financial Data Schedule
</TABLE>
- ------------------------
# Filed herewith
+ Confidential treatment requested
* To be filed by amendment
II-8
<PAGE>
EXHIBIT 3.1
STATE
OFFICE OF THE SECRETARY OF STATE OF DELAWARE
Office of the Secretary of State
-----------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF
THE CERTIFICATE OF DESIGNATION OF "LINEO, INC.", FILED IN THIS OFFICE
ON THE THIRD DAY OF MAY, A.D. 2000, AT 3 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS.
/s/ EDWARD J. FREEL, SECRETARY OF STATE
---------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 0417442
DATE: 05-03-00
<PAGE>
CERTIFICATE OF DESIGNATION
OF THE
RELATIVE RIGHTS AND PREFERENCES
OF THE
SERIES D CONVERTIBLE PREFERRED STOCK
OF
LINEO, INC.
The undersigned, the Secretary of Lineo, Inc., a Delaware corporation
(the "Corporation"), does hereby certify that, pursuant to the authority
conferred upon the Board of Directors by the Certificate of Incorporation of the
Corporation, the following resolution creating a series of Series D Convertible
Preferred Stock was duly adopted by the Board of Directors of the Corporation as
of May 1, 2000:
RESOLVED, that pursuant to the authority expressly granted to and
vested in this Board of Directors by the provisions of the Certificate of
Incorporation of the Corporation, this Board of Directors hereby creates a
series of preferred stock (the "Preferred Stock"), $.001 par value per share, of
the Corporation to be designated as Series D Convertible Preferred Stock,
initially consisting of 2,000,000 shares. Except as provided herein or as
required by law, the relative rights and preferences of the Series D Convertible
Preferred Stock shall be as follows:
SERIES D CONVERTIBLE PREFERRED STOCK
The Corporation hereby designates 2,000,000 shares of the Preferred
Stock as Series D Convertible Preferred Stock (the "Series D Preferred Stock"),
which shall have the following rights, preferences and terms:
SECTION 1. DIVIDENDS. The holders of Series D Preferred Stock shall be
entitled to receive dividends, out of any assets legally available therefor, at
the same rate as dividends are paid (other than dividends paid in additional
shares of Common Stock) with respect to the Common Stock (treating each share of
Series D Preferred Stock as being equal to the number of shares of Common Stock
into which each such share of Series D Preferred Stock could be converted
pursuant to the provisions of Section 4 hereof with such number determined as of
the record date for the determination of holders of Common Stock entitled to
receive such dividend) (the "Participating Dividends"). Dividends shall be paid
by forwarding a check, postage prepaid, to the address of each holder (or, in
the case of joint holders, to the address of any such holder) of Series D
Preferred Stock and/or Common Stock, as applicable, as shown on the books of the
Corporation, or to such other address as such holder specifies for such purpose
by written notice to the Corporation.
SECTION 2. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, each holder of outstanding
shares of Series D Preferred Stock and any other stock ranking on liquidation
PARI PASSU therewith shall be entitled to be paid out of
<PAGE>
the assets of the Corporation available for distribution to stockholders,
whether such assets are capital, surplus or earnings, after any amount shall be
paid or distributed to the holders of outstanding shares of Series A Class 1 and
Class 2 Convertible Preferred Stock (together, the "Series A Preferred Stock"),
Series B Convertible Preferred Stock (the "Series B Preferred Stock"), Series C
Convertible Preferred Stock (the "Series C Preferred Stock") and any other stock
ranking on liquidation senior to the Series D Preferred Stock, but before any
amount shall be paid or distributed to the holders of any class of Common Stock
or of any other stock ranking on liquidation junior to the Series D Preferred
Stock, an amount in cash equal to $6.00 per share (adjusted appropriately for
stock splits, stock dividends and the like) together with declared but unpaid
dividends to which the holders of outstanding shares of Series D Preferred Stock
are entitled pursuant to Section 1 hereof; provided, however, that if, upon any
liquidation, dissolution or winding up of the Corporation, the amounts payable
with respect to the Series D Preferred Stock and any other stock ranking on
liquidation PARI PASSU therewith are not paid in full, then each holder of
Series D Preferred Stock and any other stock ranking on liquidation PARI PASSU
therewith shall share ratably in any distribution of assets in proportion to the
full respective preferential amounts to which such holder is entitled.
(b) After payment of the full liquidation preferences of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock (collectively, the "Preferred Stock") as provided in
Section 2(a) and any other applicable liquidation preferences payable to holders
of outstanding Preferred Stock, any remaining assets of the Corporation then
available for distribution shall be distributed ratably among the holders of the
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
(all on an as-if converted basis) and the Common Stock.
(c) A share exchange or merger of the Corporation into or with
another entity by means of any transaction or series of transactions (except (i)
a merger into or with a wholly owned subsidiary of the Corporation with
requisite stockholder approval or (ii) a merger in which the beneficial owners
of the Corporation's outstanding capital stock immediately prior to such
transaction hold no less than 51% of the voting power in the resulting entity),
the effectuation by the Corporation of a transaction or series of related
transactions in which 50% or more of the voting power of the Corporation is
disposed of, or a sale of all or substantially all of the assets of the
Corporation shall be regarded as a liquidation, dissolution or winding up of the
affairs of the Corporation within the meaning of this Section 2; provided,
however, that each holder of Series D Preferred Stock shall have the right to
convert his, her or its shares of Series D Preferred Stock to Common Stock
pursuant to Section 4(a) hereof in lieu of receiving payment in liquidation,
dissolution or winding up of the Corporation pursuant to this Section 2. Notice
of such conversion shall be submitted in accordance with the provisions of
Section 4(c) hereof no later than ten (10) days before the effective date of
such event, provided that any such notice shall be effective if given not later
than fifteen (15) days after the date of the Corporation's notice, pursuant to
Section 6, with respect to such event.
(d) If any of the assets of the Corporation are to be
distributed other than in cash under this Section 2 or for any purpose, then the
Board of Directors of the Corporation shall promptly engage independent
competent appraisers to determine the value of the assets to be distributed.
3
<PAGE>
(i) The Corporation shall, upon receipt of such
appraiser's valuation, give prompt written notice thereof to each holder of
shares of the Corporation's capital stock. Notwithstanding the above, any
securities to be distributed shall be valued as follows:
(A) if traded on a securities exchange or
through the Nasdaq National Market, the value shall be deemed to be the average
of the closing prices of the securities on such exchange over the 30-day period
ending three (3) business days prior to the distribution;
(B) if actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the 30-day period ending three (3) business days
prior to the distribution; and
(C) if there is no active public market, the
value shall be the fair market value thereof, as determined in good faith by the
Board of Directors and the holders of Preferred Stock.
(ii) The method of valuation of securities subject to
an investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (d)(i) to reflect the approximate fair market value
thereof, as mutually determined by the Corporation and the holders of at least a
majority of the voting power of all then outstanding shares of Preferred Stock.
(iii) In the event the requirements of this
subsection 2(d) are not complied with, the Corporation shall forthwith either:
(A) cause such closing to be postponed until
such time as the requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event
the rights, preferences and privileges of the holders of the Preferred Stock
shall revert to and be the same as such rights, preferences and privileges
existing immediately prior to the date of the first notice referred to in
subsection 2(d)(iv) hereof.
(iv) The Corporation shall give each holder of record
of Preferred Stock written notice of such impending transaction not later than
20 days prior to the stockholders' meeting called to approve such transaction,
or 20 days prior to the closing of such transaction, whichever is earlier, and
shall notify such holders in writing of the final approval of such transaction.
The first of such notices shall describe the material terms and conditions of
the impending transaction and the provisions of this Section 2, and the
Corporation shall thereafter give such holders prompt notice of any material
changes. The transaction shall in no event take place sooner than 20 days after
this Corporation has given the first notice provided for herein or sooner than
10 days after this Corporation has given notice of any material changes provided
for herein; provided, however, that such periods may be shortened upon the
written consent of the holders of Preferred Stock that are entitled to such
notice rights or similar notice rights and that represent at least a majority of
the voting power of all then outstanding shares of Preferred Stock.
4
<PAGE>
(e) NOTICES. Any notice required by the provisions of this
Section 2 to be given to the holders of shares of Series D Preferred Stock shall
be in writing and shall be deemed given (i) five (5) days after having been sent
by registered or certified mail, return receipt requested, postage prepaid, or
(ii) one (1) day (or five (5) days in the case of international deliveries)
after the deposit with a nationally recognized overnight courier, having
specified next day delivery, with written verification of receipt. All notices
shall be addressed to each holder of record at the address of such holder
appearing on the books of the Corporation.
SECTION 3. VOTING POWER. Except as otherwise expressly provided herein
or as required by law, the holder of each share of Series D Preferred Stock
shall be entitled to vote on all matters submitted to a vote of the holders of
outstanding voting securities. Each share of Series D Preferred Stock shall
entitle the holder thereof to such number of votes per share as shall equal the
number of shares of Common Stock into which each share of Series D Preferred
Stock is convertible as of the record date for the determination of stockholders
entitled to vote on or consent to such matters or, if no such record date is
established, as of the date on which notice of such meeting is mailed or the
date any written consent of stockholders is solicited. Except as otherwise
expressly provided herein or as required by law, the holders of shares of the
Preferred Stock and the Common Stock shall vote together as a single class on
all matters. In all cases where class voting is required by law, Series D
Preferred Stock shall be considered a separate class.
SECTION 4. CONVERSION. The holders of Series D Preferred Stock shall
have the following conversion rights:
(a) VOLUNTARY CONVERSION. Holders of the outstanding shares of
Series D Preferred Stock shall be entitled, at any time and from time to time
after the date hereof, to cause any or all of such holder's shares to be
converted into such number of fully paid and nonassessable shares of Common
Stock as is determined by dividing $6.00 by the Conversion Price (as defined
below) applicable to such shares, determined as hereafter provided, in effect on
the date the certificate is surrendered for conversion. Initially the conversion
price shall be $6.00 per share of Common Stock, which price shall be adjusted as
hereinafter provided (and, as so adjusted, is hereinafter referred to as the
"Conversion Price"). If a holder of Series D Preferred Stock elects to convert
his, her or its Series D Preferred Stock at a time when there are any accrued
and unpaid dividends or other amounts due on such shares (including any
Participating Dividends), such dividends and other amounts shall, to the extent
permitted by applicable law, be paid in full by the Corporation in connection
with such conversion.
(b) AUTOMATIC CONVERSION. Each share of Series D Preferred
Stock outstanding shall automatically, and without the requirement of any
consent of any holder, be converted into the number of shares of Common Stock
into which such shares are convertible at the then effective Conversion Price:
(i) upon the closing of a firm commitment underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock of the Corporation to the
public at a minimum price of $7.50 per share (adjusted to reflect subsequent
stock dividends, stock splits, contributions or recapitalizations) and pursuant
to which the gross proceeds received by the Corporation equal or exceed
$7,500,000 (a "Qualified Public Offering"); (ii) upon a share exchange or merger
of the Corporation into or with another entity by means of any transaction or
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<PAGE>
series of transactions (except (x) a merger into or with a wholly owned
subsidiary of the Corporation with requisite stockholder approval or (y) a
merger in which the beneficial owners of the Corporation's outstanding capital
stock immediately prior to such transaction hold no less than 51% of the voting
power in the resulting entity), the effectuation by the Corporation of a
transaction or series of related transactions in which 50% or more of the voting
power of the Corporation is disposed of, or a sale of all or substantially all
of the assets of the Corporation; or (iii) upon approval by the holders of at
least two-thirds (2/3) of the then outstanding shares of Preferred Stock (on an
as-if converted basis). In connection with any conversion under this Section
4(b), each holder of Series D Preferred Stock shall be entitled to receive, upon
consummation of a Qualified Public Offering or other event giving rise to such
conversion, payment in full of all accrued and unpaid dividends and other
amounts due on such shares (including any Participating Dividends).
(c) CONVERSION PROCEDURES. Any holder of Series D Preferred
Stock converting such shares into shares of Common Stock pursuant to Section
4(a), or whose shares are automatically converted pursuant to Section 4(b),
shall surrender the certificate or certificates representing Series D Preferred
Stock being converted, duly assigned or endorsed for transfer to the Corporation
(or accompanied by duly executed stock powers relating thereto), at the
principal executive office of the Corporation or the offices of the transfer
agent for Series D Preferred Stock or such office or offices in the continental
United States of an agent for conversion as may from time to time be designated
by notice to the holders of Series D Preferred Stock by the Corporation,
accompanied, in the case of conversion pursuant to Section 4(a), by written
notice of conversion. Such notice of conversion shall (i) specify the number of
shares of Series D Preferred Stock to be converted, (ii) specify the name or
names in which such holder wishes the certificate or certificates for Common
Stock and for any Series D Preferred Stock not to be so converted to be issued,
(iii) include payment of any applicable transfer tax and (iv) specify the
address to which such holder wishes delivery to be made of such new certificates
to be issued upon such conversion. Upon surrender of a certificate representing
Series D Preferred Stock for conversion, the Corporation shall issue and send by
hand delivery, by courier or by first class mail (postage prepaid) to the holder
thereof or to such holder's designee, at the address designated by such holder,
a certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled upon conversion. In the event that there shall
have been surrendered a certificate or certificates representing Series D
Preferred Stock, only part of which are to be converted, the Corporation shall
issue and send to such holder or such holder's designee, in the manner set forth
in the preceding sentence, a new certificate or certificates representing the
number of shares of Series D Preferred Stock which shall not have been
converted.
(d) EFFECTIVE DATE OF CONVERSION. The issuance by the
Corporation of shares of Common Stock upon a conversion of Series D Preferred
Stock into shares of Common Stock made at the option of the holder thereof
pursuant to Section 4(a) hereof shall be effective as of the surrender of the
certificate or certificates for Series D Preferred Stock to be converted, duly
assigned or endorsed for transfer to the Corporation (or accompanied by duly
executed stock powers relating thereto). The issuance by the Corporation of
shares of Common Stock upon a conversion of Series D Preferred Stock into Common
Stock pursuant to Section 4(b) hereof shall be deemed to be effective
immediately prior to the closing of the Qualified Public Offering or upon the
effective date of the event giving rise to such conversion. On and after the
effective
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<PAGE>
date of conversion, the person or persons entitled to receive Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock.
(e) FRACTIONAL SHARES. The Corporation shall not be obligated
to deliver to holders of Series D Preferred Stock any fractional share of Common
Stock issuable upon any conversion of such Series D Preferred Stock, but in lieu
thereof may make a cash payment in respect thereof in any manner permitted by
law. Whether or not fractional shares are issuable upon such conversion shall be
determined on the basis of the total number of shares of Series D Preferred
Stock the holder is at the time converting into Common Stock and the number of
shares of Common Stock issuable upon such aggregate conversion.
(f) RESERVATION OF COMMON STOCK. The Corporation shall at all
times reserve and keep available out of its authorized and unissued Common
Stock, solely for issuance upon the conversion of Series D Preferred Stock as
herein provided, free from any preemptive rights or other obligations (except
such rights and obligations created in connection with the issuance of the
Series D Preferred Stock as are entered into by the holders thereof and the
Corporation), such number of shares of Common Stock as shall from time to time
be issuable upon the conversion of all the Series D Preferred Stock then
outstanding; provided, that the shares of Common Stock so reserved shall not be
reduced or affected in any manner whatsoever so long as any Series D Preferred
Stock is outstanding, except in the case of a reverse stock split or stock
combination. The Corporation shall prepare and shall use its reasonable business
efforts to obtain and keep in force such governmental or regulatory permits or
other authorizations as may be required by law, and shall comply with all
requirements as to registration, qualification or listing of Common Stock, in
order to enable the Corporation lawfully to issue and deliver to each holder of
record of Series D Preferred Stock such number of shares of its Common Stock as
shall from time to time be sufficient to effect the conversion of all shares of
Series D Preferred Stock then outstanding and convertible into shares of Common
Stock.
(g) ADJUSTMENTS TO CONVERSION PRICE. Upon the issuance of
additional shares of Common Stock as a dividend or other distribution on
outstanding Common Stock, the subdivision of outstanding shares of Common Stock
into a greater number of shares of Common Stock, or the combination of
outstanding shares of Common Stock into a smaller number of shares of Common
Stock, the Conversion Price shall, simultaneously with the happening of such
dividend, subdivision or combination, be adjusted by multiplying the then
effective Conversion Price by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such event and
the denominator of which shall be the number of shares of Common Stock
outstanding immediately after such event. An adjustment made pursuant to this
Section 4(g) shall be given effect, upon payment of such a dividend or
distribution, as of the record date for the determination of stockholders
entitled to receive such dividend or distribution (on a retroactive basis) and,
in the case of a subdivision or combination, immediately as of the effective
date thereof.
(h) OTHER ADJUSTMENTS. In the event the Corporation shall make
or issue, or fix a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
the Corporation other than shares of Common Stock, then and in each such event
lawful and adequate provision shall be made so that
7
<PAGE>
the holders of Series D Preferred Stock shall receive upon conversion thereof in
addition to the number of shares of Common Stock receivable thereupon, the
number of securities of the Corporation which they would have received had their
Series D Preferred Stock been converted into Common Stock on the date of such
event and had they thereafter, during the period from the date of such event to
and including the conversion date (calculated in accordance with Section 4(d)
hereof), retained such securities receivable by them as aforesaid during such
period, giving application to all adjustments called for during such period
under this Section 4 as applied to such distributed securities.
If the Common Stock issuable upon the conversion of the Series D
Preferred Stock shall be changed into the same or different number of shares of
any class or classes of stock, whether by reclassification or otherwise (other
than a subdivision or combination of shares or stock dividend provided for
above), then and in each such event the holder of each share of Series D
Preferred Stock shall have the right thereafter to convert each such share into
the kind and amount of shares of stock and other securities and property
receivable upon such reclassification or other change, by holders of the number
of shares of Common Stock into which such shares of Series D Preferred Stock
might have been converted immediately prior to such reclassification or change,
all subject to further adjustment as provided herein.
(i) OTHER DISTRIBUTIONS. In the event this Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by this Corporation or other persons, or assets (excluding
cash dividends), then, in each such case for the purpose of this Section 4(i),
the holders of the Preferred Stock shall be entitled to a proportionate share of
any such distribution as though they were the holders of the number of shares of
Common Stock of the Corporation into which their shares of Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
(j) NO IMPAIRMENT. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Preferred Stock against dilution or
other impairment.
(k) NOTICES OF ADJUSTMENT. In each case of an adjustment or
readjustment of the Conversion Price, the Corporation will furnish each holder
of Series D Preferred Stock with a certificate, prepared by the chief financial
officer of the Corporation, showing such adjustment or readjustment, and stating
in detail the facts upon which such adjustment or readjustment is based.
(l) NOTICES. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series D Preferred Stock shall
be in writing and shall be deemed given (i) five (5) days after having been sent
by registered or certified mail, return receipt requested, postage prepaid, or
(ii) one (1) day (or five (5) days in the case of international deliveries)
after the deposit with a nationally recognized overnight courier, having
specified next
8
<PAGE>
day delivery, with written verification of receipt. All notices shall be
addressed to each holder of record at the address of such holder appearing on
the books of the Corporation.
SECTION 5. NO REISSUANCE OF SERIES D PREFERRED STOCK. No share or
shares of Series D Preferred Stock acquired by the Corporation by reason of
redemption, purchase, conversion or otherwise shall be reissued, and all such
shares shall be canceled, retired, and eliminated from the shares which the
Corporation shall be authorized to issue. The Corporation may from time to time
take such appropriate corporate action as may be necessary to reduce the
authorized number of shares of Series D Preferred Stock accordingly.
SECTION 6. NOTICES OF RECORD DATE. In the event (i) the Corporation
establishes a record date to determine the holders of any class of securities
who are entitled to receive any dividend or other distribution, or (ii) there
occurs any capital reorganization of the Corporation, any reclassification or
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation, and any transfer of all or substantially all
of the assets of the Corporation to any other corporation, or any other entity
or person, or any voluntary or involuntary dissolution, liquidation or winding
up of the Corporation, the Corporation shall mail to each holder of Series D
Preferred Stock at least 20 days prior to the record date or the expected
effective date, as the case may be, specified therein, a notice specifying (a)
the date of such record date for the purpose of such dividend or distribution
and a description of such dividend or distribution, (b) the date on which any
such reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up is expected to become effective and (c)
the time, if any, that is to be fixed, as to when the holders of record of
Common Stock (or other securities) shall be entitled to exchange their shares of
Common Stock (or other securities) for securities or other property deliverable
upon such reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up.
SECTION 7. OTHER RIGHTS. Except as otherwise provided in this
Certificate of Designation, each share of Series D Preferred Stock and each
share of Common Stock shall be identical in all respects, shall have the same
powers, preferences and rights, without preference of any such class or share
over any other such class or share.
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<PAGE>
IN WITNESS WHEREOF, the undersigned has executed and subscribed this
Certificate and does affirm the foregoing as true as of the 2nd day of May,
2000.
Lineo, Inc.
a Delaware corporation
By /s/ Matthew R. Harris, Secretary
<PAGE>
STATE OF DELAWARE
-----------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF
THE CERTIFICATE OF DESIGNATION OF "LINEO, INC.", FILED IN THIS OFFICE
ON THE TWENTY-FIFTH DAY OF APRIL, A.D. 2000, AT 4:30 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS.
/s/ EDWARD J. FREEL, SECRETARY OF STATE
---------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 0401770
DATE: 04-26-00
<PAGE>
CERTIFICATE OF DESIGNATION
OF THE
RELATIVE RIGHTS AND PREFERENCES
OF THE
SERIES C CONVERTIBLE PREFERRED STOCK
OF
LINEO, INC.
The undersigned, the President and Chairman of Lineo, Inc., a Delaware
corporation (the "Corporation"), does hereby certify that, pursuant to the
authority conferred upon the Board of Directors by the Certificate of
Incorporation of the Corporation, the following resolution creating a series of
Series C Convertible Preferred Stock was duly adopted by the Board of Directors
of the Corporation as of April 25, 2000:
RESOLVED, that pursuant to the authority expressly granted to and
vested in this Board of Directors by the provisions of the Certificate of
Incorporation of the Corporation, this Board of Directors hereby creates a
series of preferred stock (the "Preferred Stock"), $.001 par value per share, of
the Corporation to be designated as Series C Convertible Preferred Stock,
initially consisting of 3,000,000 shares. Except as provided herein or as
required by law, the relative rights and preferences of the Series C Convertible
Preferred Stock shall be as follows:
SERIES C CONVERTIBLE PREFERRED STOCK
The Corporation hereby designates 3,000,000 shares of the Preferred
Stock as Series C Convertible Preferred Stock (the "Series C Preferred Stock"),
which shall have the following rights, preferences and terms:
SECTION 8. DIVIDENDS. The holders of Series C Preferred Stock shall be
entitled to receive dividends, out of any assets legally available therefor, at
the same rate as dividends are paid with respect to Series A Class 1 and Class 2
Convertible Preferred Stock (together, the "Series A Preferred Stock"), Series B
Convertible Preferred Stock (the "Series B Preferred Stock") and (other than
dividends paid in additional shares of Common Stock) with respect to the Common
Stock (treating each share of Series C Preferred Stock as being equal to the
number of shares of Common Stock into which each such share of Series C
Preferred Stock could be converted pursuant to the provisions of Section 4
hereof with such number determined as of the record date for the determination
of holders of Common Stock entitled to receive such dividend) (the
"Participating Dividends"). Dividends shall be paid by forwarding a check,
postage prepaid, to the address of each holder (or, in the case of joint
holders, to the address of any such holder) of Series C Preferred Stock and/or
Common Stock, as applicable, as shown on the books of the Corporation, or to
such other address as such holder specifies for such purpose by written notice
to the Corporation.
<PAGE>
SECTION 9. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, each holder of outstanding
shares of Series C Preferred Stock shall be entitled to be paid out of the
assets of the Corporation available for distribution to stockholders, whether
such assets are capital, surplus or earnings, on a PARI PASSU basis with each
holder of outstanding shares of Series A Preferred Stock, Series B Preferred
Stock and any other stock ranking on liquidation PARI PASSU therewith, and
before any amount shall be paid or distributed to the holders of any class of
Common Stock or of any other stock ranking on liquidation junior to the Series C
Preferred Stock, an amount in cash equal to $6.00 per share (adjusted
appropriately for stock splits, stock dividends and the like) together with
declared but unpaid dividends to which the holders of outstanding shares of
Series C Preferred Stock are entitled pursuant to Section 1 hereof; provided,
however, that if, upon any liquidation, dissolution or winding up of the
Corporation, the amounts payable with respect to the Series C Preferred Stock,
the Series A Preferred Stock, the Series B Preferred Stock and any other stock
ranking on liquidation PARI PASSU therewith are not paid in full, then each
holder of Series C Preferred Stock, Series A Preferred Stock, Series B Preferred
Stock and any other stock ranking on liquidation PARI PASSU therewith shall
share ratably in any distribution of assets in proportion to the full respective
preferential amounts to which such holder is entitled.
(b) After payment of the full liquidation preference of the
Series C Preferred Stock, Series A Preferred Stock and Series B Preferred Stock
(collectively, the "Preferred Stock") as provided in Section 2(a) and any other
applicable liquidation preferences payable to holders of outstanding Preferred
Stock, any remaining assets of the Corporation then available for distribution
shall be distributed ratably among the holders of the Preferred Stock (on an
as-if converted basis) and the Common Stock.
(c) A share exchange or merger of the Corporation into or with
another entity by means of any transaction or series of transactions (except (i)
a merger into or with a wholly owned subsidiary of the Corporation with
requisite stockholder approval or (ii) a merger in which the beneficial owners
of the Corporation's outstanding capital stock immediately prior to such
transaction hold no less than 51% of the voting power in the resulting entity),
the effectuation by the Corporation of a transaction or series of related
transactions in which 50% or more of the voting power of the Corporation is
disposed of, or a sale of all or substantially all of the assets of the
Corporation shall be regarded as a liquidation, dissolution or winding up of the
affairs of the Corporation within the meaning of this Section 2; provided,
however, that each holder of Series C Preferred Stock shall have the right to
convert his, her or its shares of Series C Preferred Stock to Common Stock
pursuant to Section 4(a) hereof in lieu of receiving payment in liquidation,
dissolution or winding up of the Corporation pursuant to this Section 2. Notice
of such conversion shall be submitted in accordance with the provisions of
Section 4(c) hereof no later than ten (10) days before the effective date of
such event, provided that any such notice shall be effective if given not later
than fifteen (15) days after the date of the Corporation's notice, pursuant to
Section 6, with respect to such event.
(d) If any of the assets of the Corporation are to be
distributed other than in cash under this Section 2 or for any purpose, then the
Board of Directors of the Corporation shall
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<PAGE>
promptly engage independent competent appraisers to determine the value of the
assets to be distributed.
(i) The Corporation shall, upon receipt of such
appraiser's valuation, give prompt written notice thereof to each holder of
shares of the Corporation's capital stock. Notwithstanding the above, any
securities to be distributed shall be valued as follows:
(A) if traded on a securities exchange or
through the Nasdaq National Market, the value shall be deemed to be the average
of the closing prices of the securities on such exchange over the 30-day period
ending three (3) business days prior to the distribution;
(B) if actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the 30-day period ending three (3) business days
prior to the distribution; and
(C) if there is no active public market, the
value shall be the fair market value thereof, as determined in good faith by the
Board of Directors and the holders of Preferred Stock.
(ii) The method of valuation of securities subject to
an investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (d)(i) to reflect the approximate fair market value
thereof, as mutually determined by the Corporation and the holders of at least a
majority of the voting power of all then outstanding shares of Preferred Stock.
(iii) In the event the requirements of this
subsection 2(d) are not complied with, the Corporation shall forthwith either:
(A) cause such closing to be postponed until
such time as the requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event
the rights, preferences and privileges of the holders of the Preferred Stock
shall revert to and be the same as such rights, preferences and privileges
existing immediately prior to the date of the first notice referred to in
subsection 2(d)(iv) hereof.
(iv) The Corporation shall give each holder of record
of Preferred Stock written notice of such impending transaction not later than
20 days prior to the stockholders' meeting called to approve such transaction,
or 20 days prior to the closing of such transaction, whichever is earlier, and
shall notify such holders in writing of the final approval of such transaction.
The first of such notices shall describe the material terms and conditions of
the impending transaction and the provisions of this Section 2, and the
Corporation shall thereafter give such holders prompt notice of any material
changes. The transaction shall in no event take place sooner than 20 days after
this Corporation has given the first notice provided for herein or sooner than
10 days after this Corporation has given notice of any material changes provided
for herein; provided, however, that such periods may be shortened upon the
written consent of the
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<PAGE>
holders of Preferred Stock that are entitled to such notice rights or similar
notice rights and that represent at least a majority of the voting power of all
then outstanding shares of Preferred Stock.
(e) Notices. Any notice required by the provisions of this
Section 2 to be given to the holders of shares of Series C Preferred Stock shall
be in writing and shall be deemed given (i) five (5) days after having been sent
by registered or certified mail, return receipt requested, postage prepaid, or
(ii) one (1) day (or five (5) days in the case of international deliveries)
after the deposit with a nationally recognized overnight courier, having
specified next day delivery, with written verification of receipt. All notices
shall be addressed to each holder of record at the address of such holder
appearing on the books of the Corporation.
SECTION 10. VOTING POWER. Except as otherwise expressly provided herein
or as required by law, the holder of each share of Series C Preferred Stock
shall be entitled to vote on all matters submitted to a vote of the holders of
outstanding voting securities. Each share of Series C Preferred Stock shall
entitle the holder thereof to such number of votes per share as shall equal the
number of shares of Common Stock into which each share of Series C Preferred
Stock is convertible as of the record date for the determination of stockholders
entitled to vote on or consent to such matters or, if no such record date is
established, as of the date on which notice of such meeting is mailed or the
date any written consent of stockholders is solicited. Except as otherwise
expressly provided herein or as required by law, the holders of shares of the
Preferred Stock and the Common Stock shall vote together as a single class on
all matters. In all cases where class voting is required herein or is required
by law, Series C Preferred Stock shall be considered a separate class.
SECTION 11. CONVERSION. The holders of Series C Preferred Stock shall
have the following conversion rights:
(a) VOLUNTARY CONVERSION. Holders of the outstanding shares of
Series C Preferred Stock shall be entitled, at any time and from time to time
after the date hereof, to cause any or all of such holder's shares to be
converted into such number of fully paid and nonassessable shares of Common
Stock as is determined by dividing $6.00 by the Conversion Price (as defined
below) applicable to such shares, determined as hereafter provided, in effect on
the date the certificate is surrendered for conversion. Initially the conversion
price shall be $6.00 per share of Common Stock, which price shall be adjusted as
hereinafter provided (and, as so adjusted, is hereinafter referred to as the
"Conversion Price"). If a holder of Series C Preferred Stock elects to convert
his, her or its Series C Preferred Stock at a time when there are any accrued
and unpaid dividends or other amounts due on such shares (including any
Participating Dividends), such dividends and other amounts shall, to the extent
permitted by applicable law, be paid in full by the Corporation in connection
with such conversion.
(b) AUTOMATIC CONVERSION. Each share of Series C Preferred
Stock outstanding shall automatically, and without the requirement of any
consent of any holder, be converted into the number of shares of Common Stock
into which such shares are convertible at the then effective Conversion Price:
(i) upon the closing of a firm commitment underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock of the Corporation to the
public at a minimum price of $10.00 per share (adjusted to reflect subsequent
stock dividends, stock splits,
15
<PAGE>
contributions or recapitalizations) and pursuant to which the gross proceeds
received by the Corporation equal or exceed $15,000,000 (a "Qualified Public
Offering"); (ii) upon approval by the holders of at least two-thirds (2/3) of
the then outstanding shares of Series C Preferred Stock; or (iii) upon the
cumulative conversion of at least two-thirds (2/3) of the then outstanding
shares of Series C Preferred Stock pursuant to Section 2(a) hereof. In
connection with any conversion under this Section 4(b), each holder of Series C
Preferred Stock shall be entitled to receive, upon consummation of a Qualified
Public Offering or other event giving rise to such conversion, payment in full
of all accrued and unpaid dividends and other amounts due on such shares
(including any Participating Dividends).
(c) CONVERSION PROCEDURES. Any holder of Series C Preferred
Stock converting such shares into shares of Common Stock pursuant to Section
4(a), or whose shares are automatically converted pursuant to Section 4(b),
shall surrender the certificate or certificates representing Series C Preferred
Stock being converted, duly assigned or endorsed for transfer to the Corporation
(or accompanied by duly executed stock powers relating thereto), at the
principal executive office of the Corporation or the offices of the transfer
agent for Series C Preferred Stock or such office or offices in the continental
United States of an agent for conversion as may from time to time be designated
by notice to the holders of Series C Preferred Stock by the Corporation,
accompanied, in the case of conversion pursuant to Section 4(a), by written
notice of conversion. Such notice of conversion shall (i) specify the number of
shares of Series C Preferred Stock to be converted, (ii) specify the name or
names in which such holder wishes the certificate or certificates for Common
Stock and for any Series C Preferred Stock not to be so converted to be issued,
(iii) include payment of any applicable transfer tax and (iv) specify the
address to which such holder wishes delivery to be made of such new certificates
to be issued upon such conversion. Upon surrender of a certificate representing
Series C Preferred Stock for conversion, the Corporation shall issue and send by
hand delivery, by courier or by first class mail (postage prepaid) to the holder
thereof or to such holder's designee, at the address designated by such holder,
a certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled upon conversion. In the event that there shall
have been surrendered a certificate or certificates representing Series C
Preferred Stock, only part of which are to be converted, the Corporation shall
issue and send to such holder or such holder's designee, in the manner set forth
in the preceding sentence, a new certificate or certificates representing the
number of shares of Series C Preferred Stock which shall not have been
converted.
(d) EFFECTIVE DATE OF CONVERSION. The issuance by the
Corporation of shares of Common Stock upon a conversion of Series C Preferred
Stock into shares of Common Stock made at the option of the holder thereof
pursuant to Section 4(a) hereof shall be effective as of the surrender of the
certificate or certificates for Series C Preferred Stock to be converted, duly
assigned or endorsed for transfer to the Corporation (or accompanied by duly
executed stock powers relating thereto). The issuance by the Corporation of
shares of Common Stock upon a conversion of Series C Preferred Stock into Common
Stock pursuant to Section 4(b) hereof shall be deemed to be effective
immediately prior to the closing of the Qualified Public Offering or upon the
effective date of the event giving rise to such conversion. On and after the
effective date of conversion, the person or persons entitled to receive Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock.
16
<PAGE>
(e) FRACTIONAL SHARES. The Corporation shall not be obligated
to deliver to holders of Series C Preferred Stock any fractional share of Common
Stock issuable upon any conversion of such Series C Preferred Stock, but in lieu
thereof may make a cash payment in respect thereof in any manner permitted by
law. Whether or not fractional shares are issuable upon such conversion shall be
determined on the basis of the total number of shares of Series C Preferred
Stock the holder is at the time converting into Common Stock and the number of
shares of Common Stock issuable upon such aggregate conversion.
(f) RESERVATION OF COMMON STOCK. The Corporation shall at all
times reserve and keep available out of its authorized and unissued Common
Stock, solely for issuance upon the conversion of Series C Preferred Stock as
herein provided, free from any preemptive rights or other obligations (except
such rights and obligations created in connection with the issuance of the
Series C Preferred Stock as are entered into by the holders thereof and the
Corporation), such number of shares of Common Stock as shall from time to time
be issuable upon the conversion of all the Series C Preferred Stock then
outstanding provided that the shares of Common Stock so reserved shall not be
reduced or affected in any manner whatsoever so long as any Series C Preferred
Stock is outstanding, except in the case of a reverse stock split or stock
combination. The Corporation shall prepare and shall use its reasonable business
efforts to obtain and keep in force such governmental or regulatory permits or
other authorizations as may be required by law, and shall comply with all
requirements as to registration, qualification or listing of Common Stock, in
order to enable the Corporation lawfully to issue and deliver to each holder of
record of Series C Preferred Stock such number of shares of its Common Stock as
shall from time to time be sufficient to effect the conversion of all shares of
Series C Preferred Stock then outstanding and convertible into shares of Common
Stock.
(g) ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price in
effect from time to time shall be subject to adjustment as follows:
(i) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS.
Upon the issuance of additional shares of Common Stock as a dividend or other
distribution on outstanding Common Stock, the subdivision of outstanding shares
of Common Stock into a greater number of shares of Common Stock, or the
combination of outstanding shares of Common Stock into a smaller number of
shares of Common Stock, the Conversion Price shall, simultaneously with the
happening of such dividend, subdivision or combination, be adjusted by
multiplying the then effective Conversion Price by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such event and the denominator of which shall be the number of shares
of Common Stock outstanding immediately after such event. An adjustment made
pursuant to this Section 4(g)(i) shall be given effect, upon payment of such a
dividend or distribution, as of the record date for the determination of
stockholders entitled to receive such dividend or distribution (on a retroactive
basis) and, in the case of a subdivision or combination, immediately as of the
effective date thereof.
(ii) SALE OF COMMON STOCK. In the event the
Corporation shall at any time or from time to time while Series C Preferred
Stock is outstanding, issue, sell or exchange any shares of Common Stock
(including shares held in the Corporation's treasury, but excluding: (i) any
Common Stock which may be issued upon conversion of the Preferred Stock, and
(ii) up to 5,000,000 shares of Common Stock issued to officers, directors,
employees, consultants or
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agents of the Corporation pursuant to the Corporation's 1999 Stock Option Plan
(the "Plan") or upon the exercise of options issued pursuant to such Plan, or
such greater number of shares as may be issuable pursuant to the adjustment
provisions of such Plan as in effect on the date hereof (collectively, the
"Excluded Shares")), for a consideration per share less than the Conversion
Price in effect immediately prior to the issuance, sale or exchange of such
shares (any such issuance, sale or exchange hereinafter referred to as a
"Dilutive Transaction"), then, and thereafter successively upon the consummation
of any Dilutive Transaction, the Conversion Price in effect immediately prior to
the Dilutive Transaction shall forthwith be reduced to an amount (calculated to
the nearest cent) determined by multiplying such Conversion Price by a fraction:
(A) the numerator of which shall be (1) the number of shares
of Common Stock of all classes outstanding immediately prior to the
Dilutive Transaction (excluding treasury shares but including all
shares of Common Stock issuable upon conversion or exercise of any
outstanding Preferred Stock, options, warrants, rights or convertible
securities), plus (2) the number of shares of Common Stock which the
net aggregate consideration received by the Corporation for the total
number of such additional shares of Common Stock so issued in the
Dilutive Transaction would purchase at the Conversion Price (prior to
adjustment), and
(B) the denominator of which shall be (1) the number of shares
of Common Stock of all classes outstanding immediately prior to the
Dilutive Transaction (excluding treasury shares but including all
shares of Common Stock issuable upon conversion or exercise of any
outstanding Preferred Stock, options, warrants, rights or convertible
securities), plus (2) the number of such additional shares of Common
Stock so issued in the Dilutive Transaction.
(iii) SALE OF OPTIONS, RIGHTS OR CONVERTIBLE
SECURITIES. In the event the Corporation shall at any time or from time to time
while the Series C Preferred Stock is outstanding, issue options, warrants or
rights to subscribe for shares of Common Stock (other than any options for
Excluded Shares), or issue any securities convertible into or exercisable or
exchangeable for shares of Common Stock, for a consideration per share
(determined by dividing the Net Aggregate Consideration (as determined below) by
the aggregate number of shares of Common Stock that would be issued if all such
options, warrants, rights or convertible securities were exercised or converted
to the fullest extent permitted by their terms) less than the Conversion Price
in effect immediately prior to the issuance of such options or rights or
convertible or exchangeable securities, the Conversion Price in effect
immediately prior to the issuance of such options, warrants or rights or
securities shall be reduced to an amount determined by multiplying such
Conversion Price by a fraction:
(A) the numerator of which shall be (1) the number of shares
of Common Stock of all classes outstanding immediately prior to the
issuance of such options, rights or convertible securities (excluding
treasury shares but including all shares of Common Stock issuable upon
conversion or exercise of any outstanding Preferred Stock, options,
warrants, rights or convertible securities), plus (2) the number of
shares of Common Stock which the total amount of consideration received
by the Corporation for the issuance of such options, warrants, rights
or convertible securities PLUS the minimum
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<PAGE>
amount set forth in the terms of such security as payable to the
Corporation upon the exercise or conversion thereof (the "Net Aggregate
Consideration") would purchase at the Conversion Price prior to
adjustment, and
(B) the denominator of which shall be (1) the number of shares
of Common Stock of all classes outstanding immediately prior to the
issuance of such options, warrants, rights or convertible securities
(excluding treasury shares but including all shares of Common Stock
issuable upon conversion or exercise of any outstanding Preferred
Stock, options, warrants, rights or convertible securities), plus (2)
the aggregate number of shares of Common Stock that would be issued if
all such options, warrants, rights or convertible securities were
exercised or converted.
(iv) EXPIRATION OR CHANGE IN PRICE. If the
consideration per share provided for in any options or rights to subscribe for
shares of Common Stock or any securities exercisable or exchangeable for or
convertible into shares of Common Stock changes at any time, the Conversion
Price in effect at the time of such change shall be readjusted to the Conversion
Price which would have been in effect at such time had such options or
convertible securities provided for such changed consideration per share
(determined as provided in Section 4(g)(iii) hereof) at the time initially
granted, issued or sold; PROVIDED, that such adjustment of the Conversion Price
will be made only as and to the extent that the Conversion Price effective upon
such adjustment remains less than or equal to the Conversion Price that would be
in effect if such options, rights or securities had not been issued. No
adjustment of the Conversion Price shall be made under this Section 4 upon the
issuance of any additional shares of Common Stock which are issued pursuant to
the exercise of any warrants, options or other subscription or purchase rights
or pursuant to the exercise of any conversion or exchange rights in any
convertible securities if an adjustment shall previously have been made upon the
issuance of such warrants, options or other rights. Any adjustment of the
Conversion Price shall be disregarded if, as, and when the rights to acquire
shares of Common Stock upon exercise or conversion of the warrants, options,
rights or convertible securities which gave rise to such adjustment expire or
are canceled without having been exercised, so that the Conversion Price
effective immediately upon such cancellation or expiration shall be equal to the
Conversion Price in effect at the time of the issuance of the expired or
canceled warrants, options, rights or convertible securities, with such
additional adjustments as would have been made to that Conversion Price had the
expired or canceled warrants, options, rights or convertible securities not been
issued.
(h) OTHER ADJUSTMENTS. In the event the Corporation shall make
or issue, or fix a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
the Corporation other than shares of Common Stock, then and in each such event
lawful and adequate provision shall be made so that the holders of Series C
Preferred Stock shall receive upon conversion thereof in addition to the number
of shares of Common Stock receivable thereupon, the number of securities of the
Corporation which they would have received had their Series C Preferred Stock
been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
conversion date (calculated in accordance with Section 4(d) hereof), retained
such securities receivable by them as aforesaid during such period, giving
application to all adjustments called for during such period under this Section
4 as applied to such distributed securities.
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<PAGE>
If the Common Stock issuable upon the conversion of the Series C
Preferred Stock shall be changed into the same or different number of shares of
any class or classes of stock, whether by reclassification or otherwise (other
than a subdivision or combination of shares or stock dividend provided for
above), then and in each such event the holder of each share of Series C
Preferred Stock shall have the right thereafter to convert each such share into
the kind and amount of shares of stock and other securities and property
receivable upon such reclassification or other change, by holders of the number
of shares of Common Stock into which such shares of Series C Preferred Stock
might have been converted immediately prior to such reclassification or change,
all subject to further adjustment as provided herein.
(i) OTHER DISTRIBUTIONS. In the event this Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by this Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in Section 4(g)(iii), then, in
each such case for the purpose of this Section 4(i), the holders of the
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Corporation into which their shares of Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
(j) NO IMPAIRMENT. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Preferred Stock against dilution or
other impairment.
(k) NOTICES OF ADJUSTMENT. In each case of an adjustment or
readjustment of the Conversion Price, the Corporation will furnish each holder
of Series C Preferred Stock with a certificate, prepared by the chief financial
officer of the Corporation, showing such adjustment or readjustment, and stating
in detail the facts upon which such adjustment or readjustment is based.
(l) NOTICES. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series C Preferred Stock shall
be in writing and shall be deemed given (i) five (5) days after having been sent
by registered or certified mail, return receipt requested, postage prepaid, or
(ii) one (1) day (or five (5) days in the case of international deliveries)
after the deposit with a nationally recognized overnight courier, having
specified next day delivery, with written verification of receipt. All notices
shall be addressed to each holder of record at the address of such holder
appearing on the books of the Corporation.
SECTION 12. NO REISSUANCE OF SERIES C PREFERRED STOCK. No share or
shares of Series C Preferred Stock acquired by the Corporation by reason of
redemption, purchase, conversion or otherwise shall be reissued, and all such
shares shall be canceled, retired, and eliminated from the shares which the
Corporation shall be authorized to issue. The Corporation may from time to time
take such appropriate corporate action as may be necessary to reduce the
authorized number of shares of Series C Preferred Stock accordingly.
20
<PAGE>
SECTION 13. NOTICES OF RECORD DATE. In the event (i) the Corporation
establishes a record date to determine the holders of any class of securities
who are entitled to receive any dividend or other distribution, or (ii) there
occurs any capital reorganization of the Corporation, any reclassification or
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation, and any transfer of all or substantially all
of the assets of the Corporation to any other corporation, or any other entity
or person, or any voluntary or involuntary dissolution, liquidation or winding
up of the Corporation, the Corporation shall mail to each holder of Series C
Preferred Stock at least 20 days prior to the record date or the expected
effective date, as the case may be, specified therein, a notice specifying (a)
the date of such record date for the purpose of such dividend or distribution
and a description of such dividend or distribution, (b) the date on which any
such reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up is expected to become effective and (c)
the time, if any, that is to be fixed, as to when the holders of record of
Common Stock (or other securities) shall be entitled to exchange their shares of
Common Stock (or other securities) for securities or other property deliverable
upon such reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up.
SECTION 14. PROTECTIVE PROVISION. So long as any shares of Series C
Preferred Stock remain outstanding, the Corporation shall not without the
affirmative vote or written consent of the holders of two-thirds in interest of
the Series C Preferred Stock voting as a class:
(a) sell, lease or otherwise dispose of (whether in one
transaction or a series of related transactions) more than 50% of its assets or
business,
(b) merge with or into or consolidate with another entity or
enter into or engage in any other transaction or series of related transactions,
in any such case in connection with or as a result of which the Corporation is
not the surviving entity or the owners of the Corporation's outstanding equity
securities immediately prior to the transaction or series of related
transactions do not own at least a majority of the outstanding equity securities
of the surviving, resulting or consolidated entity,
(c) dissolve, liquidate or wind up its operations,
(d) adopt any amendment to this Certificate of Designation, or
any amendment to its Certificate of Incorporation or Bylaws, that eliminates,
amends, restricts or otherwise adversely affects the rights and preferences of
the Series C Preferred Stock, or that increases the authorized shares of the
Series C Preferred Stock,
(e) declare or make dividend payments on any shares of its
Common Stock or any other class of its capital stock,
(f) create, or obligate itself to create, any class or series
of shares or any other security that has a preference over or is on parity with
the Series C Preferred Stock,
(g) increase the size of the Board of Directors of the
Corporation to more than five (5) members,
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<PAGE>
(h) redeem, purchase or otherwise acquire (or pay into or set
aside funds for a sinking fund for such purpose) any share or shares of
Preferred Stock or Common Stock; PROVIDED, HOWEVER, that this restriction shall
not apply to the repurchase of shares of Common Stock from employees, officers,
directors, consultants or other persons performing services for the Corporation
or any subsidiary pursuant to agreements under which the Corporation has the
right to repurchase such shares and such repurchase is approved by the
Corporation's Board of Directors,
(i) permit a subsidiary of the Corporation to sell or issue
securities to a third party, except in connection with joint ventures or other
strategic relationships approved by the Corporation's Board of Directors,
(j) increase (other than by conversion) the authorized number
of shares of Preferred Stock, or
(k) make a fundamental change in the principal business of the
Corporation as presently conducted or proposed to be conducted.
SECTION 15. OTHER RIGHTS. Except as otherwise provided in this
Certificate of Designation, each share of Series C Preferred Stock, each share
of Series A Preferred Stock, each share of Series B Preferred Stock and each
share of Common Stock shall be identical in all respects, shall have the same
powers, preferences and rights, without preference of any such class or share
over any other such class or share.
IN WITNESS WHEREOF, the undersigned has executed and subscribed this
Certificate and does affirm the foregoing as true as of the 25th day of April,
2000.
Lineo, Inc.
a Delaware corporation
By /s/ Bryan Sparks, President and Chairman
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<PAGE>
STATE OF DELAWARE
Office of the Secretary of State
-----------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF
THE CERTIFICATE OF DESIGNATION OF "LINEO, INC.", FILED IN THIS OFFICE
ON THE FOURTEENTH DAY OF MARCH, A.D. 2000, AT 2:30 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS.
/s/ EDWARD J. FREEL, SECRETARY OF STATE
---------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 0345590
DATE: 03-28-00
<PAGE>
CERTIFICATE OF DESIGNATION
OF THE
RELATIVE RIGHTS AND PREFERENCES
OF THE
SERIES B CONVERTIBLE PREFERRED STOCK
OF
LINEO, INC.
The undersigned, the President and Chairman of Lineo, Inc., a Delaware
corporation (the "Corporation"), does hereby certify that, pursuant to the
authority conferred upon the Board of Directors by the Certificate of
Incorporation of the Corporation, the following resolution creating a series of
Series B Convertible Preferred Stock was duly adopted by the Board of Directors
of the Corporation as of February 29, 2000:
RESOLVED, that pursuant to the authority expressly granted to and
vested in this Board of Directors by the provisions of the Certificate of
Incorporation of the Corporation, this Board of Directors hereby creates a
series of preferred stock (the "Preferred Stock"), $.001 par value per share, of
the Corporation to be designated as Series B Convertible Preferred Stock,
initially consisting of 4,850,000 shares. Except as provided herein or as
required by law, the relative rights and preferences of the Series B Convertible
Preferred Stock shall be as follows:
SERIES B CONVERTIBLE PREFERRED STOCK
The Corporation hereby designates 4,850,000 shares of the Preferred
Stock as Series B Convertible Preferred Stock (the "Series B Preferred Stock"),
which shall have the following rights, preferences and terms:
SECTION 16. DIVIDENDS. The holders of Series B Preferred Stock shall be
entitled to receive dividends at the same rate as dividends are paid with
respect to Series A Class 1 and Class 2 Convertible Preferred Stock (together,
the "Series A Preferred Stock") and (other than dividends paid in additional
shares of Common Stock) with respect to the Common Stock (treating each share of
Series B Preferred Stock as being equal to the number of shares of Common Stock
into which each such share of Series B Preferred Stock could be converted
pursuant to the provisions of Section 4 hereof with such number determined as of
the record date for the determination of holders of Common Stock entitled to
receive such dividend) (the "Participating Dividends"). Dividends shall be paid
by forwarding a check, postage prepaid, to the address of each holder (or, in
the case of joint holders, to the address of any such holder) of Series B
Preferred Stock and/or Common Stock, as applicable, as shown on the books of the
Corporation, or to such other address as such holder specifies for such purpose
by written notice to the Corporation.
SECTION 17. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, each holder of outstanding
shares of Series B Preferred Stock
<PAGE>
shall be entitled to be paid out of the assets of the Corporation available for
distribution to stockholders, whether such assets are capital, surplus or
earnings, on a PARI PASSU basis with each holder of outstanding shares of Series
A Preferred Stock and any other stock ranking on liquidation PARI PASSU
therewith, and before any amount shall be paid or distributed to the holders of
any class of Common Stock or of any other stock ranking on liquidation junior to
the Series B Preferred Stock, an amount in cash equal to $3.00 per share
(adjusted appropriately for stock splits, stock dividends and the like) together
with declared but unpaid dividends to which the holders of outstanding shares of
Series B Preferred Stock are entitled pursuant to Section 1 hereof; provided,
however, that if, upon any liquidation, dissolution or winding up of the
Corporation, the amounts payable with respect to the Series B Preferred Stock,
the Series A Preferred Stock and any other stock ranking on liquidation PARI
PASSU therewith are not paid in full, then each holder of Series B Preferred
Stock, Series A Preferred Stock and any other stock ranking on liquidation PARI
PASSU therewith shall share ratably in any distribution of assets in proportion
to the full respective preferential amounts to which such holder is entitled.
(b) After payment of the full liquidation preference of the
Series B Preferred Stock and Series A Preferred Stock as provided in Section
2(a) and any other applicable liquidation preferences payable to holders of
outstanding Preferred Stock, any remaining assets of the Corporation then
available for distribution shall be distributed ratably among the holders of the
Preferred Stock (on an as-if converted basis) and the Common Stock.
(c) A share exchange or merger of the Corporation (except (i)
a merger into or with a wholly owned subsidiary of the Corporation with
requisite stockholder approval or (ii) a merger in which the beneficial owners
of the Corporation's outstanding capital stock immediately prior to such
transaction hold no less than 51% of the voting power in the resulting entity)
or a sale of all or substantially all of the assets of the Corporation shall be
regarded as a liquidation, dissolution or winding up of the affairs of the
Corporation within the meaning of this Section 2; provided, however, that each
holder of Series B Preferred Stock shall have the right to convert his, her or
its shares of Series B Preferred Stock to Common Stock pursuant to Section 4(a)
hereof in lieu of receiving payment in liquidation, dissolution or winding up of
the Corporation pursuant to this Section 2. Notice of such conversion shall be
submitted in accordance with the provisions of Section 4(c) hereof no later than
ten (10) days before the effective date of such event, provided that any such
notice shall be effective if given not later than fifteen (15) days after the
date of the Corporation's notice, pursuant to Section 6, with respect to such
event.
(d) If any of the assets of the Corporation are to be
distributed other than in cash under this Section 2 or for any purpose, then the
Board of Directors of the Corporation shall promptly engage independent
competent appraisers to determine the value of the assets to be distributed. The
Corporation shall, upon receipt of such appraiser's valuation, give prompt
written notice thereof to each holder of shares of the Corporation's capital
stock. Notwithstanding the above, any securities to be distributed shall be
valued as follows:
(i) if traded on a securities exchange, the value
shall be deemed to be the average of the closing prices of the securities on
such exchange over the 30-day period ending three (3) business days prior to the
distribution;
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<PAGE>
(ii) if actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid prices over the 30-day
period ending three (3) business days prior to the distribution; and
(iii) if there is no active public market, the value
shall be the fair market value thereof, as determined in good faith by the Board
of Directors and the holders of Preferred Stock.
SECTION 18. VOTING POWER. Except as otherwise expressly provided herein
or as required by law, the holder of each share of Series B Preferred Stock
shall be entitled to vote on all matters submitted to a vote of the holders of
outstanding voting securities. Each share of Series B Preferred Stock shall
entitle the holder thereof to such number of votes per share as shall equal the
number of shares of Common Stock into which each share of Series B Preferred
Stock is convertible as of the record date for the determination of stockholders
entitled to vote on or consent to such matters or, if no such record date is
established, as of the date on which notice of such meeting is mailed or the
date any written consent of stockholders is solicited. Except as otherwise
expressly provided herein or as required by law, the holders of shares of the
Preferred Stock and the Common Stock shall vote together as a single class on
all matters. In all cases where class voting is required herein or is required
by law, Series B Preferred Stock shall be considered a separate class.
SECTION 19. CONVERSION. The holders of Series B Preferred Stock shall
have the following conversion rights:
(a) VOLUNTARY CONVERSION. Holders of the outstanding shares of
Series B Preferred Stock shall be entitled, at any time and from time to time
after the date hereof, to cause any or all of such holder's shares to be
converted into such number of fully paid and nonassessable shares of Common
Stock as is determined by dividing $3.00 by the conversion price applicable to
such shares, determined as hereafter provided, in effect on the date the
certificate is surrendered for conversion. Initially the conversion price shall
be $3.00 per share of Common Stock, which price shall be adjusted as hereinafter
provided (and, as so adjusted, is hereinafter sometimes referred to as the
"Conversion Price"). If a holder of Series B Preferred Stock elects to convert
his, her or its Series B Preferred Stock at a time when there are any accrued
and unpaid dividends or other amounts due on such shares (including any
Participating Dividends), such dividends and other amounts shall, to the extent
permitted by applicable law, be paid in full by the Corporation in connection
with such conversion.
(b) AUTOMATIC CONVERSION. Each share of Series B Preferred
Stock outstanding shall automatically, and without the requirement of any
consent of any holder, be converted into the number of shares of Common Stock
into which such shares are convertible at the then effective Conversion Price:
(i) upon the closing of a firm commitment underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock of the Corporation to the
public at a minimum price of $10.00 per share and pursuant to which the gross
proceeds received by the Corporation equal or exceed $15,000,000 (a "Qualified
Public Offering"); (ii) upon approval by the holders of at least two-thirds
(2/3) of the then outstanding shares of Series B Preferred Stock; or (iii) upon
the cumulative conversion of at least two-thirds (2/3) of the then outstanding
shares
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<PAGE>
of Series B Preferred Stock pursuant to Section 2(a) hereof. In connection with
any conversion under this Section 4(b), each holder of Series B Preferred Stock
shall be entitled to receive, upon consummation of a Qualified Public Offering
or other event giving rise to such conversion, payment in full of all accrued
and unpaid dividends and other amounts due on such shares (including any
Participating Dividends).
(c) CONVERSION PROCEDURES. Any holder of Series B Preferred
Stock converting such shares into shares of Common Stock pursuant to Section
4(a), or whose shares are automatically converted pursuant to Section 4(b),
shall surrender the certificate or certificates representing Series B Preferred
Stock being converted, duly assigned or endorsed for transfer to the Corporation
(or accompanied by duly executed stock powers relating thereto), at the
principal executive office of the Corporation or the offices of the transfer
agent for Series B Preferred Stock or such office or offices in the continental
United States of an agent for conversion as may from time to time be designated
by notice to the holders of Series B Preferred Stock by the Corporation,
accompanied, in the case of conversion pursuant to Section 4(a), by written
notice of conversion. Such notice of conversion shall (i) specify the number of
shares of Series B Preferred Stock to be converted, (ii) specify the name or
names in which such holder wishes the certificate or certificates for Common
Stock and for any Series B Preferred Stock not to be so converted to be issued,
(iii) include payment of any applicable transfer tax and (iv) specify the
address to which such holder wishes delivery to be made of such new certificates
to be issued upon such conversion. Upon surrender of a certificate representing
Series B Preferred Stock for conversion, the Corporation shall issue and send by
hand delivery, by courier or by first class mail (postage prepaid) to the holder
thereof or to such holder's designee, at the address designated by such holder,
a certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled upon conversion. In the event that there shall
have been surrendered a certificate or certificates representing Series B
Preferred Stock, only part of which are to be converted, the Corporation shall
issue and send to such holder or such holder's designee, in the manner set forth
in the preceding sentence, a new certificate or certificates representing the
number of shares of Series B Preferred Stock which shall not have been
converted.
(d) EFFECTIVE DATE OF CONVERSION. The issuance by the
Corporation of shares of Common Stock upon a conversion of Series B Preferred
Stock into shares of Common Stock made at the option of the holder thereof
pursuant to Section 4(a) hereof shall be effective as of the surrender of the
certificate or certificates for Series B Preferred Stock to be converted, duly
assigned or endorsed for transfer to the Corporation (or accompanied by duly
executed stock powers relating thereto). The issuance by the Corporation of
shares of Common Stock upon a conversion of Series B Preferred Stock into Common
Stock pursuant to Section 4(b) hereof shall be deemed to be effective
immediately prior to the closing of the Qualified Public Offering or upon the
effective date of the event giving rise to such conversion. On and after the
effective date of conversion, the person or persons entitled to receive Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock.
(e) FRACTIONAL SHARES. The Corporation shall not be obligated
to deliver to holders of Series B Preferred Stock any fractional share of Common
Stock issuable upon any conversion
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<PAGE>
of such Series B Preferred Stock, but in lieu thereof may make a cash payment in
respect thereof in any manner permitted by law.
(f) RESERVATION OF COMMON STOCK. The Corporation shall at all
times reserve and keep available out of its authorized and unissued Common
Stock, solely for issuance upon the conversion of Series B Preferred Stock as
herein provided, free from any preemptive rights or other obligations (except
such rights and obligations created in connection with the issuance of the
Series B Preferred Stock as are entered into by the holders thereof and the
Corporation), such number of shares of Common Stock as shall from time to time
be issuable upon the conversion of all the Series B Preferred Stock then
outstanding provided that the shares of Common Stock so reserved shall not be
reduced or affected in any manner whatsoever so long as any Series B Preferred
Stock is outstanding, except in the case of a reverse stock split or stock
combination. The Corporation shall prepare and shall use its reasonable business
efforts to obtain and keep in force such governmental or regulatory permits or
other authorizations as may be required by law, and shall comply with all
requirements as to registration, qualification or listing of Common Stock, in
order to enable the Corporation lawfully to issue and deliver to each holder of
record of Series B Preferred Stock such number of shares of its Common Stock as
shall from time to time be sufficient to effect the conversion of all shares of
Series B Preferred Stock then outstanding and convertible into shares of Common
Stock.
(g) ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price in
effect from time to time shall be subject to adjustment as follows:
(i) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS.
Upon the issuance of additional shares of Common Stock as a dividend or other
distribution on outstanding Common Stock, the subdivision of outstanding shares
of Common Stock into a greater number of shares of Common Stock, or the
combination of outstanding shares of Common Stock into a smaller number of
shares of Common Stock, the Conversion Price shall, simultaneously with the
happening of such dividend, subdivision or combination, be adjusted by
multiplying the then effective Conversion Price by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such event and the denominator of which shall be the number of shares
of Common Stock outstanding immediately after such event. An adjustment made
pursuant to this Section 4(g)(i) shall be given effect, upon payment of such a
dividend or distribution, as of the record date for the determination of
stockholders entitled to receive such dividend or distribution (on a retroactive
basis) and, in the case of a subdivision or combination, immediately as of the
effective date thereof.
(ii) SALE OF COMMON STOCK. In the event the
Corporation shall at any time or from time to time while Series B Preferred
Stock is outstanding, issue, sell or exchange any shares of Common Stock
(including shares held in the Corporation's treasury, but excluding: (i) any
Common Stock which may be issued upon conversion of the Preferred Stock, and
(ii) up to 2,000,000 shares of Common Stock issued to officers, directors,
employees, consultants or agents of the Corporation pursuant to the
Corporation's 1999 Stock Option Plan (the "Plan") or upon the exercise of
options issued pursuant to such Plan, or such greater number of shares as may be
issuable pursuant to the adjustment provisions of such Plan as in effect on the
date hereof (collectively, the "Excluded Shares")), for a consideration per
share less than the Conversion Price in effect immediately prior to the
issuance, sale or exchange of such shares (any such
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issuance, sale or exchange hereinafter referred to as a "Dilutive Transaction"),
then, and thereafter successively upon the consummation of any Dilutive
Transaction, the Conversion Price in effect immediately prior to the Dilutive
Transaction shall forthwith be reduced to an amount (calculated to the nearest
cent) determined by multiplying such Conversion Price by a fraction:
(A) the numerator of which shall be (1) the number of shares
of Common Stock of all classes outstanding immediately prior to the
Dilutive Transaction (excluding treasury shares but including all
shares of Common Stock issuable upon conversion or exercise of any
outstanding Preferred Stock, options, warrants, rights or convertible
securities), plus (2) the number of shares of Common Stock which the
net aggregate consideration received by the Corporation for the total
number of such additional shares of Common Stock so issued in the
Dilutive Transaction would purchase at the Conversion Price (prior to
adjustment), and
(B) the denominator of which shall be (1) the number of shares
of Common Stock of all classes outstanding immediately prior to the
Dilutive Transaction (excluding treasury shares but including all
shares of Common Stock issuable upon conversion or exercise of any
outstanding Preferred Stock, options, warrants, rights or convertible
securities), plus (2) the number of such additional shares of Common
Stock so issued in the Dilutive Transaction.
(iii) SALE OF OPTIONS, RIGHTS OR CONVERTIBLE
SECURITIES. In the event the Corporation shall at any time or from time to time
while the Series B Preferred Stock is outstanding, issue options, warrants or
rights to subscribe for shares of Common Stock (other than any options for
Excluded Shares), or issue any securities convertible into or exercisable or
exchangeable for shares of Common Stock, for a consideration per share
(determined by dividing the Net Aggregate Consideration (as determined below) by
the aggregate number of shares of Common Stock that would be issued if all such
options, warrants, rights or convertible securities were exercised or converted
to the fullest extent permitted by their terms) less than the Conversion Price
in effect immediately prior to the issuance of such options or rights or
convertible or exchangeable securities, the Conversion Price in effect
immediately prior to the issuance of such options, warrants or rights or
securities shall be reduced to an amount determined by multiplying such
Conversion Price by a fraction:
(A) the numerator of which shall be (1) the number of shares
of Common Stock of all classes outstanding immediately prior to the
issuance of such options, rights or convertible securities (excluding
treasury shares but including all shares of Common Stock issuable upon
conversion or exercise of any outstanding Preferred Stock, options,
warrants, rights or convertible securities), plus (2) the number of
shares of Common Stock which the total amount of consideration received
by the Corporation for the issuance of such options, warrants, rights
or convertible securities PLUS the minimum amount set forth in the
terms of such security as payable to the Corporation upon the exercise
or conversion thereof (the "Net Aggregate Consideration") would
purchase at the Conversion Price prior to adjustment, and
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<PAGE>
(B) the denominator of which shall be (1) the number of shares
of Common Stock of all classes outstanding immediately prior to the
issuance of such options, warrants, rights or convertible securities
(excluding treasury shares but including all shares of Common Stock
issuable upon conversion or exercise of any outstanding Preferred
Stock, options, warrants, rights or convertible securities), plus (2)
the aggregate number of shares of Common Stock that would be issued if
all such options, warrants, rights or convertible securities were
exercised or converted.
(iv) EXPIRATION OR CHANGE IN PRICE. If the
consideration per share provided for in any options or rights to subscribe for
shares of Common Stock or any securities exercisable or exchangeable for or
convertible into shares of Common Stock changes at any time, the Conversion
Price in effect at the time of such change shall be readjusted to the Conversion
Price which would have been in effect at such time had such options or
convertible securities provided for such changed consideration per share
(determined as provided in Section 4(g)(iii) hereof) at the time initially
granted, issued or sold; PROVIDED, that such adjustment of the Conversion Price
will be made only as and to the extent that the Conversion Price effective upon
such adjustment remains less than or equal to the Conversion Price that would be
in effect if such options, rights or securities had not been issued. No
adjustment of the Conversion Price shall be made under this Section 4 upon the
issuance of any additional shares of Common Stock which are issued pursuant to
the exercise of any warrants, options or other subscription or purchase rights
or pursuant to the exercise of any conversion or exchange rights in any
convertible securities if an adjustment shall previously have been made upon the
issuance of such warrants, options or other rights. Any adjustment of the
Conversion Price shall be disregarded if, as, and when the rights to acquire
shares of Common Stock upon exercise or conversion of the warrants, options,
rights or convertible securities which gave rise to such adjustment expire or
are canceled without having been exercised, so that the Conversion Price
effective immediately upon such cancellation or expiration shall be equal to the
Conversion Price in effect at the time of the issuance of the expired or
canceled warrants, options, rights or convertible securities, with such
additional adjustments as would have been made to that Conversion Price had the
expired or canceled warrants, options, rights or convertible securities not been
issued.
(h) OTHER ADJUSTMENTS. In the event the Corporation shall make
or issue, or fix a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
the Corporation other than shares of Common Stock, then and in each such event
lawful and adequate provision shall be made so that the holders of Series B
Preferred Stock shall receive upon conversion thereof in addition to the number
of shares of Common Stock receivable thereupon, the number of securities of the
Corporation which they would have received had their Series B Preferred Stock
been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
conversion date (calculated in accordance with Section 4(d) hereof), retained
such securities receivable by them as aforesaid during such period, giving
application to all adjustments called for during such period under this Section
4 as applied to such distributed securities.
If the Common Stock issuable upon the conversion of the Series B
Preferred Stock shall be changed into the same or different number of shares of
any class or classes of stock, whether by reclassification or otherwise (other
than a subdivision or combination of shares or stock
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<PAGE>
dividend provided for above), then and in each such event the holder of each
share of Series B Preferred Stock shall have the right thereafter to convert
each such share into the kind and amount of shares of stock and other securities
and property receivable upon such reclassification or other change, by holders
of the number of shares of Common Stock into which such shares of Series B
Preferred Stock might have been converted immediately prior to such
reclassification or change, all subject to further adjustment as provided
herein.
(i) NOTICES. In each case of an adjustment or readjustment of
the Conversion Price, the Corporation will furnish each holder of Series B
Preferred Stock with a certificate, prepared by the chief financial officer of
the Corporation, showing such adjustment or readjustment, and stating in detail
the facts upon which such adjustment or readjustment is based.
SECTION 20. NO REISSUANCE OF SERIES B PREFERRED STOCK. No share or
shares of Series B Preferred Stock acquired by the Corporation by reason of
redemption, purchase, conversion or otherwise shall be reissued, and all such
shares shall be canceled, retired, and eliminated from the shares which the
Corporation shall be authorized to issue. The Corporation may from time to time
take such appropriate corporate action as may be necessary to reduce the
authorized number of shares of Series B Preferred Stock accordingly.
SECTION 21. NOTICES OF RECORD DATE. In the event (i) the Corporation
establishes a record date to determine the holders of any class of securities
who are entitled to receive any dividend or other distribution, or (ii) there
occurs any capital reorganization of the Corporation, any reclassification or
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation, and any transfer of all or substantially all
of the assets of the Corporation to any other corporation, or any other entity
or person, or any voluntary or involuntary dissolution, liquidation or winding
up of the Corporation, the Corporation shall mail to each holder of Series B
Preferred Stock at least 20 days prior to the record date or the expected
effective date, as the case may be, specified therein, a notice specifying (a)
the date of such record date for the purpose of such dividend or distribution
and a description of such dividend or distribution, (b) the date on which any
such reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up is expected to become effective and (c)
the time, if any, that is to be fixed, as to when the holders of record of
Common Stock (or other securities) shall be entitled to exchange their shares of
Common Stock (or other securities) for securities or other property deliverable
upon such reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up.
SECTION 22. PROTECTIVE PROVISION. So long as any shares of Series B
Preferred Stock remain outstanding, the Corporation shall not without the
affirmative vote or written consent of the holders of two-thirds in interest of
the Series B Preferred Stock voting as a class:
(a) sell, lease or otherwise dispose of (whether in one
transaction or a series of related transactions) more than 50% of its assets or
business,
(b) merge with or into or consolidate with another entity or
enter into or engage in any other transaction or series of related transactions,
in any such case in connection with or as a result of which the Corporation is
not the surviving entity or the owners of the Corporation's outstanding equity
securities immediately prior to the transaction or series of related
transactions
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<PAGE>
do not own at least a majority of the outstanding equity securities of the
surviving, resulting or consolidated entity,
(c) dissolve, liquidate or wind up its operations,
(d) directly or indirectly redeem, purchase, or otherwise
acquire for consideration any shares of its Common Stock or any other class of
its capital stock except in connection with contractual obligations with
employees or ex-employees,
(e) adopt any amendment to this Certificate of Designation, or
any amendment to its Certificate of Incorporation or Bylaws, that eliminates,
amends, restricts or otherwise adversely affects the rights and preferences of
the Series B Preferred Stock, or that increases the authorized shares of the
Series B Preferred Stock,
(f) declare or make dividend payments on any shares of its
Common Stock or any other class of its capital stock, or
(g) create, or obligate itself to create, any class or series
of shares or any other security that has a preference over the Series B
Preferred Stock.
(h) increase the size of the Board of Directors of the
Corporation to more than five (5) members.
SECTION 23. OTHER RIGHTS. Except as otherwise provided in this
Certificate of Designation, each share of Series B Preferred Stock, each share
of Series A Preferred Stock and each share of Common Stock shall be identical in
all respects, shall have the same powers, preferences and rights, without
preference of any such class or share over any other such class or share.
IN WITNESS WHEREOF, the undersigned has executed and subscribed this
Certificate and does affirm the foregoing as true as of the 14th day of March,
2000.
Lineo, Inc.
a Delaware corporation
By /s/ Sparks, President and Chairman
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STATE OF DELAWARE
Office of the Secretary of State
-----------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF
THE CERTIFICATE OF DESIGNATION OF "LINEO, INC.", FILED IN THIS OFFICE
ON THE SIXTEENTH DAY OF FEBRUARY, A.D. 2000, AT 5 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS.
/s/ EDWARD J. FREEL, SECRETARY OF STATE
---------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 0262418
DATE: 02-16-00
<PAGE>
CERTIFICATE OF DESIGNATION
OF THE
RELATIVE RIGHTS AND PREFERENCES
OF THE
SERIES A CONVERTIBLE PREFERRED STOCK
OF
LINEO, INC.
The undersigned, the President of Lineo, Inc., a Delaware corporation
(the "Corporation"), does hereby certify that, pursuant to the authority
conferred upon the Board of Directors by the Certificate of Incorporation of the
Corporation, the following resolution creating a series of Series A Convertible
Preferred Stock was duly adopted by the Board of Directors of the Corporation as
of February 14, 2000:
RESOLVED, that pursuant to the authority expressly granted to and
vested in this Board of Directors by the provisions of the Certificate of
Incorporation of the Corporation, this Board of Directors hereby creates a
series of the preferred stock (the "Preferred Stock"), $.001 par value per
share, of the Company, 5,000,000 of which shall be designated Series A Class 1
Convertible Preferred Stock, and 2,500,000 of which shall be designated Series A
Class 2 Convertible Preferred Stock. Except as provided herein or as required by
law, the relative rights and the preferences of the Series A Class 1 Convertible
Preferred Stock and the Series A Class 2 Convertible Preferred Stock shall be
identical, and shall be as follows:
SERIES A CONVERTIBLE PREFERRED STOCK
The Corporation hereby designates as Series A Convertible Preferred
Stock 5,000,000 shares of Series A Class 1 Convertible Preferred Stock (the
"Series A Class 1 Preferred Stock"), and 2,500,000 shares of Series A Class 2
Convertible Preferred Stock (the "Series A Class 2 Preferred Stock") (the Series
A Class 1 Preferred Stock and the Series A Class 2 Preferred Stock are
collectively referred to as the "Series A Preferred Stock"). The Series A
Preferred Stock shall have the following rights, preferences and terms:
SECTION 24. DIVIDENDS. The holders of the Series A Preferred Stock
shall be entitled to receive dividends at the same rate as dividends (other than
dividends paid in additional shares of Common Stock) are paid with respect to
the Common Stock (treating each share of Series A Preferred Stock as being equal
to the number of shares of Common Stock into which each such share of Series A
Preferred Stock could be converted pursuant to the provisions of Section 4
hereof with such number determined as of the record date for the determination
of holders of Common Stock entitled to receive such dividend) (the
"Participating Dividends"). Dividends shall be paid by forwarding a check,
postage prepaid, to the address of each holder (or, in the case of joint
holders, to the address of any such holder), of Series A Preferred Stock and/or
<PAGE>
Common Stock, as applicable, as shown on the books of the Corporation, or to
such other address as such holder specifies for such purpose by written notice
to the Corporation.
SECTION 25. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, each holder of outstanding
shares of Series A Preferred Stock shall be entitled to be paid out of the
assets of the Corporation available for distribution to stockholders, whether
such assets are capital, surplus or earnings, on a PARI PASSU basis with any
other stock ranking on liquidation PARI PASSU therewith, and before any amount
shall be paid or distributed to the holders of any class of Common Stock or of
any other stock ranking on liquidation junior to the Series A Preferred Stock,
an amount in cash equal to $1.50 per share (adjusted appropriately for stock
splits, stock dividends and the like) together with declared but unpaid
dividends to which the holders of outstanding shares of Series A Preferred Stock
are entitled pursuant to Section 1 hereof; provided, however, that if, upon any
liquidation, dissolution or winding up of the Corporation, the amounts payable
with respect to the Series A Preferred Stock and any other stock ranking on
liquidation PARI PASSU therewith are not paid in full, the holders of the Series
A Preferred Stock and any other stock ranking on liquidation PARI PASSU
therewith shall share ratably in any distribution of assets in proportion to the
full respective preferential amounts to which they are entitled.
(b) After payment of the full liquidation preference of the
Series A Preferred Stock as provided in Section 2(a) and any other applicable
liquidation preferences payable to holders of outstanding Preferred Stock, any
remaining assets of the Corporation then available for distribution shall be
distributed ratably among the holders of the Preferred Stock (on an as-if
converted basis) and the Common Stock.
(c) A share exchange or merger of the Corporation (except (i)
a merger into or with a wholly owned subsidiary of the Corporation with
requisite stockholder approval or (ii) a merger in which the beneficial owners
of the Corporation's outstanding capital stock immediately prior to such
transaction hold no less than 51% of the voting power in the resulting entity)
or a sale of all or substantially all of the assets of the Corporation shall be
regarded as a liquidation, dissolution or winding up of the affairs of the
Corporation within the meaning of this Section 2; provided, however, that each
holder of the Series A Preferred Stock shall have the right to convert his, her
or its shares of Series A Preferred Stock to Common Stock pursuant to Section
4(a) hereof in lieu of receiving payment in liquidation, dissolution or winding
up of the Corporation pursuant to this Section 2. Notice of such conversion
shall be submitted in accordance with the provisions of Section 4(c) hereof no
later than ten (10) days before the effective date of such event, provided that
any such notice shall be effective if given not later than fifteen (15) days
after the date of the Corporation's notice, pursuant to Section 6, with respect
to such event.
(d) If any of the assets of the Corporation are to be
distributed other than in cash under this Section 2 or for any purpose, then the
Board of Directors of the Corporation shall promptly engage independent
competent appraisers to determine the value of the assets to be distributed. The
Corporation shall, upon receipt of such appraiser's valuation, give prompt
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<PAGE>
written notice thereof to each holder of shares of the Corporation's capital
stock. Notwithstanding the above, any securities to be distributed shall be
valued as follows:
(i) if traded on a securities exchange, the value
shall be deemed to be the average of the closing prices of the securities on
such exchange over the 30-day period ending three (3) business days prior to the
distribution;
(ii) if actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid prices over the 30-day
period ending three (3) business days prior to the distribution; and
(iii) if there is no active public market, the value
shall be the fair market value thereof, as determined in good faith by the Board
of Directors and the holders of Preferred Stock.
SECTION 26. VOTING POWER. Except as otherwise expressly provided herein
or as required by law, the holder of each share of Series A Preferred Stock
shall be entitled to vote on all matters submitted to a vote of the holders of
outstanding voting securities. Each share of Series A Preferred Stock shall
entitle the holder thereof to such number of votes per share as shall equal the
number of shares of Common Stock into which each share of Series A Preferred
Stock is convertible as of the record date for the determination of stockholders
entitled to vote on or consent to such matters or, if no such record date is
established, as of the date on which notice of such meeting is mailed or the
date any written consent of stockholders is solicited. Except as otherwise
expressly provided herein or as required by law, the holders of shares of the
Preferred Stock and the Common Stock shall vote together as a single class on
all matters. In all cases where class voting is required herein or is required
by law, the Series A Class 1 Preferred Stock and the Series A Class 2 Preferred
Stock shall each be considered a separate class.
SECTION 27. CONVERSION. The holders of the Series A Preferred Stock
shall have the following conversion rights:
(a) VOLUNTARY CONVERSION. Holders of the outstanding shares of
Series A Preferred Stock shall be entitled, at any time and from time to time
after the date hereof, to cause any or all of such holder's shares to be
converted into such number of fully paid and nonassessable shares of Common
Stock as is determined by dividing $1.50 by the conversion price applicable to
such shares, determined as hereafter provided, in effect on the date the
certificate is surrendered for conversion. Initially the conversion price shall
be $1.50 per share of Common Stock, which price shall be adjusted as hereinafter
provided (and, as so adjusted, is hereinafter sometimes referred to as the
"Conversion Price"). If a holder of Series A Preferred Stock elects to convert
his, her or its Series A Preferred Stock at a time when there are any accrued
and unpaid dividends or other amounts due on such shares (including any
Participating Dividends), such dividends and other amounts shall, to the extent
permitted by applicable law, be paid in full by the Corporation in connection
with such conversion.
(b) AUTOMATIC CONVERSION. Each share of Series A Preferred
Stock outstanding shall automatically, and without the requirement of any
consent of any holder, be converted into the number of shares of Common Stock
into which such shares are convertible at the then
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<PAGE>
effective Conversion Price: (i) upon the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
Common Stock of the Corporation to the public at a minimum price of $10.00 per
share and pursuant to which the gross proceeds received by the Corporation equal
or exceed $15,000,000 (a "Qualified Public Offering"); (ii) upon approval by the
holders of at least two-thirds (2/3) of the then outstanding shares of Series A
Preferred Stock; or (iii) upon the cumulative conversion of at least two-thirds
(2/3) of the then outstanding shares of Series A Preferred Stock pursuant to
Section 2(a) hereof. In connection with any conversion under this Section 4(b),
each holder of Series A Preferred Stock shall be entitled to receive, upon
consummation of a Qualified Public Offering or other event giving rise to such
conversion, payment in full of all accrued and unpaid dividends and other
amounts due on such shares (including any Participating Dividends).
(c) CONVERSION PROCEDURES. Any holder of Series A Preferred
Stock converting such shares into shares of Common Stock pursuant to Section
4(a), or whose shares are automatically converted pursuant to Section 4(b),
shall surrender the certificate or certificates representing the Series A
Preferred Stock being converted, duly assigned or endorsed for transfer to the
Corporation (or accompanied by duly executed stock powers relating thereto), at
the principal executive office of the Corporation or the offices of the transfer
agent for the Series A Preferred Stock or such office or offices in the
continental United States of an agent for conversion as may from time to time be
designated by notice to the holders of the Series A Preferred Stock by the
Corporation, accompanied, in the case of conversion pursuant to Section 4(a), by
written notice of conversion. Such notice of conversion shall (i) specify the
number of shares of Series A Preferred Stock to be converted, (ii) specify the
name or names in which such holder wishes the certificate or certificates for
Common Stock and for any Series A Preferred Stock not to be so converted to be
issued, (iii) include payment of any applicable transfer tax and (iv) specify
the address to which such holder wishes delivery to be made of such new
certificates to be issued upon such conversion. Upon surrender of a certificate
representing Series A Preferred Stock for conversion, the Corporation shall
issue and send by hand delivery, by courier or by first class mail (postage
prepaid) to the holder thereof or to such holder's designee, at the address
designated by such holder, a certificate or certificates for the number of
shares of Common Stock to which such holder shall be entitled upon conversion.
In the event that there shall have been surrendered a certificate or
certificates representing Series A Preferred Stock, only part of which are to be
converted, the Corporation shall issue and send to such holder or such holder's
designee, in the manner set forth in the preceding sentence, a new certificate
or certificates representing the number of shares of Series A Preferred Stock
which shall not have been converted.
(d) EFFECTIVE DATE OF CONVERSION. The issuance by the
Corporation of shares of Common Stock upon a conversion of Series A Preferred
Stock into shares of Common Stock made at the option of the holder thereof
pursuant to Section 4(a) hereof shall be effective as of the surrender of the
certificate or certificates for the Series A Preferred Stock to be converted,
duly assigned or endorsed for transfer to the Corporation (or accompanied by
duly executed stock powers relating thereto). The issuance by the Corporation of
shares of Common Stock upon a conversion of Series A Preferred Stock into Common
Stock pursuant to Section 4(b) hereof shall be deemed to be effective
immediately prior to the closing of the Qualified Public Offering or upon the
effective date of the event giving rise to such conversion. On and after the
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<PAGE>
effective date of conversion, the person or persons entitled to receive the
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock.
(e) FRACTIONAL SHARES. The Corporation shall not be obligated
to deliver to holders of Series A Preferred Stock any fractional share of Common
Stock issuable upon any conversion of such Series A Preferred Stock, but in lieu
thereof may make a cash payment in respect thereof in any manner permitted by
law.
(f) RESERVATION OF COMMON STOCK. The Corporation shall at all
times reserve and keep available out of its authorized and unissued Common
Stock, solely for issuance upon the conversion of Series A Preferred Stock as
herein provided, free from any preemptive rights or other obligations (except
such rights and obligations created in connection with the issuance of the
Series A Preferred Stock as are entered into by the holders thereof and the
Corporation), such number of shares of the Common Stock as shall from time to
time be issuable upon the conversion of all the Series A Preferred Stock then
outstanding provided that the shares of Common Stock so reserved shall not be
reduced or affected in any manner whatsoever so long as any Series A Preferred
Stock is outstanding, except in the case of a reverse stock split or stock
combination. The Corporation shall prepare and shall use its reasonable business
efforts to obtain and keep in force such governmental or regulatory permits or
other authorizations as may be required by law, and shall comply with all
requirements as to registration, qualification or listing of the Common Stock,
in order to enable the Corporation lawfully to issue and deliver to each holder
of record of Series A Preferred Stock such number of shares of its Common Stock
as shall from time to time be sufficient to effect the conversion of all shares
of Series A Preferred Stock then outstanding and convertible into shares of
Common Stock.
(g) ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price in
effect from time to time shall be subject to adjustment as follows:
(i) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS.
Upon the issuance of additional shares of Common Stock as a dividend or other
distribution on outstanding Common Stock, the subdivision of outstanding shares
of Common Stock into a greater number of shares of Common Stock, or the
combination of outstanding shares of Common Stock into a smaller number of
shares of Common Stock, the Conversion Price shall, simultaneously with the
happening of such dividend, subdivision or combination, be adjusted by
multiplying the then effective Conversion Price by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such event and the denominator of which shall be the number of shares
of Common Stock outstanding immediately after such event. An adjustment made
pursuant to this Section 4(g)(i) shall be given effect, upon payment of such a
dividend or distribution, as of the record date for the determination of
stockholders entitled to receive such dividend or distribution (on a retroactive
basis) and, in the case of a subdivision or combination, immediately as of the
effective date thereof.
(ii) SALE OF COMMON STOCK. In the event the
Corporation shall at any time or from time to time while the Series A Preferred
Stock is outstanding, issue, sell or exchange any shares of Common Stock
(including shares held in the Corporation's treasury, but excluding: (i) any
Common Stock which may be issued upon conversion of the Preferred Stock,
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<PAGE>
and (ii) up to 2,000,000 shares of Common Stock issued to officers, directors,
employees, consultants or agents of the Corporation pursuant to the
Corporation's 1999 Stock Option Plan (the "Plan") or upon the exercise of
options issued pursuant to such Plan, or such greater number of shares as may be
issuable pursuant to the adjustment provisions of such Plan as in effect on the
date hereof (collectively, the "Excluded Shares")), for a consideration per
share less than the Conversion Price in effect immediately prior to the
issuance, sale or exchange of such shares (any such issuance, sale or exchange
hereinafter referred to as a "Dilutive Transaction"), then, and thereafter
successively upon the consummation of any Dilutive Transaction, the Conversion
Price in effect immediately prior to the Dilutive Transaction shall forthwith be
reduced to an amount (calculated to the nearest cent) determined by multiplying
such Conversion Price by a fraction:
(A) the numerator of which shall be (1) the number of shares
of Common Stock of all classes outstanding immediately prior to the
Dilutive Transaction (excluding treasury shares but including all
shares of Common Stock issuable upon conversion or exercise of any
outstanding Preferred Stock, options, warrants, rights or convertible
securities), plus (2) the number of shares of Common Stock which the
net aggregate consideration received by the Corporation for the total
number of such additional shares of Common Stock so issued in the
Dilutive Transaction would purchase at the Conversion Price (prior to
adjustment), and
(B) the denominator of which shall be (1) the number of shares
of Common Stock of all classes outstanding immediately prior to the
Dilutive Transaction (excluding treasury shares but including all
shares of Common Stock issuable upon conversion or exercise of any
outstanding Preferred Stock, options, warrants, rights or convertible
securities), plus (2) the number of such additional shares of Common
Stock so issued in the Dilutive Transaction.
(iii) SALE OF OPTIONS, RIGHTS OR CONVERTIBLE
SECURITIES. In the event the Corporation shall at any time or from time to time
while the Series A Preferred Stock is outstanding, issue options, warrants or
rights to subscribe for shares of Common Stock (other than any options for
Excluded Shares), or issue any securities convertible into or exercisable or
exchangeable for shares of Common Stock, for a consideration per share
(determined by dividing the Net Aggregate Consideration (as determined below) by
the aggregate number of shares of Common Stock that would be issued if all such
options, warrants, rights or convertible securities were exercised or converted
to the fullest extent permitted by their terms) less than the Conversion Price
in effect immediately prior to the issuance of such options or rights or
convertible or exchangeable securities, the Conversion Price in effect
immediately prior to the issuance of such options, warrants or rights or
securities shall be reduced to an amount determined by multiplying such
Conversion Price by a fraction:
(A) the numerator of which shall be (1) the number of shares
of Common Stock of all classes outstanding immediately prior to the
issuance of such options, rights or convertible securities (excluding
treasury shares but including all shares of Common Stock issuable upon
conversion or exercise of any outstanding Preferred Stock, options,
warrants, rights or convertible securities), plus (2) the number of
shares of Common Stock which the total amount of consideration received
by the Corporation for the
39
<PAGE>
issuance of such options, warrants, rights or convertible securities
PLUS the minimum amount set forth in the terms of such security as
payable to the Corporation upon the exercise or conversion thereof (the
"Net Aggregate Consideration") would purchase at the Conversion Price
prior to adjustment, and
(B) the denominator of which shall be (1) the number of shares
of Common Stock of all classes outstanding immediately prior to the
issuance of such options, warrants, rights or convertible securities
(excluding treasury shares but including all shares of Common Stock
issuable upon conversion or exercise of any outstanding Preferred
Stock, options, warrants, rights or convertible securities), plus (2)
the aggregate number of shares of Common Stock that would be issued if
all such options, warrants, rights or convertible securities were
exercised or converted.
(iv) EXPIRATION OR CHANGE IN PRICE. If the
consideration per share provided for in any options or rights to subscribe for
shares of Common Stock or any securities exercisable or exchangeable for or
convertible into shares of Common Stock changes at any time, the Conversion
Price in effect at the time of such change shall be readjusted to the Conversion
Price which would have been in effect at such time had such options or
convertible securities provided for such changed consideration per share
(determined as provided in Section 4(g)(iii) hereof) at the time initially
granted, issued or sold; PROVIDED, that such adjustment of the Conversion Price
will be made only as and to the extent that the Conversion Price effective upon
such adjustment remains less than or equal to the Conversion Price that would be
in effect if such options, rights or securities had not been issued. No
adjustment of the Conversion Price shall be made under this Section 4 upon the
issuance of any additional shares of Common Stock which are issued pursuant to
the exercise of any warrants, options or other subscription or purchase rights
or pursuant to the exercise of any conversion or exchange rights in any
convertible securities if an adjustment shall previously have been made upon the
issuance of such warrants, options or other rights. Any adjustment of the
Conversion Price shall be disregarded if, as, and when the rights to acquire
shares of Common Stock upon exercise or conversion of the warrants, options,
rights or convertible securities which gave rise to such adjustment expire or
are canceled without having been exercised, so that the Conversion Price
effective immediately upon such cancellation or expiration shall be equal to the
Conversion Price in effect at the time of the issuance of the expired or
canceled warrants, options, rights or convertible securities, with such
additional adjustments as would have been made to that Conversion Price had the
expired or canceled warrants, options, rights or convertible securities not been
issued.
(h) OTHER ADJUSTMENTS. In the event the Corporation shall make
or issue, or fix a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
the Corporation other than shares of Common Stock, then and in each such event
lawful and adequate provision shall be made so that the holders of Series A
Preferred Stock shall receive upon conversion thereof in addition to the number
of shares of Common Stock receivable thereupon, the number of securities of the
Corporation which they would have received had their Series A Preferred Stock
been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
conversion date (calculated in accordance with Section 4(d) hereof), retained
such securities receivable by them as aforesaid during such period, giving
application to
40
<PAGE>
all adjustments called for during such period under this Section 4 as applied to
such distributed securities.
If the Common Stock issuable upon the conversion of the Series A
Preferred Stock shall be changed into the same or different number of shares of
any class or classes of stock, whether by reclassification or otherwise (other
than a subdivision or combination of shares or stock dividend provided for
above), then and in each such event the holder of each share of Series A
Preferred Stock shall have the right thereafter to convert each such share into
the kind and amount of shares of stock and other securities and property
receivable upon such reclassification or other change, by holders of the number
of shares of Common Stock into which such shares of Series A Preferred Stock
might have been converted immediately prior to such reclassification or change,
all subject to further adjustment as provided herein.
(i) NOTICES. In each case of an adjustment or readjustment of
the Conversion Price, the Corporation will furnish each holder of Series A
Preferred Stock with a certificate, prepared by the chief financial officer of
the Corporation, showing such adjustment or readjustment, and stating in detail
the facts upon which such adjustment or readjustment is based.
SECTION 28. NO REISSUANCE OF SERIES A PREFERRED STOCK. No share or
shares of the Series A Preferred Stock acquired by the Corporation by reason of
redemption, purchase, conversion or otherwise shall be reissued, and all such
shares shall be canceled, retired, and eliminated from the shares which the
Corporation shall be authorized to issue. The Corporation may from time to time
take such appropriate corporate action as may be necessary to reduce the
authorized number of shares of the Series A Preferred Stock accordingly.
SECTION 29. NOTICES OF RECORD DATE. In the event (i) the Corporation
establishes a record date to determine the holders of any class of securities
who are entitled to receive any dividend or other distribution, or (ii) there
occurs any capital reorganization of the Corporation, any reclassification or
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation, and any transfer of all or substantially all
of the assets of the Corporation to any other corporation, or any other entity
or person, or any voluntary or involuntary dissolution, liquidation or winding
up of the Corporation, the Corporation shall mail to each holder of Series A
Preferred Stock at least 20 days prior to the record date or the expected
effective date, as the case may be, specified therein, a notice specifying (a)
the date of such record date for the purpose of such dividend or distribution
and a description of such dividend or distribution, (b) the date on which any
such reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up is expected to become effective and (c)
the time, if any, that is to be fixed, as to when the holders of record of
Common Stock (or other securities) shall be entitled to exchange their shares of
Common Stock (or other securities) for securities or other property deliverable
upon such reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up.
SECTION 30. PROTECTIVE PROVISION. So long as any shares of the Series A
Preferred Stock remain outstanding, the Corporation shall not without the
affirmative vote or written consent of the holders of two-thirds in interest of
each of the Series A Class 1 Preferred Stock, voting separately as a class, and
the Series A Class 2 Preferred Stock, voting separately as a class:
41
<PAGE>
(a) sell, lease or otherwise dispose of (whether in one
transaction or a series of related transactions) more than 50% all of its assets
or business,
(b) merge with or into or consolidate with another entity or
enter into or engage in any other transaction or series of related transactions,
in any such case in connection with or as a result of which the Corporation is
not the surviving entity or the owners of the Corporation's outstanding equity
securities immediately prior to the transaction or series of related
transactions do not own at least a majority of the outstanding equity securities
of the surviving, resulting or consolidated entity,
(c) dissolve, liquidate or wind up its operations,
(d) directly or indirectly redeem, purchase, or otherwise
acquire for consideration any shares of its Common Stock or any other class of
its capital stock except in connection with contractual obligations with
employees or ex-employees,
(e) adopt any amendment to this Certificate of Designation, or
any amendment to its Certificate of Incorporation or Bylaws, that eliminates,
amends, restricts or otherwise adversely affects the rights and preferences of
the Series A Preferred Stock, or that increases the authorized shares of the
Series A Preferred Stock,
(f) declare or make dividend payments on any shares of its
Common Stock or any other class of its capital stock, or
(g) create, or obligate itself to create, any class or series
of shares, or any other security, that has a preference over the Series A
Preferred Stock.
(h) increase the size of the Board of Directors of the
Corporation to more than five (5) members.
SECTION 31. OTHER RIGHTS. Except as otherwise provided in this
Certificate of Designation, each share of Series A Preferred Stock and each
share of Common Stock shall be identical in all respects, shall have the same
powers, preferences and rights, without preference of any such class or share
over any other such class or share.
IN WITNESS WHEREOF, the undersigned has executed and subscribed this
Certificate and does affirm the foregoing as true as of the 14th day of
February, 2000.
Lineo, Inc.
a Delaware corporation
By /s/ Sparks, Chairman and President
<PAGE>
STATE OF DELAWARE
Office of the Secretary of State
-----------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF
THE CERTIFICATE OF THE MERGER, WHICH MERGES:
"LINEO, INC.", A UTAH CORPORATION,
WITH AND INTO "LINEO MERGER CORPORATION" UNDER THE NAME OF
"LINEO, INC.", A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF
THE STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE
TWENTY-FIRST DAY OF JANUARY, A.D. 2000, AT 9 O'CLOCK A.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS.
/s/ EDWARD J. FREEL, SECRETARY OF STATE
---------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 0210734
DATE: 01-21-00
<PAGE>
CERTIFICATE OF MERGER
LINEO, INC.
A UTAH CORPORATION
WITH AND INTO
LINEO MERGER CORPORATION
A DELAWARE CORPORATION
In accordance with Section 252 of the General Corporation Law
of Delaware, the undersigned, Bryan Sparks, being the President of Lineo, Inc.,
a Utah corporation and the President of Lineo Merger Corporation, a Delaware
corporation, DOES HEREBY CERTIFY as follows:
(1) the constituent corporations in the merger (the "Merger")
are Lineo, Inc., a Utah corporation ("Lineo Utah"), and Lineo Merger
Corporation, a Delaware corporation ("Lineo Delaware");
(2) an Agreement and Plan of Merger dated as of January 5,
2000 (the "Merger Agreement") has been approved, adopted, certified, executed
and acknowledged by each of the constituent corporations in accordance with
Section 252 of the General Corporation Law of Delaware;
(3) the name of the surviving corporation shall be Lineo
Merger Corporation, a Delaware corporation, which shall hereinwith be changed to
Lineo, Inc., a Delaware corporation;
(4) the Certificate of Incorporation and Bylaws of Lineo
Delaware shall be the Certificate of Incorporation and Bylaws of the surviving
corporation without change or amendment until thereafter amended in accordance
with the provisions thereof and applicable law;
(5) the executed Merger Agreement is on file at the principal
place of business of the surviving corporation at 383 S. 520 W. Lindon, Utah
84042;
(6) a copy of the Merger Agreement will be furnished by the
surviving corporation, on request and without cost, to any stockholder of the
constituent corporations;
(7) the authorized capital of each foreign corporation which
is a party to the merger is as follows:
<TABLE>
<CAPTION>
Corporation Class Number of Shares Par Value Per Share
---------------------------------------------------------------------------------
<PAGE>
<S> <C> <C> <C> <C>
Lineo, Inc., a Utah Common 100,000,000 no par value
Coporation Preferred 30,000,000 no par value
</TABLE>
(8) this certificate shall become effective upon filing and
acceptance by the Office of the Secretary of State of Delaware.
45
<PAGE>
IN WITNESS WHEREOF, the undersigned have affirmed the
statements herein as true, under penalties of perjury, as of this 5th day of
January, 2000.
LINEO, INC.
a Utah corporation
By: /s/ Bryan Sparks, President
Attest:
/s/ Lisa Richards, Secretary
LINEO MERGER CORPORATION
a Delaware corporation
By: /s/ Bryan Sparks, President
Attest:
/s/ Lisa Richards, Secretary
46
<PAGE>
STATE OF DELAWARE
Office of the Secretary of State
-----------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF
THE CERTIFICATE OF INCORPORATION OF "LINEO MERGER CORPORATION", FILED
IN THIS OFFICE ON THE FOURTEENTH DAY OF JANUARY, A.D. 2000, AT 1
O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS.
/s/ EDWARD J. FREEL, SECRETARY OF STATE
---------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 0200954
DATE: 01-14-00
<PAGE>
CERTIFICATE OF INCORPORATION
OF
LINEO MERGER CORPORATION
ARTICLE I
The name of this corporation is Lineo Merger Corporation (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the
State of Delaware is 1209 Orange Street, City of Wilmington, County of New
Castle, Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of Delaware.
ARTICLE IV
AUTHORIZED SHARES
4.1 AUTHORIZED CAPITAL. The total number of shares of all classes of
capital stock which the Corporation shall have authority to issue is 130,000,000
shares, consisting of 100,000,000 shares of Common Stock, $.001 par value (the
"Common Stock") and 30,000,000 shares of Preferred Stock, $.001 par value (the
"Preferred Stock").
4.2 ISSUANCE OF PREFERRED STOCK IN SERIES. The Preferred Stock may be
issued from time to time in one or more series in any manner permitted by law
and the provisions of these Articles of Incorporation, as determined from time
to time by the Board of Directors and stated in the resolution or resolutions
providing for the issuance thereof, prior to the issuance of any shares thereof.
The Board of Directors shall have the authority to fix and determine and to
amend, subject to the provisions hereof, the designations, powers, preferences
and relative, participating, optional or other rights, if any, and
qualifications, limitations or other restrictions of the shares of any series
that is wholly unissued or to be established and the number of shares
constituting any such series. Unless otherwise specifically provided in the
resolution establishing any series, the Board of Directors shall further have
the authority, after the issuance of shares of a series whose number it has
designated, to amend the resolution establishing such series to decrease the
number of shares of that series, but not below the number of shares of such
series then outstanding.
48
<PAGE>
(a) DIVIDENDS. The holders of shares of the Preferred Stock
shall be entitled to receive dividends, out of the funds of the corporation
legally available therefor, at the rate and at the time or times as may be
provided by the Board of Directors in designating a particular series of
Preferred Stock. The holders of the Preferred Stock shall not be entitled to
receive any dividends thereon, unless otherwise provided by the Board of
Directors in designating a particular series of Preferred Stock.
(b) LIQUIDATION. In the event of any liquidation, dissolution
or winding up of the affairs of the corporation, whether voluntary or
involuntary, then, before any distribution shall be made to the holders of the
Common Stock, the holders of the Preferred Stock at the time outstanding shall
be entitled to be paid the preferential amount or amounts per share as may be
provided by the Board of Directors in designating a particular series of
Preferred Stock, plus dividends accrued thereon to the date of such payment. In
designating a particular series of Preferred Stock, the Board of Directors may
also provide that such series is senior, on a par with or subordinate in order
of priority to any other existing or later issued series of Preferred Stock in
respect of distribution of amounts upon the liquidation, dissolution or winding
up of the affairs of the corporation. The holders of the Preferred Stock shall
not be entitled to receive any distributive amounts upon the liquidation,
dissolution or winding up of the affairs of the corporation, unless otherwise
provided by the Board of Directors in designating a particular series of
Preferred Stock.
(c) CONVERSION. Shares of Preferred Stock may be convertible
to shares of Common Stock at such rate and subject to such adjustments as may be
provided by the Board of Directors in designating a particular series of
Preferred Stock.
(d) REDEMPTION. The Preferred Stock may be redeemable in such
amounts, and at such time or times as may be provided by the Board of Directors
in designating a particular series of Preferred Stock. In any event, such
Preferred Stock may be repurchased by the corporation only to the extent legally
permissible.
(e) VOTING RIGHTS. Holders of Preferred Stock shall have such
voting rights as may be provided by the Board of Directors in designating a
particular series of Preferred Stock.
ARTICLE V
The Corporation reserves the right to amend, alter, change, or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon the
stockholders herein are granted subject to this right.
ARTICLE VI
The Corporation is to have perpetual existence.
ARTICLE VII
49
<PAGE>
1. LIMITATION OF LIABILITY. To the fullest extent permitted by the
Delaware General Corporation Law as it now exists or as it may hereafter be
amended, a director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director.
2. INDEMNIFICATION. To the full extent permitted by the Delaware
General Corporation Law as it now exists or as it may hereafter be amended, the
Corporation is authorized to provide indemnification of, and advancement of
expenses to, such directors, officers and agents (and any other person to which
Delaware law permits the Corporation to provide indemnification) through bylaw
provisions, agreements with such directors, officers, agents or other persons,
vote of stockholders or disinterested directors or otherwise, in excess of the
indemnification provisions and advancement of expenses permitted by Section 145
of the General Corporation Law of Delaware, subject only to limits created by
applicable Delaware law (statutory and non-statutory) with respect to actions
for breach of duty to a corporation, its stockholders and others.
3. AMENDMENTS. Neither any amendment nor repeal of this
Article VII, nor the adoption of any provision of the Corporation's Certificate
of Incorporation inconsistent with this Article VII, shall eliminate or reduce
the effect of this Article VII, in respect of any matter occurring, or any
action or proceeding accruing or arising or that, but for this Article VII,
would accrue or arise, prior to such amendment, repeal, or adoption of an
inconsistent provision.
ARTICLE VIII
The right to cumulate votes in the election of directors shall not
exist with respect to shares of stock of this Corporation.
1. NUMBER OF DIRECTORS. The number of directors which constitutes the
whole Board of Directors of the Corporation shall be designated in the Bylaws of
the Corporation. The names and addresses of the initial Board of Directors are:
Raymond J. Noorda 383 S. 520 W.
Lindon, Utah 84042
Ralph J. Yarro 383 S. 520 W.
Lindon, Utah 84042
Bryan W. Sparks 383 S. 520 W.
Lindon, Utah 84042
2. ELECTION OF DIRECTORS. Elections of directors need not be by written
ballot unless the Bylaws of the Corporation shall so provide.
ARTICLE IX
50
<PAGE>
In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, alter, amend
or repeal the Bylaws of the Corporation.
ARTICLE X
Meetings of stockholders may be held within or without the
State of Delaware, as the Bylaws may provide. The books of the Corporation may
be kept (subject to any provision contained in the statutes) outside of the
State of Delaware at such place or places as may be designated from time to time
by the Board of Directors or in the Bylaws of the Corporation.
ARTICLE XI
The name and mailing address of the incorporator is:
Michael J. Erickson, Esq.
c/o Summit Law Group, PLLC
1505 Westlake Avenue North, Suite 300
Seattle, WA 98109
I, THE UNDERSIGNED, being the incorporator hereinbefore named,
for the purpose of forming a corporation pursuant to the General Corporation Law
of the State of Delaware, do make this certificate, hereby declaring and
certifying, under penalties of perjury, that this is my act and deed and the
facts herein stated are true, and accordingly have hereunto set my hand this
13th day of January, 2000.
/S/ Michael J. Erickson, Esq.
51
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
LINEO, INC.
Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Restated Certificate of Incorporation was adopted by the
Corporation's Board of Directors and its stockholders in accordance with Section
228 thereof. This Restated Certificate of Incorporation restates, integrates and
amends the provisions of the Certificate of Incorporation of the Corporation.
ARTICLE I
The name of this corporation is Lineo, Inc. (the "Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
AUTHORIZED SHARES
4.1 AUTHORIZED CAPITAL. The total number of shares of all classes of
capital stock which the Corporation shall have authority to issue is 130,000,000
shares, consisting of 100,000,000 shares of Common Stock, $.001 par value (the
"Common Stock") and 30,000,000 shares of Preferred Stock, $.001 par value (the
"Preferred Stock").
4.2 ISSUANCE OF PREFERRED STOCK IN SERIES. The Preferred Stock may be
issued from time to time in one or more series in any manner permitted by law
and the provisions of these Articles of Incorporation, as determined from time
to time by the Board of Directors and stated in the resolution or resolutions
providing for the issuance thereof, prior to the issuance of any shares thereof.
The Board of Directors shall have the authority to fix and determine and to
amend, subject to the provisions hereof, the designations, powers, preferences
and relative, participating, optional or other rights, if any, and
qualifications, limitations or other restrictions of the shares of any series
that is wholly unissued or to be established and the number of shares
constituting any such series. Unless otherwise specifically provided in the
resolution establishing any series, the Board of Directors shall further have
the authority, after the issuance of shares of a series whose number it has
designated, to amend the resolution establishing such series to decrease the
number of shares of that series, but not below the number of shares of such
series then outstanding.
(a) DIVIDENDS. The holders of shares of the Preferred Stock shall be
entitled to receive dividends, out of the funds of the corporation legally
available therefor, at the rate and at the time or times as may be provided by
the Board of Directors in designating a particular series of Preferred Stock.
The holders of the Preferred Stock shall not be entitled to receive any
<PAGE>
dividends thereon, unless otherwise provided by the Board of Directors in
designating a particular series of Preferred Stock.
(b) LIQUIDATION. In the event of any liquidation, dissolution or
winding up of the affairs of the corporation, whether voluntary or involuntary,
then, before any distribution shall be made to the holders of the Common Stock,
the holders of the Preferred Stock at the time outstanding shall be entitled to
be paid the preferential amount or amounts per share as may be provided by the
Board of Directors in designating a particular series of Preferred Stock, plus
dividends accrued thereon to the date of such payment. In designating a
particular series of Preferred Stock, the Board of Directors may also provide
that such series is senior, on a par with or subordinate in order of priority to
any other existing or later issued series of Preferred Stock in respect of
distribution of amounts upon the liquidation, dissolution or winding up of the
affairs of the corporation. The holders of the Preferred Stock shall not be
entitled to receive any distributive amounts upon the liquidation, dissolution
or winding up of the affairs of the corporation, unless otherwise provided by
the Board of Directors in designating a particular series of Preferred Stock.
(c) CONVERSION. Shares of Preferred Stock may be convertible to
shares of Common Stock at such rate and subject to such adjustments as may be
provided by the Board of Directors in designating a particular series of
Preferred Stock.
(d) REDEMPTION. The Preferred Stock may be redeemable in such
amounts, and at such time or times as may be provided by the Board of Directors
in designating a particular series of Preferred Stock. In any event, such
Preferred Stock may be repurchased by the corporation only to the extent legally
permissible.
(e) VOTING RIGHTS. Holders of Preferred Stock shall have such voting
rights as may be provided by the Board of Directors in designating a particular
series of Preferred Stock.
ARTICLE V
The Corporation reserves the right to amend, alter, change, or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon the stockholders
herein are granted subject to this right.
ARTICLE VI
The Corporation is to have perpetual existence.
ARTICLE VII
1. LIMITATION OF LIABILITY. To the fullest extent permitted by the
Delaware General Corporation Law as it now exists or as it may hereafter be
amended, a director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director.
2. INDEMNIFICATION. To the full extent permitted by the Delaware General
Corporation Law as it now exists or as it may hereafter be amended, the
Corporation is authorized to provide indemnification of, and advancement of
expenses to, such directors, officers and agents (and any
<PAGE>
other person to which Delaware law permits the Corporation to provide
indemnification) through bylaw provisions, agreements with such directors,
officers, agents or other persons, vote of stockholders or disinterested
directors or otherwise, in excess of the indemnification provisions and
advancement of expenses permitted by Section 145 of the General Corporation Law
of Delaware, subject only to limits created by applicable Delaware law
(statutory and non-statutory) with respect to actions for breach of duty to a
corporation, its stockholders and others.
3. AMENDMENTS. Neither any amendment nor repeal of this Article VII, nor
the adoption of any provision of the Corporation's Certificate of Incorporation
inconsistent with this Article VII, shall eliminate or reduce the effect of this
Article VII, in respect of any matter occurring, or any action or proceeding
accruing or arising or that, but for this Article VII, would accrue or arise,
prior to such amendment, repeal, or adoption of an inconsistent provision.
ARTICLE VIII
The right to cumulate votes in the election of directors shall not exist
with respect to shares of stock of this Corporation.
The Board of Directors shall be set at five (5). Effective upon the date
that the Corporation becomes a Public Company, as defined below, the Board of
Directors shall be divided into three (3) classes, as determined by the Board of
Directors, with said classes to be as equal in number as may be possible, which
classes shall be elected for the terms set forth below:
Class Term
----- ----
Class 1 1 Year
Class 2 2 Years
Class 3 3 Years
Thereafter, each Director's term shall be three (3) years, and each Director
shall serve for the term he or she was elected and thereafter until his or her
successor is elected and qualified (or the number of directors is reduced), or
until his or her death, resignation or removal from office. Directors need not
be stockholders of the Corporation or residents of the State of Delaware.
Written ballots are not required in the election of Directors. For purposes of
this Restated Certificate of Incorporation, the Corporation shall be a "Public
Company" at such time and for so long as it has a class of equity securities
registered pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended, or any successor statute (the "Exchange Act"), or is otherwise subject
to the reporting requirements of Section 15(d) of the Exchange Act.
Newly created directorships resulting from any increase in the number of
Directors or any vacancies on the Board of Directors resulting from death,
resignation, removal or other cause shall be filled by the affirmative vote of a
majority of the remaining Directors then in office, even though less than a
quorum of the Board of Directors. Any Director elected in accordance with the
preceding sentence shall hold office for the remainder of the full term of the
class of Directors in which the new directorship was created or in which the
vacancy occurred and thereafter until such Director's successor shall have been
elected and qualified (or the number of directors is reduced). No decrease in
the number of Directors constituting the Board of Directors shall shorten the
term of any incumbent Director.
<PAGE>
ARTICLE IX
In furtherance of and not in limitation of powers conferred by statute, the
Board of Directors of the Corporation is expressly authorized to adopt, repeal,
alter, amend and rescind the bylaws of the Corporation by vote of a majority of
the Board of Directors. In addition, the bylaws may be amended by the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of voting stock of the Corporation entitled to vote at an election of directors.
ARTICLE X
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE XI
Any Director or the entire Board of Directors may be removed with or
without cause by the holders of not less than a majority of the shares then
entitled to vote at an election of Directors; PROVIDED, HOWEVER, beginning at
such time and for so long as the Corporation is a Public Company (as defined in
Article VIII), no Director may be removed without "Cause," as defined below.
Such action may be taken at any regular or special meeting of the stockholders
of the Corporation, or by unanimous written consent in lieu of a meeting,
provided that notice of the proposed removal, which shall include a statement of
the charges alleged against the Director(s) in the event of removal for Cause,
shall have been duly given to the stockholders together with or as a part of the
notice of the meeting.
Where a question of the removal of a Director for Cause is to be presented
for stockholder consideration while the Corporation is a Public Company, an
opportunity must be provided to such Director to present his or her defense to
the stockholders by a statement which must accompany or precede the notice of
the meeting at which removal of such Director for Cause shall be considered.
Under such circumstances the Director involved shall be served with notice of
the meeting at which such action is proposed to be taken together with a
statement of the specific charges and shall be given an opportunity to be
present and to be heard at the meeting at which his or her removal is
considered.
For purposes of this Article XI, "Cause" for removal shall be limited to
(a) action by a Director involving willful malfeasance having a material adverse
effect on the Corporation or (b) a Director being convicted of a felony;
provided that any action by a Director shall not constitute "Cause" if, in good
faith, such Director believed such action to be in or not opposed to the best
interests of the Corporation, or if a Director shall be entitled, under
applicable law or the Restated Certificate of Incorporation or Bylaws of the
Corporation, to be indemnified with respect to such action.
ARTICLE XII
Special meetings of the stockholders, for any purpose or purposes, may only
be called by the Chairman of the Board or a majority of the Board.
<PAGE>
* * *
This Restated Certificate of Incorporation shall become effective at 8:59
a.m. EST on _________, 2000.
* * *
IN WITNESS WHEREOF, the undersigned officer of the Corporation has executed
this Restated Certificate of Incorporation this ___ day of __________, 2000.
-------------------------------
Name: Matthew R. Harris
Title: Secretary
<PAGE>
EXHIBIT 3.2
AMENDMENTS TO LINEO, INC. BYLAWS
SEPTEMBER 24, 1999 BOARD OF DIRECTORS MEETING:
Number of Directors was increased to seven (7) members
FEBRUARY 14, 2000 CONSENT OF DIRECTORS IN LIEU OF SPECIAL MEETING:
Number of Directors was decreased to five (5) members
MAY 17, 2000 BOARD OF DIRECTORS MEETING:
Section 2.2 Special Meetings.
Special meetings of the stockholders, for any purpose or
purposes, may only be called by the Chairman of the Board or a majority of the
Board.
RESOLVED FURTHER, that Article II of the Bylaws shall also be amended
to add the following three sections:
Section 2.16. Action by Consent - Post IPO.
Effective upon the Effective upon the closing of the
corporation's initial public offering of securities pursuant to a registration
statement filed under the Securities Act of 1933, as amended, the stockholders
of the Corporation may not take action by written consent without a meeting but
must take any such actions at a duly called annual or special meeting in
accordance with these Bylaws and the Certificate of Incorporation.
Section 2.17. Notice of Stockholder Nominees.
Nominations of persons for election to the Board of
Directors shall be made only at a meeting of stockholders and only (i) by the
Board of Directors or a committee appointed by the Board of Directors or (ii) by
any stockholder entitled to vote in the election of directors at the meeting who
complies with the notice procedures set forth in this Section 2.17. Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the corporation. To be timely, a stockholder's notice shall be delivered to
or mailed and received at the principal executive offices of the corporation (i)
with respect to an election to be held at an annual meeting of stockholders,
ninety days prior to the date one year from the date of the immediately
preceding annual meeting of stockholders, and (ii) with respect to an election
to be held at a special meeting of stockholders for the election of directors,
the close of business on the tenth day following the date on which notice of
such meeting is first given to stockholders. For purposes of this Section 2.17,
any adjournment(s) or postponement(s) of the original meeting whereby the
meeting will reconvene within thirty days from the original date shall be deemed
for purposes of notice to be a continuation of the original meeting, and no
nominations by a stockholder of persons to be elected directors of the
corporation may be made at any such reconvened meeting unless pursuant to a
notice which was
<PAGE>
timely for the meeting on the date originally scheduled. Each such notice shall
set forth: (a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (b) a representation
that the stockholder is a holder of record of stock of the corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice; (c) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder; (d) such other information regarding each nominee proposed by such
stockholder as would be required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to the
Securities Exchange Act of 1934, as amended; and (e) the consent of each nominee
to serve as a director of the corporation if so elected.
Notwithstanding the foregoing, nothing in this Section 2.17
shall be interpreted or construed to require the inclusion of information about
any such nominee in any proxy statement distributed by, at the direction of, or
on behalf of the Board of Directors. The Chairman of the meeting shall, if the
facts warrant, determine and declare to the meeting that a nomination was not
made in accordance with the foregoing procedures, and if he should so determine,
he shall so declare to the meeting and the defective nomination shall be
disregarded.
Section 2.18 Stockholder Proposals at Annual Meeting.
Business may be properly brought before an annual meeting by a
stockholder only upon the stockholder's timely notice thereof in writing to the
Secretary of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not later than ninety days prior to the date one year from the date
of the immediately preceding annual meeting of stockholders. For purposes of
this Section 2.18, any adjournment(s) or postponement(s) of the original meeting
whereby the meeting will reconvene within thirty days from the original date
shall be deemed for purposes of notice to be a continuation of the original
meeting, and no business may be brought before any reconvened meeting unless
pursuant to a notice which was timely for the meeting on the date as originally
scheduled. Each such notice shall set forth: (a) the name and address of the
stockholder who intends to make the proposal; (b) a representation that the
stockholder is a holder of record of stock of the corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
vote for the proposal; (c) any material interest of such stockholder in such
proposal; and (d) such other information regarding such proposal as would be
required to be disclosed in solicitations of proxies pursuant to the Securities
Exchange Act of 1934, as amended.
Notwithstanding the foregoing, nothing in this Section 2.18
shall be interpreted or construed to require the inclusion of information about
any such proposal in any proxy statement distributed by, at the discretion of,
or on behalf of the Board of Directors. The Chairman of the meeting shall, if
the facts warrant, determine and declare to the meeting that a proposal was not
made in accordance with the foregoing procedures, and if he should so determine,
he shall so declare to the meeting, and any such business not properly brought
before the meeting shall be disregarded.
RESOLVED FURTHER, that Article X of the Bylaws shall be amended to read in
<PAGE>
its entirety as follows:
These bylaws may be altered, amended or repealed or new bylaws may be
adopted by the affirmative vote of holders of at least 66-2/3% vote of the
outstanding voting stock of the corporation. These bylaws may also be altered,
amended or repealed or new bylaws may be adopted by the Board of Directors, when
such power is conferred upon the Board of Directors by the certificate of
incorporation. The foregoing may occur at any regular meeting of the
stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal bylaws is conferred upon
the Board of Directors by the certificate of incorporation it shall not divest
or limit the power of the stockholders to adopt, amend or repeal bylaws.
<PAGE>
BYLAWS
OF
LINEO, INC.
A DELAWARE CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1 OFFICES......................................................................1
1.1 Business Offices.....................................................1
1.2 Registered Office....................................................1
ARTICLE 2 STOCKHOLDERS.................................................................1
2.1 Annual Stockholder Meeting...........................................1
2.2 Special Stockholder Meetings.........................................1
2.3 Place of Stockholder Meeting.........................................2
2.4 Notice of Stockholder Meeting........................................2
2.5 Fixing of Record Date................................................3
2.6 Stockholder List.....................................................4
2.7 Stockholder Quorum and Voting Requirements...........................4
2.8 Proxies..............................................................5
2.9 Voting of Shares.....................................................5
2.10 Corporation's Acceptance of Votes....................................5
2.11 Informal Action by Stockholders......................................7
2.12 Voting for Directors.................................................8
2.13 Stockholder's Rights to Inspect Corprorate Records...................8
2.14 Furnishing Financial Statements to a Stockholder....................10
2.15 Information Respecting Shares.......................................10
ARTICLE 3 BOARD OF DIRECTORS..........................................................10
3.1 General Powers......................................................10
3.2 Number, Tenure, and Qualifications of Directors.....................10
3.3 Regular Meetings of the Board of Directors..........................11
3.4 Special Meetings of the Board of Directors..........................11
3.5 Notice and Waiver of Notice of Special Director Meetings............11
3.6 Director Quorum.....................................................12
3.7 Manner of Acting....................................................12
3.8 Director Action Without a Meeting...................................12
3.9 Removal of Directors................................................13
3.10 Board of Director Vacancies.........................................13
3.11 Director Compensation...............................................14
3.12 Director Committees.................................................14
3.13 Director's Rights to Inspect Corporate Records......................14
3.14 General Standard of Conduct for Directors...........................16
ARTICLE 4 OFFICERS....................................................................17
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4.1 Number of Officers..................................................17
4.2 Appointment and Term of Office......................................17
4.3 Removal of Officers.................................................17
4.4 Chairman of the Board...............................................17
4.5 Chief Executive Officer.............................................17
4.6 President...........................................................18
4.7 Vice Presidents.....................................................18
4.8 Secretary...........................................................18
4.9 Treasurer...........................................................19
4.10 Assistant Secretaries and Assistant Treasurers......................19
4.11 Salaries............................................................19
4.12 General Standards of Conduct for Officers...........................19
ARTICLE 5 LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES, FIDUCIARIES, AND AGENTS .........................................20
5.1 Limitation of Liability of Directors and Officers...................20
5.2 Indemnification of Directors and Officers...........................20
5.3 Effect of Repeal or Modification of Article V.......................21
5.4 Insurance...........................................................21
ARTICLE 6 CERTIFICATES FOR SHARES AND THEIR TRANSFER..................................21
6.1 Certificates for Shares.............................................21
6.2 Shares Without Certificates.........................................22
6.3 Registration of Transfer of Shares..................................22
6.4 Restrictions on Transfer of Shares Permitted........................22
6.5 Acquisition of Shares...............................................23
ARTICLE 7 DISTRIBUTIONS...............................................................24
7.1 Distributions.......................................................24
ARTICLE 8 CORPORATE SEAL..............................................................24
8.1 Corporate Seal......................................................24
ARTICLE 9 FISCAL YEAR.................................................................24
9.1 Fiscal Year.........................................................24
ARTICLE 10 AMENDMENTS.................................................................25
10.1 Amendments..........................................................25
</TABLE>
ii
<PAGE>
BYLAWS
OF
LINEO, INC.
ARTICLE 1
OFFICES
1.1 BUSINESS OFFICES.
The principal office of Lineo, Inc., a Delaware corporation (the
"Corporation"), shall be located at any place either within or outside the State
of Delaware, as designated in the Corporation's Certificate of Incorporation or
the Corporation's most recent annual report on file with the Office of the
Secretary of State of Delaware providing such information. The Corporation may
have such other offices, either within or outside the State of Delaware as the
Board of Directors may designate or as the business of the Corporation may
require from time to time. The Corporation shall maintain at its principal
office a copy of those records specified in Section 2.13 of Article II of these
Bylaws.
1.2 REGISTERED OFFICE.
The registered office of the Corporation required by the Delaware
General Corporation Code shall be located within the State of Delaware. The
address of the registered office may be changed from time to time.
ARTICLE 2
STOCKHOLDERS
2.1 ANNUAL STOCKHOLDER MEETING.
An annual meeting of the stockholders shall be held each year on the
date, at the time, and at the place, fixed by the Board of Directors, for the
purpose of electing directors and for the transaction of such other business as
may come before the meeting.
2.2 SPECIAL STOCKHOLDER MEETINGS.
Special meetings of the stockholders may be called, for any purposes
described in the notice of the meeting, by the president, or by the Board of
Directors, and shall be called by the president at the request of the holders of
not less than one-tenth of all outstanding votes of the Corporation entitled to
be cast on any issue at the meeting.
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2.3 PLACE OF STOCKHOLDER MEETING.
The Board of Directors may designate any place, either within or
outside the State of Delaware, as the place for any annual meeting of the
stockholders and for any special meeting of the stockholders called by the Board
of Directors. The president of the Corporation or any stockholder or any group,
of stockholders of the Corporation holding at least ten percent (10%) of ad of
the voting shares of the Corporation may designate any place, within or outside
the State of Delaware, as the place for any special meeting of the stockholders
called by the president or the group of stockholders. If no designation is made
by the Board of Directors, the president, or the stockholders, as the case may
be, the place of the meeting shall be the principal ounce of the Corporation.
2.4 NOTICE OF STOCKHOLDER MEETING.
(a) REQUIRED NOTICE. Written notice stating the place,
day, and hour of any annual or special stockholder meeting shall be delivered
not less than ten nor more than sixty days before the date of the meeting,
either personally or by mail, by or at the direction of the Board of Directors,
the president, or other persons calling the meeting, to each stockholder of
record entitled to vote at such meeting, and to any other stockholder entitled
by the Delaware General Corporation Code or the Corporation's Certificate of
Incorporation to receive notice of the meeting. Notice shall be deemed to be
effective when mailed.
Notice shall not be required to be given to any stockholder to whom:
(i) A notice of two consecutive annual meetings,
and all notices of meetings or of the taking of action by written consent
without a meeting during the period between the two consecutive annual meetings,
have been mailed, addressed to the stockholder at the stockholder's address as
shown on the records of the Corporation, and have been returned undeliverable;
or
(ii) At least two payments, if sent by first
class mail, of dividends or interest on securities during a twelve month period,
have been mailed, addressed to the stockholder at the stockholder's address as
shown on the records of the Corporation, and have been resumed undeliverable.
If a stockholder to whom notice is not required delivers to the
Corporation a written notice setting forth the stockholder's current address, or
if another address for the stockholder is otherwise made known to the
Corporation, the requirement that notice be given to the stockholder is
reinstated.
(b) ADJOURNED MEETING. If any stockholder meeting is
adjourned to a different date, time, or place, notice need not be given of the
new date, time, or place, if the new date, time, or place is announced at the
meeting before adjournment. However, if the adjournment is for more than 30
days, or if after the adjournment a new record date for the adjourned meeting is
or must be fixed (SEE Section 2.5 of these Bylaws), then notice must be given
pursuant to the requirements of paragraph (a) of this Section 2.4 to
stockholders of record who are entitled to vote at the meeting.
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<PAGE>
(c) WAIVER OF NOTICE. Any stockholder may waive notice of
a meeting (or any notice required by the Delaware General Corporation Code, the
Corporation's Certificate of Incorporation, or these Bylaws), by a writing
signed by the stockholder, which is delivered to the Corporation (either before
or after the date and time stated in the notice as the date or time when any
action will occur or has occurred) for inclusion in the minutes or filing with
the Corporation's records.
A stockholder's attendance at a meeting:
(i) Waives objection to lack of notice or
defective notice of the meeting, unless the stockholder at the beginning of the
meeting objects to holding the meeting or transacting business at the meeting;
and
(ii) Waives objection to consideration of a
particular matter at the meeting that is not within the purpose or purposes
described in the meeting notice, unless the stockholder objects to considering
the matter when it is presented.
(d) CONTENTS OF NOTICE. Notice of any special meeting of
the stockholders shall include a description of the purpose or purposes for
which the meeting is called. Except as provided in this Section 2.4(d), in the
Certificate of Incorporation, or in the Delaware General Corporation Code,
notice of an annual meeting of the stockholders need not include a description
of the purpose or purposes for which the meeting is called.
2.5 FIXING OF RECORD DATE.
For the purpose of determining stockholders of any voting group
entitled to notice of or to vote at any meeting of stockholders, or stockholders
entitled to take action without a meeting or to demand a special meeting, or
stockholders entitled to receive payment of any distribution or dividend, or in
order to make a determination of stockholders for any other proper purpose, the
Board of Directors may fix in advance a date as the record date. Such record
date shall not be more than seventy days prior to the date on which the
particular action, requiring such determination of stockholders, is to be taken.
If no record date is so fixed by the Board of Directors, the record date shall
be at the close of business:
(a) with respect to an annual meeting of the stockholders
or any special meeting of the stockholders called by the Board of Directors or
any person or group specifically authorized by these Bylaws to call a meeting of
the stockholders, as of the close of business on the day before the first notice
is delivered to stockholders;
(b) with respect to a special stockholder meeting
demanded by the stockholders, on the earliest date of any of the demands
pursuant to which the meeting is called, or 60 days prior to the date the first
of the written demands is received by the Corporation, whichever is later;
(c) with respect to actions taken in writing without a
meeting (pursuant to Section 2.11 of these Bylaws), on the date the first
stockholder delivers to the Corporation a signed written consent upon which the
action is taken;
3
<PAGE>
(d) with respect to a distribution to stockholders (other
than one involving a repurchase or reacquisition of shares), on the date the
Board of Directors authorizes the distribution; and
(e) with respect to the payment of a share dividend, on
the date the Board of Directors authorizes the share dividend.
When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this Section, such determination shall
apply to any adjournment thereof unless the Board of Directors fixes a new
record date, which it must do if the meeting is adjourned to a date more than
120 days after the date fixed for the original meeting.
2.6 STOCKHOLDER LIST.
The secretary shall make a complete record of the stockholders entitled
to vote at each meeting of stockholders, arranged in alphabetical order within
each class or series, with the address of and the number of shares held by each.
The list must be arranged by voting group (if such exists; SEE Section 2.7 of
these Bylaws) and within each voting group by class or series of shares. The
stockholder list must be available for inspection by any stockholder, beginning
on the earlier of ten days before the meeting for which the list was prepared or
two business days after notice of the meeting is given and continuing through
the meeting and any adjournments. The list shall be available at the
Corporation's principal office or at a place identified in the notice of the
meeting in the city where the meeting is to be held. A stockholder, his agent,
or attorney is entitled on written demand to inspect and, subject to the
requirements of Section 2.13 of these Bylaws, to inspect and copy the list
during regular business hours and during the period it is available for
inspection. The Corporation shall maintain the stockholder list in written form
or in another form capable of conversion into written form within a reasonable
time.
2.7 STOCKHOLDER QUORUM AND VOTING REQUIREMENTS.
If the Certificate of Incorporation or the Delaware General Corporation
Code provide for voting by a single voting group on a matter, action on that
matter is taken when voted upon by that voting group.
Shares entitled to vote as a separate voting group may take action on a
maker at a meeting only if a quorum of those shares exists with respect to that
matter. Unless the Certificate of Incorporation, a Bylaw adopted by the
stockholders pursuant to the Delaware General Corporation Code provide
otherwise, at least two-thirds (2/3) of the votes entitled to be cast on the
matter by the voting group constitutes a quorum of that voting group for action
on that matter.
If the Certificate of Incorporation or the Delaware General Corporation
Code provide for voting by two or more voting groups on a matter, action on that
matter is taken only when voted upon by each of those voting groups counted
separately. One voting group may vote on a matter even though another voting
group entitled to vote on the matter has not voted.
Once a share is represented for any purpose at a meeting, including the
purpose of determining that a quorum exists, it is deemed present for quorum
purposes for the remainder of
4
<PAGE>
the meeting and for any adjournment of that meeting, unless a new record date
is or must be set for that adjourned meeting.
If a quorum exists, action on a matter (other than the election of
directors) by a voting group is approved if at least two-thirds (2/3) of the
votes cast within the voting group favoring the action exceed the votes cast
opposing the action, unless the Certificate of Incorporation, a Bylaw adopted by
the stockholders pursuant to the Delaware General Corporation Code, require a
greater number of affirmative votes.
2.8 PROXIES.
At all meetings of stockholders, a stockholder may vote in person or by
a proxy executed in any lawful manner. Such proxy shall be filed with the
Corporation before or at the time of the meeting. No proxy shall be valid after
eleven months from the date of its execution unless otherwise provided in the
proxy.
2.9 VOTING OF SHARES.
Unless otherwise provided in the Certificate of Incorporation, each
outstanding share entitled to vote shall be entitled to one vote, and each
fractional share shall be entitled to a corresponding fractional vote, upon each
matter submitted to a vote at a meeting of stockholders.
Except as provided by specific court order, no shares of the
Corporation held by another corporation, if a majority of the shares entitled to
vote for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting of the Corporation or counted in
determining the total number of outstanding shares at any given time for
purposes of any meeting. However, the power of the Corporation to vote any
shares, including its own shares, held by it in a fiduciary capacity is not
hereby limited.
Redeemable shares are not entitled to be voted after notice of
redemption is mailed to the holders thereof and a sum sufficient to redeem the
shares has been deposited with a bank,- trust company, or other financial
institution under an irrevocable obligation to pay the holders the redemption
price on surrender of the shares.
2.10 CORPORATION'S ACCEPTANCE OF VOTES.
(a) If the name signed on a vote, consent, waiver, proxy
appointment, or proxy appointment revocation corresponds to the name of a
stockholder, the Corporation, if acting in good faith, is entitled to accept the
vote, consent, waiver, proxy appointment, or proxy appointment revocation and
give it effect as the act of the stockholder.
(b) If the name signed on a vote, consent, waiver, proxy
appointment, or proxy appointment revocation does not correspond to the name of
a stockholder, the Corporation, if acting in good faith, is nevertheless
entitled to accept the vote, consent, waiver, proxy appointment, or proxy
appointment revocation and give it effect as the act of the stockholder if:
5
<PAGE>
(i) The stockholder is an entity as defined in
the Delaware General Corporation Code and the name signed purports to be that of
an officer or agent of the entity;
(ii) the name signed purports to be that of an
administrator, executor, guardian, or conservator representing the stockholder
and, if the Corporation requests, evidence of fiduciary status acceptable to the
Corporation has been presented with respect to the vote, consent, waiver, proxy
appointment, or proxy appointment revocation;
(iii) the name signed purports to be that of a
receiver or trustee in bankruptcy of the stockholder and, if the Corporation
requests, evidence of this status acceptable to the Corporation has been
presented with respect to the vote, consent, waiver, proxy appointment, or proxy
appointment revocation;
(iv) the name signed purports to be that of a
pledges, beneficial owner, or attorney-in-fact of the stockholder and, if the
Corporation requests, evidence acceptable to the Corporation of the signatory's
authority to sign for the stockholder has been presented with respect to the
vote, consent, waiver, proxy appointment, or proxy appointment revocation;
(v) two or more persons are the stockholder as
cotenants or fiduciaries and the name signed purports to be the name of at least
one of the cotenants or fiduciaries and the person signing appears to be acting
on behalf of all the cotenants or fiduciaries; or
(vi) the acceptance of the vote, consent, waiver,
proxy appointment, or proxy appointment revocation is otherwise proper under
rules established by the Corporation that are not inconsistent with the
provisions of this Section 2.10.
(c) If shares of the Corporation are registered in the
names of two or more persons, or if two or more persons have the same fiduciary
relationship respecting the same shares, unless the secretary is given written
notice to the contrary and furnished with a copy of the instrument creating the
relationship, their acts with respect to voting shall have the following effect:
(i) if only one votes, the act binds all;
(ii) if more than one vote, the act of the
majority so voting binds all;
(iii) if more than one vote, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionately; and
(iv) if the instrument so filed or the
registration of the shares shows that any tenancy is held in unequal interests,
a majority or even split for the purpose of this Section 2.10 shall be a
majority or even split in interest.
(d) The Corporation is entitled to reject a vote,
consent, waiver, proxy appointment, or proxy appointment revocation if the
secretary or other officer or agent authorized to tabulate votes, acting in good
faith, has reasonable basis for doubt about the validity of the signature on it
or about the signatory's authority to sign for the stockholder.
6
<PAGE>
(e) The Corporation and its officer or agent who accepts
or rejects a vote, consent, waiver, proxy appointment, or proxy appointment
revocation in good faith and in accordance with the standards of this Section
2.10 are not liable in damages to the stockholder for the consequences of the
acceptance or rejection.
(f) Corporate action based on the acceptance or rejection
of a vote, consent, waiver, proxy appointment, or proxy appointment revocation
under this Section 2.10 is valid unless a court of competent jurisdiction
determines otherwise.
2.11 INFORMAL ACTION BY STOCKHOLDERS.
(a) Unless otherwise provided in the Certificate of
Incorporation, any action which may be taken at any annual or special meeting of
stockholders may be taken without a meeting and without prior notice if one or
more consents in writing, setting forth the action so taken, are signed by the
holders of outstanding shares having not less than the minimum number of votes
necessary to authorize or take the action at a meeting at which all shares
entitled to vote thereon were present and voted.
(b) Unless written consents of all stockholders entitled
to vote have been obtained, the Corporation shall give notice of any stockholder
approval without a meeting at least ten days before the consummation of the
action authorized by the approval to:
(i) those stockholders entitled to vote who have
not consented in writing; and
(ii) those stockholders not entitled to vote and
to whom the Delaware General Corporation Code requires notice be given.
Such notice shall contain or be accompanied by the same material that
would have been required if a formal meeting had been called to consider the
action.
(c) Any stockholder giving a written consent, or the
stockholders' proxyholder, or a transferee of the shares or a personal
representative of the stockholder or their respective proxyholder, may revoke
the consent by a signed writing describing the action and stating-that the
stockholder's prior consent is revoked, if the writing is received by the
Corporation prior to the effectiveness of the action.
(d) Action taken pursuant to this Section 2.11 is not
effective unless all written consents on which the Corporation relies for the
taking of action are received by the Corporation within a sixty day period and
are not revoked. Action thus taken is effective as of the date the last written
consent necessary to effect the action is received by the Corporation, unless
all the written consents necessary to effect the action specify a later date as
the effective date of action. If the Corporation has received written consents
signed by all stockholders entitled to vote with respect to the action, the
effective date of the action may be any date that is specified in all the
written consents as the effective date of the action. The writing may be
received by the Corporation by electronically transmitted facsimile or other
form of communication providing the Corporation with a complete copy thereof,
including a copy of the signature.
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(e) Notwithstanding Subsection (a) of this Section 2.11,
directors may not be elected by written consent except by unanimous written
consent of all shares entitled to vote for the election of directors.
(f) Action taken under this Section 2.11 has the same
effect as action taken at a meeting of stockholders and may be so described in
any document.
2.12 VOTING FOR DIRECTORS.
At each election of directors, unless otherwise provided in the
Certificate of Incorporation or the Delaware General Corporation Code, every
stockholder entitled to vote at the election has the right to vote, in person or
by proxy, all of the votes to which the stockholder's shares are entitled for as
many persons as there are directors to be elected and for whose election the
stockholder has the right to vote.
Unless otherwise provided in the Certificate of Incorporation or the
Delaware General Corporation Code, directors are elected by at least two-thirds
(2/3) of the votes cast by the shares entitled to be voted in the election, at a
meeting at which a quorum is present.
2.13 STOCKHOLDER'S RIGHTS TO INSPECT CORPRORATE RECORDS.
(a) MINUTES AND ACCOUNTING RECORDS. The Corporation shall
keep as permanent records minutes of all meetings of its stockholders and Board
of Directors, a record of all actions taken by its stockholders or Board of
Directors without a meeting, a record of all actions taken on behalf of the
Corporation by a committee of the Board of Directors in place of the Board of
Directors, and a record of all waivers of notices of meetings of its
stockholders, meetings of the Board of Directors, or any meetings of committees
of the Board of Directors. The Corporation shall maintain appropriate accounting
records.
(b) ABSOLUTE INSPECTION RIGHTS OF RECORDS REQUIRED AT
PRINCIPAL OFFICE. If a stockholder gives the Corporation written notice of the
stockholder's demand at least five business days before the date on which the
stockholder wishes to inspect and copy, a stockholder (or the stockholder's
agent or attorney) has the right to inspect and copy, during regular business
hours, any of the following records, all of which the Corporation is required to
keep at its principal office:
(i) The Corporation's Certificate of
Incorporation currently in effect;
(ii) the Corporation's Bylaws currently in
effect;
(iii) the minutes of all stockholders' meetings,
and records of all action taken by stockholders without a meeting, for the past
three years;
(iv) all written communications within the past
three years to stockholders as a group or to the holders of any class or series
of shares as a group;
(v) a list of the names and business addresses
of the Corporation's current officers and directors;
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(vi) the Corporation's most recent annual report
delivered to the Office of the Secretary of State of Delaware; and
(vii) all financial statements prepared for
periods ending during the last three years that a stockholder could request
pursuant to the Delaware General Corporation Code.
(c) CONDITIONAL INSPECTION RIGHT. If a stockholder gives
the Corporation a written demand made in good faith and for a proper purpose at
least five business days before the date on which the stockholder wishes to
inspect and copy, the stockholder describes with reasonable particularity the
stockholder's purpose and the records the stockholder desires to inspect, and
the records are directly connected with the stockholder's purpose, the
stockholder (or the stockholder's agent or attorney) is entitled to inspect and
copy, during regular business hours at a reasonable location specified by the
Corporation, any of the following records of the Corporation:
(i) Excerpts from:
(A) Minutes of any meeting of the Board
of Directors, records of any action of a committee of the Board of Directors
while acting on behalf of the Corporation in place of the Board of Directors;
(B) minutes of any meeting of the
stockholders;
(C) records of action taken by the
stockholders without a meeting; and
(D) waivers of notices of any meeting
of the stockholders, of any meeting of the Board of Directors, or of any meeting
of a committee of the Board of Directors;
(ii) accounting records of the Corporation; and
(iii) the record of the Corporation's
stockholders.
(d) COPY COSTS. The right to copy records includes, if
reasonable, the right to receive copies made by photographic, xerographic, or
other means. The Corporation may impose a reasonable charge, payable in advance,
covering the costs of labor and material, for copies of any documents provided
to a stockholder. The charge may not exceed the estimated cost of production or
reproduction of the records.
(e) STOCKHOLDER INCLUDES BENEFICIAL OWNER. For purposes
of this Section 2.14, the term "stockholder" shall include a beneficial owner
whose shares are held in a voting trust and any other beneficial owner who
establishes beneficial ownership.
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2.14 FURNISHING FINANCIAL STATEMENTS TO A STOCKHOLDER.
Upon the written request of any stockholder, the Corporation shall mail
to the stockholder its most recent annual or quarterly financial statements
showing in reasonable detail its assets and liabilities and the results of its
operations.
2.15 INFORMATION RESPECTING SHARES.
Upon the written request of any stockholder, the Corporation, at its
own expense, shall mail to the stockholder information respecting the
designations, preferences, limitations, and relative rights applicable to each
class of shares, the variations determined for each series, and the authority of
the Board of Directors to determine variations for any existing or future class
or series. The Corporation may comply by mailing the stockholder a copy of its
Certificate of Incorporation containing such information.
ARTICLE 3
BOARD OF DIRECTORS
3.1 GENERAL POWERS.
All corporate powers shall be exercised by or under the authority of,
and the business and affairs of the Corporation managed under, the direction of
the Board of Directors, subject to any limitation set forth in the Certificate
of Incorporation or in any agreement authorized the Delaware General Corporation
Code.
3.2 NUMBER, TENURE, AND QUALIFICATIONS OF DIRECTORS.
(a) NUMBER. The number of directors of the Corporation
shall be not less than three (3) nor more than fifteen (15) except in the event
that there are less than three (3) stockholders of the Corporation entitled to
vote for the election of directors in which case the number of directors may
equal the number of such voting stockholders of the Corporation. Within this
range, the stockholders or the Board of Directors initially shall fix the number
of directors of the Corporation. Thereafter, again within this range, the number
of directors of the Corporation may be changed and re-established, from time to
time, by the stockholders or the Board of Directors of the Corporation.
Alternatively, if the stockholders of the Corporation elect a new Board of
Directors of the Corporation and the total number of directors elected are
within the range set by this Section 3.2 but are more or less than the number of
directors of the Corporation previously fixed by the stockholders or the Board
of Directors of the Corporation, then such number of directors shall be deemed
to be the fixed number of directors of the Corporation (until such time as the
stockholders or the Board of Directors of the Corporation change said number of
directors by the methods described herein) even though such number has not been
expressly fixed by resolution of the stockholders or the Board of Directors of
the Corporation. Notwithstanding a change in the number of directors of the
Corporation implemented by any of the methods described in this Section 3.2, no
decrease in the number of directors of the Corporation may shorten the term of
any incumbent director.
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(b) TENURE. Each director shall hold office until the
next annual meeting of stockholders or until removed. However, if a director's
term expires, the director shall continue to serve until the directors successor
shall have been elected and qualified, or until there is a decrease in the
number of directors.
(c) QUALIFICATIONS. Directors need not be residents of
the State of Delaware or stockholders of the Corporation unless the Certificate
of Incorporation so prescribes.
3.3 REGULAR MEETINGS OF THE BOARD OF DIRECTORS.
The Board of Directors may provide, by resolution, the time and place,
either within or outside the State of Delaware, for the holding of regular
meetings, which shall be held without other notice than such resolution.
3.4 SPECIAL MEETINGS OF THE BOARD OF DIRECTORS.
Special meetings of the Board of Directors may be called by or at the
request of one (1) of the directors, who may fix any place, either within or
outside the State of Delaware, as the place for holding the meeting.
3.5 NOTICE AND WAIVER OF NOTICE OF SPECIAL DIRECTOR MEETINGS.
Unless the Certificate of Incorporation provides for a longer or
shorter period, special meetings of the Board of Directors must be preceded by
at least two days notice, either orally or in writing, of the date, time, and
place of the meeting.
Notice of any meeting of the Board of Directors shall be deemed to be
effective at the earliest of: (1) when received; (2) five days after it is
mailed; or (3) the date shown on the return receipt if sent by registered or
certified mail, return receipt requested, and the receipt is signed by or on
behalf of the director.
A director may waive notice of any meeting. Except as in this Section
3.5 provided, the waiver must be in writing and signed by the director entitled
to the notice. The waiver shall be delivered to the Corporation for filing with
the corporate records, but delivery and filing are not conditions to its
effectiveness.
The attendance of a director at a meeting shall constitute a waiver of
notice of such meeting, except when a director attends a meeting for the express
purpose of objecting to the transaction of any business and at the beginning of
the meeting, or promptly upon arrival the director objects to holding the
meeting or transacting business at the meeting because of lack of notice or
defective notice, and does not thereafter vote for or assent to action taken at
the meeting.
A director who attends a special meeting to object to lack of notice
shall not be deemed to be present for quorum purposes.
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3.6 DIRECTOR QUORUM.
A majority of the number of directors shall constitute a quorum for the
transaction of business at any meeting of the Board of Directors, unless the
Certificate of Incorporation require a greater number.
A majority of the number of directors prescribed by resolution (or if
no number is prescribed, the number in office immediately before the meeting
begins) shall constitute a quorum for the transaction of business at any meeting
of the Board of Directors, unless the Certificate of Incorporation require a
greater number.
3.7 MANNER OF ACTING.
The act of the majority of the directors present at a meeting at which
a quorum is present when the vote is taken shall be the act of the Board of
Directors, unless the Certificate of Incorporation require a greater percentage.
Unless the Certificate of Incorporation provides otherwise, any or all
directors may participate in a regular or special meeting by, or conduct the
meeting through the use of, any means of communication by which all directors
participating may simultaneously hear each other during the meeting. A director
participating in a meeting by this means is deemed to be present in person at
the meeting.
A director who is present at a meeting of the Board of Directors when
corporate action is taken is considered to have assented to the action taken,
unless:
(a) the director objects at the beginning of the meeting,
or promptly upon arrival, to holding it or transacting business at the meeting;
(b) the director contemporaneously requests his dissent
or abstention as to any specific action to be entered into the minutes of the
meeting; or
(c) the director causes written notice of a dissent or
abstention as to any specific action to be received by the presiding officer of
the meeting before its adjournment or by the Corporation promptly after
adjournment of the meeting.
The right of dissent or abstention as to a specific action is not
available to a director who votes in favor of the action taken.
3.8 DIRECTOR ACTION WITHOUT A MEETING.
Unless the Certificate of Incorporation or the Delaware General
Corporation Code provide otherwise, any action required or permitted to be taken
by the Board of Directors at a meeting may be taken without a meeting if all the
directors consent to the action in writing. Action is taken by consents at the
time the last director signs a writing describing the action taken, unless,
prior to that time, any director has revoked a consent by a writing signed by
the director and received by the secretary. Action taken by consents is
effective when the last director signs the consent, unless the Board of
Directors establishes a different effective date.
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Action taken by consents has the same effect as action taken at a meeting of
directors and may be described as such in any document.
3.9 REMOVAL OF DIRECTORS.
The stockholders may remove one or more directors at a meeting called
for that purpose if notice has been given that a purpose of the meeting is such
removal. The removal may be with or without cause, unless the Certificate of
Incorporation provides that directors may only be removed with cause. If a
director is elected by a voting group of stockholders, only the stockholders of
that voting group may participate in the vote to remove the director. If
cumulative voting is in effect, a director may not be removed if the number of
votes sufficient to elect the director under cumulative voting is voted against
the director's removal. If cumulative voting is not in effect, a director may be
removed only if the number of votes cast to remove the director exceeds the
number of votes cast not to remove the director.
3.10 BOARD OF DIRECTOR VACANCIES.
(a) Unless the Certificate of Incorporation provides
otherwise, if a vacancy occurs on the Board of Directors, including a vacancy
resulting from an increase in the number of directors:
(i) the stockholders may fill the vacancy;
(ii) the Board of Directors may fill the vacancy;
or
(iii) if the directors remaining in office
constitute fewer than a quorum of the board, they may fill the vacancy by the
affirmative vote of a majority of all the directors remaining in office.
(b) Unless the Certificate of Incorporation provides
otherwise, if the vacant office was held by a director elected by a voting group
of stockholders:
(i) If one or more directors were elected by the
same voting group, only they are entitled to vote to fill the vacancy if it is
filled by the directors; and
(ii) only the holders of shares of that voting
group are entitled to vote to fill the vacancy if it is filled by the
stockholders.
A vacancy that will occur at a specific later date, because of a
resignation effective at a later date, may be filled before the vacancy occurs,
but the new director may not take office until the vacancy occurs.
If a director's term expires, the director shall continue to serve
until the director's successor is elected and qualified or until there is a
decrease in the number of directors. The term of a director elected to fill a
vacancy expires at the next stockholders' meeting at which directors are
elected.
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3.11 DIRECTOR COMPENSATION.
Unless otherwise provided in the Certificate of Incorporation, by
resolution of the Board of Directors, each director may be paid his expenses, if
any, of attendance at each meeting of the Board of Directors, and may be paid a
stated salary as a director or a fixed sum for attendance at each meeting of the
Board of Directors or both. No such payment shall preclude any director from
serving the Corporation in any capacity and receiving compensation therefor.
3.12 DIRECTOR COMMITTEES.
(a) CREATION OF COMMITTEES. Unless the Certificate of
Incorporation provides otherwise, the Board of Directors may create an Executive
Committee and such other committees as the Board of Directors deems appropriate
and appoint members of the Board of Directors to serve on them. Mach committee
must have two or more members, who serve at the pleasure of the Board of
Directors.
(b) SELECTION OF MEMBERS. The creation of a committee and
appointment of members to it must be approved by the greater of:
(i) a majority of all the directors in office
when the action is taken; or
(ii) the number of directors required by the
Certificate of Incorporation take such action, or if not specified in the
Certificate of Incorporation the number required by Section 3.7 of these Bylaws
to take action.
(c) REQUIRED PROCEDURES. Sections 3.4 through 3.9 of
these Bylaws, which govern meetings, action without a meeting, notice, waiver of
notice, and quorum and voting requirements of the Board of Directors, apply to
committees and their members as well.
(d) AUTHORITY. Unless limited by the Certificate of
Incorporation, each committee may exercise those aspects of the authority of the
Board of Directors which the Board of Directors confers upon such committee in
the resolution creating the committee.
(e) AUTHORITY OF EXECUTIVE COMMITTEE. The Executive
Committee shall have, and may exercise all powers of the Board of Directors with
respect to the management of the business and affairs of the Corporation during
the intervals between the meetings of the Board of Directors, unless otherwise
limited by the Board of Directors. Provided, however, the Executive Committee
shall not have the power to fill vacancies on the Board of Directors or to amend
these Bylaws.
3.13 DIRECTOR'S RIGHTS TO INSPECT CORPORATE RECORDS.
(a) ABSOLUTE INSPECTION RIGHTS OF RECORDS REQUIRED AT
PRINCIPAL OFFICE. If a director gives the Corporation written notice of the
director's demand at least five business days before the date on which the
director wishes to inspect and copy, the director (or the directors agent or
attorney) has the right to inspect and copy, during regular business hours, any
of the following records, all of which the Corporation Is required to keep at
its principal office:
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(i) the Corporation's Certificate of
Incorporation currently in effect;
(ii) the Corporation's Bylaws currently in
effect;
(iii) the minutes of all stockholders' meetings,
and records of all action taken by stockholders without a meeting, for the past
three years;
(iv) all written communications within the past
three years to stockholders as a group or to the holders of any class or series
of shares as a group;
(v) a list of the names and loudness addresses
of the Corporation's current officers and directors;
(vi) the Corporation's most recent annual report
delivered to the Office of the Secretary of State of Delaware; and
(vii) all financial statements prepared for
periods ending during the last three years that a stockholder could request.
(b) CONDITIONAL INSPECTION RIGHT. In addition, if a
director gives the Corporation a written demand made in good faith and for a
proper purpose at least five business days before the date on which the director
wishes to inspect and copy, the director describes with reasonable particularity
the director's purpose and the records the director desires to inspect, and the
records the director desires to inspect, and the records are directly connected
with the director's purpose, the director (or the director's agent or attorney)
is entitled to inspect and copy, during regular business hours at a reasonable
location specified by the Corporation, any of the following records of the
Corporation:
(i) Excerpts from:
(A) Minutes of any meeting of the Board
of Directors, records of any action of a committee of Board of Directors whim
acting on behalf of the Corporation in place of the Board of Directors;
(B) minutes of any meeting of the
stockholders;
(C) records of action taken by the
stockholders without a meeting; and
(D) waivers of notices of any meeting
of the stockholders, of any meeting of the Board of Directors, or of any meeting
of a committee of the Board of Directors;
(ii) accounting records of the Corporation; and
(iii) the record of the Corporation's
stockholders.
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(c) COPY COSTS. The right to copy records includes, if
reasonable, the right to receive copes made by photographic, xerographic, or
other means. The Corporation may impose a reasonable charge, payable in advance,
covering the costs of labor and material, for copies of any documents provided
to the director. The charge may not exceed the estimated cost of production or
reproduction of the records.
3.14 GENERAL STANDARD OF CONDUCT FOR DIRECTORS.
The standards of conduct for the Directors of the Corporation shall be
as follows:
(a) Each director shall discharge his or her duties as a
director, including duties as a member of a committee, (i) in good faith, (ii)
with the care an ordinarily prudent person in a like position would exercise
under similar circumstances, and (iii) in a manner if - director reasonably
believes to be in the best interests of the Corporation. The Board of Directors
and stockholders of the Corporation understand that the members of the Board of
Directors may have other business interests, activities and responsibilities
that take a substantial portion of their time and attention. Accordingly, the
members of the Board of Directors are required to devote to the business of the
Corporation in fulfillment of their respective responsibilities as a director of
the Corporation only the time and attention that they shall unilaterally deem
necessary in order to fill their responsibilities as a director.
(b) In discharging his or her duties, a director is
entitled to rely on information' opinions, reports, or statements including
financial statements and other financial data, if prepared or predator by;
(i) one or more officers or employees of the
Corporation whom the director reasonably believes to reliable and competent in
the matters presented;
(ii) legal counsel, public accountants, or other
persons as to matters the director reasonably believes are within the person's
professional or expert competence; or
(iii) a committee of the board of directors of
which the director is not a member, if the director reasonably believes the
committee merits confidence.
(c) A director is not acting in good faith if he or she
has knowledge concerning the matter in question that makes reliance otherwise
permitted by paragraph (b) of this Section 3.15 unwarranted.
(d) A director is not liable for any action taken, or any
failure to take any action as a director, if the duties of the director have
been performed in compliance with this Section 3.15.
(e) The standards of conduct set forth In this Section
3.14, or any breach of such standards, shall not affect the right or power of
the Corporation to indemnify any Individual pursuant to Article 5 of these
Bylaws.
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ARTICLE 4
OFFICERS
4.1 NUMBER OF OFFICERS.
The officers of the Corporation shall be a president, a secretary, and
a treasurer, each of whom shall be appointed by the Board of Directors. Such
other officers and assistant officers as may be deemed necessary, including any
chairman of the board, chief executive officer and any vice presidents, may be
appointed by the Board of Directors. If specifically authorized by the Board of
Directors, an officer may appoint one or more officers or assistant officers.
The same individual may simultaneously hold more than one office in the
Corporation.
4.2 APPOINTMENT AND TERM OF OFFICE.
The officers of the Corporation shall be appointed by the Board of
Directors for such term as is determined by the Board of Directors. The
designation of a specified term does not grant to the officer any contract
rights, and the Board of Directors can remove the officer at any time prior to
the end of such term. If no term is specified, the officer shall hold office
until the officer resigns, dies, or until removed in the manner provided in
Section 4.3 of these Bylaws.
4.3 REMOVAL OF OFFICERS.
Any officer or agent may be removed by the Board of Directors at any
time, with or without cause. Such removal shall be without prejudice to the
contract rights, if any, of the person so removed. Appointment of an officer or
agent shall not of itself create contract rights.
4.4 CHAIRMAN OF THE BOARD.
The chairman of the board, if any, shall have the following powers and
duties:
(a) To be the senior officer of the Corporation and, in
addition to the duties specified in this Section 4.4, to perform such duties as
may be assigned to him by the Board of Directors;
(b) to preside at all meetings of the stockholders of the
Corporation:
(c) to preside at all meetings of the Board of Directors;
(d) to be a member of the Executive Committee, if any.
4.5 CHIEF EXECUTIVE OFFICER.
The chief executive officer, if there is such an officer, shall possess
all of the powers that the Board of Directors may see fit to delegate to the
chief executive officer and he or she shall perform all of the duties that may
be prescribed by the Board of Directors from time to time.
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4.6 PRESIDENT.
The president shall be the principal executive officer of the
Corporation and, subject to the control of the Board of Directors, shall, in
general, supervise and control all of the business and affairs of the
Corporation. The president shall when present and in the absence of the chairman
of the board of the Corporation preside at all meetings of the stockholders and
of the Board of Directors. The president may sign, with, the secretary or any
other proper officer of the Corporation authorized by the Board of Directors,
certificates for shares of the Corporation, the issuance of which shall have
been authorized by a resolution of the Board of Directors, and deeds, mortgages,
bonds, contracts, or other instruments which the Board of Directors has
authorized to be executed, except in cases where the signing and execution
thereof shall be expressly delegated by the Board of Directors or by these
Bylaws to some other officer or agent of the Corporation, or shall be required
by law to be otherwise signed or executed; and in general shall perform all
duties incident to the office of president and such other duties as may be
prescribed by the Board of Directors from time to time. The president shall be a
member of the Executive Committee, if any, of the Corporation.
4.7 VICE PRESIDENTS.
If appointed, in the absence of the president or in the event of his
death, inability, or refusal to act, the vice president (or in the event there
be more than one vice president, the vice presidents in the order designated at
the time of their election, or in to absence of any designation, then in the
order of their appointment) shall perform the duties of the president, and when
so acting, shall have all the powers of and be subject to all the restrictions
upon the president. If there is no vice president, then the treasurer shall
perform such duties of the president. Any vice president may sign, with the
secretary or an assistant secretary, certificates for shares of the Corporation
the issuance of which have been authorized by resolution of the Board of
Directors; and shall perform such other duties as from time to time may be
assigned to him or her by the president or by the Board of Directors.
4.8 SECRETARY.
The secretary shall:
(a) keep the minutes of the proceedings of the
stockholders and of the Board of Directors and the other records and information
of the Corporation required to be kept, in one or more books provided for that
purpose;
(b) see that all notices are duly given in accordance
with the provisions of these Bylaws or as required by law;
(c) be custodian of the corporate records and of any seal
of the Corporation;
(d) when requested or required, authenticate any records
of the Corporation;
(e) keep a register of the post office address of each
stockholder which shall be furnished to the secretary by such stockholder,
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(f) sign with the chairman of the board, president, or a
vice president, certificates for shares of the Corporation, the issuance of
which shall have been authorized by resolution of the Board of Directors:
(g) have general charge of the stock transfer books of
the Corporation; and
(h) In general perform all duties incident to the office
of secretary and such other duties as from time to time may be assigned to him
or her by the president or by the Board of Directors.
4.9 TREASURER.
The Treasurer shall:
(a) have charge and custody of and be responsible for all
funds and securities of the Corporation;
(b) receive and give receipts for moneys due and payable
to the Corporation from any source whatsoever, and deposit all such moneys in
the name of the Corporation in such banks, trust companies, or other
depositories as shall be selected by the Board of Directors; and
(c) in general perform all of the duties incident to the
office of treasurer and such other duties as from time to time may be assigned
to him or her by the president or by the Board of Directors.
If required by the Board of Directors, the treasurer shall give a bond
for the faithful discharge of his or her duties in such sum and with such surety
or sureties as the Board of Directors shall determine.
4.10 ASSISTANT SECRETARIES AND ASSISTANT TREASURERS.
The assistant secretaries, when authorized by the Board of Directors,
may sign, with the chairman of the board, president or a vice president,
certificates for shares of the Corporation, the issuance of which shall have
been authorized by a resolution of the Board of Directors. The assistant
treasurers shall, if required by the Board of Directors, give bonds for the
faithful discharge of their duties in such sums and with such sureties as the
Board of Directors shall determine. The assistant secretaries and assistant
treasurers, in general, shall perform such duties as shall be assigned to them
by the secretary or the treasurer, respectively, or by the president or the
Board of Directors.
4.11 SALARIES.
The salaries of the offsets shall be fixed from tinge to time by the
Board of Directors.
4.12 GENERAL STANDARDS OF CONDUCT FOR OFFICERS.
The standards of conduct for the officers of the Corporation shall be
as follows:
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(a) Each officer with discretionary authority shall
discharge his or her duties under that authority (i) in good faith, (ii) with
the care an ordinarily prudent person in a like position would exercise under
similar circumstances, and (iii) in a manner the officer reasonably believes to
be In the best interests of the Corporation.
(b) In discharging his or her duties, an officer Is
entitled to rely on information, opinions, reports, or statements Including
financial statements and other financial data, if prepared or presented by:
(i) one or more officers or employees of the
Corporation whom the officer reasonably believes to be reliable and competent in
the matters presented; or
(ii) legal counsel, public accountants, or other
persons as to matters the officer reasonably believes are within the person's
professional or expert competence.
(c) An officer is not acting in good faith if he or she
has knowledge concerning the matter in question that makes reliance otherwise
permitted by paragraph (b) of this Section 5.12 unwarranted.
(d) An officer is not liable for any action taken, or any
failure to take any action as an officer if the duties of the office have been
performed in compliance with this Section 5.12.
(e) The standards of conduct set forth in this Section
5.12, or any breach of such standards, shall not affect the right or power of
the Corporation to indemnify any individual pursuant to Article 6 of these
Bylaws.
ARTICLE 5
LIMITATION OF LIABILITY AND INDEMNIFICATION OF
DIRECTORS, OFFICERS, EMPLOYEES, FIDUCIARIES, AND AGENTS
5.1 LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS.
The personal liability of the directors and officers of the Corporation
to the Corporation or its stockholders, or to any third person; shall be
eliminated or limited to the fullest extent as from time to time permitted by
Delaware law.
5.2 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Unless otherwise provided in the Certificate of Incorporation, the
Corporation shall indemnify any individual made a party to a proceeding because
the individual is or was a director or officer of the Corporation against
liability incurred in such proceeding to the fullest extent as from time to time
permitted by Delaware law.
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5.3 EFFECT OF REPEAL OR MODIFICATION OF ARTICLE V.
Any repeal or modification of this Article V by the stockholders of the
Corporation shall not adversely affect any right or protection of any person
existing at the time of such repeal or modification.
5.4 INSURANCE.
The Corporation may purchase and maintain liability insurance on behalf
of a person who is or was a director, officer, employee, fiduciary, or agent of
the Corporation, or who, while serving as a director, officer, employee,
fiduciary, or agent of the Corporation, is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee, fiduciary, or
agent of another foreign or domestic corporation or other person, or of an
employee benefit plan, against liability asserted against or incurred by him or
her in that capacity or arising from his or her status as a director, officer,
employee, fiduciary, or agent, whether or not the Corporation would have power
to indemnify him or her against the same liability under the Delaware General
Corporation Code. Insurance may be procured from any insurance company
designated by the Board of Directors, whether the insurance company is formed
under the laws of the State of Delaware or any other jurisdiction of the United
States or elsewhere, including any insurance company in which the Corporation
has an equity or any other interest through stock ownership or otherwise.
ARTICLE 6
CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 CERTIFICATES FOR SHARES.
(a) CONTENT. Certificates representing shares of the
Corporation shall, at a minimum, state on their face the name of the Corporation
and that the Corporation is organized under the lauds of the State of Delaware;
the name of the person to whom issued; and the number and class of shares and
the designation of the series, if any, the certificate represents; and be in
such form as is determined by the Board of Directors. Such certificates shall be
signed by the chairman of board, president or a vice president and by the
secretary or an assistant secretary and may be sealed with the corporate seal or
a facsimile thereof. The signatures of the officers may be facsimiles if the
certificate is countersigned by a transfer agent, or registered by a registrar,
other than the Corporation itself or an employee of the Corporation. Each
certificate for shares shall be consecutively numbered or otherwise identified.
The certificates may contain any other information the Corporation considers
necessary or appropriate.
(b) LEGEND AS TO CLASS OR SERIES. If the Corporation is
authorized to issue different classes of shares or different series within a
class, the designations, preferences, limitations, and relative rights
applicable to each class, the variations in preferences, limitations, and
relative rights determined for each series, and the authority of the Board of
Directors to determine variations for any existing or future class or series
must be summarized on the front or back of each certificate. Alternatively, each
certificate may state conspicuously on its front or
21
<PAGE>
back that the Corporation will furnish the stockholder this information on
request in writing and without charge.
(c) STOCKHOLDER LIST. The name and address of the person
to whom the shares represented are issued, with the number of shares and date of
issue, shall be entered on the stock transfer books of the Corporation.
(d) TRANSFERRING SHARES. All certificates surrendered to
the Corporation for transfer shall be canceled and no new certificate shall be
issued until the former certificate for a like number of shares shall have been
surrendered and canceled, except that in case of a lost, destroyed, or mutilated
certificate a new one may be issued therefor upon such terms and indemnity to
the Corporation as the Board of Directors may prescribe.
6.2 SHARES WITHOUT CERTIFICATES.
(a) ISSUING SHARES WITHOUT CERTIFICATES. Unless the
Certificate of Incorporation provides otherwise, the Board of Directors may
authorize the issuance of some or all of the shares of any or all classes or
series without certificates. The authorization does not affect shares already
represented by certificates until they are surrendered to the Corporation.
(b) INFORMATION STATEMENT REQUIRED. Within a reasonable
time after the issuance or transfer of shares without certificates, the
Corporation shall send the stockholder a written statement containing, at a
minimum, the name of the Corporation and that it is organized under the laws of
the State of Delaware; the name of the person to whorls issued; and the number
and class of shares and the designation of the series, if any, of the issued
shares. If the Corporation is authorized to issue different classes of shares or
different series within a class, the written statement shall describe the
designations, preferences, limitations, and relative rights applicable to each
class, the variations in preferences, limitations, and relative rights
determined for each series, and the authority of the Board of Directors to
determine variations for any existing or future class or series.
6.3 REGISTRATION OF TRANSFER OF SHARES.
Registration of the transfer of shares of the Corporation shall be made
only on the stock transfer books of the Corporation. In order to register a
transfer, the record owner shall surrender the shares to the Corporation for
cancellation, properly endorsed by the appropriate person or persons with
reasonable assurances that the endorsements are genuine and effective. Unless
the Corporation has established a procedure by which a beneficial owner of
shares held by a nominee is to be recognized by the Corporation as the owner,
the person in whose name shares stand on the books of the Corporation shall be
deemed by the Corporation to be the owner thereof for all purposes.
6.4 RESTRICTIONS ON TRANSFER OF SHARES PERMITTED.
The Board of Directors or the stockholders may impose restrictions on
the transfer or registration of transfer of shares (including any security
convertible into, or carrying a right to subscribe for or acquire shares). A
restriction does not affect shares issued before the restriction
22
<PAGE>
was adopted unless the holders of the shares are parties to the restriction
agreement or voted in favor of the registration or otherwise consented to the
restriction.
(a) A restriction on the transfer or registration of
transfer of shares may be authorized:
(i) To maintain the Corporation's status when it
is dependent on the number or identity of its stockholders;
(ii) to preserve entitlements, benefits, or
exemptions under federal, state, or local laws; and
(iii) for any other reasonable purpose.
(b) A restriction on the transfer or registration of
transfer of shares may:
(i) Obligate the stockholder first to offer the
Corporation or other persons, separately, consecutively, or simultaneously, an
opportunity to acquire the restricted shares;
(ii) obligate the Corporation or other persons,
separately, consecutively, or simultaneously, to acquire the restricted shares;
(iii) require, as a condition to a transfer or
registration, that any one or more persons, including the Corporation or any of
its stockholders, approve the transfer or registration, if the requirement is
not manifestly unreasonable; or
(iv) prohibit the transfer or the registration of
a transfer of the restricted shares to designated persons or classes of persons,
if the prohibition is not manifestly unreasonable.
A restriction on the transfer or registration of transfer of shares is
valid and enforceable against the holder or a transferee of the holder if the
restriction is authorized by this Section 6.4 and its existence is noted
conspicuously on the front or back of the certificate, or if the restriction is
contained in the information statement required by Section 6.2 of these Bylaws
with regard to shares issued without certificates. Unless so noted, a
restriction is not enforceable against a person without knowledge of the
restriction.
6.5 ACQUISITION OF SHARES.
The Corporation may acquire its own shares, and, unless otherwise
provided in the Certificate of Incorporation, the shares so acquired constitute
authorized but unissued shares.
If the Certificate of Incorporation prohibits the reissuance of
acquired shares, the number of authorized shares shall be reduced by the number
of shares acquired, effective upon amendment of the Certificate of
Incorporation, which amendment shall be adopted by the stockholders or the Board
of Directors without stockholder action. Appropriate Certificate of
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<PAGE>
Amendment must be delivered to the Office of the Secretary of State of Delaware
and must set forth:
(a) the name of the Corporation;
(b) the reduction in the number of authorized shares,
itemized by class and series;
(c) the total number of authorized shares, itemized by
class and series, remaining after reduction of the shares; and
(d) a statement that the amendment was adopted by the
Board of Directors without stockholder action and that stockholder action was
not required if such be the case.
ARTICLE 7
DISTRIBUTIONS
7.1 DISTRIBUTIONS.
The Board of Directors may authorize, and the Corporation may make,
distributions (including dividends on its outstanding shares) in the manner and
upon the terms and conditions provided by law and in the Certificate of
Incorporation.
ARTICLE 8
CORPORATE SEAL
8.1 CORPORATE SEAL.
The Board of Directors may provide a corporate seal which may be
circular in form and have inscribed thereon any designation including the name
of the Corporation, Delaware as the state of incorporation, and the words
"Corporate Seal."
ARTICLE 9
FISCAL YEAR
9.1 FISCAL YEAR.
The fiscal year of the Corporation shall be fixed by resolution of the
Board of Directors.
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<PAGE>
ARTICLE 10
AMENDMENTS
10.1 AMENDMENTS.
The Corporation's Board of Directors may amend these Bylaws, except to
the extent that the Certificate of Incorporation, these Bylaws, or the Delaware
General Corporation Code reserve this power exclusively to the stockholders in
whole or in part. However, the Board of Directors may not adopt, amend, or
repeal a Bylaw that fixes a stockholder quorum or voting requirement that is
greater than required by the Delaware General Corporation Code.
If authorized by the Certificate of Incorporation, the stockholders may
adopt, amend, or repeal a Bylaw that fixes a greater quorum or voting
requirement for stockholders, or voting groups of stockholders, than is required
by the Delaware General Corporation Code. Any such action shall comply with the
provisions of the Delaware General Corporation Code.
The Corporation's stockholders may amend or repeal the Corporation's
Bylaws even though the Bylaws may also be amended or repealed by the
Corporation's Board of Directors.
25
<PAGE>
EXHIBIT 10.1
LINEO, INC.
1999 STOCK OPTION PLAN
<PAGE>
<TABLE>
<S> <C>
1. DEFINITIONS.................................................................................................1
2. PURPOSES....................................................................................................4
3. ADMINISTRATION..............................................................................................4
(A) COMMITTEE................................................................................................4
(B) APPOINTMENT OF COMMITTEE.................................................................................4
(C) POWERS; REGULATIONS......................................................................................4
(D) DELEGATION TO EXECUTIVE OFFICER..........................................................................5
4. ELIGIBILITY.................................................................................................5
5. STOCK.......................................................................................................5
6. TERMS AND CONDITIONS OF OPTIONS.............................................................................5
(A) NUMBER OF SHARES AND TYPE OF OPTION......................................................................5
(B) DATE OF GRANT............................................................................................6
(C) OPTION PRICE.............................................................................................6
(D) DURATION OF OPTIONS......................................................................................6
(E) VESTING SCHEDULE OF OPTIONS..............................................................................7
(F) ACCELERATION OF VESTING..................................................................................7
(G) TERM OF OPTION...........................................................................................7
(H) EXERCISE OF OPTIONS......................................................................................8
(I) PAYMENT UPON EXERCISE OF OPTION..........................................................................9
(J) RIGHTS AS A SHAREHOLDER..................................................................................9
(K) TRANSFER OF OPTION......................................................................................10
(L) SECURITIES REGULATION AND TAX WITHHOLDING...............................................................11
(M) STOCK SPLIT, REORGANIZATION OR LIQUIDATION..............................................................12
(N) APPROVED TRANSACTIONS; CONTROL PURCHASE.................................................................12
(O) FURTHER ADJUSTMENTS OF AWARDS...........................................................................13
7. EFFECTIVE DATE; TERM.......................................................................................13
8. MARKET STANDOFF............................................................................................14
9. NO OBLIGATIONS TO EXERCISE OPTION..........................................................................14
10. NO RIGHT TO OPTIONS OR TO EMPLOYMENT.......................................................................14
11. APPLICATION OF FUNDS.......................................................................................14
12. INDEMNIFICATION OF COMMITTEE...............................................................................15
13. SHAREHOLDERS AGREEMENT.....................................................................................15
14. SEPARABILITY...............................................................................................15
15. NON-EXCLUSIVITY OF THE PLAN................................................................................15
16. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION......................................................15
17. AMENDMENT OF PLAN..........................................................................................16
</TABLE>
<PAGE>
LINEO, INC.
1999 STOCK OPTION PLAN
1. DEFINITIONS.
Capitalized terms not defined elsewhere in the Plan shall have the
following meanings (whether used in the singular or plural).
(a) "AGREEMENT" means a written agreement approved by the
Committee evidencing Options granted under the Plan.
(b) "APPROVED TRANSACTION" means
(i) the acquisition of the Company by another entity by
means of merger, consolidation or other transaction
or series of related transactions resulting in the
exchange of the outstanding shares of the Company for
securities of, or consideration issued, or caused to
be issued by, the acquiring entity or any of its
affiliates, provided, that after such event the
shareholders of the Company immediately prior to the
event own less than a majority of the outstanding
voting equity securities of the surviving entity
immediately following the event;
(ii) any liquidation or dissolution of the Company; and
(iii) any sale, lease, exchange or other transfer not in
the ordinary course of business (in one transaction
or a series of related transactions) of all, or
substantially all, of the assets of the Company.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute or statutes
thereto. Reference to any specific section of the Code shall
include any successor section.
(e) "COMMITTEE" shall mean the Board, or the committee appointed
by the Board pursuant to Section 3(b) of the Plan, if it is
administering the Plan.
(f) "COMMON STOCK" means the Common Stock, no par value, of the
Company.
(g) "COMPANY" means Lineo, Inc., a Utah corporation.
(h) "CONTROL PURCHASE" means any transaction (or series of related
transactions) in which any person, corporation or other entity
(including any "person" as defined in Sections 13(d)(3) and
14(d)(2) of the Exchange Act, but excluding the Company and
any employee benefit plan sponsored by the Company):
(i) purchases any Common Stock (or securities convertible
into Common Stock) for cash, securities or any other
consideration pursuant to a tender offer or exchange
offer unless by the terms of such offer the offeror,
upon consummation thereof, would be the "beneficial
owner" (as that term is defined in Rule 13d-3 under
the
1
<PAGE>
Exchange Act) of less than 30% of the shares of
Common Stock then outstanding; or
(ii) becomes the "beneficial owner", directly or
indirectly, of securities of the Company representing
fifty percent (50%) or more of the combined voting
power of the then outstanding securities of the
Company ordinarily (and apart from rights accruing
under special circumstances) having the right to vote
in the election of directors (calculated as provided
in Rule 13d-3(d) under the Exchange Act in the case
of rights to acquire the Company's securities);
PROVIDED, HOWEVER, that the foregoing shall not constitute a
Control Purchase if the transactions or related transactions
received the prior approval of a majority of all of the
directors of the Company, excluding for such purpose the votes
of directors who are directors or officers of, or have a
material financial interest in any Person (other than the
Company) who is a party to the event specified in either
clauses (i) or (ii).
(i) "COVERED EMPLOYEE" has the meaning given to it by Section
162(m)(3) of the Code.
(j) "DATE OF GRANT" means that date the Committee has deemed to be
the effective date of the Option for purposes of the Plan.
(k) "DISABILITY" means any medically determinable physical or
mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous
period of not less than twelve (12) months that renders the
Optionee unable to engage in any substantial gainful activity.
(l) "EFFECTIVE DATE" means at the time specified in the
resolutions of the Board adopting the Plan.
(m) "EMPLOYEES" means individuals employed by the Company or a
Related Corporation.
(n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute or
statutes thereto. Reference to any specific section of the
Exchange Act shall include any successor section.
(o) "EXECUTIVE OFFICER" shall be defined in Section 3(d).
(p) "FAIR MARKET VALUE" means, if the Common Stock is publicly
traded, the last sales price (or, if no last sales price is
reported, the average of the high bid and low asked prices)
for a share of Common Stock on that day (or, if that day is
not a trading day, on the next preceding trading day), as
reported by the principal exchange on which the Common Stock
is listed, or, if the Common Stock is publicly traded but not
listed on an exchange, as reported by The Nasdaq Stock Market,
or if such prices or quotations are not reported by The Nasdaq
Stock Market, as reported by any other available source of
prices or quotations selected by the Committee. If the Common
Stock is not publicly traded or if the Fair Market Value is
not determinable by any of the foregoing means, the Fair
Market Value on any day shall be determined in good faith by
the Committee on the basis of such considerations as the
Committee deems important.
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<PAGE>
(q) "IMMEDIATE FAMILY MEMBER" means a spouse, children or
grandchildren of the Optionee.
(r) "INCENTIVE STOCK OPTION" means an Option that is an incentive
stock option within the meaning of Section 422 of the Code.
(s) "NON-EMPLOYEE DIRECTOR" has the meaning given to it by Rule
16b-3 promulgated under the Exchange Act of 1934.
(t) "NON-INSIDERS" has the meaning given to it by Section
162(m)(3) of the Code.
(u) "NON-QUALIFIED STOCK OPTION" means an Option that is not an
Incentive Stock Option.
(v) "OPTION" means an option with respect to shares of Common
Stock awarded pursuant to Section 6.
(w) "OPTIONEE" means any person to whom an Option is granted under
the Plan (as well as any permitted transferee of an Option).
(x) "OUTSIDE DIRECTOR" has the meaning given to by the regulations
promulgated under Section 162(m) of the Code.
(y) "PLAN" means the Lineo, Inc. 1999 Stock Option Plan.
(z) "QUALIFIED PERFORMANCE-BASED COMPENSATION" has the meaning
given to it by the regulations promulgated under Section
162(m) of the Code.
(aa) "RELATED CORPORATION" means any corporation (other than the
Company) that is a "parent corporation" of the Company or
"subsidiary corporation" of the Company, as defined in
Sections 424(e) and 424(f) respectively, of the Code.
(bb) "SECTION 16 INSIDERS" means individuals who are subject to
Section 16(b) of the Exchange Act with respect to the Common
Stock.
(cc) "SECURITIES ACT" means the Securities Act of 1933, as amended
from time to time, or any successor statute or statutes
thereto. References to any specific section of the Securities
Act shall include any successor section.
(dd) "TEN PERCENT SHAREHOLDER" means a person who owns more than
ten percent of the total combined voting power of the Company
or any related corporation as determined with reference to
Section 424(d) of the Code.
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<PAGE>
2. PURPOSES.
The purposes of the Plan are to retain the services of directors,
valued key employees and consultants of the Company and such other persons as
the Committee shall select in accordance with Section 4, to encourage such
persons to acquire a greater proprietary interest in the Company, thereby
strengthening their incentive to achieve the objectives of the shareholders of
the Company, and to serve as an aid and inducement in hiring new employees and
to provide an equity incentive to directors, consultants and other persons
selected by the Committee.
3. ADMINISTRATION.
(a) COMMITTEE.
The Plan shall be administered by the Board unless the Board appoints a
separate committee of the board to administer the Plan pursuant to Section 3(b)
below. A majority of the members of the Committee shall constitute a quorum, and
all actions of the Committee shall be taken by a majority of the members
present. Any action may be taken by a written instrument signed by all of the
members of the Committee and any action so taken shall be fully effective as if
it had been taken at a meeting.
(b) APPOINTMENT OF COMMITTEE.
The Board may appoint a committee consisting of two or more of its
members to administer the Plan. The Board shall consider whether a director is
(i) an Outside Director and (ii) a Non-Employee Director when appointing any
such Committee and shall appoint solely two or more individuals who qualify as
Outside Directors if the Board intends for compensation attributable to Options
to be Qualified Performance-Based Compensation. The Committee shall have the
powers and authority vested in the Board hereunder (including the power and
authority to interpret any provision of the Plan or of any Option). The members
of any such Committee shall serve at the pleasure of the Board.
(c) POWERS; REGULATIONS.
Subject to the provisions of the Plan, and with a view to effecting its
purpose, the Committee shall have sole authority, in its absolute discretion,
to:
(i) construe and interpret the Plan;
(ii) define the terms used in the Plan;
(iii) prescribe, amend and rescind rules and regulations
relating to the Plan;
(iv) correct any defect, supply any omission or reconcile
any inconsistency in the Plan;
(v) grant Options under the Plan;
(vi) determine the individuals to whom Options shall be
granted under the Plan and whether the Option is an
Incentive Stock Option or a Non-Qualified Stock
Option;
(vii) determine the time or times at which Options shall be
granted under the Plan;
(viii) determine the number of shares of Common Stock
subject to each Option, the exercise price of each
Option, the duration of each Option and the times at
which each Option shall become exercisable;
(ix) determine all other terms and conditions of Options;
and
(x) make all other determinations necessary or advisable
for the administration of the Plan.
4
<PAGE>
All decisions, determinations and interpretations made by the Committee
shall be binding and conclusive on all participants in the Plan and on their
legal representatives, heirs and beneficiaries.
(d) DELEGATION TO EXECUTIVE OFFICER.
The Committee may by resolution delegate to one or more executive
officers (the "Executive Officer") of the Company the authority to grant Options
under the Plan to employees of the Company who, at the time of grant, are not
Section 16 Insiders nor Covered Employees; PROVIDED, HOWEVER, that the authority
delegated to the Executive Officer under this Section 3 shall not exceed that of
the Committee under the provisions of the Plan and shall be subject to such
limitations, in addition to those specified in this Section 3, as may be
specified by the Committee at the time of delegation.
4. ELIGIBILITY.
Incentive Stock Options may be granted to any individual who, at the
time such Options are granted, is an Employee, including Employees who are also
directors of the Company. Non-Qualified Stock Options may be granted to
Employees and to such other persons as the Committee shall select. Options may
be granted in substitution for outstanding options of another corporation in
connection with the merger, consolidation, acquisition of property or stock or
other reorganization between such other corporation and the Company or any
subsidiary of the Company. At such point as the Company first becomes subject to
the periodic reporting requirements of Section 12 of the Exchange Act, no person
shall be eligible to receive in any fiscal year Options to purchase more than
100,000 shares of Common Stock (subject to adjustment as set forth in Section
6(m) hereof).
5. STOCK.
The Company is authorized to grant Options to acquire up to a total of
2,000,000 shares of the Company's authorized but unissued, or reacquired, Common
Stock. The number of shares with respect to which Options may be granted
hereunder is subject to adjustment as set forth in Section 6(m). In the event
that any outstanding Option expires or is terminated for any reason, the shares
of Common Stock allocable to the unexercised portion of such Option may again be
subject to an Option granted to the same Optionee or to a different person
eligible under Section 4; PROVIDED, HOWEVER, that any canceled Options will be
counted against the maximum number of shares with respect to which Options may
be granted to any particular person as set forth in Section 4.
6. TERMS AND CONDITIONS OF OPTIONS.
Each Option granted under the Plan shall be evidenced by an Agreement.
Agreements may contain such provisions, not inconsistent with the Plan, as the
Committee or Executive Officer, in its discretion, may deem advisable. All
Options also shall comply with the following requirements:
(a) NUMBER OF SHARES AND TYPE OF OPTION.
Each Agreement shall state the number of shares of Common Stock to
which it pertains and whether the Option is intended to be an Incentive Stock
Option or a Non-Qualified Stock Option. In the absence of action to the contrary
by the Committee or Executive Officer in connection with the grant of an Option,
all Options shall be Non-Qualified Stock Options. The aggregate Fair Market
Value (determined at the Date of Grant) of the Common Stock with respect to
which the Incentive Stock Options granted to the Optionee and any incentive
stock options granted to the Optionee under any other stock option plan of the
Company, any
5
<PAGE>
Related Corporation or any predecessor corporation are exercisable for the first
time by the Optionee during any calendar year shall not exceed $100,000, or such
other limit as may be prescribed by the Code. If
(i) an Optionee holds one or more Incentive Stock Options
under the Plan (and/or any incentive stock options
under any other stock option plan of the Company, any
Related Corporation or any predecessor corporation),
and
(ii) the aggregate Fair Market Value of the shares of
Common Stock with respect to which, during any
calendar year, such Options become exercisable for
the first time exceeds $100,000 (said value to be
determined as provided above),
then such Option or Options are intended to qualify under Section 422 of the
Code with respect to the maximum number of such shares as can, in light of the
foregoing limitation, be so qualified, with the shares so qualified to be the
shares subject to the Option or Options earliest granted to the Optionee. If an
Option that would otherwise qualify as an Incentive Stock Option becomes
exercisable for the first time in any calendar year for shares of Common Stock
that would cause such aggregate Fair Market Value to exceed $100,000, then the
portion of the Option in respect of such shares shall be deemed to be a
Non-Qualified Stock Option.
(b) DATE OF GRANT.
Each Agreement shall state the Date of Grant.
(c) OPTION PRICE.
Each Agreement shall state the price per share of Common Stock at which
it is exercisable. The exercise price shall be fixed by the Committee or
Executive Officer at whatever price the Committee or Executive Officer may
determine in the exercise of its sole discretion; PROVIDED, HOWEVER, that the
per share exercise price for an Incentive Stock Option shall not be less than
the Fair Market Value at the Date of Grant; PROVIDED FURTHER, that with respect
to Incentive Stock Options granted to Ten Percent Shareholders of the Company,
the per share exercise price shall not be less than 110 percent (110%) of the
Fair Market Value at the Date of Grant; and, PROVIDED FURTHER, that Options
granted in substitution for outstanding options of another corporation in
connection with the merger, consolidation, acquisition of property or stock or
other reorganization involving such other corporation and the Company or any
subsidiary of the Company may be granted with an exercise price equal to the
exercise price for the substituted option of the other corporation, subject to
any adjustment consistent with the terms of the transaction pursuant to which
the substitution is to occur.
(d) DURATION OF OPTIONS.
On the Date of Grant, the Committee or Executive Officer shall
designate, subject to Section 6(g), the expiration date of the Option, which
date shall not be later than ten (10) years from the Date of Grant in the case
of Incentive Stock Options; PROVIDED, HOWEVER, that the expiration date of any
Incentive Stock Option granted to a Ten Percent Shareholder shall not be later
than five (5) years from the Date of Grant. In the absence of action to the
contrary by the Committee in connection with the grant of an Option, and except
in the case of Incentive Stock Options granted to Ten Percent Shareholders, all
Options granted under this Section 6 shall expire ten (10) years from the Date
of Grant.
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(e) VESTING SCHEDULE OF OPTIONS
No Option shall be exercisable until it has vested. The vesting
schedule for each Option shall be specified by the Committee or Executive
Officer at the time of grant of the Option; PROVIDED, HOWEVER, that if no
vesting schedule is specified at the time of grant, the Option shall be vested
according to the following schedule:
<TABLE>
<CAPTION>
Number of Years of
Continuous Employment Portion of Total
With the Company Following Option Which Will Become
Vesting Commencement Date Vested
- --------------------------------------------------- -------------------------
<S> <C>
1 1/4th
Monthly thereafter 1/48th
</TABLE>
The Committee or Executive Officer may specify a vesting schedule for
all or any portion of an Option based on the achievement of performance
objectives established in advance of the commencement by the Optionee of
services related to the achievement of the performance objectives. Performance
objectives shall be expressed in terms of one or more of the following: return
on equity, return on assets, share price, market share, sales, earnings per
share, costs, net earnings, net worth, inventories, cash and cash equivalents,
gross margin or the Company's performance relative to its internal business
plan. Performance objectives may be in respect of the performance of the Company
as a whole (whether on a consolidated or unconsolidated basis), a Related
Corporation, or a subdivision, operating unit, product or product line of the
foregoing. Performance objectives may be absolute or relative and may be
expressed in terms of a progression or a range. An Option which is exercisable
(in whole or in part) upon the achievement of one or more performance objectives
may be exercised only upon completion of the following process: (a) the Optionee
must deliver written notice to the Company that the performance objective has
been achieved and demonstrating, if necessary, how the objective has been
satisfied, (b) within 45 days after receipt of such notice, the Committee will
make a good faith determination whether such performance objective has been
achieved and deliver written notice to the Optionee detailing the results of
such determination; if the Company fails to respond with such 45-day period,
then the performance objective shall be presumed to have been achieved and (c)
upon receipt of written notice from the Company that the performance objective
has been achieved (or upon expiration of such 45-day period without a
determination by the Company), the Optionee may exercise the Option; upon
receipt of written notice from the Company that the performance objective has
not been achieved, the Optionee shall have 15 days to appeal the Company's
determination and the Company shall have 15 days after the receipt of such
appeal to consider the issues presented by the Optionee and make a determination
on the appeal, which determination shall be conclusive and binding on the
Optionee.
(f) ACCELERATION OF VESTING.
The vesting of one or more outstanding Options may be accelerated by
the Board at such times and in such amounts as it shall determine in its sole
discretion.
(g) TERM OF OPTION.
Any vested Option granted to an Optionee shall terminate, to the extent
not previously exercised, upon the occurrence of the first of the following
events:
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(i) as designated by the Committee or the Executive
Officer in accordance with Section 6(d) hereof;
(ii) the date of the Optionee's termination of employment
or contractual relationship with the Company or any
Related Corporation for cause (as determined in the
sole discretion of the Committee);
(iii) the expiration of ninety (90) days from the date of
the Optionee's termination of employment or
contractual relationship with the Company or any
Related Corporation for any reason whatsoever other
than cause, death or Disability unless the exercise
period is extended by the Committee until a date not
later than the expiration date of the Option;
(iv) the expiration of one year from (A) the date of death
of the Optionee or (B) cessation of the Optionee's
employment or contractual relationship by reason of
Disability unless the exercise period is extended by
the Committee until a date not later than the
expiration date of the Option; or
(v) any other event specified by the Committee at the
time of grant of the Option.
If an Optionee's employment or contractual relationship is terminated
by death, any Option granted to the Optionee shall be exercisable only by the
person or persons to whom such Optionee's rights under such Option shall pass by
the Optionee's will or by the laws of descent and distribution of the state or
county of the Optionee's domicile at the time of death. The Committee shall
determine whether an Optionee has incurred a Disability on the basis of medical
evidence reasonably acceptable to the Committee. Upon making a determination of
Disability, the Committee shall, for purposes of the Plan, determine the date of
an Optionee's termination of employment or contractual relationship.
Unless accelerated in accordance with Section 6(f), any unvested Option
granted to an Optionee shall terminate immediately upon termination of
employment of the Optionee by the Company for any reason whatsoever, including
death or Disability. For purposes of the Plan, transfer of employment between or
among the Company and/or any Related Corporation shall not be deemed to
constitute a termination of employment with the Company or any Related
Corporation. For purposes of this subsection with respect to Incentive Stock
Options, employment shall be deemed to continue while the Optionee is on
military leave, sick leave or other bona fide leave of absence (as determined by
the Committee). The foregoing notwithstanding, employment shall not be deemed to
continue beyond the first ninety (90) days of such leave, unless the Optionee's
re-employment rights are guaranteed by statute or by contract.
(h) EXERCISE OF OPTIONS.
An Option shall be exercisable, either all or in part, at any time
after vesting and prior to the expiration date with respect to, or the
termination of, the Option. If less than all of the shares included in an
exercisable Option are purchased, the remainder may be purchased at any
subsequent time prior to the expiration date with respect to, or the termination
of, the Option. No portion of any vested Option may be exercised for less than
one hundred (100) shares (as adjusted pursuant to Section 6(m)); PROVIDED,
HOWEVER, that if the vested Option is less than one hundred (100) shares, it may
be exercised with respect to all shares for which it is vested. Only whole
shares may be issued upon exercise of an vested Option, and to the extent that a
vested Option covers less than one (1) share, it is unexercisable.
8
<PAGE>
A vested Option or any portion thereof may be exercised by giving
written notice to the Company upon such terms and conditions as the Agreement
evidencing the vested Option may provide and in accordance with such other
procedures for the exercise of a vested Option as the Committee may establish
from time to time. Such notice shall be accompanied by payment in the amount of
the aggregate exercise price for such shares, which payment shall be in the form
specified in Section 6(i). The Company shall not be obligated to issue, transfer
or deliver a certificate of Common Stock to the holder of any vested Option
until provision has been made by the holder, to the satisfaction of the Company,
for the payment of the aggregate exercise price for all shares for which the
vested Option shall have been exercised and for satisfaction of any tax
withholding obligations associated with such exercise. Options granted to an
Optionee are, during the Optionee's lifetime, exercisable only by the Optionee
or a transferee who takes title to the Option in the manner permitted by Section
6(k).
(i) PAYMENT UPON EXERCISE OF OPTION.
The exercise price for shares purchased under an Option shall be paid
in full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or by check or, unless the Committee in its sole discretion
determines otherwise, either at the time the Option is granted or at any time
before it is exercised, a combination of cash and/or check (if any) and one or
both of the following alternative forms: (a) tendering (either actually or, if
and so long as the Common Stock is registered under Section 12(b) or 12(g) of
the Exchange Act, by attestation) Common Stock already owned by the Optionee for
at least six months (or any shorter period necessary to avoid a charge to the
Company's earnings for financial reporting purposes) having a Fair Market Value
on the day prior to the exercise date equal to the aggregate Option exercise
price; or (b) if and so long as the Common Stock is registered under Section
12(b) or 12(g) of the Exchange Act, delivery of a properly executed exercise
notice, together with irrevocable instructions, to (i) a brokerage firm
designated by the Company to deliver promptly to the Company the aggregate
amount of sale or loan proceeds to pay the Option exercise price and any
withholding tax obligations that may arise in connection with the exercise and
(ii) the Company to deliver the certificates for such purchased shares directly
to such brokerage firm, all in accordance with the regulations of the Federal
Reserve Board. In addition, to the extent permitted by the Committee in its sole
discretion, the price for shares purchased under an Option may be paid, either
singly or in combination with one or more of the alternative forms of payment
authorized by this Section 6(i), by (y) a full-recourse promissory note; or (z)
such other consideration as the Committee may permit.
(j) RIGHTS AS A SHAREHOLDER.
An Optionee shall have no rights as a shareholder with respect to any
shares of Common Stock issuable upon exercise of the Option until such holder
becomes a record holder of such shares. Subject to the provisions of Sections
6(m), no rights shall accrue to an Optionee and no adjustments shall be made on
account of dividends (ordinary or extraordinary, whether in cash, securities or
other property) or distributions or other rights declared on, or created in, the
Common Stock for which the record date is prior to the date such Optionee
becomes a record holder of the shares of Common Stock issuable upon exercise of
such Option.
9
<PAGE>
(k) TRANSFER OF OPTION.
Options granted under the Plan and the rights and privileges conferred
by the Plan may not be transferred, assigned, pledged or hypothecated in any
manner (whether by operation of law or otherwise) other than by will, by
applicable laws of descent and distribution or pursuant to a domestic relations
order (as defined in the Code or Title I of the Employment Retirement Income
Security Act of 1974 or the rules or regulations thereunder), and shall not be
subject to execution, attachment or similar process; PROVIDED, HOWEVER, that
solely with respect to Non-Qualified Stock Options, the Committee may, in its
discretion, authorize all or a portion of the Options to be granted to an
Optionee to be on terms which permit transfer by such Optionee to:
(i) Immediate Family Members,
(ii) a trust or trusts for the exclusive benefit of such
Immediate Family Members, or
(iii) a partnership in which such Immediate Family Members
are the only partners, provided that :
(x) there may be no consideration for any such
transfer,
(y) the Agreement evidencing such Options must
be approved by Committee, and must expressly
provide for transferability in a manner
consistent with this Section, and
(z) subsequent transfers of transferred Options
shall be prohibited other than by will, by
applicable laws of descent and distribution
or pursuant to a domestic relations order
(as defined in the Code or Title I of the
Employment Retirement Income Security Act of
1974 or the rules or regulations
thereunder).
Following transfer, any such Options shall continue to be subject to the same
terms and conditions as were applicable immediately prior to transfer, provided
that for purposes of Section 6(l)(2), the term "Optionee" shall be deemed to
refer to the initial transferor. The events of termination of employment of
Section 6(g) shall continue to be applied with respect to the original Optionee,
following which the options shall be exercisable by the transferee only to the
extent, and for the periods specified at Section 6(g). Upon any attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of any Option or of
any right or privilege conferred by the Plan contrary to the provisions hereof,
or upon the sale, levy or any attachment or similar process upon the rights and
privileges conferred by the Plan, such Option shall thereupon terminate and
become null and void.
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<PAGE>
(l) SECURITIES REGULATION AND TAX WITHHOLDING.
(1) No shares of Common Stock shall be issued upon exercise of
an Option unless the exercise of such Option and the issuance and delivery of
such shares shall comply with all relevant provisions of law, including, without
limitation, any applicable state securities laws, the Securities Act, the
Exchange Act, the rules and regulations thereunder and the requirements of any
stock exchange upon which such shares may then be listed, and such issuance
shall be further subject to the approval of counsel for the Company with respect
to such compliance, including the availability of an exemption from registration
for the issuance and sale of such shares. The inability of the Company to obtain
from any regulatory body the authority deemed by the Company to be necessary for
the lawful issuance and sale of any shares under the Plan, or the unavailability
of an exemption from registration for the issuance and sale of any shares under
the Plan, shall relieve the Company of any liability with respect to the
non-issuance or sale of such shares.
As long as the Common Stock is not registered under the Exchange Act,
the Company intends that all offers and sales of Options and shares of Common
Stock issuable upon exercise of Options shall be exempt from registration under
the provisions of Section 5 of the Securities Act, and the Plan shall be
administered in a manner so as to preserve such exemption. The Company also
intends that the Plan shall constitute a written compensatory benefit plan,
within the meaning of Rule 701(b) promulgated under the Securities Act, and that
each Option granted pursuant to the Plan at a time when the Common Stock is not
registered under the Exchange Act shall, unless otherwise specified by the
Committee at the time the Option is granted or at any time thereafter, be
granted in reliance on the exemption from the registration requirements of
Section 5 of the Securities Act provided by Rule 701.
As a condition to the exercise of an Option, the Committee may require
the Optionee to represent and warrant in writing at the time of such exercise
that the shares of Common Stock issuable upon exercise of the Option are being
purchased only for investment and without any then-present intention to sell or
distribute such shares. At the option of the Committee, a stop-transfer order
against such shares may be placed on the stock books and records of the Company,
and a legend indicating that such shares may not be pledged, sold or otherwise
transferred unless an opinion of counsel is provided stating that such transfer
is not in violation of any applicable law or regulation, may be stamped on the
certificates representing such shares in order to assure an exemption from
registration. The Committee also may require such other documentation as it
shall, in its discretion, deem necessary from time to time to comply with
federal and state securities laws. THE COMPANY HAS NO OBLIGATION TO UNDERTAKE
REGISTRATION OF ANY OPTION OR ANY SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF ANY OPTION.
(2) The Company may require the Optionee to pay to the Company
the amount of any withholding taxes that the Company is required to withhold
with respect to the grant, vesting or exercise of any Option. Subject to the
Plan and applicable law, the Committee may, in its sole discretion, permit the
Optionee to satisfy withholding obligations, in whole or in part, by paying
cash, by electing to have the Company withhold shares of Common Stock or by
transferring shares of Common Stock to the Company, in such amounts as are
equivalent to the Fair Market Value of the withholding obligation. The Company
shall have the right to withhold from any shares of Common Stock issuable
pursuant to an Option or from any cash amounts otherwise due or to become due
from the Company to the Optionee an amount equal to such taxes. The Company may
also deduct from any Option any other amounts due from the Optionee to the
Company or a Related Corporation.
11
<PAGE>
(3) The issuance, transfer or delivery of certificates of
Common Stock pursuant to the exercise of an Option may be delayed, at the
discretion of the Committee, until the Committee is satisfied that the
applicable requirements of the federal and state securities laws and the
withholding provisions of the Code have been met.
(m) STOCK SPLIT, REORGANIZATION OR LIQUIDATION.
(1) In the event that, at any time or from time to time, a
stock dividend, stock split, spin-off, combination or exchange of shares,
recapitalization, merger, consolidation, distribution to shareholders other than
a normal cash dividend, or other change in the Company's corporate or capital
structure results in (a) the outstanding shares, or any securities exchanged
therefor or received in their place, being exchanged for a different number or
class of securities of the Company or of any other corporation or (b) new,
different or additional securities of the Company or of any other corporation
being received by the holders of shares of Common Stock of the Company, then the
Board shall make proportional adjustments in (i) the maximum number and kind of
securities subject to the Plan as set forth in Section 5 and (ii) the number and
kind of securities that are subject to any outstanding Option and the per share
price of such securities, without any change in the aggregate price to be paid
therefor. The determination by the Board as to the terms of any of the foregoing
adjustments shall be conclusive and binding. Notwithstanding the foregoing, an
Approved Transaction or Control Purchase shall not be governed by this Section
6(m) but shall be governed by Section 6(n).
(2) The foregoing adjustments shall be made by the Committee
or by the applicable terms of any assumption or substitution document.
(3) With respect to the foregoing adjustments, the number of
shares subject to an Option shall always be a whole number. The Committee may,
if deemed appropriate, provide for a cash payment to any Optionee in connection
with any adjustment made pursuant to this Section 6(m).
(4) The grant of an Option shall not affect in any way the
right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure, to merge,
consolidate or dissolve, to liquidate or to sell or transfer all or any part of
its business or assets.
(k) APPROVED TRANSACTIONS; CONTROL PURCHASE.
(1) Except as otherwise provided in this instrument that
evidences an Option, in the event of any Approved Transaction or Control
Purchase, each Option that is at the time outstanding shall automatically
accelerate so that each such Option shall, immediately prior to the specified
effective date for the Approved Transaction or Control Purchase, become 100%
vested and exercisable.
(2) Such Option shall not so accelerate, however, if and to
the extend that such Option is, in connection with the Approved Transaction or
Control Purchase, either to be assumed by the successor corporation or parent
thereof (the "Successor Corporation") or to be replaced with a comparable option
for the purchase of shares of capital stock of the Successor Corporation. The
determination of option comparability shall be made by the Board, and its
determination shall be conclusive and binding.
(3) All such Options shall terminate and cease to remain
outstanding immediately following the consummation of the Approved Transaction
or Control Purchase, except to the extent assumed by the Successor Corporation.
12
<PAGE>
(4) The acceleration will not occur if, in the opinion of the
Company's outside accountants, it would render unavailable "pooling of interest"
accounting for an Approved Transaction or Control Purchase that would otherwise
qualify for such accounting treatment.
(o) FURTHER ADJUSTMENTS OF AWARDS.
Subject to the other provisions of Section 6, the Board shall have the
discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or change in control of the Company, as defined by
the Board, to take such further action as it determines to be necessary or
advisable, and fair and equitable to the Optionees, with respect to Options.
Such authorized action may include (but shall not be limited to) establishing,
amending or waiving the type, terms, conditions or duration of, or restrictions
on, Options so as to provide for earlier, later, extended or additional time for
exercise, lifting restrictions and other modifications, and the Board may take
such actions with respect to all Optionees, to certain categories of Optionees
or only to individual Optionees. The Board may take such action before or after
granting Options to which the action relates and before or after any public
announcement with respect to such sale, merger, consolidation, reorganization,
liquidation or change in control that is the reason for such action.
7. EFFECTIVE DATE; TERM.
The Plan shall be effective at the time specified in the resolutions of
the Board adopting the Plan (the "Effective Date"). Options may be granted by
the Committee or Executive Officer from time to time thereafter until the tenth
anniversary of the Effective Date. Termination of the Plan shall not terminate
any Option granted prior to such termination. Issuance of Non-Qualified Stock
Options under the Plan shall be subject to the requirement of RCW 21.20.310(10)
that the Administrator of Securities of the Department of Financial Institutions
of the State of Washington be provided with notification of the adoption of the
Plan. No Non-Qualified Stock Option shall be granted hereunder until this
notification requirement has been satisfied. Issuance of Incentive Stock Options
under the Plan within twelve (12) months after the Effective Date shall be
subject to the approval of the Plan by the shareholders of the Company at a duly
held meeting of shareholders at which a majority of all outstanding voting stock
of the Company is represented in person or by proxy. The approval required shall
be a majority of the votes cast on the proposal to approve the Plan. Such
approval may also be provided pursuant to a written consent in lieu of such
meeting. No Incentive Stock Option granted hereunder shall be exercisable until
this approval requirement has been satisfied. If this requirement is not
satisfied within twelve (12) months after the Effective Date, then,
notwithstanding any contrary provision in the Plan (a) no Incentive Stock
Options may thereafter be granted under the Plan, and (b) each Incentive Stock
Option granted under the Plan prior thereto shall automatically be deemed to be
a Non-Qualified Stock Option (except to the extent the Agreement evidencing the
Option expressly provides otherwise).
13
<PAGE>
8. MARKET STANDOFF.
In connection with any underwritten public offering by the Company of
its equity securities pursuant to an effective registration statement filed
under the Securities Act, including the Company's initial public offering, a
person shall not sell, make any short sale of, loan, hypothecate, pledge, grant
any option for the purchase of, or otherwise dispose or transfer for value or
otherwise agree to engage in any of the foregoing transactions with respect to,
any shares issued pursuant to an Option granted under the Plan without the prior
written consent of the Company or its underwriters. Such limitations shall be in
effect for such period of time as may be requested by the Company or such
underwriters and agreed to by the Company's officers and directors with respect
to their shares; provided, however, that in no event shall such period exceed
180 days. The limitations of this paragraph shall in all events terminate two
years after the effective date of the Company's initial public offering. Holders
of shares issued pursuant to an Option granted under the Plan shall be subject
to the market standoff provisions of this paragraph only if the officers and
directors of the Company are also subject to similar arrangements.
In the event of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
Company's outstanding Common Stock effected as a class without the Company's
receipt of consideration, then an new, substituted or additional securities
distributed with respect to the purchased shares shall immediately subject to
the provisions of this Section 8, to the same extent the purchased shares are at
such time covered by such provisions.
In order to enforce the limitations of this Section 8, the Company may
impose stop-transfer instructions with respect to the purchased shares until the
end of the applicable standoff period.
9. NO OBLIGATIONS TO EXERCISE OPTION.
The grant of an Option shall impose no obligation upon the Optionee to
exercise such Option.
10. NO RIGHT TO OPTIONS OR TO EMPLOYMENT.
Whether or not any Options are to be granted under the Plan shall be
exclusively within the discretion of the Committee, and nothing contained in the
Plan shall be construed as giving any person any right to participate under the
Plan. The grant of an Option to any Optionee shall in no way constitute any form
of agreement or understanding binding on the Company or any Related Corporation,
express or implied, that the Company or such Related Corporation will employ or
contract with such Optionee for any length of time, nor shall it interfere in
any way with the Company's or, where applicable, a Related Corporation's right
to terminate such Optionee's employment at any time, which right is hereby
reserved.
11. APPLICATION OF FUNDS.
The proceeds received by the Company from the sale of Common Stock
issued upon the exercise of Options shall be used for general corporate
purposes, unless otherwise directed by the Board.
14
<PAGE>
12. INDEMNIFICATION OF COMMITTEE.
In addition to all other rights of indemnification they may have by
virtue of being a member of the Board or an executive officer of the Company,
members of the Committee and the Executive Officer shall be indemnified by the
Company for all reasonable expenses and liabilities of any type or nature,
including attorneys' fees, incurred in connection with any action, suit or
proceeding to which they or any of them are a party by reason of, or in
connection with, the Plan or any Option granted under the Plan, and against all
amounts paid by them in settlement thereof (provided that such settlement is
approved by independent legal counsel selected by the Company), except to the
extent that such expenses relate to matters for which it is adjudged that such
Committee member or Executive Officer is liable for willful misconduct;
PROVIDED, HOWEVER, that within fifteen (15) days after the institution of any
such action, suit or proceeding, the Committee member or Executive Officer
involved therein shall, in writing, notify the Company of such action, suit or
proceeding, so that the Company may have the opportunity to make appropriate
arrangements to prosecute or defend the same.
13. SHAREHOLDERS AGREEMENT.
Unless the Agreement evidencing an Option expressly provides otherwise,
each Optionee may be required, as a condition to the issuance of any shares of
Common Stock that such Optionee acquires upon the exercise of the Option, to
execute and deliver to the Company a shareholders agreement in such form as may
be required by the Company at the time of such exercise, or a counterpart
thereof, together with, unless the Optionee is unmarried, a spousal consent in
the form required thereby, unless the Optionee has previously executed and
delivered such documents and they are in effect at the time of exercise and
apply by their terms to the shares to be issued.
14. SEPARABILITY.
With respect to Incentive Stock Options, if the Plan does not contain
any provision required to be included herein under Section 422 of the Code, such
provision shall be deemed to be incorporated herein with the same force and
effect as if such provision had been set out in full herein; PROVIDED, HOWEVER,
that to the extent any Option that is intended to qualify as an Incentive Stock
Option cannot so qualify, the Option, to that extent, shall be deemed to be a
Non-Qualified Stock Option for all purposes of the Plan.
15. NON-EXCLUSIVITY OF THE PLAN.
Neither the adoption of the Plan by the Board nor the submission of the
Plan to the shareholders of the Company for approval shall be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and the awarding of stock and cash otherwise than
pursuant to the Plan, and such arrangements may be either generally applicable
or applicable only in specific cases.
16. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION.
By acceptance of an Option, unless otherwise provided in the Agreement
evidencing the Option, the Optionee with respect to such Option shall be deemed
to have agreed that the Option is special incentive compensation that will not
be taken into account, in any manner, as salary, compensation or bonus in
determining the amount of any payment or other benefit under any pension,
retirement or other employee benefit plan, program or policy of the Company or
any of its affiliates.
15
<PAGE>
17. AMENDMENT OF PLAN.
The Board may, at any time, modify, amend or terminate the Plan or
modify or amend any Option granted pursuant to the Plan, including, without
limitation, such modifications or amendments as are necessary to maintain
compliance with applicable statutes, rules or regulations; PROVIDED, HOWEVER,
that no amendment with respect to an outstanding Option which has the effect of
reducing the benefits afforded to the Optionee shall be made over the objection
of such Optionee; FURTHER PROVIDED, that the events triggering acceleration of
vesting of an outstanding Option may be modified, expanded or eliminated without
the consent of the Optionee. The Board may condition the effectiveness of any
such amendment on the receipt of shareholder approval at such time and in such
manner as the Committee may consider necessary for the Company to comply with or
to avail the Company, the Optionees or both of the benefits of any securities,
tax, market listing or other administrative or regulatory requirement which the
Board determines to be desirable. Without limiting the generality of the
foregoing, the Board may modify grants to persons who are eligible to receive
Options under the Plan who are foreign nationals or employed outside the United
States to recognize differences in local law, tax policy or custom.
Date Approved by the Board of Directors of Company: June 28, 1999
Date Approved by the Shareholders of Company: ____________________, 1999
16
<PAGE>
EXHIBIT 10.2
GNU GENERAL PUBLIC LICENSE Version 2, June 1991
Copyright (C) 1989, 1991 Free Software Foundation, Inc. Temple Place, Suite 330,
Boston, MA 02111-1307 USA
Everyone is permitted to copy and distribute verbatim copies of this license
document, but changing it is not allowed.
Preamble
The licenses for most software are designed to take away your freedom to share
and change it. By contrast, the GNU General Public License is intended to
guarantee your freedom to share and change free software--to make sure the
software is free for all its users. This General Public License applies to most
of the Free Software Foundation's software and to any other program whose
authors commit to using it. (Some other Free Software Foundation software is
covered by the GNU Library General Public License instead.) You can apply it to
your programs, too.
When we speak of free software, we are referring to freedom, not price. Our
General Public Licenses are designed to make sure that you have the freedom to
distribute copies of free software (and charge for this service if you wish),
that you receive source code or can get it if you want it, that you can change
the Software or use pieces of it in new free programs; and that you know you can
do these things.
To protect your rights, we need to make restrictions that forbid anyone to deny
you these rights or to ask you to surrender the rights. These restrictions
translate to certain responsibilities for you if you distribute copies of the
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For example, if you distribute copies of such a program, whether gratis or for a
fee, you must give the recipients all the rights that you have. You must make
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these terms so they know their rights.
We protect your rights with two steps: (1) copyright the software, and (2) offer
you this license which gives you legal permission to copy, distribute and/or
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Also, for each author's protection and ours, we want to make certain that
everyone understands that there is no warranty for this free software. If the
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Finally, any free program is threatened constantly by software patents. We wish
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The precise terms and conditions for copying, distribution and modification
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GNU GENERAL PUBLIC LICENSE TERMS AND CONDITIONS FOR COPYING, DISTRIBUTION AND
MODIFICATION
This License applies to any program or other work which contains a notice placed
by the copyright holder saying it may be distributed under the terms of this
General Public License. The "Program", below, refers to any such program or
work, and a "work based on the Program" means either the Program or any
derivative work under copyright law: that is to say, a work containing the
Program or a portion of it, either verbatim or with modifications and/or
translated into another language. (Hereinafter, translation is
<PAGE>
included without limitation in the term "modification".) Each licensee is
addressed as "you".
Activities other than copying, distribution and modification are not covered by
this License; they are outside its scope. The act of running the Program is not
restricted, and the output from the Program is covered only if its contents
constitute a work based on the Program (independent of having been made by
running the Program). Whether that is true depends on what the Program does.
1. You may copy and distribute verbatim copies of the Program's source code as
you receive it, in any medium, provided that you conspicuously and appropriately
publish on each copy an appropriate copyright notice and disclaimer of warranty;
keep intact all the notices that refer to this License and to the absence of any
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along with the Program. You may charge a fee for the physical act of
transferring a copy, and you may at your option offer warranty protection in
exchange for a fee.
2. You may modify your copy or copies of the Program or any portion of it,
thus forming a work based on the Program, and copy and distribute such
modifications or work under the terms of Section 1 above, provided that you also
meet all of these conditions:
a) You must cause the modified files to carry prominent notices stating that
you changed the files and the date of any change.
b) You must cause any work that you distribute or publish, that in whole or in
part contains or is derived from the Program or any part thereof, to be licensed
as a whole at no charge to all third parties under the terms of this License.
c) If the modified program normally reads commands interactively when run, you
must cause it, when started running for such interactive use in the most
ordinary way, to print or display an announcement including an appropriate
copyright notice and a notice that there is no warranty (or else, saying that
you provide a warranty) and that users may redistribute the program under these
conditions, and telling the user how to view a copy of this License. (Exception:
if the Program itself is interactive but does not normally print such an
announcement, your work based on the Program is not required to print an
announcement.)
These requirements apply to the modified work as a whole. If identifiable
sections of that work are not derived from the Program,and can be reasonably
considered independent and separate works in themselves, then this License, and
its terms, do not apply to those sections when you distribute them as separate
works. But when you distribute the same sections as part of a whole which is a
work based on the Program, the distribution of the whole must be on the terms of
this License, whose permissions for other licensees extend to the entire whole,
and thus to each and every part regardless of who wrote it.
Thus, it is not the intent of this section to claim rights or contest your
rights to work written entirely by you; rather, the intent is to exercise the
right to control the distribution of derivative or collective works based on the
Program.
In addition, mere aggregation of another work not based on the Program with the
Program (or with a work based on the Program) on a volume of a storage or
distribution medium does not bring the other work under the scope of this
License.
3. You may copy and distribute the Program (or a work based on it, under Section
2) in object code or executable form under the terms of Sections 1 and 2 above
provided that you also do one of the following:
a) Accompany it with the complete corresponding machine-readable source code,
which must be distributed under the terms of Sections 1 and 2 above on a medium
customarily used for software interchange; or,
b) Accompany it with a written offer, valid for at least three years, to give
any third party, for a charge no more than your cost of physically performing
source distribution, a complete machine-readable copy of the
<PAGE>
corresponding source code, to be distributed under the terms of Sections 1 and 2
above on a medium customarily used for software interchange; or,
c) Accompany it with the information you received as to the offer to distribute
corresponding source code. (This alternative is allowed only for noncommercial
distribution and only if you received the program in object code or executable
form with such an offer, in accord with Subsection b above.)
The source code for a work means the preferred form of the work for making
modifications to it. For an executable work, complete source code means all the
source code for all modules it contains, plus any associated interface
definition files, plus the scripts used to control compilation and installation
of the executable. However, as a special exception, the source code distributed
need not include anything that is normally distributed (in either source or
binary form) with the major components (compiler, kernel, and so on) of the
operating system on which the executable runs, unless that component itself
accompanies the executable.
If distribution of executable or object code is made by offering access to copy
from a designated place, then offering equivalent access to copy the source code
from the same place counts as distribution of the source code, even though third
parties are not compelled to copy the source along with the object code.
4. You may not copy, modify, sublicense, or distribute the Program except as
expressly provided under this License. Any attempt otherwise to copy, modify,
sublicense or distribute the Program is void, and will automatically terminate
your rights under this License. However, parties who have received copies, or
rights, from you under this License will not have their licenses terminated so
long as such parties remain in full compliance.
5. You are not required to accept this License, since you have not signed it.
However, nothing else grants you permission to modify or distribute the Program
or its derivative works. These actions are prohibited by law if you do not
accept this License. Therefore, by modifying or distributing the Program (or any
work based on the Program), you indicate your acceptance of this License to do
so, and all its terms and conditions for copying, distributing or modifying the
Program or works based on it.
6. Each time you redistribute the Program (or any work based on the Program),
the recipient automatically receives a license from the original licensor to
copy, distribute or modify the Program subject to these terms and conditions.
You may not impose any further restrictions on the recipients' exercise of the
rights granted herein. You are not responsible for enforcing compliance by third
parties tothis License.
7. If, as a consequence of a court judgment or allegation of patent
infringement or for any other reason (not limited to patent issues), conditions
are imposed on you (whether by court order, agreement or otherwise) that
contradict the conditions of this License, they do not excuse you from the
conditions of this License. If you cannot distribute so as to satisfy
simultaneously your obligations under this License and any other pertinent
obligations, then as a consequence you may not distribute the Program at all.
For example, if a patent license would not permit royalty-free redistribution of
the Program by all those who receive copies directly or indirectly through you,
then the only way you could satisfy both it and this License would be to refrain
entirely from distribution of the Program.
If any portion of this section is held invalid or unenforceable under any
particular circumstance, the balance of the section is intended to apply and the
section as a whole is intended to apply in othercircumstances.
It is not the purpose of this section to induce you to infringe any patents or
other property right claims or to contest validity of any such claims; this
section has the sole purpose of protecting the integrity of the free software
distribution system, which is implemented by public license practices. Many
people have made generous contributions to the wide range of software
distributed through that system in reliance on consistent application of that
system; it is up to the author/donor to decide if he or she is willing to
distribute software through any other system and a licensee cannot impose that
choice.
This section is intended to make thoroughly clear what is believed to be a
consequence of the rest of this
<PAGE>
License.
8. If the distribution and/or use of the Program is restricted in certain
countries either by patents or by copyrighted interfaces, the original copyright
holder who places the Program under this License may add an explicit
geographical distribution limitation excluding those countries, so that
distribution is permitted only in or among countries not thus excluded. In such
case, this License incorporates the limitation as if written in the body of this
License.
9. The Free Software Foundation may publish revised and/or new versions of the
General Public License from time to time. Such new versions will be similar in
spirit to the present version, but may differ in detail to address new problems
or concerns.
Each version is given a distinguishing version number. If the Program specifies
a version number of this License which applies to it and "any later version",
you have the option of following the terms and conditions either of that version
or of any later version published by the Free Software Foundation. If the
Program does not specify a version number of this License, you may choose any
version ever published by the Free Software Foundation.
10. If you wish to incorporate parts of the Program into other free programs
whose distribution conditions are different, write to the author to ask for
permission. For software which is copyrighted by the Free Software Foundation,
write to the Free Software Foundation; we sometimes make exceptions for this.
Our decision will be guided by the two goals of preserving the free status of
all derivatives of our free software and of promoting the sharing and reuse of
software generally.
NO WARRANTY
11. Because the program is licensed free of charge, there is no warranty for the
program, to the extent permitted by applicable law. except when otherwise stated
in writing the copyright holders and/or other parties provide the program "as
is" without warranty of any kind, either expressed or implied, including, but
not limited to, the implied warranties of merchantability and fitness for a
particular purpose. the entire risk as to the quality and performance of the
program is with you. Should the program prove defective, you assume the cost of
all necessary servicing, repair or correction.
12. In no event unless required by applicable law or agreed to in writing will
any copyright holder, or any other party who may modify and/or redistribute the
program as permitted above, be liable to you for damages, including any general,
special, incidental or consequential damages arising out of the use or inability
to use the program (including but not limited to loss of data or data being
rendered inaccurate or losses sustained by you or third parties or a failure of
the program to operate with any other programs), even if such holder or other
party has been advised of the possibility of such damages.
END OF TERMS AND CONDITIONS
How to Apply These Terms to Your New Programs
If you develop a new program, and you want it to be of the greatest possible use
to the public, the best way to achieve this is to make it free software which
everyone can redistribute and change under these terms.
To do so, attach the following notices to the program. It is safest to attach
them to the start of each source file to most effectively convey the exclusion
of warranty; and each file should have at least the "copyright" line and a
pointer to where the full notice is found.
< one line to give the program's name and a brief idea of what it does. >
Copyright (C) 19yy < name of author >
This program is free software; you can redistribute it and/or modify it under
the terms of the GNU General Public License as published by the Free Software
Foundation; either version 2 of the License, or (at your
<PAGE>
option) any later version.
This program is distributed in the hope that it will be useful, but WITHOUT ANY
WARRANTY; without even the implied warranty of MERCHANTABILITY or FITNESS FOR A
PARTICULAR PURPOSE. See the GNU General Public License for more details.
You should have received a copy of the GNU General Public License along with
this program; if not, write to the Free Software Foundation, Inc., 59 Temple
Place, Suite 330, Boston, MA 02111-1307 USA
Also add information on how to contact you by electronic and paper mail.
If the program is interactive, make it output a short notice like this when it
starts in an interactive mode:
Gnomovision version 69, Copyright (C) 19yy name of author Gnomovision comes with
ABSOLUTELY NO WARRANTY; for details type `show w'. This is free software, and
you are welcome to redistribute it under certain conditions; type `show c' for
details.
The hypothetical commands `show w' and `show c' should show the appropriate
parts of the General Public License. Of course, the commands you use may be
called something other than `show w' and `show c'; they could even be
mouse-clicks or menu items--whatever suits your program.
You should also get your employer (if you work as a programmer) or your school,
if any, to sign a "copyright disclaimer" for the program, if necessary. Here is
a sample; alter the names:
Yoyodyne, Inc., hereby disclaims all copyright interest in the program
`Gnomovision' (which makes passes at compilers) written by James Hacker.
< signature of Ty Coon >, 1 April 1989 Ty Coon, President of Vice
This General Public License does not permit incorporating your program into
proprietary programs. If your program is a subroutine library, you may consider
it more useful to permit linking proprietary applications with the library. If
this is what you want to do, use the GNU Library General Public License instead
of this License.
<PAGE>
LINEO, INC.
OEM LICENSE AGREEMENT
NO. LN 0201
(AMENDED AND RESTATED 3/20/2000)
This OEM License Agreement (this "Agreement") is entered as of the Effective
Date listed on Schedule A between Lineo, Inc. ("Lineo") and the Original
Equipment Manufacturer identified below ("OEM" or "Licensee"), governing OEM's
licensed rights to use and reproduce software, related products and
documentation proprietary to Lineo, and consists of and incorporates the
following:
THIS SIGNATURE PAGE
SCHEDULE A - SCOPE, GENERAL TERMS AND LICENSE FEES
SCHEDULE B - ADDITIONAL TERMS AND EXCEPTIONS
SCHEDULE C - STANDARD TERMS AND CONDITIONS
APPENDIX I TO SCHEDULE C - END USER LICENSE AGREEMENT
SCHEDULE D - MAINTENANCE, SUPPORT AND TRAINING AGREEMENT
This Agreement amends, restates and supersedes that certain OEM License
Agreement first executed between the parties on February 17, 2000.
1. LINEO ADDRESS AND CONTACT: Lineo, Inc.
Attn: Legal
390 South 400 West
Lindon, UT 84042
Voice: 801-426-5001
Fax: 801-426-6166
2. OEM ADDRESS AND CONTACT: DaiShin Information & Communications CO.
Attn: Oneil Chung
395-68, Shindaebang-Dong
Dongjak-ku, Seoul, Korea 156-710
Voice: 82-2-3284-5008
Fax: 82-2-3284-5015
By signing below, the parties acknowledge their agreement with the terms and
conditions of this Agreement, and each signatory represents and certifies that
he or she is authorized to sign on behalf of and to bind each to the respective
signatories to all of the terms and conditions of this Agreement:
LINEO, INC. DAISHIN INFORMATION & COMMUNICATIONS CO.
By: /s/ Brad Walters By: /s/ Jae-Won Lee
-------------------------------- -----------------------------------
Printed Name: Brad Walters Printed Name: Jae-Won Lee
----------------------- --------------------------
Title: Vice President Title: CEO & President
------------------------------ ---------------------------------
Date: 2/17/00 Date: 2/17/00
------------------------------- ----------------------------------
OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West,
Lindon, Utah 84042
Page 1 of 17
- ----------------------------------
* Confidential Treatment Requested
<PAGE>
LINEO, INC.
OEM LICENSE AGREEMENT
SCHEDULE A
SCOPE, GENERAL TERMS AND LICENSE FEES
1. EFFECTIVE DATE: 15 MARCH 2000
-----------------
2. LICENSED PRODUCT:
Lineo's Embedix(TM) binary software solution to be bundled with OEM's
banking/stock trading devices and electronic transaction system products
(sometimes referred to as "OEM Products" or "OEM Hardware Platforms"),
together with associated Documentation.
3. TERRITORY:
Worldwide.
4. LICENSE TERM:
The License Term is perpetual for the total number of units (* total)
specified in this Agreement, subject to terms governing termination as set
forth in Schedule C, Standard Terms and Conditions.
5. FEES AND PAYMENT:
OEM shall pay to Lineo a nonrefundable license fee of $*, against
which it shall be entitled to up to * licenses (or units) of
Embedix(TM) binary software solution, at preferred pricing of $* USD per
license.
$ * USD will be due and payable on the Effective Date of this
Agreement
$ * USD will be due and payable within 30 days of the
Effective Date of this Agreement.
6. MAINTENANCE/SERVICE AND TRAINING FEE:
In addition to the license fee payable as set forth above, OEM shall pay to
Lineo such fees for maintenance, service and training as are set forth in
Schedule D hereto, provided that such Schedule D is separately signed by
the parties. These fees will be due and payable 30 days from the Effective
Date of this Agreement unless otherwise stated in this Agreement.
- ----------------------------------
* Confidential Treatment Requested
OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West,
Lindon, Utah 84042
Page 2 of 17
<PAGE>
LINEO, INC.
OEM LICENSE AGREEMENT
SCHEDULE B
ADDITIONAL TERMS AND EXCEPTIONS
A. The Standard Terms and Conditions set forth in Schedule C shall apply,
except that Sections 4(b) and 9(a) of Schedule C shall be superseded and
replaced as follows:
4(b) License Fees under this Agreement are due and payable pursuant to
Section 5 of Schedule A, which supersedes the Standard Terms and
Conditions set forth in Section 4(b) of Schedule C. OEM is granted no
rights hereunder to licensed copies of the Licensed Products beyond
* units.
9(a) License Term under this Agreement is as described under Section 4 of
Schedule A, which supersedes the Standard Terms and Conditions set
forth in Section 9(a) of Schedule C.
B. Further development or adaptation of the Licensed Product for OEM's
products, and product maintenance, service and training are covered, if at
all, by separate agreements between the parties.
- ----------------------------------
* Confidential Treatment Requested
OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West,
Lindon, Utah 84042
Page 3 of 17
<PAGE>
LINEO, INC.
OEM LICENSE AGREEMENT
SCHEDULE C
STANDARD TERMS AND CONDITIONS
The following standard terms and conditions apply:
1. DEFINITION. For purposes of this Agreement, the following definitions apply
to the respective capitalized terms:
a. AGREEMENT means this Agreement, consisting of the Signature Page,
Schedules A, B, C and D, and Appendix I to Schedule C, and any additional
documents attached and initialed by the parties.
b. CONFIDENTIAL INFORMATION means all business, marketing and technical
information of each party considered by each to be trade secrets or
otherwise valuable proprietary information, designated or marked as such by
either. Confidential Information shall not include information that (i) is
now or later becomes generally known to the computer industry (other than
as a result of a breach of this Agreement); (ii) is independently developed
by the receiving party; or (iii) the receiving party lawfully obtains from
any third party without restrictions on use or disclosure.
c. DERIVATIVE WORKS means a revision, modification, translation,
abridgment, condensation or expansion of Lineo Products or Documentation or
any form in which Lineo Products or Documentation may be recast,
transferred, or adapted, which, if prepared without the consent of Lineo,
would be a copyright infringement.
d. DOCUMENTATION means those software user manuals, reference manuals and
installation guides, or portions thereof (if any), which are distributed in
conjunction with the Licensed Product set forth in Schedule A.
e. END USER means an entity that acquires the Licensed Product for
Internal Use and is not an affiliate of OEM's enterprise. "End User" does
not include a Reseller.
f. INTERNAL USE means use for purposes that do not directly produce
revenue for the user.
g. LICENSED PRODUCT means the binary code version of the Lineo's Licensed
Product identified in Schedule A, including updates thereof (if any). Lineo
reserves the right at any time to make changes to any Licensed Product,
including without limitation changes required (i) for security, or (ii) to
facilitate performance in accordance with specifications.
h. MARKS means Lineo's trademarks, service marks, logos, designations and
insignias.
i. OEM PRODUCTS refers to the specific hardware manufactured or produced
by OEM with which the Licensed Product is to be bundled or on which the
Licensed Product is to be embedded to create a single product offering.
j. RESELLER refers broadly to any third party VAD, VAR, distributor or
other reseller to or through which OEM is licensed under this Agreement to
distribute copies of the Licensed Product for marketing and distribution to
End-Users, directly or through other third parties.
2. CONTRACT RESPONSIBILITIES: Subject to the terms and conditions of this
Agreement, the parties have the following respective contractual
responsibilities:
a. LINEO'S RESPONSIBILITIES: Lineo shall:
1) Grant OEM the rights and licenses to the Licensed Product as set
forth in Section 3;
2) Provide such technical support as may be agreed and set forth in
Schedule A;
3) Warrant the Licensed Product as detailed in Section 7 below; and
4) Indemnify OEM as set forth in Section 8(a) below.
b. OEM'S RESPONSIBILITIES: OEM shall:
OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West,
Lindon, Utah 84042
Page 4 of 17
<PAGE>
1) Market, sell and deliver units of the Licensed Product embedded
or incorporated with OEM's Products as permitted under this Agreement
within the Territory, as identified in Schedule A;
2) Include with all sales and distributions of OEM Hardware
Platforms incorporating or bundled with the Licensed Product an
acceptable End-User License Agreement governing End-User use of the
Licensed Product;
3) Protect Lineo's proprietary rights in the Licensed Product as set
forth in Section 5 hereof; and
4) Make all payments to Lineo as required by Section 4 and Schedule
A hereof; and
5) Indemnify Lineo as set forth in Section 8(b) below.
6) Perform all other obligations required of OEM under this
Agreement.
3. GRANT OF LICENSES. Subject to the terms and conditions of this Agreement
and for the term hereof, Lineo hereby grants to OEM the following rights and
licenses:
a. LICENSED PRODUCT AND DOCUMENTATION. Lineo hereby grants to OEM a
nonexclusive and nontransferable right and license (i) to use and reproduce
the Licensed Product and the Documentation on any tangible media and (ii)
to market and distribute copies of the Licensed Product (in binary code
only), with copies of the Documentation, to End Users, directly or through
Resellers. Unless otherwise specifically provided in Schedules A or B,
OEM's rights to reproduce the Licensed Product are limited to binary code.
Unless otherwise specifically provided in Schedules A or B, OEM's rights of
distribution and sale are limited to Licensed Product bundled with or
embedded in OEM's Product(s), and OEM shall have no rights to market or
distribute copies of the Licensed Product or Documentation independent of
OEM's Products. OEM shall not contract reproduction of the Licensed Product
and Documentation to third parties without Lineo's express written consent,
which consent shall not unreasonably be withheld. OEM may grant Resellers
the sublicensed right to distribute copies of OEM Hardware Platforms
incorporating or bundled with the Licensed Product through other Resellers,
regardless of tier, provided that such sublicenses are consistent with the
terms hereof and are no less restrictive than the license granted herein.
b. TRADEMARKS. Lineo hereby grants to OEM the nonexclusive,
nontransferable right and license to use and display Lineo's Marks solely
in connection with and only to the extent reasonably necessary for the
marketing, distribution and support of OEM's Product during the term of
this Agreement, provided that any such use and display shall comply with
Lineo's then current trademark usage policies. Upon expiration or
termination of this Agreement, OEM agrees to cease all display, advertising
and use of any and all Lineo Marks. In the case of bundled products, OEM
agrees not to alter, erase or overprint any notice provided by Lineo and
not to attach any additional trademarks without the prior written consent
of Lineo or affix any Lineo Marks to any non-Lineo product. OEM recognizes
Lineo's ownership and title to the Marks and the goodwill attaching to said
Marks. OEM agrees not to use, employ or attempt to register any trademarks
or Trade Names that are confusingly similar to Lineo's Marks or Trade
Names.
c. THIRD PARTY LICENSE. If all or any part of the Licensed Product or
Updates delivered to OEM has been licensed to Lineo by a third party
software supplier then, notwithstanding anything to the contrary contained
in this Agreement, OEM is granted a sublicense to the third party software
subject to the same terms and conditions as those contained in the
Agreement between Lineo and such third party software supplier. Lineo
reserves the right to substitute any third party software in the Licensed
Product as long as the new third party software does not materially affect
the functionality of the Licensed Product. Lineo hereby represents the
current release of the Licensed Product contains no third party software
which would require OEM to agree to any terms and conditions in addition to
those set forth in this Agreement. Certain components of the Licensed
Product are components licensed under the GNU General Public License
(version 2), which Lineo supports. OEM may obtain a copy of the GNU General
Public License at www.gnudocs.com/GNU/COPYING. Lineo will provide source
code for any of the components of the Licensed Product licensed under the
GNU General Public License. To obtain such source code, send email request
to [email protected]. OEM's rights to obtain source code to those
elements or components of the Licensed Product that are subject to the GNU
General Public License shall not be construed to create or imply a right to
any element or component of the Licensed Product that is proprietary to
Lineo, except as and to the extent that such rights are expressly granted
under this License Agreement.
d. PRODUCT TAMPERING. Unless and to the specific extent that source code
rights are specifically granted in Schedules A or B, OEM shall have no
rights directly or indirectly to de-compile, reverse engineer, reverse
compile, modify or perform any similar type of operation on the Licensed
Product, or any portion thereof, or to prepare any other form of Derivative
Works. All Derivative Works, whether or not authorized by Lineo, shall
remain the sole property of Lineo.
4. PRICING AND PAYMENT
a. PRICING AND LICENSE FEES. OEM shall pay to Lineo the Fees set out in
Schedule A as required therein. Prices are exclusive of all applicable
taxes. OEM agrees to pay all taxes associated with the marketing,
sublicensing, distribution and transfer of all Licensed Products, whether
bundled with or embedded with OEM Products, including but not limited to
sales, use, excise, added value and similar
OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West,
Lindon, Utah 84042
Page 5 of 17
<PAGE>
taxes and all customs, duties or governmental impositions, but excluding
taxes on Lineo's net income. Any tax or duty Lineo may be required to
collect or pay upon the marketing or transfer of the Licensed Product shall
be paid by OEM, and such sums shall be due and payable to Lineo upon
delivery. If OEM claims a tax exemption, OEM must provide Lineo with valid
tax exemption certificates.
b. PAYMENT AND REPORTING. License fees will accrue in the applicable
corresponding quantity upon: (a) the initial date of OEM's Internal Use of
a Licensed Product; (b) distribution by OEM of a copy of a Licensed Product
in any form (including demonstration versions or prototypes of OEM's
Product) to a Reseller or End User; or (c)(if rights to do so are
specifically granted in Schedule A) OEM's authorization to a Reseller to
increase the authorized number of copies. OEM shall pay Lineo License Fees
accrued during each calendar month, together with any other fees accruing
over the same period, within 30 days following the date of invoice for such
month. Payment shall be accompanied by a written report detailing the
quantity of bundled or embedded Licensed Product shipped by OEM in the
prior month and showing calculation of all fees payable thereon. All
payments shall be made in U.S. dollars, (i) at Lineo's address as indicated
in this Agreement or at such other address as Lineo may from time to time
indicate by proper notice hereunder or (ii) by wire transfer to a bank and
account number to be designated by Lineo. Royalty reporting requirements
shall not apply when licenses are pre-paid.
c. INTEREST shall accrue on any unpaid payment or payment balance at an
annual rate of 18% per annum, or, if lower, at the highest lawful rate,
calculated from the date the payment is due to the date it is received by
Lineo. Arrearage in excess of $5,000 not paid within 10 days of written
demand following the date payment is due shall be grounds for Lineo's
termination of this Agreement at Lineo's option.
d. RECORDS EXAMINATIONS. OEM agrees to allow Lineo to examine OEM's
records to test OEM's compliance with this Agreement. Any examination will
be conducted only by an authorized representative of Lineo, and will occur
during regular business hours at OEM's offices and will not interfere
unreasonably with OEM's business activities. Examinations will be made no
more frequently than quarterly, and Lineo will give OEM 15 business days or
more prior written notice of the date of the examination and the name of
Lineo's authorized representative who will be conducting the examination.
The audit will be conducted at Lineo's expense unless the results of such
audit establish that inaccuracies in the quarterly reports have resulted in
underpayment to Lineo of more than 5% of the amount due in any quarter, in
which case OEM shall pay all amounts determined to be due and shall bear
the expenses of the audit. All information obtained by Lineo's authorized
representative conducting the audit will be maintained confidential by the
representative. The examiner will give OEM and Lineo an examination report
containing only the information necessary to indicate compliance or
non-compliance with this Agreement.
5. LINEO'S INTELLECTUAL PROPERTY RIGHTS
a. ACKNOWLEDGMENT OF LINEO'S RIGHTS. For purposes of this Agreement, and
with the exception only of those elements (if any) of the Licensed Product
specifically identified and designated by Lineo as third-party software,
OEM acknowledges and confirms Lineo's exclusive worldwide rights, including
copyright in, and the validity of the Licensed Products (including, without
limitation, all input/output and report formats, screen displays, menu
features and overall structure, sequence and organization) and in the
Marks. OEM agrees not to challenge or otherwise to interfere with the use
and ownership by Lineo of the Licensed Product or any of the intellectual
property rights associated with the Licensed Product or the Marks
(hereinafter referred to collectively as "Lineo Intellectual Property").
OEM also shall not permit any personnel to remove any proprietary or other
legends or restrictive notices contained or included in any materials
supplied or approved by Lineo, and OEM shall not permit any personnel to
copy or modify or reverse-engineer any materials, including the Licensed
Product provided by Lineo, except as and to the extent specifically
permitted under this Agreement. Title to every copy of the Licensed Product
is vested and shall remain in Lineo, or, as applicable, in such third party
from whom Lineo holds rights of license and distribution, and title does
not pass with any license under this Agreement.
b. END USER LICENSE AGREEMENTS. OEM agrees to exercise commercially
reasonable efforts to ensure that each End User receiving the Licensed
Product through OEM or Resellers understands, and agrees to be bound by, an
appropriate End User License Agreement that is no less restrictive in its
application to the Licensed Product than the then-current form of Lineo's
End User License Agreement, the most current version of which is attached
as Appendix I hereto.
c. OEM'S WAIVER OF RIGHTS. OEM further acknowledges that it has no rights
of any kind anywhere in the world in any of Lineo's Intellectual Property
other than those limited rights granted by this Agreement. Accordingly, OEM
waives (a) all claims of any right by OEM in any of the Lineo's
Intellectual Property and (b) the right, if any, to file or own in its own
name or in that of any designee, any application for registration of any
trademark, copyright, patent, industrial design, trade secret or other
intellectual property which forms part of Lineo's Intellectual Property, or
to own any registration or patent resulting therefrom. In the event OEM, in
any jurisdiction of the world, files such an application or obtains such a
patent or registration in violation of this section, such application,
registration or patent shall be deemed held in trust by OEM for Lineo and
shall be assigned by OEM to Lineo without conditions and upon demand by
Lineo.
d. PRESERVATION AND SECURITY OF PROPRIETARY INFORMATION. OEM shall not
sell, assign, lease, license, transfer or otherwise disclose the Licensed
Product except as expressly authorized by this Agreement. OEM shall
safeguard any and all copies of the Licensed Product against unauthorized
disclosure, reproduction or tampering, and shall assist Lineo in the
enforcement of Lineo's rights in the event of unauthorized disclosure by
any person under OEM's control or service. OEM shall also ensure that
Licensor's Lineo's copyright, trademark and patent notices, which may from
time to time be updated, are prominently displayed on all copies of OEM's
Products and documentation containing the Licensed Product. OEM shall not
remove or obscure any copyright, trademark, patent or other proprietary
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rights notice already present on any of the Licensed Products or
Documentation. The notice of Lineo's intellectual property rights in the
Licensed Product shall read as follows: "Licensed Software (C)Lineo,
Inc.1999-2000, all rights reserved."
e. GOODWILL. To protect and preserve the reputation and goodwill of Lineo
and of the Licensed Product, OEM shall (1) avoid deceptive, misleading or
unethical practices that are or might be detrimental to Lineo, the Licensed
Product or the public, including any disparagement of Lineo or the Licensed
Product; (2) make no false or misleading representations with regard to
Lineo or the Licensed Product; (3) refrain from publishing or employing any
misleading or deceptive advertising material reflecting upon Lineo or the
Licensed Product; (4) refrain from making any representations, warranties
or guarantees to Resellers or End Users or to the trade with respect to the
specifications, features or capabilities of the Licensed Program that are
inconsistent with the Documentation and marketing literature distributed by
Lineo, including all warranties and disclaimers contained in such
literature; (5) not distribute for any purpose any marketing materials,
packaging or other material bearing Lineo Marks which have not been first
approved by Lineo; and (6) enter into agreements for marketing and
distribution of OEM's Product bearing or bundled with the Licensed Products
only with such Resellers who have agreed to be bound by the foregoing terms
as part of the applicable Reseller agreement.
f. THIRD-PARTY REQUIREMENTS. In the event that Lineo is required by a
third party software supplier to cease and to cause its OEM's to cease
reproduction and distribution of a particular revision of the Licensed
Products, OEM agrees to comply herewith provided Lineo provides OEM with 30
days prior written notice and further provided that Lineo replaces such
affected Lineo Product with a functionally equivalent Lineo Product as soon
as commercially practicable.
6. CONFIDENTIAL INFORMATION. OEM shall not use or disclose any Confidential
Information supplied by Lineo relating to the Licensed Product except as
authorized in writing by Lineo in advance of such disclosure and shall
safeguard all Confidential Information provided by Lineo to OEM under this
Agreement in the same or more restrictive manner as OEM safeguards its own
Confidential Information.
7. LIMITED WARRANTIES
a. Lineo's sole warranty to OEM, for its benefit and for the benefit of
its Reseller customers and any End User regarding the Licensed Product is
that the Licensed Product will conform in material respects to Lineo's most
current published specifications pertaining to the Licensed Product.
b. The exclusive remedy of OEM, for itself or on behalf of any Reseller
or End User customers, against Lineo for breach of the foregoing warranty
shall be to seek repair or replacement of the defective Licensed Product
element or unit at no charge to OEM.
c. EXCEPT AS SET FORTH IN THIS SECTION 7, LINEO DISCLAIMS ALL WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES AS TO THE
SUITABILITY OR MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF THE
LICENSED PRODUCT. IN NO EVENT SHALL LINEO BE LIABLE FOR ANY LOST OR
ANTICIPATED PROFITS, OR ANY INCIDENTAL, EXEMPLARY, SPECIAL OR CONSEQUENTIAL
DAMAGES (INCLUDING LOST PROFITS), REGARDLESS OF WHETHER LINEO WAS ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES. THE WARRANTY SET OUT IN THIS SECTION 7
SHALL BE NULL AND VOID IF THE LICENSED PRODUCT IS NOT USED IN A MANNER
CONSISTENT WITH ITS INTENDED PURPOSES OR IS MODIFIED OR REPAIRED BY OEM IN
A MANNER NOT AUTHORIZED BY THIS AGREEMENT OR IS MODIFIED OR REPAIRED BY AN
END-USER. FURTHER, THE WARRANTY IN THIS SECTION 7 DOES NOT APPLY IF THE
ERROR(S) ARE CAUSED BY ANY PROGRAMMING NOT CREATED BY LINEO, OR BY ANY
REPAIRS, MODIFICATIONS OR ENHANCEMENT NOT MADE BY LINEO.
d. OEM is not authorized to make any warranty commitment on Lineo's
behalf, whether written or oral, other than those contained above.
8. INDEMNIFICATION
a. BY LINEO. Lineo agrees to defend OEM and, to the extent of payments
made by OEM under this Agreement, to indemnify and hold OEM harmless from
any and all third-party claims, actions, demands, and related damages,
liabilities, costs and expenses resulting from charges or allegations that
the Licensed Product or Lineo Mark appropriately used by OEM infringes any
U.S. trademark, U.S. copyright or other intellectual property right of any
third party.
OEM shall permit Lineo to replace or modify the Licensed Product affected
so as to avoid infringement or to procure the right for OEM to continue use
and marketing of such items. If neither alternative is possible or
commercially reasonable, the infringing items shall be returned to Lineo,
whose sole liability shall be to refund amounts paid by OEM for the
affected copies of the Licensed Product. Lineo shall have no liability for
infringement based on (a) use of other than the current release of the
Licensed Products, or (b) modification of the Licensed Products by any
party other than Lineo, or the combination or use of the Licensed Products
with any other computer program, equipment, product, device, item or
process not furnished by Lineo, if such infringement would have been
avoided by the use of the Licensed Products alone and in their current
unmodified form, or (c) other acts of OEM.
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THE ABOVE STATES THE ENTIRE LIABILITY OF LINEO WITH RESPECT TO INFRINGEMENT
OF PATENTS, COPYRIGHTS, TRADEMARKS OR ANY OTHER FORM OF INTELLECTUAL
PROPERTY RIGHT BY ANY PRODUCT SUPPLIED BY LINEO.
b. BY OEM. OEM agrees to indemnify, defend and hold Lineo harmless from
and against any and all third-party claims, actions, demands, and related
damages, liabilities, costs and expenses arising or resulting from, or
related to, marketing, distribution or other activities by OEM or its
Resellers under this Agreement or otherwise respecting the Licensed
Product.
c. GENERAL CONDITIONS TO INDEMNITY RIGHTS. The forgoing rights and
obligations of indemnity are conditioned on (i) prompt written notification
from the indemnified party to the indemnifying party of the claim for which
indemnity is sought; (ii) sole control in the indemnifying party of the
defense of any action and all negotiations for settlement and compromise;
and (iii) cooperation and assistance from the party seeking
indemnification, including disclosure of information and authority
necessary to perform the above. The indemnified party shall be responsible
for the costs and fees of its own counsel if it desires to have separate
legal representation in any such action.
9. TERM AND TERMINATION.
a. TERM AND EXTENSIONS. The initial term hereof shall be as provided in
Schedule A. Unless earlier terminated for breach as provided herein, or
unless either party notifies the other in writing, not later than 30 days
prior to expiration of the initial term, of its intention to terminate the
agreement upon said expiration, this Agreement shall automatically renew at
the end of the initial term for successive one year terms.
b. TERMINATION FOR CAUSE. Either party may terminate this Agreement for
the substantial breach by the other party of a material term. The
terminating party will first give the other party written notice of the
breach and a reasonable period of at least 30 days in which to cure the
alleged breach. If a cure is not achieved during the cure period, then the
non-breaching party may terminate this Agreement upon written notice.
c. TERMINATION BY LINEO. Lineo may terminate this Agreement if OEM fails
to meet its payment obligations under this Agreement and this failure
continues for 10 days following receipt of written notice and demand from
Lineo.
d. INSOLVENCY, ASSIGNMENT, OR BANKRUPTCY. Either party may, at its
option, immediately terminate this Agreement upon written notice to the
other party if the other party (i) admits in writing its inability to pay
its debts generally as they become due; (ii) makes a general assignment for
the benefit of creditors; (iii) institutes proceedings to be adjudicated a
voluntary bankrupt, or consents to the filing of a petition of bankruptcy
against it; (iv) is adjudicated by a court of competent jurisdiction as
being bankrupt or insolvent; (v) seeks reorganization under any bankruptcy
act or consents to the filing of a petition seeking such reorganization; or
(vi) is the subject of a decree by a court of competent jurisdiction
appointing a receiver, liquidator, trustee or assignee in bankruptcy or in
insolvency covering all or substantially all of such party's property or
providing for the liquidation of such party's property or business affairs.
e. ACCELERATION OF PAYMENT. Upon termination of this Agreement by Lineo
under Section 9.a, 9.b or 9.c, the due dates of all outstanding invoices to
OEM for Licensed Products will automatically be accelerated so that they
become due and payable on the effective date of termination, even if longer
terms had been previously granted or allowed.
f. EFFECT OF TERMINATION ON OBLIGATIONS. Upon termination of this
Agreement for any reason, OEM shall (1) immediately cease all reproduction
of the Licensed Product and shall cease distribution of all copies
previously made; (2) within 30 calendar days after termination of this
Agreement, either deliver to Lineo or destroy all copies of Licensed
Products and Documentation in OEM's possession or under its control, and
shall furnish to Lineo an affidavit signed by an officer of Licensee
certifying that, to the best of its knowledge, such delivery or destruction
has been fully effected. Notwithstanding the foregoing, and provided OEM
fulfills its obligations specified in this Agreement with respect to such
items, OEM may continue to use and retain copies of the Licensed Products
and Documentation to the extent, but only to the extent, necessary to
support and maintain Licensed Products rightfully distributed to Resellers
and End Users by OEM prior to termination of this Agreement. Termination of
this Agreement shall not affect rights of Resellers or End Users receiving
Product incorporating or bundled with Licensed Product prior to the date of
termination, provided, however, that Lineo shall have received payment of
License Fees and other fees owing from OEM therefor.
g. SURVIVAL OF TERMS. Termination of this Agreement shall not relieve
either party of any obligations arising under this Agreement prior to the
date of termination. Any provisions of this Agreement that by their nature
extend beyond the Expiration Date or other termination of this Agreement,
including specifically obligations owing under Sections 4, 5 and 7 hereof,
will survive and remain in effect until all obligations are satisfied.
Confidentiality provisions shall remain in effect until the Confidential
Information is no longer confidential.
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10. GENERAL PROVISIONS.
a. PUBLIC ANNOUNCEMENTS AND PROMOTIONAL MATERIALS. Lineo and OEM shall
cooperate with each other either to issue a joint press release and/or to
enable each party to issue and post to its web site an announcement
concerning this Agreement, provided that each party must approve any such
press announcement prior to its release. Any separate release shall be
subject to must approve such press release prior to its release. Lineo
shall have the right to use OEM's name as a customer reference. Lineo shall
cooperate with OEM as OEM may reasonably desire and request in its
development of the initial marketing and sales materials used to promote
the distribution of OEM Products incorporating or bundled with the Licensed
Products.
b. FORCE MAJEURE. If either party is prevented from performing any
portion of this Agreement (except the payment of money) by causes beyond
its control, including labor disputes, civil commotion, war, governmental
regulations or controls, casualty, inability to obtain materials or
services or acts of God, such defaulting party will be excused from
performance for the period of the delay and for a reasonable time
thereafter.
c. DISPUTE RESOLUTION. The parties agree to attempt in good faith to
resolve all disputes arising between them first through expedited mediation
(not to exceed 48 hours from the receipt by a party of the notice described
below) and, if mediation is not successful, through negotiated settlement
or court action. Neither party shall file a lawsuit until the mediation has
been completed, except that in the event that the actions of one party will
cause or are causing the other immediate irreparable injury requiring
temporary injunctive relief and the other party is unwilling to suspend its
planned or existing activity to allow for expedited mediation, the
aggrieved party may file suit and seek such temporary injunctive relief in
a court with jurisdiction over the subject matter of the dispute. Dispute
resolution under this section shall be triggered by one party's service
upon the other of a written notice and request to mediate, identifying the
subject matter of the dispute and the nature of the relief sought. Unless
otherwise agreed in writing at the time of mediation, mediation shall be
conducted through and under the mediation rules of the American Arbitration
Association.
d. LIMITATION OF ACTIONS. No action arising or resulting from this
Agreement, regardless of its form, may be brought by either party more than
two years after termination of this Agreement.
e. THIRD PARTY CLAIMS. Neither party shall be liable for any claim by the
other based on any third party claim, except as stated in Section 7 of this
Agreement.
f. JURISDICTION. This Agreement will in all respects be governed by and
construed in accordance with the laws of the State of Utah of the United
States of America, and will not be construed in accordance with or governed
by the United Nations Convention for International Sales of Goods.
g. ATTORNEYS' FEES. If either Lineo or OEM employs attorneys to enforce
any rights arising out of or relating to this Agreement, the prevailing
party shall be entitled to recover reasonable costs and attorney's fees.
h. WAIVER. No waiver of any right or remedy on one occasion by either
party will be deemed a waiver of that right or remedy on any other
occasion.
i. SUPERIOR AGREEMENT. This Agreement will not be supplemented or
modified by any course of dealing or usage of trade. Variance from or
addition to the terms and conditions of this Agreement in any written
notification from OEM will be of no effect, unless otherwise expressly
provided for in this Agreement. This Agreement may be amended or modified
only by a writing signed by each party.
j. ASSIGNMENT. This Agreement is not assignable by OEM, in whole or in
part, without Lineo's prior written consent. Lineo will not unreasonably
withhold consent to an assignment of this Agreement or any part of this
Agreement to a parent, subsidiary or affiliate of OEM, provided that such
entity is at least as capable as OEM of satisfying OEM's responsibilities
hereunder. Any attempted assignment without Lineo's written consent will be
null and void.
k. NOTICE. Unless otherwise agreed to by the parties, all notices
required under this Agreement (except those relating to product pricing,
changes and upgrades) will be deemed effective when received and made in
writing by either (i) registered mail, (ii) certified mail, return receipt
requested, (iii) overnight mail, addressed and sent to the address
indicated on the Signature Page, to the attention of the person designated
as the responsible representative or to that person's successor, or (iv) by
telephone facsimile transfer appropriately directed to the attention of the
person designated as the responsible representative or to that person's
successor.
l. SEVERABILITY. If any term, provision, covenant or condition of this
Agreement is held invalid or unenforceable for any reason, the remainder of
the provisions will continue in full force and effect as if this Agreement
had been executed with the invalid portion eliminated. The parties further
agree to substitute for the invalid provision a valid provision that most
closely approximates the intent and economic effect of the invalid
provision.
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m. INDEPENDENT CONTRACTORS. Each party acknowledges that the parties to
this Agreement are independent contractors and that it will not, except in
accordance with this Agreement, represent itself as an agent or legal
representative of the other.
n. COMPLIANCE WITH LAWS. OEM represents and warrants that it shall comply
at its own expense with all applicable laws, rules and regulations of
governmental bodies and agencies, including all laws, rules and regulations
affecting or governing exports, in its performance under this Agreement.
o. GOVERNMENT RIGHTS. OEM agrees (i) to identify the Licensed Products in
all proposals and agreements with the United States Government or any
contractor for the United States Government; and (ii) to identify or to
mark the software products provided pursuant to any agreement with the
United States Government or any contractor for the United States Government
as necessary to obtain protection substantially equivalent to that afforded
commercial computer software and related documentation developed at private
expense and provided with Restricted Rights as defined in DOD FAR
Supplement 48 C.F.R. 252.227-7013(c)(1)(ii) in effect as of May 18, 1987 or
any successor regulation.
p. HEADINGS. The headings provided in this Agreement are for convenience
only and will not be used in interpreting or construing this Agreement.
q. SCOPE OF AGREEMENT. Each of the parties hereto acknowledges that it
has read this Agreement, understands it and agrees to be bound by its
terms. The parties further agree that this Agreement is the complete and
exclusive statement of agreement regarding the subject matter and
supersedes all proposals (oral or written), understandings,
representations, conditions, warranties, covenants and all other
communications between the parties relating thereto. This Agreement may be
amended only by a writing that refers specifically to this Agreement and is
signed by both parties.
* * * END OF STANDARD TERMS AND CONDITIONS * * *
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APPENDIX I TO SCHEDULE C, STANDARD TERMS AND CONDITIONS
LINEO END USER LICENSE AGREEMENT
IMPORTANT-READ CAREFULLY
This Lineo End User License Agreement ("EULA") is a legal agreement between you
(either an individual or a single entity) and Lineo, Inc. ("Lineo") for the
enclosed or attached Lineo software product, which includes computer software
and associated documentation ("Software"). The Software also includes any
updates and supplements to the original Software provided to you by Lineo. Any
product provided along with the Software that is associated with a separate
end-user license agreement is licensed to you under the terms of that license
agreement. By installing, copying, downloading, accessing or otherwise using the
software, you agree to be bound by the terms of this EULA. If you do not agree
to the terms of this EULA, you may not use or install the Software. If you have
purchased the Software, promptly return the Software and all accompanying
materials with proof of purchase for a refund.
SOFTWARE LICENSE
The Software is protected by copyright laws and international copyright
treaties, as well as other intellectual property laws and treaties. The Software
is licensed, not sold.
1. GRANT OF LICENSE
This EULA grants you the rights to install, use, access, display, run, or
otherwise interact with ("Run") one copy of the Software on no more than one
computer or device ("Computer").
2. OTHER RIGHTS AND LIMITATIONS
- LIMITATIONS ON REVERSE ENGINEERING, DECOMPILATION, AND DISASSEMBLY.
You may not reverse engineer, decompile, or disassemble the Software,
except and only to the extent that such activity is permitted by
applicable law.
- RENTAL. You may not rent, lease, sell, sublicense, or lend the
Software.
- LANGUAGE VERSIONS. If the media provided to you includes more than one
language version of the same Software, you may Run any of the language
versions of the Software, provided the total number of copies Run does
not exceed the number of licenses you have acquired.
- TRANSFER. You may not transfer or assign your rights or obligations
under this EULA to any person or entity without the prior written
consent of Lineo.
- SUPPORT SERVICES. Lineo may provide you with technical support
services related to the Software ("Support Services") as described in
other Lineo-provided materials. Any supplemental software code
provided to you as part of the Support Services shall be considered
part of the Software and subject to the terms and conditions of this
EULA. With respect to technical information you provide to Lineo as
part of the Support Services, Lineo may use such information for its
business purposes, including for product support and development.
Lineo will not utilize such technical information in a form that
personally identifies you.
- RESERVATION OF RIGHTS. Lineo reserves all rights not expressly granted
under this EULA.
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3. SAFEGUARDS/AUDIT RIGHTS
You agree to: (i) implement internal safeguards to prevent any unauthorized
copying, distribution, or use of the Software; (ii) provide Lineo with written
certification of the number of copies or concurrent usage of the Software on
request, and (iii) allow Lineo to audit for compliance with this EULA during
regular business hours. Lineo will pay for the cost of the audit unless the
audit shows a discrepancy which is five percent (5%) or more of the number of
copies of the Software Run over the licenses you have acquired; in which event,
you shall pay for the cost of the audit.
4. COPYRIGHTS
Lineo and its suppliers retain all ownership of the Software and all copies
thereof, provided, however, that certain components of the Software are
components licensed under the GNU General Public License (version 2), which
Lineo supports. You may obtain a copy of the GNU General Public License at
www.gnudocs.com/GNU/COPYING. Lineo will provide source code for any of the
components of the Software licensed under the GNU General Public License. To
obtain such source code, send email to [email protected]. You may make
up to two copies of electronic documentation accompanying the Software for each
license you have acquired for the Software. If you make copies, you must include
all applicable copyright notices and other proprietary rights legends that come
with the Software.
5. EXPORTS
You agree that you will not export or re-export the Software, any part thereof,
or any process or service that is the direct product of the Software (the
foregoing collectively referred to as the "Restricted Components"), to any
country, person or entity subject to U.S. export restrictions. You specifically
agree not to export or re-export any of the Restricted Components (i) to any
country to which the U.S. has embargoed or restricted the export of goods or
services, which currently include, but are not necessarily limited to Cuba,
Iran, Iraq, Libya, North Korea, Sudan and Syria, or to any national of any such
country, wherever located, who intends to transmit or transport the Restricted
Components back to any such restricted country; (ii) to any person or entity who
you know or have reason to know will utilize the Restricted Components in the
design, development or production of nuclear, chemical or biological weapons; or
(iii) to any person or entity who has been prohibited from participating in U.S.
export transactions by any federal agency of the U.S. Government. You warrant
and represent that neither the Bureau of Export Administration of the U.S.
Commerce Department nor any other U.S. federal agency has suspended, revoked or
denied your export privileges.
6. LIMITED WARRANTY
- LIMITED WARRANTY. For a period of 90 days from the date you receive
the Software or from the date of performance of Support Services by
Lineo, Lineo warrants that: (a) the unmodified Software will perform
substantially in accordance with the accompanying written materials
when used as directed, (b) Lineo media will be free of defects, and
(c) such Support Services will be performed in a manner consistent
with generally accepted industry standards. Any implied warranties are
limited to the 90 day period. This Limited Warranty is void if failure
of the Software has resulted from modification, accident, abuse, or
misapplication. Some jurisdictions do not allow limitations on
duration of an implied warranty, so the above limitation may not apply
to you.
- YOUR EXCLUSIVE REMEDY. Lineo's and its suppliers' entire liability and
your exclusive remedy arising from a breach of the Limited Warranty
is, at Lineo's option, either repair or replacement of
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the non-conforming Software, or reperformance of the nonconforming
Support Services, or return of the price you paid for the
non-conforming Software or Support Services. You must return all
non-conforming Software to Lineo with your proof of purchase to be
entitled to any of these remedies. Any replacement Software or Support
Services will be warranted for the remainder of the original warranty
period or 30 days, whichever is longer. Outside the United States,
neither these remedies nor any product support services offered by
Lineo are available without proof of your purchase from an authorized
international source.
- NO OTHER WARRANTIES. TO THE FULL EXTENT PERMITTED BY LAW, LINEO AND
ITS SUPPLIERS DISCLAIM ALL OTHER WARRANTIES, WHETHER ORAL OR WRITTEN,
EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES
OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, AND
NON-INFRINGEMENT, WITH REGARD TO THE SOFTWARE AND THE PROVISION OF OR
FAILURE TO PROVIDE SUPPORT SERVICES. THIS WARRANTY GIVES YOU SPECIFIC
LEGAL RIGHTS. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS. YOU MAY
HAVE OTHERS, WHICH VARY FROM JURISDICTION TO JURISDICTION.
- LIMITATION OF LIABILITY. LINEO AND ITS SUPPLIERS WILL NOT BE LIABLE
FOR ANY SPECIAL, INCIDENTAL, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING, WITHOUT LIMITATION, DAMAGES FOR PERSONAL INJURY, LOSS OF
BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS OR
CONFIDENTIAL INFORMATION, LOSS OF PRIVACY, OR ANY OTHER PECUNIARY
LOSS) ARISING OUT OF THE USE OF OR INABILITY TO USE THE SOFTWARE OR
THE PROVISION OF OR FAILURE TO PROVIDE SUPPORT SERVICES, EVEN IF LINEO
OR ITS SUPPLIERS HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
IN ANY CASE, THE ENTIRE LIABILITY OF LINEO AND ITS SUPPLIERS UNDER
THIS AGREEMENT AND LIMITED WARRANTY SHALL BE LIMITED TO THE AMOUNT
ACTUALLY PAID BY YOU FOR THE SOFTWARE OR SUPPORT SERVICES THAT CAUSE
THE DAMAGE. BECAUSE SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR
LIMITATION OF LIABILITY, THE ABOVE LIMITATION MAY NOT APPLY TO YOU.
7. U.S. GOVERNMENT RESTRICTED RIGHTS
Software and documentation delivered to civilian agencies of the U.S. Government
pursuant to solicitations dated prior to December 1, 1995, and Software and
documentation delivered to the Department of Defense of the U.S. Government
pursuant to solicitations dated prior to September 29, 1995, are provided with
RESTRICTED RIGHTS. Use, duplication, or disclosure by the Government is subject
to restrictions as set forth in subparagraph FAR 52.227-14(g)(Jun. 1987) or
subparagraph DFAR 252.227-7013 (c)(1)(ii)(Oct. 1988). All Software and
documentation delivered to civilian agencies or the Department of the Defense of
the U.S. Government pursuant to solicitations issued after the dates specified
above, are delivered with commercial licensing rights as set forth in this EULA
only.
8. GOVERNING LAWS AND ATTORNEYS' FEES
This EULA is governed by the laws of the State of Utah, USA, without regard to
principles of conflict of laws, and specifically excludes the United Nations
Convention on Contracts for the International Sale of Goods. If you acquired
this Software in a country outside of the United States, that country's laws may
apply. In any action or suit
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to enforce any right or remedy under this EULA or to interpret any provision of
this EULA, the prevailing party will be entitled to recover its costs, including
reasonable attorneys' fees.
9. ENTIRE AGREEMENT
This EULA constitutes the entire agreement between you and Lineo with respect to
the Software, and replaces all other understandings, communications, agreements
or representations, whether written or oral. The terms of this EULA cannot be
modified by any terms in any printed forms used by the parties in performing the
EULA, and can only be modified by express written consent of both parties. If
any part of this EULA is held to be unenforceable as written, it will be
enforced to the maximum extent allowed by applicable law, and will not affect
the enforceability of any other part.
Should you have any questions concerning this EULA, or if you desire to contact
Lineo for any reason, please contact the Lineo representative serving your
company, or send email to: [email protected].
OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West,
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LINEO, INC.
OEM LICENSE AGREEMENT
SCHEDULE D
ANNUAL OEM MAINTENANCE, SUPPORT AND TRAINING AGREEMENT
NO. LN0201
------
This OEM Maintenance, Support and Training Agreement is an element of an OEM
License Agreement ("OEM Agreement") between Lineo and Licensee, and is subject
to all the general terms and conditions thereof, except as and to the extent
such terms are specifically and directly superseded hereby. Lineo will provide
maintenance and support only in connection with OEM's pre-purchase of *
licenses (or units) as specified in the OEM License Agreement of which this is a
part, for a term expiring 12 months from the Effective Date. Lineo and OEM may,
at any time, negotiate and mutually agree to amend and extend the coverage of
the maintenance and support beyond such 12-month period, provided that any such
amendment is in writing.
A. MAINTENANCE AND PRODUCT SUPPORT:
1. MAINTENANCE/MINOR UPDATES. In consideration of the maintenance and support
Service Fee set forth in Section 3 below, Lineo will provide to OEM any
minor updates to the current version of the Licensed Product, Embedix(TM),
made generally available during the term of this Maintenance and Support
Agreement. In addition, Lineo will provide ongoing telephone and e-mail
support. The expenses of any distribution of such updates through the
distribution channels for OEM's products will be paid by OEM. OEM and Lineo
will favorably consider electronic or alternative dissemination methods of
such minor updates to the extent consistent with policies of both
companies. OEM and Lineo agree to reasonably cooperate on a monthly basis
regarding support issues and processes.
2. TECHNICAL SUPPORT. In further consideration of the maintenance and support
Service Fee set forth in Section 3, Lineo will provide OEM with Lineo's
backend technical support services, as further described herein.
a. BACK-END SUPPORT. Lineo will provide back-end support to OEM for
program errors not resolved by OEM pursuant to OEM support policies
and in accordance with subsection (b) below. This support includes
efforts to identify defective source code and to provide corrections,
workarounds and/or patches to correct program errors. Lineo will
provide OEM with a telephone number and an e-mail address which OEM
may use to report program errors during Lineo's Support local Utah
business hours (8am-5pm Mountain Standard Time). For Priority 1 or 2
failures, OEM agrees to notify Lineo via both telephone and E-mail.
OEM will identify one member of its customer support staff and an
alternate to act as the primary technical liaisons responsible for all
communications with Lineo's technical support representatives. Such
liaisons will have sufficient technical expertise, training and/or
experience for OEM to perform its obligations hereunder. Within one
week after the Effective Date, OEM will designate its liaisons(s).
Such designation will be in writing and/or E-mail to Lineo. OEM may
substitute contacts at any time by providing to Lineo one week prior
written and/or electronic notice thereof.
Lineo will make reasonable efforts to correct significant program
errors that OEM identifies, classifies and reports to Lineo and that
Lineo substantiates. Lineo may reclassify program errors if it
reasonably believes that OEM's classification is incorrect. OEM will
provide sufficient information to enable Lineo to duplicate the
program error before Lineo's response obligations
- ----------------------------------
* Confidential Treatment Requested
OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West,
Lindon, Utah 84042
Page 15 of 17
<PAGE>
will commence. Lineo will not be required to correct any program error
caused by: (a) OEM's incorporation or attachment of a feature,
program, or device to the Lineo Products, or any part thereof; (b) any
nonconformance caused by accident, transportation, neglect, misuse,
alteration, modification, or enhancement of the Lineo Products; (c)
the failure to provide a suitable installation environment; (d) use of
the Lineo Products for other than the specific purpose for which the
Lineo Products are designed; (e) use of the Lineo Products on any
systems other than the specified hardware platform for such Lineo
Products; (f) OEM's use of defective media or defective duplication of
the Lineo Products; or (g) OEM's failure to incorporate any minor
update previously released by Lineo which corrects such program error.
Provided program error reports are received by Lineo during Lineo's
local Utah business hours (8am-5pm Mountain Standard Time, Monday
through Friday), Lineo will use reasonable commercial efforts to
communicate with OEM about the program error via telephone or e-mail
within the following targeted response times:
<TABLE>
<CAPTION>
- ------------ ------------------------------------------------------------------ -----------------------------
Priority Failure Description Response Time
- ------------ ------------------------------------------------------------------ -----------------------------
<S> <C> <C>
1 Fatal (no useful work can be done) 10 working hours
- ------------ ------------------------------------------------------------------ -----------------------------
2 Severe Impact (functionality disabled): errors which result in a 1 working day
lack of application functionality or cause intermittent system
failure
- ------------ ------------------------------------------------------------------ -----------------------------
3 Degraded Operations: errors causing malfunction of non critical 3 working days
functions
- ------------ ------------------------------------------------------------------ -----------------------------
4 Minimal Impact: attributes and/or options to utility programs do Future release, on business
not operate as stated justifiable basis
- ------------ ------------------------------------------------------------------ -----------------------------
5 Enhancements Request When applicable
- ------------ ------------------------------------------------------------------ -----------------------------
</TABLE>
Lineo will use reasonable commercial efforts to resolve each
significant program error by providing either a reasonable work
around, an object code patch, or a specific action plan for how Lineo
will address the problem and an estimate of how long it will take to
rectify the defect. OEM may be required to pay to Lineo additional
fees at Lineo's then-standard rates for services performed in
connection with reported program errors which are later determined by
Lineo to have been due to hardware of software not supplied by Lineo.
Notwithstanding the foregoing, Lineo has no obligation to perform
services in connection with (i) program errors resolution from
hardware or software not supplied by Lineo: or (ii) which occur in the
Lineo Product release which is not the then-current release.
b. FRONT-LINE SUPPORT. OEM, and not Lineo, will provide front-line, or
first and second level, technical support to its Distributors,
Resellers and End Users. Such support includes call receipt, call
screening, installation assistance, problem identification and
diagnosis, efforts to create a repeatable demonstration of the program
error, maintenance of a website that provides technical and warranty
support to End Users and, if applicable, the distribution of any
defective media or minor updates. OEM agrees that any documentation
distributed by OEM will clearly and conspicuously state that End Users
should call OEM, and not Lineo, for technical support for the Lineo
Products. Lineo will have no obligation to furnish any assistance,
information or documentation with respect to the Lineo Products to any
Distributor, Reseller or End User. If Lineo believes its customer
support representatives are being contacted by a significant number of
OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West,
Lindon, Utah 84042
Page 16 of 17
<PAGE>
OEM's Distributors, Reseller or End Users, then, upon Lineo's request,
OEM will undertake every reasonable effort to minimize such contact.
3. SERVICE FEE: For maintenance and support rendered in connection with the
Licensed Product, as set forth in Sections 1 and 2 above, and for the
period of this maintenance agreement only, OEM shall pay to Lineo
maintenance and support Fees in the amount of US $*, representing *%
of the aggregate total of nonrefundable license fees payable under the OEM
License Agreement. Said maintenance and support fees shall be payable on or
before the Effective Date.
B. PRODUCT TRAINING
1. STANDARD TRAINING.
Lineo will provide its standard product training to OEM, as described below, at
any time during the period of this maintenance agreement, upon payment of the
training fees prescribed below. All training can be conducted on site at OEM in
Korea. OEM may designate one or more of the following training programs by
initialing below:
_____ LINUX SYSTEM ADMINISTRATION: 3-5 DAYS
This training program is optimal if OEM desires training designed for
those who are taking first steps into using Linux and want to learn
how to administer their Linux system, gain experience with basic Linux
administration tasks, better understand the Linux phenomenon, explore
command line and GUI utilities, learn system processes, and configure
printing and networking. If OEM selects this training program, OEM
shall pay to Lineo Training Fees consisting of U.S. $* per each
OEM participant per class.
_____ EMBEDIX SDK: 3-5 DAYS
This training program is designed for those desiring an in-depth
understanding of the Embedix SDK toolkit, Linux kernel, base programs,
compilers, and customization tools. If OEM selects this training
program, OEM shall pay to Lineo Training Fees consisting of U.S.
$* per each OEM participant per class.
_____ LINUX SYSTEM ADMINSTRATION AND EMBEDIX SDK
A combination of the two training programs above with special emphasis
on Embedix SDK. If OEM selects this combined training program, OEM
shall pay to Lineo Training Fees consisting of U.S. $* per each
OEM participant per class.
2. CUSTOMIZED TRAINING.
Any of the selected training programs may be customized, at OEM's request
and upon mutual agreement, specifically to meet OEM's needs. For any
customization of the selected training program requested by OEM, the
parties shall negotiate the terms and conditions of such customization,
including, but not limited to, additional fees and the nature of the
customization.
3. TRAINING FEES. All Training Fees are payable not later than fifteen (15)
days prior to the first day of the selected training program.
- ----------------------------------
* Confidential Treatment Requested
OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West,
Lindon, Utah 84042
Page 17 of 17
<PAGE>
EXHIBIT 10.4
STOCK PURCHASE AND SALE AGREEMENT
THIS STOCK PURCHASE AND SALE AGREEMENT (this "Agreement") is made and
entered into as of this 6th day of January, 2000 by and between Lineo, Inc., a
Utah corporation ("Lineo"), and Caldera Systems, Inc., a Utah corporation
("Caldera Systems").
WHEREAS, Lineo and Caldera Systems have agreed in principle to provide
each other with certain marketing and other services pursuant to a strategic
alliance agreement, and Lineo and Caldera Systems each wishes to purchase from
the other shares of common stock;
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter set forth, the parties hereto agree as
follows:
SECTION 1. PURCHASE AND SALE OF SHARES
1.1 PURCHASE OF LINEO STOCK.
Upon the terms and subject to the conditions herein, in reliance on the
representations and warranties set forth in Sections 2 and 4 hereof, Caldera
Systems hereby purchases from Lineo, and Lineo hereby issues and sells to
Caldera Systems 3,238,437 shares of the Common Stock of Lineo, representing
16.75% of the issued and outstanding shares of capital stock of Lineo on a
fully-diluted basis as of the date hereof (the "Lineo Shares").
1.2 PURCHASE OF CALDERA SYSTEMS STOCK.
Upon the terms and subject to the conditions herein, in reliance on the
representations and warranties set forth in Sections 3 and 4 hereof, Lineo
hereby purchases from Caldera Systems, and Caldera Systems hereby issues and
sells to Lineo, 1,250,000 shares of the Common Stock of Caldera Systems,
representing 3.35% of the issued and outstanding shares of capital stock of
Caldera Systems on a fully-diluted basis as of the date hereof (the "Caldera
Systems Shares").
1.3 CLOSING.
The closing of the purchases and sales of the Lineo Shares and the
Caldera Systems Shares contemplated by Sections 1.1 and 1.2 above (the
"Closing") shall take place at 10:00 a.m. on the date hereof, or at such other
time and date as the parties hereto mutually agree (the "Closing Date").
SECTION 2. REPRESENTATIONS AND WARRANTIES OF LINEO
In order to induce Caldera Systems to enter into this Agreement, Lineo
represents and warrants to Caldera Systems the following, except as set forth on
a Schedule of Exceptions furnished by Lineo to Caldera Systems (the "Lineo
Schedule of Exceptions"), specifically identifying the relevant subparagraph(s)
hereof, which exceptions shall be deemed to be representations and warranties as
if made hereunder:
2.1 ORGANIZATION AND CORPORATE POWER.
<PAGE>
Lineo is a corporation duly organized and validly existing under the
laws of the State of Utah, and is qualified to do business as a foreign
corporation in each jurisdiction in which the failure to be so qualified would
have a material adverse effect on its assets, liabilities, financial condition,
business, or results of operations (a "Material Adverse Effect"). Lineo has all
required corporate power and corporate authority to carry on its business as
presently conducted, to enter into and perform this Agreement and the agreements
contemplated hereby to which it is a party and to carry out the transactions
contemplated hereby and thereby, including the issuance of the Lineo Shares.
Lineo is not in material violation of any term of its Articles of Incorporation
(the "Lineo Articles of Incorporation"), or Bylaws (the "Lineo Bylaws").
2.2 AUTHORIZATION AND NON-CONTRAVENTION.
The execution, delivery and performance by Lineo of this Agreement and
each other agreement, document and instrument to be executed and delivered by
Lineo pursuant to or as contemplated by this Agreement, including, without
limitation, the issuance and delivery of the Lineo Shares, have been duly
authorized, by all necessary corporate action on behalf of Lineo. This Agreement
and each such other agreement, document, and instrument, when executed and
delivered, will constitute valid and binding obligations of Lineo, enforceable
in accordance with their respective terms, except as may be limited by
applicable law and public policy and subject to (i) applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors' rights generally and (ii) general principles
of equity and/or laws relating to the availability of specific performance,
injunctive relief or other equitable remedies, whether such enforceability is
considered in a proceeding in equity or at law. The execution and delivery by
Lineo of this Agreement and each other agreement, document and instrument to be
executed and delivered by Lineo pursuant hereto or as contemplated hereby and
the performance by Lineo of the transactions contemplated hereby and thereby,
including, without limitation, the offer, sale, issuance and delivery of the
Lineo Shares, do not and will not: (A) violate, conflict with or result in a
default (whether after the giving of notice, lapse of time or both) under any
material contract, mortgage, indenture, contract, instrument or obligation to
which Lineo is a party or by which it or its assets are bound, or any provision
of the Lineo Articles of Incorporation or Lineo Bylaws, or cause the creation of
any material lien, charge or encumbrance upon any of the assets of Lineo; (B) to
Lineo's knowledge, violate or result in a violation of, or constitute a default
under, any provision of any material law, regulation or rule, or any judgment,
order, writ, decree or statute of, or any restriction imposed by, any court or
governmental agency applicable to Lineo; (C) require from Lineo any notice to,
declaration or filing with, or consent or approval of any governmental authority
or third party other than such filings as have been made prior to the Closing
and/or as may be required to secure an exemption from qualification of the offer
and sale of the Lineo Shares under the Securities Act of 1933, as amended (the
"Securities Act"), and applicable state securities and blue sky laws; or (D)
accelerate any obligation under, or give rise to a right of termination,
suspension, revocation or impairment of, any material agreement, permit, license
or authorization applicable to any of Lineo's, operations, assets or properties,
or by which Lineo is bound.
2.3 CAPITALIZATION.
As of the Closing, the authorized capital stock of Lineo will consist
of 100,000,000 shares of Common Stock, of which 18,000,000 shares will be issued
and outstanding. As of the Closing, other than the shares described in the
preceding sentence and options to purchase 1,333,950 shares of the common stock
of Lineo granted to employees and members of the Board of Directors of Lineo
pursuant to Lineo's Stock Option Plan, Lineo has not issued any warrants,
options, rights (including, without limitation, conversion or preemptive rights
and rights of first refusal), proxy or stockholder agreements or agreements of
any kind for the purchase or acquisition from Lineo of any shares of capital
stock or other securities, including, without limitation, any securities
convertible into or exercisable or exchangeable for such shares or any warrants,
options or other rights to acquire any such convertible securities. As of the
Closing, and after giving effect
<PAGE>
to the transactions contemplated hereby, all of the outstanding shares of
capital stock of Lineo and each of its Subsidiaries will have been duly and
validly authorized and issued, fully paid and nonassessable and not subject to
any preemptive rights and will have been offered, issued, sold and delivered in
compliance with applicable federal and state securities laws. There are no
preemptive rights, rights of first refusal, put or call rights or obligations or
anti-dilution rights with respect to the issuance, sale or redemption of Lineo's
capital stock or other securities. Lineo is not a party or subject to any
agreement or understanding, and, to the best of Lineo's knowledge, there is no
agreement or understanding between any persons that affects or relates to the
voting or giving of written consents with respect to any security or the voting
by a director of Lineo.
2.4 VALID ISSUANCE OF LINEO SHARES.
The Lineo Shares, when issued, sold and delivered in accordance with
the terms of this Agreement for the consideration expressed herein, will be duly
and validly issued, fully paid and non-assessable, and will be free of
restrictions on transfer other than restrictions on transfer under this
Agreement and under applicable state and federal securities laws.
2.5 SUBSIDIARIES.
Lineo does not own or control, directly or indirectly, any interest in
any other corporation, partnership, limited liability company, association or
other business entity. Lineo is not a participant in any joint venture,
partnership or similar arrangement.
2.6 CONTRACTS AND OTHER COMMITMENTS.
Lineo has not and/or is not bound by any contract, agreement, lease,
commitment, or proposed transaction, judgment, order, writ or decree, written or
oral, absolute or contingent, other than contracts entered into in the ordinary
course of business. For the purpose of this paragraph, employment and consulting
contracts and license agreements and any other agreements relating to Lineo's
acquisition or disposition of Intellectual Property (other than standard
end-user license agreements) shall not be considered to be contracts entered
into in the ordinary course of business.
2.7 RELATED-PARTY TRANSACTIONS.
No employee, officer, stockholder or director of Lineo or member of his
or her immediate family is indebted to Lineo, nor is Lineo indebted (or
committed to make loans or extend or guarantee credit) to any of them, other
than (i) for payment of salary for services rendered, (ii) reimbursement for
reasonable expenses incurred on behalf of Lineo, and (iii) for other standard
employee benefits made generally available to all employees (including stock
option agreements outstanding under any stock option plan approved by the Board
of Directors of Lineo or such Subsidiary). To the best of Lineo's knowledge,
none of such persons has any direct or indirect ownership interest in any firm
or corporation with which Lineo is affiliated or with which Lineo has a business
relationship, or any firm or corporation that competes with Lineo, except that
employees, stockholders, officers or directors of Lineo and members of their
immediate families may own stock in publicly-traded companies that may compete
with Lineo. To the best of Lineo's, no officer, director or stockholder or any
member of their immediate families is, directly or indirectly, interested in any
material contract with Lineo (other than such contracts as relate to any such
person's ownership of capital stock or other securities of Lineo).
<PAGE>
2.8 REGISTRATION RIGHTS.
Lineo is presently not under any obligation and has not granted any
rights to register under the Securities Act any of its presently outstanding
securities or any of its securities that may subsequently be issued.
2.9 PERMITS.
Lineo has all franchises, permits, licenses, and any similar authority
necessary for the conduct of its business as now being conducted by it, the lack
of which could materially and adversely affect the business, properties,
prospects or financial condition of Lineo, and believes it can obtain, without
undue burden or expense, any similar authority for the conduct of its business
as presently planned to be conducted. Lineo is not in default in any material
respect under any of such franchises, permits, licenses or other similar
authority.
2.10 LITIGATION.
There is no action, suit, proceeding or investigation pending or, to
the best of Lineo's knowledge, currently threatened against Lineo that questions
the validity of this Agreement, or the right of Lineo to enter into this
Agreement, or to consummate the transactions contemplated hereby, or that might
result, either individually or in the aggregate, in any material adverse change
in the assets, business, properties, prospects, or financial condition of Lineo,
or in any material change in the current equity ownership of Lineo.
2.11 RETURNS AND COMPLAINTS.
Lineo has not received any customer complaints concerning alleged
defects in its products (or the design thereof) that, if true, would materially
adversely affect the operations or financial condition of Lineo.
2.12 DISCLOSURE.
Lineo has provided Caldera Systems with all the information reasonably
available to it without undue expense that Caldera Systems has requested for
deciding whether to purchase the Lineo Shares and all information that Lineo
believes is reasonably necessary to enable Caldera Systems to make such
decision.
2.13 OFFERING.
Subject, in part, to the truth and accuracy of Caldera Systems's
representations set forth in this Agreement, the offer, sale and issuance of the
Lineo Shares as contemplated by this Agreement are exempt from the registration
requirements of the Securities Act, and neither Lineo, nor any authorized agent
acting on its behalf will take any action hereafter that would cause the loss of
such exemption.
2.14 TITLE TO PROPERTY AND ASSETS; LEASES.
Except (i) as reflected in the Lineo Financial Statements (defined
in paragraph 2.15), (ii) for liens for current taxes not yet delinquent,
(iii) for liens imposed by law and incurred in the ordinary course of
business for obligations not past due to carriers, warehousemen, laborers,
materialmen and the like, (iv) for liens in respect of pledges or deposits
under workers' compensation laws or similar legislation or (v) for minor
defects in title, none of which, individually or in the aggregate, materially
interferes with the use of such property, Lineo has good and marketable title
to its property and assets free and clear of all mortgages, liens, claims and
encumbrances. With respect to the property and assets it leases, Lineo is in
compliance with
<PAGE>
such leases and, to the best of its knowledge, holds a valid leasehold
interest free of any liens, claims or encumbrances, subject to clauses
(i)-(v) above.
2.15 FINANCIAL STATEMENTS.
Lineo has made available to Caldera Systems its unaudited trial balance
sheet (which includes assets and liabilities, ending balances, revenues and
expenses, and the balance of stockholders' equity) at October 31, 1999 for the
fiscal year then ended (the "Lineo Financial Statements"). The Lineo Financial
Statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods indicated. The
Lineo Financial Statements fairly present the financial condition and operating
results of Lineo as of the dates, and for the periods, indicated therein. Except
as set forth in the Lineo Financial Statements, Lineo has no material
liabilities, contingent or otherwise, other than (i) liabilities incurred in the
ordinary course of business subsequent to October 31, 1999 and (ii) obligations
under contracts and commitments incurred in the ordinary course of business and
not required under generally accepted accounting principles to be reflected in
the Lineo Financial Statements, which in both cases, individually or in the
aggregate, are not material to the financial condition or operating results of
Lineo. Except as disclosed in the Lineo Financial Statements, Lineo is not a
guarantor or indemnitor of any indebtedness of any other person, firm or
corporation. Lineo maintains and will continue to maintain a standard system of
accounting established and administered in accordance with generally accepted
accounting principles.
2.16 CHANGES.
Since October 31, 1999, there has not been any event or condition of
any type that has materially and adversely affected the business, properties or
financial condition of Lineo or any of its Subsidiaries.
2.17 INTELLECTUAL PROPERTY.
To the best of Lineo's knowledge, Lineo, and its products have not
infringed and do not infringe the copyrights of any third party. To the best of
Lineo's knowledge, Lineo has not misappropriated and is not misappropriating any
trade secrets or proprietary confidential information of any third party, and
the products of Lineo do not include or embody any trade secret or proprietary
confidential information misappropriated by Lineo from any third party. To the
best of Lineo's knowledge, Lineo and its products have not infringed and do not
infringe any patents, trademarks, service marks, or trade names of any third
party. Each item of Intellectual Property owned by or licensed to Lineo
immediately prior to the Closing hereunder will be owned by or licensed to Lineo
on identical terms and conditions immediately subsequent to the Closing
hereunder (i.e., identical to any applicable terms and conditions immediately
prior to the Closing).
(i) To the best of Lineo's knowledge, none of Lineo and its
directors and officers (and employees with responsibility for
Intellectual Property matters) has ever received any charge, complaint,
claim, demand, or notice alleging any such infringement,
misappropriation, or violation by Lineo of Intellectual Property
(including any claim that Lineo must license or refrain from using any
Intellectual Property rights of any third party). To the best of
Lineo's knowledge and the knowledge of directors and officers (and
employees with responsibility for Intellectual Property matters) of
Lineo, no third party has infringed, misappropriated, or otherwise
violated any Intellectual Property rights of Lineo.
(ii) Within thirty days of the date of Closing, Lineo will
provide to Caldera Systems a schedule (the "IP Schedule") identifying
(a) each patent which has been issued or assigned to Lineo, (b) each
pending patent application which has been filed by or for Lineo, (c)
each trademark or
<PAGE>
service mark registration issued or assigned to Lineo, (d) each pending
trademark or service mark application which has been filed by or for
Lineo, (e) each copyright registration issued or assigned to Lineo, (f)
each pending copyright application which has been filed by or for
Lineo, and (g) each license which Lineo has granted to any third party
with respect to any of Lineo's Intellectual Property excluding licenses
to end users of Company products granted in the ordinary course of
business. Lineo will deliver to Caldera Systems correct and complete
copies of all such patents, registrations, applications, and licenses
(as amended to date). The Lineo IP Schedule will also identify each
trade name and each unregistered trademark or service mark owned or
claimed by Lineo in connection with its business. With respect to each
patent, application, and registration (each an "IP item") identified in
the Lineo IP Schedule:
(A) Lineo possess all right, title, and interest in
and to the IP item, free and clear of any mortgage, lien,
claim, license, or other encumbrance;
(B) to the best of Lineo's knowledge, the IP item is
not subject to any outstanding injunction, judgment, order,
decree, ruling, or charge;
(C) to the best of Lineo's knowledge, no action,
suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand is pending or, to the best of Lineo's or its
Subsidiaries' knowledge, and the knowledge of the directors
and officers (and employees with responsibility for
Intellectual Property matters) of Lineo and its Subsidiaries,
is threatened which challenges the legality, validity,
enforceability, use, or ownership of the IP item; and
(D) Lineo has never agreed to indemnify any Person
for or against any interference, infringement,
misappropriation, or other conflict with respect to the IP
item.
(iii) The Lineo IP Schedule will identify each item of
Intellectual Property that any third party owns and licenses to Lineo,
excluding licenses to commercially available software products (e.g.,
Windows, Microsoft Office, etc.) used by Lineo as an end user. Lineo
will deliver with the IP Schedule to Caldera Systems correct and
complete copies of all agreements applicable to such licenses (as
amended to date). The term "license" is intended to include
"sublicense." With respect to each such license and agreement required
to be identified in the Lineo IP Schedule, to the best of Lineo's
knowledge;
the license and agreement are legal, valid, binding,
enforceable, and in full force and effect;
the license and agreement will continue to be legal,
valid, binding, enforceable, and in full force and effect on identical terms on
the day immediately following the Closing;
no party to the agreement is in breach or default, and
no event has occurred which with notice or lapse of time would constitute a
breach or default or permit termination, modification, or acceleration
thereunder;
no party to the agreement has repudiated any provision
thereof;
the license is not subject to any outstanding
injunction, judgment, order, decree, ruling, or charge; and
<PAGE>
no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or is threatened which challenges
the legality, validity, or enforceability of the license or agreement.
(iv) To the best of Lineo's knowledge and to the knowledge of
the directors and officers (and employees with responsibility for
Intellectual Property matters) of Lineo, Lineo will not infringe,
misappropriate, or otherwise violate any Intellectual Property rights
of third parties as a result of the continued operation of its
businesses as presently conducted and as presently proposed to be
conducted.
2.18 MANUFACTURING AND MARKETING RIGHTS.
Except as set forth on the Lineo Schedule of Exceptions, Lineo has not
granted rights to manufacture, produce, assemble, license, market or sell its
products to any other person and is not bound by any agreement that affects
Lineo's exclusive right to develop, manufacture, assemble, distribute, market or
sell its products.
2.19 EMPLOYEES; EMPLOYEE COMPENSATION.
To the best of Lineo's knowledge, the relationships between Lineo and
its employees are good and no labor dispute or claims are pending or threatened.
None of Lineo's employees belongs to any union or collective bargaining unit. To
the best of Lineo's knowledge, Lineo has complied in all material respects with
all applicable state and federal laws related to employment. To the best of
Lineo's knowledge, no employee of Lineo is or will be in violation of any
judgment, decree or order, or any term of any employment contract, patent
disclosure agreement, or other contract or agreement relating to the
relationship of any such employee with Lineo, or any other party because of the
nature of the business conducted or presently proposed to be conducted by Lineo
or to the use by the employee of his or her best efforts with respect to such
business. Lineo is not a party to or bound by any currently effective employment
contract, deferred compensation agreement, incentive plan, profit sharing plan,
retirement agreement or other employee compensation agreement. Lineo is not
aware that any officer or key employee, or that any group of key employees,
intends to terminate their employment with Lineo, nor does Lineo have a present
intention to terminate the employment of any of the foregoing. Subject to
general principles related to wrongful termination of employees, the employment
of each officer and employee of Lineo is terminable at the will of Lineo.
<PAGE>
2.20 TAX RETURNS, PAYMENTS, AND ELECTIONS.
Lineo has timely filed all tax returns and reports (federal, state and
local) as required by law. These returns and reports are true and correct in all
material respects. Lineo has paid all taxes and other assessments due, except
those contested by it in good faith. Lineo has not elected, pursuant to the
Internal Revenue Code of 1986, as amended ("Code"), to be treated as an S
corporation or a collapsible corporation pursuant to Section 1362(a) or Section
341(f) of the Code, nor has it made any other elections pursuant to the Code
(other than elections that relate solely to methods of accounting, depreciation
or amortization) that would have a material effect on the business, properties,
prospects or financial condition of Lineo. Lineo has never had any tax
deficiency proposed or assessed against it and has not executed any waiver of
any statute of limitations on the assessment or collection of any tax or
governmental charge. None of Lineo's income tax returns (federal or otherwise)
and none of its state income or franchise tax or sales or use tax returns has
ever been audited by governmental authorities. Lineo has made adequate
provisions on its books of account for all taxes, assessments and governmental
charges with respect to its business, properties and operations for such period.
Lineo has withheld or collected from each payment made to each of its employees,
the amount of all taxes, including, but not limited to, federal income taxes,
Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes
required to be withheld or collected therefrom, and has paid the same to the
proper tax receiving officers or authorized depositaries.
2.21 ENVIRONMENTAL AND SAFETY LAWS.
Lineo is not in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and no material
expenditures are or will be required in order to comply with any such existing
statute, law or regulation.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF CALDERA SYSTEMS
In order to induce Lineo to enter into this Agreement, Caldera Systems
represents and warrants to Lineo the following, except as set forth on a
Schedule of Exceptions furnished by Caldera Systems to Lineo (the "Caldera
Systems Schedule of Exceptions"), specifically identifying the relevant
subparagraph(s) hereof, which exceptions shall be deemed to be representations
and warranties as if made hereunder:
3.1 ORGANIZATION AND CORPORATE POWER.
Each of Caldera Systems and its Subsidiaries is a corporation duly
organized and validly existing under the laws of the State of Utah, and is
qualified to own and operate its properties and assets, to do business as a
foreign corporation in each jurisdiction in which the failure to be so qualified
would have a Material Adverse Effect. Each of Caldera Systems and its
Subsidiaries has all required corporate power and corporate authority to carry
on its business as presently conducted, to enter into and perform this Agreement
and the agreements contemplated hereby to which it is a party and to carry out
the transactions contemplated hereby and thereby, including the issuance of the
Caldera Systems Shares. Caldera Systems is not in material violation of any term
of its Articles of Incorporation, as amended as of the date hereof (the "Caldera
Systems Articles of Incorporation"), or Bylaws, as amended as of the date hereof
(the "Caldera Systems Bylaws").
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3.2 AUTHORIZATION AND NON-CONTRAVENTION.
The execution, delivery and performance by Caldera Systems of this
Agreement and each other agreement, document and instrument to be executed and
delivered by Caldera Systems pursuant to or as contemplated by this Agreement,
including, without limitation, the issuance and delivery of the Caldera Systems
Shares, have been duly authorized, or will be duly authorized prior to the
Closing, by all necessary corporate action on behalf of Caldera Systems. This
Agreement and each such other agreement, document, and instrument, when executed
and delivered, will constitute valid and binding obligations of Caldera Systems,
enforceable in accordance with their respective terms, except as may be limited
by applicable law and public policy and subject to (i) applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors' rights generally and (ii) general principles
of equity and/or laws relating to the availability of specific performance,
injunctive relief or other equitable remedies, whether such enforceability is
considered in a proceeding in equity or at law. The execution and delivery by
Caldera Systems of this Agreement and each other agreement, document and
instrument to be executed and delivered by Caldera Systems pursuant hereto or as
contemplated hereby and the performance by Caldera Systems of the transactions
contemplated hereby and thereby, including, without limitation, the offer, sale,
issuance and delivery of the Caldera Systems Shares, do not and will not: (A)
violate, conflict with or result in a default (whether after the giving of
notice, lapse of time or both) under any material contract, mortgage, indenture,
contract, instrument or obligation to which Caldera Systems or any of its
Subsidiaries is a party or by which it or its assets are bound, or any provision
of the Caldera Systems Articles of Incorporation or Caldera Systems Bylaws, or
cause the creation of any material lien, charge or encumbrance upon any of the
assets of Caldera Systems or any of its Subsidiaries; (B) to Caldera Systems's
knowledge, violate or result in a violation of, or constitute a default under,
any provision of any material law, regulation or rule, or any judgment, order,
writ, decree or statute of, or any restriction imposed by, any court or
governmental agency applicable to Caldera Systems or any of its Subsidiaries;
(C) require from Caldera Systems any notice to, declaration or filing with, or
consent or approval of any governmental authority or third party other than such
filings as have been made prior to the Closing and/or as may be required to
secure an exemption from qualification of the offer and sale of the Caldera
Systems Shares under the Securities Act, and applicable state securities and
blue sky laws; or (D) accelerate any obligation under, or give rise to a right
of termination, suspension, revocation or impairment of, any material agreement,
permit, license or authorization applicable to any of Caldera Systems's, or any
of its Subsidiaries', business, operations, assets or properties, to which
Caldera Systems, or any of its Subsidiaries, is a party or by which Caldera
Systems is bound.
3.3 CAPITALIZATION.
As of the Closing, without giving effect to the transactions
contemplated hereby, the authorized capital stock of Caldera Systems will
consist of 75,000,000 shares of common stock, of which 20,144,904 shares will be
issued and outstanding and 25,000,000 shares of preferred stock of which
6,596,146 shares have been designated Series A Preferred Stock, all of which are
issued and outstanding, and 5,000,000 shares have been designated Series B
Preferred Stock, all of which are isssued and outstanding. As of the Closing,
other than the shares described in the preceding sentence, (ii) the conversion
privileges of the Series A Preferred Stock and the Series B Preferred Stock of
Caldera, and (iii) currently outstanding options to purchase 5,288,882 shares of
the common stock of Caldera granted to employees and members of the Board of
Directors of Caldera pursuant to Caldera's 1998 Stock Option Plan and 1999
Omnibus Stock Incentive Plan, Caldera Systems has not issued any warrants,
options, rights (including, without limitation, conversion or preemptive rights
and rights of first refusal), proxy or stockholder agreements or agreements of
any kind for the purchase or acquisition from Caldera Systems, or any of its
Subsidiaries, of any shares of its, or any of its Subsidiaries', capital stock
or other securities, including, without limitation, any securities convertible
into or exercisable or exchangeable for such shares or any warrants, options or
other rights to acquire any
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such convertible securities. As of the Closing, and after giving effect to the
transactions contemplated hereby, all of the outstanding shares of capital stock
of Caldera Systems and each of its Subsidiaries will have been duly and validly
authorized and issued, fully paid and nonassessable and not subject to any
preemptive rights and will have been offered, issued, sold and delivered in
compliance with applicable federal and state securities laws. Except as set
forth in the Caldera Systems Articles of Incorporation and in that certain
Amended and Restated Investor Rights Agreement, dated as of December 30, 1999,
among Caldera Systems and the shareholders of Caldera Systems who are party
thereto (the "Caldera Systems Investor Rights Agreement"), there are no
preemptive rights, rights of first refusal, put or call rights or obligations or
anti-dilution rights with respect to the issuance, sale or redemption of Caldera
Systems's capital stock or other securities. Caldera Systems is not a party or
subject to any agreement or understanding, and, to the best of Caldera Systems's
knowledge, there is no agreement or understanding between any persons that
affects or relates to the voting or giving of written consents with respect to
any security or the voting by a director of Caldera Systems.
3.4 VALID ISSUANCE OF CALDERA SYSTEMS SHARES.
The Caldera Systems Shares, when issued, sold and delivered in
accordance with the terms of this Agreement for the consideration expressed
herein, will be duly and validly issued, fully paid and non-assessable, and will
be free of restrictions on transfer other than restrictions on transfer under
this Agreement and under applicable state and federal securities laws.
3.5 SUBSIDIARIES.
Caldera Systems does not own or control, directly or indirectly, any
interest in any other corporation, partnership, limited liability company,
association or other business entity. Caldera Systems is not a participant in
any joint venture, partnership or similar arrangement.
3.6 CONTRACTS AND OTHER COMMITMENTS.
Neither Caldera Systems nor any of its Subsidiaries has and/or is bound
by any contract, agreement, lease, commitment, or proposed transaction,
judgment, order, writ or decree, written or oral, absolute or contingent, other
than contracts entered into in the ordinary course of business. For the purpose
of this paragraph, employment and consulting contracts and license agreements
and any other agreements relating to Caldera Systems's or any of its
Subsidiary's acquisition or disposition of Intellectual Property (other than
standard end-user license agreements) shall not be considered to be contracts
entered into in the ordinary course of business.
3.7 RELATED-PARTY TRANSACTIONS.
No employee, officer, stockholder or director of Caldera Systems or any
of its Subsidiaries or member of his or her immediate family is indebted to
Caldera Systems, nor is Caldera Systems or any Subsidiary indebted (or committed
to make loans or extend or guarantee credit) to any of them, other than (i) for
payment of salary for services rendered, (ii) reimbursement for reasonable
expenses incurred on behalf of Caldera Systems or such Subsidiary, and (iii) for
other standard employee benefits made generally available to all employees
(including stock option agreements outstanding under any stock option plan
approved by the Board of Directors of Caldera Systems or such Subsidiary). To
the best of Caldera Systems's or such Subsidiary's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which Caldera Systems or such Subsidiary is affiliated or with which
Caldera Systems or such Subsidiary has a business relationship, or any firm or
corporation that competes with Caldera Systems or such Subsidiary, except that
employees, stockholders, officers or directors of Caldera Systems
<PAGE>
or such Subsidiary and members of their immediate families may own stock in
publicly-traded companies that may compete with Caldera Systems or such
Subsidiary. To the best of Caldera Systems's or such Subsidiary's knowledge, no
officer, director or stockholder or any member of their immediate families is,
directly or indirectly, interested in any material contract with Caldera Systems
or such Subsidiary (other than such contracts as relate to any such person's
ownership of capital stock or other securities of Caldera Systems or such
Subsidiary).
3.8 REGISTRATION RIGHTS.
Except as set forth in the Caldera Systems Investor Rights Agreement,
Caldera Systems is presently not under any obligation and has not granted any
rights to register under the Securities Act any of its presently outstanding
securities or any of its securities that may subsequently be issued.
3.9 PERMITS.
Each of Caldera Systems and its Subsidiaries has all franchises,
permits, licenses, and any similar authority necessary for the conduct of its
business as now being conducted by it, the lack of which could materially and
adversely affect the business, properties, prospects or financial condition of
Caldera Systems or any such Subsidiary, and believes it can obtain, without
undue burden or expense, any similar authority for the conduct of its business
as presently planned to be conducted. Neither Caldera Systems nor any Subsidiary
is in default in any material respect under any of such franchises, permits,
licenses or other similar authority.
3.10 LITIGATION.
There is no action, suit, proceeding or investigation pending or, to
the best of Caldera Systems's or any of its Subsidiary's knowledge, currently
threatened against Caldera Systems or any of its Subsidiary's that questions the
validity of this Agreement, or the right of Caldera Systems to enter into this
Agreement, or to consummate the transactions contemplated hereby, or that might
result, either individually or in the aggregate, in any material adverse change
in the assets, business, properties, prospects, or financial condition of
Caldera Systems or any of its Subsidiaries, or in any material change in the
current equity ownership of Caldera Systems or any of its Subsidiaries.
3.11 RETURNS AND COMPLAINTS.
Neither Caldera Systems nor any of its Subsidiaries has received any
customer complaints concerning alleged defects in its products (or the design
thereof) that, if true, would materially adversely affect the operations or
financial condition of Caldera Systems or any of its Subsidiaries.
3.12 DISCLOSURE.
Caldera Systems has provided Lineo with all the information reasonably
available to it without undue expense that Lineo has requested for deciding
whether to purchase the Caldera Systems Shares and all information that Caldera
Systems believes is reasonably necessary to enable Lineo to make such decision.
<PAGE>
3.13 OFFERING.
Subject, in part, to the truth and accuracy of Lineo's representations
set forth in this Agreement, the offer, sale and issuance of the Caldera Systems
Shares as contemplated by this Agreement are exempt from the registration
requirements of the Securities Act, and neither Caldera Systems, any of its
Subsidiaries, nor any authorized agent acting on its behalf will take any action
hereafter that would cause the loss of such exemption.
3.14 TITLE TO PROPERTY AND ASSETS; LEASES.
Except (i) as reflected in the Caldera Systems Financial Statements
(defined in paragraph 3.15), (ii) for liens for current taxes not yet
delinquent, (iii) for liens imposed by law and incurred in the ordinary course
of business for obligations not past due to carriers, warehousemen, laborers,
materialmen and the like, (iv) for liens in respect of pledges or deposits under
workers' compensation laws or similar legislation or (v) for minor defects in
title, none of which, individually or in the aggregate, materially interferes
with the use of such property, each of Caldera Systems and its Subsidiaries has
good and marketable title to its property and assets free and clear of all
mortgages, liens, claims and encumbrances. With respect to the property and
assets it leases, each of Caldera Systems and its Subsidiaries is in compliance
with such leases and, to the best of its knowledge, holds a valid leasehold
interest free of any liens, claims or encumbrances, subject to clauses (i)-(v)
above.
3.15 FINANCIAL STATEMENTS.
Caldera Systems has delivered to Lineo its audited financial statements
(balance sheet and profit and loss statement, statement of stockholders' equity
and statement of cash flows, including notes thereto) at October 31, 1999 and
for the fiscal year then ended (the "Caldera Systems Financial Statements"). The
Caldera Systems Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated. The Caldera Systems Financial Statements
fairly present the financial condition and operating results of Caldera Systems
as of the dates, and for the periods, indicated therein. Except as set forth in
the Caldera Systems Financial Statements, neither Caldera Systems nor any of its
Subsidiaries has any material liabilities, contingent or otherwise, other than
(i) liabilities incurred in the ordinary course of business subsequent to
October 31, 1999 and (ii) obligations under contracts and commitments incurred
in the ordinary course of business and not required under generally accepted
accounting principles to be reflected in the Caldera Systems Financial
Statements, which in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of Caldera Systems or
any of its Subsidiaries. Except as disclosed in the Caldera Systems Financial
Statements, neither Caldera Systems nor any of its Subsidiaries is a guarantor
or indemnitor of any indebtedness of any other person, firm or corporation.
Caldera Systems and each of its Subsidiaries maintains and will continue to
maintain a standard system of accounting established and administered in
accordance with generally accepted accounting principles.
3.16 CHANGES.
Since October, 1999, there has not been any event or condition of any
type that has materially and adversely affected the business, properties or
financial condition of Caldera Systems or any of its Subsidiaries.
<PAGE>
3.17 INTELLECTUAL PROPERTY.
To the best of Caldera Systems's and its Subsidiaries' knowledge,
Caldera Systems, its Subsidiaries and their products have not infringed and do
not infringe the copyrights of any third party. To the best of Caldera Systems's
and its Subsidiaries' knowledge, neither Caldera Systems nor its Subsidiaries
has misappropriated or is misappropriating any trade secrets or proprietary
confidential information of any third party, and the products of Caldera Systems
and its Subsidiaries do not include or embody any trade secret or proprietary
confidential information misappropriated by Caldera Systems or its Subsidiaries
from any third party. To the best of Caldera Systems's and its Subsidiaries'
knowledge, each of Caldera Systems and its Subsidiaries and their respective
products have not infringed and do not infringe any patents, trademarks, service
marks, or trade names of any third party. Each item of Intellectual Property
owned by or licensed to Caldera Systems and its Subsidiaries immediately prior
to the Closing hereunder will be owned by or licensed to Caldera Systems and the
Subsidiary on identical terms and conditions immediately subsequent to the
Closing hereunder (i.e., identical to any applicable terms and conditions
immediately prior to the Closing).
(i) To the best of Caldera Systems's and its Subsidiaries'
knowledge, none of Caldera Systems or its Subsidiaries or their
directors and officers (and employees with responsibility for
Intellectual Property matters) has ever received any charge, complaint,
claim, demand, or notice alleging any such infringement,
misappropriation, or violation by Caldera Systems or its Subsidiaries
of Intellectual Property (including any claim that Caldera Systems and
its Subsidiaries must license or refrain from using any Intellectual
Property rights of any third party). To the best of Caldera Systems's
and its Subsidiaries' knowledge and the knowledge of directors and
officers (and employees with responsibility for Intellectual Property
matters) of Caldera Systems and its Subsidiaries, no third party has
infringed, misappropriated, or otherwise violated any Intellectual
Property rights of Caldera Systems and its Subsidiaries.
(ii) The Caldera Systems Schedule of Exceptions identifies (a)
each patent which has been issued or assigned to Caldera Systems or any
of its Subsidiaries, (b) each pending patent application which has been
filed by or for Caldera Systems or any of its Subsidiaries, (c) each
trademark or service mark registration issued or assigned to Caldera
Systems or any of its Subsidiaries, (d) each pending trademark or
service mark application which has been filed by or for Caldera Systems
or any its Subsidiaries, (e) each copyright registration issued or
assigned to Caldera Systems or any of its Subsidiaries, (f) each
pending copyright application which has been filed by or for Caldera
Systems or any of its Subsidiaries, and (g) each license which Caldera
Systems and its Subsidiaries has granted to any third party with
respect to any of Caldera Systems's Intellectual Property excluding
licenses to end users of Company products granted in the ordinary
course of business. Caldera Systems has delivered to Lineo correct and
complete copies of all such patents, registrations, applications, and
licenses (as amended to date). The Caldera Systems Schedule of
Exceptions also identifies each trade name and each unregistered
trademark or service mark owned or claimed by any of Caldera Systems
and its Subsidiaries in connection with any of their businesses. With
respect to each IP item identified in the Caldera Systems Schedule of
Exceptions:
(A) Caldera Systems and its Subsidiaries possess all
right, title, and interest in and to the IP item, free and
clear of any mortgage, lien, claim, license, or other
encumbrance;
(B) to the best of Caldera Systems's and its
Subsidiaries' knowledge, the IP item is not subject to any
outstanding injunction, judgment, order, decree, ruling, or
charge;
<PAGE>
(C) to the best of Caldera Systems's or its
Subsidiaries' knowledge, no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending
or, to the best of Caldera Systems's or its Subsidiaries'
knowledge, and the knowledge of the directors and officers
(and employees with responsibility for Intellectual Property
matters) of Caldera Systems and its Subsidiaries, is
threatened which challenges the legality, validity,
enforceability, use, or ownership of the IP item; and
(D) none of Caldera Systems and its Subsidiaries has
ever agreed to indemnify any Person for or against any
interference, infringement, misappropriation, or other
conflict with respect to the IP item.
(iii) The Caldera Systems Schedule of Exceptions identifies
each item of Intellectual Property that any third party owns and
licenses to any of Caldera Systems and its Subsidiaries, excluding
licenses to commercially available software products (e.g., Windows,
Microsoft Office, etc.) used by any of Caldera Systems and its
Subsidiaries as an end user. Caldera Systems has delivered to Lineo
correct and complete copies of all agreements applicable to such
licenses (as amended to date). The term "license" is intended to
include "sublicense." With respect to each such license and agreement
required to be identified in the Caldera Systems Schedule of
Exceptions, to the best of Caldera Systems's or its Subsidiaries'
knowledge;
the license and agreement are legal, valid, binding,
enforceable, and in full force and effect;
the license and agreement will continue to be legal,
valid, binding, enforceable, and in full force and effect on identical terms on
the day immediately following the Closing;
no party to the agreement is in breach or default, and
no event has occurred which with notice or lapse of time would constitute a
breach or default or permit termination, modification, or acceleration
thereunder;
no party to the agreement has repudiated any provision
thereof;
the license is not subject to any outstanding
injunction, judgment, order, decree, ruling, or charge; and
no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or is threatened which challenges
the legality, validity, or enforceability of the license or agreement.
(iv) To the best of Caldera Systems's and its Subsidiaries'
knowledge and to the knowledge of the directors and officers (and
employees with responsibility for Intellectual Property matters) of
Caldera Systems and its Subsidiaries, neither Caldera Systems nor any
of its Subsidiaries will infringe, misappropriate, or otherwise violate
any Intellectual Property rights of third parties as a result of the
continued operation of its businesses as presently conducted and as
presently proposed to be conducted.
3.18 MANUFACTURING AND MARKETING RIGHTS.
Except as set forth on the Caldera Systems Schedule of Exceptions,
neither Caldera Systems nor any of its Subsidiaries has granted rights to
manufacture, produce, assemble, license, market or sell its products
<PAGE>
to any other person and is not bound by any agreement that affects Caldera
Systems's or such Subsidiary's exclusive right to develop, manufacture,
assemble, distribute, market or sell its products.
3.19 EMPLOYEES; EMPLOYEE COMPENSATION.
To the best of Caldera Systems's and its Subsidiary's knowledge, the
relationships between Caldera Systems and its Subsidiaries and their respective
employees are good and no labor dispute or claims are pending or threatened.
None of Caldera Systems's or any of its Subsidiary's employees belongs to any
union or collective bargaining unit. To the best of Caldera Systems's and its
Subsidiaries' knowledge, Caldera Systems and each of its Subsidiaries has
complied in all material respects with all applicable state and federal laws
related to employment. To the best of Caldera Systems's and it Subsidiary's
knowledge, no employee of Caldera Systems or any such Subsidiary is or will be
in violation of any judgment, decree or order, or any term of any employment
contract, patent disclosure agreement, or other contract or agreement relating
to the relationship of any such employee with Caldera Systems, any of its
Subsidiaries, or any other party because of the nature of the business conducted
or presently proposed to be conducted by Caldera Systems or any of its
Subsidiaries or to the use by the employee of his or her best efforts with
respect to such business. Caldera Systems is not a party to or bound by any
currently effective employment contract, deferred compensation agreement,
incentive plan, profit sharing plan, retirement agreement or other employee
compensation agreement. Neither Caldera Systems nor any of its Subsidiaries is
aware that any officer or key employee, or that any group of key employees,
intends to terminate their employment with Caldera Systems or any of its
Subsidiaries, nor does Caldera Systems or any of its Subsidiaries have a present
intention to terminate the employment of any of the foregoing. Subject to
general principles related to wrongful termination of employees, the employment
of each officer and employee of Caldera Systems and each of its Subsidiaries is
terminable at the will of Caldera Systems or such Subsidiary, as applicable.
<PAGE>
3.20 TAX RETURNS, PAYMENTS, AND ELECTIONS.
Caldera Systems and each of its Subsidiaries has timely filed all tax
returns and reports (federal, state and local) as required by law. These returns
and reports are true and correct in all material respects. Caldera Systems and
each of its Subsidiaries has paid all taxes and other assessments due, except
those contested by it in good faith. Neither Caldera Systems nor any of its
Subsidiaries has elected pursuant to the Code, to be treated as an S corporation
or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of
the Code, nor has it made any other elections pursuant to the Code (other than
elections that relate solely to methods of accounting, depreciation or
amortization) that would have a material effect on the business, properties,
prospects or financial condition of Caldera Systems or any of its Subsidiaries.
Neither Caldera Systems nor any of its Subsidiaries has ever had any tax
deficiency proposed or assessed against it and has not executed any waiver of
any statute of limitations on the assessment or collection of any tax or
governmental charge. None of Caldera Systems's or any Subsidiary's income tax
returns (federal or otherwise) and none of its state income or franchise tax or
sales or use tax returns has ever been audited by governmental authorities.
Caldera Systems and each of its Subsidiaries has made adequate provisions on its
books of account for all taxes, assessments and governmental charges with
respect to its business, properties and operations for such period. Caldera
Systems and each of its Subsidiaries has withheld or collected from each payment
made to each of its employees, the amount of all taxes, including, but not
limited to, federal income taxes, Federal Insurance Contribution Act taxes and
Federal Unemployment Tax Act taxes required to be withheld or collected
therefrom, and has paid the same to the proper tax receiving officers or
authorized depositaries.
3.21 ENVIRONMENTAL AND SAFETY LAWS.
Neither Caldera Systems nor any of its Subsidiaries is in
violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and no material expenditures are
or will be required in order to comply with any such existing statute, law or
regulation.
<PAGE>
SECTION 4. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE PARTIES
(a) Each party purchasing securities hereunder represents to the other
that (i) it has such knowledge and experience in financial and business matters
and in private placement transactions of securities of companies in a similar
stage of development as the other party that it is capable of evaluating the
merits and risks of the investment contemplated by such purchasing party under
this Agreement and making an informed investment decision with respect thereto,
(ii) it is able to bear the economic risk of such investment and can afford to
sustain a substantial loss on such investment, (iii) it is an "accredited
investor" as such term is defined in Rule 501 under the Securities Act, (iv) it
is purchasing the securities purchased by it hereunder for its own account, for
investment only and not with a view to, or any present intention of, effecting a
resale ordistribution of or selling or granting any participation in such
securities or any part thereof, (v) it realizes that the basis for any exemption
pursuant to which the securities such party is purchasing hereunder have been
issued may not be present if, notwithstanding the representations made by such
party hereunder, such party has in mind merely acquiring the securities is is
purchasing hereunder for a fixed or determinable period in the future, or for a
market rise, or for sale if the market does not rise and (vi) it does not have
any contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third person, with
respect to such securities. Each party acknowledges that the securities
purchased by it hereunder have not been registered under the Securities Act or
the securities laws of any state or other jurisdiction in reliance on an
exemption from registration thereunder and reliance on such exemption by the
issuer of such securities is predicated on the representations and warranties
set forth in this Agreement. Furthermore, each party purchasing securities
hereunder acknowledges that such securities cannot be disposed of unless they
are subsequently registered under the Securities Act and any applicable state
laws or an exemption from such registration is available.
(b) Each party understands that the securities have not been registered
under the Securities Act, that there is no public market for the securities, and
that it must bear the economic risk of investment for an indefinite period of
time. In particular, such party is aware that the securities purchased by it
hereunder may not be sold pursuant to Rule 144 promulgated under the Securities
Act unless all of the conditions of that Rule are met. Among the conditions for
use of Rule 144 may be the availability of current information to the public
about the issuer of such securities. Such information is not now available and
such issuer has no present plans to make such information available.
(c) Each party represents that there are no claims for investment
banking fees, brokerage commissions, finder's fees or similar compensation
(exclusive of professional fees to lawyers and accountants) in connection with
the transactions contemplated by this Agreement based on any arrangement or
agreement made by or on behalf of such party. Such party (the "Indemnifying
Party") agrees to indemnify and to hold harmless the other from any liability
for any commission or compensation in the nature of a finder's fee (and the cost
and expenses of defending against such liability or asserted liability) for
which such Indemnifying Party or any of its officers, partners, employees or
representatives is responsible.
(d) Each party believes it has received all the information it
considers necessary or appropriate for deciding whether to purchase the
securities purchased by it hereunder. Such party further represents that it has
had an opportunity to ask questions and receive answers from the party issuing
such securities regarding the terms and conditions of the offering of such
securities and the business, properties, prospects and financial condition of
such issuer and to obtain additional information (to the extent such issuer
possessed such information or could acquire it without unreasonable effort or
expense) necessary to verify the accuracy of any information furnished to such
party or to which such party had access. The foregoing, however, does not limit
or modify the representations and warranties of such issuer in Section 2 or 3,
as applicable, of this Agreement or the right of such party to rely thereon.
<PAGE>
SECTION 5. CONDITIONS TO CLOSING
5.1 CONDITIONS OF CALDERA SYSTEMS'S OBLIGATIONS AT CLOSING.
The obligations of Caldera Systems under this Agreement are subject to
the fulfillment on or before the Closing of each of the following conditions,
the waiver of which shall not be effective against Caldera Systems unless it
consents in writing thereto:
(a) REPRESENTATIONS AND WARRANTIES.
The representations and warranties of Lineo and its
Subsidiaries contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and
warranties had been made on and as of the date of the Closing.
(b) PERFORMANCE.
Lineo shall have performed and complied with all agreements,
obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the
Closing.
(c) QUALIFICATIONS.
All authorizations, approvals or permits, if any, of any
governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and
sale of the L:ineo Shares pursuant to this Agreement shall be duly
obtained and effective as of the Closing.
(d) PROCEEDINGS AND DOCUMENTS.
All corporate and other proceedings in connection with the
transactions contemplated at the Closing and all documents incident
thereto shall be reasonably satisfactory in form and substance to
Caldera Systems's counsel, which shall have received all such
counterpart original and certified or other copies of such documents as
it may reasonably request.
5.2 CONDITIONS OF LINEO'S OBLIGATIONS AT CLOSING.
The obligations of Lineo under this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which shall not be effective against Lineo unless it consents in
writing thereto:
(a) REPRESENTATIONS AND WARRANTIES.
The representations and warranties of Caldera Systems and its
Subsidiaries contained in Section 3 shall be true on and as of the
Closing with the same effect as though such representations and
warranties had been made on and as of the date of the Closing.
(b) PERFORMANCE.
<PAGE>
Caldera Systems and its Subsidiaries shall have performed and
complied with all agreements, obligations and conditions contained in
this Agreement that are required to be performed or complied with by it
on or before the Closing.
(c) QUALIFICATIONS.
All authorizations, approvals or permits, if any, of any
governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and
sale of the Caldera Systems Shares pursuant to this Agreement shall be
duly obtained and effective as of the Closing.
(d) PROCEEDINGS AND DOCUMENTS.
All corporate and other proceedings in connection with the
transactions contemplated at the Closing and all documents incident
thereto shall be reasonably satisfactory in form and substance to
Lineo's counsel, which shall have received all such counterpart
original and certified or other copies of such documents as it may
reasonably request.
SECTION 6. POST-CLOSING COVENANTS OF CALDERA SYSTEMS
6.1 FINANCIAL STATEMENTS.
Caldera Systems shall deliver to Lineo:
(a) as soon as available, but in any event within 45 days
after the end of each quarterly accounting period in each fiscal year,
unaudited statements of income and cash flows of Caldera Systems for
such quarterly period and for the period from the beginning of the
fiscal year to the end of such quarter, and unaudited balance sheets of
Caldera Systems as of the end of such quarterly period, setting forth
in each case comparisons to the corresponding period in the preceding
fiscal year, and all such statements shall be prepared in accordance
with generally accepted accounting principles, consistently applied,
subject to the absence of footnote disclosures and to normal year-end
adjustments for recurring accruals, and shall be certified by Caldera
Systems's chief financial officer;
(b) within 90 days after the end of each fiscal year, audited
statements of income and cash flows of Caldera Systems for such fiscal
year, and audited balance sheets of Caldera Systems as of the end of
such fiscal year, setting forth in each case comparisons to the
preceding fiscal year, all prepared in accordance with generally
accepted accounting principles, consistently applied, and accompanied
by, with respect to the consolidated portions of such statements, an
opinion containing no exceptions or qualifications (except for
qualifications regarding specified contingent liabilities) of an
independent accounting firm of recognized national standing; and
(c) prompt notification of any matter or matters which would
reasonably be expected to, individually or in the aggregate, have a
material adverse effect on the financial condition, operating results,
business, assets, operations, employee relations or customer or
supplier relations of Caldera Systems.
Each of the financial statements referred to in subparagraphs (a) and
(b) shall be true and correct in all material respects as of the dates and for
the periods stated therein, subject in the case of the unaudited financial
statements to changes resulting from normal year-end adjustments for recurring
accruals (none of which would, alone or in the aggregate, be materially adverse
to the financial condition, operating results,
<PAGE>
business, assets, operations, business prospects, employee relations or customer
or supplier relations of Caldera Systems).
6.2 CURRENT PUBLIC INFORMATION.
At all times after Caldera Systems has filed a registration
statement with the Securities and Exchange Commission pursuant to the
requirements of either the Securities Act or the Securities and Exchange Act of
1934, as amended (the "Exchange Act"), Caldera Systems shall file all reports
required to be filed by it under the Securities Act and the Exchange Act and the
rules and regulations adopted by the Securities and Exchange Commission
thereunder and shall take such further action with respect to the provision of
information as any holder or holders of Caldera Systems Shares may reasonably
request, all to the extent required to enable such holders to sell Securities
pursuant to Rule 144 adopted by the Securities and Exchange Commission under the
Securities Act (as such rule may be amended from time to time) or any similar
rule or regulation hereafter adopted by the Securities and Exchange Commission.
Upon request, Caldera Systems shall deliver to any holder of Caldera Systems
Shares a written statement as to whether it has complied with such requirements.
SECTION 7. POST-CLOSING COVENANTS OF LINEO
7.1 FINANCIAL STATEMENTS.
Lineo shall deliver to Caldera Systems:
(a) audited financial statements for Lineo for the fiscal year
ended October 31, 1999 including balance sheet, profit and loss
statement, statement of stockholders' equity and statement of cash
flows (including notes thereto) which Lineo expects to be completed by
January 31, 2000;
(b) as soon as available, but in any event within 45 days
after the end of each quarterly accounting period in each fiscal year,
unaudited statements of income and cash flows of Lineo for such
quarterly period and for the period from the beginning of the fiscal
year to the end of such quarter, and unaudited balance sheets of Lineo
as of the end of such quarterly period, setting forth in each case
comparisons to the corresponding period in the preceding fiscal year,
and all such statements shall be prepared in accordance with generally
accepted accounting principles, consistently applied, subject to the
absence of footnote disclosures and to normal year-end adjustments for
recurring accruals, and shall be certified by Lineo's chief financial
officer;
(c) within 90 days after the end of each fiscal year, audited
statements of income and cash flows of Lineo for such fiscal year, and
audited balance sheets of Lineo as of the end of such fiscal year,
setting forth in each case comparisons to the preceding fiscal year,
all prepared in accordance with generally accepted accounting
principles, consistently applied, and accompanied by, with respect to
the consolidated portions of such statements, an opinion containing no
exceptions or qualifications (except for qualifications regarding
specified contingent liabilities) of an independent accounting firm of
recognized national standing; and
(d) prompt notification of any matter or matters which would
reasonably be expected to, individually or in the aggregate, have a
material adverse effect on the financial condition, operating results,
business, assets, operations, employee relations or customer or
supplier relations of Lineo.
Each of the financial statements referred to in subparagraphs (a), (b)
and (c) shall be true and correct
<PAGE>
in all material respects as of the dates and for the periods stated therein,
subject in the case of the unaudited financial statements to changes resulting
from normal year-end adjustments for recurring accruals (none of which would,
alone or in the aggregate, be materially adverse to the financial condition,
operating results, business, assets, operations, business prospects, employee
relations or customer or supplier relations of Lineo).
7.2 CURRENT PUBLIC INFORMATION.
At all times after Lineo has filed a registration statement
with the Securities and Exchange Commission pursuant to the requirements of
either the Securities Act or the Exchange Act, Lineo shall file all reports
required to be filed by it under the Securities Act and the Exchange Act and the
rules and regulations adopted by the Securities and Exchange Commission
thereunder and shall take such further action with respect to the provision of
information as any holder or holders of Lineo Shares may reasonably request, all
to the extent required to enable such holders to sell Securities pursuant to
Rule 144 adopted by the Securities and Exchange Commission under the Securities
Act (as such rule may be amended from time to time) or any similar rule or
regulation hereafter adopted by the Securities and Exchange Commission. Upon
request, Lineo shall deliver to any holder of Lineo Shares a written statement
as to whether it has complied with such requirements.
7.3 LINEO IP SCHEDULE.
Lineo shall deliver the IP Schedule to Caldera Systems within
thirty days of the date of this Agreement.
SECTION 8. GENERAL
8.1 AMENDMENTS, WAIVERS AND CONSENTS.
For the purposes of this Agreement and all agreements executed pursuant
hereto, no course of dealing between or among any of the parties hereto and no
delay on the part of any party hereto in exercising any rights hereunder or
thereunder shall operate as a waiver of the rights hereof and thereof. No
covenant or other provision hereof may be waived otherwise than by a written
instrument signed by the party or parties so waiving such covenant or other
provision. No amendment to this Agreement may be made without the written
consent of all of the parties hereto.
8.2 LEGEND ON SECURITIES.
The parties acknowledge and agree that the following legend shall be
typed on each certificate evidencing any of the securities issued hereunder held
at any time by a party:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS
AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE
ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH
SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE
EXEMPTION FROM REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES
AND BLUE SKY LAWS RELATING TO THE DISPOSITION OF SECURITIES, PROVIDED THAT AN
OPINION OF COUNSEL TO SUCH EFFECT IS PROVIDED TO THE ISSUER OF SUCH SECURITIES,
IN FORM SATISFACTORY TO SUCH ISSUER, IN CONNECTION THEREWITH.
<PAGE>
8.3 GOVERNING LAW.
This Agreement shall be deemed to be a contract made under, and shall
be construed in accordance with, the laws of the State of Utah, as applied to
agreements among Utah residents entered into and to be performed entirely within
Utah, without giving effect to conflict of laws principles thereof.
8.4 SECTION HEADINGS.
The descriptive headings in this Agreement have been inserted for
convenience only and shall not be deemed to limit or otherwise affect the
construction or interpretation of any provision thereof or hereof.
8.5 COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of
which when so executed and delivered shall be taken to be an original; but such
counterparts shall together constitute but one and the same document.
8.6 ENTIRE AGREEMENT.
This Agreement, including the exhibits, documents and instruments
referred to herein or therein, constitutes the entire agreement, and supersedes
all other prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof.
8.7 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
The warranties, representations and covenants of Lineo and Caldera
Systems contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing.
8.8 SUCCESSORS AND ASSIGNS.
Except as otherwise provided herein, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties (including permitted transferees of any
securities issued hereunder). Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
8.9 NOTICES.
Unless otherwise provided, all notices and other communications
required or permitted under this Agreement shall be in writing and shall be
mailed by United States first-class mail, postage prepaid, sent by facsimile or
delivered personally by hand or by a nationally recognized courier addressed to
the party to be notified at the address or facsimile number indicated for such
person at the address set forth below, or at such other address or facsimile
number as such party may designate by ten (10) days' advance written notice to
the other parties hereto:
If to Caldera Systems: Caldera Systems, Inc.
240 West Center Street
Orem, Utah 84057
<PAGE>
Attention: President
If to Lineo: Lineo, Inc.
383 South 520 West
Lindon, Utah 84042
Attention: Chief Financial Officer
All such notices and other written communications shall be effective on the date
of mailing, confirmed facsimile transfer or delivery.
8.10 ATTORNEYS' FEES.
If any action at law or in equity is necessary to enforce or interpret
the terms of this Agreement, the prevailing party shall be entitled to be
reimbursed by the non-prevailing party for reasonable attorneys' fees, costs and
disbursements, in addition to any other relief to which such party may be
entitled.
8.11 SEVERABILITY.
If one or more provisions of this Agreement are held to be
unenforceable under applicable law, such provision shall be excluded from this
Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
SECTION 9 DEFINITIONS
For the purposes of this Agreement, each of the following terms shall
have the meaning set forth opposite such term below:
"knowledge" of a person shall mean actual knowledge of such person
after (i) with respect to representations, warranties and statements made by or
with respect to Caldera Systems, inquiry of the officers and directors of
Caldera Systems and those management-level employees of Caldera Systems who have
responsibility for the area of inquiry and (ii) with respect to representations,
warranties and statements made by or with respect to Lineo, inquiry of the
officers and directors of Lineo and those management-level employees of Lineo
who have responsibility for the area of inquiry.
"Intellectual Property" shall mean (a) all inventions (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications, and patent
disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions, and reexaminations thereof, (b)
all trademarks, service marks, trade dress, logos, trade names, and corporate
names, together with all translations, adaptations, derivations, and
combinations thereof and including all goodwill associated therewith, and all
applications, registrations, and renewals in connection therewith, (c) all
copyrightable works, all copyrights, and all applications, registrations, and
renewals in connection therewith, (d) all mask works and all applications,
registrations, and renewals in connection therewith, (e) all trade secrets and
confidential business information (including ideas, research and development,
know-how, formulas, compositions, manufacturing and production processes and
techniques, technical data, designs, drawings, specifications, customer and
supplier lists, pricing and cost information, and business and marketing plans
and proposals), (f) all computer software (including data and related
documentation), (g) all other proprietary rights, and (h) all copies and
tangible embodiments thereof (in whatever form or medium).
<PAGE>
"Subsidiary" shall mean any corporation with respect to which a
specified party (or a Subsidiary thereof) owns a majority of the common stock or
has the power to vote or direct the voting of sufficient securities to elect a
majority of the directors. "Subsidiaries" shall mean, for purposes of this
Agreement, each Subsidiary of a party, collectively and individually.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.
Lineo, Inc.,
a Utah corporation
By: /s/ Bryan Sparks, President and CEO
Caldera Systems, Inc.,
a Utah corporation
By: /s/ Ransom Love, President and CEO
<PAGE>
SCHEDULE OF EXCEPTIONS
SECTION 2.6
Lineo is a party to the following licensing agreements:
<TABLE>
<CAPTION>
- ------------------ ----------------------------------- ------------------------------------
COMPANY Technology Lineo Product Affected
- ------------------ ----------------------------------- ------------------------------------
<S> <C> <C>
Viosoft Graphical IDE Embedix SDK
- ------------------ ----------------------------------- ------------------------------------
Nombas Java Script Browser
- ------------------ ----------------------------------- ------------------------------------
Voxware ROIP Browser
- ------------------ ----------------------------------- ------------------------------------
Caldera, Inc. DR DOS, lanwork place, personal Browser (lanwork place only), DR
netware DOS
- ------------------ ----------------------------------- ------------------------------------
</TABLE>
Lineo is also party to various and numerous end user license
agreements.
SECTION 2.7
Lineo's auditors are, in the course of completing an audit, calculating
amounts owed by Lineo to Caldera, Inc., Lineo's single largest shareholder.
Current estimates place the amount of the debt at $1.5 - $2.0 million.
SECTIONS 2.14, 2.15, 2.16
Lineo is in the process of completing its first independent audit. The
only financial information available at this time is an unaudited trial balance,
which has been made available to Caldera Systems. Lineo is thus unable to make
any of the representations contained in Sections 2.14, 2,15 and 2.16 regarding
its financial condition. Lineo expects its audit to be completed by February 15,
2000. Upon completion of the audit, Lineo will provide a copy of its audited
financial statements to Caldera Systems. In the meantime, Lineo will make its
Chief Financial Officer, Greg Hill, available to answer questions from Caldera
Systems regarding Lineo's financial condition.
SECTION 2.17
Lineo does not have a list of intellectual property as contemplated by
Section 2.17. Lineo will provide Caldera Systems such a list within 30 days of
the date of this Agreement.
SECTION 2.20
Lineo has not timely filed all tax returns and reports. As part of its
audit process, Lineo is currently completely all due and overdue tax returns and
reports. These returns and reports will be filed as soon as they are complete.
<PAGE>
EXHIBIT 10.5
DR DOS LICENSE AGREEMENT
THIS LICENSE AGREEMENT (this "Agreement") is made and entered into this
1st day of September, 1998 by and between Caldera, Inc., a Utah corporation
("Licensor"), and Caldera Thin Clients, Inc., a Utah corporation ("Licensee").
RECITALS
WHEREAS, Licensor owns all right, title and interest in and to that
certain technology described on EXHIBIT A hereto (the "Technology"); and
WHEREAS, Licensor is willing to grant to Licensee a broad license to use
the Technology in accordance with the terms and conditions of this Agreement
revocable only upon the occurrence of certain specific events described herein,
in exchange for which Licensor shall be entitled to receive shares of Licensee's
capital stock.
AGREEMENT
NOW, THEREFORE, in consideration of the promises and the mutual covenants
contained herein, the parties agree as follows:
1. LICENSE GRANT.
1.1. LICENSE TO THE TECHNOLOGY. Subject to the terms and conditions of
this Agreement, Licensor hereby grants to Licensee a perpetual,
non-exclusive, royalty-free, worldwide license to make, use, sell,
reproduce, distribute and sublicense the Technology and to prepare
derivative works from the Technology.
1.2. TITLE. All right, title, and interest in and to the Technology
shall remain exclusively with Licensor. All right, title, and
interest in and to any and all modifications, improvements or
derivative works of or to the Technology (the "Derivatives") shall
vest exclusively with Licensee. Licensee shall do nothing to
divest, challenge or disturb Licensor's title to the Technology.
Licensee shall take all reasonable steps to protect any of
Licensor's proprietary rights in connection with the Technology.
The provisions of this Section 1.2 shall survive termination of
this Agreement.
1.3. SUBLICENSES. As a manufacturer and supplier of products of the
Technology, Licensee shall have the right to sublicense users and
distributors to use the Technology in the ordinary course of
exploiting the Technology.
1
<PAGE>
1.4. LICENSEE STOCK. In consideration of the license granted hereunder,
Licensor shall be entitled to receive shares of Licensee's Common
Stock, no par value.
2. REPRESENTATIONS AND WARRANTIES.
2.1. TITLE. Licensor represents and warrants that (i) it has good title
to the Technology and (ii) it is authorized to grant the license
provided for herein.
2.2. NO INFRINGEMENT. Licensor warrants that, to the best of its
knowledge, the Technology does not violate or infringe any patent,
copyright, trademark, trade secret or other proprietary right of
any third party and that Licensor is not aware of any facts upon
which such a claim for infringement could be based. Licensor will
promptly notify Licensee if it becomes aware of any claim or any
facts upon which such a claim could reasonably or legitimately be
based.
3. TERM AND TERMINATION.
3.1. TERM. The license granted hereunder shall have a perpetual term
unless terminated as provided below.
3.2. TERMINATION. The license granted hereunder may be terminated as
follows:
3.2.1. By written agreement of the parties;
3.2.2. By either party in the event of a material breach of this
Agreement by the other party and such breach is not cured
within 30 days of written notice thereof;
3.2.3. By Licensor in the event that Licensee ceases doing
business as a going concern, is adjudged insolvent or
bankrupt, or upon the institution of any proceeding by or
against it seeking relief, reorganization or arrangement
under any laws relating to insolvency (except for a
proceeding that is commenced involuntarily and dismissed
within 60 days), or upon the appointment of any of a
receiver, liquidator or trustee of any of its property or
assets, or upon the liquidation, dissolution or winding up
of its business or otherwise seeks protection against
creditors' demands for payment; or
3.2.4. By Licensor in the event Licensee allows usage of the
Technology in violation of this Agreement.
2
<PAGE>
3.3. EFFECT OF TERMINATION. Upon the termination of this Agreement,
Licensee shall immediately discontinue use of the Technology. The
license shall terminate upon termination of this Agreement.
3.4. DISPOSITION OF TECHNOLOGY. Upon termination of this Agreement,
Licensee shall, pursuant to Licensor's instructions, return or
destroy the Technology and all copies thereof (in all forms,
electronic or otherwise) that are in the possession, custody, or
control of Licensee, except that Licensee may retain one copy of
the Technology (and any documentation provided therewith by
Licensor) solely for purposes of post-termination customer
support.
3.5. SURVIVAL. The termination of this Agreement shall not relieve
either party of any liability that accrued prior thereto nor shall
affect the continued operation or enforcement of any provision of
this Agreement which, by its express terms, shall survive
termination.
4. ENFORCEMENT OF IP RIGHTS.
4.1. Licensee shall have the right to, and shall at the direction of
Licensor, enforce all of the licensed intellectual property rights
against infringement by third parties. Licensor agrees to
cooperate with such enforcement efforts. In the event that
Licensee chooses not to enforce the licensed rights against an
infringer, Licensor may do so and may retain all advantages
obtained thereby.
5. GENERAL.
5.1. WAIVER OF PERFORMANCE. A failure of either party hereto at any
time to require performance by the other party of any provision of
this Agreement will in no way affect the right of the first party
to require such performance at any time thereafter. The waiver by
either party of a breach by the other party of any provision of
this Agreement will in no way be construed as a waiver of any
succeeding breach of such provision or a waiver of the provision
itself.
5.2. LAW AND VENUE. This Agreement shall be construed and enforced in
accordance with the laws of the State of Utah.
5.3. EQUITABLE RELIEF. The parties acknowledge and agree that remedies
at law may be inadequate to protect against breaches of this
Agreement and expressly consent to the granting of equitable
relief, whether temporary, preliminary or final, without proof of
actual damages, to prevent any actual or threatened breach.
3
<PAGE>
5.4. ASSIGNMENT. Except as expressly permitted herein, neither this
Agreement nor any right hereunder may be assigned by either party
in whole or in part without the express prior written consent of
the other party, which may be withheld for any or no reason.
5.5. ENTIRE AGREEMENT. This Agreement and the documents referenced
herein constitute the entire understanding and agreement of the
parties with respect to the subject matter of this Agreement and
supersede all prior agreements or understandings, written or oral,
between the parties with respect to the subject matter of this
Agreement.
5.6. AMENDMENTS. No change in, addition to, or waiver of any of the
terms and provisions of this Agreement shall be binding unless
approved by the parties hereto in a writing signed by both
parties.
5.7. SEVERABILITY. If any provision of this Agreement is held to be
invalid, void or unenforceable, the remaining provisions of this
Agreement nevertheless will continue in full force and effect
without being impaired or invalidated in any way.
5.8. ATTORNEYS' FEES. Except as otherwise provided herein, in the event
of any claim or controversy between the parties relating to this
Agreement or to the breach hereof, the prevailing party in such
action shall be entitled to recover from the other party the costs
and expenses, including reasonable fees of attorneys, experts and
other technical advisors, incurred in taking or defending such
action, including on appeal.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
LICENSOR: LICENSEE:
Caldera, Inc., Caldera Thin Clients, Inc.,
a Utah corporation a Utah corporation
By____________________________ By____________________________
Bryan Sparks, President
Its____________________________
4
<PAGE>
EXHIBIT A
DESCRIPTION OF TECHNOLOGY
The technology is the "Transferred Assets," as that term is defined in
Section 2.14 of the Asset Purchase Agreement by and between Caldera, Inc. and
Novell, Inc., dated July 23, 1996, and attached hereto as Exhibit B, together
with any derivative works based thereon created by Caldera, Inc.
5
<PAGE>
EXHIBIT B
JULY 23, 1996, ASSET PURCHASE AGREEMENT
6
<PAGE>
EXHIBIT 10.6
TECHNOLOGY ASSIGNMENT AGREEMENT
THIS TECHNOLOGY ASSIGNMENT AGREEMENT (this "Agreement") is made and
entered into this 29th day of December, 1999 by and between The Canopy Group
("Assignor") and Lineo, Inc., a Utah corporation ("Assignee").
RECITALS
WHEREAS, Assignor owns the right, title and interest in and to that
certain technology described on EXHIBIT A, including the source code and all
affiliated technology (the "Technology"); and
WHEREAS, Assignor wishes to transfer and assign all right, title and
interest in and to the Technology to Assignee.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration of Ten Dollars
($10.00), which the parties hereby acknowledge to be sufficient consideration,
the parties agree as follows:
1. ASSIGNMENT. Assignor hereby transfers and assigns all right, title and
interest in and to the Technology to Assignee effective as of the date hereof,
and hereby waives any and all claims of ownership thereto and releases Assignee
from all such claims.
2. REPRESENTATIONS AND WARRANTIES.
2.1 TITLE. Assignor hereby represents and warrants that (i) it has
good title to the Technology and (ii) it is authorized to make the assignment
provided for herein.
2.2 NO INFRINGEMENT. Assignor warrants that, to the best of its
knowledge, the Technology does not violate or infringe any patent, copyright,
trademark, trade secret or other proprietary right of any third party and that
Assignor is not aware of any facts upon which such a claim for infringement
could be based. Assignor will promptly notify Assignee if it becomes aware of
any claim or any facts upon which such a claim could reasonably or legitimately
be based.
3. GENERAL.
1
<PAGE>
3.1 LAW AND VENUE. This Agreement shall be construed and enforced in
accordance with the laws of the State of Utah.
3.2 EQUITABLE RELIEF. The parties acknowledge and agree that remedies
at law may be inadequate to protect against breaches of this Agreement and
expressly consent to the granting of equitable relief, whether temporary,
preliminary or final, without proof of actual damages, to prevent any actual or
threatened breach.
3.3 ENTIRE AGREEMENT. This Agreement and the documents referenced
herein constitute the entire understanding and agreement of the parties with
respect to the subject matter of this Agreement and supersede all prior
agreements or understandings, written or oral, between the parties with respect
to the subject matter of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
ASSIGNOR: ASSIGNEE:
The Canopy Group Lineo, Inc.,
a Utah corporation
By /s/ Ralph Yarro By /s/ Ralph Yarro
2
<PAGE>
EXHIBIT A
DESCRIPTION OF TECHNOLOGY
The technology being transferred is commonly referred to as the "Willows"
technology. It is a set of software libraries that emulate the Microsoft Win16
and Win32 Application Programming Interfact ("API"). A developer ma make use of
the libraries, by compiling against them, to create software that emulates the
functionality of the Win16 and Win32 API. The Willows technology includes
Win16/Win32 binary loader and executor, and related applications, a software
Intel instruction set emulator, demonstration programs, tools and utilities. The
Willows technology also includes all derivative works available from Award to
Canopy.
3
<PAGE>
EXHIBIT 10.7
LINEO, INC.
- --------------------------------------------------------------------------------
RECAPITALIZATION AGREEMENT
Series A Class 1 Preferred Stock
- --------------------------------------------------------------------------------
February __, 2000
<PAGE>
LINEO, INC.
RECAPITALIZATION AGREEMENT
THIS RECAPITALIZATION AGREEMENT (this "Agreement") is made as of this
__ day of February, 2000, by and between Lineo, Inc., a Delaware corporation
(together with any predecessors or successors thereto; the "Company"), and The
Canopy Group, Inc., a Utah corporation (together with its successors and
assigns; "Canopy").
RECITALS
A. Canopy currently owns 14,496,617 shares of the Common Stock of
the Company.
B. Canopy wishes to exchange 5,000,000 shares of such Common
Stock (the "Canopy Common Stock") for 5,000,000 shares of the Company's Series A
Class 1 Convertible Preferred Stock, $.001 par value per share.
C. The Company has authorized the issuance to Canopy of 5,000,000
shares of Series A Class 1 Convertible Preferred Stock having the rights and
preferences set forth in the Certificate of Designation attached as EXHIBIT A
hereto (the "Certificate"), in exchange for the Canopy Common Stock.
D The parties hereto desire to set forth the terms of the
issuance of the Series A Class 1 Preferred Stock.
AGREEMENT
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
SECTION 1. RECAPITALIZATION.
1.1 Description of Securities.
The Company's authorized capital stock consists of 100,000,000 shares
of Common Stock, par value $.001 per share, and 30,000,000 shares of Preferred
Stock, par value $.001 per share, of which 5,000,000 shares have been designated
as Series A Class 1 Convertible Preferred Stock and 2,500,000 shares have been
designated as Series A Class 2 Convertible Preferred Stock. The Company has
authorized and has reserved, and covenants to continue to reserve, a sufficient
number of shares of its Common Stock to satisfy the rights of conversion of the
holders of the Series A Class 1 Convertible Preferred Stock. For purposes of
this Agreement, (a) the shares of Series A Class 1 Convertible Preferred Stock
to be acquired by Canopy from the Company hereunder are referred to as the
"Series A Class 1 Preferred Shares," (b) the shares of Common Stock issuable
upon conversion of the Series A Class 1 Preferred Shares are referred to
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as the "Conversion Shares" and (c) the Series A Class 1 Preferred Shares and the
Conversion Shares are sometimes referred to collectively as the "Securities."
1.2 EXCHANGE.
Upon the terms and subject to the conditions herein, and in reliance on
the representations and warranties set forth in Section 2, the Company agrees to
issue to Canopy, at the Closing (as defined below in Section 1.3), 5,000,000
Series A Class 1 Preferred Shares in exchange for the surrender and cancellation
of the Canopy Common Stock, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and the Company hereby
grants Canopy the rights set forth herein.
1.3 CLOSING.
The closing of the issuance of the Series A Class 1 Preferred Shares
(the "Closing") shall take place at the offices of the Company at 10:00 a.m. on
February __, 2000, or at such other time and place as the parties hereto may
agree (the "Closing Date").
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants the following, except as set forth
in the schedule of exceptions attached hereto as EXHIBIT B (the "Disclosure
Schedule"):
2.1 ORGANIZATION AND CORPORATE POWER.
The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and is qualified to do
business as a foreign corporation in each jurisdiction in which the failure to
be so qualified would have a material adverse effect on its assets, liabilities,
condition (financial or other), business, results of operations or prospects (a
"Material Adverse Effect"). The Company has all required corporate power and
authority to carry on its business as presently conducted, to enter into and
perform this Agreement and the agreements contemplated hereby to which it is a
party and to carry out the transactions contemplated hereby and thereby,
including the issuance and exchange of the Securities and the issuance of the
Conversion Shares. The Company is not in violation of any term of the
Certificate of Incorporation and Bylaws of the Company, as amended to date (the
"Certificate of Incorporation" and the "Bylaws," respectively).
2.2 AUTHORIZATION AND NON-CONTRAVENTION.
The execution, delivery and performance by the Company of this
Agreement and all other agreements, documents and instruments to be executed and
delivered by the Company as contemplated hereby (including, without limitation,
the Certificate) and the issuance and delivery of (i) the Series A Class 1
Preferred Shares and (ii) upon the conversion of the Series A Class 1 Preferred
Shares, the Conversion Shares, have been duly authorized by all necessary
corporate and other action of the Company. This Agreement and each such other
agreement, document and instrument (including, without limitation, the
Certificate) constitute valid and binding obligations of the Company,
enforceable in accordance with their respective terms. The execution and
delivery by the Company of this Agreement and each other agreement, document
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and instrument to be executed and delivered by the Company pursuant hereto or as
contemplated hereby (including, without limitation, the Certificate) and the
performance by the Company of the transactions contemplated hereby and thereby,
including, without limitation, the issuance and delivery of (i) the Series A
Class 1 Preferred Shares and (ii) upon the conversion of the Series A Class 1
Preferred Shares, the Conversion Shares, do not and will not: (A) violate,
conflict with or result in a default (whether after the giving of notice, lapse
of time or both) under any material contract or obligation to which the Company
is a party or by which it or its assets are bound, or any provision of the
Certificate of Incorporation or Bylaws of the Company, or cause the creation of
any material encumbrance upon any of the assets of the Company; (B) violate or
result in a violation of, or constitute a default under, any provision of any
material law, regulation or rule, or any order of, or any restriction imposed
by, any court or governmental agency applicable to the Company; (C) require from
the Company any notice to, declaration or filing with, or consent or approval of
any governmental authority or third party other than as may be required to
secure an exemption from qualification of the offer and sale of the Series A
Class 1 Preferred Shares under the Securities Act of 1933, as amended (the
"Securities Act"), and applicable state securities and blue sky laws; or (D)
accelerate any obligation under, or give rise to a right of termination of, any
material agreement, permit, license or authorization to which the Company or any
of its assets is a party or by which the Company or any of its assets is bound.
2.3 CAPITALIZATION.
As of the Closing and after giving effect to the transactions
contemplated hereby, the authorized capital stock of the Company will consist of
100,000,000 shares of Common Stock, $.001 par value per share, of which
17,738,437 shares will be issued and outstanding, and 30,000,000 shares of
Preferred Stock, $.001 par value per share, of which (a) 5,000,000 shares shall
be designated as Series A Class 1 Preferred Stock, of which 5,000,000 will be
issued and outstanding and (b) 2,500,000 shares shall be designated as Series A
Class 2 Preferred Stock of which 2,500,000 shares will be issued and
outstanding.. The shares of Common Stock are held by the stockholders listed in
Section 2.3 of the Disclosure Schedule in the amounts listed therein. In
addition, the Company has authorized and reserved for issuance upon conversion
of the Series A Class 1 Preferred Shares up to 5,000,000 Conversion Shares
(subject to adjustment for stock splits, stock dividends and the like) and has
reserved for issuance upon exercise of options under the Company's stock option
plan (the "Plan") 2,000,000 shares of Common Stock (subject to adjustment for
stock splits, stock dividends and the like). Other than as described above, the
Company has not issued or agreed to issue and is not obligated to issue any
warrants, options or other rights to purchase or acquire any shares of its
capital stock, or any securities convertible into or exercisable or exchangeable
for such shares or any warrants, options or other rights to acquire any such
convertible securities. As of the Closing, and after giving effect to the
transactions contemplated hereby, all of the outstanding shares of capital stock
of the Company (including, without limitation, the Series A Class 1 Preferred
Shares) will have been duly and validly authorized and issued, fully paid and
nonassessable and, except as set forth herein, not subject to any preemptive
rights and will have been offered, issued, sold and delivered in compliance with
applicable federal and state securities and blue sky laws. The Conversion Shares
will, upon issuance, be duly and validly authorized and issued, fully paid and
nonassessable, and not subject to any preemptive rights, and will be offered,
issued, sold and delivered in compliance with applicable federal and state
securities and blue sky laws. The
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relative rights, preferences and other provisions relating to the Series A
Class 1 Preferred Shares are as set forth in EXHIBIT A hereto.
2.4 SUBSIDIARIES; INVESTMENTS.
Other than 1,250,000 shares of Common Stock of Caldera Systems, Inc., a
representative office located in Taiwan and a subsidiary located in the United
Kingdom, the Company has no subsidiaries and no interests in any corporation,
joint venture, partnership or other entity.
2.5 FINANCIAL STATEMENTS.
The Company has previously furnished to Canopy copies of its draft
audited financial statements (balance sheet, statement of operations; statement
of cash flows and statement of stockholders equity) for the fiscal year at and
ended October 31, 1999. Such financial statements were prepared in conformity
with generally accepted accounting principles applied on a consistent basis; are
complete, correct and consistent in all material respects with the books and
records of the Company; and fairly and accurately present the financial position
of the Company as of the dates thereof and the results of operations and cash
flows of the Company for the periods shown therein.
2.6 ABSENCE OF UNDISCLOSED LIABILITIES.
Except as and to the extent reflected or reserved against in the
financial statements referred to in Section 2.5 above, the Company does not have
and is not subject to any material liability or obligation of any nature,
whether accrued, absolute, contingent or otherwise.
2.7 CERTAIN CONTRACTS AND ARRANGEMENTS.
Except as set forth in Section 2.7 of the Disclosure Schedule (with
true and correct copies delivered to Canopy), the Company is not a party or
subject to or bound by:
(a) any plan or contract providing for collective bargaining
or the like, or any contract or agreement with any labor union;
(b) any contract, lease or agreement creating any obligation
of the Company to pay to any third party $100,000 or more with respect to any
single such contract or agreement;
(c) any contract or agreement for the sale, license, lease or
disposition of products or services in excess of $100,000;
(d) any contract containing covenants directly or explicitly
limiting the freedom of the Company to compete in any line of business or with
any person or entity;
(e) any license agreement (as licensor or licensee);
(f) any contract or agreement for the purchase of any
leasehold improvements, equipment or fixed assets for a price in excess of
$100,000;
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(g) any indenture, mortgage, promissory note, loan agreement,
guaranty or other agreement or commitment for borrowing in excess of $100,000 or
any pledge or security arrangement;
(h) any material joint venture, partnership, or manufacturing
agreement;
(i) any endorsement or any other advertising, promotional or
marketing agreement;
(j) any employment contracts, or agreements with officers,
directors, employees or stockholders of the Company or persons or organizations
related to or affiliated with any such persons;
(k) any pension, profit sharing, retirement (other than the
Company's 401(k) plan), stock option, phantom stock or other equity incentive
plans;
(l) any arrangement relating to any royalty payments to
employees, customers or independent contractors based on the sales volume of the
Company;
(m) any acquisition, merger or similar agreement; or
(n) any contract with a governmental body under which the
Company may have an obligation for renegotiation.
All of the Company's contracts and commitments are in full force and
effect and neither the Company nor, to the knowledge of the Company, any other
party is in default thereunder (nor, to the knowledge of the Company, has any
event occurred which with notice, lapse of time or both would constitute a
default thereunder), except to the extent that any such default would not have a
Material Adverse Effect, and the Company has not received notice of any alleged
default under any such contract, agreement, understanding or commitment.
2.8 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS.
Except as set forth in Section 2.8 of the Disclosure Schedule:
(a) The Company has the right to use, sell, and license the
Intellectual Property Rights (as defined below) material to the conduct of its
business as presently conducted, including without limitation all rights to the
Company name "Lineo" and to the trademarks and the product name "Embedix" (the
"Company Rights").
(b) The business of the Company as presently conducted and the
provision of services by the Company do not violate any agreements that the
Company has with any third party or infringe any patent, trademark, service
mark, copyright or trade secret or any other Intellectual Property Rights of any
third party.
(c) No claim is pending or threatened against the Company nor
has the Company received any notice or claim from any person asserting that any
of the Company's present or contemplated activities infringe or may infringe any
Intellectual Property Rights of
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such person, and the Company is not aware of any infringement by any other
person of any of the Company Rights.
(d) Each current and former employee of the Company, and each
of the Company's consultants and independent contractors involved in development
of any of the Company Rights, has executed an agreement regarding
confidentiality, proprietary information and assignment of inventions and
copyrights to the Company, and none of such employees, consultants or
independent contractors is in violation of any agreement or in breach of any
agreement or arrangement with former or present employers relating to
proprietary information or assignment of inventions.
As used herein, the term "Intellectual Property Rights" shall mean the
intellectual property rights, including, without limitation, all patents, patent
applications, patent rights, trademarks, trademark applications, trade names,
service marks, service mark applications, copyrights, copyright applications,
computer programs and other computer software, inventions, designs, samples,
specifications, schematics, know-how, trade secrets, proprietary processes and
formulae, including production technology and processes, all source and object
code, algorithms, promotional materials, customer lists, supplier and dealer
lists and marketing research, and all documentation and media constituting,
describing or relating to the foregoing, including without limitation, manuals,
memoranda and records.
2.9 LITIGATION.
There is no litigation or governmental proceeding or investigation
pending or threatened against the Company or affecting any of its properties or
assets or against any officer, director or key employee of the Company in his or
her capacity as an officer, director or employee of the Company, which
litigation, proceeding or investigation is reasonably likely to have a Material
Adverse Effect, or which may call into question the validity or hinder the
enforceability of this Agreement or any other agreements or transactions
contemplated hereby; nor has there occurred any event nor does there exist any
condition on the basis of which any such litigation, proceeding or investigation
might be properly instituted or commenced.
2.10 TAX MATTERS.
The Company has filed all federal, state, local and foreign income,
excise and franchise tax returns, real estate and personal property tax returns,
sales and use tax returns and other tax returns required to be filed by it where
the failure to file such returns would have a Material Adverse Effect, and has
paid all taxes owing by it, except taxes which have not yet accrued or otherwise
become due, for which adequate provision has been made in the pertinent
financial statements referred to in Section 2.5 above or which will not have a
Material Adverse Effect. All taxes and other assessments and levies which the
Company is required to withhold or collect have been withheld and collected and
have been paid over to the proper governmental authorities except where the
failure to withhold or collect and pay over would not have a Material Adverse
Effect. With regard to the federal income tax returns of the Company, the
Company has never received notice of any audit or of any proposed deficiencies
from the Internal Revenue Service. There are in effect no waivers of applicable
statutes of limitations with respect to any taxing owed by the Company for any
year. Neither the Internal Revenue Service nor any other taxing
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authority is now asserting or, to the knowledge of the Company, threatening to
assert against the Company any deficiency or claim for additional taxes or
interest thereon or penalties in connection therewith.
2.11 EMPLOYEE BENEFIT PLANS.
The Company does not maintain or contribute to any employee benefit
plan, stock option, bonus or incentive plan, severance pay policy or agreement,
deferred compensation agreement or any similar plan or agreement (an "Employee
Benefit Plan") other than the Plan and the Employee Benefit Plans identified and
described in Section 2.11 of the Disclosure Schedule. The terms and operation of
each Employee Benefit Plan comply in all material respects with all applicable
laws and regulations relating to such Employee Benefit Plan. There are no
unfunded obligations of the Company under any retirement, pension,
profit-sharing, deferred compensation plan or similar program. The Company is
not required to make any payments or contributions to any Employee Benefit Plan
pursuant to any collective bargaining agreement, and all Employee Benefit Plans
are terminable at the discretion of the Company without material liability to
the Company upon or following such termination. The Company has never maintained
or contributed to any Employee Benefit Plan providing or promising any health or
other welfare benefits (within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) to terminated
employees, except for benefits mandated by applicable law, including, but not
limited to, Section 4980B of the Internal Revenue Code of 1986, as amended, and
Part 6 of Subtitle B of Title I of ERISA.
2.12 LABOR LAWS.
The Company employs approximately 50 employees and generally enjoys
good employer-employee relationships. The Company is not delinquent in payments
to any of its employees for any wages, salaries, commissions, bonuses or other
direct compensation for any services performed for it as of the date hereof or
amounts required to be reimbursed to such employees. The Company is in
compliance in all material respects with all applicable laws and regulations
respecting labor, employment, fair employment practices, terms and conditions of
employment, and wages and hours. There are no charges of employment
discrimination or unfair labor practices or strikes, slowdowns, stoppages of
work or any other concerted interference with normal operations existing,
pending or, to the knowledge of the Company, threatened against or involving the
Company.
2.13 EMPLOYEES.
Section 2.13 of the Disclosure Schedule contains a list of all
managers, employees and consultants of the Company who, individually, have
received compensation from the Company for the fiscal year of the Company ended
October 31, 1999, in excess of $100,000. In each case, Section 2.13 of the
Disclosure Schedule includes the current job title, years of service with the
Company and aggregate annual compensation and benefits of each such individual.
To the knowledge of the Company and the Stockholders, no key employee of the
Company has any plan or intention to terminate his or her employment with the
Company. The Company has complied in all material respects with the immigration
laws of the United States with respect to the hiring, employment and engagement
of all of its employees and consultants who are not United States
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citizens, and, to the knowledge of the Company, the immigration or residency
status of each of such employees and consultants is sufficient to allow such
employees and consultants to remain lawfully employed or engaged by the Company.
2.14 HAZARDOUS WASTE, ETC.
No hazardous wastes, substances or materials or oil or petroleum
products have been generated, transported, used, disposed, stored or treated by
the Company, and no hazardous wastes, substances or materials or oil or
petroleum products have been released, discharged, disposed, transported, placed
or otherwise caused to enter the soil or water in, under or upon any real
property owned, leased or operated by the Company.
2.15 BUSINESS; COMPLIANCE WITH LAWS.
The Company has all necessary franchises, permits, licenses and other
rights and privileges necessary to permit it to own its property and to conduct
its business as it is presently or contemplated to be conducted. The Company is
currently and has heretofore been in compliance in all material respects with
all federal, state, local and foreign laws and regulations.
2.16 INVESTMENT BANKING; BROKERAGE.
There are no claims for investment banking fees, brokerage commissions,
finder's fees or similar compensation (exclusive of professional fees to lawyers
and accountants) in connection with the transaction contemplated by this
Agreement payable by the Company or based on any arrangement or agreement made
by or on behalf of the Company or any of the Stockholders.
2.17 INSURANCE.
The Company has fire, casualty, product liability, workers'
compensation and business interruption and other insurance policies, with
extended coverage, sufficient in amount to allow it to replace any of its
material properties which might be damaged or destroyed or sufficient to cover
liabilities to which the Company may reasonably become subject, and such types
and amounts of other insurance with respect to its business and properties, on
both a per occurrence and an aggregate basis, as are customarily carried by
persons engaged in the same or similar business as the Company. There is no
default or event which could give rise to a default under any such policy.
2.18 TRANSACTIONS WITH AFFILIATES.
There are no loans, leases, contracts or other transactions between the
Company and any officer, director or five percent (5%) stockholder of the
Company or any family member or affiliate of the foregoing persons, and there
have been no such transactions within the past twelve (12) months except as set
forth in Section 2.18 of the Disclosure Schedule.
2.19 SUPPLIERS.
Section 2.19 of the Disclosure Schedule sets forth each supplier of the
Company who supplied more than five percent (5%) of the Company's supplies or
materials for the fiscal year
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ended December 31, 1999 and each supplier who the Company believes may supply
for more than five percent (5%) of the Company's supplies or materials for the
fiscal year ending December 31, 2000 (each a "Supplier" and collectively the
"Suppliers"). The relationships of the Company with its Suppliers are good
commercial working relationships. No Supplier of the Company has canceled or
otherwise terminated its relationship with the Company, or has during the last
12 months decreased materially its services, supplies or materials to the
Company. No Supplier has, to the knowledge of the Company, any plan or intention
to terminate, cancel or otherwise materially and adversely modify its
relationship with the Company or to decrease materially or limit its services,
supplies or materials to the Company.
2.20 CERTAIN EVENTS.
(a) During the past ten (10) years, neither the Company nor
any of the officers or directors of the Company has had a petition under the
Bankruptcy Reform Act of 1978, as amended, or any state insolvency law, filed by
or against any of them.
(b) During the past ten (10) years, neither the Company nor
the officers or directors of the Company has been convicted in a criminal
proceeding or is a named subject of a criminal proceeding which is presently
pending (excluding traffic violations and other minor offenses).
(c) During the past ten (10) years, neither the Company nor
the stockholders, officers or directors of the Company has been, or is, the
subject of any order, judgment or decree, whether or not subsequently reversed,
suspended or vacated, of any court or any administrative agency, requiring the
payment of money damages in excess of $100,000 or permanently or temporarily
enjoining any of them from, or otherwise limiting any of their abilities to
engage in, any type of business practice.
2.21 REGISTRATION RIGHTS.
Other than as set forth in Schedule 2.21 to the Disclosure Schedule,
the Company has not granted or agreed to grant any registration rights,
including piggyback rights, to any person or entity.
2.22 DISCLOSURE.
The representations and warranties made or contained in this Agreement,
the exhibits hereto and the certificates and statements executed or delivered in
connection herewith, and the information concerning the business of the Company
delivered to Canopy in connection with or pursuant to this Agreement, when taken
together, do not and shall not contain any untrue statement of a material fact
and do not and shall not omit to state a material fact required to be stated
therein or necessary in order to make such representations, warranties or other
material not misleading in light of the circumstances in which they were made or
delivered. There have been no events or transactions or information which has
come to the attention of the management of the Company having a direct impact on
the Company or its assets, liabilities, financial condition, business, results
of operations or prospects which, in the reasonable judgment of such management,
could be expected to have a Material Adverse Effect.
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SECTION 3. REPRESENTATIONS AND WARRANTIES OF CANOPY.
Canopy represents and warrants to the Company the following:
3.1 INVESTMENT EXPERIENCE AND INTENT.
Canopy represents to the Company that it has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of the investment contemplated by this Agreement and making
an informed investment decision with respect thereto. Canopy represents that it
is an "accredited investor" as such term is defined in Rule 501 under the
Securities Act. Canopy represents and understands that it is responsible for its
own due diligence investigation and satisfying its own due diligence
requirements and shall not be entitled to rely on the due diligence
investigation of any other person or entity. Canopy represents to the Company
that it is purchasing the Series A Class 1 Preferred Shares for its own account,
for investment only and not with a view to, or any present intention of,
effecting a distribution of such securities or any part thereof except pursuant
to a registration or an available exemption under applicable law. Canopy
acknowledges that the Series A Class 1 Preferred Shares have not been registered
under the Securities Act or the securities laws of any state or other
jurisdiction and cannot be disposed of unless they are subsequently registered
under the Securities Act and any applicable state laws or exemption from such
registration is available.
3.2 AUTHORIZATION AND NON-CONTRAVENTION.
Canopy represents that it has full right, authority and power to enter
into this Agreement and each agreement, document and instrument to be executed
and delivered by or on behalf of such Investor pursuant to or as contemplated by
this Agreement and to carry out the transactions contemplated hereby and
thereby, and the execution, delivery and performance by such Investor of this
Agreement and each such other agreement, document and instrument have been duly
authorized by all necessary action. Canopy represents and warrants that this
Agreement and each agreement, document and instrument executed and delivered by
such Investor pursuant to or as contemplated by this Agreement constitute, or
when executed and delivered will constitute, valid and binding obligations of
such Investor enforceable in accordance with their respective terms and that the
execution, delivery and performance by such Investor of this Agreement and each
such other agreement, document and instrument, and the performance of the
transactions contemplated hereby and thereby do not and will not: (a) violate,
conflict with or result in a default (whether after the giving of notice, lapse
of time or both) under any contract or obligation to which such Investor is a
party or by which it or its assets are bound, or cause the creation of any
encumbrance upon any of the assets of Canopy; (b) violate or result in a
violation of, or constitute a default under, any provision of any law,
regulation or rule, or any order of, or any restriction imposed by, any court or
other governmental agency applicable to Canopy; (c) require from Canopy any
notice to, declaration or filing with, or consent or approval of any
governmental authority or other third party; or (d) accelerate any obligation
under, or give rise to a right of termination of, any agreement, permit, license
or authorization to which Canopy is a party or by which Canopy is bound.
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3.3 COMMISSIONS AND FEES.
Canopy represents that there are no claims for investment banking fees,
brokerage commissions, finder's fees or similar compensation (exclusive of
professional fees to lawyers and accountants) in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement made by or on behalf of such Investor.
SECTION 4. CONDITIONS OF EXCHANGE.
Canopy's obligation to exchange the Series A Class 1 Preferred Shares
for the Canopy Common Stock shall be subject to compliance by the Company with
its agreements herein contained and to the fulfillment to Canopy's satisfaction,
or the waiver by Canopy, on or before and at the Closing Date, of the following
conditions:
4.1 SATISFACTION OF CONDITIONS.
The representations and warranties of the Company contained in this
Agreement shall be true and correct on and as of the Closing Date; each of the
conditions specified in this Section 4 shall have been satisfied or waived in
writing by Canopy; and, on the Closing Date, certificates to such effect
executed by the President and Chief Financial Officer of the Company shall have
been delivered to Canopy.
4.2 AUTHORIZATION.
The Board of Directors of the Company shall have duly adopted
resolutions in form and substance reasonably satisfactory to Canopy and shall
have taken all action necessary for the purpose of authorizing the Company to
consummate the transactions contemplated hereby in accordance with the terms
hereof and to cause the Certificate to become effective; and Canopy shall have
received a certificate of the Secretary of the Company setting forth a copy of
the relevant Board of Directors and/or stockholder resolutions and the
Certificate of Incorporation, the Certificate and Bylaws of the Company and such
other matters as may be reasonably requested by Canopy.
4.3 OPINION OF COUNSEL.
Canopy shall have received from Summit Law Group an opinion dated as of
the Closing Date substantially in the form attached hereto as EXHIBIT C.
4.4 ALL PROCEEDINGS SATISFACTORY.
All corporate and other proceedings taken prior to or at the Closing in
connection with the transactions contemplated by this Agreement, and all
documents and evidences incident thereto, shall be reasonably satisfactory in
form and substance to Canopy.
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4.5 NO VIOLATION OR INJUNCTION.
The consummation of the transactions contemplated by this Agreement
shall not be in violation of any law or regulation and shall not be subject to
any injunction, stay or restraining order.
4.6 CONSENTS AND WAIVERS.
The Company shall have obtained all consents or waivers necessary to
execute this Agreement and the other agreements and documents contemplated
herein, to issue and sell the Securities to be sold to Canopy hereunder and to
carry out the transactions contemplated hereby and thereby and shall have
delivered evidence thereof to Canopy. All corporate and other action and
governmental filings necessary to effectuate the terms of this Agreement and
other agreements and instruments executed and delivered by the Company in
connection herewith shall have been made or taken.
SECTION 5. GENERAL.
5.1 AMENDMENTS, WAIVERS AND CONSENTS.
For the purpose of this Agreement and all agreements executed pursuant
hereto, no course of dealing between or among any of the parties hereto and no
delay on the part of any party hereto in exercising any rights hereunder or
thereunder shall operate as a waiver of the rights hereof and thereof. No
covenant or other provision hereof may be waived otherwise than by a written
instrument signed by the party or parties so waiving such covenant or other
provision. No amendment to this Agreement may be made without the written
consent of the Company and Canopy.
5.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS;
ASSIGNABILITY OF RIGHTS.
All covenants, agreements, representations and warranties of the
Company and Canopy made herein, in the Disclosure Schedule and the Certificate
and in the certificates, lists, exhibits, schedules or other written information
delivered or furnished to any Investor in connection herewith (a) are material,
shall be deemed to have been relied upon by the party or parties to whom they
are made and shall survive the Closing regardless of any investigation or
knowledge on the part of such party or its representatives and (b) shall bind
the parties' successors and assigns (including without limitation any successor
to the Company by way of acquisition, merger or otherwise), whether so expressed
or not, and, except as otherwise provided in this Agreement, all such covenants,
agreements, representations and warranties shall inure to the benefit of
Canopy's successors and assigns and to their transferees of Securities, whether
so expressed or not, and any such transferee shall be deemed the "Investor" for
purposes hereof.
5.3 MARKET STAND-OFF.
In connection with any underwritten public offering by the Company,
Canopy, if requested in good faith by the Company and the managing underwriter
of the Company's securities, shall agree not to sell or otherwise transfer or
dispose of any securities of the Company held by it (except for any securities
sold pursuant to such registration statement) for a
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period following the effective date of the applicable registration statement
that in no event shall exceed 180 days. In order to enforce the foregoing, the
Company may impose stop-transfer instructions with respect to the securities
held by Canopy until the end of such period.
5.4 LEGEND ON SECURITIES.
The Company and Canopy acknowledge and agree that the following legend
shall be typed on each certificate evidencing any of the securities issued
hereunder held at any time by Canopy:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED,
SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT
(1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH
SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO
AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT
RELATING TO THE DISPOSITION OF SECURITIES AND (3) IN
ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY LAWS.
5.5 GOVERNING LAW.
This Agreement shall be deemed to be a contract made under, and shall
be construed in accordance with, the laws of Delaware, without giving effect to
conflict of laws principles thereof.
5.6 SECTION HEADINGS AND GENDER.
The descriptive headings in this Agreement have been inserted for
convenience only and shall not be deemed to limit or otherwise affect the
construction of any provision thereof or hereof. The use in this Agreement of
the masculine pronoun in reference to a party hereto shall be deemed to include
the feminine or neuter, and vice versa, as the context may require.
5.7 COUNTERPARTS.
This Agreement may be executed simultaneously in any number of
counterparts, each of which when so executed and delivered shall be taken to be
an original; but such counterparts shall together constitute but one and the
same document.
5.8 NOTICES AND DEMANDS.
Any notice or demand which is required or provided to be given under
this Agreement or the Certificate shall be deemed to have been sufficiently
given and received for all purposes when delivered by hand, telecopy, telex or
other method of facsimile, or five days after being
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sent by certified or registered mail, postage and charges prepaid, return
receipt requested, or two days after being sent by overnight delivery providing
receipt of delivery, to the following addresses:
if to the Company: Lineo, Inc.
383 S. 520 W.
Lindon, Utah 84042
Attn: President
Fax: (801) 426-6166
copy to: Summit Law Group
1505 Westlake Avenue N., Suite 300
Seattle, Washington 98109
Attn: Mark F. Worthington, Esq.
Fax: (206) 281-9882
if to Canopy: The Canopy Group, Inc.
240 West Center Street
Orem, Utah
Attn: ___________
Fax: ___________
copy to: _______________
_______________
_______________
_______________
5.9 REMEDIES; SEVERABILITY.
It is specifically understood and agreed that any breach of the
provisions of this Agreement by any person subject hereto will result in
irreparable injury to the other parties hereto, that the remedy at law alone
will be an inadequate remedy for such breach, and that, in addition to any other
remedies which they may have, such other parties may enforce their respective
rights by actions for specific performance (to the extent permitted by law). The
Company may refuse to recognize any unauthorized transferee as one of its
stockholders for any purpose, including, without limitation, for purposes of
dividend and voting rights, until the relevant party or parties have complied
with all applicable of this Agreement. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be deemed
prohibited or invalid under such applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, and such
prohibition or invalidity shall not invalidate the remainder of such provision
or the other provisions of this Agreement.
5.10 INTEGRATION.
This Agreement, including the exhibits, documents and instruments
referred to herein or therein, constitutes the entire agreement, and supersedes
all other prior agreements and
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understandings, both written and oral, among the parties with respect to the
subject matter hereof.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.
Lineo, Inc. Canopy Group, Inc.
By: By:
------------------------------- --------------------------
Bryan Sparks, President
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EXHIBIT 10.8
LINEO, INC.
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of this __
day of February, 2000, by and between Lineo, Inc., a Delaware corporation
(together with any predecessors or successors thereto; the "Company"), and
___________________, (together with its successors and assigns; the "Investor").
RECITALS
A. The Investor wishes to invest in the Company's Series A Class 2
Convertible Preferred Stock, $.001 par value per share (the "Series A Class 2
Preferred Stock").
B. The Company has authorized the issuance and sale to the Investor
of ___________ shares of Series A Class 2 Preferred Stock having the rights and
preferences set forth in the Certificate of Designation attached as EXHIBIT A
hereto (the "Certificate"), for an aggregate purchase price of $____________.
C. The parties hereto desire to set forth the terms of the purchase
and sale of the Series A Class 2 Preferred Stock.
AGREEMENT
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter set forth, the parties hereto agree as follows:
SECTION 1. PURCHASE AND SALE OF SHARES.
1.1 Description of Securities.
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, par value $.001 per share, and 30,000,000 shares of Preferred
Stock, par value $.001 per share, of which 5,000,000 shares have been designated
as Series A Class 1 Convertible Preferred Stock and 2,500,000 shares have been
designated as Series A Class 2 Convertible Preferred Stock. The Company has
authorized and has reserved, and covenants to continue to reserve, free and
clear of preemptive and other similar rights, a sufficient number of shares of
its Common Stock to satisfy the rights of conversion of the holders of the
Series A Class 2 Preferred Stock. For purposes of this Agreement, (a) the shares
of Series A Class 2 Preferred Stock to be acquired by the Investor from the
Company hereunder are referred to as the "Series A Class 2 Preferred Shares,"
(b) the shares of Common Stock issuable upon conversion of the Series A Class 2
Preferred Shares are referred to as the "Conversion Shares" and (c) the Series A
Class 2 Preferred Shares and the Conversion Shares are sometimes referred to
collectively as the "Securities."
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1.2. SALE AND PURCHASE; CONVERSION.
Upon the terms and subject to the conditions herein, and in reliance on
the representations and warranties set forth in Section 2, the Investor hereby
purchases from the Company, and the Company hereby issues and sells to the
Investor, at the Closing (as defined below in Section 1.3), ___________ Series A
Class 2 Preferred Shares for the purchase price of $1.50 per share for an
aggregate of $____________, and the Company hereby grants the Investor the
rights set forth herein. The proceeds of this sale are intended to be used for
the expansion of the Company's business, working capital and other general
corporate purposes.
1.3 CLOSING.
The closing of the purchase and sale of the Series A Class 2 Preferred
Shares (the "Closing") shall take place at the offices of the Company at 10:00
a.m. on February __, 2000, or at such other time and place as the parties hereto
may agree (the "Closing Date"). At the Closing, the Company shall deliver to the
Investor a stock certificate, registered in the name of the Investor,
representing the number of Series A Class 2 Preferred Shares purchased by
Investor hereunder.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants the following, except as set forth in
the schedule of exceptions attached hereto as EXHIBIT B (the "Disclosure
Schedule"):
2.1 ORGANIZATION AND CORPORATE POWER.
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and is qualified to do
business as a foreign corporation in each jurisdiction in which the failure to
be so qualified would have a material adverse effect on its assets, liabilities,
condition (financial or other), business, results of operations or prospects (a
"Material Adverse Effect"). The Company has all required corporate power and
authority to carry on its business as presently conducted, to enter into and
perform this Agreement and the agreements contemplated hereby to which it is a
party and to carry out the transactions contemplated hereby and thereby,
including the issuance and conversion of the Securities and the issuance of the
Conversion Shares. The Company is not in violation of any term of the
Certificate of Incorporation and Bylaws of the Company, as amended to date (the
"Certificate of Incorporation" and the "Bylaws," respectively).
2.2 AUTHORIZATION AND NON-CONTRAVENTION.
The execution, delivery and performance by the Company of this Agreement
and all other agreements, documents and instruments to be executed and delivered
by the Company as contemplated hereby (including, without limitation, the
Certificate) and the issuance and delivery of (i) the Series A Class 2 Preferred
Shares and (ii) upon the conversion of the Series A Class 2 Preferred Shares,
the Conversion Shares, have been duly authorized by all necessary corporate and
other action of the Company. This Agreement and each such other agreement,
document and instrument (including, without limitation, the Certificate)
constitute valid and binding obligations of the Company, enforceable in
accordance with their respective terms. The execution and delivery by the
Company of this Agreement and each other agreement, document
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and instrument to be executed and delivered by the Company pursuant hereto or as
contemplated hereby (including, without limitation, the Certificate) and the
performance by the Company of the transactions contemplated hereby and thereby,
including, without limitation, the issuance and delivery of (i) the Series A
Class 2 Preferred Shares and (ii) upon the conversion of the Series A Class 2
Preferred Shares, the Conversion Shares, do not and will not: (A) violate,
conflict with or result in a default (whether after the giving of notice, lapse
of time or both) under any material contract or obligation to which the Company
is a party or by which it or its assets are bound, or any provision of the
Certificate of Incorporation or Bylaws of the Company, or cause the creation of
any material encumbrance upon any of the assets of the Company; (B) violate or
result in a violation of, or constitute a default under, any provision of any
material law, regulation or rule, or any order of, or any restriction imposed
by, any court or governmental agency applicable to the Company; (C) require from
the Company any notice to, declaration or filing with, or consent or approval of
any governmental authority or third party other than as may be required to
secure an exemption from qualification of the offer and sale of the Series A
Class 2 Preferred Shares under the Securities Act of 1933, as amended (the
"Securities Act"), and applicable state securities and blue sky laws; or (D)
accelerate any obligation under, or give rise to a right of termination of, any
material agreement, permit, license or authorization to which the Company or any
of its assets is a party or by which the Company or any of its assets is bound.
2.3 CAPITALIZATION.
As of the Closing and after giving effect to the transactions
contemplated hereby, the authorized capital stock of the Company will consist of
100,000,000 shares of Common Stock, par value $.001 per share, of which
22,738,437 shares will be issued and outstanding, and 30,000,000 shares of
Preferred Stock, par value $.001 per share, of which (a) 5,000,000 shares shall
be designated as Series A Class 1 Preferred Stock, none of which will be issued
and outstanding and (b) 2,500,000 shares shall be designated as Series A Class 2
Preferred Stock and of which not more than 2,500,000 shares will be issued and
outstanding. The shares of Common Stock are held by the stockholders listed in
Section 2.3 of the Disclosure Schedule in the amounts listed therein. In
addition, the Company has authorized and reserved for issuance upon conversion
of the Series A Preferred Shares up to 7,500,000 Conversion Shares (subject to
adjustment for stock splits, stock dividends and the like) and has reserved for
issuance upon exercise of options under the Company's stock option plan (the
"Plan") 2,000,000 shares of Common Stock (subject to adjustment for stock
splits, stock dividends and the like). The Company has also authorized the
Canopy Group, Inc. to convert up to 5,000,000 shares of Common Stock into Series
A Class 1 Preferred Stock. Other than as described above, the Company has not
issued or agreed to issue and is not obligated to issue any warrants, options or
other rights (contingent or otherwise) to purchase or acquire any shares of its
capital stock, or any securities convertible into or exercisable or exchangeable
for such shares or any warrants, options or other rights to acquire any such
convertible securities. The Company has no obligation (contingent or otherwise)
to purchase, redeem or otherwise acquire any shares of its capital stock or any
interest therein or to pay any dividend or make any other distribution in
respect thereof. There are no agreements, written or oral, between the Company
and any holder of its capital stock or, among any holders of its capital tock,
relating to the acquisition, disposition or voting of the capital stock of the
Company. As of the Closing, and after giving effect to the transactions
contemplated hereby, all of the outstanding shares of capital stock of the
Company (including, without limitation, the Series A Class 2 Preferred Shares)
will have been duly and validly authorized and issued, fully paid and
nonassessable and, except as set forth herein, not subject to
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any preemptive or similar rights to purchase or otherwise acquire shares of
capital stock of the Company and will have been offered, issued, sold and
delivered in compliance with applicable federal and state securities and blue
sky laws. No person or entity is entitled to (a) any preemptive right, right of
first refusal or similar right with respect to the issuance of any capital stock
of the Company, or (b) any rights with respect to the registration of any
capital stock of the Company under the Securities Act of 1933, as amended. The
Conversion Shares will, upon issuance, be duly and validly authorized and
issued, fully paid and nonassessable, and not subject to any preemptive rights,
and will be offered, issued, sold and delivered in compliance with applicable
federal and state securities and blue sky laws. The relative rights, preferences
and other provisions relating to the Series A Class 2 Preferred Shares are as
set forth in EXHIBIT A hereto.
2.4 SUBSIDIARIES; INVESTMENTS.
Other than 1,250,000 shares of Common Stock of Caldera Systems, Inc., a
representative office located in Taiwan and a wholly owned subsidiary located in
the United Kingdom, the Company has no subsidiaries and no capital stock or
other interest in any corporation, joint venture, partnership, trust, limited
liability company or other entity.
2.5 FINANCIAL STATEMENTS.
The Company has previously furnished to the Investor copies of its draft
audited financial statements (balance sheet, statement of operations; statement
of cash flows and statement of stockholders equity) for the fiscal year at and
ended October 31, 1999. Such financial statements were prepared in conformity
with generally accepted accounting principles applied on a consistent basis; are
complete, correct and consistent in all material respects with the books and
records of the Company; and fairly and accurately present the financial position
of the Company as of the dates thereof and the results of operations and cash
flows of the Company for the periods shown therein.
2.6 ABSENCE OF UNDISCLOSED LIABILITIES.
Except as and to the extent reflected or reserved against in the
financial statements referred to in Section 2.5 above, the Company does not have
and is not subject to any material liability or obligation of any nature,
whether accrued, absolute, contingent or otherwise.
2.7 ABSENCE OF CHANGES.
Except as set forth in Section 2.7 of the Disclosure Schedule, since
October 31, 1999 there has not been (a) any material adverse change in the
financial condition, results of operations, assets, liabilities, or business of
the Company, (b) any material asset or property of the Company made subject to a
lien of any kind, (c) any waiver of any material right of the Company, or the
cancellation of any material debt or claim held by the Company, (d) any payment
of dividends on, or other distribution with respect to, or any direct or
indirect redemption or acquisition of, any shares of the capital stock of the
Company, or any agreement or commitment therefore, (e) any mortgage, pledge or
hypothecation of any tangible or intangible asset of the Company, except in the
ordinary course of business, (f) any sale or assignment of any tangible asset of
the Company having a book value in excess of $5,000, except in the ordinary
course of business, or of any Intellectual Property Rights (as hereafter
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defined) or other intangible assets, (g) any loan by the Company to, or any loan
to the Company from, any officer, director, employee or stockholder of the
Company, or any agreement or commitment therefore (other than travel and other
advances in the ordinary course of business), (h) any damage, destruction or
loss (whether or not covered by insurance) materially and adversely affecting
the assets, property or business of the Company, (i) any repayment of any loan
owed by the Company (including, without limitation, any loan owed to any
stockholder of the Company), (j) any single capital expenditure in excess of
$50,000 or any capital expenditures aggregating more than $250,000, or (k) any
material change in the accounting methods or practices followed by the Company.
2.8 TITLE; CONDITION OF PROPERTY.
(a) Except as set forth in Section 2.8 of the Disclosure Schedule, the
Company has good title to all of its property and assets, real, personal or
mixed, tangible or intangible, free and clear of all liens, security interests,
charges and other encumbrances of any kind.
(b) Without material exception, all assets used in the Company
business are in good operating condition and repair and suitable for use in the
operation of such business, and none of such assets that (singly or when
aggregated with other assets) is material to the business of the Company is
obsolete.
2.9 CERTAIN CONTRACTS AND ARRANGEMENTS.
Except as set forth in Section 2.9 of the Disclosure Schedule (with true
and correct copies delivered to the Investor), the Company is not a party or
subject to or bound by:
(a) any plan or contract providing for collective bargaining or
the like, or any contract or agreement with any labor union;
(b) any contract, lease or agreement creating any obligation of
the Company to pay to any third party $100,000 or more with respect to any
single such contract or agreement;
(c) any contract or agreement for the sale, license, lease or
disposition of products or services in excess of $100,000;
(d) any contract containing covenants directly or explicitly
limiting the freedom of the Company to compete in any line of business or with
any person or entity;
(e) any license agreement (as licensor or licensee);
(f) any contract or agreement for the purchase of any leasehold
improvements, equipment or fixed assets for a price in excess of $100,000;
(g) any indenture, mortgage, promissory note, loan agreement,
guaranty or other agreement or commitment for borrowing in excess of $100,000 or
any pledge or security arrangement;
(h) any material joint venture, partnership, or manufacturing
agreement;
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(i) any endorsement or any other advertising, promotional or
marketing agreement;
(j) any employment contracts, or agreements with officers,
directors, employees or stockholders of the Company or persons or organizations
related to or affiliated with any such persons;
(k) any pension, profit sharing, retirement (other than the
Company's 401(k) plan), stock option, phantom stock or other equity incentive
plans;
(l) any arrangement relating to any royalty payments to
employees, customers or independent contractors based on the sales volume of the
Company;
(m) any acquisition, merger or similar agreement; or
(n) any contract with a governmental body under which the
Company may have an obligation for renegotiation.
All of the Company's contracts and commitments are in full force and
effect and neither the Company nor, to the knowledge of the Company, any other
party is in default thereunder (nor, to the knowledge of the Company, has any
event occurred which with notice, lapse of time or both would constitute a
default thereunder), except to the extent that any such default would not have a
Material Adverse Effect, and the Company has not received notice of any alleged
default under any such contract, agreement, understanding or commitment.
2.10 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS.
Except as set forth in Section 2.10 of the Disclosure Schedule:
(a) The Company has the right to use, sell, and license the
Intellectual Property Rights (as defined below) material to the conduct of its
business as presently conducted, including without limitation all rights to the
Company name "Lineo" and to the trademarks and the product name "Embedix," free
and clear of the rights of all others (the "Company Rights").
(b) The business of the Company as presently conducted, the
products marketed or sold, and the provision of services by the Company do not
violate and will not violate any agreements that the Company has with any third
party or infringe any patent, trademark, service mark, copyright or trade secret
or any other Intellectual Property Rights of any third party.
(c) No claim is pending or threatened against the Company nor
has the Company received any notice or claim from any person asserting that any
of the Company's present or contemplated activities infringe or may infringe any
Intellectual Property Rights of such person, and the Company is not aware of any
infringement by any other person of any of the Company Rights.
(d) Each current and former employee of the Company, and each
of the Company's consultants and independent contractors involved in development
of any of the Company Rights, has executed an agreement regarding
confidentiality, proprietary information and assignment of inventions and
copyrights to the Company, and none of such employees,
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consultants or independent contractors is in violation of any agreement or in
breach of any agreement or arrangement with former or present employers relating
to proprietary information or assignment of inventions. The Company has taken
all reasonable steps to protect all data, information, ideas, concepts, know-how
and materials that the Company treats as trade secrets, and all other
confidential information and Intellectual Property Rights of the Company, which
are not part of the public domain or knowledge, nor, to the best knowledge of
the Company, have they been used, divulged or appropriated for the benefit of
any person other than the Company or otherwise to the detriment of the Company.
(e) No royalties or other amounts are payable by the Company to
persons by reason of the ownership or use of the Intellectual Property Rights of
the Company.
(f) No third party has claimed or, to the best of the Company's
knowledge, has reason to claim that any person employed by or affiliated with
the Company has (a) violated or may be violating any of the terms or conditions
of his or her employment, non-competition, non-disclosure, non-solicitation or
inventions agreement with such third party, (b) disclosed or may be disclosing
or utilized or may be utilizing any Intellectual Property Rights, trade secret
or proprietary information or documentation of such third party, or (c)
interfered or may be interfering in the employment relationship between such
third party and any of its present or former employees.
As used herein, the term "Intellectual Property Rights" shall mean the
intellectual property rights, including, without limitation, all patents, patent
applications, patent rights, trademarks, trademark applications, trade names,
service marks, service mark applications, copyrights, copyright applications,
computer programs and other computer software, inventions, designs, samples,
specifications, schematics, know-how, trade secrets, proprietary processes and
formulae, including production technology and processes, all source and object
code, algorithms, promotional materials, customer lists, supplier and dealer
lists and marketing research, and all documentation and media constituting,
describing or relating to the foregoing, including without limitation, manuals,
memoranda and records.
2.11 LITIGATION.
There is no litigation or governmental proceeding or investigation
pending or threatened against the Company or affecting any of its properties or
assets or against any officer, director or key employee of the Company in his or
her capacity as an officer, director or employee of the Company, which
litigation, proceeding or investigation is reasonably likely to have a Material
Adverse Effect, or which may call into question the validity or hinder the
enforceability of this Agreement or any other agreements or transactions
contemplated hereby; nor has there occurred any event nor does there exist any
condition on the basis of which any such litigation, proceeding or investigation
might be properly instituted or commenced.
2.12 TAX MATTERS.
The Company has filed all federal, state, local and foreign income,
excise and franchise tax returns, real estate and personal property tax returns,
sales and use tax returns and other tax returns required to be filed by it where
the failure to file such returns would have a Material Adverse Effect, and has
paid all taxes owing by it, except taxes which have not yet accrued or
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otherwise become due, for which adequate provision has been made in the
pertinent financial statements referred to in Section 2.5 above or which will
not have a Material Adverse Effect. All taxes and other assessments and levies
which the Company is required to withhold or collect have been withheld and
collected and have been paid over to the proper governmental authorities except
where the failure to withhold or collect and pay over would not have a Material
Adverse Effect. With regard to the federal income tax returns of the Company,
the Company has never received notice of any audit or of any proposed
deficiencies from the Internal Revenue Service. There are in effect no waivers
of applicable statutes of limitations with respect to any taxing owed by the
Company for any year. Neither the Internal Revenue Service nor any other taxing
authority is now asserting or, to the knowledge of the Company, threatening to
assert against the Company any deficiency or claim for additional taxes or
interest thereon or penalties in connection therewith.
2.13 EMPLOYEE BENEFIT PLANS.
The Company does not maintain or contribute to any employee benefit plan,
stock option, bonus or incentive plan, severance pay policy or agreement,
deferred compensation agreement or any similar plan or agreement (an "Employee
Benefit Plan") other than the Plan and the Employee Benefit Plans identified and
described in Section 2.13 of the Disclosure Schedule. The terms and operation of
each Employee Benefit Plan comply in all material respects with all applicable
laws and regulations relating to such Employee Benefit Plan. There are no
unfunded obligations of the Company under any retirement, pension,
profit-sharing, deferred compensation plan or similar program. The Company is
not required to make any payments or contributions to any Employee Benefit Plan
pursuant to any collective bargaining agreement, and all Employee Benefit Plans
are terminable at the discretion of the Company without material liability to
the Company upon or following such termination. The Company has never maintained
or contributed to any Employee Benefit Plan providing or promising any health or
other welfare benefits (within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) to terminated
employees, except for benefits mandated by applicable law, including, but not
limited to, Section 4980B of the Internal Revenue Code of 1986, as amended, and
Part 6 of Subtitle B of Title I of ERISA.
2.14 LABOR LAWS.
The Company employs approximately 50 employees and generally enjoys good
employer-employee relationships. The Company is not delinquent in payments to
any of its employees for any wages, salaries, commissions, bonuses or other
direct compensation for any services performed for it as of the date hereof or
amounts required to be reimbursed to such employees. The Company is in
compliance in all material respects with all applicable laws and regulations
respecting labor, employment, fair employment practices, terms and conditions of
employment, and wages and hours. There are no charges of employment
discrimination or unfair labor practices or strikes, slowdowns, stoppages of
work or any other concerted interference with normal operations existing,
pending or, to the knowledge of the Company, threatened against or involving the
Company.
2.15 EMPLOYEES.
Section 2.15 of the Disclosure Schedule contains a list of all managers,
employees and consultants of the Company who, individually, have received
compensation from the Company
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for the fiscal year of the Company ended October 31, 1999, in excess of
$100,000. In each case, Section 2.15 of the Disclosure Schedule includes the
current job title, years of service with the Company and aggregate annual
compensation and benefits of each such individual. To the knowledge of the
Company and the Stockholders, no key employee of the Company has any plan or
intention to terminate his or her employment with the Company. The Company has
complied in all material respects with the immigration laws of the United States
with respect to the hiring, employment and engagement of all of its employees
and consultants who are not United States citizens, and, to the knowledge of the
Company, the immigration or residency status of each of such employees and
consultants is sufficient to allow such employees and consultants to remain
lawfully employed or engaged by the Company.
2.16 HAZARDOUS WASTE, ETC.
No hazardous wastes, substances or materials or oil or petroleum products
have been generated, transported, used, disposed, stored or treated by the
Company, and no hazardous wastes, substances or materials or oil or petroleum
products have been released, discharged, disposed, transported, placed or
otherwise caused to enter the soil or water in, under or upon any real property
owned, leased or operated by the Company.
2.17 BUSINESS; COMPLIANCE WITH LAWS.
The Company has all necessary franchises, permits, licenses and other
rights and privileges necessary to permit it to own its property and to conduct
its business as it is presently or contemplated to be conducted. The Company is
currently and has heretofore been in compliance in all material respects with
all federal, state, local and foreign laws and regulations.
2.18 INVESTMENT BANKING; BROKERAGE.
There are no claims for investment banking fees, brokerage commissions,
finder's fees or similar compensation (exclusive of professional fees to lawyers
and accountants) in connection with the transaction contemplated by this
Agreement payable by the Company or based on any arrangement or agreement made
by or on behalf of the Company or any of the Stockholders.
2.19 INSURANCE.
The Company has fire, casualty, product liability, workers' compensation
and business interruption and other insurance policies, with extended coverage,
sufficient in amount to allow it to replace any of its material properties which
might be damaged or destroyed or sufficient to cover liabilities to which the
Company may reasonably become subject, and such types and amounts of other
insurance with respect to its business and properties, on both a per occurrence
and an aggregate basis, as are customarily carried by persons engaged in the
same or similar business as the Company. There is no default or event which
could give rise to a default under any such policy.
2.20 TRANSACTIONS WITH AFFILIATES.
There are no loans, leases, contracts or other transactions between the
Company and any officer, director or five percent (5%) stockholder of the
Company or any family member or
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affiliate of the foregoing persons, and there have been no such transactions
within the past twelve (12) months except as set forth in Section 2.20 of the
Disclosure Schedule.
2.21 SUPPLIERS.
Section 2.21 of the Disclosure Schedule sets forth each supplier of the
Company who supplied more than five percent (5%) of the Company's supplies or
materials for the fiscal year ended October 31, 1999 and each supplier who the
Company believes may supply for more than five percent (5%) of the Company's
supplies or materials for the fiscal year ended October 31, 2000 (each a
"Supplier" and collectively the "Suppliers"). The relationships of the Company
with its Suppliers are good commercial working relationships. No Supplier of the
Company has canceled or otherwise terminated its relationship with the Company,
or has during the last 12 months decreased materially its services, supplies or
materials to the Company. No Supplier has, to the knowledge of the Company, any
plan or intention to terminate, cancel or otherwise materially and adversely
modify its relationship with the Company or to decrease materially or limit its
services, supplies or materials to the Company.
2.22 CERTAIN EVENTS.
(a) During the past ten (10) years, neither the Company nor any
of the officers or directors of the Company has had a petition under the
Bankruptcy Reform Act of 1978, as amended, or any state insolvency law, filed by
or against any of them which has not as of the date of this Agreement been
dismissed.
(b) During the past ten (10) years, neither the Company nor the
officers or directors of the Company has been convicted in a criminal proceeding
or is a named subject of a criminal proceeding which is presently pending
(excluding traffic violations and other minor offenses).
(c) During the past ten (10) years, neither the Company nor the
officers or directors of the Company has been, or is, the subject of any order,
judgment or decree, whether or not subsequently reversed, suspended or vacated,
of any court or any administrative agency, requiring the payment of money
damages in excess of $100,000 or permanently or temporarily enjoining any of
them from, or otherwise limiting any of their abilities to engage in, any type
of business practice.
2.23 REGISTRATION RIGHTS.
Except as disclosed is Section 2.23 of the Disclosure Schedule, the
Company has not granted or agreed to grant any registration rights, including
piggyback rights, to any person or entity.
2.24 DISCLOSURE.
The representations and warranties made or contained in this Agreement,
the exhibits hereto and the certificates and statements executed or delivered in
connection herewith, and the information concerning the business of the Company
delivered to the Investor in connection with or pursuant to this Agreement, when
taken together, do not and shall not contain any untrue statement of a material
fact and do not and shall not omit to state a material fact required to be
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stated therein or necessary in order to make such representations, warranties or
other material not misleading in light of the circumstances in which they were
made or delivered. There have been no events or transactions or information
which has come to the attention of the management of the Company having a direct
impact on the Company or its assets, liabilities, financial condition, business,
results of operations or prospects which, in the reasonable judgment of such
management, could be expected to have a Material Adverse Effect.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR.
The Investor represents and warrants to the Company the following:
3.1 INVESTMENT EXPERIENCE AND INTENT.
The Investor represents to the Company that it has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of the investment contemplated by this Agreement and making
an informed investment decision with respect thereto. The investor represents
that it is an "accredited investor" as such term is defined in Rule 501 under
the Securities Act. The Investor represents and understands that it is
responsible for its own due diligence investigation and satisfying its own due
diligence requirements and shall not be entitled to rely on the due diligence
investigation of any other person or entity. The Investor represents to the
Company that it is purchasing the Series A Class 2 Preferred Shares for its own
account, for investment only and not with a view to, or any present intention
of, effecting a distribution of such securities or any part thereof except
pursuant to a registration or an available exemption under applicable law. The
Investor acknowledges that its respective Series A Class 2 Preferred Shares have
not been registered under the Securities Act or the securities laws of any state
or other jurisdiction and cannot be disposed of unless they are subsequently
registered under the Securities Act and any applicable state laws or exemption
from such registration is available.
3.2 AUTHORIZATION AND NON-CONTRAVENTION.
The Investor represents that it has full right, authority and power to
enter into this Agreement and each agreement, document and instrument to be
executed and delivered by or on behalf of such Investor pursuant to or as
contemplated by this Agreement and to carry out the transactions contemplated
hereby and thereby, and the execution, delivery and performance by such Investor
of this Agreement and each such other agreement, document and instrument have
been duly authorized by all necessary action. The Investor represents and
warrants that this Agreement and each agreement, document and instrument
executed and delivered by such Investor pursuant to or as contemplated by this
Agreement constitute, or when executed and delivered will constitute, valid and
binding obligations of such Investor enforceable in accordance with their
respective terms and that the execution, delivery and performance by such
Investor of this Agreement and each such other agreement, document and
instrument, and the performance of the transactions contemplated hereby and
thereby do not and will not: (a) violate, conflict with or result in a default
(whether after the giving of notice, lapse of time or both) under any contract
or obligation to which such Investor is a party or by which it or its assets are
bound, or cause the creation of any encumbrance upon any of the assets of the
Investor; (b) violate or result in a violation of, or constitute a default
under, any provision of any law, regulation or rule, or any order of, or any
restriction imposed by, any court or other governmental agency applicable to the
Investor; (c) require from the Investor any notice to, declaration or filing
with,
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or consent or approval of any governmental authority or other third party;
or (d) accelerate any obligation under, or give rise to a right of termination
of, any agreement, permit, license or authorization to which the Investor is a
party or by which the Investor is bound.
3.3 COMMISSIONS AND FEES.
The Investor represents that there are no claims for investment banking
fees, brokerage commissions, finder's fees or similar compensation (exclusive of
professional fees to lawyers and accountants) in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement made by or on behalf of such Investor.
SECTION 4. CONDITIONS OF PURCHASE.
The Investor's obligation to purchase and pay for the Series A Class 2
Preferred Shares to be purchased by it shall be subject to compliance by the
Company with its agreements herein contained and to the fulfillment to the
Investor's satisfaction, or the waiver by the Investor, on or before and at the
Closing Date, of the following conditions:
4.1 SATISFACTION OF CONDITIONS.
The representations and warranties of the Company contained in this
Agreement shall be true and correct on and as of the Closing Date; each of the
conditions specified in this Section 4 shall have been satisfied or waived in
writing by the Investor; and, on the Closing Date, certificates to such effect
executed by the President and Chief Financial Officer of the Company shall have
been delivered to the Investor.
4.2 AUTHORIZATION.
The Board of Directors of the Company shall have duly adopted resolutions
in form and substance reasonably satisfactory to the Investor and shall have
taken all action necessary for the purpose of authorizing the Company to
consummate the transactions contemplated hereby in accordance with the terms
hereof and to cause the Certificate to become effective; and the Investor shall
have received a certificate of the Secretary of the Company setting forth a copy
of the relevant Board of Directors and/or stockholder resolutions and the
Certificate of Incorporation, the Certificate and Bylaws of the Company and such
other matters as may be reasonably requested by the Investor.
4.3 OPINION OF COUNSEL.
The Investor shall have received from Summit Law Group an opinion dated
as of the Closing Date substantially in the form attached hereto as EXHIBIT C.
4.4 ALL PROCEEDINGS SATISFACTORY.
All corporate and other proceedings taken prior to or at the Closing in
connection with the transactions contemplated by this Agreement, and all
documents and evidences incident thereto, shall be reasonably satisfactory in
form and substance to the Investor.
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4.5 NO VIOLATION OR INJUNCTION.
The consummation of the transactions contemplated by this Agreement shall
not be in violation of any law or regulation and shall not be subject to any
injunction, stay or restraining order.
4.6 CONSENTS AND WAIVERS.
The Company shall have obtained all consents or waivers necessary to
execute this Agreement and the other agreements and documents contemplated
herein, to issue and sell the Securities to be sold to the Investor hereunder
and to carry out the transactions contemplated hereby and thereby and shall have
delivered evidence thereof to the Investor. All corporate and other action and
governmental filings necessary to effectuate the terms of this Agreement and
other agreements and instruments executed and delivered by the Company in
connection herewith shall have been made or taken.
4.7 ATTORNEYS' FEES.
The Company shall have reimbursed Investor for its reasonable fees and
expenses of a single legal counsel, up to $10,000.
4.8 OTHER AGREEMENTS.
The Company, Investor and all other relevant parties shall have entered
into the Voting Agreement and the Investor Rights Agreement.
SECTION 5. GENERAL.
5.1 AMENDMENTS, WAIVERS AND CONSENTS.
For the purpose of this Agreement and all agreements executed pursuant
hereto, no course of dealing between or among any of the parties hereto and no
delay on the part of any party hereto in exercising any rights hereunder or
thereunder shall operate as a waiver of the rights hereof and thereof. No
covenant or other provision hereof may be waived otherwise than by a written
instrument signed by the party or parties so waiving such covenant or other
provision. No amendment to this Agreement may be made without the written
consent of the Company and the Investor.
5.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS;
ASSIGNABILITY OF RIGHTS.
All covenants, agreements, representations and warranties of the Company
and the Investor made herein, in the Disclosure Schedule and the Certificate and
in the certificates, lists, exhibits, schedules or other written information
delivered or furnished to any Investor in connection herewith (a) are material,
shall be deemed to have been relied upon by the party or parties to whom they
are made and shall survive the Closing regardless of any investigation or
knowledge on the part of such party or its representatives and (b) shall bind
the parties' successors and assigns (including without limitation any successor
to the Company by way of acquisition, merger or otherwise), whether so expressed
or not, and, except as otherwise provided in this Agreement, all such covenants,
agreements, representations and warranties shall inure to the benefit of the
Investor's successors and assigns and to their transferees of Securities,
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whether so expressed or not, and any such transferee shall be deemed the
"Investor" for purposes hereof.
5.3 LEGEND ON SECURITIES.
The Company and the Investor acknowledge and agree that the following
legend shall be typed on each certificate evidencing any of the securities
issued hereunder held at any time by an Investor:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD,
TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1)
PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH
SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN
AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO
THE DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES AND BLUE SKY LAWS.
5.4 GOVERNING LAW.
This Agreement shall be deemed to be a contract made under, and shall be
construed in accordance with, the laws of Delaware, without giving effect to
conflict of laws principles thereof.
5.5 SECTION HEADINGS AND GENDER.
The descriptive headings in this Agreement have been inserted for
convenience only and shall not be deemed to limit or otherwise affect the
construction of any provision thereof or hereof. The use in this Agreement of
the masculine pronoun in reference to a party hereto shall be deemed to include
the feminine or neuter, and vice versa, as the context may require.
5.6 COUNTERPARTS.
This Agreement may be executed simultaneously in any number of
counterparts, each of which when so executed and delivered shall be taken to be
an original; but such counterparts shall together constitute but one and the
same document.
5.7 NOTICES AND DEMANDS.
Any notice or demand which is required or provided to be given under this
Agreement or the Certificate shall be deemed to have been sufficiently given and
received for all purposes when delivered by hand, telecopy, telex or other
method of facsimile, or five days after being sent by certified or registered
mail, postage and charges prepaid, return receipt requested, or two
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days after being sent by overnight delivery providing receipt of delivery, to
the following addresses:
if to the Company: Lineo, Inc.
383 S. 520 W.
Lindon, Utah 84042
Attn: President
Fax: (801) 426-6166
copy to: Summit Law Group
1505 Westlake Avenue N., Suite 300
Seattle, Washington 98109
Attn: Mark F. Worthington, Esq.
Fax: (206) 281-9882
if to the Investor: __________________
__________________
__________________
5.8 REMEDIES; SEVERABILITY.
It is specifically understood and agreed that any breach of the
provisions of this Agreement by any person subject hereto will result in
irreparable injury to the other parties hereto, that the remedy at law alone
will be an inadequate remedy for such breach, and that, in addition to any other
remedies which they may have, such other parties may enforce their respective
rights by actions for specific performance (to the extent permitted by law). The
Company may refuse to recognize any unauthorized transferee as one of its
stockholders for any purpose, including, without limitation, for purposes of
dividend and voting rights, until the relevant party or parties have complied
with all applicable of this Agreement. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be deemed
prohibited or invalid under such applicable law, such provision shall be
ineffective to the extent
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of such prohibition or invalidity, and such prohibition or invalidity shall not
invalidate the remainder of such provision or the other provisions of this
Agreement.
5.9 INTEGRATION.
This Agreement, including the exhibits, documents and instruments
referred to herein or therein, constitutes the entire agreement, and supersedes
all other prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.
Lineo, Inc. Investor
By: ____________________________________ By:__________________________________
Bryan Sparks, President and Chairman
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EXHIBIT 10.9
LINEO, INC.
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of this __ day
of March, 2000, by and between Lineo, Inc., a Delaware corporation (together
with any predecessors or successors thereto, the "Company"), and
_________________ (together with its successors and assigns, the "Investor").
RECITALS
A. The Company has authorized the issuance and sale to the Investor of
___________ shares of Series B Convertible Preferred Stock, $.001 par value per
share (the "Series B Preferred Stock"), having the rights and preferences set
forth in the Certificate of Designation attached as EXHIBIT A hereto (the
"Certificate of Designation"), for an aggregate purchase price of $________.
AGREEMENT
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter set forth, the parties hereto agree as
follows:
SECTION 1. PURCHASE AND SALE OF SHARES.
1.1 DESCRIPTION OF SECURITIES.
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock and 30,000,000 shares of Preferred Stock, par value $.001 per
share. Of such shares of Preferred Stock, 4,850,000 shares are designated as
Series B Preferred Stock. The Company has authorized and has reserved, and
covenants to continue to reserve, free and clear of preemptive and other
preferential rights, a sufficient number of shares of its Common Stock to
satisfy the rights of conversion of the holders of the Series B Preferred Stock.
For purposes of this Agreement, (a) the shares of Series B Preferred Stock to be
acquired by the Investor from the Company hereunder are referred to as the
"Series B Preferred Shares," (b) the shares of Common Stock issuable upon
conversion of the Series B Preferred Shares are referred to as the "Conversion
Shares" and (c) the Series B Preferred Shares and the Conversion Shares are
sometimes referred to collectively as the "Securities."
1.2 SALE AND PURCHASE.
Upon the terms and subject to the conditions herein, and in reliance on the
representations and warranties set forth in Section 2, the Investor hereby
purchases from the Company, and the Company hereby issues and sells to the
Investor, at the Closing (as defined below in Section 1.3), __________ Series B
Preferred Shares for the purchase price of $3.00 per share for an aggregate of
$___________, and the Company hereby grants the Investor the rights set forth
herein. The proceeds of this sale are intended to be used for the expansion of
the Company's business, working capital, debt repayment and other general
corporate purposes.
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1.3 CLOSING.
The closing of the purchase and sale of the Series B Preferred Shares (the
"Closing") shall take place at the offices of the Company at 10:00 a.m. on March
__, 2000, or at such other time and place as the parties hereto may agree (the
"Closing Date"). At the Closing, the Company shall deliver to the Investor a
stock certificate, registered in the name of the Investor, representing the
number of shares of Series B Preferred Stock purchased by such Investor
hereunder.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants the following, except as set forth in
the schedule of exceptions attached hereto as EXHIBIT B (the "Disclosure
Schedule"):
2.1 ORGANIZATION AND CORPORATE POWER.
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and is qualified to do
business as a foreign corporation in each jurisdiction in which the failure to
be so qualified would have a material adverse effect on its assets, liabilities,
condition (financial or other), business, results of operations or prospects (a
"Material Adverse Effect"). The Company has all required corporate power and
authority to carry on its business as presently conducted, to enter into and
perform this Agreement and the agreements contemplated hereby to which it is a
party and to carry out the transactions contemplated hereby and thereby,
including the issuance and conversion of Series B Preferred Shares and the
issuance of the Conversion Shares. The Company is not in violation of any term
of the Certificate of Incorporation and Bylaws of the Company, as amended to
date (the "Certificate of Incorporation" and the "Bylaws," respectively.)
2.2 AUTHORIZATION AND NON-CONTRAVENTION.
The execution, delivery and performance by the Company of this Agreement
and all other agreements, documents and instruments to be executed and delivered
by the Company as contemplated hereby (including, without limitation, the
Certificate of Designation) and the issuance and delivery of (i) the Series B
Preferred Shares and (ii) upon the conversion of the Series B Preferred Shares,
the Conversion Shares, have been duly authorized by all necessary corporate and
other action of the Company. This Agreement and each such other agreement,
document and instrument (including, without limitation, the Certificate of
Designation) constitute valid and binding obligations of the Company,
enforceable in accordance with their respective terms. The execution and
delivery by the Company of this Agreement and each other agreement, document and
instrument to be executed and delivered by the Company pursuant hereto or as
contemplated hereby (including, without limitation, the Certificate of
Designation) and the performance by the Company of the transactions contemplated
hereby and thereby, including, without limitation, the issuance and delivery of
(i) the Series B Preferred Shares and (ii) upon the conversion of the Series B
Preferred Shares, the Conversion Shares, do not and will not: (A) violate,
conflict with or result in a default (whether after the giving of notice, lapse
of time or both) under any material contract or obligation to which the Company
is a party or by which it or its assets are bound, or any provision of the
Certificate of Incorporation or Bylaws of the Company, or cause the creation of
any material encumbrance upon any of the assets of the Company; (B) violate or
result in a violation of, or constitute a default under, any provision of any
material law, regulation or rule, or any order of, or any restriction imposed
by, any court or governmental agency applicable to the Company; (C) require from
the Company any notice to, declaration or filing with, or consent or approval of
any governmental authority or third party other than as may be required to
secure an exemption from qualification of the
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offer and sale of the Series B Preferred Shares under the Securities Act of
1933, as amended (the "Securities Act"), and applicable state securities and
blue sky laws; or (D) accelerate any obligation under, or give rise to a right
of termination of, any material agreement, permit, license or authorization to
which the Company or any of its assets is a party or by which the Company or any
of its assets is bound.
2.3 CAPITALIZATION.
As of the Closing and after giving effect to the transactions contemplated
hereby, the authorized capital stock of the Company will consist of 100,000,000
shares of Common Stock, par value $.001 per share, of which 17,738,437 shares
will be issued and outstanding, and 30,000,000 shares of Preferred Stock, par
value $.001 per share, of which (a) 7,500,000 shares will be designated as
Series A Preferred Stock, of which (i) 5,000,000 shares shall be designated as
Series A Class 1 Preferred Stock all of which are issued and outstanding and
(ii) 2,500,000 shares shall be designated as Series A Class 2 Preferred Stock
and of which not more than 2,500,000 shares will be issued and outstanding and
(b) 4,850,000 shares will be designated as Series B Preferred Stock. In
addition, the Company has authorized and reserved for issuance upon conversion
of the Series A Preferred Stock up to 7,500,000 shares of Common Stock (subject
to adjustment for stock splits, stock dividends and the like), has authorized
and reserved for issuance upon conversion of the Series B Preferred Stock up to
4,850,000 shares of Common Stock (subject to adjustment for stock splits, stock
dividends and the like) and has reserved for issuance upon exercise of options
under the Company's stock option plan (the "Plan") 2,000,000 shares of Common
Stock (subject to adjustment for stock splits, stock dividends and the like).
Other than as described above, the Company has not issued or agreed to issue and
is not obligated to issue any warrants, options or other rights to purchase or
acquire any shares of its capital stock, or any securities convertible into or
exercisable or exchangeable for such shares or any warrants, options or other
rights to acquire any such convertible securities. As of the Closing, and after
giving effect to the transactions contemplated hereby, all of the outstanding
shares of capital stock of the Company (including, without limitation, the
Series B Preferred Shares) will have been duly and validly authorized and
issued, fully paid and nonassessable and, except as set forth herein, not
subject to any preemptive rights to purchase or otherwise acquire shares of
capital stock of the Company and will have been offered, issued, sold and
delivered in compliance with applicable federal and state securities and blue
sky laws. The Conversion Shares will, upon issuance, be duly and validly
authorized and issued, fully paid and nonassessable, and not subject to any
preemptive rights, and will be offered, issued, sold and delivered in compliance
with applicable federal and state securities and blue sky laws. The relative
rights, preferences and other provisions relating to the Series B Preferred
Shares are as set forth in EXHIBIT A hereto.
2.4 SUBSIDIARIES; INVESTMENTS.
Other than 1,250,000 shares of Common Stock of Caldera Systems, Inc., a
representative office located in Taiwan and a wholly owned subsidiary located in
the United Kingdom, the Company does not currently own any capital stock or
interest in any corporation, joint venture, partnership, trust, limited
liability company or other entity.
2.5 FINANCIAL STATEMENTS.
The Company has previously furnished to the Investor copies of its draft
audited financial statements (balance sheet, statement of operations, statement
of cash flows and statement of stockholders equity) for the fiscal year at and
ended October 31, 1999. Such financial statements were prepared in conformity
with generally accepted accounting principles applied on a consistent basis; are
complete, correct and consistent in all material respects with the books and
records of the Company; and fairly and
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accurately present the financial position of the Company as of the dates thereof
and the results of operations and cash flows of the Company for the periods
shown therein.
2.6 ABSENCE OF UNDISCLOSED LIABILITIES.
Except as and to the extent reflected or reserved against in the financial
statements referred to in Section 2.5 above, the Company does not have and is
not subject to any material liability or obligation of any nature, whether
accrued, absolute, contingent or otherwise.
2.7 ABSENCE OF CHANGES.
Except as set forth in Section 2.7 of the Disclosure Schedule, since
October 31, 1999 there has not been (a) any material adverse change in the
financial condition, results of operations, assets, liabilities, or business of
the Company, (b) any material asset or property of the Company made subject to a
lien of any kind, (c) any waiver of any material right of the Company, or the
cancellation of any material debt or claim held by the Company, (d) any payment
of dividends on, or other distribution with respect to, or any direct or
indirect redemption or acquisition of, any shares of the capital stock of the
Company, or any agreement or commitment therefore, (e) any mortgage, pledge or
hypothecation of any tangible or intangible asset of the Company, except in the
ordinary course of business, (f) any sale or assignment of any tangible asset of
the Company having a book value in excess of $5,000, except in the ordinary
course of business, or of any Intellectual Property Rights (as hereafter
defined) or other intangible assets, (g) any loan by the Company to, or any loan
to the Company from, any officer, director, employee or stockholder of the
Company, or any agreement or commitment therefore (other than travel and other
advances in the ordinary course of business), (h) any damage, destruction or
loss (whether or not covered by insurance) materially and adversely affecting
the assets, property or business of the Company, (i) any repayment of any loan
owed by the Company (including, without limitation, any loan owed to any
stockholder of the Company), (j) any single capital expenditure in excess of
$50,000 or any capital expenditures aggregating more than $250,000, or (k) any
material change in the accounting methods or practices followed by the Company.
2.8 TITLE; CONDITION OF PROPERTY.
(a) Except as set forth in Section 2.8 of the Disclosure Schedule,
the Company has good title to all of its property and assets, real, personal or
mixed, tangible or intangible, free and clear of all liens, security interests,
charges and other encumbrances of any kind.
(b) Without material exception, all assets used in the Company
business are in good operating condition and repair and suitable for use in the
operation of such business, and none of such assets that (singly or when
aggregated with other assets) is material to the business of the Company is
obsolete.
2.9 CERTAIN CONTRACTS AND ARRANGEMENTS.
Except as set forth in Section 2.9 of the Disclosure Schedule (with true
and correct copies delivered to the Investor), the Company is not a party or
subject to or bound by:
(a) any plan or contract providing for collective bargaining
or the like, or any contract or agreement with any labor union;
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(b) any contract, lease or agreement creating any obligation
of the Company to pay to any third party $100,000 or more with respect to any
single such contract or agreement;
(c) any contract or agreement for the sale, license, lease or
disposition of products or services in excess of $100,000;
(d) any contract containing covenants directly or explicitly
limiting the freedom of the Company to compete in any line of business or
with any person or entity;
(e) any license agreement (as licensor or licensee);
(f) any contract or agreement for the purchase of any
leasehold improvements, equipment or fixed assets for a price in excess of
$100,000;
(g) any indenture, mortgage, promissory note, loan agreement,
guaranty or other agreement or commitment for borrowing in excess of $100,000
or any pledge or security arrangement;
(h) any material joint venture, partnership, or manufacturing
agreement;
(i) any endorsement or any other advertising, promotional or
marketing agreement;
(j) any employment contracts, or agreements with officers,
directors, employees or stockholders of the Company or persons or organizations
related to or affiliated with any such persons;
(k) any pension, profit sharing, retirement (other than the
Company's 401(k) plan), stock option, phantom stock or other equity incentive
plans;
(l) any arrangement relating to any royalty payments to
employees, customers or independent contractors based on the sales volume of the
Company;
(m) any acquisition, merger or similar agreement; or
(n) any contract with a governmental body under which the Company
may have an obligation for renegotiation.
All of the Company's contracts and commitments are in full force
and effect and neither the Company nor, to the knowledge of the Company, any
other party is in default thereunder (nor, to the knowledge of the Company, has
any event occurred which with notice, lapse of time or both would constitute a
default thereunder), except to the extent that any such default would not have a
Material Adverse Effect, and the Company has not received notice of any alleged
default under any such contract, agreement, understanding or commitment.
2.10 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS.
Except as set forth in Section 2.10 of the Disclosure Schedule:
(a) The Company has the right to use, sell, and license the
Intellectual Property Rights (as defined below) material to the conduct of its
business as presently conducted, including without
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limitation all rights to the Company name "Lineo" and to the trademarks and the
product name "Embedix" (the "Company Rights"), free and clear of the rights of
all others.
(b) The business of the Company as presently conducted, the
products as marketed or sold and the provision of services by the Company do not
violate and will not violate any agreements that the Company has with any third
party or infringe any patent, trademark, service mark, copyright or trade secret
or any other Intellectual Property Rights of any third party.
(c) No claim is pending or threatened against the Company nor has
the Company received any notice or claim from any person asserting that any of
the Company's present or contemplated activities infringe or may infringe any
Intellectual Property Rights of such person, and the Company is not aware of any
infringement by any other person of any of the Company Rights.
(d) Each current and former employee of the Company, and each of
the Company's consultants and independent contractors involved in development of
any of the Company Rights, has executed an agreement regarding confidentiality,
proprietary information and assignment of inventions and copyrights to the
Company, and none of such employees, consultants or independent contractors is
in violation of any agreement or in breach of any agreement or arrangement with
former or present employers relating to proprietary information or assignment of
inventions. The Company has taken all reasonable steps to protect all data,
information, ideas, concepts, know-how and materials that the Company treats as
trade secrets, and all other confidential information and Intellectual Property
Rights of the Company, which are not part of the public domain or knowledge,
nor, to the best knowledge of the Company, have they been used, divulged or
appropriated for the benefit of any person other than the Company or otherwise
to the detriment of the Company.
(e) No royalties or other amounts are payable by the Company to
persons by reason of the ownership or use of the Intellectual Property Rights of
the Company.
(f) No third party has claimed or, to the best of the Company's
knowledge, has reason to claim that any person employed by or affiliated with
the Company has (a) violated or may be violating any of the terms or conditions
of his or her employment, non-competition, non-disclosure, non-solicitation or
inventions agreement with such third party, (b) disclosed or may be disclosing
or utilized or may be utilizing any Intellectual Property Rights, trade secret
or proprietary information or documentation of such third party, or (c)
interfered or may be interfering in the employment relationship between such
third party and any of its present or former employees.
As used herein, the term "Intellectual Property Rights" shall mean the
intellectual property rights, including, without limitation, all patents, patent
applications, patent rights, trademarks, trademark applications, trade names,
service marks, service mark applications, copyrights, copyright applications,
computer programs and other computer software, inventions, designs, samples,
specifications, schematics, know-how, trade secrets, proprietary processes and
formulae, including production technology and processes, all source and object
code, algorithms, promotional materials, customer lists, supplier and dealer
lists and marketing research, and all documentation and media constituting,
describing or relating to the foregoing, including without limitation, manuals,
memoranda and records.
2.11 LITIGATION.
There is no litigation or governmental proceeding or investigation pending
or threatened against the Company or affecting any of its properties or assets
or against any officer, director or key employee
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of the Company in his or her capacity as an officer, director or employee of the
Company, which litigation, proceeding or investigation is reasonably likely to
have a Material Adverse Effect, or which may call into question the validity or
hinder the enforceability of this Agreement or any other agreements or
transactions contemplated hereby; nor has there occurred any event nor does
there exist any condition on the basis of which any such litigation, proceeding
or investigation might be properly instituted or commenced.
2.12 TAX MATTERS.
The Company has filed all federal, state, local and foreign income, excise
and franchise tax returns, real estate and personal property tax returns, sales
and use tax returns and other tax returns required to be filed by it where the
failure to file such returns would have a Material Adverse Effect, and has paid
all taxes owing by it, except taxes which have not yet accrued or otherwise
become due, for which adequate provision has been made in the pertinent
financial statements referred to in Section 2.5 above or which will not have a
Material Adverse Effect. All taxes and other assessments and levies which the
Company is required to withhold or collect have been withheld and collected and
have been paid over to the proper governmental authorities except where the
failure to withhold or collect and pay over would not have a Material Adverse
Effect. With regard to the federal income tax returns of the Company, the
Company has never received notice of any audit or of any proposed deficiencies
from the Internal Revenue Service. There are in effect no waivers of applicable
statutes of limitations with respect to any taxing owed by the Company for any
year. Neither the Internal Revenue Service nor any other taxing authority is now
asserting or, to the knowledge of the Company, threatening to assert against the
Company any deficiency or claim for additional taxes or interest thereon or
penalties in connection therewith.
2.13 EMPLOYEE BENEFIT PLANS.
The Company does not maintain or contribute to any employee benefit plan,
stock option, bonus or incentive plan, severance pay policy or agreement,
deferred compensation agreement or any similar plan or agreement (an "Employee
Benefit Plan") other than the Plan and the Employee Benefit Plans identified and
described in Section 2.13 of the Disclosure Schedule. The terms and operation of
each Employee Benefit Plan comply in all material respects with all applicable
laws and regulations relating to such Employee Benefit Plan. There are no
unfunded obligations of the Company under any retirement, pension,
profit-sharing, deferred compensation plan or similar program. The Company is
not required to make any payments or contributions to any Employee Benefit Plan
pursuant to any collective bargaining agreement, and all Employee Benefit Plans
are terminable at the discretion of the Company without material liability to
the Company upon or following such termination. The Company has never maintained
or contributed to any Employee Benefit Plan providing or promising any health or
other welfare benefits (within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) to terminated
employees, except for benefits mandated by applicable law, including, but not
limited to, Section 4980B of the Internal Revenue Code of 1986, as amended, and
Part 6 of Subtitle B of Title I of ERISA.
2.14 LABOR LAWS.
The Company employs approximately 50 employees and generally enjoys good
employer-employee relationships. The Company is not delinquent in payments to
any of its employees for any wages, salaries, commissions, bonuses or other
direct compensation for any services performed for it as of the date hereof or
amounts required to be reimbursed to such employees. The Company is in
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compliance in all material respects with all applicable laws and regulations
respecting labor, employment, fair employment practices, terms and conditions of
employment, and wages and hours. There are no charges of employment
discrimination or unfair labor practices or strikes, slowdowns, stoppages of
work or any other concerted interference with normal operations existing,
pending or, to the knowledge of the Company, threatened against or involving the
Company.
2.15 EMPLOYEES.
Section 2.15 of the Disclosure Schedule contains a list of all managers,
employees and consultants of the Company who, individually, have received
compensation from the Company for the fiscal year of the Company ended October
31, 1999, in excess of $100,000. In each case, Section 2.15 of the Disclosure
Schedule includes the current job title, years of service with the Company and
aggregate annual compensation and benefits of each such individual. To the
knowledge of the Company, no key employee of the Company has any plan or
intention to terminate his or her employment with the Company. The Company has
complied in all material respects with the immigration laws of the United States
with respect to the hiring, employment and engagement of all of its employees
and consultants who are not United States citizens, and, to the knowledge of the
Company, the immigration or residency status of each of such employees and
consultants is sufficient to allow such employees and consultants to remain
lawfully employed or engaged by the Company.
2.16 HAZARDOUS WASTE, ETC.
No hazardous wastes, substances or materials or oil or petroleum products
have been generated, transported, used, disposed, stored or treated by the
Company, and no hazardous wastes, substances or materials or oil or petroleum
products have been released, discharged, disposed, transported, placed or
otherwise caused to enter the soil or water in, under or upon any real property
owned, leased or operated by the Company.
2.17 BUSINESS; COMPLIANCE WITH LAWS.
The Company has all necessary franchises, permits, licenses and other
rights and privileges necessary to permit it to own its property and to conduct
its business as it is presently or contemplated to be conducted. The Company is
currently and has heretofore been in compliance in all material respects with
all federal, state, local and foreign laws and regulations.
2.18 INVESTMENT BANKING; BROKERAGE.
There are no claims for investment banking fees, brokerage commissions,
finder's fees or similar compensation (exclusive of professional fees to lawyers
and accountants) in connection with the transaction contemplated by this
Agreement payable by the Company or based on any arrangement or agreement made
by or on behalf of the Company or any of the stockholders.
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2.19 INSURANCE.
The Company has fire, casualty, product liability, workers' compensation
and business interruption and other insurance policies, with extended coverage,
sufficient in amount to allow it to replace any of its material properties which
might be damaged or destroyed or sufficient to cover liabilities to which the
Company may reasonably become subject, and such types and amounts of other
insurance with respect to its business and properties, on both a per occurrence
and an aggregate basis, as are customarily carried by persons engaged in the
same or similar business as the Company. There is no default or event which
could give rise to a default under any such policy.
2.20 TRANSACTIONS WITH AFFILIATES.
There are no loans, leases, contracts or other transactions between the
Company and any officer, director or five percent (5%) stockholder of the
Company or any family member or affiliate of the foregoing persons, and there
have been no such transactions within the past twelve (12) months except as set
forth in Section 2.20 of the Disclosure Schedule.
2.21 SUPPLIERS.
Section 2.21 of the Disclosure Schedule sets forth each supplier of the
Company who supplied more than five percent (5%) of the Company's supplies or
materials for the fiscal year ended December 31, 1999 and each supplier who the
Company believes may supply for more than five percent (5%) of the Company's
supplies or materials for the fiscal year ended December 31, 2000 (each a
"Supplier" and collectively the "Suppliers"). The relationships of the Company
with its Suppliers are good commercial working relationships. No Supplier of the
Company has canceled or otherwise terminated its relationship with the Company,
or has during the last 12 months decreased materially its services, supplies or
materials to the Company. No Supplier has, to the knowledge of the Company, any
plan or intention to terminate, cancel or otherwise materially and adversely
modify its relationship with the Company or to decrease materially or limit its
services, supplies or materials to the Company.
2.22 CERTAIN EVENTS.
(a) During the past ten (10) years, neither the Company nor any of the
officers or directors of the Company has had a petition under the Bankruptcy
Reform Act of 1978, as amended, or any state insolvency law, filed by or against
any of them which has not as of the date of this Agreement been dismissed.
(b) During the past ten (10) years, neither the Company nor the officers or
directors of the Company has been convicted in a criminal proceeding or is a
named subject of a criminal proceeding which is presently pending (excluding
traffic violations and other minor offenses).
(c) During the past ten (10) years, neither the Company nor the officers or
directors of the Company has been, or is, the subject of any order, judgment or
decree, whether or not subsequently reversed, suspended or vacated, of any court
or any administrative agency, requiring the payment of money damages in excess
of $100,000 or permanently or temporarily enjoining any of them from, or
otherwise limiting any of their abilities to engage in, any type of business
practice.
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2.23 REGISTRATION RIGHTS.
Except as disclosed in Section 2.23 of the Disclosure Schedule, the Company
has not granted or agreed to grant any registration rights, including piggyback
rights, to any person or entity.
2.24 DISCLOSURE.
The representations and warranties made or contained in this Agreement, the
exhibits hereto and the certificates and statements executed or delivered in
connection herewith, and the information concerning the business of the Company
delivered to the Investor in connection with or pursuant to this Agreement, when
taken together, do not and shall not contain any untrue statement of a material
fact and do not and shall not omit to state a material fact required to be
stated therein or necessary in order to make such representations, warranties or
other material not misleading in light of the circumstances in which they were
made or delivered. There have been no events or transactions or information
which has come to the attention of the management of the Company having a direct
impact on the Company or its assets, liabilities, financial condition, business,
results of operations or prospects which, in the reasonable judgment of such
management, could be expected to have a Material Adverse Effect.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR.
The Investor represents and warrants to the Company the following:
3.1 INVESTMENT EXPERIENCE AND INTENT.
The Investor represents to the Company that it has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of the investment contemplated by this Agreement and making
an informed investment decision with respect thereto. The Investor represents
that it is an "accredited investor" as such term is defined in Rule 501 under
the Securities Act. The Investor represents and understands that it is
responsible for its own due diligence investigation and satisfying its own due
diligence requirements and shall not be entitled to rely on the due diligence
investigation of any other person or entity. The Investor represents to the
Company that it is purchasing the Series B Preferred Shares for its own account,
for investment only and not with a view to, or any present intention of,
effecting a distribution of such securities or any part thereof except pursuant
to a registration or an available exemption under applicable law. The Investor
acknowledges that its Series B Preferred Shares have not been registered under
the Securities Act or the securities laws of any state or other jurisdiction and
cannot be disposed of unless they are subsequently registered under the
Securities Act and any applicable state laws or exemption from such registration
is available.
3.2 AUTHORIZATION AND NON-CONTRAVENTION.
The Investor represents that it has full right, authority and power to
enter into this Agreement and each agreement, document and instrument to be
executed and delivered by or on behalf of such Investor pursuant to or as
contemplated by this Agreement and to carry out the transactions contemplated
hereby and thereby, and the execution, delivery and performance by such Investor
of this Agreement and each such other agreement, document and instrument have
been duly authorized by all necessary action. The Investor represents and
warrants that this Agreement and each agreement, document and instrument
executed and delivered by such Investor pursuant to or as contemplated by this
Agreement constitute, or when executed and delivered will constitute, valid and
binding obligations of such Investor enforceable in accordance with their
respective terms and that the execution, delivery and performance by such
Investor
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of this Agreement and each such other agreement, document and instrument, and
the performance of the transactions contemplated hereby and thereby do not and
will not: (a) violate, conflict with or result in a default (whether after the
giving of notice, lapse of time or both) under any contract or obligation to
which such Investor is a party or by which it or its assets are bound, or cause
the creation of any encumbrance upon any of the assets of the Investor; (b)
violate or result in a violation of, or constitute a default under, any
provision of any law, regulation or rule, or any order of, or any restriction
imposed by, any court or other governmental agency applicable to the Investor;
(c) require from the Investor any notice to, declaration or filing with, or
consent or approval of any governmental authority or other third party; or (d)
accelerate any obligation under, or give rise to a right of termination of, any
agreement, permit, license or authorization to which the Investor is a party or
by which the Investor is bound.
3.3 COMMISSIONS AND FEES.
The Investor represents that there are no claims for investment banking
fees, brokerage commissions, finder's fees or similar compensation (exclusive of
professional fees to lawyers and accountants) in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement made by or on behalf of such Investor.
SECTION 4. CONDITIONS OF PURCHASE.
The Investor's obligation to purchase and pay for the Series B Preferred
Shares to be purchased by it shall be subject to compliance by the Company with
its agreements herein contained and to the fulfillment to the Investor's
satisfaction, or the waiver by the Investor, on or before and at the Closing
Date, of the following conditions:
4.1 SATISFACTION OF CONDITIONS.
The representations and warranties of the Company contained in this
Agreement shall be true and correct on and as of the Closing Date; each of the
conditions specified in this Section 4 shall have been satisfied or waived in
writing by the Investor; and, on the Closing Date, a certificate to such effect
executed by the President and Chief Financial Officer of the Company shall have
been delivered to the Investor.
4.2 AUTHORIZATION.
The Board of Directors of the Company shall have duly adopted resolutions
in form and substance reasonably satisfactory to the Investor and shall have
taken all action necessary for the purpose of authorizing the Company to
consummate the transactions contemplated hereby in accordance with the terms
hereof and to cause the Certificate of Designation to become effective; and the
Investor shall have received a certificate of the Secretary of the Company
setting forth a copy of the relevant Board of Directors and/or stockholder
resolutions and the Certificate of Incorporation, the Certificate of Designation
and Bylaws of the Company and such other matters as may be reasonably requested
by the Investor.
4.3 OPINION OF COUNSEL.
The Investor shall have received from Summit Law Group an opinion dated as
of the Closing Date substantially in the form attached hereto as EXHIBIT C.
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4.4 ALL PROCEEDINGS SATISFACTORY.
All corporate and other proceedings taken prior to or at the Closing in
connection with the transactions contemplated by this Agreement, and all
documents and evidences incident thereto, shall be reasonably satisfactory in
form and substance to the Investor.
4.5 NO VIOLATION OR INJUNCTION.
The consummation of the transactions contemplated by this Agreement shall
not be in violation of any law or regulation and shall not be subject to any
injunction, stay or restraining order.
4.6 CONSENTS AND WAIVERS.
The Company shall have obtained all consents or waivers necessary to
execute this Agreement and the other agreements and documents contemplated
herein, to issue and sell the Securities to be sold to the Investor hereunder
and to carry out the transactions contemplated hereby and thereby and shall have
delivered evidence thereof to the Investor. All corporate and other action and
governmental filings necessary to effectuate the terms of this Agreement and
other agreements and instruments executed and delivered by the Company in
connection herewith shall have been made or taken.
SECTION 5. GENERAL.
5.1 AMENDMENTS, WAIVERS AND CONSENTS.
For the purpose of this Agreement and all agreements executed pursuant
hereto, no course of dealing between or among any of the parties hereto and no
delay on the part of any party hereto in exercising any rights hereunder or
thereunder shall operate as a waiver of the rights hereof and thereof. No
covenant or other provision hereof may be waived otherwise than by a written
instrument signed by the party or parties so waiving such covenant or other
provision. No amendment to this Agreement may be made without the written
consent of the Company and the Investor.
5.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS; ASSIGNABILITY
OF RIGHTS.
All covenants, agreements, representations and warranties of the Company
and the Investor made herein, in the Disclosure Schedule and the Certificate of
Designation and in the certificates, lists, exhibits, schedules or other written
information delivered or furnished to the Investor in connection herewith (a)
are material, shall be deemed to have been relied upon by the party or parties
to whom they are made and shall survive the Closing regardless of any
investigation or knowledge on the part of such party or its representatives and
(b) shall bind the parties' successors and assigns (including without limitation
any successor to the Company by way of acquisition, merger or otherwise),
whether so expressed or not, and, except as otherwise provided in this
Agreement, all such covenants, agreements, representations and warranties shall
inure to the benefit of the Investor's successors and assigns and to their
transferees of Securities, whether so expressed or not, and any such transferee
shall be deemed the "Investor" for purposes hereof.
5.3 LEGEND ON SECURITIES.
The Company and the Investor acknowledge and agree that the following
legend shall be typed on each certificate evidencing any of the securities
issued hereunder held at any time by the Investor:
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THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR
BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR
OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH
RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT
TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE
DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES AND BLUE SKY LAWS.
5.4 MARKET STAND-OFF.
In connection with any underwritten public offering by the Company, the
Investor, if requested in good faith by the Company and the managing underwriter
of the Company's securities, shall agree not to sell or otherwise transfer or
dispose of any securities of the Company held by it (except for any securities
sold pursuant to such registration statement) for a period following the
effective date of the applicable registration statement that in no event shall
exceed 180 days. In order to enforce the foregoing, the Company may impose
stop-transfer instructions with respect to the securities held by the Investor
until the end of such period.
5.5 GOVERNING LAW.
This Agreement shall be deemed to be a contract made under, and shall be
construed in accordance with, the laws of Delaware, without giving effect to
conflict of laws principles thereof.
5.6 SECTION HEADINGS AND GENDER.
The descriptive headings in this Agreement have been inserted for
convenience only and shall not be deemed to limit or otherwise affect the
construction of any provision thereof or hereof. The use in this Agreement of
the masculine pronoun in reference to a party hereto shall be deemed to include
the feminine or neuter, and vice versa, as the context may require.
5.7 COUNTERPARTS.
This Agreement may be executed simultaneously in any number of
counterparts, each of which when so executed and delivered shall be taken to be
an original; but such counterparts shall together constitute but one and the
same document.
5.8 NOTICES AND DEMANDS.
Any notice or demand which is required or provided to be given under this
Agreement or the Certificate of Designation shall be deemed to have been
sufficiently given and received for all purposes when delivered by hand,
telecopy, telex or other method of facsimile, or five days after being sent by
certified or registered mail, postage and charges prepaid, return receipt
requested, or two days after being sent by overnight delivery providing receipt
of delivery, to the following addresses:
if to the Company:
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Lineo, Inc.
383 S. 520 W.
Lindon, Utah 84042
Attn: President
Fax: (801) 426-6166
copy to:
Summit Law Group
1505 Westlake Avenue N., Suite 300
Seattle, Washington 98109
Attn: Mark F. Worthington, Esq.
Fax: (206) 281-9882
if to the Investor:
- -------------------
- -------------------
- -------------------
- -------------------
5.9 REMEDIES; SEVERABILITY.
It is specifically understood and agreed that any breach of the provisions
of this Agreement by any person subject hereto will result in irreparable injury
to the other parties hereto, that the remedy at law alone will be an inadequate
remedy for such breach, and that, in addition to any other remedies which they
may have, such other parties may enforce their respective rights by actions for
specific performance (to the extent permitted by law). The Company may refuse to
recognize any unauthorized transferee as one of its stockholders for any
purpose, including, without limitation, for purposes of dividend and voting
rights, until the relevant party or parties have complied with all applicable of
this Agreement. Whenever possible, each provision of this Agreement shall be
interpreted in such a manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be deemed prohibited or invalid
under such applicable law, such provision shall be ineffective to the extent of
such prohibition or invalidity, and such prohibition or invalidity shall not
invalidate the remainder of such provision or the other provisions of this
Agreement.
5.10 INTEGRATION.
This Agreement, including the exhibits, documents and instruments referred
to herein or therein, constitutes the entire agreement, and supersedes all other
prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.
COMPANY: INVESTOR:
LINEO, INC.,
a Delaware corporation
By By
------------------------------------ ----------------------------
Bryan Sparks, President and Chairman Its
--------------------------
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EXHIBIT 10.10
LINEO, INC.
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of this __
day of April, 2000, by and between Lineo, Inc., a Delaware corporation (together
with any predecessors or successors thereto, the "Company"), and
_____________________ (together with its successors and assigns, the
"Investor").
RECITALS
A. The Company has authorized the issuance and sale to the Investor of
_______ shares of Series C Convertible Preferred Stock, $.001 par value per
share (the "Series C Preferred Stock"), having the rights and preferences set
forth in the Certificate of Designation in the form attached as EXHIBIT A hereto
(the "Certificate of Designation"), which the Company shall adopt and file with
the Secretary of State of the State of Delaware on or before the Closing (as
defined below in Section 1.3), for an aggregate purchase price of $__________.
AGREEMENT
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter set forth, the parties hereto agree as
follows:
SECTION 1. PURCHASE AND SALE OF SHARES.
1.1 DESCRIPTION OF SECURITIES.
The Company's authorized capital stock consists of 100,000,000 shares
of Common Stock and 30,000,000 shares of Preferred Stock, par value $.001 per
share. Of such shares of Preferred Stock, 3,000,000 shares are designated as
Series C Preferred Stock. The Company has authorized and has reserved, and
covenants to continue to reserve, free and clear of preemptive and other
preferential rights, a sufficient number of shares of its Common Stock to
satisfy the rights of conversion of the holders of the Series C Preferred Stock.
For purposes of this Agreement, (a) the shares of Series C Preferred Stock to be
acquired by the Investor from the Company hereunder are referred to as the
"Series C Preferred Shares," (b) the shares of Common Stock issuable upon
conversion of the Series C Preferred Shares are referred to as the "Conversion
Shares" and (c) the Series C Preferred Shares and the Conversion Shares are
sometimes referred to collectively as the "Securities."
1.2 SALE AND PURCHASE.
Upon the terms and subject to the conditions herein, and in reliance on
the representations and warranties set forth in Section 2, the Investor hereby
agrees to purchase from the Company, and the Company hereby agrees to issue and
sell to the Investor, at the Closing, ______ Series C Preferred Shares for the
purchase price of $6.00 per share for an aggregate of $_________, and the
Company hereby grants the Investor the rights set forth herein. The proceeds of
this sale are intended to be used for the expansion of the Company's business,
working capital and other general corporate purposes.
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1.3 CLOSING.
The closing of the purchase and sale of the Series C Preferred Shares
(the "Closing") shall take place at the offices of the Company at 10:00 a.m. on
April __, 2000, or at such other time and place as the parties hereto may agree
(the "Closing Date"). At the Closing, the Company shall deliver to the Investor
a stock certificate, registered in the name of the Investor, representing the
number of shares of Series C Preferred Stock purchased by such Investor
hereunder.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants the following, except as set forth
in the schedule of exceptions attached hereto as EXHIBIT B (the "Disclosure
Schedule"), which exceptions shall be deemed to be representations and
warranties as if made hereunder:
2.1 ORGANIZATION AND CORPORATE POWER.
The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and is qualified to do
business as a foreign corporation in each jurisdiction in which the failure to
be so qualified would have a material adverse effect on its assets, liabilities,
condition (financial or other), business, results of operations or prospects (a
"Material Adverse Effect"). The Company has all required corporate power and
authority to carry on its business as presently conducted, to enter into and
perform this Agreement and all other agreements contemplated hereby to which it
is a party and to carry out the transactions contemplated hereby and thereby,
including the issuance (or reservation for issuance), sale, delivery and
conversion of Series C Preferred Shares and the issuance of the Conversion
Shares. The Company is not in violation of any term of the Certificate of
Incorporation and Bylaws of the Company, as amended to date (the "Certificate of
Incorporation" and the "Bylaws," respectively.)
2.2 AUTHORIZATION AND NON-CONTRAVENTION.
The execution, delivery and performance by the Company of this
Agreement and all other agreements, documents and instruments to be executed and
delivered by the Company as contemplated hereby (including, without limitation,
the Certificate of Designation) and the issuance and delivery of (i) the Series
C Preferred Shares and (ii) upon the conversion of the Series C Preferred
Shares, the Conversion Shares, have been duly authorized by all necessary
corporate and other action of the Company. This Agreement and each such other
agreement, document and instrument (including, without limitation, the
Certificate of Designation) constitute valid and binding obligations of the
Company, enforceable in accordance with their respective terms. The execution
and delivery by the Company of this Agreement and each other agreement, document
and instrument to be executed and delivered by the Company pursuant hereto or as
contemplated hereby (including, without limitation, the Certificate of
Designation) and the performance by the Company of the transactions contemplated
hereby and thereby, including, without limitation, the issuance and delivery of
(i) the Series C Preferred Shares and (ii) upon the conversion of the Series C
Preferred Shares, the Conversion Shares, do not and will not (whether after the
giving of notice, lapse of time or both): (a) violate, conflict with or result
in a default under any instrument, judgment, order, writ, decree, contract,
statute, rule, regulation or obligation to which the Company is subject to or by
which it or its assets are bound, or any provision of the Certificate of
Incorporation or Bylaws of the Company, and a violation of which would have a
material adverse effect on the business, condition, financial or otherwise, or
operations of the Company, or (b) result in any such
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violation, or be in conflict with or constitute, with or without the passage of
time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event that results
in the creation of any lien, charge or encumbrance upon any assets of the
Company or the suspension, revocation, impairment, forfeiture or nonrenewal of
any material permit, license, authorization or approval applicable to the
Company, its business or operations or any of its assets or properties.
2.3 CAPITALIZATION.
As of the Closing and after giving effect to the transactions
contemplated hereby, the authorized capital stock of the Company will consist of
100,000,000 shares of Common Stock, par value $.001 per share, of which
20,148,724 shares are issued and outstanding, and 30,000,000 shares of Preferred
Stock, par value $.001 per share, of which (a) 7,500,000 shares are designated
as Series A Preferred Stock, of which (i) 5,000,000 shares are designated as
Series A Class 1 Preferred Stock, all of which are issued and outstanding, and
(ii) 2,500,000 shares are designated as Series A Class 2 Preferred Stock, all of
which are issued and outstanding, (b) 4,850,000 shares are designated as Series
B Preferred Stock, of which 4,833,331 shares are issued and outstanding, and (c)
3,000,000 shares are designated as Series C Preferred Stock. In addition, the
Company has authorized and reserved for issuance upon conversion of the Series A
Preferred Stock up to 7,500,000 shares of Common Stock (subject to adjustment
for stock splits, stock dividends and the like), has authorized and reserved for
issuance upon conversion of the Series B Preferred Stock up to 4,850,000 shares
of Common Stock (subject to adjustment for stock splits, stock dividends and the
like), has authorized and reserved for issuance upon conversion of the Series C
Preferred Stock up to 3,000,000 shares of Common Stock (subject to adjustment
for stock splits, stock dividends and the like) and has reserved for issuance
upon exercise of options under the Company's stock option plan (the "Plan")
5,000,000 shares of Common Stock (subject to adjustment for stock splits, stock
dividends and the like). Other than as described above, the Company has not
issued or agreed to issue and is not obligated to issue any warrants, options or
other rights to purchase or acquire any shares of its capital stock, or any
securities convertible into or exercisable or exchangeable for such shares or
any warrants, options or other rights to acquire any such convertible
securities. As of the Closing, and after giving effect to the transactions
contemplated hereby, all of the outstanding shares of capital stock of the
Company (including, without limitation, the Series C Preferred Shares) are duly
and validly authorized and issued, fully paid and nonassessable and, except as
set forth herein, not subject to any preemptive rights to purchase or otherwise
acquire shares of capital stock of the Company, are free of restrictions on
transfer, other than restrictions on transfer under this Agreement and the
Investor Rights Agreement and under applicable state and federal securities
laws, and will have been offered, issued, sold and delivered in compliance with
applicable federal and state securities laws. The Conversion Shares will, upon
issuance, be duly and validly authorized and issued, fully paid and
nonassessable, will be free of restrictions on transfer, other than restrictions
on transfer under this Agreement and the Investor Rights Agreement and under
applicable state and federal securities laws, and will not be subject to any
preemptive rights, and will be offered, issued, sold and delivered in compliance
with applicable federal and state securities laws. The relative rights,
preferences and other provisions relating to the Series C Preferred Shares are
as set forth in the Certificate of Designation.
2.4 SUBSIDIARIES; INVESTMENTS.
Except as set forth in Section 2.4 of the Disclosure Schedule and other
than 1,250,000 shares of Common Stock of Caldera Systems, Inc., a representative
office located in Taiwan and a wholly owned subsidiary located in the United
Kingdom, the Company does not currently own any capital stock or
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interest or participate in any corporation, joint venture, partnership, trust,
limited liability company or other entity.
2.5 FINANCIAL STATEMENTS.
The Company has previously furnished to the Investor copies of its
draft audited financial statements (balance sheet, statement of operations,
statement of cash flows and statement of stockholders equity, including notes
thereto) for the fiscal year at and ended October 31, 1999 (the "Financial
Statements"). Such financial statements were prepared in conformity with
generally accepted United States accounting principles applied on a consistent
basis; are complete, correct and consistent in all material respects with the
books and records of the Company; and fairly and accurately present the
financial position of the Company as of the dates thereof and the results of
operations and cash flows of the Company for the periods shown therein. The
Company maintains and will continue to maintain a standard system of accounting
established and administered in accordance with generally accepted United States
accounting principles.
2.6 ABSENCE OF UNDISCLOSED LIABILITIES.
Except as and to the extent reflected or reserved against in the
financial statements referred to in Section 2.5 above, the Company does not have
and is not subject to any material liability or obligation of any nature,
whether accrued, absolute, contingent or otherwise.
2.7 ABSENCE OF CHANGES.
Except as set forth in Section 2.7 of the Disclosure Schedule, since
October 31, 1999 there has not been (a) any material adverse change in the
financial condition, results of operations, assets, liabilities, or business of
the Company, (b) any material asset or property of the Company made subject to a
lien of any kind, (c) any waiver of any material right of the Company, or the
cancellation of any material debt or claim held by the Company, (d) any payment
of dividends on, or other distribution with respect to, or any direct or
indirect redemption or acquisition of, any shares of the capital stock of the
Company, or any agreement or commitment therefore, (e) any mortgage, pledge or
hypothecation of any tangible or intangible asset of the Company, except in the
ordinary course of business, (f) any sale or assignment of any tangible asset of
the Company having a book value in excess of $5,000, except in the ordinary
course of business, or of any Intellectual Property Rights (as hereafter
defined) or other intangible assets, (g) any loan by the Company to, or any loan
to the Company from, any officer, director, employee or stockholder of the
Company, or any agreement or commitment therefore (other than travel and other
advances in the ordinary course of business), (h) any damage, destruction or
loss (whether or not covered by insurance) materially and adversely affecting
the assets, property or business of the Company, (i) any repayment of any loan
owed by the Company (including, without limitation, any loan owed to any
stockholder of the Company), (j) any single capital expenditure in excess of
$50,000 or any capital expenditures aggregating more than $250,000, (k) any
material change in the accounting methods or practices followed by the Company,
(l) any satisfaction or discharge of any lien, claim or encumbrance or payment
of any obligation by the Company, except in the ordinary course of business and
that is not material to the business, properties, prospects or financial
condition of the Company, (m) any material change to a material contract or
agreement by which the Company or any of its assets is bound or subject, (n) any
material change in any compensation arrangement or agreement with any employee,
officer, director or stockholder of the Company, (o) to the Company's knowledge,
any other event or condition of any character that might materially and
adversely affect the business, properties, prospects or financial condition of
the Company , (p) any resignation or termination of employment of any officer or
key
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employee of the Company, or (q) any arrangement or commitment by the Company to
do any of the things described in this Section 2.7.
2.8 TITLE; CONDITION OF PROPERTY.
(a) Except as set forth in Section 2.8 of the Disclosure Schedule, the
Company has good title to all of its property and assets, real, personal or
mixed, tangible or intangible, free and clear of all liens, security interests,
charges and other encumbrances of any kind.
(b) Without material exception, all assets used in the Company business
are in good operating condition and repair and suitable for use in the operation
of such business, and none of such assets that (singly or when aggregated with
other assets) is material to the business of the Company is obsolete.
2.9 CERTAIN CONTRACTS AND ARRANGEMENTS.
Except as set forth in Section 2.9 of the Disclosure Schedule (with
true and correct copies delivered to the Investor), the Company is not a party
or subject to or bound by:
(a) any plan or contract providing for collective bargaining
or the like, or any contract or agreement with any labor union;
(b) any contract, lease or agreement creating any obligation
of the Company (contingent or otherwise) to pay to any third party $100,000 or
more with respect to any single such contract or agreement;
(c) any contract or agreement for the sale, license, lease
or disposition of products or services in excess of $100,000;
(d) any contract containing covenants directly or explicitly
limiting the freedom of the Company to compete in any line of business or with
any person or entity;
(e) any license agreement (as licensor or licensee);
(f) any contract or agreement for the purchase of any
leasehold improvements, equipment or fixed assets for a price in excess of
$100,000;
(g) any indenture, mortgage, promissory note, loan
agreement, guaranty or other agreement or commitment for borrowing in excess of
$100,000 or any pledge or security arrangement;
(h) any material joint venture, partnership, or
manufacturing agreement;
(i) any endorsement or any other advertising, promotional or
marketing agreement;
(j) any employment contracts, or agreements with officers,
directors, employees or stockholders of the Company or persons or organizations
related to or affiliated with any such persons;
(k) any pension, profit sharing, retirement (other than the
Company's 401(k) plan), stock option, phantom stock or other equity incentive
plans;
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(l) any arrangement relating to any royalty payments to
employees, customers or independent contractors based on the sales volume of the
Company;
(m) any acquisition, merger or similar agreement; or
(n) any contract with a governmental body under which the
Company may have an obligation for renegotiation.
Except as set forth in Section 2.9 of the Disclosure
Schedule, (i) each of the Company's contracts and commitments is in full force
and effect and is valid, binding and enforceable in accordance with its terms as
to the Company and, to the knowledge of the Company, as to each other party
thereto; (ii) there exists no material breach or material default (or event that
with notice or lapse of time would constitute a material breach or material
default) on the part of the Company or, to the knowledge of the Company, on the
part of any other party under any of the Company's contracts or commitments,
except to the extent that any such breach or default would not have a Material
Adverse Effect; (iii) the Company has not received a written notice of
termination or default under any of the Company's contracts or commitments; and
(iv) as of the date of this Agreement, no party to an agreement under which the
Company acquired a substantial portion of its assets has asserted any claim for
indemnification under such agreement.
The Company has not engaged in the past three (3) months in
any discussion (i) with any representative of any corporation or corporations
regarding the merger of the Company with or into any such corporation or
corporations, (ii) with any representative of any corporation, partnership,
association or other business entity or any individual regarding the sale,
conveyance or disposition of all or substantially all of the assets of the
Company or a transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of the Company would be disposed of, or
(iii) regarding any other form of liquidation, dissolution or winding up of the
Company.
2.10 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS.
Except as set forth in Section 2.10 of the Disclosure Schedule:
(a) The Company has the right to use, sell, and license the
Intellectual Property Rights (as defined below) material to the conduct of its
business as presently conducted, including without limitation all rights to the
Company name "Lineo" and to the trademarks and the product name "Embedix" (the
"Company Rights"), free and clear of the rights of all others.
(b) The business of the Company as presently conducted, the
products as marketed or sold and the provision of services by the Company do not
violate and will not violate any agreements that the Company has with any third
party or infringe any patent, trademark, service mark, copyright or trade secret
or any other Intellectual Property Rights of any third party.
(c) No claim is pending or threatened against the Company
nor has the Company received any notice or claim from any person asserting that
any of the Company's present or contemplated activities infringe or may infringe
any Intellectual Property Rights of such person, and the Company is not aware of
any infringement by any other person of any of the Company Rights.
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(d) Each current and former employee of the Company, and
each of the Company's consultants and independent contractors involved in
development of any of the Company Rights, has executed an agreement regarding
confidentiality, proprietary information and assignment of inventions and
copyrights to the Company, and none of such employees, consultants or
independent contractors is in violation of any agreement or in breach of any
agreement or arrangement with former or present employers relating to
proprietary information or assignment of inventions. The Company has taken all
reasonable steps to protect all data, information, ideas, concepts, know-how and
materials that the Company treats as trade secrets, and all other confidential
information and Intellectual Property Rights of the Company, which are not part
of the public domain or knowledge, nor, to the best knowledge of the Company,
have they been used, divulged or appropriated for the benefit of any person
other than the Company or otherwise to the detriment of the Company.
(e) No royalties or other amounts are payable by the Company
to persons by reason of the ownership or use of the Intellectual Property Rights
of the Company.
(f) No third party has claimed or, to the best of the
Company's knowledge, has reason to claim that any person employed by or
affiliated with the Company has (a) violated or may be violating any of the
terms or conditions of his or her employment, non-competition, non-disclosure,
non-solicitation or inventions agreement with such third party, (b) disclosed or
may be disclosing or utilized or may be utilizing any Intellectual Property
Rights, trade secret or proprietary information or documentation of such third
party, or (c) interfered or may be interfering in the employment relationship
between such third party and any of its present or former employees.
As used herein, the term "Intellectual Property Rights" shall mean the
intellectual property rights, including, without limitation, all patents, patent
applications, patent rights, trademarks, trademark applications, trade names,
service marks, service mark applications, copyrights, copyright applications,
computer programs and other computer software, inventions, designs, samples,
specifications, schematics, know-how, trade secrets, proprietary processes and
formulae, including production technology and processes, all source and object
code, algorithms, promotional materials, customer lists, supplier and dealer
lists and marketing research, and all documentation and media constituting,
describing or relating to the foregoing, including without limitation, manuals,
memoranda and records.
2.11 LITIGATION.
There is no litigation or governmental proceeding or investigation
pending or threatened against the Company or affecting any of its properties or
assets or against any officer, director or key employee of the Company in his or
her capacity as an officer, director or employee of the Company, which
litigation, proceeding or investigation is reasonably likely to have a Material
Adverse Effect, or which may call into question the validity or hinder the
enforceability of this Agreement or any other agreements or transactions
contemplated hereby; nor has there occurred any event nor does there exist any
condition on the basis of which any such litigation, proceeding or investigation
might be properly instituted or commenced. Neither the Company nor any of its
subsidiaries is a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company or any of its subsidiaries currently pending or which the Company or any
of its subsidiaries intends to initiate.
2.12 TAX MATTERS.
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The Company has filed all federal, state, local and foreign income,
excise and franchise tax returns, real estate and personal property tax returns,
sales and use tax returns and other tax returns required to be filed by it where
the failure to file such returns would have a Material Adverse Effect, and has
paid all taxes owing by it, except taxes which have not yet accrued or otherwise
become due, for which adequate provision has been made in the pertinent
financial statements referred to in Section 2.5 above or which will not have a
Material Adverse Effect. The filed tax returns and reports are true and correct
in all material respects. All taxes and other assessments and levies which the
Company is required to withhold or collect have been withheld and collected and
have been paid over to the proper governmental authorities except where the
failure to withhold or collect and pay over would not have a Material Adverse
Effect With regard to the federal income tax returns of the Company, the Company
has never received notice of any audit or of any proposed deficiencies from the
Internal Revenue Service. There are in effect no waivers of applicable statutes
of limitations with respect to any taxing owed by the Company for any year.
Neither the Internal Revenue Service nor any other taxing authority is now
asserting or, to the knowledge of the Company, threatening to assert against the
Company any deficiency or claim for additional taxes or interest thereon or
penalties in connection therewith.
2.13 EMPLOYEE BENEFIT PLANS.
The Company does not maintain or contribute to any employee benefit
plan, stock option, bonus or incentive plan, severance pay policy or agreement,
deferred compensation agreement or any similar plan or agreement (an "Employee
Benefit Plan") other than the Plan and the Employee Benefit Plans identified and
described in Section 2.13 of the Disclosure Schedule. The terms and operation of
each Employee Benefit Plan comply in all material respects with all applicable
laws and regulations relating to such Employee Benefit Plan. There are no
unfunded obligations of the Company under any retirement, pension,
profit-sharing, deferred compensation plan or similar program. The Company is
not required to make any payments or contributions to any Employee Benefit Plan
pursuant to any collective bargaining agreement, and all Employee Benefit Plans
are terminable at the discretion of the Company without material liability to
the Company upon or following such termination. The Company has never maintained
or contributed to any Employee Benefit Plan providing or promising any health or
other welfare benefits (within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) to terminated
employees, except for benefits mandated by applicable law, including, but not
limited to, Section 4980B of the Internal Revenue Code of 1986, as amended, and
Part 6 of Subtitle B of Title I of ERISA.
2.14 LABOR LAWS.
The Company employs approximately 105 employees and generally enjoys
good employer-employee relationships. The Company is not delinquent in payments
to any of its employees for any wages, salaries, commissions, bonuses or other
direct compensation for any services performed for it as of the date hereof or
amounts required to be reimbursed to such employees. The Company is in
compliance in all material respects with all applicable laws and regulations
respecting labor, employment, fair employment practices, terms and conditions of
employment, and wages and hours. There are no charges of employment
discrimination or unfair labor practices or strikes, slowdowns, stoppages of
work or any other concerted interference with normal operations existing,
pending or, to the knowledge of the Company, threatened against or involving the
Company.
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2.15 EMPLOYEES.
Section 2.15 of the Disclosure Schedule contains a list of all
managers, employees and consultants of the Company who, individually, have
received compensation from the Company for the fiscal year of the Company ended
October 31, 1999, in excess of $100,000. In each case, Section 2.15 of the
Disclosure Schedule includes the current job title, years of service with the
Company and aggregate annual compensation and benefits of each such individual.
To the knowledge of the Company, no key employee of the Company has any plan or
intention to terminate his or her employment with the Company. The Company has
complied in all material respects with the immigration laws of the United States
with respect to the hiring, employment and engagement of all of its employees
and consultants who are not United States citizens, and, to the knowledge of the
Company, the immigration or residency status of each of such employees and
consultants is sufficient to allow such employees and consultants to remain
lawfully employed or engaged by the Company. The employment of each officer and
employee of the Company is teminable at the will of the Company. The Company is
not a party to or bound by any currently effective employment contract.
2.16 HAZARDOUS WASTE, ETC.
No hazardous wastes, substances or materials or oil or petroleum
products have been generated, transported, used, disposed, stored or treated by
the Company, and no hazardous wastes, substances or materials or oil or
petroleum products have been released, discharged, disposed, transported, placed
or otherwise caused to enter the soil or water in, under or upon any real
property owned, leased or operated by the Company.
2.17 BUSINESS; COMPLIANCE WITH LAWS.
The Company has all necessary franchises, permits, licenses and other
rights and privileges necessary to permit it to own its property and to conduct
its business as it is presently or contemplated to be conducted and is not in
default in any material respect under any of such franchises, permits, licenses
and other similar rights and privileges. The Company is currently and has
heretofore been in compliance in all material respects with all federal, state,
local and foreign laws and regulations.
2.18 INVESTMENT BANKING; BROKERAGE.
There are no claims for investment banking fees, brokerage commissions,
finder's fees or similar compensation (exclusive of professional fees to lawyers
and accountants) in connection with the transaction contemplated by this
Agreement payable by the Company or based on any arrangement or agreement made
by or on behalf of the Company or any of the stockholders.
2.19 INSURANCE.
The Company has fire, casualty, product liability, workers'
compensation and business interruption and other insurance policies, with
extended coverage, sufficient in amount to allow it to replace any of its
material properties which might be damaged or destroyed or sufficient to cover
liabilities to which the Company may reasonably become subject, and such types
and amounts of other insurance with respect to its business and properties, on
both a per occurrence and an aggregate basis, as are customarily carried by
persons engaged in the same or similar business as the Company. There is no
default or event which could give rise to a default under any such policy.
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2.20 TRANSACTIONS WITH AFFILIATES.
There are no loans, leases, contracts or other transactions (directly
or indirectly) between the Company and any officer, director or one percent (1%)
stockholder of the Company or any family member or affiliate of the foregoing
persons, and there have been no such transactions within the past twelve (12)
months except as set forth in Section 2.20 of the Disclosure Schedule. To the
best of the Company's knowledge, none of such persons has any direct or indirect
ownership interest in any firm or corporation with which the Company is
affiliated or with which the Company has a business relationship, or any firm or
corporation that competes with the Company, except that employees, officers or
directors of the Company and members of their families may own stock in publicly
traded companies that may compete with the Company.
2.21 SUPPLIERS.
Section 2.21 of the Disclosure Schedule sets forth each supplier of the
Company who supplied more than five percent (5%) of the Company's supplies or
materials for the fiscal year ended October 31, 1999 and each supplier who the
Company believes may supply for more than five percent (5%) of the Company's
supplies or materials for the fiscal year ended October 31, 2000 (each a
"Supplier" and collectively the "Suppliers"). The relationships of the Company
with its Suppliers are good commercial working relationships. No Supplier of the
Company has canceled or otherwise terminated its relationship with the Company,
or has during the last 12 months decreased materially its services, supplies or
materials to the Company. No Supplier has, to the knowledge of the Company, any
plan or intention to terminate, cancel or otherwise materially and adversely
modify its relationship with the Company or to decrease materially or limit its
services, supplies or materials to the Company.
2.22 CERTAIN EVENTS.
(a) During the past ten (10) years, neither the Company nor any of the
officers or directors of the Company has had a petition under the Bankruptcy
Reform Act of 1978, as amended, or any state insolvency law, filed by or against
any of them which has not as of the date of this Agreement been dismissed.
(b) During the past ten (10) years, neither the Company nor the
officers or directors of the Company has been convicted in a criminal proceeding
or is a named subject of a criminal proceeding which is presently pending
(excluding traffic violations and other minor offenses).
(c) During the past ten (10) years, neither the Company nor the
officers or directors of the Company has been, or is, the subject of any order,
judgment or decree, whether or not subsequently reversed, suspended or vacated,
of any court or any administrative agency, requiring the payment of money
damages in excess of $100,000 or permanently or temporarily enjoining any of
them from, or otherwise limiting any of their abilities to engage in, any type
of business practice.
2.23 REGISTRATION RIGHTS.
Except as disclosed in Section 2.23 of the Disclosure Schedule, the
Company has not granted or agreed to grant any registration rights, including
piggyback rights, to any person or entity.
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2.24 DISCLOSURE.
The representations and warranties made or contained in this Agreement,
the exhibits hereto and the certificates and statements executed or delivered in
connection herewith, and the information concerning the business of the Company
delivered to the Investor in connection with or pursuant to this Agreement, when
taken together, do not and shall not contain any untrue statement of a material
fact and do not and shall not omit to state a material fact required to be
stated therein or necessary in order to make such representations, warranties or
other material not misleading in light of the circumstances in which they were
made or delivered. There have been no events or transactions or information
which has come to the attention of the management of the Company having a direct
impact on the Company or its assets, liabilities, financial condition, business,
results of operations or prospects which, in the reasonable judgment of such
management, could be expected to have a Material Adverse Effect. The Company has
fully provided the Investor with all the information that the Investor has
requested for deciding whether to acquire the Series C Preferred Shares.
2.25 CORPORATE DOCUMENTS.
The Certificate of Incorporation and Bylaws of the Company have been
made available to the Investor. The minute books of the Company containing
minutes of all meetings of directors and stockholders and all actions by written
consent without a meeting by the directors and stockholders since the date of
incorporation have been made available to the Investor and reflect accurately in
all material respects all actions by the directors (and any committee of
directors) and stockholders with respect to all transactions referred to in such
minutes. The stock transfer ledgers and other similar records of the Company as
made available to the Investor prior to the execution of this Agreement
accurately reflect all record transfers prior to the execution of this Agreement
in the capital stock of the Company.
2.26 OFFERING.
Subject in part to the truth and accuracy of the Investor's
representations and warranties set forth in this Agreement, the offer, sale and
issuance of the Securities as contemplated by this Agreement are exempt from the
registration requirements of the Securities Act and any applicable state
securities laws, and neither the Company nor any authorized agent acting on its
behalf will take any action hereafter that would cause the loss of such
exemption.
2.27 INVESTMENT COMPANY.
The Company is not and shall not become an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "1940 Act"). In the event the
Company breaches the foregoing, the Company shall forthwith notify the Investor
and shall take immediate corrective action to remedy such breach.
2.28 SUPPLEMENTAL REMUNERATION.
The Company has not and shall not, directly or indirectly, pay or cause
to be paid any remuneration, whether by way of supplemental or additional
interest, fee or otherwise to any investor or other stockholder of the Company
as consideration for or as an inducement to entering into by any investor or
other stockholder of the Company of any waiver or amendment of any of the terms
and provisions of the agreements or the Certificate of Incorporation which
affects any such party's rights as an investor or stockholder, unless such
remuneration is concurrently paid, on the same terms, ratably to
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all investors or stockholders whether or not such investors or stockholders
grant such waiver or agree to such amendment.
2.29 GOVERNMENTAL CONSENTS.
No consent, approval, order or authorization of, or registration,
qualification, designation, declaration or filing with, any federal, state or
local governmental authority on the part of the Company is required in
connection with the consummation of the transactions contemplated by this
Agreement other than as may be required to secure an exemption from
qualification of the offer and sale of the Series C Preferred Shares under the
Securities Act and applicable state securities laws.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR.
The Investor represents and warrants to the Company the following:
3.1 INVESTMENT EXPERIENCE AND INTENT.
The Investor represents to the Company that it has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of the investment contemplated by this Agreement and making
an informed investment decision with respect thereto. The Investor represents
that it is an "accredited investor" as such term is defined in Rule 501 under
the Securities Act. The Investor represents and understands that it is
responsible for its own due diligence investigation and satisfying its own due
diligence requirements and shall not be entitled to rely on the due diligence
investigation of any other person or entity. The Investor represents to the
Company that it is purchasing the Series C Preferred Shares for its own account,
for investment only and not with a view to, or any present intention of,
effecting a distribution of such securities or any part thereof except pursuant
to a registration or an available exemption under applicable law. The Investor
acknowledges that its Series C Preferred Shares have not been registered under
the Securities Act or the securities laws of any state or other jurisdiction and
cannot be disposed of unless they are subsequently registered under the
Securities Act and any applicable state laws or exemption from such registration
is available.
3.2 AUTHORIZATION AND NON-CONTRAVENTION.
The Investor represents that it has full right, authority and power to
enter into this Agreement and each agreement, document and instrument to be
executed and delivered by or on behalf of such Investor pursuant to or as
contemplated by this Agreement and to carry out the transactions contemplated
hereby and thereby, and the execution, delivery and performance by such Investor
of this Agreement and each such other agreement, document and instrument have
been duly authorized by all necessary action. The Investor represents and
warrants that this Agreement and each agreement, document and instrument
executed and delivered by such Investor pursuant to or as contemplated by this
Agreement constitute, or when executed and delivered will constitute, valid and
binding obligations of such Investor enforceable in accordance with their
respective terms (except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies, and (iii) to the extent the indemnification provisions contained in
the Investor Rights Agreement may be limited by applicable federal or state
securities laws) and that the execution, delivery and performance by such
Investor of this Agreement and each such other agreement, document and
instrument, and the performance of the transactions contemplated hereby and
thereby do not and will not: (a) violate, conflict with or result in a default
(whether after the giving of notice, lapse of
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time or both) under any contract or obligation to which such Investor is a party
or by which it or its assets are bound, or cause the creation of any encumbrance
upon any of the assets of the Investor; (b) violate or result in a violation of,
or constitute a default under, any provision of any law, regulation or rule, or
any order of, or any restriction imposed by, any court or other governmental
agency applicable to the Investor; (c) require from the Investor any notice to,
declaration or filing with, or consent or approval of any governmental authority
or other third party; or (d) accelerate any obligation under, or give rise to a
right of termination of, any agreement, permit, license or authorization to
which the Investor is a party or by which the Investor is bound.
3.3 COMMISSIONS AND FEES.
The Investor represents that there are no claims for investment banking
fees, brokerage commissions, finder's fees or similar compensation (exclusive of
professional fees to lawyers and accountants) in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement made by or on behalf of such Investor.
SECTION 4. CONDITIONS OF PURCHASE.
The Investor's obligation to purchase and pay for the Series C
Preferred Shares to be purchased by it shall be subject to compliance by the
Company with its agreements herein contained and to the fulfillment to the
Investor's satisfaction, or the waiver by the Investor, on or before and at the
Closing Date, of the following conditions:
4.1 SATISFACTION OF CONDITIONS.
The representations and warranties of the Company contained in this
Agreement shall be true and correct on and as of the Closing Date; the Company
shall have performed and complied with all agreements, obligations and
conditions contained in this Agreement that are required to be performed or
complied with by it on or before the Closing; and, on the Closing Date, a
certificate to such effect executed by the President and Chief Financial Officer
of the Company shall have been delivered to the Investor.
4.2 AUTHORIZATION.
The Board of Directors of the Company shall have duly adopted
resolutions in form and substance reasonably satisfactory to the Investor and
shall have taken all action necessary for the purpose of authorizing the Company
to consummate the transactions contemplated hereby in accordance with the terms
hereof and to cause the Certificate of Designation to become effective; and the
Investor shall have received a certificate of the Secretary of the Company
setting forth a copy of the relevant Board of Directors and/or stockholder
resolutions and the Certificate of Incorporation, the Certificate of Designation
and Bylaws of the Company and such other matters as may be reasonably requested
by the Investor.
4.3 OPINION OF COUNSEL.
The Investor shall have received from Summit Law Group an opinion dated
as of the Closing Date substantially in the form attached hereto as EXHIBIT C.
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4.4 ALL PROCEEDINGS SATISFACTORY.
All corporate and other proceedings taken prior to or at the Closing in
connection with the transactions contemplated by this Agreement, and all
documents and evidences incident thereto, shall be reasonably satisfactory in
form and substance to the Investor.
4.5 NO VIOLATION OR INJUNCTION.
The consummation of the transactions contemplated by this Agreement
shall not be in violation of any law or regulation and shall not be subject to
any injunction, stay or restraining order.
4.6 CONSENTS AND WAIVERS.
The Company shall have obtained all consents or waivers necessary to
execute this Agreement and the other agreements and documents contemplated
herein, to issue and sell the Securities to be sold to the Investor hereunder
and to carry out the transactions contemplated hereby and thereby and shall have
delivered evidence thereof to the Investor. All corporate and other action and
governmental filings necessary to effectuate the terms of this Agreement and
other agreements and instruments executed and delivered by the Company in
connection herewith shall have been made or taken.
4.7 AMENDMENT NO. 2 TO INVESTOR RIGHTS AGREEMENT.
The Company, each other Investor and the holders of all of the Series A
and Series B Preferred Stock shall have entered into the Amendment No. 2 to
Investor Rights Agreement.
4.8 FILING OF CERTIFICATE OF DESIGNATION.
The Certificate of Designation shall have been filed with the Secretary
of State of the State of Delaware.
SECTION 5. GENERAL.
5.1 AMENDMENTS, WAIVERS AND CONSENTS.
For the purpose of this Agreement and all agreements executed pursuant
hereto, no course of dealing between or among any of the parties hereto and no
delay on the part of any party hereto in exercising any rights hereunder or
thereunder shall operate as a waiver of the rights hereof and thereof. No
covenant or other provision hereof may be waived otherwise than by a written
instrument signed by the party or parties so waiving such covenant or other
provision. No amendment to this Agreement may be made without the written
consent of the Company and the Investor.
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5.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS;
ASSIGNABILITY OF RIGHTS.
All covenants, agreements, representations and warranties of the
Company and the Investor made herein, in the Disclosure Schedule and the
Certificate of Designation and in the certificates, lists, exhibits, schedules
or other written information delivered or furnished to the Investor in
connection herewith (a) are material, shall be deemed to have been relied upon
by the party or parties to whom they are made and shall survive the Closing
regardless of any investigation or knowledge on the part of such party or its
representatives and (b) shall bind the parties' successors and assigns
(including without limitation any successor to the Company by way of
acquisition, merger or otherwise), whether so expressed or not, and, except as
otherwise provided in this Agreement, all such covenants, agreements,
representations and warranties shall inure to the benefit of the Investor's
successors and assigns and to their transferees of Securities, whether so
expressed or not, and any such transferee shall be deemed the "Investor" for
purposes hereof.
5.3 LEGEND ON SECURITIES.
The Company and the Investor acknowledge and agree that the following
legend shall be typed on each certificate evidencing any of the securities
issued hereunder held at any time by the Investor:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES
OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED,
HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A
REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS
EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM
REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES
AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY
LAWS.
5.4 GOVERNING LAW.
This Agreement shall be deemed to be a contract made under, and shall
be construed in accordance with, the laws of Delaware, without giving effect to
conflict of laws principles thereof.
5.5 SECTION HEADINGS AND GENDER.
The descriptive headings in this Agreement have been inserted for
convenience only and shall not be deemed to limit or otherwise affect the
construction of any provision thereof or hereof. The use in this Agreement of
the masculine pronoun in reference to a party hereto shall be deemed to include
the feminine or neuter, and vice versa, as the context may require.
5.6 COUNTERPARTS.
This Agreement may be executed simultaneously in any number of
counterparts, each of which when so executed and delivered shall be taken to be
an original; but such counterparts shall together constitute but one and the
same document.
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5.7 NOTICES AND DEMANDS.
Any notice or demand which is required or provided to be given under
this Agreement or the Certificate of Designation shall be deemed to have been
sufficiently given and received for all purposes when delivered by hand,
telecopy, telex or other method of facsimile, or five days after being sent by
certified or registered mail, postage and charges prepaid, return receipt
requested, or two days after being sent by overnight delivery providing receipt
of delivery, to the following addresses:
if to the Company:
Lineo, Inc.
383 S. 520 W.
Lindon, Utah 84042
Attn: President
Fax: (801) 426-6166
copy to:
Summit Law Group
1505 Westlake Avenue N., Suite 300
Seattle, Washington 98109
Attn: Mark F. Worthington, Esq.
Fax: (206) 281-9882
if to the Investor:
- -------------------------------
- -------------------------------
- -------------------------------
- -------------------------------
- -------------------------------
- -------------------------------
5.8 REMEDIES; SEVERABILITY.
It is specifically understood and agreed that any breach of the
provisions of this Agreement by any person subject hereto will result in
irreparable injury to the other parties hereto, that the remedy at law alone
will be an inadequate remedy for such breach, and that, in addition to any other
remedies which they may have, such other parties may enforce their respective
rights by actions for specific performance (to the extent permitted by law). The
Company may refuse to recognize any unauthorized transferee as one of its
stockholders for any purpose, including, without limitation, for purposes of
dividend and voting rights, until the relevant party or parties have complied
with all applicable of this Agreement. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be deemed
prohibited or invalid under such applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, and such
prohibition or invalidity shall not invalidate the remainder of such provision
or the other provisions of this Agreement.
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5.9 INTEGRATION.
This Agreement, including the exhibits, documents and instruments
referred to herein or therein, constitutes the entire agreement, and supersedes
all other prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof.
5.10 DELAYS OR OMISSIONS.
It is agreed that no delay or omission to exercise any right, power or
remedy accruing to any party, upon any breach, default or noncompliance by
another party under this Agreement, shall impair any such right, power or
remedy, nor shall it be construed to be a waiver of any such breach, default or
noncompliance, or any acquiescence therein, or of or in any similar breach,
default or noncompliance thereafter occurring. It is further agreed that any
waiver, permit, consent or approval of any kind or character on any Investor's
part of any breach, default or noncompliance under this Agreement must be in
writing and shall be effective only to the extent specifically set forth in such
writing.
5.11 AGGREGATION OF STOCK.
All shares of the Series C Preferred Stock or Common Stock issued upon
conversion thereof held or acquired by affiliated entities or persons shall be
aggregated together for the purpose of determining the availability of any
rights under this Agreement.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.
COMPANY: INVESTOR:
LINEO, INC.,
a Delaware corporation ------------------------------
By By
----------------------------------------- ----------------------------
Bryan Sparks, President and Chairman Its
-------------------------
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EXHIBIT 10.11
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement") is made as of April 13,
2000 by and among Lineo, Inc., a Delaware corporation ("Buyer"), Yoshinobu
Ushiyama, an individual residing in Japan ("Mr. Ushiyama"), Tatsuya Takeuchi, an
individual residing in Japan ("Mr. Takeuchi", and together with Mr. Ushiyama,
collectively, "Principal Shareholders", and each a "Principal Shareholder") and
such other minority shareholders of United System Engineers, Inc., a Japanese
corporation (the "Company"), listed in the List of Shareholders attached hereto
as Schedule 1 (collectively, "Minority Shareholders", and together with
Principal Shareholders, collectively, "Sellers" and each "Seller"), acting
through Mr. Ushiyama as their representative ("Shareholder Representative").
RECITALS
A. Sellers collectively own 160,000 shares of common stock of the
Company, with par value of Yen 500 per share, representing all of the issued and
outstanding capital stock of the Company (the "Company Shares").
B. The Company is engaged in the business of development, design,
manufacture and sale of computer systems (the "Business").
C. Buyer desires to purchase from Sellers, and Sellers desire to sell to
Buyer, the Company Shares on the terms and conditions hereinafter set forth.
AGREEMENT
In consideration of the premises and the mutual agreements herein
contained, Sellers and Buyer agree as follows:
1. PURCHASE AND SALE OF COMPANY SHARES.
(a) TRANSACTION. On and subject to the terms and conditions set forth
herein, Buyer agrees to purchase from Sellers, and Sellers agree to
sell to Buyer, at the Closing, 160,000 Company Shares.
(b) CONSIDERATION. The total consideration to be paid by Buyer to Sellers
for all of the Company Shares hereunder shall be Three Hundred Twenty
Two Thousand Eight Hundred Twenty Nine and 13/100 Dollars
($322,829.13). Each Seller shall be entitled to such amount as
appearing opposite his or her name in Schedule 1 (the
"Consideration").
(c) THE CLOSING. Subject to satisfaction or waiver of the conditions set
forth in Section 3 hereof, the closing of the transactions
contemplated by this Agreement (the "Closing") shall take place at the
offices of Summit Law Group, PLLC on
<PAGE>
April 30, 2000 or on such other date as Sellers and Buyer may mutually
agree (the "Closing Date").
(d) DELIVERIES AT THE CLOSING. At the Closing, (i) each Seller shall
deliver to Buyer certificates for the Company Shares representing such
number of the Company Shares as set forth opposite his or her name in
Schedule 1, and (ii) Buyer shall deliver to each Seller the
Consideration appearing opposite his or her name in Schedule 1.
2. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY PRINCIPAL SHAREHOLDERS. Principal
Shareholders hereby jointly and severally represent and warrant to
Buyer as follows:
(i) The Company has been duly incorporated and is validly existing and
in good standing as a joint stock corporation (KABUSHIKI KAISHA) under the
laws of Japan. It has full corporate power to carry on its business as it
is now conducted and to own, lease or operate the properties and assets it
now owns, leases or operates. It is qualified to do business, is in good
standing and has all required and appropriate licenses in each jurisdiction
in which its failure to obtain or maintain such qualification, good
standing or licensing would have a material adverse effect on the condition
(financial or otherwise), assets, properties, results of operations or
business of the Company (a "Material Adverse Effect"). The Company does not
have a subsidiary (defined to mean any entity or organization in which it
has a direct or indirect equity or ownership interest in excess of 50%).
(ii) The authorized capital stock of the Company consists solely of
one class of stock and the total number of the Company Shares authorized to
be issued by the Company is 160,000 shares, of which 160,000 Company Shares
are issued and outstanding as of the date hereof.
(iii) All of the Company Shares have been legally and validly issued
and are fully paid and nonassessable; and the Company has no outstanding
obligations, understandings, or commitments regarding the issuance of any
additional shares of capital stock, or any options, rights, or warrants
concerning the issuance of any additional shares of capital stock or
securities convertible into shares of capital stock, of the Company.
(iv) The List of Shareholders in Schedule 1 lists the names and the
number of the Company Shares held of record by each Seller as of the date
hereof.
(v) There are no permits, approvals or consents of any governmental
bodies or agencies which are necessary or appropriate to be obtained by
Sellers in order for the consummation of the transactions contemplated by
this Agreement to be in compliance with applicable laws, other than
permits, approvals and consents already obtained.
(vi) The Company has delivered to Buyer the Company's unaudited
balance sheet as of December 31, 1999 and unaudited income statement and
statement of
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disposition of loss (SONSHITSUKIN SHORI KEISANSHO) for the period then
ended, which have been approved by the shareholders of the Company at the
general meeting of the shareholders. The financial statements so delivered
have been prepared in conformity with generally accepted accounting
principles in Japan ("Japanese GAAP") applied on a consistent basis (except
for changes, if any, required by Japanese GAAP and disclosed therein). Such
financial statements present fairly the financial condition and the results
of operations of the Company as of the date and for the period stated
therein. Except as and to the extent reflected or reserved against in the
balance sheet mentioned above, the Company did not have and was not subject
to any material liability or obligation of any nature, whether accrued,
absolute, contingent or otherwise, as of December 31, 1999 (the "Balance
Sheet Date"), required by Japanese GAAP to be stated therein.
(vii) Since the Balance Sheet Date, there has not been, occurred or
arisen (i) any declaration or payment of dividends by the Company or any
distribution of assets of any kind whatsoever by the Company to its
shareholders with respect to any shares of its capital stock; (ii) any
transaction, sale or transfer of any of its assets, or cancellation of any
debts or claims not in the ordinary course of business; (iii) any material
adverse change in the results of operations, financial condition, assets or
liabilities of the Company; (iv) any increase in, or commitment to
increase, the compensation payable or to become payable to any officer,
director, employee or agent of the Company, or any bonus payment or similar
arrangement made to or with any such officers, directors, employees or
agents, except for bonus payment or similar arrangement made consistent
with the past practice; (v) any incurring of, assumption of, or taking any
property subject to, any liability, except for liabilities incurred or
assumed or property taken subsequent to the Balance Sheet Date in the
ordinary course of business and consistent with past practice; (vi) any
adoption of a plan or agreement or amendment to any plan or agreement
providing any new or additional "fringe benefits" (including, but not
limited to, vacation plans or programs, sick leave plans or programs,
dental or medical plans or programs, and related or similar benefits); or
(vii) any material alteration in the manner of keeping the books, accounts
or record of the Company, or in the accounting practices therein reflected.
(viii) Except in each case as set forth in the Disclosure Schedule,
attached hereto as SCHEDULE 2:
(A) The Company owns and has good and marketable title to, or is
licensed or otherwise possesses legally enforceable rights to use, all
patents, patent applications, disclosures, copyrights (whether
registered or unregistered), and any applications therefor, software
or applications (in both source code and object code), websites,
domain names, technology, trademarks, trade names, service marks,
trade secrets, know-how or mask work right (the "Intellectual
Property") material to the conduct of its business as presently
conducted;
(B) The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby will not
breach, violate or conflict in any material respect with any
instrument or agreement governing any of the Intellectual Property, or
impair the right of the Company to use, sell,
3
<PAGE>
license or dispose of the Intellectual Property, or to bring any
action for the infringement of the Intellectual Property;
(C) To the actual knowledge of Principal Shareholders, no third
party is infringing any of the Intellectual Property;
(D) The Company has taken reasonable steps necessary or
appropriate (including, without limitation, entering into agreements
concerning nondisclosure and assignment of inventions and copyrights
with all employees of the Company and setting forth in the employment
rules (SHUGYOKISOKU) the prohibition against employees' work for
another employer without the consent of the Company) to safeguard and
maintain the secrecy and confidentiality of, and establish the
Company's proprietary rights in, all of the Intellectual Property;
(E) All embodiments of those trade secrets which are related to
the Company's Business are presently and as of the Closing Date will
be located at the Company's headquarters; and
(F) The Company has in all material respects performed, or is
now performing the obligations of the Company in all material respects
pursuant to each and every license or agreement concerning the
Intellectual Property. All such licenses and agreements are in full
force and effect and are a valid and enforceable obligation against
the other party or parties thereto in accordance with their terms
(subject to the enforcement of remedies).
(ix) Within the times and in the manner prescribed by law, the Company
has filed all applicable tax returns and has paid or caused to be paid all taxes
which have been due pursuant to such tax returns. All tax returns filed by the
Company through the Closing Date, including any amendments to date, have been
prepared in good faith without negligence or willful misrepresentation and are
complete and accurate in all material respects and accurately set forth all
items (to the extent required to be included or reflected in such returns)
relevant to their future tax liabilities, including the tax bases of their
properties and assets.
(x) No examination of the tax returns of the Company is currently in
progress nor, to the knowledge of Principal Shareholders, is any such
examination threatened. To the knowledge of Principal Shareholders, no
governmental entity has proposed (tentatively or definitively), asserted or
assessed, or threatened to propose or assert, any deficiency, assessment or
claim for national, local or foreign taxes against the Company.
(xi) There is no action, suit or proceeding to which the Company is a
party (either as a plaintiff or defendant) pending before any court or
governmental agency, authority or body or arbitrator that would have a Material
Adverse Effect; and to the knowledge of Principal Shareholders, there is no such
action, suit or proceeding threatened against the Company. Neither the Company,
nor, to the knowledge of Principal Shareholders, any officer, director or
employee of any of the foregoing, has been permanently or temporarily enjoined
by any order, judgment or decree of any court
4
<PAGE>
or any governmental agency, authority or body from engaging in or continuing any
conduct or practice in connection with the Business, assets, or properties of
the Company.
(xii) The conduct of business by the Company on the date hereof does
not violate any laws, statutes, ordinances, rules, regulations, decrees, orders,
permits or other similar items in force on the date hereof, the enforcement of
which would have a Material Adverse Effect, nor has the Company received any
notice of any such violation. The Company holds all permits and licenses that
are required to permit it to conduct its Business as now conducted; all such
permits and licenses are valid and in full force and effect and will remain so
upon consummation of the transactions contemplated by this Agreement; and, to
the knowledge of Principal Shareholders, no suspension, cancellation or
termination of any of such permits or licenses is threatened or imminent.
(xiii) Mr. Ushiyama is duly authorized to act as Shareholder
Representative on behalf of Minority Shareholders in connection with this
Agreement, including without limitation the execution, delivery and performance
of this Agreement on their behalf.
(b) REPRESENTATIONS AND WARRANTIES OF SELLER. Each Seller, with respect to
himself or herself, hereby represents and warrants to Buyer as follows:
(i) Seller has good, marketable and indefeasible title to, is the sole
record and beneficial owner of, has full power of disposition over and has full
capacity to sell and transfer to Buyer such number of the Company Shares as set
forth opposite his or her name in Schedule 1, and, at Closing, Buyer will have
good, marketable and indefeasible title to such Company Shares. Such Company
Shares are free and clear of all liens, claims, debts, or other encumbrances;
provided, that a transfer of such Company Shares is subject to the approval of
the Board of Directors as set forth in the Articles of Incorporation of the
Company. To the best knowledge of each Seller, no shareholder of the Company is
entitled to any preemptive or similar rights to subscribe for shares of capital
stock of the Company.
(ii) Seller has full power and capacity to enter into this Agreement and
all other agreements contemplated hereby to which Seller is or will be a party
(collectively the "Seller Related Agreements") and to consummate the
transactions contemplated hereby and thereby (including sale and delivery of the
Company Shares). This Agreement and the Seller Related Agreements constitute (or
upon execution will constitute) legal, valid and binding obligations of Seller,
enforceable against Seller in accordance with their respective terms and
conditions, except as the enforceability thereof may be limited by bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or other similar
laws relating to the enforcement of creditors' rights generally and by general
principles of equity.
(iii) The execution and delivery of this Agreement and the Seller Related
Agreements, the consummation of the transactions contemplated hereby and thereby
and the fulfillment of the terms hereof and thereof will not result in a breach
of any of the terms or provisions of, or constitute a default under, or conflict
with, any agreement, indenture or other instrument to which either Seller is a
party or by which Seller is bound,
5
<PAGE>
any judgment, decree, order or award of any court, governmental body or
arbitrator by which Seller is bound, or any law, rule or regulation
applicable to Seller.
(c) REPRESENTATIONS AND WARRANTIES OF BUYER. Except as set forth in the
Disclosure Schedule attached hereto as SCHEDULE 2, Buyer hereby represents
and warrants to Sellers as follows:
(i) Buyer has been duly organized and is validly existing and in good
standing as a corporation under the laws of the State of Delaware and is
qualified to do business as a foreign corporation in each jurisdiction in which
the failure to be so qualified would have a Material Adverse Effect. Buyer has
all requisite corporate power and authority to carry on its business as
presently conducted, enter into this Agreement and all other agreements herein
contemplated to be executed in connection herewith by Buyer (collectively, the
"Buyer Related Agreements") and to consummate the transactions contemplated
hereby and thereby. This Agreement and the Buyer Related Agreements have been
duly authorized by all necessary action, corporate or otherwise, and constitute
(or upon execution will constitute) legal, valid and binding obligations of
Buyer, enforceable against Buyer in accordance with their respective terms and
conditions, except as the enforceability thereof may be limited by bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or other similar
laws relating to the enforcement of creditors' rights generally and by general
principles of equity.
(ii) The execution and delivery of this Agreement and the Buyer Related
Agreements, the consummation of the transactions contemplated hereby and thereby
and the fulfillment of the terms hereof and thereof will not result in a breach
of any of the terms or provisions of, or constitute a default under, or conflict
with, any agreement, indenture or other instrument to which Buyer is a party or
by which it is bound, the charter documents of Buyer, any judgment, decree,
order or award of any court, governmental body or arbitrator by which Buyer is
bound, or any law, rule or regulation applicable to Buyer.
(iii) Immediately prior to the Closing, the authorized share capital of the
Buyer consists, or will consist of 100,000,000 shares of common stock, of which
20,148,724 are issued and outstanding, and 30,000,000 shares of preferred stock,
of which 7,500,000, 4,850,000 and 3,000,000 shares of preferred stock are
designated Series A Preferred, Series B Preferred and Series C Preferred,
respectively, and of which 7,500,000, 4,833,331 and none, respectively, are
issued and outstanding. 5,000,000 additional shares of common stock of Buyer are
reserved for issuance to employees, officers and directors of Buyer pursuant to
such employee stock option plans as may be approved by the Buyer's board of
directors, of which options for 1,808,381 shares are currently outstanding.
(iv) Buyer has previously furnished to Sellers copies of its draft audited
financial statements (balance sheet, statement of operations, statement of cash
flows and statement of stockholders equity) for the fiscal year at and ended
October 31, 1999. Such financial statements were prepared in conformity with
generally accepted accounting principles in the United States ("US GAAP")
applied on a consistent basis; are complete,
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correct and consistent in all material respects with the books and records of
Buyer; and fairly and accurately present the financial position of Buyer as of
the dates thereof and the results of operations and cash flows of Buyer for the
periods shown therein. Except as and to the extent reflected or reserved against
in the balance sheet so furnished to Sellers, Buyer did not have and was not
subject to any material liability or obligation of any nature, whether accrued,
absolute, contingent or otherwise, as of October 31, 1999 (the "Buyer Balance
Sheet Date"), required by US GAAP to be stated therein.
(v) Since the Buyer Balance Sheet Date, there has not been (a) any
material adverse change in the financial condition, results of operations,
assets, liabilities, or business of Buyer, (b) any material asset or property of
Buyer made subject to a lien of any kind, (c) any waiver of any material right
of Buyer, or the cancellation of any material debt or claim held by Buyer, (d)
any payment of dividends on, or other distribution with respect to, or any
direct or indirect redemption or acquisition of, any shares of the capital stock
of Buyer, or any agreement or commitment therefore, (e) any mortgage, pledge or
hypothecation of any tangible or intangible asset of Buyer, except in the
ordinary course of business, (f) any sale or assignment of any tangible asset of
Buyer having a book value in excess of $25,000, except in the ordinary course of
business, or of any Buyer Intellectual Property Rights (as hereafter defined) or
other intangible assets, (g) any loan by Buyer to, or any loan to Buyer from,
any officer, director, employee or stockholder of Buyer, or any agreement or
commitment therefore (other than travel and other advances in the ordinary
course of business), (h) any damage, destruction or loss (whether or not covered
by insurance) materially and adversely affecting the assets, property or
business of Buyer, (i) any repayment of any loan owed by Buyer (including,
without limitation, any loan owed to any stockholder of Buyer), (j) any single
capital expenditure in excess of $50,000 or any capital expenditures aggregating
more than $250,000, or (k) any material change in the accounting methods or
practices followed by Buyer.
(vi) Buyer is not a party or subject to or bound by any acquisition, merger
or similar agreement that may have a Material Adverse Effect.
(vii) With respect to Buyer Intellectual Property Rights (as defined
below):
(A) Buyer has the right to use, sell, and license the Buyer
Intellectual Property Rights (as defined below) material to the conduct of its
business as presently conducted, including without limitation all rights to
Buyer name "Lineo" and to the trademarks and the product name "Embedix" (the
"Buyer Rights"), free and clear of the rights of all others.
(B) The business of Buyer as presently conducted, the products as
marketed or sold and the provision of services by Buyer do not violate and will
not violate any agreements that Buyer has with any third party or infringe any
patent, trademark, service mark, copyright or trade secret or any other
Intellectual Property Rights of any third party
(C) No claim is pending or threatened against Buyer nor has Buyer
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received any notice or claim from any person asserting that any of Buyer's
present or contemplated activities infringe or may infringe any Buyer
Intellectual Property Rights of such person, and Buyer is not aware of any
infringement by any other person of any of Buyer Rights.
(D) Each current and former employee of Buyer, and each of Buyer's
consultants and independent contractors involved in development of any of Buyer
Rights, has executed an agreement regarding confidentiality, proprietary
information and assignment of inventions and copyrights to Buyer, and none of
such employees, consultants or independent contractors is in violation of any
agreement or in breach of any agreement or arrangement with former or present
employers relating to proprietary information or assignment of inventions. Buyer
has taken all reasonable steps to protect all data, information, ideas,
concepts, know-how and materials that Buyer treats as trade secrets, and all
other confidential information and Buyer Intellectual Property Rights of Buyer,
which are not part of the public domain or knowledge, nor, to the best knowledge
of Buyer, have they been used, divulged or appropriated for the benefit of any
person other than Buyer or otherwise to the detriment of Buyer.
(E) No royalties or other amounts are payable by Buyer to persons by
reason of the ownership or use of the Buyer Intellectual Property Rights of
Buyer.
(F) No third party has claimed or, to the best of Buyer's knowledge,
has reason to claim that any person employed by or affiliated with Buyer has (i)
violated or may be violating any of the terms or conditions of his or her
employment, non-competition, non-disclosure, non-solicitation or inventions
agreement with such third party, (ii) disclosed or may be disclosing or utilized
or may be utilizing any Buyer Intellectual Property Rights, trade secret or
proprietary information or documentation of such third party, or (iii)
interfered or may be interfering in the employment relationship between such
third party and any of its present or former employees.
As used herein, the term "Buyer Intellectual Property Rights" shall mean
the intellectual property rights, including, without limitation, all patents,
patent applications, patent rights, trademarks, trademark applications, trade
names, service marks, service mark applications, copyrights, copyright
applications, computer programs and other computer software, inventions,
designs, samples, specifications, schematics, know-how, trade secrets,
proprietary processes and formulae, including production technology and
processes, all source and object code, algorithms, promotional materials,
customer lists, supplier and dealer lists and marketing research, and all
documentation and media constituting, describing or relating to the foregoing,
including without limitation, manuals, memoranda and records.
(viii) There is no litigation or governmental proceeding or investigation
pending or threatened against Buyer or affecting any of its properties or assets
or against any officer, director or key employee of Buyer in his or her capacity
as an officer, director or employee of Buyer, which litigation, proceeding or
investigation is reasonably likely to have a Material Adverse Effect, or which
may call into question the validity or hinder the enforceability of this
Agreement or any other agreements or transactions contemplated
8
<PAGE>
hereby; nor has there occurred any event nor does there exist any condition on
the basis of which any such litigation, proceeding or investigation might be
properly instituted or commenced.
(ix) Buyer has filed all federal, state, local and foreign income, excise
and franchise tax returns, real estate and personal property tax returns, sales
and use tax returns and other tax returns required to be filed by it where the
failure to file such returns would have a Material Adverse Effect, and has paid
all taxes owing by it, except taxes which have not yet accrued or otherwise
become due, for which adequate provision has been made in the pertinent
financial statements referred to above or which will not have a Material Adverse
Effect. All taxes and other assessments and levies which Buyer is required to
withhold or collect have been withheld and collected and have been paid over to
the proper governmental authorities except where the failure to withhold or
collect and pay over would not have a Material Adverse Effect. With regard to
the federal income tax returns of Buyer, Buyer has never received notice of any
audit or of any proposed deficiencies from the Internal Revenue Service. There
are in effect no waivers of applicable statutes of limitations with respect to
any taxing owed by Buyer for any year. Neither the Internal Revenue Service nor
any other taxing authority is now asserting or, to the knowledge of Buyer,
threatening to assert against Buyer any deficiency or claim for additional taxes
or interest thereon or penalties in connection therewith.
(x) There are no permits, approvals or consents of any governmental bodies
or agencies which are necessary or appropriate to be obtained by Buyer in order
for the consummation of the transactions contemplated by this Agreement to be in
compliance with applicable laws, other than a securities notice filed with the
Minister of Finance of Japan pursuant to the ministerial ordinances issued under
the Securities and Exchange Law of Japan, and such other permits, approvals and
consents already obtained.
3. CONDITIONS TO CLOSING.
(a) CONDITIONS PRECEDENT TO EACH PARTY'S OBLIGATIONS TO CLOSE. The obligations
of the parties to effect the Closing shall be subject to the following
conditions unless waived in writing by Buyer and Sellers:
(i) No law or order shall have been enacted, entered, issued, promulgated
or enforced by any governmental entity, nor shall any legal action have been
instituted and remain pending or, to the knowledge of Principal Shareholders and
Buyer, have been threatened and remain so at what would otherwise be the Closing
Date, which prohibits or restricts or would (if successful) prohibit or restrict
the transactions contemplated by this Agreement or which would not permit the
Company's Business as presently conducted to continue unimpaired following the
Closing Date. No governmental entity shall have notified any party to this
Agreement that consummation of the transactions contemplated by this Agreement
would constitute a violation of any laws of any jurisdiction and/or that it
intends to commence proceedings to restrain or prohibit such transactions or
force divestiture or rescission, unless such governmental entity shall have
withdrawn such notice and abandoned any such proceedings prior to the time which
otherwise would have been the Closing Date; and
9
<PAGE>
(ii) To the extent required by applicable law, all governmental permits and
approvals required to be obtained from any governmental entity or agency shall
have been received or obtained on or prior to the Closing Date.
(b) CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS TO CLOSE. The obligations of
Buyer to effect the Closing shall be subject to the following conditions
except to the extent waived in writing by Buyer:
(i) The respective representations and warranties of Principal
Shareholders and each Seller herein contained shall be true and correct in all
material respects as of the Closing Date with the same effect as though made as
of such date; Principal Shareholders and Sellers shall have in all material
respects performed all obligations and complied with all covenants and
conditions required under this Agreement to be performed or complied with by
them on or prior to the Closing Date; and Principal Shareholders and Sellers
shall have executed and delivered to Buyer certificates, dated as of the Closing
Date, to that effect in form and substance satisfactory to Buyer;
(ii) The Board of Directors of the Company shall have approved the transfer
by Sellers of the Company Shares to Buyer, and Buyer shall have been furnished
with satisfactory evidence of all other consents, approvals or notifications of
other persons whose consent, approval or notification is required in order to
permit the transactions contemplated hereunder; and
(iii) Buyer shall have received an opinion from counsel to the Company in
form and substance mutually agreeable to Buyer and the Company.
(c) CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS TO CLOSE. The obligations of
Sellers to effect the Closing shall be subject to the following conditions,
except to the extent waived in writing by Sellers:
(i) The representations and warranties of Buyer herein contained shall be
true and correct in all material respects as of the Closing Date with the same
effect as though made as of such date; Buyer shall have in all material respects
performed all obligations and complied with all covenants and conditions
required under this Agreement to be performed or complied with by it at or prior
to the Closing Date; and Buyer shall have delivered to Sellers a certificate in
form and substance satisfactory to Sellers, dated the Closing Date and signed by
its duly authorized officer, to such effect;
(ii) Sellers shall have been furnished with satisfactory evidence of all
consents, approvals or notifications of other persons whose consent, approval or
notification is required in order to permit the transactions contemplated
hereunder;
(iii) Buyer shall have executed employment agreements with Mr. Ushiyama,
Mr. Takeuchi and Mr. Koichi Narasaki on such terms and conditions mutually
agreeable to the parties thereto and shall have granted, effective on the
Closing Date, stock options to those Sellers who shall become employees of Buyer
upon the Closing.
10
<PAGE>
(iv) Buyer shall have executed an indemnity agreement for the benefits of
Principal Shareholders, Satoru Miura, Masatoshi Suzuki and Yoshito Iguchi
(collectively "Financial Support Providers"), in which Buyer agrees to: (i) use
or caused to be used commercially reasonable best efforts to arrange for the
release of Financial Support Providers from the guarantee they have made on
behalf of the Company ("Guarantees"); (ii) pay or cause to be paid when due any
and all the Company's borrowings in respect of which Guarantees have been
provided with respect to which such release has not been effected; (iii) pay or
cause to be paid when due any and all loans made to the Company by Financial
Support Providers ("Loans"); and (iv) indemnity and hold Financial Support
Providers harmless from and against all liability, damage, deficiency, loss,
cost or expense, including attorneys' fees and costs of investigation
("Losses"), incurred by Financial Support Providers in connection with any
execution of Guarantees by the creditors thereof and/or any breach by the
Company of Loans.
4. Termination.
(a) TERMINATION. Anything contained herein to the contrary notwithstanding,
this Agreement may not be terminated or canceled prior to the Closing Date,
except:
(i) By written consent of Buyer and Sellers; or
(ii) Upon the failure to satisfy one or more conditions to Close set forth
herein; or
(iii) By either party by written notice to the other if the Closing has not
occurred by April 30, 2000.
(b) EFFECT OF TERMINATION. If this Agreement is terminated pursuant to Section
4(a) above, all rights and obligations of the parties hereunder shall
terminate without any liability of any party to the other (except for any
liability of the party then in breach).
5. INDEMNIFICATION.
(a) INDEMNIFICATION BY PRINCIPAL SHAREHOLDERS. Principal Shareholders shall
jointly and severally indemnify and hold harmless Buyer from and against
all Losses, incurred by Buyer in good faith and which arise from or are
attributable to any breach of any representation or warranty made by
Principal Shareholders in Section 2(a) above even though any such
representation or warranty may have been made by Principal Shareholders in
good faith and to the best of their knowledge (unless such representation
or warranty is expressly limited in this Agreement to the knowledge of
Principal Shareholders).
(b) INDEMNIFICATION BY SELLER. Each Seller (including Principal Shareholders)
shall indemnify and hold harmless Buyer from and against all Losses which
Buyer shall incur in good faith and which arise from or are attributable to
any breach of any representation or warranty made by such Seller in Section
2(b) above even though any such representation or warranty may have been
made by such Seller in
11
<PAGE>
good faith and to the best of his or her knowledge (unless such
representation or warranty is expressly limited in this Agreement to the
knowledge of such Seller), provided, however, that the indemnity obligation
of each Seller (other than Principal Shareholders) hereunder shall be
limited to the consideration he or she has received pursuant to this
Agreement.
(c) INDEMNIFICATION BY BUYER. Buyer shall indemnify and hold harmless Sellers
(including Principal Shareholders) from and against all Losses which
Sellers shall incur in good faith and which arise from or are attributable
to any breach of any representation or warranty made by Buyer in Section
2(c) above even though any such representation or warranty may have been
made by Buyer in good faith and to the best of its knowledge (unless such
representation or warranty is expressly limited in this Agreement to the
knowledge of Buyer).
(d) INDEMNIFICATION PROCEDURES. If any party claiming the right to be
indemnified hereunder (the "Indemnitee") is threatened with any claim, or
any claim is presented to or made by the Indemnitee, or any action is
commenced against the Indemnitee, which may give rise to a right of
indemnification hereunder, the Indemnitee shall, with reasonable
promptness, give to the party or parties claiming to be liable hereunder
(the "Indemnitor") a written notice of the claim and request the Indemnitor
to defend the Indemnitee, and, without prejudice to the Indemnitee's right
of indemnification hereunder, shall, prior to taking any action with
respect to the subject claim, make itself available to meet with the
Indemnitor and in good faith attempt to resolve and settle the claim
without further recourse to the Indemnitee's rights and remedies under this
Section 5. The Indemnitor may elect, within thirty (30) days after receipt
of such notice, or no later than five (5) days before the return date
required by any citation, claim or other statute, whichever occurs earlier,
to contest or defend against such claim at the expense of the Indemnitor
(with counsel selected by the Indemnitor and reasonably acceptable to the
Indemnitee), and shall give a written notice to the Indemnitee of the
commencement of such defense with reasonable promptness after the giving of
the written notice of the claim by the Indemnitee. The Indemnitee, its
subsidiaries, successors and assigns shall be entitled to participate with
the Indemnitor in such event, but shall not be entitled in any way to
release, waive, settle, modify or pay such claim without the consent of the
Indemnitor if the Indemnitor has assumed such defense. In the event the
Indemnitor has assumed said defense and has employed counsel with respect
thereto, the Indemnitee shall also be entitled to employ separate counsel
at the Indemnitee's expense. In the event that the Indemnitor does not
elect to contest or defend the claim as provided above, the Indemnitee, its
subsidiaries, successors or assigns shall have the exclusive right (but not
the obligation) to prosecute, defend, compromise, settle or pay the claim
in its sole discretion and pursue its rights under this Agreement,
including the remedies set forth in Section 7 hereof.
(e) INDEMNITEE'S COOPERATION. In the event that a claim or benefit, other than
an insurance claim against an insurer of the Indemnitee under a policy
obtained on or after the Closing Date, is created in connection with the
occurrence of any Losses
12
<PAGE>
which have not been collected by the Indemnitee at the time payment with
respect to such Losses is made by the Indemnitor, the Indemnitee shall
assign such benefit or claim to the Indemnitor as a condition to the
payment by the Indemnitor and shall cooperate with the Indemnitor in its
efforts to collect any such benefit or claim. If such claim or benefit is
not assignable under applicable laws, the Indemnitee shall cooperate in
good faith with the Indemnitor's efforts to collect such claim or benefit.
6. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties contained in or made pursuant to this
Agreement shall survive the Closing and expire on the first anniversary of the
Closing except that if a claim or notice is given under Section 5 with respect
to any representation or warranty prior to the applicable expiration date, such
representation or warranty shall continue until such claim is finally resolved.
No claim or action for breach of any representation or warranty shall be
asserted or maintained by any party hereto after the expiration of such
representation or warranty pursuant to the preceding sentence except for claims
made in writing prior to such expiration or actions (whether instituted before
or after such expiration) based on any claim made in writing prior to such
expiration.
7. NONCOMPETITION COVENANT.
(a) NONCOMPETITION. Principal Shareholders and Mr. Koichi Narasaki
acknowledge and agree that, after the Closing, Buyer shall be
beneficially entitled, jointly with the Company, to the goodwill and
going concern value of the Business of the Company and that such
goodwill and going concern value shall be protected and preserved to
the maximum extent permitted by law. Principal Shareholders and Mr.
Koichi Narasaki also acknowledge that their management contributions
to the Company have been uniquely valuable and involve proprietary
information that would be competitively unfair to make available to
any competitor of the Company, and after the Closing, Buyer. For these
and other reasons and as an inducement to Buyer to enter into this
Agreement, each Principal Shareholder and Mr. Koichi Narasaki agrees
that for a period of two (2) years from the Closing Date, he will not,
directly or indirectly, for his own benefit or as agent for another,
carry on or participate in the ownership, management or control of, or
be employed by, or consult for or otherwise render services to, or
allow his name or reputation to be used in or by any other present or
future business enterprise that engages in the Business competitive
with the Company in the geographic areas that the Company currently
conducts its Business.
(b) RESTRICTIONS ON SOLICITING EMPLOYEES. In addition, to protect the
Company and, after the Closing, Buyer against any efforts by Principal
Shareholders and Mr. Koichi Narasaki to cause employees of the Company
to terminate their employment with the Company, each Principal
Shareholder and Mr. Koichi Narasaki agrees that, until the later of
(i) the expiry of a period of two (2) years following the Closing Date
and (ii) the expiry of a period of six (6) months following the date
that his service to or employment with the Company terminates
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<PAGE>
(for whatever reason), he shall not directly or indirectly (i) induce
any such employee to leave the Company or any of its affiliates or to
accept any other employment or position with any other business
enterprise engaging in the Business or (ii) assist such enterprise in
hiring any such employee.
(c) EXCEPTIONS. Nothing contained in this Section 7 shall limit the right
of a Principal Shareholder and Mr. Koichi Narasaki as an investor to
hold and make investments in securities of any corporation or limited
partnership that is registered on a national securities exchange or
admitted to trading privileges thereon or traded in a generally
recognized over-the-counter market, provided that Principal
Shareholder's and Mr. Koichi Narasaki's equity interest therein does
not exceed 5% of the outstanding shares or interests in such
corporation or partnership. For avoidance of doubt, nothing contained
in this Section 7 is intended to prohibit or restrict the activities
of a Principal Shareholder and Mr. Koichi Narasaki in performing his
duties as a director, officer or employee of the Company, Buyer or any
of their affiliates. Further, for avoidance of doubt, it is agreed
among the parties hereto that no Sellers (other than Principal
Shareholders and Mr. Koichi Narasaki) shall be subject to the
restrictions set forth in this Section 7.
(d) SPECIAL REMEDIES AND ENFORCEMENT. Each Principal Shareholder and Mr.
Koichi Narasaki recognizes and agrees that a breach by a Principal
Shareholder or Mr. Koichi Narasaki of any of the covenants set forth
in this Section 7 could cause irreparable harm to the Company and,
after the Closing, Buyer, that the Company's and Buyer's remedies at
law in the event of such breach would be inadequate, and that,
accordingly, in the event of such breach a restraining order or
injunction or both may be issued against a breaching Principal
Shareholder and Mr. Koichi Narasaki, in addition to any other rights
and remedies which are available to the Company or Buyer. If this
Section 7 is more restrictive than permitted by the laws of the
jurisdiction in which the Company or Buyer seeks enforcement hereof,
this Section 7 shall be limited to the extent permitted by such laws.
8. COVENANTS.
(a) GENERAL. The parties hereto agree to execute, acknowledge and deliver,
at or after the Closing Date, such other and further instruments and
documents as may be reasonably necessary to implement, consummate and
effectuate the terms of this Agreement. Sellers agree that at any time
and from time to time, at the Company's expense, Sellers shall execute
such documents and take any and all necessary actions as reasonably
requested by Buyer or the Company to promptly transfer to the Company
any assets held in the names of Sellers, which are related to or used
in connection with the Business of the Company.
(b) CONFIDENTIALITY. After the Closing, no Seller (including Principal
Shareholders) shall, at any time, make use of, divulge or otherwise
disclose, directly or indirectly, any trade secret or other
proprietary data (including, but not limited to, any customer list,
record or financial information) of or concerning the Business,
14
<PAGE>
except in furtherance of his or her duties and responsibilities as a
director, officer or employee of the Company (or Buyer)
(c) CONTINUED EMPLOYMENT. Buyer hereby confirms its agreement and
acknowledgement to continue the employment of all directors, officers
and employees of the Company with the Company after the Closing on
terms consistent with those of other employees of Buyer of comparable
status.
9. ASSIGNMENT. Except with respect to an assignment by Buyer to a
successor of all of the Company Shares, no party hereto may assign this
Agreement or any Buyer Related Agreement or Seller Related Agreement, nor any of
its rights or obligations hereunder may be assignable or transferable, in any
manner to a third party, without the prior written consent of (in case of an
assignment by a Seller) Buyer or (in case of an assignment by Buyer) Sellers.
Subject to the foregoing, this Agreement, the Buyer Related Agreements and
Seller Related Agreements shall be binding upon, inure to the benefit of, and be
enforceable by the heirs, administrators, executors and proper assigns of
Sellers and of Buyer to which they are or will be parties.
10. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Delaware without giving effect
to any choice of law rule that would cause the application of the laws of any
jurisdiction other than the internal laws of the State of Delaware to the rights
and duties of the parties.
11. EXPENSES. Sellers and Buyer shall each pay and bear its or his own
costs and expenses incident to the negotiation, preparation and performance of
this Agreement and the transaction contemplated hereby, including but not
limited to the fees, expenses and disbursements of their respective accountants
and legal counsel; provided, that Buyer shall bear the costs and expenses of the
audit of the Company, to the extent that Buyer determines such audit is
necessary or desirable and expenses to be borne or paid by Sellers shall be
charged to the Company.
12. PUBLICITY. No party shall issue any press release, publicity statement
or other public notice relating to this Agreement or the transactions
contemplated by this Agreement, without obtaining the prior written consent of
the other party or unless a particular action is required by applicable law;
provided, that the parties acknowledge that Buyer and its affiliates may issue a
press release at or following the Closing to announce the acquisition of the
Company and that the Company may send a notice of the acquisition to its
customers, supplies and such other business contacts of the Company in a manner
customary in Japan.
13. ENTIRE AGREEMENT. This Agreement, together with the Exhibits and
Schedules attached hereto, contains the entire agreement of the parties hereto
(including the Minority Shareholders represented by the Shareholder
Representative), and supersedes any prior written or oral agreements between
them concerning the subject matter contained herein. There are no
representations, agreements, arrangements or understanding, oral or written,
between and among the parties hereto, relating to the subject matter contained
in this Agreement, which are not fully expressed herein.
15
<PAGE>
14. COUNTERPARTS.
This Agreement and any amendments hereto may be executed in any number of
counterparts, and each such counterpart shall for all purposes be deemed to be
an original.
15. TAX MATTERS.
Sellers and Buyer acknowledge and agree that each is responsible for
obtaining his, her or its own tax advice with respect to the transactions
contemplated hereby and the tax impact thereof on his, her or its own tax
obligations.
16. AGREEMENT TO ARBITRATE.
(a) The parties agree that any dispute, controversy or claim concerning or
relating to this Agreement (a "Dispute"), shall be resolved pursuant
to this Section 16.
(b) The parties shall use all reasonable efforts to resolve the Dispute
through direct discussions. Within 20 days of written notice that
there is a Dispute, the parties shall meet in King County, Washington
or confer by telephone in an effort to reach an amicable settlement
and to explore alternative means to resolve the dispute expeditiously
(E.G., mediation).
(c) If the Dispute has not been resolved as a result of the procedure in
paragraph (b) hereof or otherwise within sixty (60) days of the
initial written notice that there is a Dispute (or such additional
time to which the parties may agree), the matter shall be resolved by
final and binding arbitration in King County, Washington under the
then current Rules promulgated by the CPR Institute for Dispute
Resolution. The arbitration shall be governed by the United States
Arbitration Act, 9 USCss.1-16. There shall be three arbitrators, each
of whom shall be neutral, independent and impartial. Any arbitrator
may be of any nationality. The award shall be final, binding and
conclusive upon the parties. Judgment on an arbitral award may be
entered by any court of competent jurisdiction, or application may be
made to such a court for judicial acceptance of the award and any
appropriate order including enforcement.
(d) The dispute resolution proceedings contemplated by this provision
shall be as confidential and private as permitted by law. To that end,
the parties shall not disclose the existence, content or results of
any proceedings conducted in accordance with this provision, and
materials prepared or submitted in connection with such proceedings
shall not be admissible in any other proceeding, provided, however,
that this confidentiality provision shall not prevent a petition to
vacate or enforce an arbitral award, and shall not bar disclosures
required by law. The parties agree that any decision or award
resulting from proceedings in accordance with this dispute resolution
provision shall have no preclusive effect in any other matter
involving third parties.
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(e) The arbitral award shall be rendered in writing and shall state the
reasons for the award.
The arbitral tribunal shall not be empowered to award any form of punitive
damages or any other remedy not measured by the prevailing party's actual
damages, nor to act as amiable compositeur and shall not make an award solely
out of fairness and equity. The arbitration award may award reasonable
attorneys' fees to the prevailing party.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
or their duly authorized representatives as of the date first above written.
LINEO, INC., AS BUYER
By:
--------------------------------------
Name:
Title:
YOSHINOBU USHIYAMA,
AS PRINCIPAL SHAREHOLDER AND SELLER
------------------------------------------
TATSUYA TAKEUCHI,
AS PRINCIPAL SHAREHOLDER AND SELLER
------------------------------------------
YOSHINOBU USHIYAMA,
AS SHAREHOLDER REPRESENTATIVE ON BEHALF OF
MINORITY SHAREHOLDERS
18
<PAGE>
INDEX OF SCHEDULES AND EXHIBIT
SCHEDULE
1. List of Shareholders
2. Disclosure Schedule
19
<PAGE>
SCHEDULE 1
LIST OF SHAREHOLDERS
20
<PAGE>
EXHIBIT 10.12
SHARE PURCHASE AGREEMENT
THIS AGREEMENT made as of the 1st day of May, 2000.
BETWEEN:
SHIRLEY PITT ("Pitt"), of
19344 - 119B Avenue
Pitt Meadows, British Columbia
OF THE FIRST PART
STUART LYNNE ("Lynne"), of
35 Wilkes Creek Drive
Port Moody, British Columbia
OF THE SECOND PART
BRUCE BALDEN ("Balden"), of
331 Oxford Drive
Port Moody, British Columbia
OF THE THIRD PART
DONNA ALARIE ("Alarie"), of
35 Wilkes Creek Drive
Port Moody, British Columbia and
OF THE FOURTH PART
RICHARD PITT ("Richard"), of
19344 - 119B Avenue
Pitt Meadows, British Columbia
OF THE FIFTH PART
KENNETH CILLIS ("Ken"), of
2658 Burnside Place
Coquitlam, British Columbia
OF THE SIXTH PART
JACK VANDENAKKER ("Jack"), of
3085 Anmore Creek Way
Anmore, British Columbia
<PAGE>
-2-
OF THE SEVENTH PART
TED POWELL ("Ted"), of
3331 West 8th Avenue
Vancouver, British Columbia
OF THE EIGHTH PART
REGULAR EXPRESSIONS INC. ("Regular"), of
Suite 1104 - 100 Park Royal
West Vancouver BC V7T 1A2
OF THE NINTH PART
FIREPLUG COMPUTERS INC. (the "Company"),
Suite 1104 - 100 Park Royal South
West Vancouver BC V7T 1A2
OF THE TENTH PART
(herein collectively called the "Vendors")
AND:
LINEO, INC.
390 South 400 West
Lindon, Utah 84047
U.S.A.
(herein called the "Purchaser")
OF THE ELEVENTH PART
WHEREAS:
A. Pitt, Balden, Alarie, Lynne, Cillis, Van den Akker, Powell, Regular
Expressions and Richard are hereinafter referred to as the "Vendors";
<PAGE>
-3-
B. The Vendors are the beneficial owners of all the issued and outstanding
shares in the capital of Fireplug Computers Inc. (herein called the "Company"),
being the following quantities and types:
Shirley Pit t 100 Class "A" Voting with no par value;
Stuart Lynne 100 Class "A" Voting with no par value;
Bruce Balden 100 Class "A" Voting with no par value;
Donna Alarie 56 Class "A" Voting with no par value;
Richard Pitt 56 Class "A" Voting with no par value;
Kenneth Cillis 19 Class "A" Voting with no par value;
Jack VanDenAkker 17 Class "A" Voting with no par value;
Ted Powell 7 Class "A" Voting with no par value; and
Regular Expressions Inc. 8 Class "A" Voting with no par value.
C. The Vendors have provided to the Purchaser and the Purchaser has relied upon
the following financial information:
(i) unaudited financial statements of the Company as at December 31,
1999, attached hereto as Schedule "A".
D. The Vendors have agreed to sell and the Purchaser has agreed to purchase 100%
of the issued and outstanding shares in the capital of the Company being 463
shares with no par value (herein called the "Shares");
<PAGE>
-4-
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises,
the covenants, agreements and warranties hereinafter set forth, it is hereby
agreed as follows
1. DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
1.1 "Agreement" shall mean this Share Purchase Agreement, together
with the Schedules, as the same may be updated or amended from
time to time as provided herein.
1.2 "Unaudited Financial Statements" shall mean the unaudited
balance sheet of the Company at December 31, 1999, and the
related unaudited statements of operations, changes in
shareholders' equity and cash flows for the years then ended,
including related footnotes, in each case which Unaudited
Financial Statements are annexed as Schedule "A" to this
Agreement.
1.3 "Business" shall mean the Linux design and programming
business of Fireplug Computers Inc.
1.4 "Business Day" shall mean any day that is not a Saturday, a
Sunday or other day on which banks are required or authorized
by law to be closed in the State of Delaware, USA.
<PAGE>
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1.5 "Buyer" shall have the same meaning as that set forth for
"Purchaser"
1.6 "Closing" shall have the meaning set forth in Section 8.1.
1.7 "Closing Date" shall mean the date and effective time at which
the Closing occurs.
1.8 "Code" shall mean the United States of America Internal
Revenue Code of 1986, as amended, together with the
regulations promulgated thereunder.
1.9 "Company Affiliate" shall mean any affiliate of the Company
other than the Vendors.
1.10 "Company Shares" means all of the issued and outstanding
shares of Fireplug Computers Inc.
1.11 "Contract" shall mean any contract, agreement, indenture,
note, bond, loan agreement, letter of credit agreement, line
of credit agreement, instrument, lien, conditional sales
contract, mortgage, franchise, commitment, obligation or other
arrangement or agreement, but shall exclude leases of real or
personal property and insurance policies.
<PAGE>
-6-
1.12 "Encumbrances" shall mean any security interest, pledge,
mortgage, lien, charge, adverse claim of ownership or other
encumbrance of any kind.
1.13 "Environmental Laws" shall mean all applicable provincial,
national and local statutes, regulations, rules, ordinances,
codes, licenses, permits, orders, approvals, plans,
authorizations, concessions, franchises, and similar items of
all authorities, and all applicable judicial, administrative
and regulatory decrees, judgments and orders, any of which
relate to the protection of human health or the environment
from the effects of hazardous substances, including but not
limited to those pertaining to reporting, licensing,
permitting, investigating, and remediating emissions,
discharges, releases or threatened releases of Hazardous
Substances into the air, surface water, groundwater or land,
or relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of
Hazardous Substances.
1.14 "Family Member" shall mean with respect to a particular
individual, such individual's spouse, parents, children,
siblings, mothers- and fathers-in-law, sons- and
daughters-in-law, and brothers- and sisters-in-law.
1.15 "Financial Statements" shall mean the Unaudited Financial
Statements and the Interim Financial Statements of the
Company.
<PAGE>
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1.16 "GAAP" shall mean generally accepted accounting principles (as
such term is used in the applicable country's professional
accounting standards) from time to time in effect.
1.17 "Hazardous Substance" shall mean any substance or waste which
is listed as hazardous, regulated or toxic, or is a
contaminant, pollutant or hazardous or toxic substance or
waste under any Environmental Laws, or any substance or waste
which has been determined at any time by regulation, ruling or
otherwise by any Authority to be a contaminant, pollutant or
hazardous or toxic substance and which shall include, without
limitation, hazardous waste, any medical waste, biohazardous
waste, industrial waste and special waste.
1.18 "Intellectual Property" means each and every and any and all
patents and patent rights, trademarks and trademark rights,
trade names and trade name rights, service marks and service
mark rights, service names and service name rights, brand
names, inventions, procedures, formulae, copyrights and
copyright rights, trade dress, business and product names,
logos, slogans, trade secrets, processes, designs,
methodologies, computer programs (including all source codes)
and related documentation, Linux embedded platforms and
related documentation, technical information, know-how and all
pending applications for and registrations of patents,
trademarks, service marks and copyrights.
<PAGE>
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1.19 "Knowledge" shall mean (i) in the case of any Vendor,
knowledge of such Vendor, and if such Vendor is an entity,
knowledge of any officer or director of such entity, (ii) in
the case of the Buyer, knowledge of any officer or director of
the Buyer, and (iii) in the case of the Company or any
Subsidiary, knowledge of any officer or director of the
Company. An individual will be deemed to have "Knowledge" of a
particular fact or other matter if (a) such individual is
actually aware of such fact or other matter; or (b) with
respect to Sections 3.26 and 6.11 only, such individual would
likely discover or otherwise become aware of such fact or
other matter by exercising the care an ordinarily prudent
person in a like position would exercise under similar
circumstances.
1.20 "Lineo Shares and Options" shall have the meaning set forth in
Sections 3.1.2 and 3.1.3.
1.21 "Material Adverse Effect" shall mean a material adverse effect
on the business, operations, properties, assets (including
intangible assets), liabilities (contingent or otherwise),
financial condition or results of operations of the Company,
taken as a whole.
<PAGE>
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1.22 "Permits" shall mean all permits, licenses and other
approvals, certificates of need, accreditations, participation
agreements, consents, authorizations, certificates of
authority and orders.
1.23 "Person" shall mean an individual, firm, trust, association,
corporation, limited liability company, partnership, limited
partnership, limited liability partnership, Authority or other
entity.
1.24 "Purchase Price" shall have the meaning set forth in Section
3.
1.25 "Subsidiary" shall mean a corporation, partnership or other
entity of which the Company (i) has the power to elect more
than fifty percent (50%) of the board of directors or other
governing authority either directly or indirectly or (ii) owns
or controls more than fifty percent (50%) of the outstanding
equity securities or equity interests either directly or
through an unbroken chain of entities as to each of which
fifty percent (50%) or more of the outstanding equity
securities or equity interests is owned directly or indirectly
by its parent.
1.26 "Tax" or "Taxes" shall mean all taxes, levies, imposts,
duties, excises, licenses and resignation fees, and charges of
any kind or nature whatsoever including, without limitation,
income tax withholding, unemployment and social welfare taxes,
sales and use taxes and property taxes, and interest,
penalties and additions to tax with respect to any of the
above.
<PAGE>
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1.27 "Tax Return" shall mean any return, declaration, report, claim
for refund, or information return or statement relating to
Taxes, including any schedule or attachment to such documents
and any amendment of such documents.
1.28 "U.S. Person" shall mean: (i) any natural person resident in
the United States; (ii) any partnership or corporation
organized or incorporated under the laws of the United States;
(iii) any estate of which any executor or administrator is a
U.S. person; (iv) any trust of which any trustee is a U.S.
person; (v) any agency or branch of a foreign entity located
in the United States; (vi) any non-discretionary account or
similar account (other than an estate or trust) held by a
dealer or other fiduciary for the benefit or account of a U.S.
person; (vii) any discretionary account or similar account
(other than an estate or trust) held by a dealer or other
fiduciary organized, incorporated, or (if an individual)
resident in the United States; and (viii) any partnership or
corporation if: (a) organized or incorporated under the laws
of any foreign jurisdiction; and (b) formed by a U.S. person
principally for the purpose of investing in securities not
registered under the Act, unless it is organized or
incorporated, and owned, by accredited investors (as defined
in Rule 501(a)) who are not natural persons, estates or
trusts.
1.29 "Undisclosed Liability" shall mean an obligation, indebtedness
or liability of any nature (each of which, for purposes of
this definition, is assumed to be
<PAGE>
-11-
material), which is not reserved against or disclosed on the
Balance Sheet, or in the notes to the Balance Sheet or to the
Interim Financial Statements, and which is not so reflected,
reserved against or otherwise disclosed in this Agreement.
1.30 "Vendor" and "Vendors" are identified in Section of the
Preamble to this Agreement.
1.31 "1934 Act" shall mean the U.S. Securities Exchange Act of
1934, as amended.
1.32 Other Defined Terms. The terms defined in the first paragraph
and in the whereas clauses shall have the meanings given to
such terms in such paragraph and whereas clauses.
2 SALE AND PURCHASE
2.1 The Vendor hereby agrees to sell and the Purchaser hereby
agrees to buy the Shares on the terms and conditions herein
contained.
PURCHASE PRICE
2.2 The total consideration, being the Purchase Price shall be the
sum of $1,200,000.00 (One Million Two Hundred Thousand
Dollars) in the currency of the United States of America,
which Purchase Price shall be paid as follows:
<PAGE>
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2.2.1 on the date of closing the sum of $500,000.00 (Five Hundred
Thousand Dollars) in lawful currency of the United States of
America by delivery of a bank draft payable to the designated
solicitor for the Vendors, David H. Stoller, "In Trust";
2.2.2 allotment and issuance of 70, 000 Series D Preference Shares
of the Purchaser with a current value of $420,000.00 (Four
Hundred Twenty Thousand Dollars) in the currency of the United
States of America, such shares to be convertible to the common
shares of the Purchaser, at closing, to be issued in
accordance with Schedule "E";
2.2.3 Options to acquire 62,220 (Sixty-Two Thousand Two Hundred
Twenty) common shares of the Purchaser currently valued at
$6.00 (Six Dollars) per share in the currency of the United
States of America with a strike price of $1.50 (One Dollar and
Fifty Cents) in the currency of the United States of America,
to be distributed pursuant to Schedule "E".
3 REPRESENTATIONS AND WARRANTIES OF THE DIRECTORS OF FIREPLUG COMPUTERS
INC.
<PAGE>
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In order to induce the Purchaser to enter into and consummate this Agreement,
the following representations and warranties are made to the Purchaser by the
Directors of Fireplug Computers Inc.:
3.1 The authorized capital of the Company is 6,000,000 (Six
Million) shares as follows: 2,000,000 Class "A" Voting Shares
with no par value;
3.1.1 2,000,000 Class "B" Non-Voting Shares with no par
value; and
3.1.2 2,000,000 Class "C" Non-Voting Redeemable Preferred
Shares with a par value of $1.00 each.
3.2 The issued and outstanding shares in the capital of the
Company are set forth in paragraph B of the preamble to this
Agreement.
3.3 The only Directors of the Company are Stuart Lynne and Richard
Pitt.
3.4 The Company carries on business in the Province of British
Columbia and does not carry on business in any other Province
or Territory of Canada nor in any other country.
3.5 There will be no restriction by the Company on the Vendors
transferring of the legal and beneficial title and ownership
of the Shares to the Purchaser at the time of closing.
<PAGE>
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3.6 The Company has the corporate power to own the property owned
by it and to carry on the business carried on by it and is
duly qualified to carry on business in the Provinces of
British Columbia.
3.7 The Company is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of
incorporation and has all requisite corporate or other power
and authority:
3.7.1 to conduct its business as it is now conducted and to
own or lease all of the properties owned or leased by
it, and
3.7.2 in the case of the Company, to enter into and perform
its obligations under this Agreement and to undertake
the transactions contemplated hereby.
3.8 True, correct and complete copies of the Memorandum of
Association and Articles of Incorporation and Bylaws of the
Company (or other constituting documents) as of the date of
this Agreement have been previously delivered or made
available to the Buyer.
3.9 The corporate records and minute books of the Company contain
complete, comprehensive and accurate minutes of all meetings
and other corporate actions of the incorporators, directors,
committees of directors and shareholders of the Company held,
in the case of the Company, since its date of incorporation
and the share certificate books and register of shareholders
of the Company are
<PAGE>
-15-
complete and accurate, reflecting all transactions in the
equity securities of the Company .
3.10 The Company's share transfer records reflect fully all
issuances, transfers and redemptions of the Company Shares
since the date of incorporation.
3.11 The Company is duly qualified to do business as a foreign
corporation, and is in good standing, in all jurisdictions in
which the ownership or lease of property by it or the conduct
of its business makes such qualification necessary.,
3.12 The execution, delivery and performance of this Agreement and
the consummation of the transactions provided for herein have
been duly authorized by all requisite corporate action on the
part of the Company, and this Agreement has been duly executed
and delivered by the Company.
3.13 Assuming due execution and delivery by the other parties, this
Agreement constitutes the legal, valid and binding obligation
of the Company, enforceable against the Company in accordance
with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, or other laws
affecting creditors' rights and remedies generally.
<PAGE>
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3.14 All outstanding capital shares of the Company have been duly
authorized and validly issued, are fully paid and
non-assessable, and have in no case been issued in violation
of any preemptive rights granted by the Company.
3.15 All outstanding capital shares of the Company were authorized,
offered, issued and sold in accordance with applicable law.
The Company has capital shares in its treasury, but none have
been repurchased pursuant to a promissory note that is not yet
fully paid.
3.16 There is no existing subscription, option, warrant, call,
right, commitment or other agreement (whether statutory or
contractual) to which the Company is a party requiring, and
there are no convertible securities of the Company outstanding
which upon conversion would require, directly or indirectly,
the issuance of any additional capital shares of the Company
or other securities convertible into or exercisable or
exchangeable for capital shares of the Company or any other
equity security of the Company, and there are no obligations
(contingent or otherwise) of the Company
3.16.1 to repurchase, redeem or otherwise acquire any
outstanding capital shares of the Company or
<PAGE>
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3.16.2 except for guarantees of obligations of, or loans and
advances to, the Company provide funds to, or make
investments in, or provide any guarantee with respect
to the obligations of, any other Person.
3.17 There are no bonds, debentures, notes, lines of credit,
letters of credit, or other indebtedness issued and
outstanding having the right to vote on any matters on which
the Company's shareholders may vote.
3.18 The Company Shares to be sold pursuant to this Agreement
constitute all of the issued and outstanding capital shares of
the Company.
3.19 The Company has granted no Person any registration rights in
respect of capital shares of the corporation or securities
convertible into or exercisable or exchangeable for capital
shares of the Company.
3.20 Each Vendor is the sole record owner of the shares of the
Company listed beside such Vendor's name in Section B of the
preamble to this Agreement.
3.21 Except as provided herein, the execution and delivery of this
Agreement, the compliance with and performance of the terms
and provisions of this Agreement, and the consummation of the
transactions contemplated herein by the Company will not
<PAGE>
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3.21.1 conflict with or result in the contravention or
breach of the terms, conditions or provisions of,
3.21.2 constitute a default (or an event which, with notice,
lapse of time, or both, would constitute a default)
under,
3.21.3 result in any violation of,
3.21.4 require the obtaining of any consent or approval of,
the taking of any action of, the making of any filing
with, or the giving of any notice to, any Person
(except such consents, approvals, actions, filings
and notices that will have been obtained, taken,
made, given or effectively waived prior to the
Closing, as a result of or under the terms of,
3.21.5 result in or give to any Person any right of
termination, cancellation, acceleration,
modification, or increased or accelerated rights,
entitlements or payments under, or
3.21.6 result in the creation or imposition of any
Encumbrance upon the Company or any of their
respective assets or the Company Shares under:
<PAGE>
-19-
the Charter of the Company or any resolutions adopted
by the shareholders or the Board of Directors or any
committee of the Board of Directors of the Company;
any order, judgment, decree, license, permit,
statute, law, rule, or regulation to which the
Company or any of its respective assets is subject;
or any provision of any Contract to which the Company
is party or by which the Company or any of their
respective assets is bound except, in the case of
clauses 4.19.6B and Schedule "C", for any such
violations, breaches, defaults, terminations,
cancellations or accelerations which in the aggregate
would not be reasonably likely to have a Material
Adverse Effect or a material adverse effect on the
ability of the Company to consummate the transactions
contemplated by this Agreement.
3.22 No Permit by or from, or declaration, filing or registration
with, or notification to, any Authority is required to be made
or obtained by the Company in connection with the execution,
delivery and performance of this Agreement, or the
consummation of the transactions contemplated hereby except
where the failure to obtain the Permit, or make the
declaration, filing, registration, or notification would not
have a Material Adverse Effect or a material adverse
<PAGE>
-20-
effect on the parties' ability to consummate the transactions
contemplated by this Agreement.
3.23 Except as set forth in this Agreement there is no action,
suit, proceeding or investigation in progress or pending or,
to the Knowledge of the Company, threatened or contemplated,
at law or in equity, in any court or before or by any
Authority against or relating to the Company or any of their
respective properties, or the conduct of the Company's
business as currently operated or contemplated to be operated,
which in any case would be reasonably likely to have a
Material Adverse Effect or a material adverse effect on the
parties' ability to consummate the transactions contemplated
by this Agreement.
3.24 There is not currently outstanding against the Company any
judgment, decree, injunction, ruling or order of any Authority
which, insofar as it can be reasonably foreseen, individually
or in the aggregate, would have a Material Adverse Effect.
3.25 Schedule "A" identifies the Financial Statements that have
been furnished to the Buyer. The Financial Statements:
3.25.1 have been prepared based upon, and are consistent
with, the books and records of the Company (which
books and records are correct and complete in all
material respects), and
<PAGE>
-21-
3.25.2 fairly present the financial position, results of
operations, changes in shareholders' equity and cash
flows of the Company as of the dates and for the
periods set forth in such Financial Statements, in
accordance with applicable country GAAP applied
consistently throughout the periods involved, except
normal year-end audit adjustments with respect to the
Interim Financial Statements.
3.26 The balance sheets included in the Financial Statements
accurately reflect all properties and assets of the Company,
whether real, personal or mixed, which are required to be
reflected on such balance sheets in accordance with applicable
country GAAP, consistently applied.
3.27 The Company has no Undisclosed Liabilities outstanding on the
date of this Agreement, whether due or to become due, which
individually or in the aggregate would be reasonably likely to
have a Material Adverse Effect.
3.28 The Company has complied with, and are not in violation of,
and have not received any notices of violation with respect
to, any national, provincial or local statute, law, regulation
or ordinance with respect to the conduct of their business, or
the ownership or operation of their business, except for
failures to comply or violations that would not be reasonably
likely to have a Material Adverse Effect.
<PAGE>
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3.29 Since the date of the Financial Statements, except as
contemplated by this Agreement, there has not been, occurred
or arisen:
3.29.1 any change, destruction or loss not covered by
insurance with respect to the Company having a
Material Adverse Effect;
3.29.2 any material change by the Company in its accounting
methods, principles or practices;
3.29.3 any material revaluation of any of the assets of the
Company, including, without limitation, writing down
the value of inventory; or
3.29.4 any other event that resulted in a Material Adverse
Effect.
3.30 Except as set forth in Schedule "F", to the Knowledge of the
Company,
3.30.1 No Vendor, and no Family Member, Affiliate or
Associate of any Vendor (other than the Company),
3.30.2 No Officer, director or other Affiliate of the
Company ("Company Affiliate"), and
<PAGE>
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3.30.3 No Associate or Family Member of any Company
Affiliate ("Related Party") directly or indirectly
3.31 sells to or purchases from the Company any products or
services in any material amount,
3.32 has any interest in any corporation, partnership, limited
liability company, proprietorship or other entity which sells
to or purchases from the Company any products or services in
any material amount,
3.33 has any cause of action or claim against the Company in any
material amount; or
3.34 has a beneficial interest in any Contract to which the Company
is a party or which binds it or its assets.
3.35 The Company is not indebted, either directly or indirectly, to
any Related Party in any amount other than current obligations
for payments of salaries, bonuses and other fringe benefits
for past services rendered and recorded on the books of the
Company; except as set forth in Schedule "A" and as follows:
3.35.1 Loan from Regular Expressions Ltd. $27,100.00; and
3.35.2 Loan from Stuart Lynne $35,623.85.
3.36 The Company is not indebted to any Vendor in any amount for
any management or other fees.
3.37 The liabilities, contingent or otherwise, of the Company which
are not disclosed or reflected in Schedule "A" do not exceed
$50,000.00 in Canadian funds.
<PAGE>
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3.38 The Company has not guaranteed, or agreed to guarantee, any
debt, liability or other obligation of any person, firm, or
corporation.
3.39 There are monies owing to Richard which will be offset against
his indebtedness to the Company.
3.40 No dividends or other distribution on any shares in the
capital of the Company have been made, declared or authorized
since December 1, 1999.
3.41 Other than as provided on Schedule "A", no payments of any
kind have been made or authorized since December 31, 1999 to
or on behalf of the Vendors or to or on behalf of officers,
directors, shareholders or employees of the Company or under
any management agreements with the Company save and except in
the ordinary course of business and at the regular rates of
salary or management fees payable to them.
3.42 The Company has no leases of equipment or property.
3.43 The Company is not a citizen or resident of the United States
of America nor has a permanent establishment therein in the
last five years.
<PAGE>
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3.44 The Company does not maintain and has never maintained a
Permanent Establishment, as defined in the Code, in the United
States of America and the Company has never filed or is
required to file a tax return with the IRS.
3.45 The Company is not a party to any oral or written:
3.45.1 union or collective bargaining agreement,
3.45.2 agreement with any officer or other key employee of
the Company, the benefits of which are contingent, or
the terms of which are materially altered, upon the
occurrence of a change in control of the Company or
other transaction involving the Company of the nature
contemplated by this Agreement,
3.45.3 agreement with any officer of the Company providing
any term of employment or compensation guarantee,
3.45.4 agreement or plan, including any stock option plan,
stock appreciation right plan, restricted stock plan
or stock purchase plan, any of the benefits of which
will be increased, or the vesting of the benefits of
which will be accelerated, by the occurrence of any
of the transactions contemplated by this Agreement
or the value of any of the benefits of which will be
<PAGE>
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calculated on the basis of any of the transactions
contemplated by this Agreement; or
3.45.5 agreement or commitment to provide health care, life
insurance or other benefits after termination of
employment.
3.46 The Company has:
3.46.1 filed when due (after taking into account applicable
extensions) with the appropriate agencies all Tax
Returns, with the exception of Income Tax Returns
required to be filed by them, and
3.46.2 paid when due and payable all Taxes owed by them or,
to the extent of Taxes not yet due and payable, have
accrued or otherwise adequately reserved on the
Financial Statements in material compliance with
applicable country GAAP for the payment of such Taxes
not yet due and payable.
3.47 All such Tax Returns are correct and complete in all material
respects.
3.48 Complete and, subject to the filing of the Income Tax Returns,
accurate copies of such Tax Returns due or filed for the past
three years have been furnished or made available to the
Buyer.
<PAGE>
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3.49
3.50 Under the provisions of the INCOME TAX ACTS of Canada and
British Columbia the Company has always been a
Canadian-controlled private corporation.
3.51 The Company has not prior to the date hereto:
3.51.1 made any election under Section 85 of the INCOME TAX
ACT (Canada) with respect to the acquisition or
disposition of any property;
3.51.2 made any election under Sections 83 of the INCOME TAX
ACT (Canada);
3.51.3 acquired any property from a person with whom it was
not dealing at arm's length; or
3.51.4 disposed of anything to a person with whom the
Company was not dealing at arm's length for proceeds
less than the fair market value thereof.
3.52 The Company has made all elections required to be made under
the INCOME TAX ACT of Canada in connection with any
distributions by the Company and all such elections were true
and correct.
3.53 Subject to the filing of the Income Tax Returns, there are no
Taxes assessed or, to the Knowledge of the Company, asserted
in respect of any Tax Returns filed
<PAGE>
-28-
by the Company or claimed to be due by any taxing authority or
otherwise that are not accrued or adequately reserved for on
the Financial Statements in accordance with GAAP.
3.54 The Company is not a party to any action or proceeding, and to
the Company's Knowledge, no action or proceeding is threatened
or contemplated, for the assessment or collection of any
Taxes, and the Company has received no deficiency notices or
reports in respect of any Tax.
3.55 To the Knowledge of the Company, no Tax Return of the Company
is currently being audited or is scheduled for future audit by
any Authority.
3.56 Schedule "C" to this Agreement sets forth each of the
following Contracts to which the Company is a party:
3.56.1 any Contract for borrowed money or deferred portion
of purchase price;
3.56.2 any loan agreement, credit agreement, promissory
note, guarantee, indenture,
3.56.3 subordination agreement, letter of credit, use of
credit, interest rate or foreign
<PAGE>
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3.56.4 currency protection agreement or any other similar
type of Contract;
3.56.5 any consulting or other Contract with attorneys,
accountants, actuaries, appraisers, investment
bankers, lobbyists, government relations' persons or
other professional advisers providing for total
payments equal to or in excess of Twenty Five
Thousand Dollars (USD $25,000) and that cannot be
terminated by the Company without penalty on 30 days
or less notice;
3.56.6 any Contract (except for Contracts with customers)
which, in whole or in part,
3.56.7 presently restricts or precludes the Company or any
present or future Subsidiary or Affiliate of the
Company from conducting any business anywhere in the
world, or
3.56.8 upon the occurrence of any event, the giving of
notice or the passage of time, by its terms would
have such an effect;
3.56.9 any Contract that involves aggregate payments by or
to the Company in excess of Twenty Five Thousand
Dollars (USD $25,000) and that cannot be terminated
by the Company without penalty on 30 days or less
notice; and
<PAGE>
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3.56.10 any indemnification agreement (except those entered
into in the ordinary course of business), guaranty or
power of attorney granted to any Person (other than
the Company).
3.57 The Company has delivered or otherwise made available to the
Buyer true, correct and complete copies of the Contracts set
forth in Schedule "C" of this Agreement, and all other
contracts, together with all amendments, waivers,
modifications, supplements or side letters affecting the
obligations of any party under such Contracts.
3.58 Except as set forth opposite or otherwise as part of the
description of such Contract:
3.58.1 No party to any Contract listed in Schedule "C" has
given to the Company notice of any breach or default
under any such Contract by the Company, which has not
been cured or waived;
3.58.2 The Company is not in violation or breach of or
default of any material term under any Contract
listed in Schedule "C" in any respect or, with notice
or lapse of time or both, would be in violation or
breach of or default under any such Contract;
<PAGE>
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3.58.3 To the Knowledge of the Company no other party to any
such Contract is in violation or breach of or default
under any such Contract or, with notice or lapse of
time or both, would be in violation or breach of or
default under any such Contract; and
3.58.4 No consent by or of any party to any Contract listed
in Schedule "C" is required in order to consummate
the transactions contemplated by this Agreement
without causing a breach or violation of or a default
under such Contract.
3.59 The Company either has all right, title and interest in (free
and clear of all Encumbrances), or a valid and binding license
to use, all of the Intellectual Property used by the Company
in the conduct of their respective businesses, except to the
extent that the failure to have such rights have not had and
would not be reasonably likely to have a Material Adverse
Effect.
3.60 Except as disclosed herein,
3.60.1 all registrations with and applications to
Authorities in respect of such Intellectual Property
are valid and in full force and effect,
3.60.2 the Company has and the Subsidiaries have taken
reasonable security measures to protect the secrecy,
confidentiality and value of their
<PAGE>
-32-
respective trade secrets which Company or the
Subsidiary considers to be material, and
3.60.3 the Company is not, and the Company has not received
any notice that it is in violation or breach of or
default under (or with the giving of notice or lapse
of time or both, would be in violation or breach of
or default under) any license to use such
Intellectual Property, except to the extent that the
failure to have such rights has not had and would not
be reasonably likely to have a Material Adverse
Effect.
3.61 The Company has not, and no Subsidiary has, received notice
that the Company is infringing any Intellectual Property of
any other Person.
3.62 No claim is pending or, to the Knowledge of the Company, has
been made to such effect that has not been resolved.
3.63 To the Knowledge of the Company , the Company is not
infringing any Intellectual Property rights of any other
Person, which infringement would be reasonably likely to have
a Material Adverse Effect.
<PAGE>
-33-
3.64 The Company has received letters of breach of intellectual
property rights from several sources regarding their operation
of an ISP, and all offending material has been removed from
the ISP.
3.65 Except where any such matters or violations would,
individually or in the aggregate, not be reasonably expected
to have a Material Adverse Effect:
3.65.1 the Company has not generated, used, manufactured,
processed, distributed, handled, transported,
treated, stored, released or disposed of, and has not
suffered or permitted anyone else to generate, use,
manufacture, process, distribute, handle, transport,
treat, store, release or dispose of, any Hazardous
Substance in violation of any Environmental Laws;
3.65.2 there has not been any generation, use, manufacture,
processing, distribution, handling, transportation,
treatment, storage, release or disposal of any
Hazardous Substance in connection with the conduct of
the Business or the use of any property or facility
leased or owned by the Company , or to the Knowledge
of the Company , any nearby or adjacent properties or
facilities, which has created or might reasonably be
expected to create any liability under any
Environmental Laws or which would require reporting
to or notification of any Authority;
<PAGE>
-34-
3.65.3 to the Knowledge of the Company, no friable asbestos
or polychlorinated biphenyl, and no underground
storage tank, is contained in or located at any
property or facility of the Company ;
3.65.4 any Hazardous Substance handled or dealt with in any
way in connection with the Business has been and is
being handled or dealt with in compliance with any
Environmental Laws;
3.65.5 there are no investigations, proceedings, actions,
orders, claims or notices that are pending,
anticipated or, to the Knowledge of the Company
threatened or contemplated against the Company or
involving the Business and relating to Environmental
Laws; and
3.65.6 the Company has not received, and no Subsidiary has
received, any notice of, and the Company does not
have Knowledge of, and no Subsidiary has Knowledge
of, any facts which relate to the ownership or
operation of the Business or any of the properties or
facilities of the Company and that might constitute a
violation of any Environmental Laws.
3.66 No broker, agent, finder, consultant or other Person has been
retained by, or has acted on behalf of the Company (other than
legal and accounting advisors) or is entitled to be paid based
upon any agreements or understandings made by such parties in
connection with the transactions contemplated by this
<PAGE>
-35-
Agreement, and neither the Buyer nor the Company shall have
any liability for any broker's fee, finder's fee, consultant's
fee or similar third party remuneration payable by reason of
any action of the Company.
3.67 The accounting books, minute books, share transfer records,
and other records of the Company, all of which have been made
available to the Buyer, are complete and correct in all
material respects and to the Knowledge of the Company, have
been maintained in accordance with sound business practices
and the requirements of Section 13(b)(2) of the 1934 Act
(regardless of whether or not the Company is subject to that
Section), including the maintenance of an adequate system of
internal controls.
3.68 At the Closing, all such books and records will be in the
possession of the Company.
3.69 There is no real property owned by the Company .
3.70 The Company owns all the properties and assets (whether
tangible or intangible) that it purports to own located in the
facilities operated by the Company or reflected as owned in
the books and records of the Company or such Subsidiary,
including all of the properties and assets reflected in the
Balance Sheet and the Interim Financial Statements (except for
assets held under capitalized leases disclosed or not required
to be disclosed and personal
<PAGE>
-36-
property sold since the date of the Balance Sheet and the
Financial Statements, as the case may be, in the ordinary
course of business), and all of the properties and assets
purchased or otherwise acquired by the Company since the date
of the Balance Sheet (except for personal property acquired
and sold since the date of the Balance Sheet in the ordinary
course of business and consistent with past practice).
3.71 All of the assets related to the business of the Company shall
remain the property of the Company, with the exception of
those set forth in schedule "D"..
3.72 To the Knowledge of the Company, the equipment of the Company
is in good operating condition and repair, and are adequate
for the uses to which they are being put.
3.73 All accounts receivable of the Company that are reflected on
the Balance Sheet (collectively, the "Accounts Receivable")
represent or will represent valid obligations arising from
sales actually made or services actually performed in the
ordinary course of business.
3.74 Unless paid before the Closing Date, the Accounts Receivable
are or will be as of the Closing Date collectible net of the
respective reserves shown on the
<PAGE>
-37-
Balance Sheet or the Interim Financial Statements, except as
disclosed in Schedule "C" to this Agreement.
3.75 The Company does not maintain inventory in the odinary course
of its business and has no inventory at the Closing Date.
3.76 The Company does not maintain insurance.
3.77 Except as disclosed in this Agreement, the Company has not,
and no director, officer, agent or employee of the Company, or
any other Person associated with or acting for or on behalf of
the Company has, directly or indirectly:
3.77.1 made any bribe, rebate, payoff, influence payment,
kickback, or other payment to any Person, private or
public, regardless of form, whether in money,
property, or services
3.77.2 to obtain favourable treatment in securing business,
3.77.3 to pay for favourable treatment for business secured,
3.77.4 to obtain special concessions or for special
concessions already obtained, for or in respect of
the Company or any Affiliate, or
<PAGE>
-38-
3.77.5 in violation of any legal requirement, or
3.77.6 established or maintained any fund or asset that has
not been recorded in the books and records of the
Company.
3.78 No representation or warranties of the Company fail to state a
material fact necessary to make the statements herein or
therein, in light of the circumstances in which they were
made, not misleading.
3.79 There is no fact known to the Company that has specific
application to the Company (other than general economic or
industry conditions) and that materially adversely affects the
assets, business, prospects, financial condition, or results
of operations of the Company (on a consolidated basis) that
has not been set forth in this Agreement.
4 REPRESENTATIONS AND WARRANTIES OF THE INDIVIDUAL VENDORS
4.1 Each individual Vendor represents and warrants for himself
that he has the full power and capacity necessary to enter
into and perform its obligations under this Agreement and to
consummate the transactions contemplated herein.
4.2 This Agreement has been duly executed and delivered by each
individual Vendor and, assuming due execution and delivery by
the other parties, constitutes the legal, valid and binding
obligation of such Vendor, enforceable
<PAGE>
-39-
against such Vendor in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency,
reorganization, or other laws affecting creditors' rights and
remedies generally.
4.3 Each individual Vendor warrants, for himself, that there is no
existing subscription, option, warrant, call, right,
commitment or other agreement (whether preemptive or
contractual) to which such Vendor is a party requiring, and
there are no convertible securities of the Company owned or
held by such Vendor which upon conversion would require,
directly or indirectly, the issuance of any additional capital
shares of the Company or other securities convertible into or
exercisable or exchangeable for capital shares of the Company
or any other equity security of the Company, and there are no
obligations (contingent or otherwise) of such Vendor to
purchase or otherwise acquire any outstanding capital shares
of the Company.
4.4 The Company Shares to be sold by such Vendor pursuant to this
Agreement will be delivered to the Buyer free and clear of all
Encumbrances (except Encumbrances arising out of, under or in
connection with this Agreement), and such delivery will not be
in violation of any preemptive rights.
4.5 Each individual Vendor is the sole beneficial owner of the
Company Shares listed beside such Vendor's name on Exhibit A,
and has the full legal right and
<PAGE>
-40-
power to sell, convey, transfer, and assign such Company
Shares to the Buyer pursuant to this Agreement.
4.6 Each individual Vendor is not a party to any shareholder
agreement, voting agreement, voting trust, proxy or other
agreement with respect to the voting or transfer of the
Company Shares.
4.7 Each individual Vendor warrants for himself that no Person
(other than the Buyer as provided in this Agreement) has any
agreement or option or any right or privilege (whether
preemptive or contractual) capable of becoming an agreement or
option for the purchase from such Vendor of any of the Company
Shares being transferred by such Vendor to the Buyer pursuant
to this Agreement.
4.8 Each individual Vendor warrants for himself that he has no
knowledge of any action, suit, proceeding or investigation in
progress or pending to the Knowledge of such Vendor which
affects the Vendor's ability to transfer to the Buyer the
Corporate Shares to be sold by such Vendor, free and clear of
all claims or encumbrances whatsoever.
4.9 Each individual Vendor warrants for himself that no broker,
agent, finder, consultant or other Person has been retained
by, or has acted on behalf of such
<PAGE>
-41-
Vendor (other than legal and accounting advisors) or is
entitled to be paid based upon any agreements or
understandings made by such parties in connection with the
transactions contemplated by this Agreement. Neither the Buyer
nor the individual Vendor or the Company shall have any
liability for any broker's fee, finder's fee, consultant's fee
or similar third party remuneration payable by reason of any
action of such Vendor.
4.10 Each individual Vendor warrants that he is not a U.S. Person.
5 INDIVIDUAL VENDOR'S REPRESENTATIONS AND WARRANTIES
5.1 Each individual Vendor purports and warrants that neither he,
nor his spouse, nor any Company controlled by him or his
spouse, owns any property or assets which are used by the
Company or are necessary or useful in the conduct of its
business.
5.2 The representations, warranties, covenants and agreements by
the individual Vendors contained in this Agreement or any
certificates or documents delivered pursuant to the provisions
hereof or in connection with the transaction contemplated
hereby shall be true at and as of the time of closing as
though such representations and warranties were made at and as
of such time.
<PAGE>
-42-
Notwithstanding any investigations or enquiries made by the
Purchaser prior to closing or the waiver of any condition by
the Purchaser, the representations, warranties, covenants and
agreements of the individual Vendors shall survive the closing
date and notwithstanding the closing of the purchase and sale
herein provided for, shall continue in full force and effect.
In the event that any of the said representations and
warranties are found to be incorrect or there is a breach of
any covenants or agreement of the individual Vendors, which
incorrectness or breach shall result in any loss or damage
sustained directly or indirectly by the Purchaser then the
individual Vendor concerned in such incorrectness or breach
shall pay the amount of such loss or damage to the Purchaser
within 30 days of receiving notice thereof provided that the
Purchaser shall not be entitled to make any claim unless the
loss or damage suffered shall exceed the amount of $1,000.00
(One Thousand Dollars) in Canadian funds.
5.3 Each individual Vendor warrants for himself that he is a
resident of Canada within the meaning of the Income Tax Act.
6 PURCHASER'S REPRESENTATIONS AND WARRANTIES
In order to induce the Vendors to enter into and consummate this Agreement, the
Purchaser represents and warrants to and covenants with the Vendors as follows:
<PAGE>
-43-
6.1 The Purchaser is a company duly incorporated under the laws of
the State of Delaware, is not a reporting company, is a valid
and subsisting company, and will be in good standing in the
Office of the Registrar of Companies of the State of Delaware;
6.2 The Company carries on business in the State of Utah and the
United States of America and does not carry on business in any
Province or Territory of Canada;
6.3 The Purchaser has due and sufficient right and authority to
enter into this Agreement on the terms and conditions herein
set forth and to transfer the legal and beneficial title and
ownership of the Shares and Options to the Vendors as set
forth in Paragraph 2 of this agreement;
6.4 No person, firm or corporation has any agreement or option or
a right capable of becoming an agreement for the purchase of
the Lineo Shares and Options;
6.5 The Purchaser shall transfer the Lineo Shares and Options to
the Vendors in accordance with Schedule "E" and such Shares
and Options shall be registered on the books of the Purchaser
in the names of the Vendors at the time of closing;
<PAGE>
-44-
6.6 The representations and warranties of the Purchaser set forth
in this Agreement shall be true and correct as of the date of
the Agreement and shall be true and correct as of the date of
closing as if made by the Purchaser on the closing date;
6.7 The Purchaser or its nominees shall issue at the time of
closing the Lineo Shares and Options forming part of the
Purchase Price as set forth in PARAGRAPHS 2 .1.2, 2.1.3 and
Schedule "E" herein. of this agreement;
6.8 The representations, warranties, covenants and agreements by
the Purchaser contained in this Agreement or any certificates
or documents delivered pursuant to the provisions hereof or in
connection with the transaction contemplated hereby shall be
true at and as of the time of closing as though such
representations and warranties were made at and as of such
time. Notwithstanding any investigations or enquiries made by
the Vendors prior to closing or the waiver of any condition by
the Vendors, the representations, warranties, covenant and
agreement of the Purchasers shall survive the closing date and
notwithstanding the closing of the purchase and sale herein
provided for, shall continue in full force and effect. In the
event that any of the said representations and warranties are
found to be incorrect or there is a breach of any covenants or
agreement of the Purchaser, which incorrectness or breach
shall result in any loss or damage sustained directly or
indirectly by the Vendors then the Purchaser shall pay the
amount of such loss or damage to the Vendors within 30 days of
receiving notice thereof, provided that the Vendors shall not
<PAGE>
-45-
be entitled to make any claim unless the loss or damage
suffered shall exceed the amount of $1,000.00 (One Thousand
Dollars) in Canadian funds.
7 CONDITIONS PRECEDENT FOR PURCHASER
All obligations of the Purchaser under this Agreement are subject to the
fulfilment, prior to closing, of each of the following conditions:
7.1 Richard Pitt, Stuart Lynne and Bruce Balden shall have been
offered employment contracts with the Purchaser.
7.2 The Vendors shall transfer the Shares to the Purchaser and
such Shares shall be registered on the books of the Company in
the name of the Purchaser at the time of closing.
7.3 The representations and warranties of the Vendors set forth in
this Agreement shall be true and correct as of the date of the
Agreement and shall be true and correct as of the date of
closing as if made by the Vendors on the closing date.
7.4 The foregoing conditions in this section are inserted for the
exclusive benefit of the Purchaser and may be waived by it in
whole or in part at any time.
<PAGE>
-46-
8 CONDITIONS PRECEDENT FOR VENDORS
8.1 The representations and warranties of the Purchaser set forth
in this Agreement shall be true and correct as of the date of
closing as if made by the Purchaser on the date of closing.
8.2 The following persons shall have been offered and shall have
accepted Contracts of Employment with the Purchaser:
Stuart Lynne;
Richard Pitt; and
Bruce Balden.
8.3 The Vendors shall acquire at the time of closing that portion
of the Purchase Price consisting of the Lineo Shares and
Options in the capital of the Purchaser pursuant to PARAGRAPH
2.1, such Shares and Options to be allotted and issued from
treasury and allocated as set forth on Schedule "E".
8.4 The cash portion of the Purchase Price shall be paid in
accordance with Section 2 of this Agreement.
8.5 The Purchaser shall pay the Vendor's closing costs, including
legal costs.
<PAGE>
-47-
8.6 The foregoing conditions in this section are inserted for the
exclusive benefit of the Vendors and may be waived by them in
whole or in part at any time.
9 CLOSING
9.1 The sale and purchase of the Shares and the other transactions
contemplated by this Agreement shall be closed at the offices
of David H. Stoller. Barrister and Solicitor, Suite 1104 - 100
Park Royal South, West Vancouver, British Columbia V7T 1A2,
Canada at 11:00 a.m. (Pacific Daylight Time) on May 1, 2000 or
on such other date or at such other place as may be agreed
upon, which date is referred to herein as the "date of
closing" and "closing date" and which time is referred to
herein as "closing" and "time of closing".
9.2 The Vendors shall have caused to be delivered to the Purchaser
an opinion of the solicitors for the Company in form and
substance satisfactory to the Purchaser's solicitors, dated
the closing date to the effect that:
9.2.1 the Company is duly organized and validly existing
under the laws of the Province of British Columbia,
is in good standing in the Office of the Registrar of
Companies of British Columbia;
<PAGE>
-48-
9.2.2 all necessary steps and corporate proceedings have
been taken to permit the Shares to be duly and
validly transferred to and registered in the name of
the Purchaser;
9.2.3 the number of authorized and issued shares in the
capital of the Company are as warranted by the Vendor
and all issued shares are duly authorized, validly
issued and outstanding as fully paid and
non-assessable; and
9.2.4 based on knowledge and belief, such solicitors know
of no claims, judgment, actions, suits, litigation,
proceedings or investigations, actual, pending or
threatened against the Company which might materially
affect any business, properties, assets, prospects of
conditions, financial or otherwise of the Company or
which could result in any material liability to the
Company.
9.3 The Purchaser shall transfer or provide the share certificates
and options as required to the Vendors in accordance with
Schedule "E", and such compensation shall be registered on the
books of the Purchaser in the names of the Vendors as set
forth on Schedule "E".
9.4 At the Closing, the Vendors shall deliver or cause to be
delivered to the Purchaser:
<PAGE>
-49-
9.4.1 all deeds of conveyance, transfer of the Shares, and
Share Certificates properly endorsed on the reverse,
in form and content satisfactory to the Purchaser's
counsel, appropriate to effectively vest a good and
marketable title to the Shares in the Purchaser to
the extent contemplated by this Agreement;
9.4.2 all consents or approvals required to be obtained by
the Vendors for the purpose of validly transferring
the Shares and the Company;
9.4.3 new share certificates in the name of the Purchaser
representing the Shares transferred;
9.4.4 the opinion of the solicitor for the Company;
9.4.5 duly executed releases of, or evidence to the
reasonable satisfaction of the Purchaser as to the
discharge of any and all liabilities to Shareholders
which the Purchaser has not agreed to assume; and
9.4.6 certified copies of such resolutions of the
Shareholders and directors of the Company as are
required to be passed to authorize the execution,
delivery and implementation of this Agreement and of
all documents to be delivered by the Vendors hereto.
<PAGE>
-50-
9.5 At the time of Closing, the Purchaser shall deliver or cause
to be delivered to the Vendors:
9.5.1 a Banker's Draft payable to David H. Stoller In Trust
for that portion of the Purchase Price payable in
cash;
9.5.2 all documents required to convey the Lineo Shares and
Options to the Vendors; and
9.5.3 the legal opinion as required.
9.6 The parties will sign and deliver such further documentation
as may be required to fulfil their obligations pursuant to the
terms of this Agreement.
10 NOTICES
10.1 All notices, requested, demands and other communications
hereunder shall be in writing and shall be deemed to have been
duly given if delivered by hand, faxed or mailed postage
prepaid addressed as follows:
<PAGE>
-51-
To the Vendors: At the addresses set forth on page 1 of this
Agreement;
To the Purchaser: At 390 South 400 West, Lindon, Utah 84042,
U.S.A. Facsimile number (801) 426-6166
or to such other address as may be given in writing by the
Vendors or the Purchaser, and shall be deemed to have been
received, if delivered, on the date of delivery and if mailed
as aforesaid at Vancouver, British Columbia then on the next
business day following the posting thereof.
11 PARTIES IN INTEREST
11.1 This Agreement shall enure to the benefit of and shall be
binding upon the Vendors, their heirs, executors,
administrators and assigns and the Purchaser and its
successors and assigns.
12 GENERAL
12.1 Time shall be of the essence of this Agreement.
12.2 The waiver by any party of any breach of any term of this
Agreement shall not prevent the subsequent enforcement of that
term and shall not be deemed a waiver of any subsequent breach
unless in writing and signed by and on behalf of the parties
hereto.
<PAGE>
-52-
12.3 This Agreement embodies the entire understanding between the
parties hereto and there are no promises, terms, conditions or
obligations, oral or written, express or implied, other than
those contained herein.
12.4 Any dispute between the parties to this Agreement may be
referred to a single arbitrator in accordance with the
provisions of the Commercial Arbitration Act, R.S.B.C. 1996,
as amended.
12.5 In this Agreement, wherever the masculine is used, such use
shall include the feminine.
12.6 Any part of this Agreement that is found to be invalid or
unenforceable for any reason shall, wherever possible, be
severable from the Agreement and shall not in any way
prejudice the validity or enforceability of the remainder.
12.7 This Agreement shall be construed and governed in all respects
by the laws of the State of Delaware, and the forum of
conveyance shall be British Columbia.
13 SCHEDULES
The following schedules are annexed to, and form part of, this Agreement:
Schedule "A" Financial Statements of Fireplug Computers Inc. dated
December 31, 1999;
<PAGE>
-53-
Schedule "B" Liens, Mortgages and Other Encumbrances to the Assets of Fireplug
Computers Inc.
Schedule "C" Particulars of Accounts Receivable from DVD Technologies, Inc. and
Sierra;
Schedule "D" Assets presently owned by Fireplug Computers Inc. which do not form
part of the Assets subject to this sale;
Schedule "E" Distribution of Shares and Options Among Vendors.
Schedule "F" List of Current Suppliers
IN WITNESS WHEREOF the Vendors and the Purchaser have duly executed
this Agreement this 1st day of May, 2000.
SIGNED, SEALED AND DELIVERED )
by SHIRLEY PITT in the )
presence of: ) _________________________
) SHIRLEY PITT
______________________________ )
)
SIGNED, SEALED AND DELIVERED )
by STUART LYNNE in the )
presence of: ) _________________________
) STUART LYNNE
______________________________ )
SIGNED, SEALED AND DELIVERED )
by BRUCE BALDEN in the )
presence of: ) _________________________
) BRUCE BALDEN
______________________________ )
<PAGE>
-54-
SIGNED, SEALED AND DELIVERED )
by DONNA ALARIE in the )
presence of: ) _________________________
) DONNA ALARIE
______________________________ )
SIGNED, SEALED AND DELIVERED )
by RICHARD PITT in the )
presence of: ) _________________________
) RICHARD PITT
______________________________ )
SIGNED, SEALED AND DELIVERED )
by KENNETH CILLIS in the )
presence of: ) _________________________
) KENNETH CILLIS
______________________________ )
SIGNED, SEALED AND DELIVERED )
by JACK VANDENAKKER in the )
presence of: ) _________________________
) JACK VANDENAKKER
______________________________ )
SIGNED, SEALED AND DELIVERED )
by TED POWELL in the )
presence of: ) _________________________
) TED POWELL
______________________________ )
SIGNED, SEALED AND DELIVERED ) REGULAR EXPRESSIONS INC.
<PAGE>
-55-
On behalf of REGULAR EXPRESSIONS INC. ) per:
In the presence of: )
)
)
______________________________ ) _________________________
Authorized Signatory
SIGNED, SEALED AND DELIVERED ) FIREPLUG COMPUTERS INC.
On behalf of FIREPLUG COMPUTERS INC. ) per:
In the presence of: )
)
)
______________________________ ) _________________________
Authorized Signatory
SIGNED, SEALED AND DELIVERED ) LINEO, INC.
On behalf of LINEO, INC. ) per:
In the presence of: )
)
)
______________________________ ) _________________________
Authorized Signatory
<PAGE>
STOCK PURCHASE AGREEMENT
BY AND AMONG
MORETON BAY VENTURES PTY LTD,
an Australian corporation,
LINEO, INC.
a Delaware, USA corporation
AND
THE SELLERS NAMED HEREIN
DATED AS OF MAY 10, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1. DEFINITIONS......................................................................................5
ARTICLE 2. SALE OF SHARES; CLOSING.........................................................................10
2.1 PURCHASE AND SALE...............................................................................10
2.2 PURCHASE PRICE..................................................................................10
2.3 DELIVERY OF CORPORATION SHARES; PAYMENT.........................................................11
2.4 TIME AND PLACE OF CLOSING.......................................................................11
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF CORPORATION...................................................11
3.1 ORGANIZATION, ETC...............................................................................11
3.2 AUTHORIZATION; EXECUTION; BINDING EFFECT........................................................12
3.3 CAPITALIZATION; SHARE OWNERSHIP.................................................................12
3.4 SUBSIDIARIES....................................................................................13
3.5 NO CONFLICTING AGREEMENTS OR CHARTER PROVISIONS.................................................13
3.6 CONSENTS, APPROVALS, LICENSES, ETC..............................................................13
3.7 LITIGATION......................................................................................14
3.8 FINANCIAL STATEMENTS............................................................................14
3.9 NO UNDISCLOSED LIABILITIES......................................................................14
3.10 COMPLIANCE WITH LAWS; PERMITS...................................................................14
3.11 NO ADVERSE CHANGES..............................................................................14
3.12 CERTAIN TRANSACTIONS............................................................................15
3.13 BENEFIT PLANS...................................................................................15
3.14 TAX MATTERS.....................................................................................16
3.15 CONTRACTS.......................................................................................17
3.16 LEASED PROPERTY.................................................................................17
3.17 INTELLECTUAL PROPERTY...........................................................................18
3.18 COMPLIANCE WITH ENVIRONMENTAL LAWS..............................................................18
3.19 NO BROKERS......................................................................................19
3.20 BOOKS AND RECORDS...............................................................................19
3.21 TITLE TO PROPERTIES; ENCUMBRANCES...............................................................19
3.22 CONDITION AND SUFFICIENCY OF ASSETS.............................................................19
3.23 ACCOUNTS RECEIVABLE.............................................................................19
3.24 INVENTORY.......................................................................................19
3.25 INSURANCE.......................................................................................19
3.26 LABOR RELATIONS; COMPLIANCE.....................................................................20
3.27 CERTAIN PAYMENTS................................................................................20
3.28 DISCLOSURE......................................................................................20
3.29 EQUITY..........................................................................................20
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF THE SELLERS...................................................20
4.1 CAPACITY; EXECUTION; VALIDITY; BINDING EFFECT...................................................20
4.2 SHARE OWNERSHIP.................................................................................20
4.3 NO OTHER RIGHTS.................................................................................21
4.4 NO CONFLICTING AGREEMENTS.......................................................................21
4.5 CONSENTS, APPROVALS, LICENSES, ETC..............................................................21
4.6 LITIGATION......................................................................................21
<PAGE>
4.7 NO BROKERS......................................................................................21
4.8 NO U.S. PERSONS.................................................................................22
4.9 INVESTMENT EXPERIENCE AND INTENT................................................................22
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF BUYER.........................................................22
5.1 ORGANIZATION AND CORPORATE POWER................................................................22
5.2 AUTHORIZATION AND NON-CONTRAVENTION.............................................................22
5.3 CAPITALIZATION..................................................................................23
5.4 SUBSIDIARIES; INVESTMENTS.......................................................................23
5.5 FINANCIAL STATEMENTS............................................................................23
5.6 ABSENCE OF UNDISCLOSED LIABILITIES..............................................................23
5.7 ABSENCE OF CHANGES..............................................................................24
5.8 TITLE; CONDITION OF PROPERTY....................................................................24
5.9 CERTAIN CONTRACTS AND ARRANGEMENTS..............................................................24
5.10 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS.............................................26
5.11 LITIGATION......................................................................................26
5.12 TAX MATTERS.....................................................................................27
5.13 EMPLOYEE BENEFIT PLANS..........................................................................27
5.14 LABOR LAWS......................................................................................27
5.15 EMPLOYEES.......................................................................................27
5.16 HAZARDOUS WASTE, ETC............................................................................28
5.17 BUSINESS; COMPLIANCE WITH LAWS..................................................................28
5.18 INVESTMENT BANKING; BROKERAGE...................................................................28
5.19 INSURANCE.......................................................................................28
5.20 TRANSACTIONS WITH AFFILIATES....................................................................28
5.21 SUPPLIERS.......................................................................................28
5.22 CERTAIN EVENTS..................................................................................29
5.23 REGISTRATION RIGHTS.............................................................................29
5.24 DISCLOSURE......................................................................................29
5.25 CORPORATE DOCUMENTS.............................................................................29
5.26 OFFERING........................................................................................29
5.27 INVESTMENT COMPANY..............................................................................30
5.28 SUPPLEMENTAL REMUNERATION.......................................................................30
5.29 GOVERNMENTAL CONSENTS...........................................................................30
ARTICLE 6. COVENANTS OF SELLERS, BUYER AND CORPORATION.....................................................30
6.1 INVESTIGATION OF BUSINESS; ACCESS TO PROPERTIES AND RECORDS.....................................30
6.2 REGULATORY AND OTHER AUTHORIZATIONS.............................................................30
6.3 REASONABLE EFFORTS; CONSENTS AND NOTIFICATIONS..................................................31
6.4 FURTHER ASSURANCES..............................................................................31
6.5 CONDUCT OF BUSINESS OF THE CORPORATION AND SUBSIDIARIES.........................................32
6.6 PRESERVATION OF BUSINESS........................................................................33
6.7 ANNOUNCEMENTS...................................................................................33
6.8 NO SOLICITATION.................................................................................33
6.9 RIGHT TO UPDATE AND CURE........................................................................34
6.10 MARKET STAND-OFF AGREEMENT......................................................................34
6.11 SECURITIES LAW COMPLIANCE.......................................................................34
ARTICLE 7. CONDITIONS TO BUYER'S OBLIGATION TO CLOSE.......................................................35
7.1 REPRESENTATIONS; WARRANTIES AND COVENANTS OF THE CORPORATION AND THE SELLERS....................35
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7.2 FILINGS; CONSENTS; WAITING PERIODS..............................................................35
7.3 NO INJUNCTION...................................................................................35
7.4 CLOSING DELIVERIES..............................................................................35
7.5 ABSENCE OF LITIGATION...........................................................................37
7.6 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS.............................................37
7.7 NO MATERIAL ADVERSE EFFECT......................................................................37
7.8 GENERAL RELEASE.................................................................................37
7.9 TAX FILING CODE SECTION 338(g) ELECTION.........................................................38
ARTICLE 8. CONDITIONS TO SELLERS'OBLIGATIONS TO CLOSE......................................................38
8.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BUYER..........................................38
8.2 FILINGS; CONSENTS; WAITING PERIODS..............................................................38
8.3 NO INJUNCTION...................................................................................38
8.4 CLOSING DELIVERIES..............................................................................38
8.5 ABSENCE OF LITIGATION...........................................................................39
8.6 ABSENCE OF LITIGATION...........................................................................39
ARTICLE 9. SURVIVAL; INDEMNIFICATION.......................................................................39
9.1 INDEMNIFICATION.................................................................................39
9.2 LIMITATIONS ON INDEMNIFICATION..................................................................41
ARTICLE 10. TERMINATION.....................................................................................42
10.1 TERMINATION.....................................................................................42
10.2 PROCEDURE AND EFFECT OF TERMINATION.............................................................43
ARTICLE 11. MISCELLANEOUS...................................................................................43
11.1 COUNTERPARTS....................................................................................43
11.2 GOVERNING LAW...................................................................................43
11.3 NO THIRD PARTY BENEFICIARIES....................................................................43
11.4 ENTIRE AGREEMENT................................................................................44
11.5 EXPENSES........................................................................................44
11.6 NOTICES.........................................................................................44
11.7 SUCCESSORS AND ASSIGNS..........................................................................44
11.8 HEADINGS; DEFINITIONS...........................................................................45
11.9 AMENDMENTS AND WAIVERS..........................................................................45
11.10 VENUE; SERVICE OF PROCESS.......................................................................45
11.11 ARBITRATION.....................................................................................45
11.12 ATTORNEYS'FEES..................................................................................46
11.13 SEVERABILITY OF PROVISIONS; JEOPARDY............................................................47
11.14 SELLER APPROVAL.................................................................................47
</TABLE>
Exhibits
- --------
Exhibit A List of Sellers
Exhibit B Option Holders
Exhibit C Deed of Release
Schedules
- ---------
Corporation Disclosure Schedule
Buyer Disclosure Schedule
Seller Disclosure Schedule
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STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT dated as of May 10, 2000 is made and
entered into by and among all of the Sellers listed on EXHIBIT A hereto (each a
"Seller" and collectively the "Sellers"), Moreton Bay Ventures Pty Ltd, ACN 069
159 539, an Australian corporation (the "Corporation"), and Lineo, Inc., a
Delaware, USA, corporation (the "Buyer").
WHEREAS, the Sellers own all of the shares of the Corporation issued
and outstanding as of the date of this Agreement, with each Seller owning that
number of shares of the Corporation set forth opposite such Seller's name in
EXHIBIT A hereto; and
WHEREAS, the Buyer desires to purchase from the Sellers, and the
Sellers desire to sell to the Buyer, all of the shares of the Corporation issued
and outstanding as of the date of this Agreement upon the terms and subject to
the conditions set forth in this Agreement (the sale and purchase of such shares
are referred to in this Agreement as the "Share Purchase");
NOW, THEREFORE, in consideration of the mutual agreements, covenants,
representations and warranties contained herein, and subject to the terms and
conditions hereinafter set forth, the parties to this Agreement hereby agree as
follows:
ARTICLE 1.
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
1.1 "ACCOUNTANTS" shall have the meaning set forth in Section 2.2(b).
1.2 "ACCOUNTS RECEIVABLE" shall have the meaning set forth in Section
3.23.
1.3 "AFFILIATE" shall mean, with respect to any Person, a Person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such Person.
1.4 "AGREEMENT" shall mean this Stock Purchase Agreement, together with
the Buyer Disclosure Schedule, the Corporation Disclosure Schedule and the
Seller Disclosure Schedule, as the same may be updated or amended from time to
time as provided herein.
1.5 "ASSOCIATE" shall mean, with respect to any Person, any corporation
or other business organization of which such Person is an executive officer (as
such term is defined in Rule 3b-7 under the 1934 Act), or the Corporations Law
of Queensland, Australia, (as the context requires), or partner or is the
beneficial owner, directly or indirectly, of ten percent or more of any class of
equity securities, any trust or estate in which such Person has a substantial
beneficial interest or as to which such Person serves as a trustee or in a
similar capacity and any relative or spouse of such Person.
1.6 "AUDITED FINANCIAL STATEMENTS" shall mean the audited balance sheet
of the Corporation at March 31, 2000, and the related audited consolidated
statements of operations, changes in shareholders' equity and cash flows for the
years then ended, including related footnotes, in each case as examined by and
accompanied by the report of an independent certified public accountant, which
Audited Financial Statements are included in the Corporation Disclosure
Schedule.
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1.7 "AUTHORITY" shall mean any Australian, foreign, federal, provincial
state or local entity or municipality or subdivision thereof or any authority,
department, commission, board, bureau, agency, court or instrumentality thereof.
1.8 "BALANCE SHEET" shall mean the unaudited consolidated balance sheet
of the Corporation as of March 31, 2000, included in the Interim Financial
Statements.
1.9 "BENEFIT PLANS" shall mean any and all private or Government plans,
programs, Welfare Plans, Pension Plans and other arrangements under which or
through which the Corporation, any Subsidiary or any Affiliate provides, or has
an obligation to provide, or makes, or has an obligation to make, contributions,
compensation or benefits of any kind or description whatsoever (whether current
or deferred and whether paid in cash or in kind) to, or on behalf of, one, or
more than one, employee or director or former employee or former director, other
than any plans, programs or other arrangements which only provide for the
payment of cash compensation currently from the general assets of the
Corporation, any Subsidiary or any Affiliate on a payday by payday basis as base
salary or hourly wages for current services.
1.10 "BUSINESS" shall mean the internet software and appliance
development business of Moreton Bay Ventures Pty Ltd.
1.11 "BUSINESS DAY" shall mean any day that is not a Saturday, a Sunday
or other day on which banks are required or authorized by law to be closed in
Salt Lake City, Utah, USA.
1.12 "BUYER" shall have the meaning set forth in the first paragraph of
the Agreement.
1.13 "BUYER DISCLOSURE SCHEDULE" shall mean the disclosure schedule,
dated as of the date of this Agreement, delivered to the Sellers by the Buyer.
1.14 "BUYER FINANCIAL STATEMENTS" shall have the same meaning as set
forth in Section 5.5.
1.15 "BUYER RIGHTS" shall have the meaning set forth in Section 5.10.
1.16 "BYLAWS" shall mean the Bylaws, as amended, of Buyer.
1.17 "CERTIFICATE OF INCORPORATION" shall mean Certificate of
Incorporation and all amendments thereto of Buyer.
1.18 "CLOSING" shall have the meaning set forth in Section 2.4.
1.19 "CLOSING BALANCE SHEET" shall have the meaning set forth in
Section 2.2(b).
1.20 "CLOSING DATE" shall mean the date and effective time at which the
Closing occurs.
1.21 "CODE" shall mean the United States of America Internal Revenue
Code of 1986, as amended, together with the regulations promulgated thereunder.
1.22 "CORPORATION AFFILIATE" shall have the meaning set forth in
Section 3.12.
1.23 "CONTRACT" shall mean any contract, agreement, indenture, note,
bond, loan agreement, letter of credit agreement, line of credit agreement,
instrument, lien, conditional sales contract, mortgage, franchise, commitment,
obligation or other arrangement or agreement, but shall exclude leases of real
or personal property and insurance policies.
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1.24 "CORPORATION" shall mean Moreton Bay Ventures Pty Ltd. ACN 069 159
539, an Australian corporation.
1.25 "CORPORATION DISCLOSURE SCHEDULE" shall mean the disclosure
schedule, dated as of the date of this Agreement, delivered to the Buyer by the
Corporation.
1.26 "CORPORATION SHARES" shall have the meaning set forth in Section
2.1.
1.27 "EMPLOYEE BENEFIT PLAN" shall have the same meaning set forth in
Section 5.13.
1.28 "ENCUMBRANCES" shall mean any security interest, pledge, mortgage,
lien, charge, adverse claim of ownership or other encumbrance of any kind.
1.29 "ENVIRONMENTAL LAWS" shall mean all applicable laws, regulations,
rules, ordinances, codes, licenses, permits, orders, approvals, plans,
authorizations, concessions, franchises, and similar items of all in whatever
jurisdiction, and all applicable judicial, administrative and regulatory
decrees, judgments and orders, any of which relate to the protection of human
health or the environment from the effects of hazardous substances, including
but not limited to those pertaining to reporting, licensing, permitting,
investigating, and remediating emissions, discharges, releases or threatened
releases of Hazardous Substances into the air, surface water, groundwater or
land, or relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport, or handling of Hazardous Substances.
1.30 "EQUITY" shall have the meaning set forth in Section 2.2(c).
1.31 "ERISA" shall have the meaning set forth in Section 5.13.
1.32 "FAMILY MEMBER" shall mean with respect to a particular
individual, such individual's spouse, parents, children, siblings, mothers- and
fathers-in-law, sons- and daughters-in-law, and brothers- and sisters-in-law.
1.33 "FINANCIAL STATEMENTS" shall mean the Audited Financial Statements
and the Interim Financial Statements of the Corporation.
1.34 "GAAP" shall mean generally accepted accounting principles (as
such term is used in the applicable country's professional accounting standards)
from time to time in effect.
1.35 "HAZARDOUS SUBSTANCE" shall mean any substance or waste which is
listed as hazardous, regulated or toxic, or is a contaminant, pollutant or
hazardous or toxic substance or waste under any Environmental Laws, or any
substance or waste which has been determined at any time by regulation, ruling
or otherwise by any Authority to be a contaminant, pollutant or hazardous or
toxic substance and which shall include, without limitation, hazardous waste,
any medical waste, biohazardous waste, industrial waste and special waste.
1.36 "INDEMNIFYING SELLERS" shall mean Robert A. Waldie, Mary E. Waldie
and Peter Cronk, as a trustee of the Cronk Superannuation Fund.
1.37 "INDEMNIFIED LOSSES" shall have the meaning set forth in Section
9.1(a).
1.38 "INDEMNITEES" shall have the meaning set forth in Section 9.1(a).
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1.39 "INTERIM FINANCIAL STATEMENTS" shall mean the Balance Sheet as of
[NEED DATE] and the related unaudited consolidated statement of operations,
changes in shareholders' equity and cash flows for the three month period then
ended, including related footnotes, if any, which Interim Financial Statements
are included in the Corporation Disclosure Schedule.
1.40 "INTELLECTUAL PROPERTY" means each and every and any and all
patents and patent rights, trademarks and trademark rights, trade names and
trade name rights, service marks and service mark rights, service names and
service name rights, brand names, inventions, procedures, formulae, copyrights
and copyright rights, trade dress, business and product names, logos, slogans,
trade secrets, processes, designs, methodologies, computer programs (including
all source codes) and related documentation, linux embedded platforms and
related documentation, technical information, know-how and all pending
applications for and registrations of patents, trademarks, service marks and
copyrights.
1.41 "IRS" shall mean the U.S. Internal Revenue Service.
1.42 "KNOWLEDGE" shall mean (i) in the case of any Seller, knowledge of
such Seller, and if such Seller is an entity, knowledge of any officer or
director of such entity, (ii) in the case of the Buyer, knowledge of any officer
or director of the Buyer, and (iii) in the case of the Corporation or any
Subsidiary, knowledge of any officer or director of the Corporation or such
Subsidiary. An individual will be deemed to have "Knowledge" of a particular
fact or other matter if (a) such individual is actually aware of such fact or
other matter; or (b) with respect to Sections 3.26 and 6.11 only, such
individual would likely discover or otherwise become aware of such fact or other
matter by exercising the care an ordinarily prudent person in a like position
would exercise under similar circumstances.
1.43 "LEASES" shall have the meaning set forth in Section 3.16.
1.44 "LINEO OPTIONS" shall mean the options referred to in Section
2.3(c).
1.45 "LINEO SHARES" shall have the meaning set forth in Section 2.2.
1.46 "MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on
the business, operations, properties, assets (including intangible assets),
liabilities (contingent or otherwise), financial condition or results of
operations of the Corporation and the Subsidiaries, taken as a whole.
1.47 "MBV OPTIONS" shall mean the options on issue in the Corporation
as set out in EXHIBIT B.
1.48 "OPTION HOLDERS" shall mean the holders of MBV Options as set out
in EXHIBIT B.
1.49 "PERMITS" shall mean all permits, licenses and other approvals,
certificates of need, accreditations, participation agreements, consents,
authorizations, certificates of authority and orders.
1.50 "PERMITTED ENCUMBRANCES" shall mean (i) Encumbrances for Taxes not
yet due and payable and for property Taxes being contested in good faith, (ii)
Encumbrances and imperfections of title that do not secure payment of borrowed
money and the existence of which, in the aggregate, do not have a Material
Adverse Effect.
1.51 "PERSON" shall mean an individual, firm, trust, association,
corporation, limited liability company, partnership, limited partnership,
limited liability partnership, Authority or other entity.
1.52 "PLAN" shall have the same meaning set forth in Section 5.3.
8
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1.53 "PURCHASE PRICE" shall have the meaning set forth in Section 2.2.
1.54 "RELATED PARTY" shall have the meaning set forth in Section 3.12.
1.55 "SELLER" and "SELLERS" are identified on EXHIBIT A hereto.
1.56 "SELLER DISCLOSURE SCHEDULE" shall mean the disclosure schedules,
dated as of the date of this Agreement, delivered to the Buyer by any Seller.
1.57 "SHARE PURCHASE" shall have the meaning set forth in the Recitals
hereto.
1.58 "SUBSIDIARY" shall mean a corporation, partnership or other entity
of which the Corporation (i) has the power to elect more than fifty percent
(50%) of the board of directors or other governing authority either directly or
indirectly or (ii) owns or controls more than fifty percent (50%) of the
outstanding equity securities or equity interests either directly or through an
unbroken chain of entities as to each of which fifty percent (50%) or more of
the outstanding equity securities or equity interests is owned directly or
indirectly by its parent.
1.59 "SUBSIDIARY SHARES" shall have the meaning set forth in Section
3.4(b).
1.60 "SUPPLIER" OR "SUPPLIERS" shall have the same meaning set forth in
Section 5.21.
1.61 "SURVIVAL PERIOD" shall have the meaning as set forth in Section
9.1(f).
1.62 "TAKEOVER PROPOSAL" shall mean any proposal for a merger,
consolidation, acquisition of all or substantially all of the capital shares or
assets of the Corporation or the acquisition of a substantial equity interest in
the Corporation or a substantial portion of the consolidated assets of the
Corporation, or any solicitation of proxies in connection with any meeting for
the purpose of effecting a business combination or change in control.
1.63 "TAX" or "TAXES" shall mean all taxes, levies, imposts, duties,
excises, licenses and resignation fees, and charges of any kind or nature
whatsoever including, without limitation, income tax withholding, unemployment
and social welfare taxes, sales and use taxes and property taxes, stamp duty,
fringe benefits tax, capital gains, tax, payroll tax and interest, penalties and
additions to tax with respect to any of the above.
1.64 "TAX RETURN" shall mean any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment to such documents and any amendment of such documents.
1.65 "THIRD PARTY INTERESTS" shall mean any security interest, lease,
license, option, voting arrangement, easement, covenant, notation, restriction,
interest under any agreement, interest under any trust, or other right, equity,
entitlement or other interest of any nature held by a third party.
1.66 "U.S. PERSON" shall mean: (i) any natural person resident in the
United States; (ii) any partnership or corporation organized or incorporated
under the laws of the United States; (iii) any estate of which any executor or
administrator is a U.S. person; (iv) any trust of which any trustee is a U.S.
person; (v) any agency or branch of a foreign entity located in the United
States; (vi) any non-discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary for the benefit or account
of a U.S. person; (vii) any discretionary account or similar account (other than
an estate or trust) held by a dealer or other fiduciary organized, incorporated,
or (if an individual) resident
9
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in the United States; and (viii) any partnership or corporation if: (a)
organized or incorporated under the laws of any foreign jurisdiction; and (b)
formed by a U.S. person principally for the purpose of investing in securities
not registered under the Act, unless it is organized or incorporated, and owned,
by accredited investors (as defined in Rule 501(a)) who are not natural persons,
estates or trusts.
1.67 "UNDISCLOSED LIABILITY" shall mean an obligation, indebtedness or
liability of any nature (each of which, for purposes of this definition, is
assumed to be material), which is not reserved against or disclosed on the
Balance Sheet, or in the notes to the Balance Sheet or to the Interim Financial
Statements, and which is not so reflected, reserved against or otherwise
disclosed in this Agreement or the Corporation Disclosure Schedule.
1.68 "1933 ACT" shall mean the U.S. Securities Act of 1933, as amended.
1.69 "1934 ACT" shall mean the U.S. Securities Exchange Act of 1934, as
amended.
1.70 "1940 ACT" shall have the meaning set forth in Section 5.27.
1.71 OTHER DEFINED TERMS. The terms defined in the first paragraph and
in the whereas clauses shall have the meanings given to such terms in such
paragraph and whereas clauses.
ARTICLE 2.
SALE OF SHARES; CLOSING
2.1 PURCHASE AND SALE. Subject to the satisfaction or waiver of the
conditions to the Closing set forth in this Agreement, at the Closing the
Sellers will sell, and the Buyer will purchase, ordinary shares of the
Corporation, free from all Third Party Interests, which constitute, and will
constitute as of the Closing, all of the issued and outstanding shares on issue
in the Corporation (collectively, the "Corporation Shares"), with the amount of
Corporation Shares to be sold by each Seller set forth opposite such Seller's
name on EXHIBIT A hereto.
2.2 PURCHASE PRICE.
(a) In full payment of the Corporation Shares, the Buyer shall
pay and deliver to the Sellers an aggregate purchase price consisting of the
Purchase Price. The Purchase Price consists of [956,315] shares of the
unregistered Series D Convertible Preferred Stock of the Buyer (the "Lineo
Shares"), and Ten Thousand Dollars in currency of the United States of America
(USD $10,000). The Closing Purchase Price shall be paid to and allocated among
each of the Sellers as set forth opposite each Seller's name on EXHIBIT A
hereto.
(b) The Corporation will use diligent efforts to cause Arthur
Andersen LLP (the "Accountants") to prepare an audited consolidated balance
sheet ("Closing Balance Sheet") of the Corporation and its Subsidiaries as of
the Closing Date, including a computation of the Corporation's Equity, as
defined below, as of the Closing Date. The Corporation will deliver the Closing
Balance Sheet to the Buyer and Seller within thirty (30) days after the Closing
Date. The Closing Balance Sheet will be prepared in accordance with GAAP applied
on a basis consistent with the preparation of the Audited Financial Statements,
including without limitation accruals, prepaid expenses and taxes.
(c) "Equity" as used herein shall mean the excess of (x) the
sum of cash, net receivables and net inventory, over (y) the sum of accounts
payable, amounts outstanding under the
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Corporation's line of credit, long-term debt (including the current portion
thereof) and other accrued liabilities.
2.3 DELIVERY OF CORPORATION SHARES; PAYMENT.
(a) DELIVERY OF CORPORATION SHARES. At the Closing, each
Seller, severally and not jointly, shall sell, assign, transfer and deliver to
the Buyer the number of the Corporation Shares set forth opposite such Seller's
name on EXHIBIT A by delivery to the Buyer of a certificate or certificates
representing such Corporation Shares, accompanied by duly executed share
transfer forms, in form and substance satisfactory to the Buyer and free and
clear of all Encumbrances. The Corporation agrees to, as soon as practicable
after the Closing and subject to stamping, accept for registration each transfer
for the Corporation Shares and to issue to the Buyer a certificate or
certificates, in the name of the Buyer, representing the Corporation Shares.
(b) PAYMENT OF THE PURCHASE PRICE. At the Closing, the Buyer
shall pay to the Sellers the Purchase Price as set forth on EXHIBIT A.
(c) The Corporation and the Option Holders agree that all MBV
Options will be cancelled on and from the date of issue by the Buyer to the
Option Holders of Lineo Options in the amounts set forth on EXHIBIT B. The Buyer
agrees to issue the Lineo Options within a reasonable time after the Closing.
Each Lineo Option will be exercisable for one share of common stock of Buyer at
an exercise price of $3.00 per share.
2.4 TIME AND PLACE OF CLOSING. The closing (the "Closing") of the Share
Purchase will be held at the office of the Corporation at 2:00 p.m. on May 10,
2000 or such other time and place as shall be agreed to by the parties.
2.5 Waiver of rights. Each of the Sellers:
(a) agrees to waive any right under the Articles of
Association of the Corporation to require the Corporation or its directors to
give any notice in respect of the sale of the Corporation Shares;
(b) declares in accordance with the Articles of Association of
the Corporation that the Buyer is a desirable person to whom it is in the
interests of the Corporation for the Corporation Shares to be transferred; and
(c) waives any right to require another Seller or the
Corporation to transfer or cause to be transferred any Corporation Shares to the
Seller.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF CORPORATION
The Corporation represents and warrants to the Buyer that the
statements contained in this Article 3 are true and correct, except as set forth
in the Corporation Disclosure Schedule.
3.1 ORGANIZATION, ETC. The Corporation and each Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of its respective jurisdictions of incorporation and has all requisite corporate
or other power and authority (i) to conduct its business as it is now conducted
and to own or lease all of the properties owned or leased by it, and (ii) in the
case of the Corporation, to enter into and perform its obligations under this
Agreement and to undertake the
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transactions contemplated hereby. True, correct and complete copies of the
Articles of Incorporation and Bylaws of the Corporation (or other constituting
documents) and each Subsidiary as of the date of this Agreement have been
previously delivered or made available to the Buyer. The corporate records and
minute books of the Corporation and each Subsidiary contain complete,
comprehensive and accurate minutes of all meetings and other corporate actions
of the incorporators, directors, committees of directors and shareholders of the
Corporation and each Subsidiary held, in the case of the Corporation, since its
date of incorporation and, in the case of each Subsidiary, since the date of its
acquisition by the Corporation, and the share certificate books and register of
shareholders of the Corporation and each Subsidiary are complete and accurate,
reflecting all transactions in the equity securities of the Corporation and each
Subsidiary. The Corporation's and each Subsidiary's share transfer records
reflect fully all issuances, transfers and redemptions of the Corporation Shares
and each Subsidiary's shares since the date of incorporation. The Corporation
and each Subsidiary is duly qualified to do business as a foreign corporation,
and is in good standing, in all jurisdictions in which the ownership or lease of
property by it or the conduct of its business makes such qualification
necessary, a complete list of which jurisdictions is set forth in Section 3.1 of
the Corporation Disclosure Schedule.
3.2 AUTHORIZATION; EXECUTION; BINDING EFFECT. The execution, delivery
and performance of this Agreement and the consummation of the transactions
provided for herein have been duly authorized by all requisite corporate action
on the part of the Corporation, and this Agreement has been duly executed and
delivered by the Corporation. Assuming due execution and delivery by the other
parties, this Agreement constitutes the legal, valid and binding obligation of
the Corporation, enforceable against the Corporation in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, or other laws affecting creditors' rights and remedies
generally.
3.3 CAPITALIZATION; SHARE OWNERSHIP. The issued shares, options and
warrants of the Corporation and each Subsidiary are listed in Section 3.3 of the
Corporation Disclosure Schedule. All outstanding capital shares of the
Corporation and each Subsidiary have been duly authorized and validly issued,
are fully paid, and have in no case been issued in violation of any preemptive
rights granted by the Corporation or the applicable Subsidiary. All outstanding
capital shares of the Corporation or any Subsidiary were authorized, offered,
issued and sold in accordance with applicable law. Neither the Corporation or
any Subsidiary has any capital shares in its treasury, other than shares which
have been repurchased pursuant to a promissory note that is not yet fully paid.
Except as set forth in Section 3.3 of the Corporation Disclosure Schedule, there
is no existing subscription, option, warrant, call, right, commitment or other
agreement (whether statutory or contractual) to which the Corporation or any
Subsidiary is a party requiring, and there are no convertible securities of the
Corporation or any Subsidiary outstanding which upon conversion would require,
directly or indirectly, the issuance of any additional capital shares of the
Corporation, a Subsidiary or other securities convertible into or exercisable or
exchangeable for capital shares of the Corporation, a Subsidiary, or any other
equity security of the Corporation or a Subsidiary, and there are no obligations
(contingent or otherwise) of the Corporation or any Subsidiary (i) to
repurchase, redeem or otherwise acquire any outstanding capital shares of the
Corporation or the capital shares of, or other equity interests in, any
Subsidiary, or (ii) except for guarantees of obligations of, or loans and
advances to, the Corporation or any Subsidiary, provide funds to, or make
investments in, or provide any guarantee with respect to the obligations of, any
other Person. There are no bonds, debentures, notes, lines of credit, letters of
credit, or other indebtedness issued and outstanding having the right to vote on
any matters on which the Corporation's shareholders may vote. The Corporation
Shares to be sold pursuant to this Agreement constitute all of the issued shares
of the Corporation. The Corporation has granted no Person any registration
rights in respect of capital shares of the corporation or securities convertible
into or exercisable or exchangeable for capital shares of the Corporation. Each
Seller is the sole record owner of the shares of the Corporation listed beside
such Seller's name in EXHIBIT A.
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3.4 SUBSIDIARIES.
(a) Other than the Subsidiaries, if any, set forth in Section
3.4(a) of the Corporation Disclosure Schedule, there are no corporations,
partnerships, limited liability companies, joint ventures, business trusts,
associations, or other entities (i) over which the Corporation has control
(whether absolute or shared) or a right to exercise control, or (ii) in which
the Corporation owns, of record or beneficially, any direct or indirect equity
interest or any right (contingent or otherwise) to acquire the same.
(b) Section 3.4(b) of the Corporation Disclosure Schedule sets
forth the jurisdiction of incorporation of each Subsidiary, if any, its
authorized capital stock, the number and class or series of its issued and
outstanding shares of capital stock, and the current ownership by Corporation
and its Subsidiaries of such shares (collectively, the "Subsidiary Shares"). The
Subsidiary Shares constitute all the issued and outstanding shares of capital
stock of the Subsidiaries. The Subsidiary Shares have been duly authorized and
validly issued, are fully paid and non-assessable, and were not issued in
violation of any preemptive rights. There are no existing subscriptions,
options, warrants, calls, rights of conversion or other rights, agreements,
arrangements or commitments relating to the capital stock of any Subsidiary
obligating any Subsidiary, directly or indirectly, to issue, sell, or otherwise
transfer, or repurchase, redeem, or otherwise acquire any shares of its capital
stock. Either the Corporation or another Subsidiary owns the Subsidiary Shares
issued by the respective Subsidiaries free and clear of all Encumbrances, except
Encumbrances arising out of, under or in connection with this Agreement. There
are no voting trusts, shareholder agreements, proxies or other agreements in
effect with respect to the voting or transfer of the Subsidiary Shares.
3.5 NO CONFLICTING AGREEMENTS OR CONSTITUTION PROVISIONS. Except as set
forth in Section 3.5 of the Corporation Disclosure Schedule, the execution and
delivery of this Agreement, the compliance with and performance of the terms and
provisions of this Agreement, and the consummation of the transactions
contemplated hereby by the Corporation will not (i) conflict with or result in
the contravention or breach of the terms, conditions or provisions of, (ii)
constitute a default (or an event which, with notice, lapse of time, or both,
would constitute a default) under, (iii) result in any violation of, (iv)
require the obtaining of any consent or approval of, the taking of any action
of, the making of any filing with, or the giving of any notice to, any Person
(except such consents, approvals, actions, filings and notices that will have
been obtained, taken, made, given or effectively waived prior to the Closing, a
true, correct and complete list of which is set forth in Section 3.5 of the
Corporation Disclosure Schedule) as a result of or under the terms of, (v)
result in or give to any Person any right of termination, cancellation,
acceleration, modification, or increased or accelerated rights, entitlements or
payments under, or (vi) result in the creation or imposition of any Encumbrance
upon the Corporation or any Subsidiary or any of their respective assets or the
Corporation Shares under: (A) the Constitution of the Corporation or any
Subsidiary or any resolutions adopted by the shareholders or the Board of
Directors or any committee of the Board of Directors of the Corporation or any
Subsidiary; (B) any order, judgment, decree, license, permit, statute, law,
rule, or regulation to which the Corporation or any Subsidiary or any of their
respective assets is subject; or (C) any provision of any Contract to which the
Corporation or any Subsidiary is party or by which the Corporation or any
Subsidiary or any of their respective assets is bound except, in the case of
clauses (B) and (C), for any such violations, breaches, defaults, terminations,
cancellations or accelerations which in the aggregate would not be reasonably
likely to have a Material Adverse Effect or a material adverse effect on the
ability of the Corporation or any Subsidiary to consummate the transactions
contemplated by this Agreement.
3.6 CONSENTS, APPROVALS, LICENSES, ETC. No Permit by or from, or
declaration, filing or registration with, or notification to, any Authority is
required to be made or obtained by the Corporation or any Subsidiary in
connection with the execution, delivery and performance of this Agreement, or
the consummation of the transactions contemplated hereby, except as set forth in
Section 3.6 of the
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Corporation Disclosure Schedule, and except where the failure to obtain the
Permit, or make the declaration, filing, registration, or notification would not
have a Material Adverse Effect or a material adverse effect on the parties'
ability to consummate the transactions contemplated by this Agreement.
3.7 LITIGATION. Except as set forth in Section 3.7 of the Corporation
Disclosure Schedule, there is no action, suit, proceeding or investigation in
progress or pending or, to the Knowledge of the Corporation or any Subsidiary,
threatened or contemplated, at law or in equity, in any court or before or by
any Authority against or relating to the Corporation or any Subsidiary or any of
their respective properties, or the conduct of the Corporation's or any
Subsidiary's business as currently operated or contemplated to be operated,
which in any case would be reasonably likely to have a Material Adverse Effect
or a material adverse effect on the parties' ability to consummate the
transactions contemplated by this Agreement. Except as set forth in Section 3.7
of the Corporation Disclosure Schedule, there is not currently outstanding
against the Corporation or any Subsidiary any judgment, decree, injunction,
ruling or order of any Authority which, insofar as it can be reasonably
foreseen, individually or in the aggregate, would have a Material Adverse
Effect.
3.8 FINANCIAL STATEMENTS. The Audited Financial Statements (i) have
been prepared based upon, and are consistent with, the books and records of the
Corporation and the Subsidiaries (which books and records are correct and
complete in all material respects), and (ii) fairly present the financial
position, results of operations, changes in shareholders' equity and cash flows
of the Corporation on a consolidated basis as of the dates and for the periods
set forth in such Audited Financial Statements, in accordance with applicable
country GAAP applied consistently throughout the periods involved, except normal
year-end audit adjustments with respect to the Interim Financial Statements. The
balance sheets included in the Audited Financial Statements accurately reflect
all properties and assets of the Corporation and each Subsidiary, whether real,
personal or mixed, which are required to be reflected on such balance sheets in
accordance with applicable country GAAP, consistently applied.
3.9 NO UNDISCLOSED LIABILITIES. The Corporation and its Subsidiaries
have no Undisclosed Liabilities outstanding on the date of this Agreement,
whether due or to become due, which individually or in the aggregate would be
reasonably likely to have a Material Adverse Effect, except as set forth in
Section 3.9 of the Corporation Disclosure Schedule.
3.10 COMPLIANCE WITH LAWS; PERMITS. The Corporation and the
Subsidiaries have complied with, and are not in violation of, and have not
received any notices of violation with respect to, any national, provincial or
local statute, law, regulation or ordinance with respect to the conduct of their
business, or the ownership or operation of their business, except for failures
to comply or violations that would not be reasonably likely to have a Material
Adverse Effect.
3.11 NO ADVERSE CHANGES. Since the date of the Audited Financial
Statements, except as set forth in Section 3.11 of the Corporation Disclosure
Schedule or as contemplated by this Agreement, there has not been, occurred or
arisen:
(i) any change, destruction or loss not covered by
insurance with respect to the Corporation or any Subsidiary having a Material
Adverse Effect;
(ii) any material change by the Corporation and any
Subsidiary in its accounting methods, principles or practices;
(iii) any material revaluation of any of the assets
of the Corporation or any Subsidiary, including, without limitation, writing
down the value of inventory; or
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(iv) any other event that resulted in a Material
Adverse Effect.
3.12 CERTAIN TRANSACTIONS. Except as set forth in Section 3.12 of the
Corporation Disclosure Schedule, to the Knowledge of the Corporation or any
Subsidiary:
(i) No (A) Seller, and no Family Member, Affiliate or
Associate of any Seller (other than the Corporation and its Subsidiaries), (B)
officer, director or other Affiliate of the Corporation or any Subsidiary
("Corporation Affiliate"), and (C) Associate or Family Member of any Corporation
Affiliate ("Related Party") directly or indirectly (1) sells to or purchases
from the Corporation or any Subsidiary any products or services in any material
amount, (2) has any interest in any corporation, partnership, limited liability
company, proprietorship or other entity which sells to or purchases from the
Corporation or any Subsidiary any products or services in any material amount,
(3) has any cause of action or claim against the Corporation or any Subsidiary
in any material amount; or (4) has a beneficial interest in any Contract to
which the Corporation or any Subsidiary is a party or which binds it or its
assets;
(ii) The Corporation is not, and no Subsidiary is,
indebted, either directly or indirectly, to any Related Party in any amount
other than current obligations for payments of salaries, bonuses and other
fringe benefits for past services rendered and recorded on the books of the
Corporation or a Subsidiary;
(iii) The Corporation is not, and no Subsidiary is,
indebted to any Seller in any amount for any management or other fees.
(iv) No Related Party is indebted to the Corporation
or any Subsidiary.
(v) No Seller is or ever has been a citizen or
resident of the United States of America nor has a permanent establishment
therein.
(vi) The Corporation does not maintain and has never
maintained a Permanent Establishment, as defined in the Code, in the United
States of America and the Corporation has never filed or is required to file a
tax return with the IRS.
3.13 BENEFIT PLANS.
(a) The Corporation and each Subsidiary has made available to
Buyer true and correct copies of all Benefit Plans and, to the extent
applicable, all related trust agreements, summary plan descriptions, actuarial
reports, insurance contracts, administrative service agreements, maintained for
the benefit of, or relating to, any current or former employee of the
Corporation, each Subsidiary, and any Affiliate.
(b) With respect to the Benefit Plans, individually and in the
aggregate, (i) no event has occurred, and to the Knowledge of the Corporation,
there exists no condition or set of circumstances in connection with which the
Corporation could be subject to any liability that is reasonably expected to
have a Material Adverse Effect.
(c) With respect to the Benefit Plans, individually and in the
aggregate, there are no funded benefit obligations for which contributions have
not been made or properly accrued, and there are no unfunded benefit obligations
that have not been accounted for by reserves or otherwise properly footnoted in
accordance with GAAP in the Financial Statements, which obligations are
reasonably expected to have a Material Adverse Effect.
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(d) With respect to each Benefit Plan, to the Knowledge of the
Corporation, neither such Benefit Plan, nor any trustee, administrator,
fiduciary, agent or employee thereof has at any time been involved in a
transaction, which could create a liability that is reasonably expected to have
a Material Adverse Effect.
(e) Except as set forth in Schedule 3.13 of the Corporation
Disclosure Schedule, neither the Corporation nor any of its Subsidiaries is a
party to any oral or written (i) union or collective bargaining agreement, (ii)
agreement with any officer or other key employee of the Corporation or any of
its Subsidiaries, the benefits of which are contingent, or the terms of which
are materially altered, upon the occurrence of a change in control of the
Corporation or other transaction involving the Corporation of the nature
contemplated by this Agreement, (iii) agreement with any officer of the
Corporation or any of its Subsidiaries providing any term of employment or
compensation guarantee (iv) agreement or plan, including any stock option plan,
stock appreciation right plan, restricted stock plan or stock purchase plan, any
of the benefits of which will be increased, or the vesting of the benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which will
be calculated on the basis of any of the transactions contemplated by this
Agreement; or (v) agreement or commitment to provide health care, life insurance
or other benefits after termination of employment, except for retirement
benefits under the Corporation's retirement plans.
(f) Nothing contained in this Agreement shall limit or
restrict the Corporation's or the Buyer's right from and after the Closing Date
to amend or modify any Benefit Plan in such manner as the Corporation or the
Buyer deems appropriate or to terminate a Benefit Plan.
3.14 TAX MATTERS.
(a) The Corporation and each Subsidiary have (i) filed when
due (after taking into account applicable extensions) with the appropriate
agencies all Tax Returns required to be filed by them, and (ii) paid when due
and payable all Taxes owed by them or, to the extent of Taxes not yet due and
payable, have accrued or otherwise adequately reserved on the Financial
Statements in material compliance with applicable country GAAP for the payment
of such Taxes not yet due and payable. All such Tax Returns are correct and
complete in all material respects. Complete and accurate copies of all such Tax
Returns due or filed have been furnished or made available to the Buyer.
(b) There are no Taxes assessed or, to the Knowledge of the
Corporation or any Subsidiary, asserted in respect of any Tax Returns filed by
the Corporation or any Subsidiary or claimed to be due by any taxing authority
or otherwise that are not accrued or adequately reserved for on the Financial
Statements in accordance with GAAP. The Corporation is not, and no Subsidiary
is, a party to any action or proceeding, and to the Corporation's or any
Subsidiary's Knowledge, no action or proceeding is threatened or contemplated,
for the assessment or collection of any Taxes, and the Corporation has received
no deficiency notices or reports or any Subsidiary in respect of any Tax and has
not lodged any private ruling requests with the Australian Tax Office. To the
Knowledge of the Corporation or any Subsidiary, no Tax Return of the Corporation
or any Subsidiary is currently being audited or, to the Corporation's or any
Subsidiary's Knowledge, is scheduled for future audit by any Authority.
(c) The Corporation has complied with the provisions of part
IIIAA of the Income Tax Assessment Act of 1936 (Cth) and has maintained proper
records of franking debits and franking credits for the purposes of that Act.
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(d) All documents to which the Corporation is a party or may
be interested in the enforcement of, and all transfers of any issued shares
(other than as contemplated by this Agreement), have been properly stamped if
required under applicable stamp duty legislation.
3.15 CONTRACTS.
(a) Section 3.15 of the Corporation Disclosure Schedule sets
forth each of the following Contracts to which the Corporation or any Subsidiary
is a party: (i) any Contract for borrowed money or deferred portion of purchase
price; (ii) any loan agreement, credit agreement, promissory note, guarantee,
indenture, subordination agreement, letter of credit, use of credit, interest
rate or foreign currency protection agreement or any other similar type of
Contract; (iii) any consulting or other Contract with attorneys, accountants,
actuaries, appraisers, investment bankers, lobbyists, government relations'
persons or other professional advisers providing for total payments equal to or
in excess of Twenty Five Thousand Dollars (USD $25,000) and that cannot be
terminated by the Corporation without penalty on 30 days or less notice; (iv)
any Contract (except for Contracts with customers) which, in whole or in part,
(A) presently restricts or precludes the Corporation or any present or future
Subsidiary or Affiliate of the Corporation from conducting any business anywhere
in the world, or (B) upon the occurrence of any event, the giving of notice or
the passage of time, by its terms would have such an effect; (v) any Contract
that involves aggregate payments by or to the Corporation or any Subsidiary in
excess of Twenty Five Thousand Dollars (USD $25,000) and that cannot be
terminated by the Corporation without penalty on 30 days or less notice; and
(vi) any indemnification agreement (except those entered into in the ordinary
course of business), guaranty or power of attorney granted to any Person (other
than the Corporation or a Subsidiary). The Corporation has delivered or
otherwise made available to the Buyer true, correct and complete copies of the
Contracts set forth in Section 3.15 of the Corporation Disclosure Schedule,
together with all amendments, waivers, modifications, supplements or side
letters affecting the obligations of any party under such Contracts.
(b) Except as set forth opposite or otherwise as part of the
description of such Contract in Section 3.15 of the Corporation Disclosure
Schedule:
(i) No party to any Contract listed in Section 3.15
to the Corporation Disclosure Schedule has given to the Corporation or any
Subsidiary notice of any breach or default under any such Contract by the
Corporation or a Subsidiary, which has not been cured or waived;
(ii) The Corporation is not, and no Subsidiary is, in
violation or breach of or default of any material term under any Contract listed
in Section 3.15 to the Corporation Disclosure Schedule in any respect or, with
notice or lapse of time or both, would be in violation or breach of or default
under any such Contract; and, to the Knowledge of the Corporation or any
Subsidiary no other party to any such Contract is in violation or breach of or
default under any such Contract or, with notice or lapse of time or both, would
be in violation or breach of or default under any such Contract; and
(iii) No consent by or of any party to any Contract
listed in Section 3.15 to the Corporation Disclosure Schedule is required in
order to consummate the transactions contemplated by this Agreement without
causing a breach or violation of or a default under such Contract.
3.16 LEASED PROPERTY. Set forth in Section 3.16 of the Corporation
Disclosure Schedule is a true, complete and correct list of all leases, licenses
or similar arrangements in respect of the use of real or personal property by
the Corporation or any Subsidiary which, in the case of personal property
arrangements, require cumulative payments in excess of USD $25,000 by the
Corporation or any Subsidiary (the "Leases"). Each Lease is in full force and
effect, has not been amended or modified in any way, and the Corporation is not,
and no Subsidiary is, in violation or breach of or default under any
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material term of any such Lease, nor has any event occurred which, with the
passage of time or action by a third party, could constitute such a violation,
breach or default. To the best of the Corporation's or any Subsidiary's
Knowledge, no other party to any Lease is in violation or breach of or default
under the terms of such Lease, nor has any event occurred which, with the
passage of time or action by a third party, could constitute such a violation,
breach or default. Except as set forth opposite or otherwise as part of the
description of such Lease in Section 3.16 of the Corporation Disclosure
Schedule, no consent by or of any party to any such Lease is required in order
to consummate the transactions contemplated by this Agreement without causing a
breach or violation of, a default under such Lease or increased charges under
such Lease.
3.17 INTELLECTUAL PROPERTY. The Corporation or a Subsidiary either has
all right, title and interest in (free and clear of all Encumbrances), or a
valid and binding license to use, all of the Intellectual Property used by the
Corporation or any Subsidiary in the conduct of their respective businesses,
except to the extent that the failure to have such rights have not had and would
not be reasonably likely to have a Material Adverse Effect. Except as disclosed
in Section 3.17 of the Corporation Disclosure Schedule, (i) all registrations
with and applications to Authorities in respect of such Intellectual Property
are valid and in full force and effect, (ii) the Corporation has and the
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of their respective trade secrets which Corporation or
the Subsidiary considers to be material, and (iii) the Corporation is not, and
no Subsidiary is, and the Corporation has not, and no Subsidiary has, received
any notice that it is, in violation or breach of or default under (or with the
giving of notice or lapse of time or both, would be in violation or breach of or
default under) any license to use such Intellectual Property, except to the
extent that the failure to have such rights has not had and would not be
reasonably likely to have a Material Adverse Effect. The Corporation has not,
and no Subsidiary has, received notice that the Corporation or any Subsidiary is
infringing any Intellectual Property of any other Person; no claim is pending
or, to the Knowledge of the Corporation or any Subsidiary, has been made to such
effect that has not been resolved; and to the Knowledge of the Corporation or
any Subsidiary, the Corporation is not, and no Subsidiary is, infringing any
Intellectual Property rights of any other Person, which infringement would be
reasonably likely to have a Material Adverse Effect.
3.18 COMPLIANCE WITH ENVIRONMENTAL LAWS. Except as set forth in Section
3.18 of the Corporation Disclosure Schedule, and except where any such matters
or violations would, individually or in the aggregate, not be reasonably
expected to have a Material Adverse Effect, (i) the Corporation has not, and no
Subsidiary has, generated, used, manufactured, processed, distributed, handled,
transported, treated, stored, released or disposed of, and has not suffered or
permitted anyone else to generate, use, manufacture, process, distribute,
handle, transport, treat, store, release or dispose of, any Hazardous Substance
in violation of any Environmental Laws; (ii) there has not been any generation,
use, manufacture, processing, distribution, handling, transportation, treatment,
storage, release or disposal of any Hazardous Substance in connection with the
conduct of the Business or the use of any property or facility leased or owned
by the Corporation or any Subsidiary, or to the Knowledge of the Corporation or
any Subsidiary, any nearby or adjacent properties or facilities, which has
created or might reasonably be expected to create any liability under any
Environmental Laws or which would require reporting to or notification of any
Authority; (iii) to the Knowledge of the Corporation or any Subsidiary, no
friable asbestos or polychlorinated biphenyl, and no underground storage tank,
is contained in or located at any property or facility of the Corporation or any
Subsidiary; (iv) any Hazardous Substance handled or dealt with in any way in
connection with the Business has been and is being handled or dealt with in
compliance with any Environmental Laws; (v) there are no investigations,
proceedings, actions, orders, claims or notices that are pending, anticipated
or, to the Knowledge of the Corporation or any Subsidiary threatened or
contemplated against the Corporation or any Subsidiary or involving the Business
and relating to Environmental Laws; and (vi) the Corporation has not received,
and no Subsidiary has received, any notice of, and the Corporation does not have
Knowledge of, and no Subsidiary has
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Knowledge of, any facts which relate to the ownership or operation of the
Business or any of the properties or facilities of the Corporation or any
Subsidiary and that might constitute a violation of any Environmental Laws.
3.19 NO BROKERS. No broker, agent, finder, consultant or other Person
has been retained by, or has acted on behalf of the Sellers or the Corporation
(other than legal and accounting advisors) or is entitled to be paid based upon
any agreements or understandings made by such parties in connection with the
transactions contemplated by this Agreement, and neither the Buyer nor the
Corporation shall have any liability for any broker's fee, finder's fee,
consultant's fee or similar third party remuneration payable by reason of any
action of the Sellers or the Corporation.
3.20 BOOKS AND RECORDS. The accounting books, minute books, share
transfer records, and other records of the Corporation and each Subsidiary, all
of which have been made available to the Buyer, are complete and correct in all
material respects and to the Knowledge of the Corporation, have been maintained
in accordance with sound business practices and the requirements of the
Corporations Law of Queensland, Australia, including the maintenance of an
adequate system of internal controls. At the Closing, all such books and records
will be in the possession of the Corporation.
3.21 TITLE TO PROPERTIES; ENCUMBRANCES.
(a) There is no real property owned by the Corporation or any
Subsidiary.
(b) The Corporation and each Subsidiary owns all the
properties and assets (whether tangible or intangible) that it purports to own
located in the facilities operated by the Corporation or any Subsidiary or
reflected as owned in the books and records of the Corporation or such
Subsidiary, including all of the properties and assets reflected in the Balance
Sheet and the Interim Financial Statements (except for assets held under
capitalized leases disclosed or not required to be disclosed in Section 3.16 of
the Corporation Disclosure Schedule and personal property sold since the date of
the Balance Sheet and the Interim Financial Statements, as the case may be, in
the ordinary course of business), and all of the properties and assets purchased
or otherwise acquired by the Corporation or any Subsidiary since the date of the
Balance Sheet (except for personal property acquired and sold since the date of
the Balance Sheet in the ordinary course of business and consistent with past
practice).
3.22 CONDITION AND SUFFICIENCY OF ASSETS. To the Knowledge of the
Corporation, the buildings, structures, and equipment of the Corporation and any
Subsidiary are in good operating condition and repair, and are adequate for the
uses to which they are being put.
3.23 ACCOUNTS RECEIVABLE. All accounts receivable of the Corporation or
any Subsidiary that are reflected on the Balance Sheet and on the Closing
Balance Sheet (collectively, the "Accounts Receivable") represent or will
represent valid obligations arising from sales actually made or services
actually performed in the ordinary course of business. Unless paid before the
Closing Date, the Accounts Receivable are or will be as of the Closing Date
collectible net of the respective reserves shown on the Balance Sheet or the
Interim Financial Statements.
3.24 INVENTORY. All inventory of the Corporation or any Subsidiary is
usable and salable in the ordinary course of business.
3.25 INSURANCE. The Corporation and each Subsidiary has obtained and
maintains insurance policies as listed on Schedule 3.25, and all such policies
are in full force and effect. All premiums due on such policies have been paid,
and the Corporation or any Subsidiary has not received any notice of
cancellation with respect thereto. Neither the Corporation nor any Subsidiary
has any obligation, liability
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or indebtedness for premiums or for retrospective premium adjustments for any
period through the date hereof. The Corporation Disclosure Schedule lists the
types, amounts of coverage and deductibles of all such insurance policies, and
true, correct and complete copies thereof have been delivered to the Buyer.
3.26 LABOR RELATIONS; COMPLIANCE. Neither the Corporation nor any
Subsidiary has been or is a party to any collective bargaining or other labor
Contract.
3.27 CERTAIN PAYMENTS. Neither the Corporation nor any Subsidiary has,
and no director, officer, agent or employee of the Corporation, any Subsidiary,
or any other Person associated with or acting for or on behalf of the
Corporation or any Subsidiary has, directly or indirectly (a) made any bribe,
rebate, payoff, influence payment, kickback, or other payment to any Person,
private or public, regardless of form, whether in money, property, or services
(i) to obtain favorable treatment in securing business, (ii) to pay for
favorable treatment for business secured, (iii) to obtain special concessions or
for special concessions already obtained, for or in respect of the Corporation,
any Subsidiary or any Affiliate, or (iv) in violation of any legal requirement,
or (b) established or maintained any fund or asset that has not been recorded in
the books and records of the Corporation or any Subsidiary.
3.28 DISCLOSURE. No representation or warranties of the Corporation and
no statement in the Corporation Disclosure Schedule fails to state a material
fact necessary to make the statements herein or therein, in light of the
circumstances in which they were made, not misleading. There is no fact known to
the Corporation that has specific application to the Corporation or any
Subsidiary (other than general economic or industry conditions) and that
materially adversely affects the assets, business, prospects, financial
condition, or results of operations of the Corporation or any Subsidiary (on a
consolidated basis) that has not been set forth in this Agreement or the
Corporation Disclosure Schedule.
3.29 EQUITY. The Equity of the Corporation at the Closing is not less
than the lesser of USD $600,000 or the amount of Equity reflected in the Audited
Financial Statements.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Each Seller, severally and not jointly, represents and warrants to the
Buyer that the statements contained in Sections 4.1 to 4.7 of this Agreement are
true and correct, except as set forth in the Seller Disclosure Schedule.
4.1 CAPACITY; EXECUTION; VALIDITY; BINDING EFFECT. Such Seller has the
full power and capacity necessary to enter into and perform its obligations
under this Agreement and to consummate the transactions contemplated herein.
This Agreement has been duly executed and delivered by such Seller and, assuming
due execution and delivery by the other parties, constitutes the legal, valid
and binding obligation of such Seller, enforceable against such Seller in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, or other laws affecting creditors'
rights and remedies generally.
4.2 SHARE OWNERSHIP. Except as set forth on Section 4.2 of the Seller
Disclosure Schedule, there is no existing subscription, option, warrant, call,
right, commitment or other agreement (whether preemptive or contractual) to
which such Seller is a party requiring, and there are no convertible securities
of the Corporation owned or held by such Seller which upon conversion would
require, directly or indirectly, the issuance of any additional capital shares
of the Corporation or other securities convertible into or exercisable or
exchangeable for capital shares of the Corporation or any other equity security
of the Corporation, and there are no obligations (contingent or otherwise) of
such Seller to purchase or
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otherwise acquire any outstanding capital shares of the Corporation. The
Corporation Shares to be sold by such Seller pursuant to this Agreement will be
delivered to the Buyer free and clear of all Encumbrances (except Encumbrances
arising out of, under or in connection with this Agreement), and such delivery
will not be in violation of any preemptive rights. Such Seller is the sole
beneficial owner of the Corporation Shares listed beside such Seller's name on
Exhibit A, and has the full legal right and power to sell, convey, transfer, and
assign such Corporation Shares to the Buyer pursuant to this Agreement. Such
Seller is not a party to any shareholder agreement, voting agreement, voting
trust, proxy or other agreement with respect to the voting or transfer of the
Corporation Shares.
4.3 NO OTHER RIGHTS. No Person (other than the Buyer as provided in
this Agreement) has any agreement or option or any right or privilege (whether
preemptive or contractual) capable of becoming an agreement or option for the
purchase from such Seller of any of the Corporation Shares being transferred by
such Seller to the Buyer pursuant to this Agreement.
4.4 NO CONFLICTING AGREEMENTS. The execution and delivery of this
Agreement, the compliance with and performance of the terms and provisions of
this Agreement, and the consummation of the transactions contemplated herein by
such Seller will not (i) conflict with or result in a breach of the terms,
conditions or provisions of, (ii) constitute a violation or breach or default
(or an event which, with notice, lapse of time, or both, would constitute a
default) under, (iii) result in any violation of, (iv) require the obtaining of
any consent or approval of, the taking of any action of, the making of any
filing with, or the giving of any notice to, any Person (except such consents,
approvals, actions, filings and notices that will have been obtained, taken,
made, given, or effectively waived prior to the Closing, a true, accurate and
complete list of which is set forth in Section 4.4 of the Seller Disclosure
Schedule) as a result of or under the terms of, (v) result in or give to any
Persons any right of termination, cancellation, acceleration, modification, or
increased or accelerated rights, entitlements or payments under, or (vi) result
in the creation or imposition of any Encumbrance upon such Seller under: (A) any
provision of any Contract to which such Seller is a party or by which it or any
of its assets is bound, or (B) any order, decree, license, permit, statute, law,
rule or regulation to which such Seller is subject.
4.5 CONSENTS, APPROVALS, LICENSES, ETC. Except for any consent,
approval, authorization, license, order or Permit that is also required to be
obtained by the Corporation, the Buyer or any other Seller, no consent,
approval, authorization, license, order or Permit of, or declaration, filing or
registration with, or notification to, any Authority is required to be made or
obtained by such Seller in connection with the execution, delivery and
performance of this Agreement, and the consummation of the transactions
contemplated hereby.
4.6 LITIGATION. There is no action, suit, proceeding or investigation
in progress or pending to the Knowledge of such Seller which affects this
Agreement or that Seller's Corporation Shares or any action taken or to be taken
or documents executed or to be executed by such Seller pursuant to or in
connection with the provisions of this Agreement, or that would otherwise
prevent the consummation of the transactions by such Seller contemplated by this
Agreement. There is no present state of facts or circumstances of which such
Seller has Knowledge which might reasonably be expected to result in any such
action, suit, proceeding or investigation.
4.7 NO BROKERS. Except as set forth in Section 3.19, no broker, agent,
finder, consultant or other Person has been retained by, or has acted on behalf
of such Seller (other than legal and accounting advisors) or is entitled to be
paid based upon any agreements or understandings made by such parties in
connection with the transactions contemplated by this Agreement, and except as
set forth in Section 3.19, neither the Buyer nor the Corporation shall have any
liability for any broker's fee, finder's fee, consultant's fee or similar third
party remuneration payable by reason of any action of such Seller.
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4.8 NO U.S. PERSONS. Except as disclosed in the Sellers' Disclosure
Schedule, such Seller is not a U.S. Person.
4.9 INVESTMENT EXPERIENCE AND INTENT. Such Seller represents to the
Buyer that it has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of the investment
contemplated by this Agreement and making an informed investment decision with
respect thereto. Such Seller represents and understands that it is responsible
for his own due diligence investigation and satisfying his own due diligence
requirements and shall not be entitled to rely on the due diligence
investigation of any other person or entity. Such Seller represents to the Buyer
that it is purchasing the Lineo Shares for his own account, for investment only
and not with a view to, or any present intention of, effecting a distribution of
such securities or any part thereof except pursuant to a registration or an
available exemption under applicable law. The Investor acknowledges that its
Lineo Shares have not been registered under the Securities Act or the securities
laws of any state or other jurisdiction and cannot be disposed of unless they
are subsequently registered under the Securities Act and any applicable state
laws or exemption from such registration is available.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF BUYER
The Buyer represents and warrants to the Corporation and the Sellers
that the statements contained in this Article 5 are true and correct, except as
set forth in the Buyer Disclosure Schedule:
5.1 ORGANIZATION AND CORPORATE POWER. The Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, USA, and is qualified to do business as a foreign corporation in each
jurisdiction in which the failure to be so qualified would have a Material
Adverse Effect. The Buyer has all required corporate power and authority to
carry on its business as presently conducted, to enter into and perform this
Agreement and all other agreements contemplated hereby to which it is a party
and to carry out the transactions contemplated hereby and thereby, including the
issuance (or reservation for issuance), sale, delivery and conversion of Lineo
Shares. The Buyer is not in violation of any term of the Certificate of
Incorporation and Bylaws of the Buyer, as amended to date (the "Certificate of
Incorporation" and the "Bylaws," respectively.)
5.2 AUTHORIZATION AND NON-CONTRAVENTION. The execution, delivery and
performance by the Buyer of this Agreement and all other agreements, documents
and instruments to be executed and delivered by the Buyer as contemplated hereby
and the issuance and delivery of the Lineo Shares have been duly authorized by
all necessary corporate and other action of the Buyer. This Agreement and each
such other agreement, document and instrument constitute valid and binding
obligations of the Buyer, enforceable in accordance with their respective terms.
The execution and delivery by the Buyer of this Agreement and each other
agreement, document and instrument to be executed and delivered by the Buyer
pursuant hereto or as contemplated hereby and the performance by the Buyer of
the transactions contemplated hereby and thereby, including, without limitation,
the issuance and delivery of the Lineo Shares do not and will not (whether after
the giving of notice, lapse of time or both): (a) violate, conflict with or
result in a default under any instrument, judgment, order, writ, decree,
contract, statute, rule, regulation or obligation to which the Buyer is subject
to or by which it or its assets are bound, or any provision of the Certificate
of Incorporation or Bylaws of the Buyer, and a violation of which would have a
material adverse effect on the business, condition, financial or otherwise, or
operations of the Buyer, or (b) result in any such violation, or be in conflict
with or constitute, with or without the passage of time and giving of notice,
either a default under any such provision, instrument, judgment, order, writ,
decree or contract or an event that results in the creation of any lien, charge
or encumbrance upon any assets of the Buyer or the suspension, revocation,
impairment, forfeiture or nonrenewal of any material permit,
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license, authorization or approval applicable to the Buyer, its business or
operations or any of its assets or properties.
5.3 CAPITALIZATION. The authorized capital stock of the Buyer consists
of 100,000,000 shares of Common Stock, par value $.001 per share, of which
20,148,724 shares are issued and outstanding, and 30,000,000 shares of Preferred
Stock, par value $.001 per share, of which (a) 7,500,000 shares are designated
as Series A Preferred Stock, of which (i) 5,000,000 shares are designated as
Series A Class 1 Preferred Stock, all of which are issued and outstanding, and
(ii) 2,500,000 shares are designated as Series A Class 2 Preferred Stock, all of
which are issued and outstanding, (b) 4,850,000 shares are designated as Series
B Preferred Stock, of which 4,833,331 shares are issued and outstanding, (c)
3,000,000 shares are designated as Series C Preferred Stock and (d) 2,000,000
are designated as Series D Convertible Preferred Stock. In addition, the Buyer
has authorized and reserved for issuance upon conversion of the Series A
Preferred Stock up to 7,500,000 shares of Common Stock (subject to adjustment
for stock splits, stock dividends and the like), has as authorized and reserved
for issuance upon conversion of the Series B Preferred Stock up to 4,850,000
shares of Common Stock (subject to adjustment for stock splits, stock dividends
and the like), has authorized and reserved for issuance upon conversion of the
Series C Preferred Stock up to 3,000,000 shares of Common Stock (subject to
adjustment for stock splits, stock dividends and the like), has authorized and
reserved for issuance upon conversion of the Series D Preferred Stock up to
2,000,000 shares of Common Stock (subject to adjustment for stock splits, stock
dividends and the like) and has reserved for issuance upon exercise of options
under the Buyer's stock option plan (the "Plan") 5,000,000 shares of Common
Stock (subject to adjustment for stock splits, stock dividends and the like).
Other than as described above, the Buyer has not issued or agreed to issue and
is not obligated to issue any warrants, options or other rights to purchase or
acquire any shares of its capital stock, or any securities convertible into or
exercisable or exchangeable for such shares or any warrants, options or other
rights to acquire any such convertible securities. All of the outstanding shares
of capital stock of the Buyer are duly and validly authorized and issued, fully
paid and nonassessable and, except as set forth herein, not subject to any
preemptive rights to purchase or otherwise acquire shares of capital stock of
the Buyer, are free of restrictions on transfer, other than restrictions on
transfer under applicable state and federal securities laws, and have been
offered, issued, sold and delivered in compliance with applicable federal and
state securities laws.
5.4 SUBSIDIARIES; INVESTMENTS. Except as set forth in Section 5.4 of
the Buyer Disclosure Schedule and other than 1,250,000 shares of Common Stock of
Caldera Systems, Inc., a representative office located in Taiwan and a wholly
owned subsidiary located in the United Kingdom, the Buyer does not currently own
any capital stock or interest or participate in any corporation, joint venture,
partnership, trust, limited liability Buyer or other entity.
5.5 FINANCIAL STATEMENTS. The Buyer has previously furnished to the
Investor copies of its draft audited financial statements (balance sheet,
statement of operations, statement of cash flows and statement of stockholders
equity, including notes thereto) for the fiscal year at and ended October 31,
1999 (the "Buyer Financial Statements"). Such financial statements were prepared
in conformity with generally accepted United States accounting principles
applied on a consistent basis; are complete, correct and consistent in all
material respects with the books and records of the Buyer; and fairly and
accurately present the financial position of the Buyer as of the dates thereof
and the results of operations and cash flows of the Buyer for the periods shown
therein. The Buyer maintains and will continue to maintain a standard system of
accounting established and administered in accordance with United States GAAP.
5.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the extent
reflected or reserved against in the financial statements referred to in Section
5.5 above, the Buyer does not have and is not subject to any material liability
or obligation of any nature, whether accrued, absolute, contingent or otherwise.
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5.7 ABSENCE OF CHANGES. Except as set forth in Section 5.7 of the Buyer
Disclosure Schedule, since October 31, 1999 there has not been (a) any material
adverse change in the financial condition, results of operations, assets,
liabilities, or business of the Buyer, (b) any material asset or property of the
Buyer made subject to a lien of any kind, (c) any waiver of any material right
of the Buyer, or the cancellation of any material debt or claim held by the
Buyer, (d) any payment of dividends on, or other distribution with respect to,
or any direct or indirect redemption or acquisition of, any shares of the
capital stock of the Buyer, or any agreement or commitment therefore, (e) any
mortgage, pledge or hypothecation of any tangible or intangible asset of the
Buyer, except in the ordinary course of business, (f) any sale or assignment of
any tangible asset of the Buyer having a book value in excess of USD $5,000,
except in the ordinary course of business, or of any Intellectual Property
Rights (as hereafter defined) or other intangible assets, (g) any loan by the
Buyer to, or any loan to the Buyer from, any officer, director, employee or
stockholder of the Buyer, or any agreement or commitment therefore (other than
travel and other advances in the ordinary course of business), (h) any damage,
destruction or loss (whether or not covered by insurance) materially and
adversely affecting the assets, property or business of the Buyer, (i) any
repayment of any loan owed by the Buyer (including, without limitation, any loan
owed to any stockholder of the Buyer), (j) any single capital expenditure in
excess of USD $50,000 or any capital expenditures aggregating more than USD
$250,000, (k) any material change in the accounting methods or practices
followed by the Buyer, (l) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Buyer, except in the ordinary
course of business and that is not material to the business, properties,
prospects or financial condition of the Buyer, (m) any material change to a
material contract or agreement by which the Buyer or any of its assets is bound
or subject, (n) any material change in any compensation arrangement or agreement
with any employee, officer, director or stockholder of the Buyer, (o) to the
Buyer's knowledge, any other event or condition of any character that might
materially and adversely affect the business, properties, prospects or financial
condition of the Buyer , (p) any resignation or termination of employment of any
officer or key employee of the Buyer, or (q) any arrangement or commitment by
the Buyer to do any of the things described in this Section 5.7.
5.8 TITLE; CONDITION OF PROPERTY.
(a) Except as set forth in Section 5.8 of the Buyer's
Disclosure Schedule, the Buyer has good title to all of its property and assets,
real, personal or mixed, tangible or intangible, free and clear of all liens,
security interests, charges and other encumbrances of any kind.
(b) Without material exception, all assets used in the Buyer
business are in good operating condition and repair and suitable for use in the
operation of such business, and none of such assets that (singly or when
aggregated with other assets) is material to the business of the Buyer is
obsolete.
5.9 CERTAIN CONTRACTS AND ARRANGEMENTS. Except as set forth in Section
5.9 of the Buyer's Disclosure Schedule (with true and correct copies delivered
to the Investor), the Buyer is not a party or subject to or bound by:
(a) any plan or contract providing for collective bargaining
or the like, or any contract or agreement with any labor union;
(b) any contract, lease or agreement creating any obligation
of the Buyer (contingent or otherwise) to pay to any third party USD $100,000 or
more with respect to any single such contract or agreement;
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(c) any contract or agreement for the sale, license, lease or
disposition of products or services in excess of USD $100,000;
(d) any contract containing covenants directly or explicitly
limiting the freedom of the Buyer to compete in any line of business or with any
person or entity;
(e) any license agreement (as licensor or licensee);
(f) any contract or agreement for the purchase of any
leasehold improvements, equipment or fixed assets for a price in excess of USD
$100,000;
(g) any indenture, mortgage, promissory note, loan agreement,
guaranty or other agreement or commitment for borrowing in excess of USD
$100,000 or any pledge or security arrangement;
(h) any material joint venture, partnership, or manufacturing
agreement;
(i) any endorsement or any other advertising, promotional or
marketing agreement;
(j) any employment contracts, or agreements with officers,
directors, employees or stockholders of the Buyer or persons or organizations
related to or affiliated with any such persons;
(k) any pension, profit sharing, retirement (other than the
Buyer's 401(k) plan), stock option, phantom stock or other equity incentive
plans;
(l) any arrangement relating to any royalty payments to
employees, customers or independent contractors based on the sales volume of the
Buyer;
(m) any acquisition, merger or similar agreement; or
(n) any contract with a governmental body under which the
Buyer may have an obligation for renegotiation.
Except as set forth in Section 5.9 of the Buyer's Disclosure Schedule,
(i) each of the Buyer's contracts and commitments is in full force and effect
and is valid, binding and enforceable in accordance with its terms as to the
Buyer and, to the knowledge of the Buyer, as to each other party thereto; (ii)
there exists no material breach or material default (or event that with notice
or lapse of time would constitute a material breach or material default) on the
part of the Buyer or, to the knowledge of the Buyer, on the part of any other
party under any of the Buyer's contracts or commitments, except to the extent
that any such breach or default would not have a Material Adverse Effect; (iii)
the Buyer has not received a written notice of termination or default under any
of the Buyer's contracts or commitments; and (iv) as of the date of this
Agreement, no party to an agreement under which the Buyer acquired a substantial
portion of its assets has asserted any claim for indemnification under such
agreement.
The Buyer has not engaged in the past three (3) months in any
discussion (i) with any representative of any corporation or corporations
regarding the merger of the Buyer with or into any such corporation or
corporations, (ii) with any representative of any corporation, partnership,
association or other business entity or any individual regarding the sale,
conveyance or disposition of all or substantially all of the assets of the Buyer
or a transaction or series of related transactions in which more than fifty
percent (50%) of the voting power of the Buyer would be disposed of, or (iii)
regarding any other form of liquidation, dissolution or winding up of the Buyer.
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5.10 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS. Except as set
forth in Section 5.10 of the Buyer's Disclosure Schedule:
(a) The Buyer has the right to use, sell, and license the
Intellectual Property material to the conduct of its business as presently
conducted, including without limitation all rights to the Buyer name "Lineo" and
to the trademarks and the product name "Embedix" (the "Buyer Rights"), free and
clear of the rights of all others.
(b) The business of the Buyer as presently conducted, the
products as marketed or sold and the provision of services by the Buyer do not
violate and will not violate any agreements that the Buyer has with any third
party or infringe any patent, trademark, service mark, copyright or trade secret
or any other Intellectual Property of any third party.
(c) No claim is pending or threatened against the Buyer nor
has the Buyer received any notice or claim from any person asserting that any of
the Buyer's present or contemplated activities infringe or may infringe any
Intellectual Property of such person, and the Buyer is not aware of any
infringement by any other person of any of the Buyer Rights.
(d) Each current and former employee of the Buyer, and each of
the Buyer's consultants and independent contractors involved in development of
any of the Buyer Rights, has executed an agreement regarding confidentiality,
proprietary information and assignment of inventions and copyrights to the
Buyer, and none of such employees, consultants or independent contractors is in
violation of any agreement or in breach of any agreement or arrangement with
former or present employers relating to proprietary information or assignment of
inventions. The Buyer has taken all reasonable steps to protect all data,
information, ideas, concepts, know-how and materials that the Buyer treats as
trade secrets, and all other confidential information and Intellectual Property
of the Buyer, which are not part of the public domain or knowledge, nor, to the
best knowledge of the Buyer, have they been used, divulged or appropriated for
the benefit of any person other than the Buyer or otherwise to the detriment of
the Buyer.
(e) No royalties or other amounts are payable by the Buyer to
persons by reason of the ownership or use of the Intellectual Property of the
Buyer.
(f) No third party has claimed or, to the best of the Buyer's
knowledge, has reason to claim that any person employed by or affiliated with
the Buyer has (a) violated or may be violating any of the terms or conditions of
his or her employment, non-competition, non-disclosure, non-solicitation or
inventions agreement with such third party, (b) disclosed or may be disclosing
or utilized or may be utilizing any Intellectual Property, trade secret or
proprietary information or documentation of such third party, or (c) interfered
or may be interfering in the employment relationship between such third party
and any of its present or former employees.
5.11 LITIGATION. There is no litigation or governmental proceeding or
investigation pending or threatened against the Buyer or affecting any of its
properties or assets or against any officer, director or key employee of the
Buyer in his or her capacity as an officer, director or employee of the Buyer,
which litigation, proceeding or investigation is reasonably likely to have a
Material Adverse Effect, or which may call into question the validity or hinder
the enforceability of this Agreement or any other agreements or transactions
contemplated hereby; nor has there occurred any event nor does there exist any
condition on the basis of which any such litigation, proceeding or investigation
might be properly instituted or commenced. Neither the Buyer nor any of its
subsidiaries is a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. There
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is no action, suit, proceeding or investigation by the Buyer or any of its
subsidiaries currently pending or which the Buyer or any of its subsidiaries
intends to initiate.
5.12 TAX MATTERS. The Buyer has filed all federal, state, local and
foreign income, excise and franchise tax returns, real estate and personal
property tax returns, sales and use tax returns and other tax returns required
to be filed by it where the failure to file such returns would have a Material
Adverse Effect, and has paid all taxes owing by it, except taxes which have not
yet accrued or otherwise become due, for which adequate provision has been made
in the pertinent financial statements referred to in Section 5.5 above or which
will not have a Material Adverse Effect. The filed tax returns and reports are
true and correct in all material respects. All taxes and other assessments and
levies which the Buyer is required to withhold or collect have been withheld and
collected and have been paid over to the proper governmental authorities except
where the failure to withhold or collect and pay over would not have a Material
Adverse Effect With regard to the federal income tax returns of the Buyer, the
Buyer has never received notice of any audit or of any proposed deficiencies
from the Internal Revenue Service. There are in effect no waivers of applicable
statutes of limitations with respect to any taxing owed by the Buyer for any
year. Neither the Internal Revenue Service nor any other taxing authority is now
asserting or, to the knowledge of the Buyer, threatening to assert against the
Buyer any deficiency or claim for additional taxes or interest thereon or
penalties in connection therewith.
5.13 EMPLOYEE BENEFIT PLANS. The Buyer does not maintain or contribute
to any employee benefit plan, stock option, bonus or incentive plan, severance
pay policy or agreement, deferred compensation agreement or any similar plan or
agreement (an "Employee Benefit Plan") other than the Plan and the Employee
Benefit Plans identified and described in Section 5.13 of the Buyer's Disclosure
Schedule. The terms and operation of each Employee Benefit Plan comply in all
material respects with all applicable laws and regulations relating to such
Employee Benefit Plan. There are no unfunded obligations of the Buyer under any
retirement, pension, profit-sharing, deferred compensation plan or similar
program. The Buyer is not required to make any payments or contributions to any
Employee Benefit Plan pursuant to any collective bargaining agreement, and all
Employee Benefit Plans are terminable at the discretion of the Buyer without
material liability to the Buyer upon or following such termination. The Buyer
has never maintained or contributed to any Employee Benefit Plan providing or
promising any health or other welfare benefits (within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) to terminated employees, except for benefits mandated by applicable
law, including, but not limited to, Section 4980B of the Internal Revenue Code
of 1986, as amended, and Part 6 of Subtitle B of Title I of ERISA.
5.14 LABOR LAWS. The Buyer employs approximately 105 employees and
generally enjoys good employer-employee relationships. The Buyer is not
delinquent in payments to any of its employees for any wages, salaries,
commissions, bonuses or other direct compensation for any services performed for
it as of the date hereof or amounts required to be reimbursed to such employees.
The Buyer is in compliance in all material respects with all applicable laws and
regulations respecting labor, employment, fair employment practices, terms and
conditions of employment, and wages and hours. There are no charges of
employment discrimination or unfair labor practices or strikes, slowdowns,
stoppages of work or any other concerted interference with normal operations
existing, pending or, to the knowledge of the Buyer, threatened against or
involving the Buyer.
5.15 EMPLOYEES. Section 5.15 of the Buyer's Disclosure Schedule
contains a list of all managers, employees and consultants of the Buyer who,
individually, have received compensation from the Buyer for the fiscal year of
the Buyer ended October 31, 1999, in excess of $100,000. In each case, Section
5.15 of the Disclosure Schedule includes the current job title, years of service
with the Buyer and aggregate annual compensation and benefits of each such
individual. To the knowledge of the Buyer, no key employee of the Buyer has any
plan or intention to terminate his or her employment with the Buyer.
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The Buyer has complied in all material respects with the immigration laws of the
United States with respect to the hiring, employment and engagement of all of
its employees and consultants who are not United States citizens, and, to the
knowledge of the Buyer, the immigration or residency status of each of such
employees and consultants is sufficient to allow such employees and consultants
to remain lawfully employed or engaged by the Buyer. The employment of each
officer and employee of the Buyer is terminable at the will of the Buyer. The
Buyer is not a party to or bound by any currently effective employment contract.
5.16 HAZARDOUS WASTE, ETC. No hazardous wastes, substances or materials
or oil or petroleum products have been generated, transported, used, disposed,
stored or treated by the Buyer, and no hazardous wastes, substances or materials
or oil or petroleum products have been released, discharged, disposed,
transported, placed or otherwise caused to enter the soil or water in, under or
upon any real property owned, leased or operated by the Buyer.
5.17 BUSINESS; COMPLIANCE WITH LAWS. The Buyer has all necessary
franchises, permits, licenses and other rights and privileges necessary to
permit it to own its property and to conduct its business as it is presently or
contemplated to be conducted and is not in default in any material respect under
any of such franchises, permits, licenses and other similar rights and
privileges. The Buyer is currently and has heretofore been in compliance in all
material respects with all federal, state, local and foreign laws and
regulations.
5.18 INVESTMENT BANKING; BROKERAGE. There are no claims for investment
banking fees, brokerage commissions, finder's fees or similar compensation
(exclusive of professional fees to lawyers and accountants) in connection with
the transaction contemplated by this Agreement payable by the Buyer or based on
any arrangement or agreement made by or on behalf of the Buyer or any of the
stockholders.
5.19 INSURANCE. The Buyer has fire, casualty, product liability,
workers' compensation and business interruption and other insurance policies,
with extended coverage, sufficient in amount to allow it to replace any of its
material properties which might be damaged or destroyed or sufficient to cover
liabilities to which the Buyer may reasonably become subject, and such types and
amounts of other insurance with respect to its business and properties, on both
a per occurrence and an aggregate basis, as are customarily carried by persons
engaged in the same or similar business as the Buyer. There is no default or
event which could give rise to a default under any such policy.
5.20 TRANSACTIONS WITH AFFILIATES. There are no loans, leases,
contracts or other transactions (directly or indirectly) between the Buyer and
any Affiliate of the Buyer or any Family Member or Associate of any such
Affiliate, and there have been no such transactions within the past twelve (12)
months except as set forth in Section 5.20 of the Buyer's Disclosure Schedule.
To the best of the Buyer's knowledge, none of such persons has any direct or
indirect ownership interest in any firm or corporation with which the Buyer is
affiliated or with which the Buyer has a business relationship, or any firm or
corporation that competes with the Buyer, except that employees, officers or
directors of the Buyer and members of their families may own stock in publicly
traded companies that may compete with the Buyer.
5.21 SUPPLIERS. Section 5.21 of the Buyer's Disclosure Schedule sets
forth each supplier of the Buyer who supplied more than five percent (5%) of the
Buyer's supplies or materials for the fiscal year ended October 31, 1999 and
each supplier who the Buyer believes may supply for more than five percent (5%)
of the Buyer's supplies or materials for the fiscal year ended October 31, 2000
(each a "Supplier" and collectively the "Suppliers"). The relationships of the
Buyer with its Suppliers are good commercial working relationships. No Supplier
of the Buyer has canceled or otherwise terminated its relationship with the
Buyer, or has during the last 12 months decreased materially its services,
supplies or
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materials to the Buyer. No Supplier has, to the knowledge of the Buyer, any plan
or intention to terminate, cancel or otherwise materially and adversely modify
its relationship with the Buyer or to decrease materially or limit its services,
supplies or materials to the Buyer.
5.22 CERTAIN EVENTS.
(a) During the past ten (10) years, neither the Buyer nor any
of the officers or directors of the Buyer has had a petition under the
Bankruptcy Reform Act of 1978, as amended, or any state insolvency law, filed by
or against any of them which has not as of the date of this Agreement been
dismissed.
(b) During the past ten (10) years, neither the Buyer nor the
officers or directors of the Buyer has been convicted in a criminal proceeding
or is a named subject of a criminal proceeding which is presently pending
(excluding traffic violations and other minor offenses).
(c) During the past ten (10) years, neither the Buyer nor the
officers or directors of the Buyer has been, or is, the subject of any order,
judgment or decree, whether or not subsequently reversed, suspended or vacated,
of any court or any administrative agency, requiring the payment of money
damages in excess of USD $100,000 or permanently or temporarily enjoining any of
them from, or otherwise limiting any of their abilities to engage in, any type
of business practice.
5.23 REGISTRATION RIGHTS. Except as disclosed in Section 5.23 of the
Buyer's Disclosure Schedule, the Buyer has not granted or agreed to grant any
registration rights, including piggyback rights, to any person or entity.
5.24 DISCLOSURE. The representations and warranties made or contained
in this Agreement, the exhibits hereto and the certificates and statements
executed or delivered in connection herewith, and the information concerning the
business of the Buyer delivered to the Sellers in connection with or pursuant to
this Agreement, when taken together, do not and shall not contain any untrue
statement of a material fact and do not and shall not omit to state a material
fact required to be stated therein or necessary in order to make such
representations, warranties or other material not misleading in light of the
circumstances in which they were made or delivered. There have been no events or
transactions or information which has come to the attention of the management of
the Buyer having a direct impact on the Buyer or its assets, liabilities,
financial condition, business, results of operations or prospects which, in the
reasonable judgment of such management, could be expected to have a Material
Adverse Effect.
5.25 CORPORATE DOCUMENTS. The Certificate of Incorporation and Bylaws
of the Buyer have been made available to the Sellers. The minute books of the
Buyer containing minutes of all meetings of directors and stockholders and all
actions by written consent without a meeting by the directors and stockholders
since the date of incorporation have been made available to the Investor and
reflect accurately in all material respects all actions by the directors (and
any committee of directors) and stockholders with respect to all transactions
referred to in such minutes. The stock transfer ledgers and other similar
records of the Buyer as made available to the Sellers prior to the execution of
this Agreement accurately reflect all record transfers prior to the execution of
this Agreement in the capital stock of the Buyer.
5.26 OFFERING. Subject in part to the truth and accuracy of the
Investor's representations and warranties set forth in this Agreement, the
offer, sale and issuance of the Securities as contemplated by this Agreement are
exempt from the registration requirements of the Securities Act and any
applicable state securities laws, and neither the Buyer nor any authorized agent
acting on its behalf will take any action hereafter that would cause the loss of
such exemption.
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5.27 INVESTMENT CORPORATION. The Buyer is not and shall not become an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Corporation Act of 1940, as amended (the "1940
Act"). In the event the Buyer breaches the foregoing, the Buyer shall forthwith
notify the Investor and shall take immediate corrective action to remedy such
breach.
5.28 SUPPLEMENTAL REMUNERATION. The Buyer has not and shall not,
directly or indirectly, pay or cause to be paid any remuneration, whether by way
of supplemental or additional interest, fee or otherwise to any investor or
other stockholder of the Buyer as consideration for or as an inducement to
entering into by any investor or other stockholder of the Buyer of any waiver or
amendment of any of the terms and provisions of the agreements or the
Certificate of Incorporation which affects any such party's rights as an
investor or stockholder, unless such remuneration is concurrently paid, on the
same terms, ratably to all investors or stockholders whether or not such
investors or stockholders grant such waiver or agree to such amendment.
5.29 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Buyer is required in connection with the consummation of the transactions
contemplated by this Agreement other than as may be required to secure an
exemption from qualification of the offer and sale of the Series C Preferred
Shares under the Securities Act and applicable state securities laws.
ARTICLE 6.
COVENANTS OF SELLERS, BUYER AND CORPORATION
6.1 INVESTIGATION OF BUSINESS; ACCESS TO PROPERTIES AND RECORDS. Prior
to the Closing or termination of this Agreement, the Corporation shall give to
the Buyer and its legal counsel, accountants, lenders and other representatives
reasonable access during normal business hours to all of the Corporation's and
the Subsidiaries' properties (including books, contracts, commitments and
records) for inspection (including financial, legal and environmental), and
shall permit them to consult with each Seller and with management employees of
the Corporation and the Subsidiaries to allow the Buyer full opportunity to make
such investigations as are necessary to review the affairs of the Corporation
and the Subsidiaries. If, prior to Closing, the Buyer discovers any breach by
any Seller or the Corporation of any representation or warranty contained in
this Agreement or any circumstances or condition that would constitute such a
breach, the Buyer will notify the Sellers promptly of such facts known to the
Buyer and the nature of the breach.
6.2 REGULATORY AND OTHER AUTHORIZATIONS.
(a) Subject to the limitations set forth in this Section 6.2,
each of the Sellers, the Corporation and the Buyer shall take all reasonable
actions to obtain all Permits of all Authorities that may be or become necessary
for the execution and delivery of this Agreement and the performance of their
respective obligations pursuant to this Agreement (which actions shall include,
without limitation, furnishing all information and obtaining all approvals
required and will cooperate fully with one another in promptly seeking to obtain
all such Permits. Each party to this Agreement agrees to provide information
requested by any Authority or the other party in connection with obtaining such
Permits, and agrees not to take any action that will have the effect of
delaying, impairing or impeding the receipt of any required Permits.
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(b) Notwithstanding anything in Section 6.2(a) to the
contrary, the Corporation shall coordinate on behalf of all parties the
obtaining of all such Permits. The Buyer and the Corporation shall by mutual
agreement determine the substance of all communications and filings made by the
parties with any Authority regarding the transactions contemplated by this
Agreement, including without limitation:
(i) the extent to which it may be necessary to
resolve or settle any concerns on the part of any Authority regarding the
legality under any law of the transactions contemplated by this Agreement by
entering into negotiations, providing information, making proposals, entering
into and performing agreements or submitting to judicial or administrative
orders, agreeing to any restrictions on the conduct of business after Closing by
the Buyer or the Corporation or any Subsidiary, or selling or otherwise
disposing of, or holding separate (through the establishment of a trust or
otherwise), particular assets or categories of assets or businesses of the
Buyer, including, after the Closing, the Corporation or any Subsidiary;
(ii) contesting the entry in a judicial or
administrative proceeding brought under any local law by any Authority or any
other Person of any permanent or preliminary injunction or other order that
would make consummation of the transactions contemplated by this Agreement
unlawful or would prevent or delay the transactions, including, without
limitation, taking the steps contemplated by Section 6.2(b)(i);
(iii) if such an injunction or order has been issued
in such a proceeding, taking any and all steps, including, without limitation,
appeal thereof, the posting of a bond or the steps contemplated by Section
6.2(b)(i), necessary to vacate, modify or suspend such injunction or order so as
to permit the consummation of the transaction on the schedule contemplated by
this Agreement;
(iv) responding to and complying with any request or
subpoena for additional information by any Authority; and
(v) determining any other appropriate response or
initiative to avoid or eliminate impediments under any law that may be asserted
by any Authority or any other Person to the consummation of the transactions
contemplated by this Agreement.
6.3 REASONABLE EFFORTS; CONSENTS AND NOTIFICATIONS. Subject to the
terms and conditions provided in this Agreement, each Seller, the Corporation
and the Buyer each will use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement and to cooperate with one another in
connection with the foregoing, including using all reasonable efforts:
(i) to obtain all necessary waivers, consents,
releases and approvals from other parties to loan agreements, Leases, guarantees
and other Contracts;
(ii) to lift or rescind any injunction or restraining
order or other order adversely affecting the ability of the parties to this
Agreement to consummate the transactions contemplated by this Agreement; and to
fulfill all conditions to this Agreement.
6.4 FURTHER ASSURANCES. The Sellers, the Corporation and the Buyer
agree that, from time to time, at or after the Closing Date, each of them will
execute and deliver such further instruments of conveyance and transfer and take
such other action as may be reasonably necessary to carry out the purposes of
this Agreement.
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6.5 CONDUCT OF BUSINESS OF THE CORPORATION AND SUBSIDIARIES. From the
date of this Agreement through the Closing, except as otherwise provided by this
Agreement, disclosed in the Corporation's Disclosure Schedule or consented to or
approved by the Buyer in writing, the Corporation covenants and agrees that (and
the Sellers covenant and agree as expressly noted below that):
(i) the Corporation and the Subsidiaries shall
operate their businesses in the ordinary and usual course in all material
respects in accordance with past practices;
(ii) the Corporation (and the Sellers acting with
respect to the shares of the Corporation) shall not, and no Subsidiary shall,
issue, purchase or agree to purchase, sell or agree to issue or sell:
(A) any of its capital shares; or
(B) any securities convertible into or
evidencing the right to purchase, or options with respect to, or rights to
subscribe for, any of its capital shares;
(iii) the Corporation shall not, and no Subsidiary
shall, (and the Sellers acting with respect to the capital shares of the
Corporation shall not) amend its Articles of Incorporation or Bylaws ( or other
governance documents) or declare or pay any dividend (whether in cash or
property) or declare or effect any stock split, reclassification or other change
in capital structure;
(iv) the Corporation and the Subsidiaries shall
maintain their respective books and records in the usual, regular and ordinary
manner consistent with past practice;
(v) the Corporation and the Subsidiaries shall comply
in all material respects with all applicable laws; and
(vi) the Corporation shall not, and no Subsidiary
shall:
(A) enter into or consummate any joint
venture, partnership or other similar arrangement or form any other new
arrangement for the conduct of its business or acquire or enter into any
agreement or letter of intent to acquire, by merger, consolidation, or purchase
of stock or assets, any business, entity or Person;
(B) purchase any material assets or
securities of any Person, except for asset purchases in the ordinary course of
its business for individual amounts not in excess of Twenty Five Thousand
Dollars (USD $25,000);
(C) enter into any transactions, commitments
or obligations outside the ordinary course of business or incur any
indebtedness, including notes payable, current maturities of long-term debt or
capital lease obligations, except for trade payables and other normal items
accrued as current liabilities;
(D) take or agree to take any action
prohibited by this Section 6.5 or that would be reasonably likely to cause any
representation or warranty made by the Corporation or any Seller in this
Agreement to be untrue or inaccurate in any material respect at the Closing
Date;
(E) take any action to amend or terminate
any Benefit Plan or to adopt any other plan, program, arrangement or practice
providing benefits for or compensation to or on
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behalf of its employees or former employees before the Closing Date, except as
required by applicable law;
(F) increase the base compensation or bonus,
incentive, severance or other benefit plan of any employee, consultant or agent,
except for increases in base annual salaries in the ordinary course of business;
or
(G) grant any Encumbrance on any asset,
except for Permitted Encumbrances.
6.6 PRESERVATION OF BUSINESS. Subject to the terms and conditions of
this Agreement and except as otherwise provided by this Agreement or disclosed
in the Corporation's Disclosure Schedule, the Corporation and the Subsidiaries
shall use reasonable efforts to:
(i) preserve the business of the Corporation and the
Subsidiaries and keep generally available to the Corporation and the
Subsidiaries the services of the employees, officers, consultants, contractors
and agents of the Corporation and the Subsidiaries;
(ii) preserve generally the goodwill of customers,
suppliers, creditors and others having business relations with the Corporation
or any Subsidiary; and
(iii) continue performance in the ordinary course of
their respective obligations under all Contracts to which the Corporation or any
Subsidiary is a party or which binds it or its assets.
In connection with the operation of the Business between the date of
this Agreement and the Closing, the Corporation shall confer in good faith on a
regular and frequent basis with one or more designated representatives of the
Buyer (which representatives shall have been designated by the Buyer to the
Corporation in writing) with respect to material matters affecting or impacting
the operations of the Corporation or any Subsidiaries and shall consult in
general with respect to the ongoing operations of the Corporation and the
Subsidiaries. The Corporation and the Sellers shall cooperate with the Buyer in
its efforts to communicate with the employees, consultants, professionals,
agents and others having business relationships with the Corporation regarding
the transition of the Corporation's business to ownership by the Buyer.
6.7 ANNOUNCEMENTS. Neither the Sellers, the Corporation, the
Subsidiaries or the Buyer, nor any agent or any Affiliate of any of the
foregoing, shall make any public statements, including, without limitation, any
press releases or other public disclosure, with respect to this Agreement and
the transactions contemplated by this Agreement without the prior consent of the
Buyer and the Corporation (which consent may not be unreasonably withheld or
delayed), except as may be required by law or advisable under the rules of any
securities exchange to which the Buyer is subject.
6.8 NO SOLICITATION. From the date of this Agreement to the earlier of
(i) the Closing Date or (ii) the termination of this Agreement in accordance
with its terms, the Sellers agree that (A) they will not, and (B) they will not
authorize or permit any officer, director or employee of the Corporation or any
Subsidiary, or any investment banker, attorney, financial advisor, accountant or
other Person retained by any Seller or the Corporation or any Subsidiary,
directly or indirectly (including by way of furnishing any information) to: (1)
solicit, initiate, assist, encourage or accept any Takeover Proposal or any
inquiries relating to a Takeover Proposal or to make any proposals which could
reasonably be expected to lead to any Takeover Proposal relating to the
Corporation or any Subsidiary; (2) engage in any negotiations with respect to,
or otherwise attempt to consummate, a Takeover Proposal; (3) provide any public
or nonpublic
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information concerning the Corporation or any Subsidiary to any Person in
connection with any Takeover Proposal or to any Person whom any Seller or the
Corporation or any Subsidiary knows or has reason to believe is in the process
of planning or considering a Takeover Proposal; or (4) reach any agreement or
understanding for or with respect to any Takeover Proposal.
6.9 RIGHT TO UPDATE AND CURE.
(a) From time to time prior to the Closing, the Buyer, the
Corporation and the Sellers shall update or amend their respective disclosure of
any matter set forth or required to be set forth in their respective Disclosure
Schedules to reflect any changes in (or any inaccuracies in) such Disclosure
Schedule. For purposes of Section 7.1 or Section 8.1, any material change in a
disclosure, representation or warranty made by the Corporation or any Seller
shall entitle the Buyer to terminate this Agreement, unless the Buyer consents
in writing to the material change or fails to object within 15 days of its
receipt of written notice of such change. Notwithstanding anything in this
Agreement to the contrary, any party that receives a material change in the
disclosures may defer the Closing Date for up to five Business Days after
receipt of such change, provided that the Closing Date shall not under any
circumstances be deferred beyond the deadline specified in Section 10.1 hereof.
(b) Prior to the Closing, each of the parties to this
Agreement agrees to notify the other parties promptly in writing of, and
contemporaneously will provide the other parties with true and complete copies
of, any and all information or documents relating to, and will use all
commercially reasonable efforts to cure before Closing, any event, transaction
or circumstance occurring after the date of this Agreement that causes or will
cause any covenant or agreement under this Agreement to be breached or that
renders or will render untrue any representation or warranty contained in this
Agreement as if the same were made on or as of the date of such event,
transaction or circumstance. Each of the parties to this Agreement also agrees
to notify the other parties promptly in writing of, and will use all
commercially reasonable efforts to cure, before the Closing, any violation or
breach of any representation, warranty, covenant or agreement made in this
Agreement, whether occurring or arising before, on or after the date of this
Agreement.
6.10 MARKET STAND-OFF AGREEMENT. In connection with a public offering
by the Buyer, the Sellers if requested in good faith by the Buyer and the
managing underwriter of the public offering, shall agree not to sell or
otherwise transfer or dispose of any securities of the Buyer held by them
(except for any securities sold pursuant to such registration statement) for a
period following the effective date of the applicable registration statement
that in no event shall exceed 180 days. In order to enforce the foregoing, the
Buyer may impose stop-transfer instructions with respect to the Lineo Shares
held by such Seller (and the shares of securities of every other person subject
to the foregoing restriction) until the end of such period.
6.11 SECURITIES LAW COMPLIANCE.
(a) Sellers agree that all offers and sales of the Lineo
Shares prior to one year after the Closing shall be made only in accordance with
the provisions of Rule 903 or Rule 904 under the Securities Act, pursuant to
registration of the Lineo Shares under the Securities Act; or pursuant to an
available exemption from the registration requirements of the Securities Act;
and not to engage in hedging transactions with regard to the Lineo Shares prior
to one year after the Closing unless in compliance with the Securities Act.
(b) Sellers acknowledge that the Lineo Shares have not been
registered under the Securities Act and may not be offered or sold in the United
States or to U.S. Persons (other than distributors) unless the Lineo Shares are
registered under the Securities Act, or an Exemption from the
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registration provisions of the Securities Act is available. Sellers further
acknowledge that hedging transactions involving the Lineo Shares may not be
conducted unless in compliance with the Securities Act.
ARTICLE 7.
CONDITIONS TO BUYER'S OBLIGATION TO CLOSE
The Buyer's obligation to consummate the Share Purchase shall be
subject to the satisfaction on or prior to the Closing Date of all of the
following conditions (any of which may be waived in writing by the Buyer in its
sole discretion):
7.1 REPRESENTATIONS; WARRANTIES AND COVENANTS OF THE CORPORATION AND
THE SELLERS. Subject to the second sentence of this Section 7.1, the
representations and warranties of the Corporation and the Sellers in this
Agreement shall be true and correct on and as of the Closing Date with the same
effect as though such representations and warranties had been made on and as of
such date, except for representations and warranties that speak as of a specific
date or time other than the Closing Date (which need only be true and correct as
of such date or time). The Closing condition contained in this Section 7.1, as
it relates to representations and warranties, shall be satisfied unless the
inaccuracies in and breaches of such representations and warranties, without
reference to materiality qualifiers, have or are likely to have an adverse
effect on the Corporation and its Subsidiaries, taken as a whole, or on the
Buyer's ownership of the Corporation Shares, of Fifty Thousand Dollars
(USD$50,000) or more. The covenants and agreements of the Corporation and the
Sellers to be performed on or before the Closing Date in accordance with this
Agreement shall have been performed in all material respects.
7.2 FILINGS; CONSENTS; WAITING PERIODS. All registrations, filings,
applications, notices, consent, approvals, waivers, authorizations,
qualifications and orders to be filed, made or obtained by the Buyer, the
Corporation or any Seller in order to consummate the transactions contemplated
by this Agreement (including, without limitation, any filings or actions
required shall have been filed, made or obtained. The Sellers and the
Corporation and the Subsidiaries shall have obtained the consent of the
requisite parties to the agreements identified in Sections 3.6, 3.15 and 3.16 of
the Corporation Disclosure Schedule, which consent shall be in form and
substance reasonably satisfactory to the Buyer. The Corporation shall have
obtained written enforceable waivers with respect to all existing breaches and
any continuing breaches (including any breaches anticipated to continue in the
ordinary course of the business of the Corporation and the Subsidiaries after
the Closing) of agreement with respect to those Contracts and Leases identified
in Sections 3.15 and 3.16 of the Corporation Disclosure Schedule, which waivers
shall be in form and substance satisfactory to the Buyer.
7.3 NO INJUNCTION. There shall be no injunction, restraining order or
decree of any nature of any Authority or other Person that is in effect and that
(i) restrains, prohibits or makes illegal the consummation of the Share
Purchase, or (ii) imposes conditions on the consummation of the Share Purchase
not otherwise provided for in this Agreement.
7.4 CLOSING DELIVERIES. The Sellers or the Corporation, as appropriate,
shall have delivered or caused to be delivered to the Buyer the following:
(i) True and correct copies of the Articles of
Incorporation of the Corporation (or other organizational document) and each
Subsidiary certified as of a date not more than thirty (30) calendar days
preceding the Closing Date, and true and correct copies of the Bylaws of the
Corporation and each Subsidiary as in effect on the day prior to Closing,
certified by the Secretary of the Corporation;
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(ii) Certificates of good standing, current within
thirty (30) calendar days, relating to the Corporation and each Subsidiary from
their respective jurisdiction of incorporation and each other jurisdiction in
which the Corporation or any Subsidiary is qualified to do business as a foreign
corporation;
(iii) A resolution of the Board of Directors of the
Corporation authorizing the execution, delivery and performance by the
Corporation of this Agreement and the consummation of the transactions
contemplated herein, certified by the Secretary of the Corporation as remaining
in full force and effect on the Closing Date;
(iv) A certificate of the Secretary of the
Corporation attesting to the incumbency of the officers of the Corporation
executing this Agreement or any other certificates or agreements delivered by
the Corporation to the Buyer at or prior to the Closing;
(v) The common seal (if any), asset register, all
other registers, management accounts, budgets and all books of accounts,
ledgers, records, documents and other business papers of any kind of the
Corporation, certificates of registration of any business names, certificates of
title (if any) for any Corporation assets, executed and stamped originals and
copies of any property leases, contracts, certificates of registration and other
documents of title for any intellectual property rights, cheque books of the
Corporation, a list of all bank accounts maintained by the Corporation and the
signatories on those accounts maintained by the Corporation and the signatories
on those accounts, and akey to business premise owned or leased by the
Corporation. Please note that in respect of the items referred to in this
sub-paragraph, delivery will be made by leaving the items in a safe and
appropriate place at the Corporation's principal place of business or at any
other place as the parties may agree.
(vi) such written and duly executed resignations with
effect from the Closing Date from any directors, secretary, or auditor of the
Corporation as the Buyer may nominate in writing prior to the Closing Date.
(vii) minutes of a meeting of the directors of the
Corporation at which:
(a) persons nominated in writing (if
any) for the purpose by the Buyer
and having consented in writing to
the appointment will be appointed
directors of the Corporation;
(b) the person nominated in writing (if
any) for the purpose by the Buyer
and having consented in writing to
the appointment will be appointed
as secretary of the Corporation;
(c) a resolution that the directors of
the Corporation accept the
resignations (if any) referred to
above;
(d) if requested by the Buyer, a
resolution that the directors
resolved to change the bank account
signatories to persons nominated
bythe Buyer; and
(e) a resolution of the directors of
the Corporation to register the
share transfers referred to in
paragraph 2.3 of this agreement
subject to those transfers being
stamped.
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(viii) any waiver, consent, letter of
non-crystallisation or other document necessary to give the Buyer full legal and
beneficial ownership of the Corporation Shares.
7.5 ABSENCE OF LITIGATION. No claim, action, suit, arbitration,
investigation, inquiry or other proceeding by any Authority or other Person with
respect to this Agreement or the transactions contemplated hereby shall be
threatened or pending on the Closing Date and, up to the Closing, no party to
this Agreement shall have been advised by any Authority (which advisory has not
been officially withdrawn by such Authority on or prior to the Closing Date)
that such Authority is reviewing this Agreement or the transactions contemplated
hereby to determine whether to file or commence any litigation with respect to
any aspect of this Agreement or the transactions contemplated hereby.
7.6 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS. There shall
not have been made or threatened by any Person any claim asserting that such
Person (a) is the holder or the beneficial owner of, or has the right to acquire
or to obtain beneficial ownership of, any stock of, or any other voting, equity,
or ownership interest in, the Corporation or any Subsidiary, or (b) is entitled
to all or any portion of the Purchase Price payable for the Corporation Shares.
7.7 NO MATERIAL ADVERSE EFFECT. Before the Closing Date, there shall
have been no material change in the assets or liabilities, the business or
condition (financial or otherwise), the results of operations or prospects of
the Corporation or any Subsidiary, whether as a result of any legislative or
regulatory change, revocation of any license or right to do business, fire,
explosion, accident, casualty, labor trouble, flood, drought, riot, storm,
condemnation or act of God or other public force or otherwise, that results in a
Material Adverse Effect.
7.8 GENERAL RELEASE. The Corporation, the Buyer and each of the
employees of the Corporation shall execute and deliver a Deed of Release in the
form attached hereto as EXHIBIT C.
7.9 TAX FILING CODE SECTION 338(g) ELECTION. The Corporation, Buyer and
Seller shall prepare and File an election under Section 338(g) of the Code to
treat this transaction as an asset purchase.
7.10 ACTIONS PENDING REGISTRATION. On Closing, beneficial ownership in
the Corporation Shares will pass to the Buyer and the Sellers irrevocably
appoint the Buyer as their attorney for the purpose of casting votes at any
general meeting of the Corporation up until the time the Corporation Shares are
registered. Without limiting the generality of the foregoing, pending
registration of the transfers of the Corporation Shares, the Sellers shall take
all necessary and desirable action required and directed by the Buyer to
exercise its rights in respect of those shares including:
(a) attending and voting at the direction of the Buyer at any general
meeting of shareholders of the Corporation;
(b) executing such proxies or powers of attorney in such reasonable
form required by the Buyer appointing the Buyer or its nominee to attend and
vote at a particular general meeting or all general meetings of shareholders of
the Corporation;
(c) executing such written resolutions of shareholders of the
Corporation as may be directed by the Buyer.
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The Buyer indemnifies and will keep indemnified each Seller against all
losses, costs, damages or other liabilities of any nature which the Seller may
incur directly or indirectly, in whole or in part (and if in part to that
extent) as a result of acting at the direction of the Buyer under this section
7.10.
ARTICLE 8.
CONDITIONS TO SELLERS' OBLIGATIONS TO CLOSE
Each Seller's obligation to consummate the Share Purchase is subject to
the satisfaction on or prior to the Closing Date of all of the following
conditions (any of which may be waived in writing by such Seller, in its sole
discretion):
8.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BUYER. The
representations and warranties of the Buyer in this Agreement shall be true and
correct on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date except for
representations and warranties that speak as of a specific date or time other
than the Closing Date (which need only be true and correct as of such date, or
time), and the covenants and agreements of the Buyer to be performed on or
before the Closing Date in accordance with this Agreement shall have been
performed in all material respects.
8.2 FILINGS; CONSENTS; WAITING PERIODS. All registrations, filings,
applications, notices, consents, approvals, waivers, authorizations,
qualifications and orders to be filed, made or obtained by the Buyer, the
Corporation or any Seller in order to consummate the transactions contemplated
by this Agreement shall have been filed, made or obtained. The Buyer shall have
obtained the consents identified in Section 5.3 of the Buyer Disclosure
Schedule, which consents shall be in form and substance reasonably satisfactory
to the Corporation.
8.3 NO INJUNCTION. The condition set forth in Section 7.3 shall have
been satisfied.
8.4 CLOSING DELIVERIES. The Buyer shall have delivered or caused to be
delivered to the Corporation's legal counsel (in the case of clauses (i), (ii)
and (iii) below) and to each Seller (in the case of clause (iv) below) the
following:
(i) Certificates of good standing, current within
thirty (30) calendar days, relating to the Buyer from its jurisdiction of
incorporation and each other jurisdiction in which the Buyer is qualified to do
business as a foreign corporation;
(ii) A certificate of the Secretary of the Buyer
attesting to the incumbency of the officers of the Buyer executing this
Agreement and any other certificates or agreements delivered by the Buyer to the
Sellers at or prior to the Closing;
(iii) A resolution of the Board of Directors of the
Buyer authorizing the execution, delivery and performance by the Buyer of this
Agreement and the consummation of the transactions contemplated herein,
certified by the Secretary of the Buyer; and
(iv) The Purchase Price payable in accordance with
Section 2.3 to each Seller (as specified in Section 2.2) pursuant to this
Agreement.
8.5 ABSENCE OF LITIGATION. The condition set forth in Section 7.5 shall
have been satisfied.
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8.6 NO MATERIAL ADVERSE EFFECT. Before the Closing Date, there shall
have been no material change in the assets or liabilities, the business or
condition (financial or otherwise), the results of operations or prospects of
the Buyers or any Subsidiary, whether as a result of any legislative or
regulatory change, revocation of any license or right to do business, fire,
explosion, accident, casualty, labor trouble, flood, drought, riot, storm,
condemnation or act of God or other public force or otherwise, that results in a
Material Adverse Effect.
ARTICLE 9.
SURVIVAL; INDEMNIFICATION
9.1 INDEMNIFICATION.
(a) If the Closing occurs, and subject to the limitations set
forth in this Article 9, the Indemnifying Sellers, severally and not jointly
(according to their pro-rata ownership of their respective Corporation Shares as
set forth in EXHIBIT A) shall indemnify and hold harmless the Buyer and its
Affiliates (collectively, the "Buyer Indemnitees") from and against and in
respect of any and all loss, damage, diminution in value, liability, cost and
expense, including reasonable attorneys' fees and amounts paid in settlement
(collectively, the "Indemnified Losses"), suffered or incurred by any one or
more of the Buyer Indemnitees by reason of, or arising out of:
(i) any misrepresentation or breach of representation or
warranty of the Corporation contained in this Agreement, the Corporation
Disclosure Schedule, or any certificate, instrument, agreement or other writing
delivered by or on behalf of the Corporation pursuant to this Agreement or in
connection with the transactions contemplated herein, or the breach of any
covenant or agreement of the Corporation contained in this Agreement, the
Corporation Disclosure Schedule, or any certificate, instrument, agreement or
other writing delivered to the Buyer by or on behalf of the Corporation pursuant
to this Agreement or in connection with the transactions contemplated herein;
(ii) any claim by any holder of options or warrants to
purchase securities of the Corporation that such instruments were not either
canceled as of the Closing Date or cancelable within 90 days of the Closing
without any consideration payable by the Corporation; and
(iii) any and all actions, orders, assessments, fees and
expenses incident to any of the foregoing or incurred in investigating or
attempting to avoid the same or to oppose the imposition thereof, or in
enforcing this indemnification.
(b) Each Seller, severally and not jointly, shall indemnify
and hold harmless the Buyer Indemnitees from and against any Indemnified Losses
caused by a breach of that Seller's representations, warranties or agreements
set forth in this Agreement. For avoidance of doubt, no Seller shall have
responsibility for a breach by any other Seller.
(c) If the Closing occurs, and subject to the limitations set
forth in this Article 9, the Buyer shall indemnify and hold harmless the Sellers
and their Affiliates (collectively, the "Seller Indemnitees") from and against
and in respect of any and all Indemnified Losses suffered or incurred by any one
or more of the Seller Indemnitees by reason of, or arising out of:
(i) any misrepresentation or breach of representation or
warranty of the Buyer contained in this Agreement, the Buyer Disclosure
Schedule, or any certificate, instrument, agreement or other writing delivered
by or on behalf of the Buyer pursuant to this Agreement or in connection with
the transactions contemplated herein, or the breach of any covenant or agreement
of the
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Buyer contained in this Agreement, the Buyer Disclosure Schedule, or any
certificate, instrument, agreement or other writing delivered to the Sellers by
or on behalf of the Buyer pursuant to this Agreement or in connection with the
transactions contemplated herein; and
(ii) any and all actions, orders, assessments, fees and
expenses incident to any of the foregoing or incurred in investigating or
attempting to avoid the same or to oppose the imposition thereof, or in
enforcing this indemnification.
(d) The party or parties entitled to indemnification under any
provision of this Article 9 are sometimes collectively referred to herein as the
"Indemnitees" and the party or parties obligated to indemnify under any
provision of this Article 9 are sometimes collectively referred to herein as the
"Indemnifying Parties". The Indemnifying Parties shall reimburse Indemnitees on
demand for any Indemnified Losses suffered by the Indemnitees, based on the
judgment of any court of competent jurisdiction or pursuant to a bona fide
compromise or settlement of claims, demands or actions in respect of any
Indemnified Losses, provided however that no third party claim may be settled
without the prior written consent of the Indemnifying Party, which consent shall
not be unreasonably withheld or delayed. The Indemnifying Parties shall have the
opportunity to defend at their expense any claim, action or demand for which the
Indemnitees claim indemnity against the Indemnifying Parties, provided that: (i)
the defense is conducted by reputable counsel approved by the Indemnitees, which
approval shall not be unreasonably withheld or delayed; (ii) the defense is
expressly assumed in writing within 15 days after written notice of the claim,
action or demand is given to the Indemnifying Parties; and (iii) counsel for the
Indemnitees may participate at all times and in all proceedings (formal and
informal) relating to the defense, compromise and settlement of the claim,
action or demand at the expense of the Indemnitees.
(e) No claim shall be brought by any Indemnitee under this
Article 9 for Indemnified Losses, and none of them shall be entitled to receive
any payment with respect thereto, unless and until the aggregate amount of such
claim(s) equals or exceeds USD$600,000, and the Indemnities will only be
entitled to reimbursement hereunder for Indemnified Losses in excess of such
USD$600,000 amount; provided, that any indemnified Losses arising from breaches
of the representations set forth in Section 4.1, 4.2, 4.3 and 4.4 or pursuant to
subsection (a)(ii) above shall be reimbursed from the first dollar of loss.
Anything to the contrary notwithstanding, (A) with respect to the
representations and warranties set forth in Article 3, (i) each Indemnifying
Seller will only be liable to the Buyer Indemnitees for the pro rata portion of
such Indemnified Losses in accordance with the percentages set forth opposite
that Indemnifying Seller's name on Exhibit A; (ii) no Indemnifying Seller shall
be liable to the Buyer Indemnitees for Indemnified Losses in excess of the
percentages set forth opposite that Indemnifying Sellers name on Exhibit A;
(iii) the Indemnifying Sellers shall not be liable to the Buyer Indemnitees
under this Article 9 to reimburse Indemnified Losses, if any, in excess in the
aggregate amount of USD$3,000,000 (which equals a USD$3,600,000 maximum after
taking into account the aforementioned USD$600,000 deductible); provided,
however, that such limitation shall not apply to any loss suffered by the Buyer
Indemnitees attributable to fraudulent misrepresentations or to breaches of the
representations set forth in Sections 4.1, 4.2, 4.3 and 4.4, and (iv) no Seller
shall be liable with respect to the breach of any representation or warranty of
any other Seller.
(f) The Corporation shall not have any liability, obligation
or indebtedness to any Seller as a result of any misrepresentation or breach of
representation or warranty by any Seller contained in this Agreement, the
Corporation Disclosure Schedule, the Seller Disclosure Schedule or any
certificate, instrument, agreement or other writing delivered by or on behalf of
any Seller or the Corporation pursuant to this Agreement, or in connection with
the transactions contemplated herein, or the breach of any covenant or agreement
of any Seller or the Corporation contained in this Agreement, the Corporation
Disclosure Schedule or the Seller Disclosure Schedule, or any certificate,
instrument, agreement or other
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writing by or on behalf of any Seller pursuant to the provisions of this
Agreement or in connection with the transactions contemplated herein.
9.2 LIMITATIONS ON INDEMNIFICATION.
(a) The representations and warranties of Buyer and each
Seller (including without limitation each Indemnifying Seller) contained in this
Agreement, the Buyer Disclosure Schedule, the Corporation Disclosure Schedule,
the Seller Disclosure Schedule or in any certificate, instrument, agreement or
other writing delivered by or on behalf of Buyer or any Seller pursuant to this
Agreement or in connection with the transactions contemplated herein shall
survive any investigation heretofore or hereafter made by or on behalf of the
Buyer or the Seller, as applicable (subject to the provisions of this Article
9), and the consummation of the transactions contemplated herein, and all such
representations and warranties shall be of no further force and effect after two
years from the date of the Closing, except for matters set forth in Sections
3.14, 3.17, 3.18, 4.1, 4.2, 4.3, 4.4, 5.10, 5.12 and 5.16, for which the
survival period shall extend until the expiration of the applicable statutory
limitations period (as applicable, the "Survival Period"). Anything to the
contrary notwithstanding, a claim for indemnification which is made in writing
but not resolved prior to the expiration of the Survival Period may be pursued
and resolved after such expiration.
(b) An Indemnitee shall be obligated to prosecute diligently
and in good faith any claim for Indemnified Losses with any applicable insurer
prior to collecting any indemnification payment hereunder, provided that an
Indemnitee shall be entitled to collect an indemnification payment otherwise due
to it hereunder if such Indemnitee has not received reimbursement from the
applicable insurer(s) within twelve (12) months after it has given such
insurer(s) appropriate written notice of its claim.
(c) In the case where an Indemnitee recovers from third
parties all or any part of any amount previously paid to it by any Seller
hereunder, such Indemnitee shall promptly pay over to such Seller the amount so
recovered (net of any expenses actually incurred by it in procuring such
recovery), but not in excess of any amount previously so paid by the
Indemnifying Party. No amount shall become payable by an Indemnifying Party to
an Indemnity in respect of any third party claim unless and to the extent that
the Indemnity shall have become required to pay after exhausting all available
remedies, and shall actually have paid, the relevant Indemnified Losses to the
relevant third party.
(d) The amount of any claim made hereunder shall be reduced by
taking into account (i) any amount payable to the Buyer or the Corporation by
any insurer or other third party in respect of the relevant Indemnified Losses,
and (ii) any offsetting benefit (including any tax reduction) to the relevant
Corporation or to any Affiliate thereof, either in the year in which the
Indemnified Losses are sustained or in any other year.
(e) For purposes of computing the amount of any Indemnified
Losses, only the loss actually sustained shall be taken into account, to the
exclusion of any price/earnings or similar multiplier implicit in the Purchase
Price, and in no event shall any Indemnifying Party be liable for unforeseen or
consequential damages.
(f) The Indemnitees shall not be entitled to any
indemnification payments if they have not timely notified the Indemnifying
Parties and otherwise complied in all material respects with all the other
provisions of this Article 9.
(g) The Indemnitees shall not be entitled to any
indemnification in connection with Indemnified Losses resulting from facts of
which the Indemnitees were aware at the time of executing this Agreement.
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(h) Sellers shall have no liability under any provision of
this Agreement for Indemnified Losses which arise as a result of (i) actions
taken by the Buyer or the Corporation after the Closing Date, or (ii) the
passing of, or any change in, after the date hereof, any law or administrative
practice of any government, governmental department, agency or regulatory body
in any such case not actually in force at the date of this Agreement.
(i) The Indemnitees shall use their best efforts, and the
Buyer Indemnitees shall cause the Corporation to use its best efforts, to
mitigate any Indemnified Losses which any of them may suffer as a result of any
matters giving rise to a claim for indemnification hereunder.
(j) The provisions of this Article 9 shall constitute the sole
remedy of all of the parties hereto for any misrepresentation or breach of
representation or warranty contained in this Agreement, any Disclosure Schedule,
or any certificate, instrument, agreement or other writing delivered by or on
behalf of any such party pursuant to this Agreement or in connection with the
transactions contemplated herein.
ARTICLE 10.
TERMINATION
10.1 TERMINATION. This Agreement may be terminated at any time prior to
Closing by:
(a) the mutual consent of the Buyer and the holders of a
majority in interest of the ordinary shares of the Corporation;
(b) the Buyer or the holders of a majority in interest of the
ordinary shares of the Corporation if the Closing has not occurred by the close
of business on the date which is 30 calendar days following the date of this
Agreement, so long as the failure to consummate the transaction on or before
such date did not result from a breach of this Agreement by the party seeking
termination of this Agreement;
(c) at any time before the Closing, by any Seller or the
Buyer, (A) in the event of a material breach of this Agreement hereof by any
non-terminating party if such non-terminating party fails to cure such breach
within 10 Business Days following notification by any one or more of the
terminating parties, or (B) upon notification to the non-terminating parties by
the terminating party that the satisfaction of any condition to the terminating
party's obligations under this Agreement has become impossible or impracticable
with the use of best efforts unless the failure of such condition to be
satisfied is caused by a breach of this Agreement by the terminating party or
the non-terminating parties waive such condition within 10 Business Days of
receipt of such notification (and, for purposes of (ii) and (iii) only, a breach
or material breach by any Seller shall constitute a breach or material breach,
as the case may be, by all of the Sellers);
(d) if such termination is required pursuant to any final and
nonappealable judgment or order entered in any judicial or administrative
proceeding initiated by an Authority;
(e) as provided in Section 6.9; and
(f) as provided in Section 11.11.
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10.2 PROCEDURE AND EFFECT OF TERMINATION. In the event of termination
of this Agreement pursuant to Section 10.1, written notice of such termination
shall promptly be given by the terminating party to the other parties, and this
Agreement shall upon that notice terminate and become void and have no effect,
and the transactions contemplated by this The parties shall abandon agreement
without further action, except that the provisions of Section 11.5 shall survive
the termination of this Agreement; provided, however, that such termination
shall not relieve any party of any liability for any breach by it of this
Agreement.
ARTICLE 11.
MISCELLANEOUS
11.1 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall be considered one and the same agreement. The Agreement and
signatures on this Agreement, may be transmitted by facsimile, and such shall
deem such a transmission a delivery of this Agreement signing party.
11.2 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Utah, USA applicable to a contract
executed and performed in such state without reference to the choice of law
principles of such state.
11.3 NO THIRD PARTY BENEFICIARIES. Except as provided in Section 6.10
above, nothing in this Agreement is intended, nor shall it be construed, to
confer any rights or benefits upon any Person that is not a party to this
Agreement, and no other Person not a party to this Agreement shall have any
rights or remedies under this Agreement.
11.4 ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties with respect to the subject matter of this Agreement, and
this Agreement supersedes all prior drafts of such agreement, and all prior and
contemporaneous agreements, representations, negotiations, discussions,
correspondence, communications, term sheets and understandings of the parties,
except for the Confidentiality Agreement, which agreement is ratified and
remains in full force and effect. There are no agreements, understandings,
representations and warranties between the parties other than those set forth or
referred to in this Agreement.
11.5 EXPENSES. Except as set forth in this Agreement (and particularly
Section 2.3), whether the Share Purchase is or is not consummated, all costs and
expenses, including but not limited to fees and expenses of attorneys, advisers,
agents, and accountants, incurred in connection with this Agreement and the
transactions contemplated by this Agreement shall be paid by the party incurring
such costs and expenses, whether such costs and expenses were incurred prior to
or are incurred after the date hereof, and in particular, all such costs and
expenses incurred by or on behalf of the Sellers shall be borne by the Sellers
or the Corporation. All Australian stamp duty payable on, or in relation to the
transactions contemplated by, this Agreement or any document executed pursuant
to this Agreement shall be paid by the Buyer.
11.6 NOTICES. All notices under this Agreement shall be sufficiently
given for all purposes under this Agreement if in writing (a) when delivered
personally; (b) in the case of domestic deliveries within the United States,
three Business Days after deposited for first class mailing by the United States
Postal Service; (c) in the case of domestic deliveries within the United States,
one day after deposited for delivery by a nationally recognized overnight
delivery service; (d) in the case of foreign deliveries, two days after
deposited for delivery by a reputable foreign or overseas air courier; or (e)
when receipt is confirmed, by telecopy, telefax or other electronic transmission
service to the appropriate address or
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number as set forth below. Notices to the Sellers shall be addressed to each
Seller at the address noted in Exhibit A hereto or at such other address and to
the attention of such other Person as each Seller may designate by written
notice to the Buyer. Notices to the Corporation shall be addressed to:
Moreton Bay Ventures Pty Ltd.
Unit 12/97 Jljaws Street, Summer Park
Brisbane, Australia QLD 4047
Attention: Bob Waldie, Managing Director
Telecopy: +1 61 73 2791820
or at such other address and to the attention of such other Person as each
Seller may designate by written notice to the Buyer. Notices to the Buyer shall
be addressed to:
Lineo, Inc.
1505 Westlake Avenue North, Suite 400
Seattle, Washington 98109
Attention: Matthew Harris, Vice President & General Counsel
Telecopy: (206) 281-9882
or to such other address and to the attention of such other Person as the Buyer
may designate by written notice to the Sellers.
11.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties to this Agreement and their respective
successors and permitted assigns. No party to this Agreement shall have the
right to assign its rights or interests in or delegate its obligations under
this Agreement without the express prior written consent of all other parties to
this Agreement; provided, however, the Buyer may assign its rights or interests
under this Agreement to any direct or indirect wholly owned subsidiary of the
Buyer, in which event the Buyer shall remain liable under this Agreement; and
provided further that any Seller may, by notice to the Buyer, direct that no
Seller may direct any or all of his share of the Closing Purchase Price be paid
to any other Person. No such assignment shall release the Buyer from its
obligations hereunder without the Sellers' written consent.
11.8 HEADINGS; DEFINITIONS. The Section and article headings contained
in this Agreement are inserted for convenience and reference only and will not
affect the meaning or interpretation of this Agreement. All references to
Sections or Articles contained in this Agreement mean Sections or Articles of
this Agreement unless otherwise stated. All capitalized terms defined in this
Agreement are equally applicable to both the singular and plural forms of such
terms. As the context requires, the singular form of any term includes the
plural and vice versa, and all pronouns used herein shall be deemed to refer to
the masculine, feminine or neuter gender.
11.9 AMENDMENTS AND WAIVERS. This Agreement may not be modified or
amended except by an instrument or instruments in writing signed by the party
against whom enforcement of any such modification or amendment is sought. Any
party to this Agreement may, only by an instrument in writing, waive compliance
by any other party to this Agreement with any term or provision of this
Agreement. The waiver by any parties to this Agreement of a breach of any term
or provision of this Agreement shall not be construed as a waiver of any
subsequent breach.
11.10 VENUE; SERVICE OF PROCESS. In the event that any litigation or
other judicial relief should be commenced or applied for, but without limitation
to the provision requiring arbitration set forth in Section 11.11 below, each
party to this Agreement hereby consents to the exclusive jurisdiction of the
state and federal courts sitting in Salt Lake City, Utah, United States of
America, in any action on a claim
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arising out of, under or in connection with this Agreement or the transactions
contemplated by this Agreement. Each party to this Agreement further agrees that
personal jurisdiction over him may be effected by service of process by
registered or certified mail addressed as provided in Section 11.6 above and
that when so made shall be as if served upon him personally within the State of
Utah.
11.11 ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by binding
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association ("Rules of AAA"), and the procedures set forth below. In
the event of any inconsistency between the Rules of AAA and the procedures set
forth below, the procedures set forth below shall control. Judgment upon the
award rendered by the arbitrator may be enforced in any court having
jurisdiction thereof.
(a) LOCATION. The location of the arbitration shall be Salt
Lake City, Utah, United States of America.
(b) SELECTION OF ARBITRATOR. The arbitration shall be
conducted by one neutral arbitrator who is independent and disinterested with
respect to the parties, this Agreement, and the outcome of the arbitration and
who is an attorney having at least fifteen (15) year's experience in corporate
and securities issues. The arbitrator shall be selected by the parties to the
arbitration in the manner provided in the Rules of the AAA.
(c) DISCOVERY. Unless the parties mutually agree in writing to
some additional and specific pre-hearing discovery, the only pre-hearing
discovery shall be (a) reasonably limited production of relevant and
non-privileged documents, and (b) the identification of witnesses to be called
at the hearing, which identification shall give the witness's name, general
qualifications and position, and a brief statement as to the general scope of
the testimony to be given by the witness. The arbitrator shall decide any
disputes and shall control the process concerning these pre-hearing discovery
matters. Pursuant to the Rules of AAA, the parties may subpoena witnesses and
documents for presentation at the hearing.
(d) CASE MANAGEMENT. Prompt resolution of any dispute is
important to both parties; and the parties agree that the arbitration of any
dispute shall be conducted expeditiously. The arbitrator is instructed and
directed to assume case management initiative and control over the arbitration
process (including scheduling of events, pre-hearing discovery and activities,
and the conduct of the hearing), in order to complete the arbitration as
expeditiously as is reasonably practical for obtaining a just resolution of the
dispute.
(e) REMEDIES. The arbitrator shall follow and apply applicable
law and the provisions of this Agreement. The arbitrator shall grant such legal
or equitable remedies and relief in compliance with applicable law that the
arbitrator deems just and equitable, to the same extent that remedies or relief
could be granted by a state or federal court, provided however, that no punitive
damages may be awarded. No court action may be maintained seeking punitive
damages. The decision of the arbitrator shall be binding upon the parties.
(f) EXPENSES. The expenses of the arbitration, including the
arbitrator's fees and expert witness fees, but not including the attorneys' fees
(which are addressed in Section 11.12 below) incurred by the parties to the
arbitration, may be awarded to the prevailing party, in the discretion of the
arbitrator, or may be apportioned between the parties in any manner deemed
appropriate by the arbitrator. Unless and until the arbitrator decides that one
party is to pay for all (or a share) of such expenses, both parties shall share
equally in the payment of the arbitrator's fees as and when billed by the
arbitrator.
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(g) CONFIDENTIALITY. Except as set forth below, the parties
shall keep confidential the fact of the arbitration, the dispute being
arbitrated, and the decision of the arbitrator. Notwithstanding the foregoing,
the parties may disclose information about the arbitration to persons who have a
need to know, such as directors, trustees, management employees, witnesses,
experts, investors, attorneys, lenders, insurers, and others who may be directly
affected. Additionally, each party may make such disclosures as are required by
applicable securities laws or other applicable law or regulation. Further, if a
party is expressly asked by a third party about the dispute or the arbitration,
the party may disclose and acknowledge in general and limited terms that there
is a dispute with the other party which is being (or has been) arbitrated. Once
the arbitration award has become final, if the arbitration award is not promptly
satisfied, then these confidentiality provisions shall no longer be applicable.
11.12 ATTORNEYS' FEES. In the event that any dispute between any two or
more of the parties to this Agreement should result in litigation or
arbitration, the prevailing party in such dispute shall be entitled to recover
from the other party all reasonable fees, costs and expenses of enforcing any
right of the prevailing party, including without limitation, reasonable
attorneys' fees, arbitration fees and other expenses, all of which shall be
deemed to have accrued upon the commencement of such action and shall be paid
whether or not such action is prosecuted to judgment or arbitration award. Any
judgment, order or arbitration award entered in such action shall contain a
specific provision providing for the recovery of attorney fees and costs
incurred in enforcing such judgment or award and an award of prejudgment
interest from the date of the breach at the maximum rate of interest allowed by
law. For the purposes of this Section 11.12: (a) attorney's fees shall include,
without limitation, fees incurred in the following: (1) post-judgment motions;
(2) contempt proceedings; (3) garnishment, levy, and debtor and third party
examinations; (4) discovery; and (5) bankruptcy litigation and (b) prevailing
party shall mean the party who is determined by the tier of fact in the
proceeding to have prevailed or who prevails by dismissal, default or otherwise.
11.13 SEVERABILITY OF PROVISIONS; JEOPARDY.
(a) If any provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated by this Agreement is not affected in any manner adverse to any
party. Upon a determination that such an adverse affect will occur, the parties
to this Agreement shall negotiate in good faith to modify this Agreement so as
to effect the original intent of the parties as closely as possible in an
acceptable manner to the end that transactions contemplated to this Agreement
are fulfilled to the greatest extent possible.
(b) Notwithstanding anything to the contrary contained in this
Agreement, in the event that it is determined prior to the Closing that the
performance by any party hereto of any term, covenant, condition or provision of
this Agreement should be in violation of any statute, ordinance, or be otherwise
deemed illegal, the parties shall immediately attempt to negotiate an amendment
to this Agreement to eliminate such jeopardy. In the event that such an
amendment is not practicable or cannot be agreed upon within fifteen (15) days
of notice of the need thereof, either party may, at its option, terminate this
Agreement forthwith.
11.14 SELLER APPROVAL. The execution and delivery of this Agreement by
all Sellers shall constitute unanimous shareholder approval of the execution and
delivery of this Agreement by the Corporation.
IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of
each of the parties effective as of the date first above written.
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CORPORATION:
Moreton Bay Ventures Pty Ltd, an Australian
corporation
By:
---------------------------------------
Its:
--------------------------------------
SELLERS:
Robert B Waldie
------------------------------------------
Mary E Waldie
------------------------------------------
Antonio B Merenda
------------------------------------------
Peter Cronk, Sandra Judith Cronk and Lynda
Sandra Cronk as Trustees of the Cronk Super
Fund
------------------------------------------
------------------------------------------
------------------------------------------
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Richard S J Stevenson
------------------------------------------
Graeme R Kitchen
------------------------------------------
Gregory Ungerer
------------------------------------------
Roger Brown
------------------------------------------
Matthew Ramsay
------------------------------------------
Christopher Trew
------------------------------------------
Peter A Waldie
------------------------------------------
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Robert A Waldie
------------------------------------------
Sirius Technologies, an Australian corporation
By:
---------------------------------------
Its:
--------------------------------------
Southern Cross Fund 1, a Delaware limited
partnership
By:
---------------------------------------
Its:
--------------------------------------
BUYER:
LINEO, INC., a Delaware corporation
By:
---------------------------------------
Bryan W. Sparks, Chairman and President
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EXHIBIT 10.14
STOCK PURCHASE AGREEMENT
BY AND AMONG
LINEO, INC.
AND
THE SELLERS NAMED HEREIN
DATED AS OF MAY 1, 2000
-i-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 1.DEFINITIONS............................................................................................1
ARTICLE 2.SALE OF SHARES; CLOSING................................................................................5
2.1 Purchase and Sale.....................................................................................5
2.2 Purchase Price........................................................................................6
2.3 Time and Place of Closing.............................................................................6
ARTICLE 3.REPRESENTATIONS AND WARRANTIES OF THE MAJORITY SHAREHOLDERS............................................6
3.1 Organization and Corporate Power......................................................................6
3.2 Capitalization; Share Ownership.......................................................................6
3.3 Subsidiaries; Investments.............................................................................7
3.4 Financial Statements..................................................................................7
3.5 Absence of Undisclosed Liabilities....................................................................7
3.6 Absence of Changes....................................................................................7
3.7 Title; Condition of Property..........................................................................8
3.8 Certain Contracts and Arrangements....................................................................8
3.9 Intellectual Property Rights; Employee Restrictions...................................................9
3.10 Litigation...........................................................................................10
3.11 Tax Matters..........................................................................................11
3.12 Employee Benefits....................................................................................11
3.13 Labor Laws...........................................................................................11
3.14 Employees............................................................................................11
3.15 Hazardous Waste, Etc.................................................................................12
3.16 Business; Compliance with Laws.......................................................................12
3.17 Investment Banking; Brokerage........................................................................12
3.18 Insurance............................................................................................12
3.19 Transactions with Affiliates.........................................................................12
3.20 Suppliers............................................................................................13
3.21 Certain Events.......................................................................................13
3.22 Registration Rights..................................................................................13
3.23 Disclosure...........................................................................................13
3.24 Corporate Documents..................................................................................14
3.25 Governmental Consents................................................................................14
3.26 Equity...............................................................................................14
ARTICLE 4.REPRESENTATIONS AND WARRANTIES OF THE SELLERS.........................................................14
4.1 Capacity; Execution; Validity; Binding Effect........................................................14
4.2 Share Ownership......................................................................................14
4.3 No Other Rights......................................................................................15
4.4 No Conflicting Agreements............................................................................15
4.5 Consents, Approvals, Licenses, Etc...................................................................15
4.6 Litigation...........................................................................................15
4.7 No Brokers...........................................................................................16
4.8 No U.S. Persons......................................................................................16
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ARTICLE 5.REPRESENTATIONS AND WARRANTIES OF BUYER...............................................................16
5.1 Organization and Corporate Power.....................................................................16
5.2 Authorization and Non-Contravention..................................................................16
5.3 Capitalization.......................................................................................17
5.4 Subsidiaries; Investments............................................................................17
5.5 Financial Statements.................................................................................17
5.6 Absence of Undisclosed Liabilities...................................................................18
5.7 Absence of Changes...................................................................................18
5.8 Title; Condition of Property.........................................................................18
5.9 Certain Contracts and Arrangements...................................................................19
5.10 Intellectual Property Rights; Employee Restrictions..................................................20
5.11 Litigation...........................................................................................21
5.12 Tax Matters..........................................................................................21
5.13 Employee Benefit Plans...............................................................................21
5.14 Labor Laws...........................................................................................22
5.15 Employees............................................................................................22
5.16 Hazardous Waste, Etc.................................................................................22
5.17 Business; Compliance with Laws.......................................................................22
5.18 Insurance............................................................................................23
5.19 Transactions with Affiliates.........................................................................23
5.20 Suppliers............................................................................................23
5.21 Certain Events.......................................................................................23
5.22 Registration Rights..................................................................................24
5.23 Disclosure...........................................................................................24
5.24 Corporate Documents..................................................................................24
5.25 Offering.............................................................................................24
5.26 Investment Company...................................................................................24
5.27 Supplemental Remuneration............................................................................24
5.28 Governmental Consents................................................................................25
ARTICLE 6.COVENANTS OF SELLERS AND BUYER........................................................................25
6.1 Investigation of Business; Access to Properties and Records..........................................25
6.2 Regulatory and Other Authorizations..................................................................25
6.3 Reasonable Efforts; Consents and Notifications.......................................................26
6.4 Further Assurances...................................................................................26
6.5 Conduct of Business of the Company...................................................................26
6.6 Preservation of Business.............................................................................28
6.7 Announcements........................................................................................28
6.8 No Solicitation......................................................................................28
6.9 Right to Update and Cure.............................................................................29
6.10 Market Stand-Off Agreement...........................................................................29
6.11 Securities Law Compliance............................................................................30
6.12 Tax Filing Code Section 338(g) Election..............................................................30
6.13 Covenant Not to Compete/Nonsolicitation..............................................................30
ARTICLE 7.CONDITIONS TO BUYER'S OBLIGATION TO CLOSE.............................................................31
7.1 Representations; Warranties and Covenants of the Majority Shareholders and the Sellers...............31
7.2 Filings; Consents; Waiting Periods...................................................................32
7.3 No Injunction........................................................................................32
7.4 Closing Deliveries...................................................................................32
7.5 Absence of Litigation................................................................................32
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7.6 No Claim Regarding Stock Ownership or Sale Proceeds..................................................32
7.7 No Material Adverse Effect...........................................................................33
ARTICLE 8.CONDITIONS TO SELLERS' OBLIGATIONS TO CLOSE...........................................................33
8.1 Representations, Warranties and Covenants of the Buyer...............................................33
8.2 Filings; Consents; Waiting Periods...................................................................33
8.3 No Injunction........................................................................................33
8.4 Closing Deliveries...................................................................................33
8.5 Series C Convertible Preferred Stock of the Buyer....................................................34
8.6 Absence of Litigation................................................................................34
8.7 No Material Adverse Effect...........................................................................34
ARTICLE 9.SURVIVAL; INDEMNIFICATION.............................................................................34
9.1 Indemnification......................................................................................34
9.2 Limitations on Indemnification.......................................................................37
ARTICLE 10.TERMINATION..........................................................................................38
10.1 Termination..........................................................................................38
10.2 Procedure and Effect of Termination..................................................................39
ARTICLE 11.MISCELLANEOUS........................................................................................39
11.1 Counterparts.........................................................................................39
11.2 Governing Law........................................................................................39
11.3 No Third Party Beneficiaries.........................................................................39
11.4 Entire Agreement.....................................................................................39
11.5 Expenses.............................................................................................39
11.6 Notices..............................................................................................40
11.7 Successors and Assigns...............................................................................40
11.8 Headings; Definitions................................................................................40
11.9 Amendments and Waivers...............................................................................40
11.10 Arbitration..........................................................................................41
11.11 Attorneys' Fees......................................................................................42
11.12 Severability of Provisions; Jeopardy.................................................................42
</TABLE>
EXHIBITS
Exhibit A List of Sellers
Exhibit B Liquidity Agreement
Exhibit C Stock Option Undertaking
Exhibit D Employment Agreements
SCHEDULES
Majority Shareholders Disclosure Schedule
Buyer Disclosure Schedule
Seller Disclosure Schedule
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STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT dated as of May 1, 2000 is made
and entered into by and among all of the Sellers listed on Exhibit A hereto
(each a "Seller" and collectively the "Sellers"), and Lineo, Inc., a Delaware,
USA, corporation (the "Buyer").
WHEREAS, the Sellers own all of the shares of Inup S.A., a
"societe anonyme" (the "Company"), having its registered office at 9-11, avenue
Michelet - 93400 Saint Ouen - France, incorporated at the Trade Registry of
Bobigny B 421 701 384, with an issued share capital of 187,500 Euros as of the
date of this Agreement, with each Seller owning that number of shares of the
Company set forth opposite such Seller's name in EXHIBIT A hereto; and
WHEREAS, the Buyer desires to purchase from the Sellers, and
the Sellers desire to sell to the Buyer, all of the shares of the Company issued
and outstanding as of the date of this Agreement upon the terms and subject to
the conditions set forth in this Agreement (the sale and purchase of such shares
are referred to in this Agreement as the "Share Purchase");
NOW, THEREFORE, in consideration of the mutual agreements,
covenants, representations and warranties contained herein, and subject to the
terms and conditions hereinafter set forth, the parties to this Agreement hereby
agree as follows:
ARTICLE 1.
DEFINITIONS
As used in this Agreement, the following terms shall have the
following meanings:
1.1 "ACCOUNTANTS" shall have the meaning set forth in Section 2.2(b).
1.2 "ACCOUNTS RECEIVABLE" shall have the meaning set forth in Section
3.23.
1.3 "AFFILIATE" shall mean, with respect to any Person, a Person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such Person.
1.4 "AGREEMENT" shall mean this Share Purchase Agreement, together with
the Buyer Disclosure Schedule, the Majority Shareholders Disclosure Schedule and
the Seller Disclosure Schedule, as the same may be updated or amended from time
to time as provided herein.
1.5 "ASSOCIATE" shall mean, with respect to any Person, any corporation
or other business organization of which such Person is an executive officer (as
such term is defined in Rule 3b-7 under the 1934 Act) or partner or is the
beneficial owner, directly or indirectly, of [ten] percent or more of any class
of equity securities, any trust or estate in which such Person has a substantial
beneficial interest or as to which such Person serves as a trustee or in a
similar capacity and any relative or spouse of such Person.
<PAGE>
1.6 "AUTHORITY" shall mean any United States, French, foreign, federal,
provincial state or local entity or municipality or subdivision thereof or any
authority, department, commission, board, bureau, agency, court or
instrumentality thereof.
1.7 "BUSINESS" shall mean the software development business of Inup S.A
as conducted at the date hereof.
1.8 "BUSINESS DAY" shall mean any day that is not a Saturday, a Sunday
or other day on which banks are required or authorized by law to be closed in
Salt Lake City, Utah, USA or Paris, France.
1.9 "BUYER" shall have the meaning set forth in the first paragraph of
the Agreement.
1.10 "BUYER INDEMNITIES" shall have the meaning set forth in Section
9.1(a).
1.11 "BUYER RIGHTS" shall have the meaning set forth in Section 5.10.
1.12 "BUYER DISCLOSURE SCHEDULE" shall mean the disclosure schedule,
dated as of the date of this Agreement, delivered to the Sellers by the Buyer.
1.13 "BUYER'S FINANCIAL STATEMENTS" shall have the meaning set forth in
Section 5.5.
1.14 "CASH BALANCE" shall have the meaning set forth in Section 3.2.6.
1.15 "CLOSING" shall have the meaning set forth in Section 2.4.
1.16 "CLOSING BALANCE SHEET" shall have the meaning set forth in
Section 2.2(b).
1.17 "CLOSING DATE" shall mean the date and effective time at which the
Closing occurs.
1.18 "CODE" shall mean the United States of America Internal Revenue
Code of 1986, as amended, together with the regulations promulgated thereunder.
1.19 "COMPANY FINANCIAL STATEMENTS" shall have the meaning set forth in
Section 3.4.
1.20 "CONTRACT" shall mean any contract, agreement, indenture, note,
bond, loan agreement, letter of credit agreement, line of credit agreement,
instrument, lien, conditional sales contract, mortgage, franchise, commitment,
obligation or other arrangement or agreement, but shall exclude leases of real
or personal property and insurance policies.
1.21 "COMPANY" shall mean Inup S.A., a French company.
1.22 "COMPANY SHARES" shall have the meaning set forth in Section 2.1.
1.23 "DISCLOSURE SCHEDULE" shall mean any of the Majority Shareholders
Disclosure Schedule, the Buyer Disclosure Schedule or the Seller Disclosure.
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1.24 "EMPLOYEE BENEFIT PLAN" shall have the meaning set forth in
Sections 3.12 and 5.13 with respect to the Company and the Buyer, respectively.
1.25 "ENCUMBRANCES" shall mean any security interest, pledge, mortgage,
lien, charge, adverse claim of ownership or other encumbrance of any kind.
1.26 "ERISA" shall have the meaning set forth in Section 3.13.
1.27 "FAMILY MEMBER" shall mean with respect to a particular
individual, such individual's spouse, parents, children, siblings, mothers- and
fathers-in-law, sons- and daughters-in-law, and brothers- and sisters-in-law.
1.28 "GAAP" shall mean generally accepted accounting principles (as
such term is used in the applicable country's professional accounting standards)
from time to time in effect.
1.29 "INDEMNIFIED LOSSES" shall have the meaning set forth in Section
9.1(a).
1.30 "INDEMNIFYING PARTY" shall have the meaning set forth in Section
9.1(d).
1.31 "INDEMNITEES" shall have the meaning set forth in Section 9.1(d).
1.32 "INTELLECTUAL PROPERTY" shall mean each and every and any and all
patents and patent rights, trademarks and trademark rights, trade names and
trade name rights, service marks and service mark rights, service names and
service name rights, brand names, inventions, procedures, formulae, copyrights
and copyright rights, trade dress, business and product names, logos, slogans,
trade secrets, processes, designs, methodologies, computer programs (including
all source codes) and related documentation, linux embedded platforms and
related documentation, technical information, know-how and all pending
applications for and registrations of patents, trademarks, service marks and
copyrights.
1.33 "IRS" shall mean the U.S. Internal Revenue Service.
1.34 "KNOWLEDGE" shall mean (i) in the case of any Seller, knowledge of
such Seller, and if such Seller is an entity, knowledge of any director or any
member of senior management of such entity and (ii) in the case of the Buyer,
knowledge of any officer or director of the Buyer. An individual will be deemed
to have "Knowledge" of a particular fact or other matter if such individual is
actually aware of such fact or other matter.
1.35 "LINEO SHARES" shall have the meaning set forth in Section 2.2.
1.36 "PERMITS" shall mean all permits, licenses and other approvals,
certificates of need, accreditations, participation agreements, consents,
authorizations, certificates of authority and orders
1.37 "MAJORITY SHAREHOLDERS" shall mean Hugo Delchini and Laurent
Rousseau.
1.38 "MAJORITY SHAREHOLDERS DISCLOSURE SCHEDULE" shall mean the
disclosure schedule, dated as of the date of this Agreement, delivered to the
Buyer by the Majority Shareholders.
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1.39 "MATERIAL ADVERSE EFFECT" on a Person shall mean a material
adverse effect on the business, operations, properties, assets (including
intangible assets), liabilities (contingent or otherwise), financial conditi0on
or results of operations of such Person and its Subsidiaries, taken as a whole.
1.40 "PERMITTED ENCUMBRANCES" shall mean (i) Encumbrances for Taxes not
yet due and payable and for property Taxes being contested in good faith, (ii)
Encumbrances and imperfections of title that do not secure payment of borrowed
money and the existence of which, in the aggregate, do not have a Material
Adverse Effect.
1.41 "PERSON" shall mean an individual, firm, trust, association,
corporation, limited liability company, partnership, limited partnership,
limited liability partnership, Authority or other entity.
1.42 "PURCHASE PRICE" shall have the meaning set forth in Section 2.2.
1.43 "RELATED PARTY" shall have the meaning set forth in Section 3.12.
1.44 "SELLER" and "SELLERS" are identified on Exhibit A hereto.
1.45 "SELLER DISCLOSURE SCHEDULE" shall mean the disclosure schedules,
dated as of the date of this Agreement, delivered to the Buyer by any Seller.
1.46 "SELLER INDEMNITIES" shall have the meaning set forth in Section
9.1(c).
1.47 "SHARE PURCHASE" shall have the meaning set forth in the Recitals
hereto.
1.48 "SUBSIDIARY" of a Person shall mean a corporation, partnership or
other entity of which such Person (i) has the power to elect more than fifty
percent (50%) of the board of directors or other governing authority either
directly or indirectly or (ii) owns or controls more than fifty percent (50%) of
the outstanding equity securities or equity interests either directly or through
an unbroken chain of entities as to each of which fifty percent (50%) or more of
the outstanding equity securities or equity interests is owned directly or
indirectly by its parent.
1.49 "SURVIVAL PERIOD" shall have the meaning as set forth in Section
9.2(a).
1.50 "TAKEOVER PROPOSAL" shall mean any proposal for a merger,
consolidation, acquisition of all or substantially all of the capital shares or
assets of a Person or the acquisition of a substantial equity interest in such
Person or a substantial portion of the consolidated assets of such Person, or
any solicitation of proxies in connection with any meeting for the purpose of
effecting a business combination or change in control.
1.51 "TAX" or "TAXES" shall mean all taxes, levies, imposts, duties,
excises, licenses and resignation fees, and charges of any kind or nature
whatsoever including, without limitation, income tax withholding, unemployment
and social security or welfare taxes, value added, sales and use taxes and
property taxes, and interest, penalties and additions to tax with respect to any
of the above.
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1.52 "TAX RETURN" shall mean any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment to such documents and any amendment of such documents.
1.53 "U.S. PERSON" shall mean: (i) any natural person resident in the
United States; (ii) any partnership or corporation organized or incorporated
under the laws of the United States; (iii) any estate of which any executor or
administrator is a U.S. person; (iv) any trust of which any trustee is a U.S.
person; (v) any agency or branch of a foreign entity located in the United
States; (vi) any non-discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary for the benefit or account
of a U.S. person; (vii) any discretionary account or similar account (other than
an estate or trust) held by a dealer or other fiduciary organized, incorporated,
or (if an individual) resident in the United States; and (viii) any partnership
or corporation if: (a) organized or incorporated under the laws of any foreign
jurisdiction; and (b) formed by a U.S. person principally for the purpose of
investing in securities not registered under the Act, unless it is organized or
incorporated, and owned, by accredited investors (as defined in Rule 501(a)) who
are not natural persons, estates or trusts.
1.54 "UNDISCLOSED LIABILITY" of a Person shall mean an obligation,
indebtedness or liability of any nature (each of which, for purposes of this
definition, is assumed to be material), which is required by applicable country
GAAP to be reserved against or disclosed on a balance sheet of such Person,
which is not so reserved against or disclosed on such Person's balance sheet, or
in the notes thereto, and which is not so reflected, reserved against or
otherwise disclosed in this Agreement or a Disclosure Schedule hereto.
1.55 "1933 ACT" shall mean the U.S. Securities Act of 1933, as amended.
1.56 "1934 ACT" shall mean the U.S. Securities Exchange Act of 1934, as
amended.
1.57 "1940 ACT" shall have the meaning set forth in Section 5.27.
1.58 OTHER DEFINED TERMS. The terms defined in the first paragraph and
in the whereas clauses shall have the meanings given to such terms in such
paragraph and whereas clauses.
ARTICLE 2.
SALE OF SHARES; CLOSING
2.1 PURCHASE AND SALE. Subject to the satisfaction or waiver of the
conditions to the Closing set forth in this Agreement, at the Closing the
Sellers will sell, and the Buyer will purchase, common shares of the Company
which constitute, and will constitute as of the Closing, all of the issued and
outstanding shares of capital stock of the Company (collectively, the "Company
Shares"), with the amount of Company Shares to be sold by each Seller set forth
opposite such Seller's name on EXHIBIT A hereto. The parties agree that, for the
sole purposes of United States GAAP, the Company Shares shall be deemed to be
sold with effect as of May 1, 2000, notwithstanding that the share transfer
forms with respect thereto will have been executed and the Closing will occur at
a subsequent time.
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2.2 PURCHASE PRICE.
(a) In full payment of the Company Shares, the Buyer shall pay
and deliver to the Sellers an aggregate purchase price consisting of 83,334
shares of the unregistered Series C Convertible Preferred Stock of the Buyer and
1,333,333 shares of the unregistered Common Stock of Buyer (together the "Lineo
Shares"), and Ten Thousand Dollars in currency of the United States of America
(USD $10,000) (the "Purchase Price"). The Purchase Price shall be paid to and
allocated among each of the Sellers as set forth opposite each Seller's name on
EXHIBIT A hereto.
(b) The Sellers acknowledge and agree that the Purchase Price
includes full payment to them of any amounts that may otherwise be owing to or
claimed by them as supplemental remuneration or otherwise with respect to all
patents, patent rights and other Intellectual Property owned by the Company.
(c) Delivery of Company Shares. At the Closing, each Seller,
severally and not jointly, shall sell, assign, transfer and deliver to the Buyer
the number of the Company Shares set forth opposite such Seller's name on
EXHIBIT A by delivery to the Buyer of duly executed share transfer forms
relating to such Company Shares, in form and substance satisfactory to the Buyer
and free and clear of all Encumbrances.
(d) Payment of the Purchase Price. At the Closing, the Buyer
shall pay the Purchase Price by delivery to the Sellers of duly issued
certificates representing the Lineo Shares and certified checks in accordance
with EXHIBIT A.
2.3 TIME AND PLACE OF CLOSING. The closing (the "Closing") of the Share
Purchase will be held at the office of Salans Hertzfeld & Heilbronn, 9 rue
Boissy d'Anglas, 75008 Paris, France at 4:00 p.m. on Friday, May 5, 2000 or such
other time and place as shall be agreed to by the parties.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF THE MAJORITY SHAREHOLDERS
The Majority Shareholders represent and warrant to the Buyer that the
statements contained in this Article 3 are true and correct, except as set forth
in the Majority Shareholders Disclosure Schedule.
3.1 ORGANIZATION AND CORPORATE POWER. The Company is a SOCIETE ANONYME
duly organized and validly existing under the laws of the Republic of France,
and is qualified to do business as a foreign company in each jurisdiction in
which the failure to be so qualified would have a Material Adverse Effect on the
Company. The Company has all required corporate power and authority to carry on
its business as presently conducted. The Company is not in violation of any term
of the Bylaws of the Company, as amended to date (i.e., its statuts, hereafter
referred to as its "Bylaws".) The execution, delivery and performance of this
Agreement and the consummation of the transactions provided for herein does not
violate the Company's By-laws or any material agreement by which it is bound.
3.2 CAPITALIZATION; SHARE OWNERSHIP. The authorized and outstanding
capital shares, options and warrants of the Company are listed in Section 3.2 of
the Majority
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Shareholders Disclosure Schedule. Other than as set forth in Section 3.2 of
the Majority Shareholders Disclosure Schedule, the Company has not issued or
agreed to issue and is not obligated to issue any warrants, options or other
rights to purchase or acquire any shares of its capital stock, or any
securities convertible into or exercisable or exchangeable for such shares or
any warrants, options or other rights to acquire any such convertible
securities. All of the outstanding shares of capital stock of the Company are
duly and validly authorized and issued, fully paid and nonassessable and,
except as set forth herein and except for the Shareholders Agreement dated
November 3, 1999 among the Sellers which the Sellers agree shall terminate
upon the Closing, not subject to any preemptive rights to purchase or
otherwise acquire shares of capital stock of the Company, are free of
restrictions on transfer.
3.3 SUBSIDIARIES; INVESTMENTS. The Company does not currently own any
capital stock or interest or participate in any corporation, joint venture,
partnership, trust, limited liability corporation or other entity.
3.4 FINANCIAL STATEMENTS. The Company has previously furnished to the
Buyer copies of its draft audited financial statements (balance sheet, statement
of operations, statement of cash flows and statement of stockholders equity,
including notes thereto) for the fiscal year at and ended December 31, 1999 (the
"Company Financial Statements"), a copy of which is included in Section 3.4 of
the Majority Shareholders Disclosure Schedule. Such financial statements were
prepared in conformity with French GAAP applied on a consistent basis; are
complete, correct and consistent in all material respects with the books and
records of the Company; and fairly and accurately present the financial position
of the Company as of the dates thereof and the results of operations and cash
flows of the Company for the periods shown therein. The Company maintains and
will continue to maintain a standard system of accounting established and
administered in accordance with French GAAP.
3.5 ABSENCE OF UNDISCLOSED LIABILITIES. The Company does not have and
is not subject to any material Undisclosed Liability.
3.6 ABSENCE OF CHANGES. Since December 31, 1999 there has not been (a)
any material adverse change in the financial condition, results of operations,
assets, liabilities, or business of the Company, (b) any material asset or
property of the Company made subject to a lien of any kind, (c) any waiver of
any material right of the Company, or the cancellation of any material debt or
claim held by the Company, (d) any payment of dividends on, or other
distribution with respect to, or any direct or indirect redemption or
acquisition by the Company of, any shares of the capital stock of the Company,
or any agreement or commitment therefore, (e) any mortgage, pledge or
hypothecation of any tangible or intangible asset of the Company, except in the
ordinary course of business, (f) any sale or assignment of any tangible asset of
the Company having a book value in excess of 5,000 Euros, except in the ordinary
course of business, or of any Intellectual Property Rights (as hereafter
defined) or other intangible assets, (g) any loan by the Company to, or any loan
to the Company from, any officer, director, employee or stockholder of the
Company, or any agreement or commitment therefore (other than travel and other
advances in the ordinary course of business), (h) any damage, destruction or
loss (whether or not covered by insurance) materially and adversely affecting
the assets, property or business of the Company, (i) any repayment of any loan
owed by the Company (including, without limitation, any loan owed to any
stockholder of the Company), (j) any single capital expenditure in excess of
20,000 Euros or any capital expenditures aggregating more than 50,000 Euros, (k)
any material change in the accounting methods or practices followed by the
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Company, (l) any satisfaction or discharge of any lien, claim or encumbrance or
payment of any obligation by the Company, except in the ordinary course of
business and that is not material to the business, properties, prospects or
financial condition of the Company, (m) any material change to or termination of
a material contract or agreement by which the Company or any of its assets is
bound or subject, (n) any material change in any compensation arrangement or
agreement with any employee, officer, director or stockholder of the Company,
(o) to the Majority Shareholders knowledge, any other event or condition of any
character that might materially and adversely affect the business, properties,
prospects or financial condition of the Company, (p) any resignation or
termination of employment of any officer or key employee of the Company, or (q)
any arrangement or commitment by the Company to do any of the things described
in this Section 3.6.
3.7 TITLE; CONDITION OF PROPERTY.
(a) Except as set forth in Section 3.7 of the Majority
Shareholders Disclosure Schedule, the Company has good title to all of its
property and assets, real, personal or mixed, tangible or intangible, free and
clear of all liens, security interests, charges and other encumbrances of any
kind.
(b) Without material exception, all assets used in the
Company's business are in good operating condition and repair and suitable for
use in the operation of such business, and none of such assets that (singly or
when aggregated with other assets) is material to the business of the Company is
obsolete.
3.8 CERTAIN CONTRACTS AND ARRANGEMENTS.
(a) Except as set forth in Section 3.8 of the Majority Shareholders
Disclosure Schedule (with true and correct copies delivered to the Buyer), the
Company is not a party or subject to or bound by:
(i) any plan or contract providing for collective bargaining
or the like, or any contract or agreement with any labor union;
(ii) any contract, lease or agreement creating any obligation
of the Company (contingent or otherwise) to pay to any third party 25,000 Euros
or more per year with respect to any single such contract or agreement;
(iii) any contract or agreement for the sale, license, lease
or disposition of products or services in excess of 25,000 Euros per year;
(iv) any contract containing covenants directly or explicitly
limiting the freedom of the Company to compete in any line of business or with
any person or entity;
(v) any license agreement (as licensor or licensee);
(vi) any contract or agreement for the purchase of any
leasehold improvements, equipment or fixed assets for a price in excess of
25,000 Euros per year;
(vii) any indenture, mortgage, promissory note, loan
agreement, guaranty or other agreement or commitment for borrowing in excess of
25,000 Euros or any pledge or security arrangement;
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(viii) any material joint venture, partnership, or
manufacturing agreement;
(ix) any endorsement or any other advertising, promotional or
marketing agreement;
(x) any employment contracts, or agreements with officers,
directors, employees or stockholders of the Company or persons or organizations
related to or affiliated with any such persons;
(xi) any pension, profit sharing, stock option, phantom stock
or other equity incentive plans;
(xii) any arrangement relating to any royalty payments to
employees, customers or independent contractors based on the sales volume of the
Company;
(xiii) any acquisition, merger or similar agreement; or
(xiv) any contract with a governmental body under which the
Company may have an obligation for renegotiation..
(b) Except as set forth in Section 3.8 of the Majority
Shareholders Disclosure Schedule, (i) each of the Company's contracts and
commitments is in full force and effect and is valid, binding and enforceable in
accordance with its terms as to the Company and, to the knowledge of the
Majority Shareholders, as to each other party thereto; (ii) there exists no
material breach or material default (or event that with notice or lapse of time
would constitute a material breach or material default) on the part of the
Company or, to the knowledge of the Majority Shareholders, on the part of any
other party under any of the Company's contracts or commitments, except to the
extent that any such breach or default would not have a Material Adverse Effect
on the Company; (iii) to the knowledge of the Majority Shareholders, the Company
has not received a written notice of termination or default under any of the
Company's contracts or commitments; and (iv) to the knowledge of the Majority
Shareholders, as of the date of this Agreement, no party to an agreement under
which the Company acquired a substantial portion of its assets has asserted any
claim for indemnification under such agreement.
(c) Except as set forth in Section 3.8 of the Majority
Shareholders Disclosure Schedule, the Company has not engaged in the past three
(3) months in any discussion (i) with any representative of any corporation or
corporations regarding the merger of the Company with or into any such
corporation or corporations, (ii) with any representative of any corporation,
partnership, association or other business entity or any individual regarding
the sale, conveyance or disposition of all or substantially all of the assets of
the Company or a transaction or series of related transactions in which more
than fifty percent (50%) of the voting power of the Company would be disposed
of, or (iii) regarding any other form of liquidation, dissolution or winding up
of the Company.
3.9 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS. Except as set
forth in Section 3.9 of the Majority Shareholders Disclosure Schedule:
(a) The Company has the right to use, sell, and license the
Intellectual Property material to the conduct of its business as presently
conducted and listed in Section 3.9 of the Majority Shareholders Disclosure
Schedule, including without limitation all rights
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to the Company name "Inup" (the "Company Rights"), free and clear of the rights
of all others.
(b) To the knowledge of the Majority Shareholders, the
business of the Company as presently conducted, the products as marketed or sold
and the provision of services by the Company do not violate and will not violate
any agreements that the Company has with any third party or infringe any patent,
trademark, service mark, copyright or trade secret or any other Intellectual
Property of any third party.
(c) To the knowledge of the Majority Shareholders, no claim is
pending or threatened against the Company nor has the Company received any
notice or claim from any person asserting that any of the Company's present or
contemplated activities infringe or may infringe any Intellectual Property of
such person, and the Majority Shareholders are not aware of any infringement by
any other person of any of the Company Rights.
(d) Each current and former employee of the Company, and each
of the Company's consultants and independent contractors involved in development
of any of the Company Rights, has executed an agreement regarding
confidentiality, proprietary information and assignment of inventions and
copyrights to the Company, as described in Section 3.9 of the Majority
Shareholders Disclosure Schedule, and to the knowledge of the Majority
Shareholders, none of such employees, consultants or independent contractors is
in violation of any agreement or in breach of any agreement or arrangement with
former or present employers relating to proprietary information or assignment of
inventions. The Company has taken all reasonable steps to protect all data,
information, ideas, concepts, know-how and materials that the Company treats as
trade secrets, and all other confidential information and Intellectual Property
of the Company, which are not part of the public domain or knowledge, nor, to
the knowledge of the Majority Shareholders, have they been used, divulged or
appropriated for the benefit of any person other than the Company or otherwise
to the detriment of the Company.
(e) No royalties or other amounts are payable by the Company
to persons by reason of the ownership or use of the Intellectual Property of the
Company.
(f) No third party has claimed to the Company or, to the best
of the Majority Shareholders knowledge, has reason to claim that any person
employed by or affiliated with the Company has (a) violated or may be violating
any of the terms or conditions of his or her employment, non-competition,
non-disclosure, non-solicitation or inventions agreement with such third party,
(b) disclosed or may be disclosing or utilized or may be utilizing any
Intellectual Property, trade secret or proprietary information or documentation
of such third party, or (c) interfered or may be interfering in the employment
relationship between such third party and any of its present or former
employees.
3.10 LITIGATION. There is no litigation or governmental proceeding or
investigation pending or threatened against the Company or affecting any of its
properties or assets or against any officer, director or key employee of the
Company in his or her capacity as an officer, director or employee of the
Company, which litigation, proceeding or investigation is reasonably likely to
have a Material Adverse Effect on the Company, or which may call into question
the validity or hinder the enforceability of this Agreement or any other
agreements or transactions contemplated hereby; nor to the Majority
Shareholder's knowledge, has there occurred any event nor does there exist any
condition on the basis of which any such
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litigation, proceeding or investigation might be properly instituted or
commenced. The Company is not a party or to the Majority Shareholder's
knowledge, is subject to the provisions of any order, writ, injunction, judgment
or decree of any court or government agency or instrumentality. There is no
action, suit, proceeding or investigation by the Company currently pending or
which the Company intends to initiate.
3.11 TAX MATTERS. As of the date hereof (i) the Company has filed on a
timely basis all returns and reports in respect of Taxes for which the Company
may be liable; (ii) all Taxes required to be paid by the Company that were due
and payable prior to the date hereof have been paid; (iii) there are no pending
audits or investigations or pending or, to the best knowledge of the Majority
Shareholders, threatened claims relating to Taxes for which the Company may
become liable; and (iv) no deficiencies for any Taxes have been assessed against
the Company which remain unpaid.
3.12 EMPLOYEE BENEFITS. Except as set forth on Section 3.12 of the
Majority Shareholders Disclosure Schedule, as of the date hereof there are no
plans, policies or arrangements, whether written or oral, providing for
insurance coverage, disability benefits, vacation benefits, severance benefits,
retirement benefits, deferred compensation, profit sharing, bonus or other
incentives, stock options or other forms of other employee or post-retirement
benefits ("Employee Benefit Plans") covering directors or employees or former
directors or employees of the Companies which provide for any individual or
collective terms and conditions of employment that are more favorable than the
applicable CONVENTION COLLECTIVE or the applicable requirements of law in any
material respect. The terms and operation of each Employee Benefit Plan comply
in all material respects with all applicable laws and regulations relating to
such Employee Benefit Plan. There are no unfunded obligations of the Company
under any retirement, pension, profit-sharing, deferred compensation plan or
similar program. The Company is not required to make any payments or
contributions to any Employee Benefit Plan other than pursuant to applicable law
and the applicable collective bargaining agreement.
3.13 LABOR LAWS. The Company employs approximately seven (7) employees
and generally enjoys good employer-employee relationships. The Company is not
delinquent in payments to any of its employees for any wages, salaries,
commissions, bonuses or other direct compensation for any services performed for
it as of the date hereof or amounts required to be reimbursed to such employees.
The Company is in compliance in all material respects with all applicable laws
and regulations respecting labor, employment, fair employment practices, terms
and conditions of employment, and wages and hours. There are no charges of
employment discrimination or unfair labor practices or strikes, slowdowns,
stoppages of work or any other concerted interference with normal operations
existing, pending or, to the knowledge of the Majority Shareholders, threatened
against or involving the Company. There are no other material controversies
pending or, to the knowledge of the Majority Shareholders, threatened, between
the Company and any of its respective employees.
3.14 EMPLOYEES. Section 3.14 of the Majority Shareholders Disclosure
Schedule contains a list of all managers, employees and consultants of the
Company who, individually, have received compensation from the Company for the
fiscal year of the Company ended December 31, 1999 in excess of 100,000 Euros.
In each case, Section 3.14 of the Majority Shareholders Disclosure Schedule
includes the current job title, years of service with the
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Company and aggregate annual compensation and benefits of each such individual.
To the knowledge of the Majority Shareholders, no key employee of the Company
has any plan or intention to terminate his or her employment with the Company.
The Company has complied in all material respects with the immigration laws of
France with respect to the hiring, employment and engagement of all of its
employees and consultants who are not French citizens, and, to the knowledge of
the Majority Shareholders, except as set forth in Section 3.14 of the Majority
Shareholders Disclosure Schedule, the immigration or residency status of each of
such employees and consultants is sufficient to allow such employees and
consultants to remain lawfully employed or engaged by the Company. The Company
is not a party to or bound by any currently effective employment contract other
than those relating to employees listed in Section 3.14 of the Majority
Shareholders Disclosure Schedule.
3.15 HAZARDOUS WASTE, ETC. No hazardous wastes, substances or materials
or oil or petroleum products have been generated, transported, used, disposed,
stored or treated by the Company, and, to the Majority Shareholders' knowledge,
no hazardous wastes, substances or materials or oil or petroleum products have
been released, discharged, disposed, transported, placed or otherwise caused to
enter the soil or water in, under or upon any real property owned, leased or
operated by the Company.
3.16 BUSINESS; COMPLIANCE WITH LAWS. The Company has all necessary
franchises, permits, licenses and other rights and privileges necessary to
permit it to own its property and to conduct its business as it is presently or
contemplated to be conducted and is not in default in any material respect under
any of such franchises, permits, licenses and other similar rights and
privileges. The Company is currently and has heretofore been in compliance in
all material respects with all federal, state, local and foreign laws and
regulations applicable to it.
3.17 INVESTMENT BANKING; BROKERAGE. Except as set forth in Section 3.17
of the Majority Shareholders Disclosure Schedule, there are no claims for
investment banking fees, brokerage commissions, finder's fees or similar
compensation (exclusive of professional fees to lawyers and accountants) in
connection with the transaction contemplated by this Agreement payable by the
Company or based on any arrangement or agreement made by or on behalf of the
Company or any of the Majority Shareholders.
3.18 INSURANCE. The Company has the insurance policies listed in
Section 3.18 of the Majority Shareholders Disclosure Schedule, sufficient in
amount to allow it to replace any of its material properties which might be
damaged or destroyed or sufficient to cover liabilities to which the Company may
reasonably become subject, and such types and amounts of other insurance with
respect to its business and properties, on both a per occurrence and an
aggregate basis, as are customarily carried by persons engaged in the same or
similar business as the Company. To the Majority Shareholders' knowledge, there
is no default or event which could give rise to a default under any such policy.
3.19 TRANSACTIONS WITH AFFILIATES. There are no loans, leases,
contracts or other transactions (directly or indirectly) between the Company and
any Affiliate of the Company any Family Member or Associate of any such
Affiliate, and there have been no such transactions within the past twelve (12)
months except as set forth in Section 3.19 of the Majority Shareholders
Disclosure Schedule. To the best of the Majority Shareholders' knowledge, except
as set forth in Section 3.19 of the Majority Shareholders Disclosure Schedule,
none of such persons has any direct or indirect ownership interest in any firm
or
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corporation with which the Company is affiliated or with which the Company has a
business relationship, or any firm or corporation that competes with the
Company, except that employees, officers or directors of the Company and members
of their families may own stock in publicly traded companies that may compete
with the Company.
3.20 SUPPLIERS. Section 3.20 of the Majority Shareholders Disclosure
Schedule sets forth each supplier of the Company who supplied more than five
percent (5%) of the Company's supplies or materials for the fiscal year ended
December 31, 1999 and each supplier who the Company believes may supply for more
than five percent (5%) of the Company's supplies or materials for the fiscal
year ended December 31, 2000 (each a "Supplier" and collectively the
"Suppliers"). To the Majority Shareholders' knowledge, the relationships of the
Company with its Suppliers are good commercial working relationships. No
Supplier of the Company has canceled or otherwise terminated its relationship
with the Company, or has during the last 12 months decreased materially its
services, supplies or materials to the Company. No Supplier has, to the Majority
Shareholders' knowledge, any plan or intention to terminate, cancel or otherwise
materially and adversely modify its relationship with the Company or to decrease
materially or limit its services, supplies or materials to the Company.
3.21 CERTAIN EVENTS.
(a) During the past ten (10) years, neither the Company nor to
the Majority Shareholders' knowledge, any of the members of senior management or
directors of the Company has had a petition under the French insolvency law of
January 25, 1985, filed by or against any of them which has not as of the date
of this Agreement been dismissed.
(b) During the past ten (10) years, neither the Company nor to
the Majority Shareholders' knowledge, any of the members of senior management or
directors of the Company has been convicted in a criminal proceeding or is a
named subject of a criminal proceeding which is presently pending (excluding
traffic violations and other minor offenses).
(c) During the past ten (10) years, neither the Company nor to
the Majority Shareholders' knowledge, any of the members of senior management or
directors of the Company has been, or is, the subject of any order, judgment or
decree, whether or not subsequently reversed, suspended or vacated, of any court
or any administrative agency, requiring the payment of money damages in excess
of 100,000 Euros or permanently or temporarily enjoining any of them from, or
otherwise limiting any of their abilities to engage in, any type of business
practice.
3.22 REGISTRATION RIGHTS. The Company has not granted or agreed to
grant any registration rights, including piggyback rights, to any person or
entity.
3.23 DISCLOSURE. The representations and warranties made or contained
in this Section, the exhibits hereto and the certificates and statements
executed or delivered in connection herewith, and the information concerning the
business of the Company delivered to the Buyer in connection with or pursuant to
this Agreement, when taken together, do not and shall not contain any untrue
statement of a material fact and do not and shall not omit to state a material
fact required to be stated therein or necessary in order to make such
representations, warranties or other material not misleading in light of the
circumstances in
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which they were made or delivered. There have been no events or transactions or
information which has come to the attention of the management of the Company
having a direct impact on the Company or its assets, liabilities, financial
condition, business, results of operations or prospects which, in the reasonable
judgment of such management, could be expected to have a Material Adverse Effect
on the Company.
3.24 CORPORATE DOCUMENTS. The Bylaws of the Company have been made
available to the Buyer. The minute books of the Company containing minutes of
all meetings of directors and stockholders and all actions by written consent
without a meeting by the directors and stockholders since the date of
incorporation have been made available to the Buyer and reflect accurately in
all material respects all actions by the directors (and any committee of
directors) and stockholders with respect to all transactions referred to in such
minutes. The stock transfer ledgers and other similar records of the Company as
made available to the Buyer prior to the execution of this Agreement accurately
reflect all record transfers prior to the execution of this Agreement in the
capital stock of the Company.
3.25 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement.
3.26 CASH BALANCES. The Company has cash on deposit in the form of
SICAV DE TRESORIE with the BNP as of the date hereof in an amount of not less
than FRF 3,082,250 (the "Cash Balance").
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Each Seller, severally and not jointly, represents and
warrants to the Buyer that the statements contained in Sections 4.1 to 4.8 of
this Agreement are true and correct, except as set forth in the Seller
Disclosure Schedule.
4.1 CAPACITY; EXECUTION; VALIDITY; BINDING EFFECT. Such Seller has the
full power and capacity necessary to enter into and perform its obligations
under this Agreement and to consummate the transactions contemplated herein.
This Agreement has been duly executed and delivered by such Seller and, assuming
due execution and delivery by the other parties, constitutes the legal, valid
and binding obligation of such Seller, enforceable against such Seller in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, or other laws affecting creditors'
rights and remedies generally.
4.2 SHARE OWNERSHIP. Except as set forth on Section 4.2 of the Seller
Disclosure Schedule, there is no existing subscription, option, warrant, call,
right, commitment or other agreement (whether preemptive or contractual) to
which such Seller is a party requiring, and there are no convertible securities
of the Company owned or held by such Seller which upon conversion would require,
directly or indirectly, the issuance of any additional capital shares of the
Company or other securities convertible into or exercisable or exchangeable for
capital shares of the Company or any other equity security of the Company, and
there are no obligations (contingent or otherwise) of such Seller to purchase or
otherwise acquire any outstanding capital shares of the Company. The Company
Shares to be sold by such Seller
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pursuant to this Agreement will be delivered to the Buyer free and clear of all
Encumbrances (except Encumbrances arising out of, under or in connection with
this Agreement), and such delivery will not be in violation of any preemptive
rights. Such Seller is the sole beneficial owner of the Company Shares listed
beside such Seller's name on Exhibit A, and has the full legal right and power
to sell, convey, transfer, and assign such Company Shares to the Buyer pursuant
to this Agreement. Except for the Shareholders Agreement dated November 3, 1999
among the Sellers which the Sellers agree shall be deemed to terminate upon
Closing, such Seller is not a party to any shareholder agreement, voting
agreement, voting trust, proxy or other agreement with respect to the voting or
transfer of the Company Shares.
4.3 NO OTHER RIGHTS. No Person (other than the Buyer as provided in
this Agreement) has any agreement or option or any right or privilege (whether
preemptive or contractual) capable of becoming an agreement or option for the
purchase from such Seller of any of the Company Shares being transferred by such
Seller to the Buyer pursuant to this Agreement.
4.4 NO CONFLICTING AGREEMENTS. The execution and delivery of this
Agreement, the compliance with and performance of the terms and provisions of
this Agreement, and the consummation of the transactions contemplated herein by
such Seller will not (i) conflict with or result in a breach of the terms,
conditions or provisions of, (ii) constitute a violation or breach of default
(or an event which, with notice, lapse of time, or both, would constitute a
default) under, (iii) result in any violation of, (iv) require the obtaining of
any consent or approval of, the taking of any action of, the making of any
filing with, or the giving of any notice to, any Person (except such consents,
approvals, actions, filings and notices that will have been obtained, taken,
made, given, or effectively waived prior to the Closing, a true, accurate and
complete list of which is set forth in Section 4.4 of the Seller Disclosure
Schedule) as a result of or under the terms of, (v) result in or give to any
Persons any right of termination, cancellation, acceleration, modification, or
increased or accelerated rights, entitlements or payments under, or (vi) result
in the creation or imposition of any Encumbrance upon such Seller under: (A) any
provision of any Contract relating to the Shares to which such Seller is a party
or by which it or any of the Shares are bound, or (B) any order, decree,
license, permit, statute, law, rule or regulation to which such Seller is
subject.
4.5 CONSENTS, APPROVALS, LICENSES, ETC. Except for any consent,
approval, authorization, license, order or Permit that is also required to be
obtained by the Company, the Buyer or any other Seller, no consent, approval,
authorization, license, order or Permit of, or declaration, filing or
registration with, or notification to, any Authority is required to be made or
obtained by such Seller in connection with the execution, delivery and
performance of this Agreement, and the consummation of the transactions
contemplated hereby.
4.6 LITIGATION. There is no action, suit, proceeding or investigation
in progress or pending to the Knowledge of such Seller which affects this
Agreement or the Company Shares or any action taken or to be taken or documents
executed or to be executed by such Seller pursuant to or in connection with the
provisions of this Agreement, or that would otherwise prevent the consummation
of the transactions by such Seller contemplated by this Agreement. There is no
present state of facts or circumstances of which such Seller has Knowledge which
might reasonably be expected to result in any such action, suit, proceeding or
investigation.
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4.7 NO BROKERS. Except as set forth in Section 3.17, no broker, agent,
finder, consultant or other Person has been retained by, or has acted on behalf
of such Seller (other than legal and accounting advisors) or is entitled to be
paid based upon any agreements or understandings made by such parties in
connection with the transactions contemplated by this Agreement, and except as
set forth in Section 3.17, neither the Buyer nor the Company shall have any
liability for any broker's fee, finder's fee, consultant's fee or similar third
party remuneration payable by reason of any action of such Seller.
4.8 NO U.S. PERSONS. Except as set forth in Section 4.8 of the Seller
Disclosure, such Seller is not a U.S. Person.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF BUYER
The Buyer represents and warrants to the Sellers that the
Statements contained in this Article 5 are true and correct, except as set forth
in the Buyer Disclosure Schedule:
5.1 ORGANIZATION AND CORPORATE POWER. The Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, USA, and is qualified to do business as a foreign corporation in each
jurisdiction in which the failure to be so qualified would have a Material
Adverse Effect on the Buyer. The Buyer has all required corporate power and
authority to carry on its business as presently conducted, to enter into and
perform this Agreement and all other agreements contemplated hereby to which it
is a party and to carry out the transactions contemplated hereby and thereby,
including the issuance (or reservation for issuance), sale, delivery and
conversion of Lineo Shares. The Buyer is not in violation of any term of the
Certificate of Incorporation and Bylaws of the Buyer, as amended to date (the
"Certificate of Incorporation" and the "Bylaws," respectively.)
5.2 AUTHORIZATION AND NON-CONTRAVENTION. The execution, delivery and
performance by the Buyer of this Agreement and all other agreements, documents
and instruments to be executed and delivered by the Buyer as contemplated hereby
and the issuance and delivery of the Lineo Shares have been duly authorized by
all necessary corporate and other action of the Buyer. This Agreement and each
such other agreement, document and instrument constitute valid and binding
obligations of the Buyer, enforceable in accordance with their respective terms.
The execution and delivery by the Buyer of this Agreement and each other
agreement, document and instrument to be executed and delivered by the Buyer
pursuant hereto or as contemplated hereby and the performance by the Buyer of
the transactions contemplated hereby and thereby, including, without limitation,
the issuance and delivery of the Lineo Shares do not and will not (whether after
the giving of notice, lapse of time or both): (a) violate, conflict with or
result in a default under any instrument, judgment, order, writ, decree,
contract, statute, rule, regulation or obligation to which the Buyer is subject
to or by which it or its assets are bound, or any provision of the Certificate
of Incorporation or Bylaws of the Buyer, and a violation of which would have a
material adverse effect on the business, condition, financial or otherwise, or
operations of the Buyer, or (b) result in any such violation, or be in conflict
with or constitute, with or without the passage of time and giving of notice,
either a default under any such provision, instrument, judgment, order, writ,
decree or contract or an event that results in the creation of any lien, charge
or encumbrance upon any assets of the Buyer or the suspension, revocation,
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impairment, forfeiture or nonrenewal of any material permit, license,
authorization or approval applicable to the Buyer, its business or operations or
any of its assets or properties.
5.3 CAPITALIZATION. The authorized capital stock of the Buyer consists
of 100,000,000 shares of Common Stock, par value $.001 per share, of which
20,148,724 shares are issued and outstanding, and 30,000,000 shares of Preferred
Stock, par value $.001 per share, of which (a) 7,500,000 shares are designated
as Series A Preferred Stock, of which (i) 5,000,000 shares are designated as
Series A Class 1 Preferred Stock, all of which are issued and outstanding, and
(ii) 2,500,000 shares are designated as Series A Class 2 Preferred Stock, all of
which are issued and outstanding, (b) 4,850,000 shares are designated as Series
B Preferred Stock, of which 4,833,331 shares are issued and outstanding, and (c)
3,000,000 shares are designated as Series C Preferred Stock. In addition, the
Buyer has authorized and reserved for issuance upon conversion of the Series A
Preferred Stock up to 7,500,000 shares of Common Stock (subject to adjustment
for stock splits, stock dividends and the like), has authorized and reserved for
issuance upon conversion of the Series B Preferred Stock up to 4,850,000 shares
of Common Stock (subject to adjustment for stock splits, stock dividends and the
like), has authorized and reserved for issuance upon conversion of the Series C
Preferred Stock up to 3,000,000 shares of Common Stock (subject to adjustment
for stock splits, stock dividends and the like) and has reserved for issuance
upon exercise of options under the Buyer's stock option plan (the "Plan")
5,000,000 shares of Common Stock (subject to adjustment for stock splits, stock
dividends and the like). Other than as described above, the Buyer has not issued
or agreed to issue and is not obligated to issue any warrants, options or other
rights to purchase or acquire any shares of its capital stock, or any securities
convertible into or exercisable or exchangeable for such shares or any warrants,
options or other rights to acquire any such convertible securities. All of the
outstanding shares of capital stock of the Buyer are duly and validly authorized
and issued, fully paid and nonassessable and, except as set forth herein, not
subject to any preemptive rights to purchase or otherwise acquire shares of
capital stock of the Buyer, are free of restrictions on transfer, other than
restrictions on transfer under applicable state and federal securities laws, and
have been offered, issued, sold and delivered in compliance with applicable
federal and state securities laws. When issued in accordance with Article 2, the
Lineo Shares will be duly and validly authorized and issued, fully paid and
nonassessable and, except as set forth herein, not subject to any preemptive
rights to purchase or otherwise acquire shares of capital stock of the Buyer,
will be free of restrictions on transfer, other than restrictions on transfer
under applicable state and federal securities laws, and will have been offered,
issued, sold and delivered in compliance with applicable federal and state
securities laws.
5.4 SUBSIDIARIES; INVESTMENTS. Except as set forth in Section 5.4 of
the Buyer Disclosure Schedule and other than 1,250,000 shares of Common Stock of
Caldera Systems, Inc., a representative office located in Taiwan and a wholly
owned subsidiary located in the United Kingdom, the Buyer does not currently own
any capital stock or interest or participate in any corporation, joint venture,
partnership, trust, limited liability Buyer or other entity.
5.5 FINANCIAL STATEMENTS. The Buyer has previously furnished to the
Sellers copies of its draft audited financial statements (balance sheet,
statement of operations, statement of cash flows and statement of stockholders
equity, including notes thereto) for the fiscal year at and ended October 31,
1999 (the "Buyer Financial Statements"). Such financial statements were prepared
in conformity with U.S. GAAP applied on a consistent basis; are complete,
correct and consistent in all material respects with the books and records of
the Buyer; and fairly and accurately present the financial position of the Buyer
as of the dates thereof and the
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results of operations and cash flows of the Buyer for the periods shown therein.
The Buyer maintains and will continue to maintain a standard system of
accounting established and administered in accordance with United States GAAP.
5.6 ABSENCE OF UNDISCLOSED LIABILITIES. The Buyer does not have and is
not subject to any material undisclosed liability.
5.7 ABSENCE OF CHANGES. Except as set forth in Section 5.7 of the Buyer
Disclosure Schedule, since October 31, 1999 there has not been (a) any material
adverse change in the financial condition, results of operations, assets,
liabilities, or business of the Buyer, (b) any material asset or property of the
Buyer made subject to a lien of any kind, (c) any waiver of any material right
of the Buyer, or the cancellation of any material debt or claim held by the
Buyer, (d) any payment of dividends on, or other distribution with respect to,
or any direct or indirect redemption or acquisition of, any shares of the
capital stock of the Buyer, or any agreement or commitment therefore, (e) any
mortgage, pledge or hypothecation of any tangible or intangible asset of the
Buyer, except in the ordinary course of business, (f) any sale or assignment of
any tangible asset of the Buyer having a book value in excess of USD $5,000,
except in the ordinary course of business, or of any Intellectual Property
Rights (as hereafter defined) or other intangible assets, (g) any loan by the
Buyer to, or any loan to the Buyer from, any officer, director, employee or
stockholder of the Buyer, or any agreement or commitment therefore (other than
travel and other advances in the ordinary course of business), (h) any damage,
destruction or loss (whether or not covered by insurance) materially and
adversely affecting the assets, property or business of the Buyer, (i) any
repayment of any loan owed by the Buyer (including, without limitation, any loan
owed to any stockholder of the Buyer), (j) any single capital expenditure in
excess of USD $50,000 or any capital expenditures aggregating more than USD
$250,000, (k) any material change in the accounting methods or practices
followed by the Buyer, (l) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Buyer, except in the ordinary
course of business and that is not material to the business, properties,
prospects or financial condition of the Buyer, (m) any material change to a
material contract or agreement by which the Buyer or any of its assets is bound
or subject, (n) any material change in any compensation arrangement or agreement
with any employee, officer, director or stockholder of the Buyer, (o) to the
Buyer's knowledge, any other event or condition of any character that might
materially and adversely affect the business, properties, prospects or financial
condition of the Buyer , (p) any resignation or termination of employment of any
officer or key employee of the Buyer, or (q) any arrangement or commitment by
the Buyer to do any of the things described in this Section 5.7.
5.8 TITLE; CONDITION OF PROPERTY.
(a) Except as set forth in Section 5.8 of the Buyer Disclosure
Schedule, the Buyer has good title to all of its property and assets, real,
personal or mixed, tangible or intangible, free and clear of all liens, security
interests, charges and other encumbrances of any kind.
(b) Without material exception, all assets used in the Buyer
business are in good operating condition and repair and suitable for use in the
operation of such business, and none of such assets that (singly or when
aggregated with other assets) is material to the business of the Buyer is
obsolete.
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5.9 CERTAIN CONTRACTS AND ARRANGEMENTS.
(a) Except as set forth in Section 5.9 of the Buyer Disclosure
Schedule (with true and correct copies delivered to the Seller), the Buyer is
not a party or subject to or bound by:
(i) any plan or contract providing for collective bargaining
or the like, or any contract or agreement with any labor union;
(ii) any contract, lease or agreement creating any obligation
of the Buyer (contingent or otherwise) to pay to any third party USD $100,000 or
more with respect to any single such contract or agreement;
(iii) any contract or agreement for the sale, license, lease
or disposition of products or services in excess of USD $100,000;
(iv) any contract containing covenants directly or explicitly
limiting the freedom of the Buyer to compete in any line of business or with any
person or entity;
(v) any license agreement (as licensor or licensee);
(vi) any contract or agreement for the purchase of any
leasehold improvements, equipment or fixed assets for a price in excess of USD
$100,000;
(vii) any indenture, mortgage, promissory note, loan
agreement, guaranty or other agreement or commitment for borrowing in excess of
USD $100,000 or any pledge or security arrangement;
(viii) any material joint venture, partnership, or
manufacturing agreement;
(ix) any endorsement or any other advertising, promotional or
marketing agreement;
(x) any employment contracts, or agreements with officers,
directors, employees or stockholders of the Buyer or persons or organizations
related to or affiliated with any such persons;
(xi) any pension, profit sharing, retirement (other than the
Buyer's 401(k) plan), stock option, phantom stock or other equity incentive
plans;
(xii) any arrangement relating to any royalty payments to
employees, customers or independent contractors based on the sales volume of the
Buyer;
(xiii) any acquisition, merger or similar agreement; or
(xiv) any contract with a governmental body under which the
Buyer may have an obligation for renegotiation.
(b) Except as set forth in Section 5.9 of the Buyer Disclosure
Schedule, (i) each of the Buyer's contracts and commitments is in full force and
effect and is valid, binding and enforceable in accordance with its terms as to
the Buyer and, to the knowledge of the Buyer, as to each other party thereto;
(ii) there exists no material breach or material default
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(or event that with notice or lapse of time would constitute a material breach
or material default) on the part of the Buyer or, to the knowledge of the Buyer,
on the part of any other party under any of the Buyer's contracts or
commitments, except to the extent that any such breach or default would not have
a Material Adverse Effect on the Buyer; (iii) the Buyer has not received a
written notice of termination or default under any of the Buyer's contracts or
commitments; and (iv) as of the date of this Agreement, no party to an agreement
under which the Buyer acquired a substantial portion of its assets has asserted
any claim for indemnification under such agreement.
(c) The Buyer has not engaged in the past three (3) months in
any discussion (i) with any representative of any corporation or corporations
regarding the merger of the Buyer with or into any such corporation or
corporation, (ii) with any representative of any corporation, partnership,
association or other business entity or any individual regarding the sale,
conveyance or disposition of all or substantially all of the assets of the Buyer
or a transaction or series of related transactions in which more than fifty
percent (50%) of the voting power of the Buyer would be disposed of, or (iii)
regarding any other form of liquidation, dissolution or winding up of the Buyer.
5.10 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS. Except as set
forth in Section 5.10 of the Buyer Disclosure Schedule:
(a) The Buyer has the right to use, sell, and license the
Intellectual Property material to the conduct of its business as presently
conducted, including without limitation all rights to the Buyer name "Lineo" and
to the trademarks and the product name "Embedix" (the "Buyer Rights"), free and
clear of the rights of all others.
(b) The business of the Buyer as presently conducted, the
products as marketed or sold and the provision of services by the Buyer do not
violate and will not violate any agreements that the Buyer has with any third
party or infringe any patent, trademark, service mark, copyright or trade secret
or any other Intellectual Property of any third party.
(c) No claim is pending or threatened against the Buyer nor
has the Buyer received any notice or claim from any person asserting that any of
the Buyer's present or contemplated activities infringe or may infringe any
Intellectual Property of such person, and the Buyer is not aware of any
infringement by any other person of any of the Buyer Rights.
(d) Each current and former employee of the Buyer, and each of
the Buyer's consultants and independent contractors involved in development of
any of the Buyer Rights, has executed an agreement regarding confidentiality,
proprietary information and assignment of inventions and copyrights to the
Buyer, and none of such employees, consultants or independent contractors is in
violation of any agreement or in breach of any agreement or arrangement with
former or present employers relating to proprietary information or assignment of
inventions. The Buyer has taken all reasonable steps to protect all data,
information, ideas, concepts, know-how and materials that the Buyer treats as
trade secrets, and all other confidential information and Intellectual Property
of the Buyer, which are not part of the public domain or knowledge, nor, to the
best knowledge of the Buyer, have they been used, divulged or appropriated for
the benefit of any person other than the Buyer or otherwise to the detriment of
the Buyer.
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(e) No royalties or other amounts are payable by the Buyer to
persons by reason of the ownership or use of the Intellectual Property of the
Buyer.
(f) No third party has claimed or, to the best of the Buyer's
knowledge, has reason to claim that any person employed by or affiliated with
the Buyer has (a) violated or may be violating any of the terms or conditions of
his or her employment, non-competition, non-disclosure, non-solicitation or
inventions agreement with such third party, (b) disclosed or may be disclosing
or utilized or may be utilizing any Intellectual Property, trade secret or
proprietary information or documentation of such third party, or (c) interfered
or may be interfering in the employment relationship between such third party
and any of its present or former employees.
5.11 LITIGATION. There is no litigation or governmental proceeding or
investigation pending or threatened against the Buyer or affecting any of its
properties or assets or against any officer, director or key employee of the
Buyer in his or her capacity as an officer, director or employee of the Buyer,
which litigation, proceeding or investigation is reasonably likely to have a
Material Adverse Effect on the Buyer, or which may call into question the
validity or hinder the enforceability of this Agreement or any other agreements
or transactions contemplated hereby; nor has there occurred any event nor does
there exist any condition on the basis of which any such litigation, proceeding
or investigation might be properly instituted or commenced. Neither the Buyer
nor any of its subsidiaries is a party or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Buyer or any of its subsidiaries currently pending or which the Buyer or any of
its subsidiaries intends to initiate.
5.12 TAX MATTERS. The Buyer has filed all federal, state, local and
foreign income, excise and franchise tax returns, real estate and personal
property tax returns, sales and use tax returns and other tax returns required
to be filed by it where the failure to file such returns would have a Material
Adverse Effect on the Buyer, and has paid all taxes owing by it, except taxes
which have not yet accrued or otherwise become due, for which adequate provision
has been made in the pertinent financial statements referred to in Section 5.5
above or which will not have a Material Adverse Effect on the Buyer. The filed
tax returns and reports are true and correct in all material respects. All taxes
and other assessments and levies which the Buyer is required to withhold or
collect have been withheld and collected and have been paid over to the proper
governmental authorities except where the failure to withhold or collect and pay
over would not have a Material Adverse Effect on the Buyer. With regard to the
federal income tax returns of the Buyer, the Buyer has never received notice of
any audit or of any proposed deficiencies from the Internal Revenue Service.
There are in effect no waivers of applicable statutes of limitations with
respect to any taxing owed by the Buyer for any year. Neither the Internal
Revenue Service nor any other taxing authority is now asserting or, to the
knowledge of the Buyer, threatening to assert against the Buyer any deficiency
or claim for additional taxes or interest thereon or penalties in connection
therewith.
5.13 EMPLOYEE BENEFIT PLANS. The Buyer does not maintain or contribute
to any to any employee benefit plan, stock option, bonus or incentive plan,
pension plan, severance pay policy or agreement, deferred compensation agreement
or any similar plan or agreement (an "Employee Benefit Plan") other than the
Employee Benefit Plans identified and described in Section 5.13 of the Buyer
Disclosure Schedule. The terms and operation of each Employee
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Benefit Plan comply in all material respects with all applicable laws and
regulations relating to such Employee Benefit Plan. There are no unfunded
obligations of the Buyer under any retirement, pension, profit-sharing, deferred
compensation plan or similar program. The Buyer is not required to make any
payments or contributions to any Employee Benefit Plan pursuant to any
collective bargaining agreement, and all Employee Benefit Plans are terminable
at the discretion of the Buyer without material liability to the Buyer upon or
following such termination. The Buyer has never maintained or contributed to any
Employee Benefit Plan providing or promising any health or other welfare
benefits (within the meaning of Section 3(3) of ERISA) to terminated employees,
except for benefits mandated by applicable law, including, but not limited to,
Section 4980B of the Internal Revenue Code of 1986, as amended, and Part 6 of
Subtitle B of Title I of ERISA.
5.14 LABOR LAWS. The Buyer employs approximately 105 employees and
generally enjoys good employer-employee relationships. The Buyer is not
delinquent in payments to any of its employees for any wages, salaries,
commissions, bonuses or other direct compensation for any services performed for
it as of the date hereof or amounts required to be reimbursed to such employees.
The Buyer is in compliance in all material respects with all applicable laws and
regulations respecting labor, employment, fair employment practices, terms and
conditions of employment, and wages and hours. There are no charges of
employment discrimination or unfair labor practices or strikes, slowdowns,
stoppages of work or any other concerted interference with normal operations
existing, pending or, to the knowledge of the Buyer, threatened against or
involving the Buyer.
5.15 EMPLOYEES. Section 5.15 of the Buyer Disclosure Schedule contains
a list of all managers, employees and consultants of the Buyer who,
individually, have received compensation from the Buyer for the fiscal year of
the Buyer ended October 31, 1999, in excess of $100,000. In each case, Section
5.15 of the Buyer Disclosure Schedule includes the current job title, years of
service with the Buyer and aggregate annual compensation and benefits of each
such individual. To the knowledge of the Buyer, no key employee of the Buyer has
any plan or intention to terminate his or her employment with the Buyer. The
Buyer has complied in all material respects with the immigration laws of the
United States with respect to the hiring, employment and engagement of all of
its employees and consultants who are not United States citizens, and, to the
knowledge of the Buyer, the immigration or residency status of each of such
employees and consultants is sufficient to allow such employees and consultants
to remain lawfully employed or engaged by the Buyer. The employment of each
officer and employee of the Buyer is terminable at the will of the Buyer. The
Buyer is not a party to or bound by any currently effective employment contract.
5.16 HAZARDOUS WASTE, ETC. No hazardous wastes, substances or materials
or oil or petroleum products have been generated, transported, used, disposed,
stored or treated by the Buyer, and no hazardous wastes, substances or materials
or oil or petroleum products have been released, discharged, disposed,
transported, placed or otherwise caused to enter the soil or water in, under or
upon any real property owned, leased or operated by the Buyer.
5.17 BUSINESS; COMPLIANCE WITH LAWS. The Buyer has all necessary
franchises, permits, licenses and other rights and privileges necessary to
permit it to own its property and to conduct its business as it is presently or
contemplated to be conducted and is not in default in any material respect under
any of such franchises, permits, licenses and other similar rights and
privileges. The Buyer is currently and has heretofore been in compliance in all
material respects with all federal, state, local and foreign laws and
regulations.
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5.18 INVESTMENT BANKING; BROKERAGE. There are no claims for investment
banking fees, brokerage commissions, finder's fees or similar compensation
(exclusive of professional fees to lawyers and accountants) in connection with
the transaction contemplated by this Agreement payable by the Buyer or based on
any arrangement or agreement made by or on behalf of the Buyer or any of the
stockholders.
5.19 INSURANCE. The Buyer has fire, casualty, product liability,
workers' compensation and business interruption and other insurance policies,
with extended coverage, sufficient in amount to allow it to replace any of its
material properties which might be damaged or destroyed or sufficient to cover
liabilities to which the Buyer may reasonably become subject, and such types and
amounts of other insurance with respect to its business and properties, on both
a per occurrence and an aggregate basis, as are customarily carried by persons
engaged in the same or similar business as the Buyer. There is no default or
event which could give rise to a default under any such policy.
5.20 TRANSACTIONS WITH AFFILIATES. There are no loans, leases,
contracts or other transactions (directly or indirectly) between the Buyer and
any Affiliate of the Buyer or any Family Member or Associate of any such
Affiliate, and there have been no such transactions within the past twelve (12)
months except as set forth in Section 5.20 of the Buyer Disclosure Schedule. To
the best of the Buyer's knowledge, none of such persons has any direct or
indirect ownership interest in any firm or corporation with which the Buyer is
affiliated or with which the Buyer has a business relationship, or any firm or
corporation that competes with the Buyer, except that employees, officers or
directors of the Buyer and members of their families may own stock in publicly
traded companies that may compete with the Buyer.
5.21 SUPPLIERS. Section 5.21 of the Buyer Disclosure Schedule sets
forth each supplier of the Buyer who supplied more than five percent (5%) of the
Buyer's supplies or materials for the fiscal year ended October 31, 1999 and
each supplier who the Buyer believes may supply for more than five percent (5%)
of the Buyer's supplies or materials for the fiscal year ended October 31, 2000
(each a "Supplier" and collectively the "Suppliers"). The relationships of the
Buyer with its Suppliers are good commercial working relationships. No Supplier
of the Buyer has canceled or otherwise terminated its relationship with the
Buyer, or has during the last 12 months decreased materially its services,
supplies or materials to the Buyer. No Supplier has, to the knowledge of the
Buyer, any plan or intention to terminate, cancel or otherwise materially and
adversely modify its relationship with the Buyer or to decrease materially or
limit its services, supplies or materials to the Buyer.
5.22 CERTAIN EVENTS.
(a) During the past ten (10) years, neither the Buyer nor any
of the officers or directors of the Buyer has had a petition under the
Bankruptcy Reform Act of 1978, as amended, or any state insolvency law, filed by
or against any of them which has not as of the date of this Agreement been
dismissed.
(b) During the past ten (10) years, neither the Buyer nor the
officers or directors of the Buyer has been convicted in a criminal proceeding
or is a named subject of a criminal proceeding which is presently pending
(excluding traffic violations and other minor offenses).
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(c) During the past ten (10) years, neither the Buyer nor the
officers or directors of the Buyer has been, or is, the subject of any order,
judgment or decree, whether or not subsequently reversed, suspended or vacated,
of any court or any administrative agency, requiring the payment of money
damages in excess of USD $100,000 or permanently or temporarily enjoining any of
them from, or otherwise limiting any of their abilities to engage in, any type
of business practice.
5.23 REGISTRATION RIGHTS. Except as disclosed in Section 5.23 of the
Buyer Disclosure Schedule, the Buyer has not granted or agreed to grant any
registration rights, including piggyback rights, to any person or entity.
5.24 DISCLOSURE. The representations and warranties made or contained
in this Agreement, the exhibits hereto and the certificates and statements
executed or delivered in connection herewith, and the information concerning the
business of the Buyer delivered to the Sellers in connection with or pursuant to
this Agreement, when taken together, do not and shall not contain any untrue
statement of a material fact and do not and shall not omit to state a material
fact required to be stated therein or necessary in order to make such
representations, warranties or other material not misleading in light of the
circumstances in which they were made or delivered. There have been no events or
transactions or information which has come to the attention of the management of
the Buyer having a direct impact on the Buyer or its assets, liabilities,
financial condition, business, results of operations or prospects which, in the
reasonable judgment of such management, could be expected to have a Material
Adverse Effect on the Buyer.
5.25 CORPORATE DOCUMENTS. The Certificate of Incorporation and Bylaws
of the Buyer have been made available to the Sellers. The minute books of the
Buyer containing minutes of all meetings of directors and stockholders and all
actions by written consent without a meeting by the directors and stockholders
since the date of incorporation have been made available to the Sellers and
reflect accurately in all material respects all actions by the directors (and
any committee of directors) and stockholders with respect to all transactions
referred to in such minutes. The stock transfer ledgers and other similar
records of the Buyer as made available to the Sellers prior to the execution of
this Agreement accurately reflect all record transfers prior to the execution of
this Agreement in the capital stock of the Buyer.
5.26 OFFERING. Subject in part to the truth and accuracy of the Sellers
representations and warranties set forth in this Agreement, the offer, sale and
issuance of the Securities as contemplated by this Agreement are exempt from the
registration requirements of the Securities Act and any applicable state
securities laws, and neither the Buyer nor any authorized agent acting on its
behalf will take any action hereafter that would cause the loss of such
exemption.
5.27 INVESTMENT COMPANY. The Buyer is not and shall not become an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended (the "1940 Act").
In the event the Buyer breaches the foregoing, the Buyer shall forthwith notify
the Sellers and shall take immediate corrective action to remedy such breach.
5.28 SUPPLEMENTAL REMUNERATION. The Buyer has not and shall not,
directly or indirectly, pay or cause to be paid any remuneration, whether by way
of supplemental or additional interest, fee or otherwise to any investor or
other stockholder of the Buyer as
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consideration for or as an inducement to entering into by any investor or other
stockholder of the Buyer of any waiver or amendment of any of the terms and
provisions of the agreements or the Certificate of Incorporation which affects
any such party's rights as an investor or stockholder, unless such remuneration
is concurrently paid, on the same terms, ratably to all investors or
stockholders whether or not such investors or stockholders grant such waiver or
agree to such amendment.
5.29 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Buyer is required in connection with the consummation of the transactions
contemplated by this Agreement other than as may be required to secure an
exemption from qualification of the offer and sale of the Lineo Shares under the
Securities Act and applicable state securities laws.
ARTICLE 6.
COVENANTS OF SELLERS AND BUYER
6.1 INVESTIGATION OF BUSINESS; ACCESS TO PROPERTIES AND RECORDS. Prior
to the Closing or termination of this Agreement, the Sellers shall cause the
Company to give to the Buyer and its legal counsel, accountants, lenders and
other representatives reasonable access during normal business hours to all of
the Company's and the Subsidiaries' properties (including books, contracts,
commitments and records) for inspection (including financial, legal and
environmental), and shall permit them to consult with each Seller and with
management employees of the Company and the Subsidiaries to allow the Buyer full
opportunity to make such investigations as are necessary to review the affairs
of the Company and the Subsidiaries. If, prior to Closing, the Buyer discovers
any breach by any Seller or the Company of any representation or warranty
contained in this Agreement or any circumstances or condition that would
constitute such a breach, the Buyer will notify the Sellers promptly of such
facts known to the Buyer and the nature of the breach.
6.2 REGULATORY AND OTHER AUTHORIZATIONS.
(a) Subject to the limitations set forth in this Section 6.2,
each of the Sellers and the Buyer shall take all reasonable actions to obtain
all Permits of all Authorities that may be or become necessary for the execution
and delivery of this Agreement and the performance of their respective
obligations pursuant to this Agreement (which actions shall include, without
limitation, furnishing all information and obtaining all approvals required) and
will cooperate fully with one another in promptly seeking to obtain all such
Permits. Each party to this Agreement agrees to provide information requested by
any Authority or the other party in connection with obtaining such Permits, and
agrees not to take any action that will have the effect of delaying, impairing
or impeding the receipt of any required Permits.
(b) Notwithstanding anything in Section 6.2(a) to the
contrary, the Sellers shall cause the Company to coordinate on behalf of all
parties the obtaining of all such Permits. The Buyer and the Sellers in
association with the Company, to the extent permitted by applicable law and
subject to the Company's best corporate interest, shall by mutual agreement
determine the substance of all communications and filings made by the parties
with any Authority regarding the transactions contemplated by this Agreement,
including without limitation:
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(i) the extent to which it may be necessary to resolve or
settle any concerns on the part of any Authority regarding the legality under
any law of the transactions contemplated by this Agreement by entering into
negotiations, providing information, making proposals, entering into and
performing agreements or submitting to judicial or administrative orders,
agreeing to any restrictions on the conduct of business after Closing by the
Buyer or the Company or any Subsidiary, or selling or otherwise disposing of, or
holding separate (through the establishment of a trust or otherwise), particular
assets or categories of assets or businesses of the Buyer, including, after the
Closing, the Company or any Subsidiary;
(ii) contesting the entry in a judicial or administrative
proceeding brought under any local law by any Authority or any other Person of
any permanent or preliminary injunction or other order that would make
consummation of the transactions contemplated by this Agreement unlawful or
would prevent or delay the transactions, including, without limitation, taking
the steps contemplated by Section 6.2(b)(i);
(iii)if such an injunction or order has been issued in such a
proceeding, taking any and all steps, including, without limitation, appeal
thereof, the posting of a bond or the steps contemplated by Section 6.2(b)(i),
necessary to vacate, modify or suspend such injunction or order so as to permit
the consummation of the transaction on the schedule contemplated by this
Agreement;
(iv) responding to and complying with any request or subpoena
for additional information by any Authority; and
(v) determining any other appropriate response or initiative
to avoid or eliminate impediments under any law that may be asserted by any
Authority or any other Person to the consummation of the transactions
contemplated by this Agreement.
6.3 REASONABLE EFFORTS; CONSENTS AND NOTIFICATIONS. Subject to the
terms and conditions provided in this Agreement, each Seller and the Buyer each
will use all reasonable efforts to take, or cause to be taken, all actions and
to do, or cause to be done, all things necessary, proper or advisable to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement and to cooperate with one another in connection
with the foregoing, including using all reasonable efforts:
(i) to obtain all necessary waivers, consents, releases and
approvals from other parties to loan agreements, Leases, guarantees and other
Contracts;
(ii) to lift or rescind any injunction or restraining order or
other order adversely affecting the ability of the parties to this Agreement to
consummate the transactions contemplated by this Agreement; and to fulfill all
conditions to this Agreement.
6.4 FURTHER ASSURANCES. The Sellers and the Buyer agree that, from time
to time, at or after the Closing Date, each of them will execute and deliver
such further instruments of conveyance and transfer and take such other action
as may be reasonably necessary to carry out the purposes of this Agreement.
6.5 CONDUCT OF BUSINESS OF THE COMPANY. From the date of this Agreement
through the Closing, except as otherwise provided by this Agreement or consented
to or approved by the Buyer in writing:
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(i) the Company shall operate its businesses in the ordinary
and usual course in all material respects in accordance with past practices;
(ii) the Company (and the Sellers acting with respect to the
shares of the Company) shall not issue, purchase or agree to purchase, sell or
agree to issue or sell:
(A) any of its capital shares; or
(B) any securities convertible into or evidencing the
right to purchase, or options
with respect to, or rights to subscribe for, any of its capital shares;
(iii) the Company shall not (and the Sellers acting with
respect to the capital shares of the Company shall not) amend its Articles of
Incorporation or Bylaws ( or other governance documents) or declare or pay any
dividend (whether in cash or property) or declare or effect any stock split,
reclassification or other change in capital structure;
(iv) the Company shall maintain its respective books and
records in the usual, regular and ordinary manner consistent with past practice;
(v) the Company shall comply in all material respects with all
applicable laws; and
(vi) the Company shall not:
(A) enter into or consummate any joint venture,
partnership or other similar arrangement or form any other new arrangement for
the conduct of its business or acquire or enter into any agreement or letter of
intent to acquire, by merger, consolidation, or purchase of stock or assets, any
business, entity or Person;
(B) purchase any material assets or securities of any
Person, except for asset purchases in the ordinary course of its business for
individual amounts not in excess of Twenty Five Thousand Dollars (USD $25,000);
(C) enter into any transactions, commitments or
obligations outside the ordinary course of business or incur any indebtedness,
including notes payable, current maturities of long-term debt or capital lease
obligations, except for trade payables and other normal items accrued as current
liabilities;
(D) take or agree to take any action prohibited by this
Section 6.5 or that would be reasonably likely to cause any representation or
warranty made by any Seller in this Agreement to be untrue or inaccurate in
any material respect at the Closing Date;
(E) take any action to amend or terminate any Employee
Benefit Plan or to adopt any other plan, program, arrangement or practice
providing benefits for or compensation to or on behalf of its employees or
former employees before the Closing Date, except as required by applicable law
or by the applicable collective bargaining agreement ;
(F) increase the base compensation or bonus, incentive,
severance or other benefit plan of any employee, consultant or agent, except for
increases in base annual salaries in the ordinary course of business; or
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(G) grant any Encumbrance on any asset, except for
Permitted Encumbrances.
Notwithstanding the foregoing, the parties acknowledge that the Majority
Shareholders have resigned from the Company's Board of Directors with effect as
of May 3, 2000, and that S. You Huang has been appointed by the Board of
Directors as President-Directeur-General. Buyer agrees that S. You Huang shall
execute the Employment Agreements in the form attached hereto as Exhibit D on
behalf of the Company at the Closing, and that Buyer shall thereafter convene a
meeting of the shareholders of the Company in order to appoint such new
directors as Buyer shall see fit.
6.6 PRESERVATION OF BUSINESS.
(a) Subject to the terms and conditions of this Agreement and
except as otherwise provided by this Agreement, the Company shall use reasonable
efforts to:
(i) preserve the business of the Company and keep generally
available to the Company the services of the employees, officers, consultants,
contractors and agents of the Company;
(ii) preserve generally the goodwill of customers, suppliers,
creditors and others having business relations with the Company; and
(iii) continue performance in the ordinary course of their
respective obligations under all Contracts to which the Company is a party or
which binds it or its assets.
(b) In connection with the operation of the Business between
the date of this Agreement and the Closing, to the extent permitted by
applicable law and subject to the Company's best corporate interest, the Sellers
shall cause the Company to confer in good faith on a regular basis with one or
more designated representatives of the Buyer (which representatives shall have
been designated by the Buyer to the Sellers and to the Company in writing) with
respect to material matters affecting or impacting the operations of the Company
or any Subsidiaries and shall consult in general with respect to the ongoing
operations of the Company and the Subsidiaries. The Sellers shall cooperate with
the Buyer in its efforts to communicate with the employees, consultants,
professionals, agents and others having business relationships with the Company
regarding the transition of the Company's business to ownership by the Buyer.
6.7 ANNOUNCEMENTS. Neither the Sellers, the Company, or the Buyer, nor
any agent or any Affiliate of any of the foregoing, shall make any public
statements, including, without limitation, any press releases or other public
disclosure, with respect to this Agreement and the transactions contemplated by
this Agreement without the prior consent of the other party and the Company
(which consent may not be unreasonably withheld or delayed), except as may be
required by law or advisable under the rules of any securities exchange to which
the Buyer is subject.
6.8 NO SOLICITATION. From the date of this Agreement to the earlier of
(i) the Closing Date or (ii) the termination of this Agreement in accordance
with its terms, the Sellers agree that (A) they will not, and (B) they will not
authorize or permit any officer, director or
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employee of the Company, or any investment banker, attorney, financial advisor,
accountant or other Person retained by any Seller or the Company, directly or
indirectly (including by way of furnishing any information) to: (1) solicit,
initiate, assist, encourage or accept any Takeover Proposal or any inquiries
relating to a Takeover Proposal or to make any proposals which could reasonably
be expected to lead to any Takeover Proposal relating to the Company Subsidiary;
(2) engage in any negotiations with respect to, or otherwise attempt to
consummate, a Takeover Proposal; (3) provide any public or nonpublic information
concerning the Company to any Person in connection with any Takeover Proposal or
to any Person whom any Seller or the Company knows or has reason to believe is
in the process of planning or considering a Takeover Proposal; or (4) reach any
agreement or understanding for or with respect to any Takeover Proposal.
6.9 RIGHT TO UPDATE AND CURE.
(a) From time to time prior to the Closing, the Buyer and the
Sellers shall update or amend their respective disclosure of any matter set
forth or required to be set forth in their respective Disclosure Schedules to
reflect any changes in (or any inaccuracies in) such Disclosure Schedule. For
purposes of Section 7.1 or Section 8.1, any material change in a disclosure,
representation or warranty made by the Majority Shareholders or any Seller
following the execution and delivery of this Agreement and prior to the Closing
shall entitle the Buyer to terminate this Agreement, and any material change in
a disclosure, representation or warranty made by the Buyer following the
execution and delivery of this Agreement and prior to the Closing shall entitle
the Sellers to terminate this Agreement, in each case by written notice to the
other given within 15 days of its receipt of written notice of such change and
in any event prior to the Closing. Notwithstanding anything in this Agreement to
the contrary, any party that receives notice of a material change in the
disclosures may defer the Closing Date for up to five Business Days after
receipt of such change, provided that the Closing Date shall not under any
circumstances be deferred beyond the deadline specified in Section 10.1 hereof.
(b) Prior to the Closing, each of the parties to this
Agreement agrees to notify the other parties promptly in writing of, and
contemporaneously will provide the other parties with true and complete copies
of, any and all information or documents relating to, and will use all
commercially reasonable efforts to cure before Closing, any event, transaction
or circumstance occurring after the date of this Agreement that causes or will
cause any covenant or agreement under this Agreement to be breached or that
renders or will render untrue any representation or warranty contained in this
Agreement as if the same were made on or as of the date of such event,
transaction or circumstance. Each of the parties to this Agreement also agrees
to notify the other parties promptly in writing of, and will use all
commercially reasonable efforts to cure, before the Closing, any violation or
breach of any representation, warranty, covenant or agreement made in this
Agreement, whether occurring or arising before, on or after the date of this
Agreement.
6.10 MARKET STAND-OFF AGREEMENT. In connection with a public offering
by the Buyer, the Sellers if requested in good faith by the Buyer and the
managing underwriter of the public offering, shall agree not to sell or
otherwise transfer or dispose of any securities of the Buyer held by them
(except for any securities sold pursuant to such registration statement) for a
period following the effective date of the applicable registration statement
that in no event shall exceed 180 days or, if shorter, the amount of time
applicable to Lineo's officers and directors generally for such purpose. In
order to enforce the foregoing, the
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Buyer may impose stop-transfer instructions with respect to the Lineo Shares
held by such Seller (and the shares of securities of every other person subject
to the foregoing restriction) until the end of such period.
6.11 SECURITIES LAW COMPLIANCE.
(a) Sellers agree that all offers and sales of the Lineo
Shares prior to one year after the Closing shall be made only in accordance with
the provisions of Rule 903 or Rule 904 under the Securities Act, pursuant to
registration of the Lineo Shares under the Securities Act; or pursuant to an
available exemption from the registration requirements of the Securities Act;
and not to engage in hedging transactions with regard to the Lineo Shares prior
to one year after the Closing unless in compliance with the Securities Act.
(b) Sellers acknowledge that the Lineo Shares have not been
registered under the Securities Act and may not be offered or sold in the United
States or to U.S. Persons (other than distributors) unless the Lineo Shares are
registered under the Securities Act, or an Exemption from the registration
provisions of the Securities Act is available, and that the Lineo Shares may not
be sold outside the United States except in compliance with all other applicable
securities laws. Sellers further acknowledge that hedging transactions involving
the Lineo Shares may not be conducted unless in compliance with the Securities
Act.
(c) Each Seller represents to the Company that such Seller has
such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of the investment contemplated by
this Agreement and making an informed investment decision with respect thereto.
Each Seller who is a U.S Person represents that such Seller is an "accredited
investor" as such term is defined in Rule 501 under the Securities Act. Each
Seller represents and understands that such Seller is responsible for its own
due diligence investigation and satisfying its own due diligence requirements
and shall not be entitled to rely on the due diligence investigation of any
other person or entity. Each Seller represents to the Buyer that it is acquiring
the Lineo Shares for such Seller's own account, for investment only and not with
a view to, or any present intention of, effecting a distribution of such
securities or any part thereof except pursuant to a registration or an available
exemption under applicable law. Each Seller acknowledges that such Seller's
Lineo Shares have not been registered under the Securities Act or the securities
laws of any state or other jurisdiction and cannot be disposed of unless they
are subsequently registered under the Securities Act and any applicable state
laws or exemption from such registration is available.
6.12 TAX FILING CODE SECTION 338(g) ELECTION. The Buyer has indicated
to the Sellers that it will prepare and File an election under Section 338(g) of
the Code to treat this transaction as an asset purchase. In this respect, upon
demand of the Buyer, the Sellers shall reasonably cooperate with the Buyer
provided that the Sellers shall incur no costs or other liability now or in the
future in this respect.
6.13 COVENANT NOT TO COMPETE/NONSOLICITATION.
(a) Covenant. Each of the Majority Shareholders agrees not to
directly or indirectly compete (as defined in sub-section 6.13(b) below) with
the Company in the noncompetition area (as defined in sub-section 6.13( c)
below) for a period of two (2) years from the Closing Date (the "Non-Compete
Period").
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(b) Direct and Indirect Competition. Each of the Majority Shareholders
agrees that the phrase "directly or indirectly compete" shall include:
(i) owning, managing, operating, or controlling, or
participating in the ownership, management, operation, or control of, or being
connected with or having any interest in, as a stockholder, director, officer,
employee, agent, consultant, assistant, advisor, sole proprietor, partner, or
otherwise, any business (other than the Company's) that is involved in the
development, marketing, and/or sale of Linux-based embedded software components
and applications (including, but not limited to, traditional embedded devices,
handheld devices, personal digital assistants, thin clients, and thin servers),
provided, however, that this prohibition shall not apply to the ownership of
less than five percent (5%) of the voting stock in companies whose stock is
traded on a national securities exchange or in the over-the-counter market;
(ii) soliciting, causing to be solicited, contracting with, or
otherwise engaging in business with any person or business entity, whom or which
at the time is a current client of the Company, and whom or which is known to
such Majority Shareholder and with whom or which such Majority Shareholder has
dealt, directly or indirectly, during the final 12 months of the Non-Compete
Period, for the purpose of the development, marketing, and/or sale of
Linux-based embedded software components or applications;
(iii) soliciting, persuading, inducing, or otherwise causing
employees of the Company to leave the Company's employ; or
(iv) soliciting or engaging in any employment or other
activity that is the same or similar to any business in which the Company is
now, or has plans to become, engaged.
(c) Noncompetition Area. Each of the Majority Shareholders agrees that
the phrase "noncompetition area" means any national market in which the Buyer or
its Subsidiaries, within twelve (12) months prior to the commencement of any
direct or indirect competitive action(s) by Majority Shareholder, (i) has
developed, marketed, or sold Linux-based embedded software components or
applications, or (ii) has made material commitments to do so.
ARTICLE 7.
CONDITIONS TO BUYER'S OBLIGATION TO CLOSE
The Buyer's obligation to consummate the Share Purchase shall
be subject to the satisfaction on or prior to the Closing Date of all of the
following conditions (any of which may be waived in writing by the Buyer in its
sole discretion):
7.1 REPRESENTATIONS; WARRANTIES AND COVENANTS OF THE MAJORITY
SHAREHOLDERS AND THE SELLERS. Subject to the second sentence of this Section
7.1, the representations and warranties of the Majority Shareholders and the
Sellers in this Agreement shall be true and correct on and as of the Closing
Date with the same effect as though such representations and warranties had been
made on and as of such date, except for representations and warranties that
speak as of a specific date or time other than the Closing Date (which need only
be true
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and correct as of such date or time). The Closing condition contained in this
Section 7.1, as it relates to representations and warranties, shall be satisfied
unless the inaccuracies in and breaches of such representations and warranties,
without reference to materiality qualifiers, have or are likely to have an
adverse effect on the Company, taken as a whole, or on the Buyer's ownership of
the Company Shares, of Fifty Thousand Dollars (USD$50,000) or more. The
covenants and agreements of the Sellers to be performed on or before the Closing
Date in accordance with this Agreement shall have been performed in all material
respects.
7.2 FILINGS; CONSENTS; WAITING PERIODS. All registrations, filings,
applications, notices, consent, approvals, waivers, authorizations,
qualifications and orders to be filed, made or obtained by the Sellers in order
to consummate the transactions contemplated by this Agreement (including,
without limitation, any filings or actions required) shall have been filed, made
or obtained.
7.3 NO INJUNCTION. There shall be no injunction, restraining order or
decree of any nature of any Authority or other Person that is in effect and that
(i) restrains, prohibits or makes illegal the consummation of the Share
Purchase, or (ii) imposes conditions on the consummation of the Share Purchase
not otherwise provided for in this Agreement.
7.4 CLOSING DELIVERIES. The Sellers or the Majority Shareholders, as
appropriate, shall have delivered or caused to be delivered to the Buyer the
following:
(i) True and correct copies of the Bylaws of the Company as in
effect on the day prior to Closing;
(ii) A certificate of the Majority Shareholders and each of
the Sellers, if requested by the Buyer, attesting to the matters set forth in
Section 7.1;
(iii)The documents to be delivered by the Sellers as described
in Section 2.2(c);
(iv) The Company Financial Statements;
(v) Evidence reasonably satisfactory to the Buyer of the
existence of the Cash Balance as at Closing; and
(vi) Copies of the Liquidity Agreement, the Stock Option
Undertaking, and the Employment Agreements in the form attached as Exhibit A, B
and C, respectively, duly signed by the Majority Shareholders.
7.5 ABSENCE OF LITIGATION. No claim, action, suit, arbitration,
investigation, inquiry or other proceeding by any Authority or other Person with
respect to this Agreement or the transactions contemplated hereby shall be
threatened or pending on the Closing Date and, up to the Closing, no party to
this Agreement shall have been advised by any Authority (which advisory has not
been officially withdrawn by such Authority on or prior to the Closing Date)
that such Authority is reviewing this Agreement or the transactions contemplated
hereby to determine whether to file or commence any litigation with respect to
any aspect of this Agreement or the transactions contemplated hereby.
7.6 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS. There shall
not have been made or threatened by any Person any claim asserting that such
Person (a) is the holder
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or the beneficial owner of, or has the right to acquire or to obtain beneficial
ownership of, any stock of, or any other voting, equity, or ownership interest
in the Company, or (b) is entitled to all or any portion of the Purchase Price
payable for the Company Shares.
7.7 NO MATERIAL ADVERSE EFFECT. Before the Closing Date, there shall
have been no material change in the assets or liabilities, the business or
condition (financial or otherwise), the results of operations or prospects of
the Company or any Subsidiary, whether as a result of any legislative or
regulatory change, revocation of any license or right to do business, fire,
explosion, accident, casualty, labor trouble, flood, drought, riot, storm,
condemnation or act of God or other public force or otherwise, that results in a
Material Adverse Effect.
ARTICLE 8.
CONDITIONS TO SELLERS' OBLIGATIONS TO CLOSE
Each Seller's obligation to consummate the Share Purchase is
subject to the satisfaction on or prior to the Closing Date of all of the
following conditions (any of which may be waived in writing by such Seller, in
its sole discretion):
8.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BUYER. The
representations and warranties of the Buyer in this Agreement shall be true and
correct on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date except for
representations and warranties that speak as of a specific date or time other
than the Closing Date (which need only be true and correct as of such date, or
time), and the covenants and agreements of the Buyer to be performed on or
before the Closing Date in accordance with this Agreement shall have been
performed in all material respects.
8.2 FILINGS; CONSENTS; WAITING PERIODS. All registrations, filings,
applications, notices, consents, approvals, waivers, authorizations,
qualifications and orders to be filed, made or obtained by the Buyer, the
Company or any Seller in order to consummate the transactions contemplated by
this Agreement shall have been filed, made or obtained. The Buyer shall have
obtained the consents identified in Section 5.3 of the Buyer Disclosure
Schedule, which consents shall be in form and substance reasonably satisfactory
to the Majority Shareholders.
8.3 NO INJUNCTION. The condition set forth in Section 7.3 shall have
been satisfied.
8.4 CLOSING DELIVERIES. The Buyer shall have delivered or caused to be
delivered to the Sellers' legal counsel (in the case of clauses (i), (ii) and
(iii) below), to each Seller (in the case of clause (iv) below), and to the
Majority Shareholders (in the case of clause (v) below) the following:
(i) A certificate of the Secretary of the Buyer attesting to
the incumbency of the officers of the Buyer executing this Agreement and any
other certificates or agreements delivered by the Buyer to the Sellers at or
prior to the Closing;
(ii) A certificate of the Chairman of the Board or President
of the Buyer attesting on behalf of the Buyer to the matters set forth in
Section 8.1;
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(iii) A resolution of the Board of Directors of the Buyer
authorizing the execution, delivery and performance by the Buyer of this
Agreement and the consummation of the transactions contemplated herein,
certified by the Secretary of the Buyer;
(iv) The Purchase Price payable in accordance with Section 2.2
to each Seller (as specified in Section 2.2) pursuant to this Agreement; and
(v) Duly executed copies of the Liquidity Agreement and Stock
Option Undertaking in the forms attached hereto as Exhibit B and C respectively
and the Employment Agreements in the form attached as Exhibit C (duly signed by
the Company).
8.5 SERIES C CONVERTIBLE PREFERRED STOCK OF THE BUYER. The Buyer shall
have consummated the issuance of at least 3,000,000 shares of its Series C
Convertible Preferred Stock.
8.6 ABSENCE OF LITIGATION. No claim, action, suit, arbitration,
investigation, inquiry or other proceeding by any Authority or other Person with
respect to this Agreement or the transactions contemplated hereby shall be
threatened or pending on the Closing Date and, up to the Closing, no party to
this Agreement shall have been advised by any Authority (which advisory has not
been officially withdrawn by such Authority on or prior to the Closing Date)
that such Authority is reviewing this Agreement or the transactions contemplated
hereby to determine whether to file or commence any litigation with respect to
any aspect of this Agreement or the transactions contemplated hereby.
8.7 NO MATERIAL ADVERSE EFFECT. Before the Closing Date, there shall
have been no material change in the assets or liabilities, the business or
condition (financial or otherwise), the results of operations or prospects of
the Buyer or any of its Subsidiaries, whether as a result of any legislative or
regulatory change, revocation of any license or right to do business, fire,
explosion, accident, casualty, labor trouble, flood, drought, riot, storm,
condemnation or act of God or other public force or otherwise, that results in a
Material Adverse Effect.
ARTICLE 9.
SURVIVAL; INDEMNIFICATION
9.1 INDEMNIFICATION .
(a) If the Closing occurs, and subject to the limitations set
forth in this Article 9, the Majority Shareholders, severally and not jointly
(according to their pro-rata ownership of the Company shares as set forth in
EXHIBIT A) shall indemnify and hold harmless the Buyer and its Affiliates
(collectively, the "Buyer Indemnitees") from and against and in respect of any
and all loss, damage, diminution in value, liability, cost and expense,
including reasonable attorneys' fees and amounts paid in settlement
(collectively, the "Indemnified Losses"), suffered or incurred by any one or
more of the Buyer Indemnitees by reason of, or arising out of:
(i) any misrepresentation or breach of representation or
warranty of the Majority Shareholders contained in this Agreement, the Majority
Shareholders Disclosure Schedule, or any certificate, instrument, agreement or
other writing delivered by or on behalf of the Majority Shareholders pursuant to
this Agreement or in connection with the
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transactions contemplated herein, or the breach of any covenant or agreement of
the Majority Shareholders contained in this Agreement, the Majority Shareholders
Disclosure Schedule, or any certificate, instrument, agreement or other writing
delivered to the Buyer by or on behalf of the Majority Shareholders pursuant to
this Agreement or in connection with the transactions contemplated herein; and
(ii) any and all actions, orders, assessments, fees and
expenses incident to any of the foregoing or incurred in investigating or
attempting to avoid the same or to oppose the imposition thereof, or in
enforcing this indemnification.
(b) Each Seller, severally and not jointly, shall indemnify
and hold harmless the Buyer Indemnitees from and against any Indemnified Losses
caused by a breach of that Seller's representations, warranties or agreements
set forth in this Agreement. For avoidance of doubt, no Seller shall have
responsibility for a breach by any other Seller.
(c) If the Closing occurs, and subject to the limitations set
forth in this Article 9, the Buyer shall indemnify and hold harmless the Sellers
and their Affiliates (collectively, the "Seller Indemnitees") from and against
and in respect of any and all Indemnified Losses suffered or incurred by any one
or more of the Seller Indemnitees by reason of, or arising out of:
(i) any misrepresentation or breach of representation or
warranty of the Buyer contained in this Agreement, the Buyer Disclosure
Schedule, or any certificate, instrument, agreement or other writing delivered
by or on behalf of the Buyer pursuant to this Agreement or in connection with
the transactions contemplated herein, or the breach of any covenant or agreement
of the Buyer contained in this Agreement, the Buyer Disclosure Schedule, or any
certificate, instrument, agreement or other writing delivered to the Sellers by
or on behalf of the Buyer pursuant to this Agreement or in connection with the
transactions contemplated herein; and
(ii) any and all actions, orders, assessments, fees and
expenses incident to any of the foregoing or incurred in investigating or
attempting to avoid the same or to oppose the imposition thereof, or in
enforcing this indemnification.
(d) The party or parties entitled to indemnification under any
provision of this Article 9 are sometimes collectively referred to herein as the
"Indemnitees" and the party or parties obligated to indemnify under any
provision of this Article 9 are sometimes collectively referred to herein as the
"Indemnifying Parties". The Indemnifying Parties shall reimburse Indemnitees on
demand for any Indemnified Losses suffered by the Indemnitees, based on the
judgment of any court of competent jurisdiction or pursuant to a bona fide
compromise or settlement of claims, demands or actions in respect of any
Indemnified Losses, provided however that no third party claim may be settled
without the prior written consent of the Indemnifying Party, which consent shall
not be unreasonably withheld or delayed. The Indemnifying Parties shall have the
opportunity to defend at their expense any claim, action or demand for which the
Indemnitees claim indemnity against the Indemnifying Parties, provided that: (i)
the defense is conducted by reputable counsel approved by the Indemnitees, which
approval shall not be unreasonably withheld or delayed; (ii) the defense is
expressly assumed in writing within 15 days after written notice of the claim,
action or demand is given to the Indemnifying Parties; and (iii) counsel for the
Indemnitees may
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participate at all times and in all proceedings (formal and informal) relating
to the defense, compromise and settlement of the claim, action or demand at the
expense of the Indemnitees.
(e) No claim shall be brought by any Indemnitee under this
Article 9 for Indemnified Losses, and none of them shall be entitled to receive
any payment with respect thereto, unless and until the aggregate amount of such
claim(s) equals or exceeds USD$150,000, in which case the Indemnitees will be
entitled to reimbursement hereunder for Indemnified Losses from the first dollar
of loss. Anything to the contrary notwithstanding, (A) with respect to the
representations and warranties set forth in Article 3, (i) each Majority
Shareholder will be liable to the Buyer Indemnitees for the pro rata portion of
such Indemnified Losses in accordance with the percentages set forth opposite
that Majority Shareholder's name on Exhibit A; (ii) no Majority Shareholder
shall be liable to the Buyer Indemnitees for Indemnified Losses in excess of the
percentages set forth opposite that Majority Shareholder's name on Exhibit A;
and (iii) the Majority Shareholders shall not be liable to the Buyer Indemnitees
under this Article 9 to reimburse Indemnified Losses, if any, in excess in the
aggregate of the product of the number of Lineo shares received by him times
USD$6.00; provided, however, that such limitation shall not apply to any loss
suffered by the Buyer Indemnitees attributable to fraudulent misrepresentations;
and (B) with respect to the representations and warranties set forth in Article
4, (x) no Seller shall be liable for Indemnified Losses in excess in the
aggregate of the product of the number of Lineo shares received by him times
USD$6.00, provided, however, that such limitation shall not apply to any loss
suffered by the Buyer Indemnitees attributable to fraudulent misrepresentations
or to breaches of the representations set forth in Sections 4.1, 4.2, 4.3 and
4.4, and (y) no Seller shall be liable with respect to the breach of any
representation or warranty of any other Seller.
(f) Any Seller (including any Majority Shareholder) may
satisfy any obligation for indemnification under this Article 9 by delivering to
the applicable Buyer Indemnitees Lineo Shares having a fair market value
(determined in accordance with the following sentence) equal to the Indemnified
Losses or other amounts for which such Seller is liable hereunder. For purposes
of this Section 9.1(f), "fair market value" shall mean the greater of $6.00 per
share (adjusted for any stock splits, stock dividends, recapitalizations and
other similar events occurring after the date hereof) and the average of the
closing prices (last sale) of the Lineo Shares on the principal U.S. national
securities exchange or market system on which they are traded for the ten
trading days immediately prior to the payment.
(g) The Company shall not have any liability, obligation or
indebtedness to any Seller as a result of any misrepresentation or breach of
representation or warranty by any Seller contained in this Agreement, the
Majority Shareholders Disclosure Schedule, the Seller Disclosure Schedule or any
certificate, instrument, agreement or other writing delivered by or on behalf of
any Seller pursuant to this Agreement, or in connection with the transactions
contemplated herein, or the breach of any covenant or agreement of any Seller
contained in this Agreement, the Majority Shareholders Disclosure Schedule or
the Seller Disclosure Schedule, or any certificate, instrument, agreement or
other writing by or on behalf of any Seller pursuant to the provisions of this
Agreement or in connection with the transactions contemplated herein.
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9.2 LIMITATIONS ON INDEMNIFICATION.
(a) The representations and warranties of Buyer and each
Seller (including without limitation each Majority Shareholder) contained in
this Agreement, the Buyer Disclosure Schedule, the Majority Shareholders
Disclosure Schedule, the Seller Disclosure Schedule or in any certificate,
instrument, agreement or other writing delivered by or on behalf of Buyer or any
Seller pursuant to this Agreement or in connection with the transactions
contemplated herein shall survive any investigation heretofore or hereafter made
by or on behalf of the Buyer or the Seller, as applicable (subject to the
provisions of this Article 9), and the consummation of the transactions
contemplated herein, and all such representations and warranties shall be of no
further force and effect after two years from the date of the Closing, except
for matters set forth in Sections 3.11, 3.12, 3.13, 3.14, 3.15, 4.1, 4.2, 4.3,
4.4, 5.2, 5.3, 5.12, 5.13, 5.14, 5.15 and 5.16, for which the survival period
shall extend until the expiration of the applicable statutory limitations period
(as applicable, the "Survival Period"). Anything to the contrary
notwithstanding, a claim for indemnification which is made in writing but not
resolved prior to the expiration of the Survival Period may be pursued and
resolved after such expiration.
(b) An Indemnitee shall be obligated to prosecute diligently
and in good faith any claim for Indemnified Losses with any applicable insurer
prior to collecting any indemnification payment hereunder, provided that an
Indemnitee shall be entitled to collect an indemnification payment otherwise due
to it hereunder if such Indemnitee has not received reimbursement from the
applicable insurer(s) within twelve (12) months after it has given such
insurer(s) appropriate written notice of its claim.
(c) In the case where an Indemnitee recovers from third
parties all or any part of any amount previously paid to it by any Seller
hereunder, such Indemnitee shall promptly pay over to such Seller the amount so
recovered (net of any expenses actually incurred by it in procuring such
recovery), but not in excess of any amount previously so paid by the
Indemnifying Party. No amount shall become payable by an Indemnifying Party to
an Indemnity in respect of any third party claim unless and to the extent that
the Indemnity shall have become required to pay after exhausting all available
remedies, and shall actually have paid, the relevant Indemnified Losses to the
relevant third party.
(d) The amount of any claim made hereunder shall be reduced by
taking into account (i) any amount payable to the Buyer or the Company by any
insurer or other third party in respect of the relevant Indemnified Losses, and
(ii) any offsetting benefit (including any tax reduction) to the relevant
Company or to any Affiliate thereof, either in the year in which the Indemnified
Losses are sustained or in any other year.
(e) For purposes of computing the amount of any Indemnified
Losses, only the loss actually sustained shall be taken into account, to the
exclusion of any price/earnings or similar multiplier implicit in the Purchase
Price, and in no event shall any Indemnifying Party be liable for unforeseen or
consequential damages.
(f) The Indemnitees shall not be entitled to any
indemnification payments if they have not timely notified the Indemnifying
Parties and otherwise complied in all material respects with all the other
provisions of this Article 9.
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(g) The Indemnitees shall not be entitled to any
indemnification in connection with Indemnified Losses resulting from facts of
which the Indemnitees were aware at the time of executing this Agreement.
(h) Sellers shall have no liability under any provision of
this Agreement for Indemnified Losses which arise as a result of (i) actions
taken by the Buyer or the Company after the Closing Date, or (ii) the passing
of, or any change in, after the date hereof, any law or administrative practice
of any government, governmental department, agency or regulatory body in any
such case not actually in force at the date of this Agreement.
(i) The Indemnitees shall use their best efforts, and the
Buyer Indemnitees shall cause the Company to use its best efforts, to mitigate
any Indemnified Losses which any of them may suffer as a result of any matters
giving rise to a claim for indemnification hereunder.
(j) The provisions of this Article 9 shall constitute the sole
remedy of all of the parties hereto for any misrepresentation or breach of
representation or warranty contained in this Agreement, any Disclosure Schedule,
or any certificate, instrument, agreement or other writing delivered by or on
behalf of any such party pursuant to this Agreement or in connection with the
transactions contemplated herein
ARTICLE 10.
TERMINATION
10.1 TERMINATION. This Agreement may be terminated at any time prior to
Closing by:
(a) the mutual consent of the Buyer and the holders of a
majority in interest of the common shares of the Company;
(b) the Buyer or the holders of a majority in interest of the
common shares of the Company if the Closing has not occurred by the close of
business on the date which is 30 calendar days following the date of this
Agreement, so long as the failure to consummate the transaction on or before
such date did not result from a breach of this Agreement by the party seeking
termination of this Agreement;
(c) at any time before the Closing, by any Seller or the
Buyer, (A) in the event of a material breach of this Agreement hereof by any
non-terminating party if such non-terminating party fails to cure such breach
within five Business Days following notification by any one or more of the
terminating parties, or (B) upon notification to the non-terminating parties by
the terminating party that the satisfaction of any condition to the terminating
party's obligations under this Agreement has become impossible or impracticable
with the use of best efforts unless the failure of such condition to be
satisfied is caused by a breach of this Agreement by the terminating party or
the non-terminating parties waive such condition within five Business Days of
receipt of such notification (and, for purposes of (ii) and (iii) only, a breach
or material breach by any Seller shall constitute a breach or material breach,
as the case may be, by all of the Sellers); and
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<PAGE>
if such termination is required pursuant to any final and nonappealable judgment
or order entered in any judicial or administrative proceeding initiated by an
Authority.
10.2 PROCEDURE AND EFFECT OF TERMINATION. In the event of termination
of this Agreement pursuant to Section 10.1, written notice of such termination
shall promptly be given by the terminating party to the other parties, and this
Agreement shall upon that notice terminate and become void and have no effect,
and the transactions contemplated by this The parties shall abandon agreement
without further action, except that the provisions of Section 11.5 shall survive
the termination of this Agreement; provided, however, that such termination
shall not relieve any party of any liability for any breach by it of this
Agreement.
ARTICLE 11.
MISCELLANEOUS
11.1 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall be considered one and the same agreement. The Agreement and
signatures on this Agreement, may be transmitted by facsimile, and such shall
deem such a transmission a delivery of this Agreement signing party.
11.2 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to a contract
executed and performed in such state without reference to the choice of law
principles of such state.
11.3 NO THIRD PARTY BENEFICIARIES. Except as provided in Section 6.10
above, nothing in this Agreement is intended, nor shall it be construed, to
confer any rights or benefits upon any Person that is not a party to this
Agreement, and no other Person not a party to this Agreement shall have any
rights or remedies under this Agreement.
11.4 ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties with respect to the subject matter of this Agreement, and
this Agreement supersedes all prior drafts of such agreement, and all prior and
contemporaneous agreements, representations, negotiations, discussions,
correspondence, communications, term sheets and understandings of the parties,
except for the Confidentiality Agreement, which agreement is ratified and
remains in full force and effect. There are no agreements, understandings,
representations and warranties between the parties other than those set forth or
referred to in this Agreement.
11.5 EXPENSES. Except as set forth in this Agreement, whether the Share
Purchase is or is not consummated, all costs and expenses, including but not
limited to fees and expenses of attorneys, advisers, agents, and accountants,
incurred in connection with this Agreement and the transactions contemplated by
this Agreement shall be paid by the party incurring such costs and expenses,
whether such costs and expenses were incurred prior to or are incurred after the
date hereof, and in particular, all such costs and expenses incurred by or on
behalf of the Sellers shall be borne by the Sellers and not charged to the
Company. Notwithstanding the foregoing, the audit contemplated by Section 2.2(b)
shall be at the Buyer's sole expense.
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<PAGE>
11.6 NOTICES. All notices under this Agreement shall be sufficiently
given for all purposes under this Agreement if in writing (a) when delivered
personally; (b) in the case of domestic deliveries within the United States,
three Business Days after deposited for first class mailing by the United States
Postal Service; (c) in the case of domestic deliveries within the United States,
one day after deposited for delivery by a nationally recognized overnight
delivery service; (d) in the case of foreign deliveries, two days after
deposited for delivery by a reputable foreign or overseas air courier; or (e)
when receipt is confirmed, by telecopy, telefax or other electronic transmission
service to the appropriate address or number as set forth below. Notices to the
Sellers shall be addressed to each Seller at the address noted in Exhibit A
hereto or at such other address and to the attention of such other Person as
each Seller may designate by written notice to the Buyer.
Notices to the Buyer shall be addressed to:
Lineo, Inc.
1505 Westlake Avenue North, Suite 400
Seattle, Washington 98109
Attention: Matthew Harris, Vice President & General Counsel
Telecopy: (206) 281-9882
or to such other address and to the attention of such other Person as the Buyer
may designate by written notice to the Sellers.
11.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties to this Agreement and their respective
successors and permitted assigns. No party to this Agreement shall have the
right to assign its rights or interests in or delegate its obligations under
this Agreement without the express prior written consent of all other parties to
this Agreement; provided, however, the Buyer may assign its rights or interests
under this Agreement to any direct or indirect wholly owned subsidiary of the
Buyer, in which event the Buyer shall remain liable under this Agreement; and
provided further that any Seller may, by notice to the Buyer, direct that no
Seller may direct any or all of his share of the Closing Purchase Price be paid
to any other Person. No such assignment shall release the Buyer from its
obligations hereunder without the Sellers' written consent.
11.8 HEADINGS; DEFINITIONS. The Section and article headings contained
in this Agreement are inserted for convenience and reference only and will not
affect the meaning or interpretation of this Agreement. All references to
Sections or Articles contained in this Agreement mean Sections or Articles of
this Agreement unless otherwise stated. All capitalized terms defined in this
Agreement are equally applicable to both the singular and plural forms of such
terms. As the context requires, the singular form of any term includes the
plural and vice versa, and all pronouns used herein shall be deemed to refer to
the masculine, feminine or neuter gender.
11.9 AMENDMENTS AND WAIVERS. This Agreement may not be modified or
amended except by an instrument or instruments in writing signed by the party
against whom enforcement of any such modification or amendment is sought. Any
party to this Agreement may, only by an instrument in writing, waive compliance
by any other party to this Agreement with any term or provision of this
Agreement. The waiver by any parties to this Agreement of a breach of any term
or provision of this Agreement shall not be construed as a waiver of any
subsequent breach.
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<PAGE>
11.10 ARBITRATION.
Any controversy or claim arising out of or relating to this Agreement, or the
breach thereof, shall be settled by binding arbitration in accordance with the
International Arbitration Rules of the American Arbitration Association ("Rules
of AAA"), and the procedures set forth below. In the event of any inconsistency
between the Rules of AAA and the procedures set forth below, the procedures set
forth below shall control. Judgment upon the award rendered by the arbitrator
may be enforced in any court having jurisdiction thereof.
(a) Location and Language. The location of the arbitration
shall be New York, New York, United States of America. The language of the
arbitration shall be English.
(b) Selection of Arbitrator. Unless the parties subsequently
agree otherwise, the arbitration shall be conducted by three arbitrators, one of
whom shall be appointed by the Majority Shareholders and/or the Sellers (or any
of them as are parties to the arbitration), one of whom shall be appointed by
the Buyer, and the third of whom, who shall be the presiding arbitrator, shall
be appointed by the two party-appointed arbitrators, or, in the event of their
failure to agree within a reasonable time on such third arbitrator, by the AAA.
If the AAA appoints the presiding arbitrator, it shall endeavor to appoint as
such presiding arbitrator an attorney having at least fifteen (15) year's
experience in corporate and securities issues and who has previously acted as an
arbitrator in an international arbitration. Notwithstanding the foregoing, in
the event that the Majority Shareholders or the Sellers cannot agree on the
appointment of their arbitrator, all of the arbitrators shall be appointed by
the AAA.
(c) Discovery. Unless the parties mutually agree in writing to
some additional and specific pre-hearing discovery, the only pre-hearing
discovery shall be (a) reasonably limited production of relevant, non-privileged
and specifically identifiable documents, and (b) the identification of witnesses
to be called at the hearing, which identification shall give the witness's name,
general qualifications and position, and a brief statement as to the general
scope of the testimony to be given by the witness. The arbitrators shall decide
any disputes over and shall control the process concerning these pre-hearing
discovery matters.
(d) Case Management. Prompt resolution of any dispute is
important to all of the parties; and the parties agree that the arbitration of
any dispute shall be conducted expeditiously. The arbitrators are instructed and
directed to assume case management initiative and control over the arbitration
process (including scheduling of exchanges of submissions, pre-hearing
discovery, and the conduct of the hearing), in order to complete the arbitration
as expeditiously as is reasonably practical for obtaining a just resolution of
the dispute.
(e) Remedies. In reaching their decision, the arbitrators
shall follow and apply applicable law and the provisions of this Agreement. The
decision of the arbitrators shall be binding upon the parties.
(f) Expenses. The expenses of the arbitration, including the
fees of the arbitrators and the AAA, any expert witness fees, and the attorneys'
fees incurred by the parties to the arbitration, may be awarded to the
prevailing party, in the discretion of the arbitrator, or may be apportioned
between the parties in any manner deemed appropriate by the arbitrator.
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<PAGE>
(g) Confidentiality. Except as set forth below, the parties
shall keep confidential the fact of the arbitration, the dispute being
arbitrated, and the decision of the arbitrators. Notwithstanding the foregoing,
the parties may disclose information about the arbitration to persons who have a
need to know, such as directors, trustees, management employees, witnesses,
experts, investors, attorneys, lenders, insurers, and others who may be directly
affected. Additionally, each party may make such disclosures as are required by
applicable securities laws or other applicable law or regulation. Further, if a
party is expressly asked by a third party about the dispute or the arbitration,
the party may disclose and acknowledge in general and limited terms that there
is a dispute with the other party which is being (or has been) arbitrated. Once
the arbitration award has become final, if the arbitration award is not promptly
satisfied, then these confidentiality provisions shall no longer be applicable.
11.11 ATTORNEYS' FEES. In the event that any dispute between any two or
more of the parties to this Agreement should result in litigation or
arbitration, the prevailing party in such dispute (if any) shall be entitled to
recover from the other party all reasonable fees, costs and expenses of
enforcing any right of the prevailing party, including without limitation,
reasonable attorneys' fees, arbitration fees and other expenses, all of which
shall be deemed to have accrued upon the commencement of such action and shall
be paid whether or not such action is prosecuted to judgment or arbitration
award. Any judgment, order or arbitration award entered in such action shall
contain a specific provision providing for the recovery of attorney fees and
costs incurred in enforcing such judgment or award and an award of prejudgment
interest from the date of the breach at the maximum rate of interest allowed by
law. For the purposes of this Section 11.11: (a) attorney's fees shall include,
without limitation, fees incurred in the following: (1) post-judgment motions;
(2) contempt proceedings; (3) garnishment, levy, and debtor and third party
examinations; (4) discovery; and (5) bankruptcy litigation and (b) prevailing
party shall mean the party who is determined by the trier of fact in the
proceeding to have prevailed as to a substantial preponderance of the issues or
who prevails by dismissal, default or otherwise.
11.12 SEVERABILITY OF PROVISIONS; JEOPARDY.
(a) If any provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated by this Agreement is not affected in any manner adverse to any
party. Upon a determination that such an adverse affect will occur, the parties
to this Agreement shall negotiate in good faith to modify this Agreement so as
to effect the original intent of the parties as closely as possible in an
acceptable manner to the end that transactions contemplated to this Agreement
are fulfilled to the greatest extent possible.
(b) Notwithstanding anything to the contrary contained in this
Agreement, in the event that it is determined prior to the Closing that the
performance by any party hereto of any term, covenant, condition or provision of
this Agreement should be in violation of any statute, ordinance, or be otherwise
deemed illegal, the parties shall immediately attempt to negotiate an amendment
to this Agreement to eliminate such jeopardy. In the event that such an
amendment is not practicable or cannot be agreed upon within fifteen (15) days
of notice of the need thereof, either party may, at its option, terminate this
Agreement forthwith.
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IN WITNESS WHEREOF, this Agreement has been signed by or on
behalf of each of the parties effective as of the date first above written.
SELLERS:
- ----------------------- -----------------------
Hugo Delchni Laurent Rousseau
- ----------------------- -----------------------
Thomas Louis Eric Sauzedde
- ----------------------- -----------------------
Eric Pinon Yves Cognet
- ----------------------- -----------------------
Thierry Freyche Jean Joya
- ----------------------- -----------------------
Francis Maunoury Frederic Vasseur
- ----------------------- -----------------------
Thierry Letrilliart Gerard Delon
- ----------------------- -----------------------
Alain Bankier Francois Chateau
- ----------------------- -----------------------
Andre Taliercio Isabelle Pesquie-Geday
TECHNOCOM VENTURES TECHNOVENTURES
By: _______________________ By: _______________________
Name: Name:
Title: Title:
STOCK PURCHASE AGREEMENT
SIGNATURE PAGE
PAGE 1 OF 48
<PAGE>
AXEL INV FUND NOTOIR SA
By: _______________________ By: _______________________
Name: Name:
Title: Title
SOFIGIP SA
By: _______________________
Name:
Title:
BUYER:
LINEO, INC., a Delaware corporation
By: _______________________________
Its: ______________________________
STOCK PURCHASE AGREEMENT
SIGNATURE PAGE
PAGE 2 OF 48
<PAGE>
EXHIBIT 10.15
SHARE PURCHASE AGREEMENT
THIS SHARE PURCHASE AGREEMENT (this "Agreement") is made as of this 9th
day of May, 2000, by and among Lineo, Inc., a Delaware corporation ("Lineo"),
RT-Control Inc., an Ontario corporation (the "Company") and the persons listed
in SCHEDULE "1.1(a)" Column I hereto (together the "Shareholders") and the
persons listed in SCHEDULE "1.1(a)" Column II hereto (together the
"Principals").
WHEREAS, the Shareholders own 300 common shares in the capital of the
Company;
WHEREAS, the 300 common shares referred to in the previous recital
(collectively, the "Company Shares," and individually, a "Company Share")
constitute all of the issued and outstanding shares in the capital of the
Company;
WHEREAS, the Shareholders desire to sell the Company Shares to Lineo,
and Lineo desires to purchase the Company Shares from the Shareholders, upon the
terms and conditions set forth herein; and
WHEREAS, the parties wish to set forth certain other agreements among
them.
NOW THEREFORE, in consideration of the mutual covenants of the parties
set forth in this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE 1 - PURCHASE AND SALE
1.1 SHARES.
On the terms and subject to the conditions set forth in this Agreement, at the
Closing and upon the basis of the representations, warranties, covenants and
agreements contained herein, the Shareholders shall sell, convey, transfer and
deliver to Lineo, and Lineo shall purchase from the Shareholders, the Company
Shares in consideration for the purchase price which is to be satisfied in cash
and by the issuance of 404,169 unregistered shares of Lineo Series D Convertible
Preferred Stock (as defined below) as set forth in SCHEDULE "1.1(a)" hereto. As
used herein, the term "Lineo Shares" means shares of Series D Convertible
Preferred Stock, U.S. $.001 par value per share, of Lineo as more particularly
described in the Certificate of Designation attached hereto as SCHEDULE
"1.1(b)". The shares of Lineo Series D Preferred Stock issuable to the
Shareholders hereunder in exchange for the Company Shares are sometimes
collectively referred to as the "Lineo Shares" and individually as a "Lineo
Share" and the Shares of the Common Stock of Lineo issuable upon the conversion
of the Lineo Shares shall be referred to as
<PAGE>
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"Conversion Shares". The cash and Lineo Shares shall be delivered at Closing to
the Shareholders as set out in SCHEDULE "1.1(a)" hereto.
ARTICLE 2 - MANNER OFEXCHANGE
2.1 PURCHASE PRICE.
At the Closing, each Shareholder shall deliver to Lineo a certificate or
certificates representing all of the Company Shares held by the Shareholder in
the number set out in SCHEDULE "1.1(a)" hereto, accompanied by a stock power or
powers duly executed in blank, with all necessary stock transfer and other
documentary stamps attached, and Lineo shall deliver to the Shareholders, as set
forth in SCHEDULE "1.1(a)" hereto, (i) cash consideration in immediately
available funds and/or (ii) one or more certificates representing Lineo Shares
due to the Shareholders issued in the name of the Shareholders.
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
THE PRINCIPALS
As an inducement to Lineo to enter into and perform its obligations under this
Agreement, the Company and the Principals (and the other Shareholders only to
the extent so specifically provided), jointly and severally, represent and
warrant to Lineo as set out below. The parties acknowledge and agree that all
representations and warranties in respect of the Company are given by the
Principals on a joint and several basis. Any representation and warranty or
covenant given below by a Shareholder who is not a Principal is given severally
and not jointly and severally and only in respect of himself.
3.1 ORGANIZATION AND GOOD STANDING.
The Company is a corporation duly organized, validly existing under the laws of
the Province of Ontario and has full power and authority to conduct its business
as it is now being conducted and to own, operate or lease the properties and
assets it currently owns, operates or holds under lease. The Company is duly
licensed and qualified to do business in the jurisdiction in which it operates
its business, except for those jurisdictions where the failure to be so
registered, qualified or licensed would not individually or in the aggregate
have a material adverse effect on the business, prospects, results of
operations, financial condition or assets of the Company.
3.2 POWER AND AUTHORIZATION.
The Company has full corporate power and authority to execute and deliver this
Agreement and any agreement, document, certificate or instrument being delivered
pursuant to or in connection with the transactions contemplated by this
Agreement (collectively the "Transaction Documents"), to perform its obligations
hereunder and thereunder and to consummate the transactions contemplated hereby
and thereby. Each Shareholder has full power and authority to execute and
deliver this Agreement and each of the other Transaction Documents to which he
is or will be a party, and to perform his obligations hereunder and thereunder
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the Transaction Documents, and the
performance by the Company of its obligations
<PAGE>
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hereunder and thereunder, and the consummation of the transactions contemplated
hereunder and thereunder, have been duly authorized by the board of directors of
the Company and by the Shareholders. This Agreement and the Transaction
Documents have been duly executed and delivered by the Company and by each
Shareholder and constitute the legal, valid and binding obligations of the
Company and of each Shareholder, enforceable against the Company and each
Shareholder in accordance with their respective terms, subject to the fact that
enforcement may be limited by bankruptcy, insolvency, liquidation,
reorganization, reconstruction and other similar laws generally effecting
enforceability of creditors' rights and equitable remedies such as specific
performance and injunction are in the discretion of the court from which they
are sought.
3.3 SUBSIDIARIES.
The Company does not own or control (directly or indirectly), or own or hold any
right to acquire, any share, partnership interest, joint venture interest,
equity participation or other security or interest in any other entity,
corporation, partnership, trust or any other business association.
3.4 ORGANIZATIONAL DOCUMENTS.
The copies of the Articles of Incorporation and Bylaws of the Company, each as
heretofore amended, which have been delivered to Lineo are true, complete and
correct. The minute books of the Company made available to Lineo are correct and
complete and contain a complete summary of all meetings of directors and
shareholders since the time of incorporation of the Company and accurately
reflect all transactions referred to in such minutes in all material respects,
and all material corporate actions and decisions taken by the Company's board of
directors, shareholders and any committees of the board of directors. SCHEDULE
"3.4" contains a complete list of all officers and directors of the Company.
3.5 OWNERSHIP OF THE COMPANY.
The Company and the Shareholders represent and warrant that the authorized
capital of the Company consists of an unlimited number of common shares, of
which, at the time of Closing, 300 are issued and outstanding, all of which are
owned of record and beneficially by the Shareholders as described in SCHEDULE
"1.1(a)", who have good and marketable title therero, free and clear of any and
all Liens. The designations, powers, preferences, rights, conditions,
limitations and restrictions in respect of each class and series of authorized
capital of the Company are as set forth in the Articles of Incorporation of the
Company, as amended to the date hereof, and all such designations, powers,
preferences, rights, conditions, limitations and restrictions are valid, binding
and enforceable and in accordance with all applicable laws. All outstanding
shares of the Company have been duly authorized and validly issued, are fully
paid and non-assessable. None of the outstanding securities of the Company have
been issued in violation of any pre-emptive rights, rights of first refusal or
similar rights and are not now nor shall be subject to any such pre-emptive
rights, rights of first refusal or similar rights. No contract, commitment or
undertaking of any kind has been made for the issuance of additional shares or
other securities of the Company, nor is there in effect or outstanding any
subscription, option, warrant or other right to acquire any shares of the
Company or other instruments convertible into or exchangeable for such shares.
There are no voting trust agreements or other contracts, agreements or
arrangements restricting or otherwise relating to voting, dividend or
<PAGE>
-4-
other rights with respect to the Company's capital. The Company does not hold
any shares in its treasury. Upon delivery of the Company Shares to Lineo
pursuant to the provisions of this Agreement, Lineo will acquire good, valid and
marketable title to the Company Shares, free and clear of any and all Liens.
3.6 NO VIOLATION.
The Company represents and warrants, and the Principals to the best of their
knowledge represent and warrant, that the execution, delivery and performance by
the Company and each Shareholder of this Agreement and the Transaction Documents
and the consummation of the transactions contemplated herein and therein do not
and will not:
(a) except as specified herein, conflict with, result in the breach,
modification, termination or violation of, or loss of any benefit under,
constitute a default under, accelerate the performance required by, result in or
give rise to a right to amend or modify the terms of, result in the creation of
any Lien upon any assets or properties, or in any manner release any party
thereto from any obligation under, any mortgage, note, bond, indenture,
contract, agreement, lease, license or other instrument or obligation of any
kind or nature by which the Company or each Principal, or any of their
respective properties or assets, may be bound or affected;
(b) conflict with,violate or result in any loss of benefit under, any
permit, concession, franchise, order, judgment, writ, injunction, regulation,
statute or decree; or
(c) conflict with or violate any provision of the Articles of
Incorporation or Bylaws, each as heretofore amended, of the Company.
3.7 NO CONSENT REQUIRED.
Except as set forth on SCHEDULE "3.7", The Company represents and warrants, and
the Principals to the best of their knowledge represent and warrant, that no
consent, approval, order or authorization of, or declaration, filing or
registration with, any person, entity or governmental authority is required to
be made or obtained by the Company or a Principal in connection with the
authorization, execution, delivery or performance of this Agreement, the
Transaction Documents or the transactions contemplated hereby and thereby.
3.8 FINANCIAL STATEMENTS.
(a) SCHEDULE "3.8(a)" contains the audited balance sheets and
statements of earnings and retained earnings as of and for the fiscal period
ended December 31, 1999 for the Company. The foregoing financial statements are
referred to in this Agreement as the "Financial Statements".
The Company represents and warrants, and the Principals to the best of their
knowledge represent and warrant, that the Financial Statements are complete and
correct in all material respects, are consistent with the books and records of
the Company and are in accordance with generally accepted accounting principles
consistently applied and fairly present the Company's financial condition,
assets, liabilities and retained earnings as of their respective dates and the
<PAGE>
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statements of income, retained earnings and cash flow for the periods related
thereto. Except as disclosed in SCHEDULE "3.8(b)" and to the best knowledge of
the Principals, all material liabilities and obligations, whether accrued or
absolute, and whether due or to become due, which existed as of the date of a
balance sheet have been disclosed in the balance sheets included in the
Financial Statements or in the notes thereto. The Company represents and
warrants, and the Principals to the best of their knowledge represent and
warrant, that the statements of income included in the Financial Statements do
not contain any material items of special or non-recurring income or other
income not earned in the ordinary course of business.
3.9 ABSENCE OF UNDISCLOSED LIABILITIES.
The Company represents and warrants, and the Principals to the best of their
knowledge represent and warrant, that as of the date hereof, the Company has
not, and as of the Closing Date, the Company will not have, any material debts,
liabilities or obligations of any nature arising out of transactions entered
into on or prior to the Closing Date, or any transaction, series of
transactions, action or inaction occurring on or prior to the Closing Date, or
any state of facts or condition existing on or prior to the Closing Date except
(a) for liabilities and obligations under agreements, contracts, leases or
commitments disclosed in this Agreement or in a Schedule hereto, and (b) for
liabilities and obligations arising in the ordinary course of business,
consistent in form and amount with past practice, since December 31, 1999, none
of which liabilities or obligations, individually or in the aggregate, is
material in amount with respect to the business, prospects, results of
operations, financial condition or assets of the Company. Except as disclosed on
SCHEDULE "4.9(a)". The Company represents and warrants, and the Principals to
the best of their knowledge represent and warrant, that the Company is not under
any obligation, contingent or otherwise, to refund or rebate any amounts paid or
payable to it for services rendered prior to the date hereof. As of the date
hereof, the Company does not have, and as of the Closing Date, the Company will
not have, any debts, liabilities or obligations of any nature to, or owing from,
the Shareholders except for those contained in SCHEDULE "3.9".
3.10 COMPLIANCE WITH LAWS; PERMITS.
The Company represents and warrants, and the Principals to the best of their
knowledge represent and warrant, that the Company is in compliance with all
laws, regulations, rules, ordinances, orders and other requirements applicable
to the operation, conduct or ownership of its property or business in all
material respects. Neither the Company nor the Shareholders has received notice
of the violation or of any claim of violation of any law, regulation, rule,
ordinance, order or other requirement or Permit (as defined below) applicable to
it. The Company represents and warrants, and the Principals to the best of their
knowledge represent and warrant, that, the Company holds all of the permits,
licenses, approvals and authorizations of governmental authorities or third
parties (collectively, "Permits") necessary for the conduct of its business. All
such Permits are in full force and effect, and will remain with the Company
upon, and will not be affected by, the Closing. The Company represents and
warrants, and the Principals to the best of their knowledge represent and
warrant, that there is no condition, nor has any event occurred, which
constitutes or with the giving of notice or passage of time or both would
constitute a violation of the terms of any Permit and no cancellation,
modification or revocation of any of the Permits is pending or threatened.
<PAGE>
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3.11 PROPERTY.
(a) The Company represents and warrants, and the Principals to the best
of their knowledge represent and warrant, that the Company owns no real
property, has good and marketable title or rights as lessee to all real,
personal, mixed, tangible and intangible property of any kind or nature owned or
used by it, and it owns each of the assets shown or reflected or to be shown or
reflected on the Financial Statements, in each case free and clear of all Liens,
except for Liens identified on SCHEDULE "3.11(a)" hereto on the date hereof.
(b) All leases of real property and all material leases of personal
property leased by the Company and utilized in its business, including any and
all leases with related parties (collectively, the "Leased Property"), are
listed on SCHEDULE "3.11(b)", and correct and complete copies previously have
been furnished to Lineo. To the best knowledge of the Principals, the Company
enjoys peaceful and undisturbed possession under all such leases. To the best
knowledge of the Principals, any real property that the Company occupies or
leases under such leases is in good condition and repair with adequate plumbing,
heating and air conditioning and with public access as required for the conduct
of its business, except for such deficiencies which are not material,
individually or in the aggregate, in nature or cost.
3.12 CONDITION OF PROPERTY AND RELATED MATTERS.
The Company represents and warrants, and the Principals to the best of their
knowledge represent and warrant, that all buildings, machinery, equipment and
other tangible assets used by the Company are in fair or good operating
condition and repair, reasonable wear and tear excepted, are useable in the
ordinary course of their business and are adequate and suitable for the uses to
which they are being put. None of such items requires any repairs or replacement
except for maintenance in the ordinary course of business or such other repairs
or replacements which are not material, individually or in the aggregate, in
nature or cost. All such assets and property are located at real property
locations constituting the Leased Property, or as otherwise identified on
SCHEDULE "3.12" hereto.
3.13 MATERIAL CONTRACTS.
The Company represents and warrants, and the Principals to the best of their
knowledge represent and warrant, that the Company has not entered into nor is it
bound by any contract, agreement, relationship or commitment, written or oral,
including without limitation any obligations for money borrowed or under leases,
or any arrangements with customers, pursuant to which the Company is obligated
to pay or entitled to receive, in the aggregate, in excess of U.S. $15,000,
other than those identified on SCHEDULE "3.13" hereto (the "Material
Contracts"); true, correct and complete copies of all written Material Contracts
and true and complete descriptions of all oral Material Contracts previously
have been furnished to Lineo. Except as set forth on SCHEDULE "3.13" and to the
best knowledge of the Principals, the Company is not in default, and no event
has occurred which with the giving of notice or the passage of time or both
would constitute a default by the Company, or to the knowledge of the Company or
the Principals, any other party under any Material Contract or any other
obligation owed by the
<PAGE>
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Company, and, to the knowledge of the Company and the Principals, no event has
occurred which with the giving of notice or the passage of time or both would
constitute a default by any other party to any such Material Contract or
obligation. The continuation, validity and effectiveness of all Material
Contracts will in no way be affected by the transactions contemplated hereby and
there are no negotiations pending to revise the terms of any such Material
Contracts. The Company represents and warrants, and the Principals to the best
of their knowledge represent and warrant, that the Company is not a party to or
bound by any contract, agreement, relationship or commitment, whether or not
deemed material, which in any way restricts or purports to restrict the
Company's ability to acquire any property or assets or conduct business or
provide services to any person or entity anywhere in the world. None of the
Company nor the Shareholders is a party to, or obligated to any party under, any
partnership agreement, shareholders' agreement, buy/sell agreement or any other
agreement, written or oral, relating to or in any way affecting the disposition
of the Company Shares.
3.14 INTELLECTUAL PROPERTY.
(a) The Company represents and warrants, and the Principals to the best
of their knowledge represent and warrant, that the Company owns and possesses
all right, title and interest in and to, all of the Proprietary Rights
identified in SCHEDULE "3.14(c)" (as defined below) and none of such Proprietary
Rights have been abandoned;
(b) Except as disclosed in SCHEDULE "3.14(c)" and to the best knowledge
of the Principals, no claim by any third party contesting the validity,
enforceability, use or ownership of any such Proprietary Rights has been made,
is currently outstanding or is threatened;
(c) Except as disclosed in SCHEDULE "3.14(c)" and to the best knowledge
of the Principals, neither the Company nor the Principals have received any
notice of, nor is the Company aware of any reasonable basis for an allegation
of, any infringement or misappropriation by, or conflict with, any third party
with respect to such Proprietary Rights, nor has the Company nor the Principals,
or any registered agent of the Company received any claim of infringement or
misappropriation of or other conflict with any Proprietary Rights of any third
party;
(d) Except as disclosed in SCHEDULE "3.14(c)", to the best knowledge of
the Principals the Company has not infringed, misappropriated or otherwise
violated any Proprietary Rights of any third parties, and none of the Company
nor the Principals is aware of any infringement, misappropriation or conflict
which will occur as a result of the continued operation of the Company as
presently operated and as contemplated to be operated or as a result of the
consummation of the transactions contemplated hereby; and
(e) Except as described in SCHEDULE "3.14(e)" all personnel, including
without limitation employees, agents, consultants and contractors, who have
contributed to or participated in the conception and/or development of all or
any part of the Proprietary Rights which are not licensed to the Company from a
third party or which by their nature are not the
<PAGE>
-8-
sole proprietary property of the Company either (1) have been party to a
"work-for-hire" arrangement or agreement with the Company, in accordance with
applicable federal and provincial law, that has accorded the Company full,
effective, exclusive and original ownership of all tangible and intangible
property thereby arising, or (2) have executed appropriate instruments of
assignment in favour of the Company as assignee that have conveyed to the
Company full, effective and exclusive ownership of all tangible and intangible
property thereby arising.
As used herein, the term "Proprietary Rights" means all proprietary information
of the Company, including all the patents, patent applications, patent
disclosures and inventions (whether or not patentable and whether or not reduced
to practice), all trademarks, service marks, trade dress, trade names, corporate
names, domain names, copyrights, all trade secrets, confidential information,
ideas, formulae, compositions, know-how, processes and techniques, drawings,
specifications, designs, logos, plans, improvements, proposals, technical and
computer data, documentation and software, financial, business and marketing
plans, and related information and all other proprietary, industrial or
intellectual property rights relating to the business of the Company, set forth
in SCHEDULE "3.14(c)", the consummation of the transactions contemplated by this
Agreement and the Transaction Documents will not adversely affect the right of
Lineo or the Company to continue to use the Company's Proprietary Rights.
3.15 EMPLOYEE BENEFIT PLANS.
Except as set forth in SCHEDULE "3.15", the Company has not maintained,
sponsored, adopted, made contributions to or obligated itself to make
contributions to or to pay any benefits or grant rights under or with respect to
or made any commitments to create any employee benefit plan, pension plan, plan
of deferred compensation, medical plan, life insurance plan, long-term
disability plan, dental plan or other plan providing for the welfare of either
the Company's employees or former employees or beneficiaries thereof, personnel
policy (including but not limited to vacation time, holiday pay, bonus programs,
moving expense reimbursement programs and sick leave), excess benefit plan,
bonus or incentive plan (including but not limited to stock options, restricted
stock, phantom stock, stock bonus and deferred bonus plans), salary reduction
agreement, change-of-control agreement, golden parachute, employment agreement,
consulting agreement or any other benefit, program or contract (collectively,
"Employee Benefit Plans") which could give rise to or result in the Company or
Lineo having any debt, liability, claim or obligation of any kind or nature,
whether accrued, absolute, contingent, direct, indirect, known or unknown,
perfected or inchoate or otherwise and whether or not due or to become due.
3.16 SALARIES.
SCHEDULE "3.16" contains a complete and correct list setting forth (i) the
names, job descriptions/titles, current compensation rate, date of hire,
vacation accrual rate and accrued vacation time of all individuals presently
employed by the Company other than the Principals. The Company has made and
remitted all deductions required by law to be made for wages and salaries, which
deductions are consistent with past practices. The Company has not made any
prepayments of salaries, bonuses or any other amounts due to any of its
employees or former employees. The Company represents and warrants, and the
Principals to the best of their knowledge represent and warrant, that all
obligations to employees, whether for salaries,
<PAGE>
-9-
commissions, bonuses, vacation or otherwise, which are required to be accrued on
the Financial Statements in accordance with Canadian generally accepted
accounting principles consistently applied have been accrued on the Financial
Statements in accordance with Canadian generally accepted accounting principles
consistently applied.
3.17 PERSONNEL AGREEMENTS, PLANS AND ARRANGEMENTS.
Except as listed in SCHEDULES "3.15" or "3.16", the Company is not a party to or
obligated with respect to any (a) outstanding contracts with current or former
employees, agents, consultants, advisers, salesmen, sales representatives,
distributors, sales agents, independent contractors, or dealers, or (b)
collective bargaining agreements or contracts with any labour or trade union,
employee bargaining agency or other representative of employees or any employee
benefits provided for by any such agreement. The Company has complied in all
material respects with all applicable laws relating to the employment of labour,
including but not limited to provisions thereof relating to wages, hours,
vacation pay, collective bargaining and the payment, deduction and remittance of
all amounts required to be deducted and/or remitted in respect of wages and
salaries and of other Taxes and such deductions are consistent with past
practices and in accordance with Canadian generally accepted accounting
principles consistently applied. Neither the Company nor the Principals have
received notice from any employee of the Company that any such employee is
terminating his or her employment with the Company, nor to the best knowledge of
the Company and the Principals does any employee intend to terminate his or her
employment with the Company as a result of the transactions contemplated hereby.
3.18 BOOKS AND RECORDS.
The Company represents and warrants, and the Principals to the best of their
knowledge represent and warrant, that all the books, records and accounts of the
Company are in all material respects accurate and complete, accurately reflect
all matters normally entered into the books, records or accounts maintained by
similar businesses, are in all material respects in accordance with all laws,
regulations and rules applicable to the Company and accurately present and
reflect in all material respects all of the transactions described therein.
3.19 INSURANCE POLICIES.
SCHEDULE "3.19" contains correct and complete lists and descriptions, including
policy numbers, of all insurance policies owned or held by the Company. The
Company represents and warrants, and the Principals to the best of their
knowledge represent and warrant, that such policies are in full force and
effect, and the Company is not in default under any of them.
3.20 BANK ACCOUNTS.
SCHEDULE "3.20" is a complete and correct list of each bank and brokerage firm
in which the Company has an account or safe deposit box, the number of each such
account or box, the names of all persons authorized to draw thereon or to have
access thereto, and a description of the items in each such box as of a date not
more than seven days prior to the date hereof.
3.21 TAXES.
Except as set forth on SCHEDULE "3.21":
<PAGE>
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(a) The Company represents and warrants, and the Principals to the best
of their knowledge represent and warrant, that the Company has properly prepared
and duly and timely filed with the appropriate taxing authorities all Tax
Returns that are required to have been filed for, by, on behalf of or with
regard to the Company and its assets, operations and businesses, and such
returns are correct and complete and reflect all liabilities for Taxes for the
periods covered thereby.
(b) The Company represents and warrants, and the Principals to the best
of their knowledge represent and warrant, that all Taxes due and payable by or
with respect to the Company for all periods through the Closing Date have been
or will be fully and timely paid when due, and adequate accruals for Taxes
(rather than for deferred Taxes) have been provided in the books and records of
the Company with respect to any period for which Tax Returns have not yet been
filed or for which Taxes are not yet due and owing.
(c) The Company represents and warrants, and the Principals to the best
of their knowledge represent and warrant, that the Company has complied in all
material respects with all applicable laws, rules and regulations relating to
the remittance and withholding of Taxes and has duly and timely withheld from
employee salaries, wages and other compensation all amounts required to be so
withheld for all periods under all applicable laws and has remitted to the
appropriate taxing authorities all amounts due to be remitted and established
adequate reserves for all amounts not yet due to be remitted.
(d) The Company represents and warrants, and the Principals to the best
of their knowledge represent and warrant, that any deficiencies asserted,
assessed or proposed as a result of any governmental audits of the Tax Returns
of the Company have been paid or settled, and there are no present disputes as
to Taxes payable by the Company. The Company represents and warrants, and the
Principals to the best of their knowledge represent and warrant, that there is
no audit, investigation, or proceeding in progress, pending or threatened in
writing against the Company by any governmental agency in connection with Taxes;
nor, to the knowledge of the Company or the Principals, is there any reasonable
basis for any such audit, investigation or proceeding. No issue has been raised
by a federal, provincial, local or foreign taxing authority in any current or
prior examination of the Company which, by application of the same or similar
principles, could reasonably be expected to result in a proposed deficiency for
any subsequent taxable period.
(e) The Company has not (1) executed or filed with any taxing authority
any agreement extending the period for assessment or collection of any Taxes,
including but not limited to any applicable statute of limitations; (2)
requested any extension of time within which to file any Tax Return, which Tax
Return has not since been filed; or (3) received any written ruling of a taxing
authority related to Taxes or entered into any written and legally binding
agreement with a taxing authority relating to Taxes.
(f) After the date hereof, no election or consent with respect to any
Tax (or the computation thereof) affecting the Company will be made without
Lineo's prior written consent.
<PAGE>
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(g) To the extent that income Tax Returns have been required to be
filed by the Company, the Principals have provided Lineo with correct and
complete copies of all income Tax Returns of the Company for the Company's last
full fiscal year.
(h) Each of the Shareholders is not a non-resident within the meaning
of Section 116 of the INCOME TAX ACT (Canada).
(i) The Company represents and warrants, and the Principals to the best
of their knowledge represent and warrant, that the Company is not subject to any
private letter ruling of the Canada Customs and Revenue Agency or comparable
rulings of other taxing authorities.
3.22 LITIGATION.
Except as set forth in SCHEDULE "3.22", there is no claim, counter-claim,
action, suit, order, proceeding or investigation pending or, to the knowledge of
the Company or the Principals, threatened against or involving the Company (or
pending or, to the knowledge of the Company or the Principals, threatened
against any of the officers, directors or key employees of the Company with
respect to business activities on behalf of the Company) with respect to or
affecting the Company, its accounts, business, properties, assets or rights, or
relating to the transactions contemplated hereby, before any court, agency,
regulatory, administrative or other governmental body or officer or before any
arbitrator; nor, to the knowledge of the Company or the Principals, is there any
reasonable basis for any such claim, action, suit, proceeding or governmental,
administrative or regulatory investigation. The Company represents and warrants,
and the Principals to the best of their knowledge represent and warrant, that
the Company is not directly subject to or affected by any order, judgment,
decree or ruling of any court or governmental agency. Except as set forth in
SCHEDULE "3.22", none of the Company nor the Principals have received any
written opinion or memorandum of legal advice from legal counsel to the effect
that any of them is exposed to any liability which may be material to the
business, prospects, results of operations, financial condition or assets of the
Company. Except as set forth in SCHEDULE "3.22", the Company is not engaged in
any legal action to recover monies due it or for damages sustained by it, and
none of the assets of the Company nor any of its business practices is in any
manner, directly or indirectly, affected by injunction of any court or
governmental, administrative or regulatory agency or body.
3.23 CONDUCT OF THE BUSINESS.
Except as set forth on SCHEDULE "3.23" and except for any material adverse
change exceeding a value of $25,000, since December 31, 1999 the Company has
conducted its business only in the ordinary course of business consistent with
past custom and practice, and has incurred no liabilities or obligations
whatsoever other than in the ordinary course of business consistent with past
custom and practice and there has been no material adverse change exceeding a
value of $25,000 in the assets, condition (financial or otherwise), results of
operations, employee or customer relations, business activities or business
prospects of the Company, nor does the Company nor the Principals know of any
such change which is threatened, nor has there been any damage, destruction or
loss materially adversely affecting any of the assets, or the business
<PAGE>
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condition (financial or otherwise), results of operations, prospects or
activities of the Company. Without limitation of the foregoing and except as set
forth on SCHEDULES "3.16" or "3.23" and except for any material adverse change
exceeding a value of $25,000, since December 31, 1999 the Company has not:
(a) voluntarily or involuntarily sold, transferred, abandoned,
surrendered, subjected to a Lien or otherwise disposed of any assets or property
rights except in the ordinary course of business consistent with past custom and
practice;
(b) changed any accounting principles, methods or practices utilized by
it or changed any of its depreciation rates or amortization policies or rates;
(c) made any loan or advance to any party in excess of $15,000;
(d) issued, redeemed or purchased any stock, bond or corporate security
or declared or made any payment or distribution on or with respect to its
capital stock;
(e) incurred debt, liabilities, or obligations of any nature whether
accrued, absolute, contingent, direct, indirect, perfected or otherwise and
whether due or to become due except (i) current liabilities incurred and
liabilities under contracts entered into in the ordinary course of business
consistent with past custom and practice and (ii) bonus obligations to the
Shareholders and Principals incurred in the ordinary course of business
consistent with past custom and practice;
(f) save and except for increasing the salaries of the Principals to
$152,000 per annum, increased the compensation payable to any of its officers,
employees or agents;
(g) save and except for repayments of loans to the Principals, paid any
amounts to or for the benefit of the Principals, any officer, employee,
consultant, contractor or agent other than salaries at the rates set forth on
SCHEDULE "3.16";
(h) waived any rights of substantial value;
(i) transferred or disposed of any cash or cash equivalents outside of
the ordinary course of business, consistent with past custom and practice;
(j) entered into any other material transaction out of the ordinary
course of business which has had a material adverse effect on the Company; or
(k) committed to any of the foregoing.
3.24 BROKERS.
None of the Company, nor the Shareholders have (i) incurred any obligation or
liability, contingent or otherwise, for brokers' or finders' fees or commissions
in connection with the transactions contemplated by this Agreement or the
Transaction Documents or (ii) made any
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statement or representation or entered into any discussion which could give rise
to any such obligation or liability of the Company or Lineo.
3.25 OWNERSHIP OF LINEO SHARES.
None of the Company, nor the Shareholders, nor, to the knowledge (such knowledge
being limited to actual knowledge without any duty to inquire) of the Company,
the Shareholders, any of the employees of the Company, own any shares of Lineo.
3.26 NO ILLEGAL OR IMPROPER TRANSACTIONS.
None of the Company, nor the Principals, nor to the knowledge of the Principals,
any of the Company's directors, officers or employees has, directly or
indirectly used funds or other assets of the Company, or made any promise or
undertaking in such regard, for (a) illegal contributions, gifts, entertainment
or other expenses relating to political activity; (b) illegal payments to or for
the benefit of governmental officials or employees, whether domestic or foreign;
(c) illegal payments to or for the benefit of any person, firm, corporation or
other entity, or any director, officer, employee, agent or representative
thereof; or (d) the establishment or maintenance of a secret or unrecorded fund;
and there have been no false or fictitious entries made in the books or records
of the Company with respect thereto.
3.27 NO MISREPRESENTATION.
The Company represents and warrants, and the Principals to the best of their
knowledge represent and warrant, that none of the representations and warranties
of the Company, the Principals or the Shareholders set forth in this Agreement
or any of the Transaction Documents contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements
contained herein or therein not misleading. To the knowledge of the Company and
the Shareholders, there is no material fact or information which has not been
disclosed to Lineo in writing which materially adversely affects or could
reasonably be anticipated to materially adversely affect the business, condition
(financial or otherwise), property or assets of the Company or the ability of
the Company and the Shareholders to consummate the transactions contemplated
hereby.
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF LINEO
As an inducement to the Company and to each Shareholder to enter into and
perform their respective obligations under this Agreement, Lineo hereby
represents and warrants to the Company and to each Shareholder as follows:
4.1 LINEO SHARES.
Lineo's authorized capital stock consists of 100,000,000 shares of Common Stock
and 30,000,000 shares of Preferred Stock, par value $.001 per share. Of such
shares of Preferred Stock, 2,000,000 shares are designated as Series D
Convertible Preferred Stock as set forth in the Certificate of Designation.
Lineo has authorized and has reserved, and covenants to continue to reserve,
free and clear of preemptive and other preferential rights, a sufficient number
of shares
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of its Common Stock to satisfy the rights of conversion of the holders of the
Series D Convertible Preferred Stock (the "Conversion Stock").
4.2 ORGANIZATION AND CORPORATE POWER.
Lineo is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware, and is qualified to do business as a
foreign corporation in each jurisdiction in which the failure to be so qualified
would have a material adverse effect on its assets, liabilities, condition
(financial or other), business, results of operations or prospects (a "Material
Adverse Effect"). Lineo has all required corporate power and authority to carry
on its business as presently conducted, to enter into and perform this Agreement
and the agreements contemplated hereby to which it is a party and to carry out
the transactions contemplated hereby and thereby, including the issuance of
Lineo Shares and the issuance of the Conversion Shares. Lineo is not in
violation of any term of its Certificate of Incorporation and Bylaws, as amended
to date (the "Certificate of Incorporation" and "Bylaws", respectively).
4.3 AUTHORIZATION AND NON-CONTRAVENTION.
The execution, delivery and performance by Lineo of this Agreement and all other
agreements, documents and instruments to be executed and delivered by Lineo as
contemplated hereby (including, without limitation, the Certificate of
Designation) and the issuance and delivery of (i) the Series D Convertible
Preferred Shares and (ii) upon the conversion of the Series D Convertible
Preferred Shares, the Conversion Shares, have been duly authorized by all
necessary corporate and other action of Lineo. This Agreement and each such
other agreement, document and instrument (including, without limitation, the
Certificate of Designation) constitute valid and binding obligations of Lineo,
enforceable in accordance with their respective terms. The execution and
delivery by Lineo of this Agreement and each other agreement, document and
instrument to be executed and delivered by Lineo pursuant hereto or as
contemplated hereby (including, without limitation, the Certificate of
Designation) and the performance by Lineo of the transactions contemplated
hereby and thereby, including, without limitation, the issuance and delivery of
(i) the Series D Convertible Preferred Shares and (ii) upon the conversion of
the Series D Convertible Preferred Shares, the Conversion Shares, do not and
will not: (A) violate, conflict with or result in a default (whether after the
giving of notice, lapse of time or both) under any material contract or
obligation to which Lineo is a party or by which it or its assets are bound, or
any provision of the Certificate of Incorporation or Bylaws of Lineo, or cause
the creation of any material encumbrance upon any of the assets of Lineo; (B)
violate or result in a violation of, or constitute a default under, any
provision of any material law, regulation or rule, or any order of, or any
restriction imposed by, any court or governmental agency applicable to Lineo;
(C) require from Lineo any notice to, declaration or filing with, or consent or
approval of any governmental authority or third party other than as may be
required to secure an exemption from qualification of the offer and sale of the
Series D Convertible Preferred Shares under the Securities Act of 1933, as
amended (the "Securities Act"), and applicable state securities and blue sky
laws; or (D) accelerate any obligation under, or give rise to a right of
termination of, any material agreement, permit, license or authorization to
which Lineo or any of its assets is a party or by which Lineo or any of its
assets is bound.
<PAGE>
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4.4 CAPITALIZATION.
As of the Closing and after giving effect to the transactions contemplated
hereby, the authorized capital stock of Lineo will consist of 100,000,000 shares
of Common Stock, par value $.001 per share, of which 21,482,057 shares will be
issued and outstanding, and 30,000,000 shares of Preferred Stock, par value
$.001 per share, of which (a) 7,500,000 shares will be designated as Series A
Preferred Stock, of which (i) 5,000,000 shares shall be designated as Series A
Class 1 Preferred Stock all of which are issued and outstanding and (ii)
2,500,000 shares shall be designated as Series A Class 2 Preferred Stock all of
which are issued and outstanding, (b) 4,850,000 shares will be designated as
Series B Preferred Stock, of which 4,833,331 shares are issued and outstanding,
(c) 3,000,000 shares will be designated as Series C Preferred Stock and
2,000,000 will be designated as Series D Convertible Preferred Stock. In
addition, Lineo has authorized and reserved for issuance upon conversion of the
Series A Preferred Stock up to 7,500,000 shares of Common Stock (subject to
adjustment for stock splits, stock dividends and the like), has authorized and
reserved for issuance upon conversion of the Series B Preferred Stock up to
4,850,000 shares of Common Stock (subject to adjustment for stock splits, stock
dividends and the like), has authorized and reserved for issuance upon
conversion of the Series C Preferred Stock up to 3,000,000 shares of Common
Stock, has authorized and reserved for issuance upon conversion of the Series D
Convertible Preferred Stock up to 2,000,000 Common Stock (subject to adjustment
for stock splits, dividends and the like) and has reserved for issuance upon
exercise of options under Lineo's stock option plans (the "Plans") 5,000,000
shares of Common Stock (subject to adjustment for stock splits, stock dividends
and the like). Other than as described above, Lineo has not issued or agreed to
issue and is not obligated to issue any warrants, options or other rights to
purchase or acquire any shares of its capital stock, or any securities
convertible into or exercisable or exchangeable for such shares or any warrants,
options or other rights to acquire any such convertible securities. As of the
Closing, and after giving effect to the transactions contemplated hereby, all of
the outstanding shares of capital stock of Lineo (including, without limitation,
the Series D Convertible Preferred Shares) will have been duly and validly
authorized and issued, fully paid and nonassessable and, except as set forth
herein, not subject to any preemptive rights to purchase or otherwise acquire
shares of capital stock of Lineo and will have been offered, issued, sold and
delivered in compliance with applicable federal and state securities and blue
sky laws. The Conversion Shares will, upon issuance, be duly and validly
authorized and issued, fully paid and nonassessable, and not subject to any
preemptive rights, and will be offered, issued, sold and delivered in compliance
with applicable federal and state securities and blue sky laws.
4.5 FINANCIAL STATEMENTS.
Lineo has previously furnished to the Investor copies of its draft audited
financial statements (balance sheet, statement of operations, statement of cash
flows and statement of stockholders equity) for the fiscal year at and ended
October 31, 1999. Such financial statements were prepared in conformity with
generally accepted accounting principles applied on a consistent basis; are
complete, correct and consistent in all material respects with the books and
records of
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Lineo; and fairly and accurately present the financial position of Lineo as of
the dates thereof and the results of operations and cash flows of Lineo for the
periods shown therein.
4.6 ABSENCE OF UNDISCLOSED LIABILITIES.
Except as and to the extent reflected or reserved against in the financial
statements referred to in Section 4.5 above, Lineo does not have and is not
subject to any material liability or obligation of any nature, whether accrued,
absolute, contingent or otherwise. (a)
4.7 NO CONSENT REQUIRED.
Except for a filing under the INVESTMENT CANADA ACT as provided in Section 8.5
and applicable filings under the Securities Act of 1933, as amended, no consent,
approval, order or authorization of, or declaration, filing or registration
with, any person, entity or governmental authority is required to be made or
obtained by Lineo in connection with the authorization, execution, delivery or
performance of this Agreement, the Transaction Documents or the transactions
contemplated hereby including the Hart-Scott-Rodino Act (assuming the truth and
accuracy of the representations and warranties in Section 5.7).
4.8 MATERIAL INFORMATION
The representations and warranties made or contained in this Agreement, the
Confidential Private Placement Memorandum contained in SCHEDULE 4.8, the
exhibits hereto and the certificates or statements executed or delivered in
connection herewith, and the information concerning the business of Lineo
delivered to the Shareholders in connection with or pursuant to this Agreement,
when taken together, do not and shall not contain any untrue statement of a
material fact and do not and shall not omit to state a material fact required to
be stated therein or necessary in order to make such representations, warranties
or other material not misleading in light of the circumstances in which they
were made or delivered. Lineo has fully provided the Shareholders with all the
information that the Shareholders have requested for deciding whether to
consummate the transactions contemplated by this Agreement.
ARTICLE 5 -PRE-CLOSING COVENANTS AND OTHER TERMS
5.1 INVESTIGATION BY LINEO.
Prior to the Closing, the Principals and the Company have and will afford to the
officers, counsel, accountants or other authorized representatives of Lineo
reasonable access during normal business hours to, and otherwise make available
to Lineo, the offices, facilities, properties, files, documents, contracts,
insurance policies, books and records of the Company so as to afford Lineo the
opportunity to make such review, examination and investigation of the Company as
Lineo may request and the Shareholders and the Company at the sole cost of Lineo
will cooperate with Lineo in connection with any permits, approvals, filings or
consents required by law to be obtained. Lineo will be permitted to make
extracts from or to make copies of such
<PAGE>
-17-
books and records as may be reasonably necessary. Except for the materials and
information contained in the Schedules to this Agreement, no investigation,
review, study or examination by Lineo or their representatives shall offset,
limit or diminish the scope of the representations and warranties of the Company
and the Shareholders in this Agreement or reduce or limit the liability of the
Company and the Shareholders for any breach thereof.
5.2 CONDUCT OF BUSINESS.
From the date hereof through the Closing, except as otherwise expressly provided
for in this Agreement, the Company covenants and agrees that it will, and the
Principals agree to cause the Company to carry on the Company's business
diligently, in the ordinary course and in substantially the same manner as such
business has previously been carried out. Without limiting the foregoing or the
other provisions of this Agreement, the Company and the Principals, jointly and
severally, covenant and agree that:
(a) Except as otherwise expressly permitted in this Agreement, or
except as consented to by Lineo, the Company will not (i) increase in any manner
the base compensation of, or enter into any new bonus or incentive agreement or
arrangement with, any of the Company's employees, consultants or contractors,
(ii) pay or agree to pay any additional pension, retirement allowance or other
employee benefit to any such employee, consultant or contractor whether past or
present, (iii) enter into any new employment, severance, consulting, or other
compensation agreement with any existing employee, consultant or contractor,
(iv) hire or offer to hire any new employees, consultants or contractors, (v)
pay any amount to or for the benefit of the Shareholders or any officer,
employee, consultant, contractor or agent other than salaries at the rates set
forth on SCHEDULE "3.16" and other distributions referred to in SCHEDULE "3.13",
or (vi) amend any existing or enter into any new Employee Benefit Plan.
(b) The Company will use its best efforts to keep available the
services of its present employees, consultants and contractors and preserve the
goodwill, reputation and present relationships of the Company with its
suppliers, customers, licensors and others having business relations with the
Company.
(c) The Company shall not create any obligation or liability (absolute
or contingent) except current liabilities incurred in the ordinary course of
business consistent with past custom and practice and obligations under
contracts entered into in the ordinary course of business consistent with past
custom and practice.
(d) The Company will (i) maintain its property and assets in good
repair, order and condition (ordinary wear and tear excepted), (ii) maintain and
keep in full force existing insurance, (iii) maintain the books and records in
the usual, regular and ordinary manner on a basis consistent with past
practices, and (iv) perform and comply with its contractual obligations,
including without limitation obligations under Material Contracts and Permits.
The Company shall not mortgage, hypothecate, grant Liens in or otherwise
encumber its interest in the Leased Property, or sublease its interest in the
Leased Property or amend any material lease to which it is a party or by which
it is bound.
<PAGE>
-18-
(e) The Company shall not amend its Articles of Incorporation or
Bylaws.
(f) Except in the ordinary course of business consistent with past
custom and practice or as otherwise expressly provided for in this Agreement,
the Company shall not: (i) sell, lease, transfer or otherwise dispose of any of
its properties or assets, including without limitation cash and cash
equivalents, (ii) create or permit to exist any new Lien on any of its
properties or assets, (iii) enter into any joint venture, partnership or other
similar arrangement, (iv) accelerate or delay any service to be rendered to a
customer of the Company in a manner inconsistent with past practices, (v) make
any new commitments for capital expenditures, or (vi) enter into any commitment
to borrow money.
(g) The Company shall duly and timely file all Tax Returns and
information returns and pay all Taxes when due.
(h) The Company shall not undertake any action or fail to take any
action that will result in a breach of the representations and warranties set
forth in Article 3 hereof as if made on and as of the Closing Date.
(i) The Company will not declare or pay any dividend or make any other
distribution to any shareholders with respect to the shares of the Company, will
not purchase or redeem any of its shares, will not issue rights or options to
purchase or subscribe to any shares, issue or sell any shares or alter its
equity interests.
(j) The Company will not grant any power of attorney.
(k) The Company and the Principals will promptly supply to Lineo copies
of all litigation or legal proceedings pertaining in any way to the Company or
the assets or business which may arise after the date hereof and will advise
Lineo promptly in writing of any threat of litigation or other legal proceedings
pertaining thereto.
5.3 NON-NEGOTIATION.
In consideration of the substantial expenditure of time, effort and expense
undertaken by Lineo in connection with its due diligence review and the
preparation and execution of this Agreement and the Transaction Documents, the
Company and the Shareholders agree that none of the Company and the
Shareholders, or any of their respective representatives, agents or employees
will, after the execution of this Agreement until the earlier of (i) the
termination of this Agreement, or (ii) the Closing, directly or indirectly,
solicit, encourage, initiate, negotiate or discuss with any third party or
permit the consummation of any acquisition proposal relating to or affecting the
Company or any part of the Company, or any direct or indirect interests in the
Company, whether by purchase of assets or stock, purchase of interests, business
combination, merger or other transaction, and that the Company and the
Shareholders will promptly advise Lineo of the terms of any communications, the
Company or the Shareholders may receive or become aware of relating to any bid
for all or any part of any such interest in the Company.
<PAGE>
-19-
5.4 REASONABLE COMMERCIAL EFFORTS.
The Company and the Shareholders will each use reasonable commercial efforts
between the date hereof and the Closing to secure fulfilment of all of the
conditions precedent to Lineo's obligations hereunder, and Lineo will use
reasonable commercial efforts between the date hereof and the Closing to secure
fulfilment of all of the conditions precedent to the obligations of the Company
and the Shareholders hereunder.
5.5 PRINCIPALS.
The Principals will cause the Company to comply with the provisions of this
ARTICLE 5. The Shareholders agree not to grant any power of attorney with
respect to the Company Shares, the Company, or the Company's business or assets.
The Shareholders will not sell any Company Shares or in any way reduce prior to
the Closing their risk or commit to reduce their risk with respect to Company
Shares owned by the Shareholders or the Lineo Shares to be acquired by the
Shareholders hereunder.
5.6 MARKET STAND-OFF AGREEMENT.
In connection with a public offering by Lineo, the Shareholders if requested in
good faith by Lineo and the managing underwriter of the public offering, shall
agree not to sell or otherwise transfer or dispose of any securities of Lineo
held by them (except for any securities sold pursuant to such registration
statement) for a period following the effective date of the applicable
registration statement that in no event shall exceed 180 days. In order to
enforce the foregoing, Lineo may impose stop-transfer instructions with respect
to the Lineo Shares held by such Shareholder (and the shares of securities of
every other person subject to the foregoing restriction) until the end of such
period.
5.7 SECURITIES LAW COMPLIANCE.
(a) Each of the Shareholders agrees that all offers and sales of the
Lineo Shares prior to one year after the Closing shall be made only in
accordance with the provisions of Rule 904 under the Securities Act, pursuant to
registration of the Lineo Shares under the Securities Act; or pursuant to an
available exemption from the registration requirements of the Securities Act;
and not to engage in hedging transactions with regard to the Lineo Shares prior
to one year after the Closing unless in compliance with the Securities Act.
(b) The Shareholders acknowledge that the Lineo Shares have not been
registered under the Securities Act and may not be offered or sold in the United
States or to U.S. persons (other than distributors) unless the Lineo Shares are
registered under the Securities Act, or an exemption from the registration
provisions of the Securities Act is available. The Shareholders further
acknowledge that hedging transactions involving the Lineo Shares may not be
conducted unless in compliance with the Securities Act.
(c) Each of the Shareholders represents to Lineo that he has such
knowledge and experience in financial and business matters that he is capable of
evaluating the merits and risks of the investment contemplated by this Agreement
and making an informed investment
<PAGE>
-20-
decision with respect thereto. Each of the Shareholders represents and
understands that he is responsible for his own due diligence investigation and
satisfying his own due diligence requirements and shall not be entitled to rely
on the due diligence investigation of any other person or entity. Each of the
Shareholders represents to Lineo that he is acquiring the Lineo Stock for his
own account, for investment only and not with a view to, or any present
intention of, effecting a distribution of such securities or any part thereof
except pursuant to a registration or an available exemption under applicable
law. Each of the Shareholders acknowledges that the Lineo Stock has not been
registered under the Securities Act of 1933 or the securities laws of any state
or other jurisdiction and cannot be disposed of unless it is subsequently
registered under the Securities Act and any applicable state laws or exemption
from such registration is available. Each of the Shareholders represents that
there are no claims for investment banking fees, brokerage commissions, finder's
fees or similar compensation (exclusive of professional fees to lawyers and
accountants) in connection with the transactions contemplated by this Agreement
based on any arrangement or agreement made by or on behalf of such Shareholder.
ARTICLE 6 - CONDITIONS PRECEDENT TO THE CLOSING
6.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF LINEO.
The obligations of Lineo under this Agreement to consummate the transactions
contemplated hereby will be subject to the satisfaction, at or prior to the
Closing, of all of the following conditions, any one or more of which may be
waived at the option of Lineo:
(a) NO BREACH OF COVENANTS; TRUE AND CORRECT REPRESENTATIONS AND
WARRANTIES. There shall have been no material breach by the Company or the
Shareholders in the performance of any of their respective covenants herein to
be performed by any or all of them in whole or in part prior to the Closing, and
the representations and warranties of the Company and the Shareholders contained
in this Agreement, if specifically qualified by materiality, shall be true and
correct as of the Closing and, if not so qualified, shall be true and correct in
all material respects as of the Closing, except for representations or
warranties that are made by their terms as of a date specified by month, day and
year, which shall be true and correct or true and correct in all material
respects, as applicable, as of such specified date. Lineo shall receive at the
Closing a certificate dated and validly executed on behalf of the Company
certifying, in such detail as Lineo may reasonably require, the fulfilment of
the foregoing conditions, and restating and reconfirming as of the Closing all
of the covenants, representations and warranties of the Company and the
Shareholders contained in this Agreement, specifying in detail the extent of any
breaches thereof.
(b) DELIVERY OF DOCUMENTS. Lineo shall have received all documents and
other items to be delivered under Section 7.2.
(c) NO LEGAL OBSTRUCTION. No suit, action or proceeding not disclosed
in the Schedules to this Agreement by any person, entity or governmental agency
shall be pending or threatened in writing, which if determined adverse to the
Company or Lineo's interests in the Company, could reasonably be expected to
have a material adverse effect upon (i) the properties, assets, condition
(financial or otherwise), operating results, employee, customer or supplier
<PAGE>
-21-
relations, business activities or business prospects of the Company, (ii) Lineo,
or (iii) the benefits to Lineo of the transactions contemplated hereby. No
injunction, restraining order or order of any nature shall have been issued by
or be pending before any court of competent jurisdiction or any governmental
agency challenging the validity or legality of the transactions contemplated
hereby or restraining or prohibiting the consummation of such transactions or
compelling Lineo to dispose of or discontinue or materially restrict the
operations of a significant portion of the Company. All material permits,
approvals, filings and consents required or advisable to be obtained or made,
and all waiting periods required or contemplated to expire, prior to the
consummation of the transactions contemplated hereby or applicable laws of any
country having jurisdiction over the transactions contemplated hereby shall have
been obtained, made or expired, as the case may be (all such permits, approvals,
filings and consents and the lapse of all such waiting periods being referred to
as the "Requisite Regulatory Approvals"), and all such Requisite Regulatory
Approvals shall be in full force and effect.
(d) DAMAGE OR DESTRUCTION. From the date hereof until the Closing,
there shall have been no material loss or destruction of any portion of the
properties or assets of the Company, nor any institution or threat of any
condemnation or other proceedings to acquire or limit the use of any of the
properties or assets of the Company.
(e) NO MATERIAL ADVERSE CHANGE. From the date hereof until the Closing,
there shall have been no material adverse change in the properties, assets,
condition (financial or otherwise), operating results, employee, customer or
supplier relations, business activities or business prospects of the Company and
the Company shall not have lost any material customer (or, in the aggregate, any
material portion of the Company's business).
(f) APPROVAL BY LINEO'S COUNSEL AND ACCOUNTANTS. All actions,
proceedings, instruments and documents reasonably required to carry out this
Agreement and all other related legal and accounting matters shall have been
reasonably approved as to form and substance by counsel and accountants for
Lineo.
(g) LEASE. The landlord with respect to the premises located at 195 The
West Mall, Suite 608, Toronto, Ontario, shall have provided its consent or the
Principals shall have taken action to obtain such consent, if required, to the
transaction contemplated by this Agreement.
(h) TAXES. The Company and the Shareholders shall cooperate with Lineo
to file an election under Section 338(g) of the Internal Revenue Code at Lineo's
sole cost and expense.
6.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE
SHAREHOLDERS.
The obligations of the Company and the Shareholders under this Agreement to
consummate the transactions contemplated hereby will be subject to the
satisfaction, at or prior to the Closing, of all the following conditions, any
one or more of which may be waived at the option of the Company and the
Shareholders:
<PAGE>
-22-
(a) NO BREACH OF COVENANTS; TRUE AND CORRECT REPRESENTATIONS AND
WARRANTIES. There shall have been no material breach by Lineo in the performance
of any of the covenants herein to be performed by it in whole or in part prior
to the Closing, and the representations and warranties of Lineo contained in
this Agreement, if specifically qualified by materiality, shall be true and
correct as of the Closing and, if not so qualified, shall be true and correct in
all material respects as of the Closing, except for representations or
warranties that are made by their terms as of a date specified by month, day and
year, which shall be true and correct or true and correct in all material
respects, as applicable, as of such specified date. The Company and the
Shareholders shall receive at the Closing a certificate dated as of the Closing
and executed on behalf of Lineo, certifying in such detail as the Company and
the Shareholders may reasonably require, the fulfilment of the foregoing
conditions, and restating and reconfirming as of the Closing all of the
covenants, representations and warranties of Lineo contained in this Agreement,
specifying in detail the extent of any breaches thereof.
(b) DELIVERY OF DOCUMENTS. The Company and the Shareholders shall have
received all documents and other items to be delivered by Lineo under Section
7.3.
(c) NO LEGAL OBSTRUCTION. All Requisite Regulatory Approvals shall be
in full force and effect.
(d) APPROVAL BY COUNSEL AND ACCOUNTANTS. All actions, proceedings,
instruments and documents reasonably required to carry out this Agreement and
all other related legal and accounting matters shall have been reasonably
approved as to form and substance by counsel and accountants for the Company and
the Shareholders.
(e) NO MATERIAL ADVERSE CHANGE. From the date hereof until the Closing,
there shall have been no material adverse change in the properties, assets,
condition (financial or otherwise), operating results, employee, customer or
supplier relations, business activities or business prospects of Lineo.
ARTICLE 7 - CLOSING
7.1 CLOSING.
The consummation of the transactions that are the subject of this Agreement will
be closed (the "Closing") at the office of Owens, Wright, Suite 401, 20 Holly
Street, Toronto, Ontario, no later than the third business day after the
satisfaction or waiver of the conditions to the parties' obligations set forth
in Article 6 hereof (other than the delivery of certificates and opinions
contemplated to be delivered at the Closing, which shall be delivered at the
Closing) or at such other time or place as the parties may mutually agree (the
"Closing Date") and in any event no later than 5:00 p.m. Toronto time on May 16,
2000. In the event that the transactions contemplated hereby have not closed on
or before 5:00 p.m. Toronto time on May 16, 2000, and (i) on such date the
Company and the Shareholders on the one hand or Lineo on the other is ready,
willing and able to satisfy the conditions precedent to Closing of the other
party or parties (the "Ready Party"), and the other party or parties is or are
not so ready, willing and able, or (ii)
<PAGE>
-23-
the conditions to a party's obligations set forth in Article 6 hereof are not
satisfied (except as a result of a material default or breach of this Agreement
by such party) (the "Specified Party"), then the Ready Party or Specified Party
may, in addition to any other remedies it may have, terminate this Agreement
upon written notice to the others without liability to such other parties.
7.2 DELIVERIES BY THE COMPANY AND THE SHAREHOLDERS.
At the Closing, the Company and the Shareholders shall deliver or cause to be
delivered to Lineo:
(a) SHARE CERTIFICATES AND INSTRUMENTS OF CONVEYANCE. Certificates for
all of the Company Shares, accompanied by stock powers duly executed in blank,
with all necessary stock transfer and other documentary stamps attached;
(b) CONSENTS. Copies of all written consents required to be obtained by
the Company or the Shareholders in connection with the transactions contemplated
by this Agreement and the Transaction Documents, and specified in SCHEDULE
"3.7", in form and substance reasonably satisfactory to Lineo;
(c) OPINION OF COUNSEL. An opinion of counsel for the Company, dated as
of the Closing Date, in form and substance reasonably satisfactory to counsel
for Lineo;
(d) CORPORATE DOCUMENTS. The Company's Articles of Incorporation and
Bylaws certified by an appropriate officer of the Company as in effect at the
Closing;
(e) CERTIFICATES OF GOOD STANDING. Certificates of good standing, dated
as of a recent date for each of the Company and any corporate Shareholder,
issued by an appropriate official of the Province of Ontario;
(f) RESOLUTIONS. A copy of the resolutions of the Board of Directors of
the Company certified by the secretary of the Company as having been duly and
validly adopted and in full force and effect as of the Closing Date authorizing
execution and delivery of this Agreement and the Transaction Documents and
performance, and the appointment and elections of officers and directors of the
Company nominated by Lineo, and consummation of the transactions contemplated
hereby and thereby by the Company; and
(g) OTHER DOCUMENTS. Such other documents and instruments as Lineo or
its counsel or accountants reasonably shall deem necessary to consummate the
transactions contemplated hereby.
All documents delivered to Lineo shall be in form and substance reasonably
satisfactory to counsel and accountants for Lineo.
7.3 DELIVERIES BY LINEO.
At the Closing, Lineo will deliver to the Company and/or the Shareholders,
simultaneously with delivery of the items referred to in Section 7.2 above:
<PAGE>
-24-
(a) LINEO SHARES. Certificates representing the Lineo Shares being
issued to the Shareholders, issued in the name of the Shareholders together with
all necessary share transfer and other documentary stamps attached;
(b) CASH ON Closing. Cash, certified cheques or bank drafts in the
amounts described in SCHEDULE "1.1(a)" representing the cash consideration;
(c) EXPENSES. Cash, certified cheques, or bank drafts representing the
expenses described in paragraph 9.6;
(d) PUT AGREEMENT. An agreement satisfactory to all parties hereto
between the Principals and Lineo which grants the right to each of the
Shareholders to cause Lineo to purchase by cash or certified cheque from each of
the Principals the Lineo Shares or Conversion Shares;
(e) EMPLOYMENT AND STOCK OPTION AGREEMENTS. Employment Agreements
entered into by each of the Principals and the Company, and Stock Option
Agreements entered into by each of Darren Best, Steve Robinson and the Company,
in each case satisfactory to the Principals, Messrs. Best and Robison, as the
case may be, and Lineo;
(f) OPINION OF COUNSEL. An opinion of counsel for Lineo, dated as of
the Closing Date, in form and substance reasonably satisfactory to counsel for
Lineo;
(g) CORPORATE DOCUMENTS. Lineo's Articles of Incorporation and Bylaws
certified by an appropriate officer of Lineo as in effect at the Closing;
(h) CERTIFICATES OF GOOD STANDING. Certificates of good standing, dated
as of a recent date for Lineo, issued by an appropriate official of the State of
Delaware;
(i) RESOLUTIONS. A copy of the resolutions of the Board of Directors of
Lineo certified by the secretary of Lineo, as having been duly and validly
adopted and in full force and effect as of the Closing Date authorizing
execution and delivery of this Agreement and the Transaction Documents and
performance, and consummation of the transactions contemplated hereby and
thereby by Lineo; and
(j) OTHER DOCUMENTS. Such other documents and instruments as the
Company, the Shareholders or their counsel or accountants reasonably shall deem
necessary to consummate the transactions contemplated hereby.
All documents delivered to the Company and/or the Shareholders shall be in form
and substance reasonably satisfactory to counsel for the Company and the
Shareholders.
<PAGE>
-25-
ARTICLE 8 - OTHER AGREEMENTS
8.1 CONFIDENTIALITY.
(a) CONFIDENTIALITY. After the Closing, each Shareholder and Principal
shall strictly maintain the confidentiality of all information, documents and
materials relating to the Company or the transactions contemplated by this
Agreement, including without limitation the terms of this Agreement, except to
the extent disclosure of any such information is required by law or authorized
by Lineo or reasonably occurs in connection with disputes over the terms of this
Agreement. In the event that a Shareholder or a Principal reasonably believes
after consultation with counsel that it is required by law to disclose any
confidential information described in this SECTION 8.1(a), the Shareholders will
(i) provide Lineo with prompt notice before such disclosure in order that Lineo
may attempt to obtain a protective order or other assurance that confidential
treatment will be accorded to confidential information, and (ii) cooperate with
Lineo in attempting to obtain such order or assurance. The provisions of this
SECTION 8.1(a) shall not apply to any information, documents or materials which
are in the public domain or shall come into the public domain, other than by
reason of default by the Shareholders or any of their Affiliates of this
Agreement or becomes known in the industry through no wrongful act on the part
of the Shareholders.
(b) REMEDIES. Without limiting the right of Lineo to pursue all other
legal and equitable rights available to it, including without limitation,
damages for the actual or threatened violation of this SECTION 8.1 by the
Shareholders, it is agreed that other remedies cannot fully compensate Lineo for
such a violation and that Lineo shall be entitled to injunctive relief and/or
specific performance to prevent violation or continuing violation thereof. It is
the intent and understanding of each party hereto that if, in any action before
any court or agency legally empowered to enforce this SECTION 8.1, any term,
restriction, covenant or promise in this SECTION 8.1 is found to be unreasonable
and for that reason unenforceable, then such term, restriction, covenant or
promise shall be deemed modified to the extent necessary to make it enforceable
by such court or agency.
8.2 SURVIVAL OF REPRESENTATION AND WARRANTIES.
All of the representations and warranties set forth in this Agreement or in any
of the Transaction Documents shall survive the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby, regardless of any investigation, inquiry or examination
made for or on behalf of or any knowledge of Lineo, the Company or the
Shareholders or the acceptance by any of them of any certificate or opinion for
two years after Closing.
8.3 COOPERATION AFTER THE CLOSING.
Lineo, the Company and the Shareholders will, at any time, and from time to
time, after the Closing Date, execute and deliver such further instruments of
conveyance and transfer and take such additional action as may be reasonably
necessary to effect, consummate, confirm or evidence the transactions
contemplated by this Agreement and the Transaction Documents.
<PAGE>
-26-
Without limiting the other obligations of the Shareholders hereunder, the
Shareholders agree that, after the Closing, the Shareholders shall provide
reasonable cooperation and assistance to Lineo or the Company, at Lineo's or the
Company's sole cost and expense, with respect to any matters, disputes, suits or
claims by or against any person not a party to this Agreement.
8.4 TAX MATTERS.
(a) TAX PERIODS ENDING ON OR BEFORE THE CLOSING DATE. The Principals
shall be responsible for the preparation of the Tax Returns of the Company for
all taxable periods ending on or prior to the Closing Date. Such Tax Returns,
together with all work papers and schedules related thereto, shall be delivered
to Lineo for its review and acceptance no later than thirty (30) days prior to
the earlier of (i) the date on which Lineo anticipates that Lineo's independent
chartered accountants will issue their final report and opinion with respect to
Lineo's audit of the financial statements containing combined operations of
Lineo and the Company for the fiscal year in which the Closing occurs and (ii)
the filing of such returns, and shall be prepared in a manner consistent with
prior practice unless otherwise required by applicable laws. The Principals
shall reimburse Lineo for Taxes payable by the Company with respect to such
period within fifteen (15) days after payment by Lineo of such Taxes to the
extent such unpaid Taxes are not reflected in reserves for Tax liabilities
(other than any reserve for deferred taxes) on the books and records of the
Company. In this regard, Lineo will require the Company to provide
representatives of the Principals with access to the books and records of the
Company during normal business hours.
(b) TAX PERIODS BEGINNING BEFORE AND ENDING AFTER THE CLOSING DATE.
Lineo shall prepare or cause to be prepared and file or cause to be filed all
Tax Returns of the Company for all periods which begin on or prior to the
Closing Date and end after the Closing Date. All liability for Taxes of the
Company with respect to such period shall rest with Lineo.
(c) PRE-CLOSING PERIOD/POST-CLOSING PERIOD. For purposes of this
Agreement, (i) the allocation of Taxes for a straddle period between the period
prior to the Closing Date (the "Pre-Closing Period") and the period after the
Closing Date (the "Post-Closing Period") shall be made on the basis of an
interim Closing of the books as of the end of the Closing Date; (ii) any Tax
resulting from any transaction undertaken pursuant to or contemplated by this
Agreement is attributable to the Post-Closing Period.
8.5 INVESTMENT CANADA
Within 30 days after the Closing, Lineo agrees to file a Notification of the
transaction in accordance with the INVESTMENT CANADA ACT.
<PAGE>
-27-
ARTICLE 9 - MISCELLANEOUS
9.1 NOTICES, CONSENTS, ETC.
Any notices, consents or other communication required to be sent or given
hereunder by any of the parties shall in every case be in writing and shall be
deemed properly served if (a) delivered personally, or (b) delivered by courier,
at the addresses as set forth below or at such other addresses as may be
furnished in writing. All such notices and communications shall be deemed
received upon the delivery thereof in accordance with the foregoing.
(a) If to the Shareholders, c/o:
John Fabrizio
195 The West Mall
Suite 608
Toronto, Ontario
M9C 5K1
with a copy to:
Owens, Wright
20 Holly Street
Suite 401
Toronto, Ontario
M4S 3B1
Attn: Steven A. Robinson
(b) If to the Company (prior to the Closing):
RT-Control Inc.
195 The West Mall
Suite 608
Toronto, Ontario
M9C 5K1
Attn: John Fabrizio
If prior to the Closing, with a copy to:
Owens, Wright
20 Holly Street
Suite 401
Toronto, Ontario
M4S 3B1
<PAGE>
-28-
Attn: Steven A. Robinson
(c) If to Lineo or, after the Closing, the Company:
Lineo, Inc.
390 South 400 West
Lindon, Utah
84042
Attn: Matthew R. Harris
with a copy to:
Summit Law Group, PLLC
1505 Westlake Avenue North, Unit 300
Seattle, Washington
98109
Attn: Michael J. Erickson
9.2 SEVERABILITY.
The unenforceability or invalidity of any provision of this Agreement shall not
affect the enforceability or validity of any other provision which shall remain
in full force and effect and be enforceable to the fullest extent permitted by
law.
9.3 AMENDMENT AND WAIVER.
This Agreement may not be amended orally but may only be amended in writing by
all of the parties hereto. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
other breach or as a waiver by any other party hereto.
9.4 DOCUMENTS.
Each party will execute all documents and take such other actions as any other
party may reasonably request in order to consummate the transactions provided
for herein and to accomplish the purposes of this Agreement.
9.5 COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of which shall
be deemed an original but all of which together shall constitute one and the
same agreement.
9.6 EXPENSES.
Lineo shall pay all reasonable costs and expenses incurred or to be incurred by
the Shareholders and/or the Company in negotiating and preparing this Agreement
and in closing and carrying out the transactions contemplated by this Agreement
and the Transaction Documents, including
<PAGE>
-29-
without limitation all legal and accounting fees and expenses and fees and
expenses relating to the preparation of the Financial Statements deemed
obligations of the Company for purposes of the Financial Statements and tax
advice. Lineo shall pay all costs and expenses incurred or to be incurred by
Lineo in negotiating and preparing this Agreement and in closing and carrying
out the transactions contemplated by this Agreement and the Transaction
Documents.
9.7 GOVERNING LAW.
This Agreement shall be construed and enforced in accordance with, and all
questions concerning the construction, validity, interpretation and performance
of this Agreement shall be governed by, the laws of the State of Delaware and
the laws of the United States applicable therein, without giving effect to
provisions thereof regarding conflicts of law.
9.8 HEADINGS.
The subject headings of Articles and Sections of this Agreement are included for
purposes of convenience only and shall not affect the construction or
interpretation of any of its provisions.
9.9 ASSIGNMENT.
This Agreement will be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns. Neither this Agreement nor
any of the rights, interests or obligations hereunder may be assigned or
delegated by a Shareholder in any manner whatsoever, whether directly or by
operation of law or otherwise, without the prior written consent of Lineo. Lineo
shall have the right to assign this Agreement to an Affiliate, provided Lineo
shall continue to be obligated hereunder, including to issue the Lineo Shares.
9.10 DEFINITIONS.
For purposes of this Agreement, the following terms have the meaning set forth
below:
"BUSINESS" shall be a collective reference to any and all aspects of the
embedded linux business of the Company.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"KNOWLEDGE" or "TO THE BEST KNOWLEDGE" means actual knowledge without
investigation.
"LIENS" means any liens, claims, mortgages, charges, security interests, pledges
or other encumbrances or adverse claims or interests of any nature.
"TAX" and "TAXES" means all taxes including any federal, provincial, local or
foreign income, gross receipts, capital, franchise, import, goods and services,
value added, sales and use, alternative minimum, add-on minimum, sales, use,
transfer, registration, excise, natural resources, severance, stamp, occupation,
premium, windfall profit, environmental, customs, duties, real property,
personal property, capital stock, social security, unemployment, disability,
payroll, license, employee withholding, or other tax, of any kind whatsoever,
including any interest, penalties or additions to tax or additional amounts in
respect of the foregoing.
<PAGE>
-30-
"TAX RETURNS" means returns, declarations, reports, claims for refund,
information returns or other documents (including any related or supporting
Schedules, statements or information) filed or required to be filed in
connection with the determination, assessment or collection of any Taxes of any
party or the administration of any laws, regulations or administrative
requirements relating to any Taxes.
"U.S. PERSON" shall mean: (i) any natural person resident in the United States;
(ii) any partnership or corporation organized or incorporated under the laws of
the United States; (iii) any estate of which any executor or administrator is a
U.S. person; (iv) any trust of which any trustee is a U.S. person; (v) any
agency or branch of a foreign entity located in the United States; (vi) any
non-discretionary account or similar account (other than an estate or trust)
held by a dealer or other fiduciary for the benefit or account of a U.S. person;
(vii) any discretionary account or similar account (other than an estate or
trust) held by a dealer or other fiduciary organized, incorporated , or (if an
individual) resident in the United States; and (viii) any partnership or
corporation if: (a) organized or incorporated under the laws of any foreign
jurisdiction; and (b) formed by a U.S. person principally for the purpose of
investing in securities not registered under the Securities Act, unless it is
organized or incorporated, and owned, by accredited investors (as defined in
Rule 501(a) of the Securities Act) who are not natural persons, estates or
trusts.
9.11 ENTIRE AGREEMENT.
This Agreement, the Transaction Documents, and the documents, schedules and
exhibits described herein or attached or delivered pursuant hereto constitutes
the sole and only agreement among the parties with respect to the subject matter
hereof. Any agreements, representations or documentation respecting the
transactions contemplated by this Agreement, including without limitation, any
correspondence, discussions or course of dealing, which are not expressly set
forth in this Agreement, the Transaction Documents, or the documents, schedules
and exhibits described herein or attached or delivered pursuant hereto or are
null and void, it being understood that no party has relied on any
representation not set forth in this Agreement, the Transaction Documents or the
documents, schedules and exhibits described herein or attached or delivered
pursuant hereto. It is expressly understood and agreed that upon Closing, the
Confidentiality Agreement shall automatically be rendered null and void to the
same extent as if it were never executed.
9.12 THIRD PARTIES.
Except as expressly set forth in Section 11.9 or 3.1(c) of this Agreement,
nothing herein expressed or implied is intended or shall be construed to confer
upon or give to any person or entity, other than the parties to this Agreement
and their respective permitted successors and assigns, any rights or remedies
under or by reason of this Agreement.
9.13 INTERPRETATIVE MATTERS.
Unless the context otherwise requires, (a) all references to Articles, Sections
or Schedules are to Articles, Sections or Schedules in and to this Agreement,
and (b) words in the singular or plural include the singular and plural,
pronouns stated in either the masculine, the feminine or neuter gender shall
include the masculine, feminine and neuter, and (d) the term "including" shall
mean
<PAGE>
-31-
by way of example and not by way of limitation. All references to "dollars",
"$", and "CDN" in this Agreement are references to Canadian dollars unless
prefixed by "U.S.".
9.14 NO STRICT CONSTRUCTION.
The language used in this Agreement will be deemed to be the language chosen by
the parties hereto to express their mutual intent, and no rule of strict
construction will be applied against any party hereto.
9.15 DEFAULT.
The mere lapse of time for performing any obligation or covenant contained
herein shall serve to put the party who is obliged to perform or fulfil such
obligation or covenant in default, without any notice or demand being required
therefor.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
LINEO, INC.
Per:
---------------------------
Name:
Title:
RT-CONTROL INC.
Per:
---------------------------
Name:
Title:
<PAGE>
-32-
SIGNED, SEALED & DELIVERED )
in the presence of: )
)
)
- -------------------------------- ) -----------------------------------
WITNESS ) John Fabrizio
)
)
)
- -------------------------------- ) -----------------------------------
WITNESS ) Michael David Durrant
)
)
)
- -------------------------------- ) -----------------------------------
WITNESS ) Donald Jeff Dionne
)
)
)
- -------------------------------- ) -----------------------------------
WITNESS ) Steven A. Robinson
)
)
)
- -------------------------------- ) -----------------------------------
WITNESS ) Darren Best
)
)
<PAGE>
-33-
SCHEDULE "1.1(a)"
<TABLE>
<CAPTION>
I II
NUMBER OF
NUMBER OF SHARES OF
NAME OF NAME OF COMPANY SERIES D CASH
SHAREHOLDER PRINCIPAL SHARES CONVERTIBLE PAYMENT
PREFERRED
STOCK
<S> <C> <C> <C> <C>
John Fabrizio John Fabrizio 97 134,723 --
Michael D. Durrant Michael D. Durrant 97 134,723 --
Donald J. Dionne Donald J. Dionne 97 134,723 --
Steve A. Robinson 3 -- $5,000 U.S.
Darren Best 6 -- $10,000 U.S.
TOTALS 300 404,169 (x $6 = $15,000 U.S.
$2,425,014
</TABLE>
<PAGE>
-34-
SCHEDULE "1.1(b)"
CERTIFICATE OF DESIGNATION OF SERIES D CONVERTIBLE PREFERRED SHARES
<PAGE>
-35-
SCHEDULE "3.4"
ORGANIZATIONAL DOCUMENTS - RT-CONTROL INC.
<PAGE>
-36-
SCHEDULE "3.7"
Consent of Oxford Properties Group Inc. required under the lease of the Premises
located at 195 The West Mall, Suite 608, Toronto, Ontario as such lease is
contained in Schedule 3.11(b).
<PAGE>
-37-
SCHEDULE "3.8(a)"
FINANCIAL STATEMENTS
<PAGE>
-38-
SCHEDULE "3.8(b)"
Professional Fees accrued but not billed $5,183.19
<PAGE>
-39-
SCHEDULE "3.9"
SHAREHOLDER'S LIABILITY
SHAREHOLDER LOANS (NOT INCLUDING ACCRUED EMPLOYMENT PAYMENTS)
As at April 30, 2000:
Michael Durrant $9,662.91
Jeff Dionne $3,556.37
John Fabrizio $2,372.46
<PAGE>
-40-
SCHEDULE "3.11(a)"
Liens pursuant to a search of the Personal Property Security Act Registry,
Ontario with a file currency date of May 4, 2000
RT-CONTROL INC. - NIL
JOHN FABRIZIO
<TABLE>
<CAPTION>
- ------------------------------------ --------------- -------------------- ------------------------ -------------------
Registration File Collateral
Number Number Secured Party Classification Expiry Date
- ------------------------------------ --------------- -------------------- ------------------------ -------------------
<S> <C> <C> <C> <C>
19990428 1842 1531 8747 850496004 General Motors Consumer Goods, Apr. 28, 2003
Acceptance Other, incl. Motor
Corporation of Vehicle
Canada
Limited
- ------------------------------------ --------------- -------------------- ------------------------ -------------------
</TABLE>
MICHAEL DURRANT - NIL
JEFFREY DIONNE
<TABLE>
<CAPTION>
- ------------------------------------ --------------- -------------------- ------------------------ -------------------
Registration File Collateral
Number Number Secured Party Classification Expiry Date
- ------------------------------------ --------------- -------------------- ------------------------ -------------------
<S> <C> <C> <C> <C>
19980402 1810 1531 4289 839492757 HongKong Consumer Goods, Apr. 2, 2002
Bank of Other, incl. Motor
Canada Vehicle
- ------------------------------------ --------------- -------------------- ------------------------ -------------------
</TABLE>
DARREN BEST
<TABLE>
<CAPTION>
- ------------------------------------ --------------- -------------------- ------------------------ -------------------
Registration File Collateral
Number Number Secured Party Classification Expiry Date
- ------------------------------------ --------------- -------------------- ------------------------ -------------------
<S> <C> <C> <C> <C>
19990818 1844 1531 4347 854099685 Bank of Nova Consumer Goods, Aug. 13, 2003
Scotia incl. Motor
Vehicle
- ------------------------------------ --------------- -------------------- ------------------------ -------------------
</TABLE>
STEVEN ROBINSON
<TABLE>
<CAPTION>
- ------------------------------------ --------------- -------------------- ------------------------ -------------------
Registration File Collateral
Number Number Secured Party Classification Expiry Date
- ------------------------------------ --------------- -------------------- ------------------------ -------------------
<S> <C> <C> <C> <C>
20000418 1823 1531 5229 861038469 Bank of Nova Consumer Goods, April 15, 2004
Scotia incl. Motor
Vehicle
- ------------------------------------ --------------- -------------------- ------------------------ -------------------
</TABLE>
<PAGE>
-41-
SCHEDULE "3.11(b)"
LEASED PROPERTY
1. Offer to Sublease
2. Landlord's Consent to Sublease
3. Lease
4. Copier Lease
<PAGE>
-42-
SCHEDULE "3.12"
PROPERTY AT OTHER LOCATIONS
NIL
<PAGE>
-43-
SCHEDULE "3.13"
MATERIAL CONTRACTS
Earthlink Value: $18,850 US
3100 New York Due: May 15, 2000
Pasedena, CA
USA 91107
Science Horizons Value: $31,800 US
1333 Gateway Dr. Due: May 28, 2000
Suite 1028
Melbourne, Florida
ZiLOG Value: $51,000 US
4201 Bee Caves Due: May 28, 2000
Suite C-100
Austin, Texas
Cancelled as of April, 2000
Lease:
Associate Carriers Value Outstanding: $77,361.50 CDN
365 Evans Avenue Outstanding Periods: 25 months
Suite 400
Toronto, Ontario
M8Z 1K2
Copier & Fax Machine Lease:
E.O.E. Value Outstanding: $16,958.40 CDN
2 Berkley Street Outstanding Periods: 57 months
Suite 204
Toronto, Ontario
M5A 2W3
<PAGE>
-44-
SCHEDULE "3.14(c)"
PROPRIETARY RIGHTS
1. Canadian Trademark Applications filed on April 14, 2000 and U.S. Trademark
Applications sent for filing:
(a) Cdn. Appln. for I NET READY
(b) U.S. Appln. for I NET READY
(c) Cdn. Appln. for I NET READY & Design
(d) U.S. Appln. for I NET READY & Design
(e) Cdn. Appln. for GEEKCREEK
(f) U.S. Appln. for GEEKCREEK
(g) Cdn. Appln. for UCLINUX
(h) U.S. Appln. for UCLINUX
(i) Cdn. Appln. for UCLINUX & Design
(j) U.S. Appln. for UCLINUX & Design
(k) Cdn. Appln. for UCSIMM
(l) U.S. Appln. for UCSIMM
(m) Cdn. Appln. for UCSIMM & Design
(n) U.S. Appln. for UCSIMM & Design
(o) Cdn. Appln. for UCKERNEL
(p) U.S. Appln. for UCKERNEL
(q) Cdn. Appln. for UCKERNEL & Design
(r) U.S. Appln. for UCKERNEL & Design
(s) U.S. Appln, for Cdn. Appln. for PALMLINUX
(t) U.S. Appln. for PALMLINUX
(u) Cdn. Appln. for RT-KERNEL
(v) U.S. Appln. for RT-KERNEL
(w) Cdn. Appln. for RT-CONTROL
(x) U.S. Appln. for RT-CONTROL
(y) Cdn. Appln. for RT-CONTROL & Design
(z) U.S. Appln. for RT-CONTROL & Design
2. Dispute with Rick Farmer and Adicon Consulting & Design
Letters to Rick Farmer and Adicon Consulting & Design dated September
17, 1999 concerning potential copyright infringement.
<PAGE>
-45-
SCHEDULE "3.14(e)"
To the extent that all or any part of the Proprietary Rights constitute open
source software, the Company does not have full, effective, exclusive and
original ownership thereof.
1. Confidentiality Agreement with Circuit Images Inc.
2. Assignment of Intellectual Property by Circuit Images Inc.
<PAGE>
-46-
SCHEDULE "3.15"
EMPLOYEE BENEFIT PLANS
1. Options to purchase shares of Lineo, Inc. at $1.50 have been offered to
each of the following employees in the following amounts:
Paula Main 4,000
Mike Schlifer 4,000
Darren Best 8,000
2. Employment offer currently made to Michael Leslie includes options to
purchase 4,000 shares of Lineo, Inc. at $1.50.
<PAGE>
-47-
SCHEDULE "3.16"
EMPLOYEES AND SALARIES [EXCLUDING PRINCIPALS]
Paula Main, Executive Assistant
$35,000 CDN per annum
Date of Hire: January 1, 2000
Vacation Accrual Rate: 3 weeks per year
Accrued Vacation Time: 5 days
Darren Best, Project Manager
$65,000 CDN per annum
Date of Hire: part-time January 1 - March 27, 2000; full-time: March 27, 2000
Vacation Accrual Rate: 3 weeks per year
Accrued Vacation Time: 1.25 days
Ed Lui, Corporate Communications
$13.00/hr CDN
Date of Hire: April 1, 2000
Vacation Accrual Rate: 4% of gross pay
Accrued Vacation Time: .5 days
Michael Schlifer, Design Engineer
$45,000 CDN per annum
Date of Hire: March 1, 2000
Vacation Accrual Rate: 3 weeks per year
Accrued Vacation Time: 2.5 days
<PAGE>
-48-
SCHEDULE "3.19"
INSURANCE POLICIES
Commercial Business Policy with Zurich Insurance Company
<PAGE>
-49-
SCHEDULE "3.20"
BANK ACCOUNTS AND HOLDINGS
Bank of Nova Scotia
44 King Street West
Toronto, Ontario
M5H 1H1
Attn: John DaCosta
Tel: (416) 933-1180
Fax: (416) 866-2828
Acct: 6133312
Acct: 441813
GIC: 07923-73
Metro Credit Union
Jorgenson Hall, L158
350 Victoria Street
Toronto, Ontario
M5B 2K3
Attn: Monia De Clara
Tel: (416) 252-5621
Tel: (800) 777-8507
Acct: 6900518
Harris Trust & Savings
P.O. Box 94033
Palatine, Illinois
USA 60094-4033
Tel: (888) 340-2265
Acct: 29100 17637
Money Market Acct: 29100 17926
<PAGE>
-50-
SCHEDULE "3.21"
TAXES
Corporate Tax: First filing due and payable June, 2000 for
1999. No previous outstanding.
Provincial Sales Tax: Current to February 29, 2000, filed
quarterly Period March 1, 2000 - May 30,
2000 due June 23, 2000
Goods and Services Tax (GST): Due December 31, 1999, filed yearly
Refund owing of $10,156.01 CDN;
Claim subject to review by Canada
Customs and Revenue Agency by letter
dated April 25, 2000 (attached)
Payroll Tax Deductions: Due May 15, 2000 (owing for April)
Income Tax: $13,724.14 CDN
CPP: $ 3,096.28 CDN
EI: $ 2,395.06 CDN
<PAGE>
-51-
SCHEDULE "3.22"
LITIGATION
Letters to Rick Farmer and Adicon Consulting & Design dated September 17, 1999
concerning potential copyright infringement.
<PAGE>
-52-
SCHEDULE "3.23"
Operations out of the ordinary course since December 31, 1999
1. $200,000 U.S. borrowed from Lineo, Inc. not reflected in Financial
Statements dated December 31, 1999
<PAGE>
-53-
SCHEDULE "4.8"
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM
<PAGE>
EXHIBIT 10.16
LINEO, INC.
INVESTOR RIGHTS AGREEMENT
THIS INVESTOR RIGHTS AGREEMENT (this "Agreement") is made as of February
__, 2000 by and among LINEO, INC., a Delaware corporation (the "Company") and
the investors named on Schedule 1 hereto (the "Investors").
RECITALS
A. The Investors are acquiring shares of Series A Convertible Preferred
Stock, $.001 par value per share, of the Company (the "Series A Preferred
Stock") pursuant to the terms of a Stock Purchase Agreement and a
Recapitalization Agreement dated as of the date hereof between the Company and
the Investors (the "Purchase Agreement").
B. It is a condition to the obligations of the Investors under the
Purchase Agreement that this Agreement be executed by the parties.
AGREEMENT
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings:
"Affiliate" and "Affiliated" refer to any person who is an "affiliate" as
defined in Rule 12b-2 of the General Rules and Regulations under the Securities
Exchange Act of 1934, as amended. For purposes of this definition, "person"
means any individual, firm, corporation, constituent members of a partnership,
constituent members of a limited liability company, trust, incorporated or
unincorporated association, joint venture, joint stock company, governmental
authority or other entity of any kind, and includes any successor (by merger or
otherwise) of such entity.
"Common Stock" means the Company's common stock, $.001 par value per share.
"Common Stock Equivalent" means shares of: (a) Common Stock; (b) Common
Stock issuable upon conversion of Series A Preferred Stock; and (c) any other
Common Stock issuable upon conversion or exercise of any security (other than
Series A Preferred Stock), including options, issued or granted by the Company
that is convertible into or exercisable for Common Stock.
"Holder" shall mean an Investor who holds Registrable Securities and any
holder of Registrable Securities to whom the registration rights conferred by
this Agreement have been transferred in compliance with the terms and conditions
hereof.
"Preferred Stock" means the Series A Preferred Stock and any other shares
of preferred stock of any series any time issued by the Company.
-1-
<PAGE>
"Public Offering" means a firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, covering the offer and sale of Common Stock of the Corporation
to the public at a minimum price of $10.00 per share and pursuant to which the
gross proceeds received by the Corporation equal or exceed $15,000,000.
"Register," "Registered" and "Registration" shall refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act and applicable rules and regulations thereunder, and the
declaration or ordering of effectiveness of such registration statement.
"Registrable Securities" shall mean any shares of Common Stock held by the
Investors and permitted assignees (or subject to acquisition by the Investors
and permitted assignees upon conversion of Series A Preferred Stock), including
any shares issued by way of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization; provided, however, that if a Holder owns Series A Preferred
Stock, the Holder may exercise its registration rights hereunder by converting
the shares to be sold publicly into Common Stock as of the closing of the
relevant offering and shall not be required to cause such Series A Preferred
Stock to be converted to Common Stock until and unless such closing occurs; and
provided, further, that any Common Stock that is sold in a registered sale
pursuant to an effective registration statement under the Securities Act or
pursuant to Rule 144 thereunder, or that may be sold without restriction as to
volume or otherwise pursuant to Rule 144 under the Securities Act (as confirmed
by an unqualified opinion of counsel to the Company), shall not be deemed
Registrable Securities;
"Securities Act" means the Securities Act of 1933, as amended.
"Stockholder" and "Stockholders" mean the Investors and any other
stockholders of the Company that become parties to this Agreement..
"Shares" mean all shares of Stock now owned, or hereafter acquired, by any
Stockholder.
"Stock" means all shares of Common Stock and Preferred Stock, and all other
securities of the Company that may be issued in exchange for or in respect of
shares of Common Stock and Preferred Stock (whether by way of stock split, stock
dividend, combination, reclassification, reorganization or any other means), the
number of which is determined on an as-converted-into-Common Stock basis.
"Transfer" means to sell, assign, transfer, pledge, hypothecate, mortgage,
encumber or dispose of all or any part of its Shares.
2. RIGHT TO PARTICIPATE IN COMPANY SALES.
Subject to the terms and conditions specified in this Section 2, and until
such time as the Company's Public Offering, the Company grants to each Investor
the right to purchase such Investor's pro rata portion of any company shares
that the Company may, from time to time, propose to sell after the date of this
Agreement.
-2-
<PAGE>
2.1 NOTICE
If the Company proposes to sell Company Shares, it shall give each Investor
written notice of its intention (the "Company Notice") ten (10) days prior to
the proposed date of closing of the transaction in which the Company Shares are
to be issued (the "Company Shares Closing Date"). The Company Notice shall
include, to the extent such information is known by the Company: (a) a
description of the type of Company Shares; (b) the number and the anticipated
per share price of the Company Shares; (c) the name of any proposed purchaser;
(d) the Company Shares Closing Date; and (e) in reasonable detail, the other
terms and conditions, if any, pursuant to which the Company is proposing to sell
the Company Shares.
2.2 ELECTION
Each Investor shall have until five (5) days after the date of the Company
Notice to notify the Company in writing of its election and agreement to
purchase its respective pro rata portion of such Company Shares at the same
price and upon the same terms as any other investors in such offering or, if
there are no investors in such offering other than the Investors, then at the
price and upon the terms specified in the Company's Notice. Each such notice by
an Investor to the Company shall specify the maximum quantity of Company Shares
that such Investor is willing to agree to purchase.
2.3 PRO RATA PORTION
For purposes of this Section 2, each purchasing Investor's pro rata portion
of the Company Shares is that proportion of the Company Shares as the number of
Shares then held by such purchasing Investor bears to the total number of Common
Stock Equivalents then outstanding.
2.4 SUBSEQUENT OFFERING
If all Company Shares referred to in the Company Notice are not elected to
be purchased as provided in this Section 2 or if for any reason any Investor
that had elected to purchase such Company Shares does not timely consummate such
purchase, then the Company may, on the Company Shares Closing Date or during the
ninety (90)-day period following the Company Shares Closing Date, sell such
unsubscribed Company Shares to any person or persons at a price not less, and
upon terms no more favorable to the purchasers of such securities, than those
specified in the Company Notice. If the Company has not sold all of the Company
Shares within such ninety (90)-day period, then this Section 2 participation
right shall be revived and such Company Shares shall not be offered unless first
reoffered to the Stockholders in accordance with this Section 2.
2.5 EXCLUDED OFFERINGS
The right of participation in this Section 2 shall not apply to the
Company's currently anticipated Series B Preferred Stock financing, information
about which has been disclosed separately to the Investors. The right of
participation in this Section 2 shall also not apply where the Company, with the
approval of the Board of Directors, issues or reserves shares of common stock in
connection with (i) a stock dividend to holders of common stock or upon the
subdivision or combination of shares of common stock, (ii) any stock option plan
or other restricted stock plan or employee stock bonus program or grant or other
similar arrangement designated and approved by the Board of Directors, (iii) the
conversion of convertible preferred stock, (iv) in connection with the merger or
consolidation
-3-
<PAGE>
of the Company or a subsidiary of the Company with any other operating company,
or the exchange of the capital stock of the Company for the capital stock of
another operating company, (v) the acquisition of any assets, stock or other
interest in any other operating entity, and (vi) pursuant to any equipment
leasing arrangement or debt financing from a bank or similar financial
institution; provided, that in the case of any transaction described in clauses
(iv) or (v) of this Section 2.5, such transaction must receive prior approval by
the Company's Board of Directors and shall not be excluded from the right of
participation in this Section 2 where such transaction is with a five percent or
greater stockholder of the Company or an "affiliate" of the Company, as that
term is defined in Rule 144 under the Securities Act of 1933, as amended. Any
determination made by the Company's Board of Directors with respect to any
matter described in this Section 2.5 shall be conclusive.
2.6 ASSIGNMENT
The right of participation under this Section 2 is not assignable except by
an Investor: (a) to an Affiliated entity or to a partner or retired partner of
such Investor or to a partner or retired partner of an Affiliated entity; or (b)
to a constituent member of an Affiliated entity that is a limited liability
company.
3. COMPANY COVENANTS.
3.1 INFORMATION RIGHTS
The Company shall deliver to the Investors the following:
(a) Annual financial statements prepared in accordance with Generally
Accepted Accounting Principles ("GAAP") within 90 days following the fiscal year
end.
(b) Quarterly unaudited financial statements prepared in accordance
with GAAP within 45 days following each fiscal quarter.
3.2 INSPECTION RIGHTS The Investors shall have the right to inspect the
books and records of the Company during normal business hours upon written
request made at least one (1) business day in advance; provided, that the
Investors shall avail themselves of such right no more often than once every
fiscal quarter.
3.3 INSURANCE
(a) The Company agrees to maintain in full force and effect a policy
or policies of insurance issued by insurers of recognized responsibility,
insuring it and its properties and business against such losses and risks, and
in such amounts, as are customary in the case of corporations of established
reputation engaged in the same or a similar business and similarly situated, and
within ninety (90) days following the Closing, obtain and maintain in full force
and effect thereafter a policy of directors and officers liability insurance in
an amount that is commercially reasonable.
(b) The Company agrees to maintain in full force and effect a policy
or policies of key person life insurance issued by insurers of recognized
responsibility covering the life of Bryan Sparks in the amount of no less that
$2,000,000.
-4-
<PAGE>
3.4 PROPRIETARY RIGHTS AGREEMENTS
All of the Company's current and future employees and consultants shall
enter into a proprietary rights agreement or another standard proprietary rights
agreements containing such provisions regarding confidentiality, non-use and
invention assignments as are customary for similarly situated companies.
3.5 BOARD APPROVAL
The following matters shall be approved by the Company's Board of Directors
in accordance with the Company's Bylaws and Delaware law:
(a) Annual Company budgets;
(b) Appointment of corporate officers;
(c) Changes in Compensation for any Company officer with annual
compensation of more than $100,000 per year;
(d) Amendments to the Company's Stock Option Plan;
(e) Grants of stock options;
(f) Sale or issuance of any capital stock;
(g) The purchase of any non-budgeted capital equipment for more than
$100,000; and
(h) Transactions between the Company and any officer or director of
the Company, or their affiliates (such approval to be granted
only by the Company's disinterested directors).
(i) Any merger or consolidation of the Company with another company
or any acquistion by the Company of the stock or substantially
all the assets of another business.
3.6 BOARD COMPENSATION Non-employee directors shall be reimbursed for
their reasonable out-of-pocket expenses incurred in connection with
attending meetings of the Board of Directors or any Committee thereof.
4. CONFIDENTIALITY AGREEMENT.
Each Investor, and any successor or assign of such Investor, who receives
from the Company or its agents, directly or indirectly, any information that the
Company has not made generally available to the public, pursuant to the
preparation and execution of this Agreement or disclosure in connection
therewith or pursuant to the provisions of Section 3: (a) acknowledges and
agrees that such information is confidential and for its use only in connection
with evaluating its investment in the Company; (b) agrees that it will not
disseminate such information to any person other than its
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accountant, investment advisor, limited partners or attorney and that such
dissemination shall be only for purposes of evaluating its investment; and (c)
agrees to execute and to cause Affiliates to execute such confidentiality
agreements as are necessary or desirable to further the intent of this Section
4.
5. REGISTRATION RIGHTS.
5.1. REQUEST FOR REGISTRATION
(a) If the Company shall receive at any time after the earlier of (i)
January __ 2003 or (ii) six (6) months after the effective date of a Public
Offering, a written request from the holders (the "Initiating Holders") of a
majority of the Registrable Securities that the Company file a registration
statement under the Securities Act covering the registration of all or part of
the Registrable Securities having an aggregate offering price, net of
underwriting discounts and commissions, equal to or exceeding $5,000,000, then
the Company shall, subject to Section 5.1(b) below:
(i) Promptly give written notice of the proposed registration to
all other Holders; and
(ii) As soon as practicable, either (A) elect to make a primary
offering, in which case the rights of such Holders shall be as set forth in
Section 5.2 hereof or (B) use its best efforts to effect such registration
(including, without limitation, filing post-effective amendments, appropriate
qualifications under applicable blue sky or other state securities laws, and
appropriate compliance with the Securities Act) and as would permit or
facilitate the sale and distribution of all or such portion of such Registrable
Securities as are specified in such request, together with all or such portion
of the Registrable Securities of any Holder or Holders joining in such request
as are specified in a written request received by the Company within twenty (20)
days after such written notice from the Company is mailed or delivered.
(b) The Company shall not be obligated to effect, or to take any
action to effect, any such registration pursuant to this Section 5.1 after the
Company has initiated two (2) such registrations pursuant to this Section 5.1
(counting for these purposes only registrations which have been declared or
ordered effective and pursuant to which securities have been sold and
registrations which have been withdrawn by the Holders as to which the Holders
have not elected to bear the expenses of registration pursuant to Section 5.3
hereof and would, absent such election, have been required to bear such
expenses).
(c) Subject to Section 5.1(b) above, the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Initiating Holders; provided, however, that if (i) in the good faith
judgment of the Board of Directors of the Company, such registration would be
detrimental to the Company, and the Board of Directors of the Company concludes,
as a result, that it is essential to defer the filing of such registration
statement at such time, and (ii) the Company shall furnish to such Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be detrimental
to the Company for such registration statement to be filed in the near future
and that it is, therefore, essential to defer the filing of such registration
statement, then the Company shall have the right to defer such filing for a
period of not more than ninety (90) days after receipt of the request of the
Initiating Holders, and, provided further,
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that the Company shall not defer its obligation in this manner more than once in
any twelve-month period.
(d) The registration statement filed pursuant to the request of the
Initiating Holders may, subject to the provisions of Section 5.13 hereof,
include other securities of the Company with respect to which registration
rights have been granted, and may include securities of the Company being sold
for the account of the Company.
(e) The right of any Holder to registration pursuant to this Section
5.1 shall be conditioned upon such Holder's participation in such underwriting
and the inclusion of such Holder's Registrable Securities in the underwriting
(unless otherwise mutually agreed by a majority in interest of the Initiating
Holders and such Holder with respect to such participation and inclusion) to the
extent provided herein. A Holder may elect to include in such underwriting all
or a part of the Registrable Securities it holds.
(f) If the Company shall request inclusion in any registration
pursuant to this Section 5.1 of securities being sold for its own account, or if
other persons shall request inclusion in any registration pursuant to this
Section 5.1, the Initiating Holders shall, on behalf of all Holders, offer to
include such securities in the underwriting and may condition such offer on
their acceptance of the further applicable provisions of this Agreement. The
Company shall (together with all Holders and other persons proposing to
distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the representative of the
underwriter or underwriters selected for such underwriting by a majority in
interest of the Initiating Holders, which underwriters are reasonably acceptable
to the Company. Notwithstanding any other provision of this Section 5.1, if the
representative of the underwriters in good faith advises the Initiating Holders
in writing that marketing factors require a limitation on the number of shares
to be underwritten, the number of shares to be included in the underwriting or
registration shall be allocated as set forth in Section 5.11 hereof. If a person
who has requested inclusion in such registration as provided above does not
agree to the terms of any such underwriting, such person shall be excluded
therefrom by written notice from the Company, the underwriter or the Initiating
Holders. The securities so excluded shall also be withdrawn from registration.
Any Registrable Securities or other securities excluded or withdrawn from such
underwriting shall also be withdrawn from such registration. If shares are so
withdrawn from the registration and if the number of shares to be included in
such registration was previously reduced as a result of marketing factors
pursuant to this Section 5.1(f), then the Company shall offer to all Holders who
have retained rights to include securities in the registration the right to
include additional securities in the registration in an aggregate amount equal
to the number of shares so withdrawn, with such shares to be allocated among
such Holders requesting additional inclusion in accordance with Section 5.11.
5.2 COMPANY REGISTRATION
(a) Subject to Section 5.2(e) below, if at any time or times after
the date hereof the Company shall determine to register any of its equity
securities either for its own account or the account of a security holder or
holders exercising their respective demand registration rights, the Company
will:
(i) Promptly give to each Holder written notice thereof; and
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(ii) Use its best efforts to include in such registration (and
any related qualification under blue sky laws or other compliance), except as
set forth in Section 5.2(c) below, and in any underwriting involved therein, all
the Registrable Securities specified in a written request or requests, made by
any Holder and received by the Company within ten (10) days after the written
notice from the Company described in (i) above is mailed or delivered by the
Company. Such written request may specify all or a part of a Holder's
Registrable Securities.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise the Holders as a part of the written notice given pursuant to Section
5.2(a)(i) above. In such event, the right of any Holder to registration pursuant
to this Section 5.2 shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's Registrable Securities in
the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders of securities of the Company with registration
rights to participate therein distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
representative of the underwriter or underwriters selected by the Company.
(c) Notwithstanding any other provision of this Section 5.2, if the
representative of the underwriters in good faith advises the Company in writing
that marketing factors require a limitation on the number of shares to be
underwritten, the representative may (subject to the limitation set forth below)
exclude all Registrable Securities from, or limit the number of Registrable
Securities to be included in, the registration and underwriting. The Company
shall so advise all holders of securities requesting registration, and the
number of shares of securities that are entitled to be included in the
registration and underwriting shall be allocated first to the Company for
securities being sold for its own account and thereafter as set forth in Section
5.11. If any person does not agree to the terms of any such underwriting, he,
she or it shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
(d) If shares are so withdrawn from the registration or if the number
of shares of Registrable Securities to be included in such registration was
previously reduced as a result of marketing factors, the Company shall then
offer to all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among the persons requesting additional inclusion in accordance
with Section 5.11 hereof.
(e) This Section 5.2 shall not apply to a registration on any
registration form that does not permit secondary sales or to registrations
relating solely to (i) employee benefit plans, (ii) transactions pursuant to
Rule 145 or any other similar rule promulgated under the Securities Act or (iii)
securities issued in connection with mergers with or acquisitions of other
corporations by the Company.
5.3. EXPENSES
In the case of any registration under Sections 5.1 and 5.2 hereof, the
Company shall bear all costs and expenses of each such registration, including,
but not limited to, printing, legal and
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accounting expenses, Securities and Exchange Commission ("SEC") filing fees and
"blue sky" fees and expenses (the "Registration Expenses"); provided, however,
that the Company shall have no obligation to pay or otherwise bear (i) any
portion of the fees or disbursements of more than one (1) counsel for the
selling Holders of Registrable Securities in connection with the registration of
their Registrable Securities, and in any event shall not responsible for fees
for such counsel in excess of $10,000, or (ii) any portion of the underwriter's
commissions or discounts attributable to the Registrable Securities being
offered and sold by the Holders of Registrable Securities; and, provided
further, that if the Holders bear the Registration Expenses for any registration
proceeding commenced pursuant to this Agreement and subsequently withdrawn by
the Holders registering shares therein, such registration proceeding shall not
be counted as a requested registration pursuant to Section 5.1 hereof.
Furthermore, in the event that a withdrawal by the Holders is based upon
material adverse information relating to the Company that is different from the
information known or available (upon request from the Company or otherwise) to
the Holders requesting registration at the time of their request for
registration under Section 5.1, such registration shall not be treated as a
counted registration for purposes of Section 5.1 hereof, even though the Holders
do not bear the Registration Expenses for such registration.
5.4 OBLIGATIONS OF THE COMPANY
In the case of each registration effected by the Company pursuant to this
Agreement, the Company will keep each Holder advised in writing as to the
initiation of each registration and as to the completion thereof. At its
expense, the Company will use its best efforts to:
(a) Keep such registration effective for a period of one (1) month or
until the Holder or Holders have completed the distribution described in the
registration statement relating thereto, whichever first occurs;
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement;
(c) Furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as a Holder
from time to time may reasonably request;
(d) Notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such seller, prepare and
furnish to such seller a reasonable number of copies of a supplement or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such shares, such prospectus shall not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or incomplete in the light to the circumstances then existing;
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(e) Enter into any reasonable underwriting agreement required by the
proposed underwriter, if any, in such form and containing such terms as are
customary; provided, however, that no Holder shall be required to make any
representations or warranties other than with respect to its title to the
Registrable Securities and any written information provided by the Holder to the
Company, and if the underwriter requires that representations or warranties be
made and that indemnification be provided, the Company shall make all such
representations and warranties and provide all such indemnities, including,
without limitation, in respect of the Company's business, operations and
financial information and the disclosures relating thereto in the prospectus;
(f) Use its best efforts to register or qualify the securities covered by said
registration statement under the securities or "blue sky" laws of such
jurisdictions as any selling Holder may reasonably request, provided that the
Company shall not be required to register or qualify the securities in any
jurisdictions which require it to qualify to do business therein;
(g) Cause all such Registrable Securities to be listed on each
securities exchange or quotation system on which similar securities issued by
the Company are then listed or quoted;
(h) Otherwise use its best efforts to comply with the securities laws
of the United States and other applicable jurisdictions and all applicable rules
and regulations of the SEC and comparable governmental agencies in other
applicable jurisdictions and make generally available to its stockholders, in
each case as soon as practicable, but not later than 45 days after the close of
the period covered thereby, an earnings statement of the Company which will
satisfy the provisions of Section 11(a) of the Securities Act;
(i) Obtain and furnish to each selling Holder, immediately prior to
the effectiveness of the registration statement (and, in the case of an
underwritten offering, at the time of delivery of any Registrable Securities
sold pursuant thereto), a cold comfort letter from the Company's independent
public accountants in customary form and covering such matters of the type
customarily covered by cold comfort letters as the Holders of a majority of the
Registrable Securities being sold may reasonably request; and
(j) Otherwise cooperate with the underwriter or underwriters, the
Commission and other regulatory agencies and take all actions and execute and
deliver or cause to be executed and delivered all documents necessary to effect
the registration of any Registrable Securities under this Agreement.
5.5 SUSPENSION
In the case of a registration for the sale of Registrable Securities, upon
receipt of any notice (a "Suspension Notice") from the Company of the happening
of any event which makes any statement made in the registration statement or
related prospectus untrue or which requires the making of any changes in such
registration statement or prospectus so that they will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein in light of the
circumstances under which they were made not misleading, each Holder of
Registrable Securities registered under such registration statement shall
forthwith discontinue disposition of such Registrable Securities pursuant to
such registration statement until such Holder's receipt of the copies of the
supplemented or amended prospectus or until it is advised in writing (the
"Advice") by the Company that the use of the prospectus may be resumed, and has
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received copies of any additional or supplemental filings which are incorporated
by reference in the prospectus; provided, however, that the Company shall not
give a Suspension Notice until after the registration statement has been
declared effective and shall not give more than one Suspension Notice to the
Holders in respect to all Registrable Securities and pursuant to this Section
5.5 during any period of 12 consecutive months and in no event shall the period
from the date on which any Holder receives a Suspension Notice to the date on
which any Holder receives either the Advice or copies of the supplemented or
amended prospectus (the "Suspension Period") exceed 60 days. In the event that
the Company shall give any Suspension Notice, the Company shall use its best
efforts and take such actions as are reasonably necessary to render the Advice
and end the Suspension Period as promptly as practicable.
5.6 INDEMNIFICATION
(a) Incident to any registration statement referred to herein, the
Company will indemnify and hold harmless each Holder who offers or sells any
such Registrable Securities in connection with such registration statement
(including its partners (including partners of partners and stockholders of any
such partners), and directors, officers, employees and agents of any of them (a
"Selling Holder"), and each person who controls any of them within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act (a
"Controlling Person"), from and against any and all losses, claims, damages,
expenses and liabilities, joint or several (including any investigation, legal
and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, as the same
are incurred), to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities arise out of or are based on (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement
(including any related preliminary or definitive prospectus, or any amendment or
supplement to such registration statement or prospectus), (ii) any omission or
alleged omission to state in such document a material fact required to be stated
in it or necessary to make the statements in it not misleading, or (iii) any
violation by the Company of the Securities Act, any state securities or "blue
sky" laws or any rule or regulation thereunder in connection with such
registration; provided, however, that the Company will not be liable to the
extent that such loss, claim, damage, expense or liability arises from and is
based on an untrue statement or omission or alleged untrue statement or omission
made in reliance on and in conformity with information furnished in writing to
the Company by such underwriter, Selling Holder or Controlling Person expressly
for use in such registration statement. With respect to such untrue statement or
omission or alleged untrue statement or omission in the information furnished in
writing to the Company by such Selling Holder expressly for use in such
registration statement, such Selling Holder will indemnify and hold harmless
each underwriter, the Company (including its directors, officers, employees and
agents), each other Holder (including its partners (including partners of
partners and stockholders of such partners) and directors, officers, employees
and agents of any of them, and each person who controls any of them within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)),
from and against any and all losses, claims, damages, expenses and liabilities,
joint or several, to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise to the same extent provided in the
immediately preceding sentence.
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(b) The foregoing indemnity provisions are subject to the condition
that, insofar as they relate to any violation made in a preliminary prospectus
but eliminated or remedied in the amended prospectus on file with the SEC at the
time the registration statement in question becomes effective or in the amended
prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final
Prospectus"), such indemnity provisions shall not inure to the benefit of any
person if a copy of the Final Prospectus was furnished to the indemnified party
and was not furnished to the person asserting the loss, liability, claim or
damage at or prior to the time such action is required by the Securities Act.
(c) If the indemnification provided for in Section 5.6(a) above for
any reason is held by a court of competent jurisdiction to be unavailable to an
indemnified party in respect of any losses, claims, damages, expenses or
liabilities referred to therein, then each indemnifying party under this Section
5.6, in lieu of indemnifying such indemnified party thereunder, shall contribute
to the amount paid or payable by such indemnified party as a result of such
losses, claims, damages, expenses or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, the other
Selling Holders and the underwriters from the offering of the Registrable
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company, the other Selling Holders and the underwriters in
connection with the statements or omissions which resulted in such losses,
claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company, the
Selling Holders and the underwriters shall be deemed to be in the same
respective proportions that the net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Holders and the underwriting
discount received by the underwriters, in each case as set forth in the table on
the cover page of the applicable prospectus, bear to the aggregate public
offering price of the Registrable Securities. The relative fault of the Company,
the Selling Holders and the underwriters shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company, the Selling Holders or the underwriters and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Company and the Selling Holders agree that it would not be just
and equitable if contribution pursuant to this Section 5.6(c) were determined by
pro rata or per capita allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. In no event, however, shall a Selling Holder be
required to contribute any amount under this Section 5.6(c) in excess of the
lesser of (i) that proportion of the total of such losses, claims, damages or
liabilities indemnified against equal to the proportion of the total Registrable
Securities sold under such registration statement which are being sold by such
Selling Holder or (ii) the proceeds received by such Selling Holder from its
sale of Registrable Securities under such registration statement. No person
found guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not found guilty of such fraudulent misrepresentation.
(d) Promptly after receipt by the indemnified party under this
Section 5.6 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against the indemnifying party under this Section 5.6, deliver to
the indemnifying party a written notice of the commencement thereof, and the
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indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, to assume the defense thereof with counsel
mutually satisfactory to the parties; provided, however, that the indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if, in the opinion of counsel for the
indemnifying party, representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding.
(e) The amount paid by an indemnifying party or payable to an
indemnified party as a result of the losses, claims, damages and liabilities
referred to in this Section 5.6 shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim, payable as the same are incurred. The indemnification and
contribution provided for in this Section 5.6 will remain in full force and
effect regardless of any investigation made by or on behalf of the indemnified
parties or any officer, director, employee, agent or controlling person of the
indemnified parties.
5.7 INFORMATION BY HOLDER
Each Holder of Registrable Securities shall furnish to the Company such
information regarding such Holder and the distribution proposed by such Holder
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
referred to in this Agreement.
5.8 RULE 144 REPORTING
In the event that the Company becomes subject to Section 13 or Section
15(d) of the Exchange Act, the Company shall use its best efforts to take all
action as may be required as a condition to the availability of Rule 144 or Rule
144A under the Securities Act (or any successor or similar exemptive rules
hereafter in effect). The Company shall furnish to any Holder, within 15 days of
a written request, a written statement executed by the Company as to the steps
it has taken to comply with the current public information requirement of Rule
144 or Rule 144A or such successor rules.
5.9 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS
The registration rights of the Holders of Registrable Securities under this
Agreement may be transferred or assigned by any Holder to (i) any general or
limited partner or other comparable affiliate of such Holder, (ii) any fund
managed by or associated with such Holder or (iii) any transferee or assignee of
such Holder's Registrable Securities who after such transfer or assignment will
hold at least fifty percent (50%) of the Registrable Securities owned by such
Holder on the date hereof; provided that the Company is given prior written
notice of such transfer or assignment setting forth the name and address of the
transferee or assignee and identifying the number of Registrable Securities so
transferred or assigned, and, provided further, that the transferee or assignee
of such rights assumes in writing the obligations of such Holder under this
Agreement.
5.10 MARKET STAND-OFF AGREEMENT
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In connection with a public offering by the Company, the Holders, if
requested in good faith by the Company and the managing underwriter of the
public offering, shall agree not to sell or otherwise transfer or dispose of any
securities of the Company held by them (except for any securities sold pursuant
to such registration statement) for a period following the effective date of the
applicable registration statement that in no event shall exceed 180 days.
Notwithstanding the foregoing, such an agreement shall not be required unless
all of the officers and directors and five percent (5%) or greater stockholders
of the Company and all other persons with registration rights enter into similar
agreements. In order to enforce the foregoing, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares of securities of every other person subject to the
foregoing restriction) until the end of such period.
5.11 ALLOCATION OF REGISTRATION OPPORTUNITIES
In any circumstance in which all of the Registrable Securities and other
shares of Common Stock of the Company (including shares of Common Stock issued
or issuable upon conversion of shares of any currently unissued series of
Preferred Stock of the Company) with registration rights (the "Other Shares")
requested to be included in a registration on behalf of the Holders or other
selling stockholders cannot be so included as a result of limitations of the
aggregate number of shares of Registrable Securities and Other Shares that may
be so included, the number of shares of Registrable Securities and Other Shares
that may be so included shall be allocated among the Holders and other selling
stockholders requesting inclusion of shares pro rata on the basis of the number
of shares of Registrable Securities and Other Shares that would be held by such
Holders and other selling stockholders, assuming conversion; provided, however,
that if any Holder or other selling stockholder does not request inclusion of
the minimum number of shares of Registrable Securities and Other Shares
allocated to him, her or it pursuant to the above-described procedure, the
remaining portion of his, her or its allocation shall be reallocated among those
requesting Holders and other selling stockholders whose allocations did not
satisfy their requests pro rata on the basis of the number of shares of
Registrable Securities and Other Shares that would be held by such Holders and
other selling stockholders, assuming conversion, and this procedure shall be
repeated until all of the shares of Registrable Securities and Other Shares
which may be included in the registration on behalf of the Holders and other
selling stockholders have been so allocated.
5.12 TERMINATION OF REGISTRATION RIGHTS
The rights of any Holder to request registration or inclusion in any
registration pursuant to this Agreement shall terminate upon the earlier of (i)
five (5) years after the closing of the Company's first Public Offering or (ii)
as to any Investor on such date after the closing of the Company's first Public
Offering as such Investor owns less then thirty percent (30%) of the number of
Registrable Securities originally purchased by such Investor.
6. MISCELLANEOUS.
6.1 TERM
This Agreement, except for the provisions set forth in Section 5, shall
terminate upon the closing of the Company's first Public Offering.
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6.2 SPECIFIC ENFORCEMENT
The Company and the Stockholders expressly agree that they will be
irreparably damaged if this Agreement is not specifically enforced. Upon a
breach or threatened breach of the terms, covenants and/or conditions of this
Agreement by any party, the Company and the Stockholders shall, in addition to
all other remedies, each be entitled to a temporary or permanent injunction,
without showing any actual damage, and/or a decree for specific performance, in
accordance with the provisions of this Agreement.
6.3 LEGEND
Each certificate evidencing any of the Shares shall bear a legend
substantially as follows:
The shares represented by this certificate are subject to the
terms and conditions of a certain Investor Rights Agreement
dated as of FEBRUARY __, 2000, as at any time amended, and may
not be sold, transferred or encumbered except in accordance
with the terms and provisions of said Agreement, a copy of
which is on file at the principal executive office of the
Company and will be furnished to the holder of this
certificate upon request and without charge.
6.4 NOTICES
Unless otherwise provided, any notice under this Agreement shall be given
in writing and shall be deemed effectively given: (a) upon personal delivery to
the party to be notified; (b) upon confirmation of receipt by fax by the party
to be notified; (c) one business day after deposit with a reputable overnight
courier, prepaid for overnight delivery and addressed as set forth in (d); or
(d) three days after deposit with the U.S. Post Office, postage prepaid,
registered or certified with return receipt requested and addressed to the party
to be notified at the address indicated for such party on the signature page, or
at such other address as such party may designate by 10 days' advance written
notice to the other parties given in the foregoing manner.
6.5 AMENDMENTS AND WAIVERS
Any term of this Agreement may be amended and the observance of any term
may be waived (either generally or in a particular instance and either
retroactively or prospectively) only with the written consent of the Company and
the holders of a majority of the then outstanding Shares held by the Investors.
6.7 GOVERNING LAW; JURISDICTION; VENUE
This Agreement shall be governed by and construed under the laws of the
State of Delaware without regard to principles of conflict of laws.
-15-
<PAGE>
6.8 SUCCESSORS AND ASSIGNS
The terms and conditions of this Agreement shall inure to the benefit of
and be binding on the respective successors and assigns of the parties.
6.9 SEVERABILITY
If one or more provisions of this Agreement are held to be unenforceable
under applicable law, such provision shall be excluded from this Agreement, and
the balance of this Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
6.10 ENTIRE AGREEMENT; COUNTERPARTS
This Agreement constitutes the entire agreement between the parties about
its subject and supersedes all prior agreements. This Agreement may be executed
in two or more counterparts, which together shall constitute one instrument.
6.11 AUTHORIZATION
Each party represents that this Agreement has been duly authorized,
executed and delivered by such party and constitutes a valid and binding
obligation of such party, enforceable against such party in accordance with
its terms.
[Signature page follows]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
Lineo, Inc.
By:
------------------------------------
Bryan Sparks, President and Chairman
Egan-Managed Capital, L.P.
By EMC Partners, L.P.,
its General Partner
---------------------------
By Michael H. Shanahan
General Partner
Motorola, Inc.
By:
-----------------------
Its: -------------------
-17-
<PAGE>
Canopy Group, Inc.
By:
-----------------------
Its: -------------------
-18-
<PAGE>
SCHEDULE 1
INVESTORS
Egan-Managed Capital, L.P.
Motorola, Inc
The Canopy Group, Inc.
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<PAGE>
EXHIBIT 10.17
AMENDMENT NO. 1 TO
INVESTOR RIGHTS AGREEMENT
This AMENDMENT NO. 1 TO INVESTOR RIGHTS AGREEMENT (this "Amendment No.
1") is made as of March __, 2000 by and among Lineo, Inc., a Delaware
corporation (the "Company"), the investors listed on Schedule 1 hereto
(individually and collectively, the "Series A Investors"), and the investors
listed on Schedule 2 hereto (individually and collectively, the "Series B
Investors"), with respect to that certain Investor Rights Agreement dated
February 17, 2000 by and among the Company and the Series A Investors (the
"Investor Rights Agreement").
WHEREAS, in connection with their purchase of shares of the Company's
Series A Convertible Preferred Stock, the Series A Investors were extended
certain registration, information and inspection rights as set forth in the
Investor Rights Agreement, and
WHEREAS, the Company is willing to grant registration, information and
inspection rights as set forth on EXHIBIT A and EXHIBIT B hereto, respectively,
to the Series B Investors on terms identical to those already granted to the
Series A Investors pursuant to the Investor Rights Agreement;
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants, and conditions set forth herein and in
the Series B Preferred Stock Purchase Agreement of even date herewith, the
parties hereto mutually agree to amend the Investor Rights Agreement, for the
benefit of the Series B Investors, to provide as follows:
1. DEFINITIONS.
A. The definition of "Registrable Securities" set forth in the Investor
Rights Agreement is hereby deleted in its entirety and replaced with the
following definition:
"Registrable Securities" shall mean any shares of Common Stock held by
the Investors and permitted assignees (or subject to acquisition by the
Investors and permitted assignees upon conversion of Series A Preferred
Stock or Series B Convertible Preferred Stock, $.001 par value per
share, of the Company ("Series B Preferred Stock")), including any
shares issued by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization; provided, however, that if a
Holder owns Series A Preferred Stock or Series B Preferred Stock, the
Holder may exercise its registration rights hereunder by converting the
shares to be sold publicly into Common Stock as of the closing of the
relevant offering and shall not be required to cause such Series A
Preferred Stock or Series B Preferred Stock to be converted to Common
Stock until and unless such closing occurs; and provided, further, that
any Common Stock that is sold in a registered sale pursuant to an
effective registration statement under the Securities Act or pursuant
to
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Rule 144 thereunder, or that may be sold without restriction as to
volume or otherwise pursuant to Rule 144 under the Securities Act
(as confirmed by an unqualified opinion of counsel to the Company),
shall not be deemed Registrable Securities.
B. For purposes of the definition of "Holder" in Section 1 and for
purposes of Sections 3, 4 (regarding "Confidentiality Agreement," as set forth
in EXHIBIT C hereto) and 5 of the Investor Rights Agreement only, the definition
of "Investor" and "Investors" as set forth in the preamble to the Investor
Rights Agreement is hereby amended by adding the Series B Investors such that,
for purposes of the definition of "Holder" in Section 1 and for purposes of
Sections 3, 4 and 5 only, each of the Series A Investors and Series B Investors
shall individually be considered an "Investor," and collectively they shall be
considered "Investors."
2. MISCELLANEOUS.
2.1 RATIFICATION. Except as expressly set forth in this Amendment No.
1, the terms of the Investor Rights Agreement shall remain in full force and
effect. In the event of a conflict between the terms of this Amendment No. 1 and
the terms of the Investor Rights Agreement, the terms of this Amendment No. 1
shall control.
2.2 SPECIFIC ENFORCEMENT. The Company, the Series A Investors and the
Series B Investors expressly agree that they will be irreparably damaged if this
Amendment No. 1 is not specifically enforced. Upon a breach or threatened breach
of the terms, covenants and/or conditions of this Amendment No. 1 by any party,
the Company and the Series A and B Investors shall, in addition to all other
remedies, each be entitled to a temporary or permanent injunction, without
showing any actual damage, and/or a decree for specific performance, in
accordance with the provisions of this Amendment No. 1.
2.3 NOTICES. Unless otherwise provided, any notice under this Amendment
No. 1 shall be given in writing and shall be deemed effectively given: (a) upon
personal delivery to the party to be notified; (b) upon confirmation of receipt
by fax by the party to be notified; (c) one business day after deposit with a
reputable overnight courier, prepaid for overnight delivery and addressed as set
forth in (d); or (d) three days after deposit with the U.S. Post Office, postage
prepaid, registered or certified with return receipt requested and addressed to
the party to be notified at the address indicated for such party on the
signature page, or at such other address as such party may designate by 10 days'
advance written notice to the other parties given in the foregoing manner.
2.4 GOVERNING LAW. This Amendment No. 1 shall be governed by and
construed under the laws of the State of Delaware without regard to principles
of conflict of laws.
2.5 SUCCESSORS AND ASSIGNS. The terms and conditions of this Amendment
No. 1 shall inure to the benefit of and be binding on the respective successors
and assigns of the parties.
2.6 SEVERABILITY. If one or more provisions of this Amendment No. 1 are
held to be unenforceable under applicable law, such provision shall be excluded
from this Amendment No.
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1, and the balance of this Amendment No. 1 shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
2.7 COUNTERPARTS. This Amendment No. 1 may be executed in two or more
counterparts, which together shall constitute one instrument.
2.8 AUTHORIZATION. Each party represents that this Amendment No. 1 has
been duly authorized, executed and delivered by such party and constitutes a
valid and binding obligation of such party, enforceable against such party in
accordance with its terms.
2.9 LEGEND. Each certificate evidencing any of the shares of capital
stock of the Company owned by the Series B Investors shall bear a legend
substantially as follows:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND
CONDITIONS OF A CERTAIN INVESTOR RIGHTS AGREEMENT DATED AS OF MARCH 15,
2000, AS AT ANY TIME AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR
ENCUMBERED EXCEPT IN ACCORDANCE WITH THE TERMS AND PROVISIONS OF SAID
AGREEMENT, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICE
OF THE COMPANY AND WILL BE FURNISHED TO THE HOLDER OF THIS CERTIFICATE
UPON REQUEST AND WITHOUT CHARGE.
[Signature pages follow]
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 as
of the date first above written.
COMPANY:
Lineo, Inc.,
a Delaware corporation
By:________________________________________
Bryan Sparks, President and Chairman
SERIES A INVESTORS
Egan-Managed Capital, L.P.
By EMC Partners, L.P.,
its General Partner
By____________________________
Michael H. Shanahan
General Partner
Motorola, Inc.
By: ______________________
Its: __________________
The Canopy Group, Inc.
By: ______________________
Its: __________________
4
<PAGE>
SERIES B INVESTORS
Rainier Investors, LLC
By__________________________________
Michael J. Erickson, Member
5
<PAGE>
SCHEDULE 1
SERIES A INVESTORS
Egan-Managed Capital, L.P.
Motorola, Inc
The Canopy Group, Inc.
6
<PAGE>
SCHEDULE 2
SERIES B INVESTORS
7
<PAGE>
EXHIBIT A
REGISTRATION RIGHTS
5. REGISTRATION RIGHTS.
5.1. REQUEST FOR REGISTRATION
(a) If the Company shall receive at any time after the earlier of (i)
February 17, 2003 or (ii) six (6) months after the effective date of a Public
Offering, a written request from the holders (the "Initiating Holders") of a
majority of the Registrable Securities that the Company file a registration
statement under the Securities Act covering the registration of all or part of
the Registrable Securities having an aggregate offering price, net of
underwriting discounts and commissions, equal to or exceeding $5,000,000, then
the Company shall, subject to Section 5.1(b) below:
(i) Promptly give written notice of the proposed registration
to all other Holders; and
(ii) As soon as practicable, either (A) elect to make a
primary offering, in which case the rights of such Holders shall be as set forth
in Section 5.2 hereof or (B) use its best efforts to effect such registration
(including, without limitation, filing post-effective amendments, appropriate
qualifications under applicable blue sky or other state securities laws, and
appropriate compliance with the Securities Act) and as would permit or
facilitate the sale and distribution of all or such portion of such Registrable
Securities as are specified in such request, together with all or such portion
of the Registrable Securities of any Holder or Holders joining in such request
as are specified in a written request received by the Company within twenty (20)
days after such written notice from the Company is mailed or delivered.
(b) The Company shall not be obligated to effect, or to take any action
to effect, any such registration pursuant to this Section 5.1 after the Company
has initiated two (2) such registrations pursuant to this Section 5.1 (counting
for these purposes only registrations which have been declared or ordered
effective and pursuant to which securities have been sold and registrations
which have been withdrawn by the Holders as to which the Holders have not
elected to bear the expenses of registration pursuant to Section 5.3 hereof and
would, absent such election, have been required to bear such expenses).
(c) Subject to Section 5.1(b) above, the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Initiating Holders; provided, however, that if (i) in the good faith
judgment of the Board of Directors of the Company, such registration would be
detrimental to the Company, and the Board of Directors of the Company concludes,
as a result, that it is essential to defer the filing of such registration
statement at such time, and (ii) the Company shall furnish to such Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be detrimental
to the Company for such registration statement to be filed in the near future
and that it is, therefore, essential to defer the filing of such registration
statement, then the Company shall have the right to defer such filing for a
period of not more than ninety (90) days after receipt of the request of the
Initiating Holders, and, provided further, that the Company shall not defer its
obligation in this manner more than once in any twelve-month period.
(d) The registration statement filed pursuant to the request of the
Initiating Holders may, subject to the provisions of Section 5.13 hereof,
include other securities of the Company with respect to
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<PAGE>
which registration rights have been granted, and may include securities of the
Company being sold for the account of the Company.
(e) The right of any Holder to registration pursuant to this Section
5.1 shall be conditioned upon such Holder's participation in such underwriting
and the inclusion of such Holder's Registrable Securities in the underwriting
(unless otherwise mutually agreed by a majority in interest of the Initiating
Holders and such Holder with respect to such participation and inclusion) to the
extent provided herein. A Holder may elect to include in such underwriting all
or a part of the Registrable Securities it holds.
(f) If the Company shall request inclusion in any registration pursuant
to this Section 5.1 of securities being sold for its own account, or if other
persons shall request inclusion in any registration pursuant to this Section
5.1, the Initiating Holders shall, on behalf of all Holders, offer to include
such securities in the underwriting and may condition such offer on their
acceptance of the further applicable provisions of this Agreement. The Company
shall (together with all Holders and other persons proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the representative of the underwriter or underwriters
selected for such underwriting by a majority in interest of the Initiating
Holders, which underwriters are reasonably acceptable to the Company.
Notwithstanding any other provision of this Section 5.1, if the representative
of the underwriters in good faith advises the Initiating Holders in writing that
marketing factors require a limitation on the number of shares to be
underwritten, the number of shares to be included in the underwriting or
registration shall be allocated as set forth in Section 5.11 hereof. If a person
who has requested inclusion in such registration as provided above does not
agree to the terms of any such underwriting, such person shall be excluded
therefrom by written notice from the Company, the underwriter or the Initiating
Holders. The securities so excluded shall also be withdrawn from registration.
Any Registrable Securities or other securities excluded or withdrawn from such
underwriting shall also be withdrawn from such registration. If shares are so
withdrawn from the registration and if the number of shares to be included in
such registration was previously reduced as a result of marketing factors
pursuant to this Section 5.1(f), then the Company shall offer to all Holders who
have retained rights to include securities in the registration the right to
include additional securities in the registration in an aggregate amount equal
to the number of shares so withdrawn, with such shares to be allocated among
such Holders requesting additional inclusion in accordance with Section 5.11.
5.2 COMPANY REGISTRATION
(a) Subject to Section 5.2(e) below, if at any time or times after the
date hereof the Company shall determine to register any of its equity securities
either for its own account or the account of a security holder or holders
exercising their respective demand registration rights, the Company will:
(i) Promptly give to each Holder written notice thereof; and
(ii) Use its best efforts to include in such registration (and
any related qualification under blue sky laws or other compliance), except as
set forth in Section 5.2(c) below, and in any underwriting involved therein, all
the Registrable Securities specified in a written request or requests, made by
any Holder and received by the Company within ten (10) days after the written
notice from the Company described in (i) above is mailed or delivered by the
Company. Such written request may specify all or a part of a Holder's
Registrable Securities.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise the Holders as a part of the written notice given pursuant to Section
5.2(a)(i) above. In such event, the right of any Holder to registration pursuant
to this Section 5.2 shall be conditioned upon such Holder's participation in
such underwriting and the inclusion
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<PAGE>
of such Holder's Registrable Securities in the underwriting to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall (together with the Company and the other holders of
securities of the Company with registration rights to participate therein
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the representative of the
underwriter or underwriters selected by the Company.
(c) Notwithstanding any other provision of this Section 5.2, if the
representative of the underwriters in good faith advises the Company in writing
that marketing factors require a limitation on the number of shares to be
underwritten, the representative may (subject to the limitation set forth below)
exclude all Registrable Securities from, or limit the number of Registrable
Securities to be included in, the registration and underwriting. The Company
shall so advise all holders of securities requesting registration, and the
number of shares of securities that are entitled to be included in the
registration and underwriting shall be allocated first to the Company for
securities being sold for its own account and thereafter as set forth in Section
5.11. If any person does not agree to the terms of any such underwriting, he,
she or it shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
(d) If shares are so withdrawn from the registration or if the number
of shares of Registrable Securities to be included in such registration was
previously reduced as a result of marketing factors, the Company shall then
offer to all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among the persons requesting additional inclusion in accordance
with Section 5.11 hereof.
(e) This Section 5.2 shall not apply to a registration on any
registration form that does not permit secondary sales or to registrations
relating solely to (i) employee benefit plans, (ii) transactions pursuant to
Rule 145 or any other similar rule promulgated under the Securities Act or (iii)
securities issued in connection with mergers with or acquisitions of other
corporations by the Company.
5.3. EXPENSES
In the case of any registration under Sections 5.1 and 5.2 hereof, the
Company shall bear all costs and expenses of each such registration, including,
but not limited to, printing, legal and accounting expenses, Securities and
Exchange Commission ("SEC") filing fees and "blue sky" fees and expenses (the
"Registration Expenses"); provided, however, that the Company shall have no
obligation to pay or otherwise bear (i) any portion of the fees or disbursements
of more than one (1) counsel for the selling Holders of Registrable Securities
in connection with the registration of their Registrable Securities, and in any
event shall not responsible for fees for such counsel in excess of $10,000, or
(ii) any portion of the underwriter's commissions or discounts attributable to
the Registrable Securities being offered and sold by the Holders of Registrable
Securities; and, provided further, that if the Holders bear the Registration
Expenses for any registration proceeding commenced pursuant to this Agreement
and subsequently withdrawn by the Holders registering shares therein, such
registration proceeding shall not be counted as a requested registration
pursuant to Section 5.1 hereof. Furthermore, in the event that a withdrawal by
the Holders is based upon material adverse information relating to the Company
that is different from the information known or available (upon request from the
Company or otherwise) to the Holders requesting registration at the time of
their request for registration under Section 5.1, such registration shall not be
treated as a counted registration for purposes of Section 5.1 hereof, even
though the Holders do not bear the Registration Expenses for such registration.
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5.4 OBLIGATIONS OF THE COMPANY
In the case of each registration effected by the Company pursuant to
this Agreement, the Company will keep each Holder advised in writing as to the
initiation of each registration and as to the completion thereof. At its
expense, the Company will use its best efforts to:
(a) Keep such registration effective for a period of one (1) month or
until the Holder or Holders have completed the distribution described in the
registration statement relating thereto, whichever first occurs;
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement;
(c) Furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as a Holder
from time to time may reasonably request;
(d) Notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such seller, prepare and
furnish to such seller a reasonable number of copies of a supplement or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such shares, such prospectus shall not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or incomplete in the light to the circumstances then existing;
(e) Enter into any reasonable underwriting agreement required by the
proposed underwriter, if any, in such form and containing such terms as are
customary; provided, however, that no Holder shall be required to make any
representations or warranties other than with respect to its title to the
Registrable Securities and any written information provided by the Holder to the
Company, and if the underwriter requires that representations or warranties be
made and that indemnification be provided, the Company shall make all such
representations and warranties and provide all such indemnities, including,
without limitation, in respect of the Company's business, operations and
financial information and the disclosures relating thereto in the prospectus;
(f) Use its best efforts to register or qualify the securities covered
by said registration statement under the securities or "blue sky" laws of such
jurisdictions as any selling Holder may reasonably request, provided that the
Company shall not be required to register or qualify the securities in any
jurisdictions which require it to qualify to do business therein;
(g) Cause all such Registrable Securities to be listed on each
securities exchange or quotation system on which similar securities issued by
the Company are then listed or quoted;
(h) Otherwise use its best efforts to comply with the securities laws
of the United States and other applicable jurisdictions and all applicable rules
and regulations of the SEC and comparable governmental agencies in other
applicable jurisdictions and make generally available to its stockholders, in
each case as soon as practicable, but not later than 45 days after the close of
the period covered thereby,
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an earnings statement of the Company which will satisfy the provisions of
Section 11(a) of the Securities Act;
(i) Obtain and furnish to each selling Holder, immediately prior to the
effectiveness of the registration statement (and, in the case of an underwritten
offering, at the time of delivery of any Registrable Securities sold pursuant
thereto), a cold comfort letter from the Company's independent public
accountants in customary form and covering such matters of the type customarily
covered by cold comfort letters as the Holders of a majority of the Registrable
Securities being sold may reasonably request; and
(j) Otherwise cooperate with the underwriter or underwriters, the
Commission and other regulatory agencies and take all actions and execute and
deliver or cause to be executed and delivered all documents necessary to effect
the registration of any Registrable Securities under this Agreement.
5.5 SUSPENSION
In the case of a registration for the sale of Registrable Securities,
upon receipt of any notice (a "Suspension Notice") from the Company of the
happening of any event which makes any statement made in the registration
statement or related prospectus untrue or which requires the making of any
changes in such registration statement or prospectus so that they will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
in light of the circumstances under which they were made not misleading, each
Holder of Registrable Securities registered under such registration statement
shall forthwith discontinue disposition of such Registrable Securities pursuant
to such registration statement until such Holder's receipt of the copies of the
supplemented or amended prospectus or until it is advised in writing (the
"Advice") by the Company that the use of the prospectus may be resumed, and has
received copies of any additional or supplemental filings which are incorporated
by reference in the prospectus; provided, however, that the Company shall not
give a Suspension Notice until after the registration statement has been
declared effective and shall not give more than one Suspension Notice to the
Holders in respect to all Registrable Securities and pursuant to this Section
5.5 during any period of 12 consecutive months and in no event shall the period
from the date on which any Holder receives a Suspension Notice to the date on
which any Holder receives either the Advice or copies of the supplemented or
amended prospectus (the "Suspension Period") exceed 60 days. In the event that
the Company shall give any Suspension Notice, the Company shall use its best
efforts and take such actions as are reasonably necessary to render the Advice
and end the Suspension Period as promptly as practicable.
5.6 INDEMNIFICATION
(a) Incident to any registration statement referred to herein, the
Company will indemnify and hold harmless each Holder who offers or sells any
such Registrable Securities in connection with such registration statement
(including its partners (including partners of partners and stockholders of any
such partners), and directors, officers, employees and agents of any of them (a
"Selling Holder"), and each person who controls any of them within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act (a
"Controlling Person"), from and against any and all losses, claims, damages,
expenses and liabilities, joint or several (including any investigation, legal
and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, as the same
are incurred), to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities arise out of or are based on (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement
(including any related preliminary or definitive prospectus, or any amendment or
supplement to such registration
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statement or prospectus), (ii) any omission or alleged omission to state in such
document a material fact required to be stated in it or necessary to make the
statements in it not misleading, or (iii) any violation by the Company of the
Securities Act, any state securities or "blue sky" laws or any rule or
regulation thereunder in connection with such registration; provided, however,
that the Company will not be liable to the extent that such loss, claim, damage,
expense or liability arises from and is based on an untrue statement or omission
or alleged untrue statement or omission made in reliance on and in conformity
with information furnished in writing to the Company by such underwriter,
Selling Holder or Controlling Person expressly for use in such registration
statement. With respect to such untrue statement or omission or alleged untrue
statement or omission in the information furnished in writing to the Company by
such Selling Holder expressly for use in such registration statement, such
Selling Holder will indemnify and hold harmless each underwriter, the Company
(including its directors, officers, employees and agents), each other Holder
(including its partners (including partners of partners and stockholders of such
partners) and directors, officers, employees and agents of any of them, and each
person who controls any of them within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act)), from and against any and all
losses, claims, damages, expenses and liabilities, joint or several, to which
they, or any of them, may become subject under the Securities Act, the Exchange
Act or other federal or state statutory law or regulation, at common law or
otherwise to the same extent provided in the immediately preceding sentence.
(b) The foregoing indemnity provisions are subject to the condition
that, insofar as they relate to any violation made in a preliminary prospectus
but eliminated or remedied in the amended prospectus on file with the SEC at the
time the registration statement in question becomes effective or in the amended
prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final
Prospectus"), such indemnity provisions shall not inure to the benefit of any
person if a copy of the Final Prospectus was furnished to the indemnified party
and was not furnished to the person asserting the loss, liability, claim or
damage at or prior to the time such action is required by the Securities Act.
(c) If the indemnification provided for in Section 5.6(a) above for any
reason is held by a court of competent jurisdiction to be unavailable to an
indemnified party in respect of any losses, claims, damages, expenses or
liabilities referred to therein, then each indemnifying party under this Section
5.6, in lieu of indemnifying such indemnified party thereunder, shall contribute
to the amount paid or payable by such indemnified party as a result of such
losses, claims, damages, expenses or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, the other
Selling Holders and the underwriters from the offering of the Registrable
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company, the other Selling Holders and the underwriters in
connection with the statements or omissions which resulted in such losses,
claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company, the
Selling Holders and the underwriters shall be deemed to be in the same
respective proportions that the net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Holders and the underwriting
discount received by the underwriters, in each case as set forth in the table on
the cover page of the applicable prospectus, bear to the aggregate public
offering price of the Registrable Securities. The relative fault of the Company,
the Selling Holders and the underwriters shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company, the Selling Holders or the underwriters and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Company and the Selling Holders agree that it would not
be just and equitable if contribution pursuant to this Section 5.6(c) were
determined by pro rata or per capita allocation or by any
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other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. In no event,
however, shall a Selling Holder be required to contribute any amount under this
Section 5.6(c) in excess of the lesser of (i) that proportion of the total of
such losses, claims, damages or liabilities indemnified against equal to the
proportion of the total Registrable Securities sold under such registration
statement which are being sold by such Selling Holder or (ii) the proceeds
received by such Selling Holder from its sale of Registrable Securities under
such registration statement. No person found guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not found guilty of
such fraudulent misrepresentation.
(d) Promptly after receipt by the indemnified party under this Section
5.6 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against the indemnifying party under this Section 5.6, deliver to the
indemnifying party a written notice of the commencement thereof, and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, to assume the defense thereof with counsel
mutually satisfactory to the parties; provided, however, that the indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if, in the opinion of counsel for the
indemnifying party, representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding.
(e) The amount paid by an indemnifying party or payable to an
indemnified party as a result of the losses, claims, damages and liabilities
referred to in this Section 5.6 shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim, payable as the same are incurred. The indemnification and
contribution provided for in this Section 5.6 will remain in full force and
effect regardless of any investigation made by or on behalf of the indemnified
parties or any officer, director, employee, agent or controlling person of the
indemnified parties.
5.7 INFORMATION BY HOLDER
Each Holder of Registrable Securities shall furnish to the Company such
information regarding such Holder and the distribution proposed by such Holder
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
referred to in this Agreement.
5.8 RULE 144 REPORTING
In the event that the Company becomes subject to Section 13 or Section
15(d) of the Exchange Act, the Company shall use its best efforts to take all
action as may be required as a condition to the availability of Rule 144 or Rule
144A under the Securities Act (or any successor or similar exemptive rules
hereafter in effect). The Company shall furnish to any Holder, within 15 days of
a written request, a written statement executed by the Company as to the steps
it has taken to comply with the current public information requirement of Rule
144 or Rule 144A or such successor rules.
5.9 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS
The registration rights of the Holders of Registrable Securities under
this Agreement may be transferred or assigned by any Holder to (i) any general
or limited partner or other comparable affiliate of such Holder, (ii) any fund
managed by or associated with such Holder or (iii) any transferee or assignee
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of such Holder's Registrable Securities who after such transfer or assignment
will hold at least fifty percent (50%) of the Registrable Securities owned by
such Holder on the date hereof; provided that the Company is given prior written
notice of such transfer or assignment setting forth the name and address of the
transferee or assignee and identifying the number of Registrable Securities so
transferred or assigned, and, provided further, that the transferee or assignee
of such rights assumes in writing the obligations of such Holder under this
Agreement.
5.10 MARKET STAND-OFF AGREEMENT
In connection with a public offering by the Company, the Holders, if
requested in good faith by the Company and the managing underwriter of the
public offering, shall agree not to sell or otherwise transfer or dispose of any
securities of the Company held by them (except for any securities sold pursuant
to such registration statement) for a period following the effective date of the
applicable registration statement that in no event shall exceed 180 days.
Notwithstanding the foregoing, such an agreement shall not be required unless
all of the officers and directors and five percent (5%) or greater stockholders
of the Company and all other persons with registration rights enter into similar
agreements. In order to enforce the foregoing, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares of securities of every other person subject to the
foregoing restriction) until the end of such period.
5.11 ALLOCATION OF REGISTRATION OPPORTUNITIES
In any circumstance in which all of the Registrable Securities and
other shares of Common Stock of the Company (including shares of Common Stock
issued or issuable upon conversion of shares of any currently unissued series of
Preferred Stock of the Company) with registration rights (the "Other Shares")
requested to be included in a registration on behalf of the Holders or other
selling stockholders cannot be so included as a result of limitations of the
aggregate number of shares of Registrable Securities and Other Shares that may
be so included, the number of shares of Registrable Securities and Other Shares
that may be so included shall be allocated among the Holders and other selling
stockholders requesting inclusion of shares pro rata on the basis of the number
of shares of Registrable Securities and Other Shares that would be held by such
Holders and other selling stockholders, assuming conversion; provided, however,
that if any Holder or other selling stockholder does not request inclusion of
the minimum number of shares of Registrable Securities and Other Shares
allocated to him, her or it pursuant to the above-described procedure, the
remaining portion of his, her or its allocation shall be reallocated among those
requesting Holders and other selling stockholders whose allocations did not
satisfy their requests pro rata on the basis of the number of shares of
Registrable Securities and Other Shares that would be held by such Holders and
other selling stockholders, assuming conversion, and this procedure shall be
repeated until all of the shares of Registrable Securities and Other Shares
which may be included in the registration on behalf of the Holders and other
selling stockholders have been so allocated.
5.12 TERMINATION OF REGISTRATION RIGHTS
The rights of any Holder to request registration or inclusion in any
registration pursuant to this Agreement shall terminate upon the earlier of (i)
five (5) years after the closing of the Company's first Public Offering or (ii)
as to any Investor on such date after the closing of the Company's first Public
Offering as such Investor owns less then thirty percent (30%) of the number of
Registrable Securities originally purchased by such Investor.
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EXHIBIT B
INFORMATION AND INSPECTION RIGHTS
3.1 INFORMATION RIGHTS
The Company shall deliver to the Investors the following:
(a) Annual financial statements prepared in accordance with Generally
Accepted Accounting Principles ("GAAP") within 90 days following the fiscal year
end.
(b) Quarterly unaudited financial statements prepared in accordance
with GAAP within 45 days following each fiscal quarter.
3.2 INSPECTION RIGHTS The Investors shall have the right to inspect the
books and records of the Company during normal business hours upon written
request made at least one (1) business day in advance; provided, that the
Investors shall avail themselves of such right no more often than once every
fiscal quarter.
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EXHIBIT C
CONFIDENTIALITY AGREEMENT
4. CONFIDENTIALITY AGREEMENT.
Each Investor, and any successor or assign of such Investor, who
receives from the Company or its agents, directly or indirectly, any information
that the Company has not made generally available to the public, pursuant to the
preparation and execution of this Agreement or disclosure in connection
therewith or pursuant to the provisions of Section 3: (a) acknowledges and
agrees that such information is confidential and for its use only in connection
with evaluating its investment in the Company; (b) agrees that it will not
disseminate such information to any person other than its accountant, investment
advisor, limited partners or attorney and that such dissemination shall be only
for purposes of evaluating its investment; and (c) agrees to execute and to
cause Affiliates to execute such confidentiality agreements as are necessary or
desirable to further the intent of this Section 4.
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EXHIBIT 10.18
AMENDMENT NO. 2 TO
INVESTOR RIGHTS AGREEMENT
This AMENDMENT NO. 2 TO INVESTOR RIGHTS AGREEMENT (this "Amendment No.
2") is made as of April __, 2000 by and among Lineo, Inc., a Delaware
corporation (the "Company"), the investors listed on Schedule 1 hereto
(individually and collectively, the "Series A Investors"), the investors listed
on Schedule 2 hereto (individually and collectively, the "Series B Investors")
and the investors listed on Schedule 3 hereto (individually and collectively,
the "Series C Investors") with respect to that certain Investor Rights Agreement
dated February 17, 2000 by and among the Company and the Series A Investors (the
"Investor Rights Agreement").
WHEREAS, in connection with their purchase of shares of the Company's
Series A Convertible Preferred Stock, the Series A Investors were extended
certain registration, information and inspection rights as set forth in the
Investor Rights Agreement,
WHEREAS, in connection with their purchase of shares of the Company's
Series B Convertible Preferred Stock, the Series B Investors were extended
certain registration, information and inspection rights as set forth in
Amendment No. 1 to the Investor Rights Agreement dated March 15, 2000
("Amendment No. 1"), and
WHEREAS, the Company, the Series A Investors and the Series B Investors
wish to amend the registration, information and inspection rights set forth in
the Investor Rights Agreement and Amendment No. 1, and the Company is willing to
grant such registration, information and inspection rights to the Series C
Investors as set forth on EXHIBIT A and EXHIBIT B hereto;
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants, and conditions set forth herein and in
the Series C Preferred Stock Purchase Agreement of even date herewith, the
parties hereto mutually agree to amend the Investor Rights Agreement to provide
as follows:
1. DEFINITIONS.
A. The definition of "Registrable Securities" set forth in the Investor
Rights Agreement is hereby deleted in its entirety and replaced with the
following definition:
"Registrable Securities" shall mean any shares of Common Stock held by
the Investors and permitted assignees (or subject to acquisition by the
Investors and permitted assignees upon conversion of Series A Preferred
Stock, Series B Convertible Preferred Stock, $.001 par value per share,
of the Company ("Series B Preferred Stock") or Series C Convertible
Preferred Stock, $.001 par value per share, of the Company ("Series C
Preferred Stock")), including any shares issued by way of a stock
dividend or stock split
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or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization; provided, however, that
if a Holder owns Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock, the Holder may exercise its registration
rights hereunder by converting the shares to be sold publicly into
Common Stock as of the closing of the relevant offering and shall not
be required to cause such Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock to be converted to Common Stock
until and unless such closing occurs; and provided, further, that any
Common Stock that is sold in a registered sale pursuant to an
effective registration statement under the Securities Act or pursuant
to Rule 144 thereunder, or that may be sold without restriction as to
volume or otherwise pursuant to Rule 144 under the Securities Act (as
confirmed by an unqualified opinion of counsel to the Company), shall
not be deemed Registrable Securities.
B. For purposes of the definition of "Holder" in Section 1 and for
purposes of Sections 3, 4 (regarding "Confidentiality Agreement," as set forth
in EXHIBIT C hereto), 5 and 6.5 of the Investor Rights Agreement only, the
definition of "Investor" and "Investors" as set forth in the preamble to the
Investor Rights Agreement is hereby amended by adding the Series B Investors and
Series C Investors such that, for purposes of the definition of "Holder" in
Section 1 and for purposes of Sections 3, 4, 5 and 6.5 only, each of the Series
A Investors, Series B Investors and Series C Investors shall individually be
considered an "Investor," and collectively they shall be considered "Investors."
2. REGISTRATION RIGHTS. Section 5 of the Investor Rights Agreement is
hereby amended and restated in its entirety as set forth on EXHIBIT A hereto.
3. INFORMATION AND INSPECTION RIGHTS. Sections 3.1 and 3.2 of the
Investor Rights Agreement are hereby amended and restated in their entirety as
set forth on EXHIBIT B hereto.
4. CONFIDENTIALITY. Section 4 of the Investor Rights Agreement is
hereby amended and restated in its entirety as set forth on EXHIBIT C hereto.
5. MISCELLANEOUS.
5.1 RATIFICATION. Except as expressly set forth in this Amendment No.
2, the terms of the Investor Rights Agreement, as amended by Amendment No. 1,
shall remain in full force and effect. In the event of a conflict between the
terms of this Amendment No. 2 and the terms of the Investor Rights Agreement, as
amended by Amendment No. 1, the terms of this Amendment No. 2 shall control.
5.2 SPECIFIC ENFORCEMENT. The Company, the Series A Investors, the
Series B Investors and the Series C Investors expressly agree that they will be
irreparably damaged if this Amendment No. 2 is not specifically enforced. Upon a
breach or threatened breach of the terms, covenants and/or conditions of this
Amendment No. 2 by any party, the Company and the Series A, B and C Investors
shall, in addition to all other remedies, each be entitled to a temporary or
permanent injunction, without showing any actual damage, and/or a decree for
specific performance, in accordance with the provisions of this Amendment No. 2.
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5.3 NOTICES. Unless otherwise provided, any notice under this Amendment
No. 2 shall be in writing and shall be deemed given (i) five (5) days after
having been sent by registered or certified mail, return receipt requested,
postage prepaid, or (ii) one (1) day (or five (5) days in the case of
international deliveries) after the deposit with a nationally recognized
overnight courier, having specified next day delivery, with written verification
of receipt. All notices shall be addressed to each holder of record at the
address of such holder appearing on the books of the Corporation.
5.4 GOVERNING LAW. This Amendment No. 2 shall be governed by and
construed under the laws of the State of Delaware without regard to principles
of conflict of laws.
5.5 SUCCESSORS AND ASSIGNS. The terms and conditions of this Amendment
No. 2 shall inure to the benefit of and be binding on the respective successors
and assigns of the parties.
5.6 SEVERABILITY. If one or more provisions of this Amendment No. 2 are
held to be unenforceable under applicable law, such provision shall be excluded
from this Amendment No. 2, and the balance of this Amendment No. 2 shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
5.7 COUNTERPARTS. This Amendment No. 2 may be executed in two or more
counterparts, which together shall constitute one instrument.
5.8 AUTHORIZATION. Each party represents that this Amendment No. 2 has
been duly authorized, executed and delivered by such party and constitutes a
valid and binding obligation of such party, enforceable against such party in
accordance with its terms.
5.9 LEGEND. Each certificate evidencing any of the shares of capital
stock of the Company owned by the Series C Investors shall bear a legend
substantially as follows:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND
CONDITIONS OF A CERTAIN INVESTOR RIGHTS AGREEMENT DATED AS OF FEBRUARY
17, 2000, AS AT ANY TIME AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR
ENCUMBERED EXCEPT IN ACCORDANCE WITH THE TERMS AND PROVISIONS OF SAID
AGREEMENT, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICE
OF THE COMPANY AND WILL BE FURNISHED TO THE HOLDER OF THIS CERTIFICATE
UPON REQUEST AND WITHOUT CHARGE.
[Signature pages follow]
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IN WITNESS WHEREOF, the parties have executed this Amendment No. 2 as
of the date first above written.
COMPANY:
Lineo, Inc.,
a Delaware corporation
By: ___________________________________________
Bryan Sparks, President and Chairman
SERIES A INVESTORS
Egan-Managed Capital, L.P.
By EMC Partners, L.P.,
its General Partner
By___________________________
Michael H. Shanahan
General Partner
Motorola, Inc.
By: ______________________
Its: _____________________
The Canopy Group, Inc.
By: ______________________
Its: ____________________
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SERIES B INVESTORS
Acer Investment Worldwide Rainier Investors, LLC
By:_______________________________ By:_____________________________________
Its:______________________________ Its:____________________________________
AII Holding Samsung Electro-Mechanics Co., Ltd.
By:_______________________________ By:_____________________________________
Its:______________________________ Its:____________________________________
Arima Computer Corporation Seligman New Technologies Fund, Inc.
By:_______________________________ By:_____________________________________
Its:______________________________ Its:____________________________________
Brilliant World Limited Seligman Investment Opportunities
(Master) Fund - NTV Portfolio
By:_______________________________ By:_____________________________________
Its:______________________________ Its:____________________________________
Budworth Investments Limited Silver Star Developments Limited
By:_______________________________ By:_____________________________________
Its:______________________________ Its:____________________________________
Compal Electronics, Inc. Summit Law Group, PLLC
By:_______________________________ By:_____________________________________
Its:______________________________ Its:____________________________________
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Egan-Managed Capital, L.P. Wisecom Investments, LLC
By:_______________________________ By:_____________________________________
Its:______________________________ Its:____________________________________
Exchange Place Investments, LLC
By:_______________________________
Its:______________________________
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SERIES C INVESTORS
_____________________________________
Name of Investor
By __________________________________
Its _________________________________
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SCHEDULE 1
SERIES A INVESTORS
Egan-Managed Capital, L.P.
Motorola, Inc
The Canopy Group, Inc.
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SCHEDULE 2
SERIES B INVESTORS
Acer Investment Worldwide
AII Holding
Arima Computer Corporation
Brilliant World Limited
Budworth Investments Limited
Compal Electronics, Inc.
Egan-Managed Capital, L.P.
Exchange Place Investments, LLC
Rainier Investors, LLC
Samsung Electro-Mechanics Co., Ltd.
Seligman New Technologies Fund, Inc.
Seligman Investment Opportunities (Master) Fund - NTV Portfolio
Silver Star Developments Limited
Summit Law Group, PLLC
Wisecom Investments, LLC
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SCHEDULE 3
SERIES C INVESTORS
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EXHIBIT A
REGISTRATION RIGHTS
5. REGISTRATION RIGHTS.
5.1. REQUEST FOR REGISTRATION
(a) If the Company shall receive at any time after the earlier of (i)
February 17, 2003 or (ii) six (6) months after the effective date of a Public
Offering, a written request from the holders (the "Initiating Holders") of a
majority of the Registrable Securities then outstanding that the Company file a
registration statement under the Securities Act covering the registration of all
or part of the Registrable Securities having an aggregate offering price, net of
underwriting discounts and commissions, equal to or exceeding $5,000,000, then
the Company shall, subject to Section 5.1(b) below:
(i) Within ten (10) days of the receipt of such request, give
written notice of the proposed registration to all Holders; and
(ii) As soon as practicable, either (A) elect to make a
primary offering, in which case the rights of such Holders shall be as set forth
in Section 5.2 hereof or (B) use its best efforts to effect such registration
(including, without limitation, filing post-effective amendments, appropriate
qualifications under applicable blue sky or other state securities laws, and
appropriate compliance with the Securities Act) and as would permit or
facilitate the sale and distribution of all or such portion of such Registrable
Securities as are specified in such request, together with all or such portion
of the Registrable Securities of any Holder or Holders joining in such request
as are specified in a written request received by the Company within twenty (20)
days after such written notice from the Company is mailed or delivered.
(b) The Company shall not be obligated to effect, or to take any action
to effect, any such registration pursuant to this Section 5.1 after the Company
has initiated two (2) such registrations pursuant to this Section 5.1 (counting
for these purposes only registrations which have been declared or ordered
effective and pursuant to which securities have been sold and registrations
which have been withdrawn by the Holders as to which the Holders have not
elected to bear the expenses of registration pursuant to Section 5.4 hereof and
would, absent such election, have been required to bear such expenses).
(c) Subject to Section 5.1(b) above, the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable and in any event within sixty (60) days of
receipt of the request or requests of the Initiating Holders; provided, however,
that if (i) in the good faith judgment of the Board of Directors of the Company,
such registration would be detrimental to the Company, and the Board of
Directors of the Company concludes, as a result, that it is essential to defer
the filing of such registration statement at such time, and (ii) the Company
shall furnish to such Holders a certificate signed by the President of the
Company stating that in the good faith judgment of the Board of Directors of the
Company, it would be detrimental to the Company for such registration statement
to be filed in the near future and that it is, therefore, essential to defer the
filing of such registration statement, then the Company shall have the right to
defer such filing for a period of not more than ninety (90) days after receipt
of the request of the Initiating Holders, and, provided further, that the
Company shall not defer its obligation in this manner more than once in any
twelve-month period.
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(d) The registration statement filed pursuant to the request of the
Initiating Holders may, subject to the provisions of Section 5.13 hereof,
include other securities of the Company with respect to which registration
rights have been granted, and may include securities of the Company being sold
for the account of the Company.
(e) The right of any Holder to registration pursuant to this Section
5.1 shall be conditioned upon such Holder's participation in such underwriting
and the inclusion of such Holder's Registrable Securities in the underwriting
(unless otherwise mutually agreed by a majority in interest of the Initiating
Holders and such Holder with respect to such participation and inclusion) to the
extent provided herein. A Holder may elect to include in such underwriting all
or a part of the Registrable Securities it holds.
(f) If the Company shall request inclusion in any registration pursuant
to this Section 5.1 of securities being sold for its own account, or if other
persons shall request inclusion in any registration pursuant to this Section
5.1, the Initiating Holders shall, on behalf of all Holders, offer to include
such securities in the underwriting and may condition such offer on their
acceptance of the further applicable provisions of this Agreement. The Company
shall (together with all Holders and other persons proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the representative of the underwriter or underwriters
selected for such underwriting by a majority in interest of the Initiating
Holders, which underwriters are reasonably acceptable to the Company.
Notwithstanding any other provision of this Section 5.1, if the representative
of the underwriters in good faith advises the Initiating Holders in writing that
marketing factors require a limitation on the number of shares to be
underwritten, the number of shares to be included in the underwriting or
registration shall be allocated as set forth in Section 5.13 hereof. If a person
who has requested inclusion in such registration as provided above does not
agree to the terms of any such underwriting, such person shall be excluded
therefrom by written notice from the Company, the underwriter or the Initiating
Holders. The securities so excluded shall also be withdrawn from registration.
Any Registrable Securities or other securities excluded or withdrawn from such
underwriting shall also be withdrawn from such registration. If shares are so
withdrawn from the registration and if the number of shares to be included in
such registration was previously reduced as a result of marketing factors
pursuant to this Section 5.1(f), then the Company shall offer to all Holders who
have retained rights to include securities in the registration the right to
include additional securities in the registration in an aggregate amount equal
to the number of shares so withdrawn, with such shares to be allocated among
such Holders requesting additional inclusion in accordance with Section 5.13.
5.2 COMPANY REGISTRATION
(a) Subject to Section 5.2(e) below, if at any time or times after the
date hereof the Company shall determine to register any of its equity securities
either for its own account or the account of a security holder or holders
exercising their respective demand registration rights, the Company will:
(i) Promptly give to each Holder written notice thereof; and
(ii) Use its best efforts to include in such registration (and
any related qualification under blue sky laws or other compliance), except as
set forth in Section 5.2(c) below, and in any underwriting involved therein, all
the Registrable Securities specified in a written request or requests, made by
any Holder and received by the Company within twenty (20) days after the written
notice from the Company described in (i) above is mailed or delivered by the
Company. Such written request may specify all or a part of a Holder's
Registrable Securities.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise the Holders as a part of the written notice given
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pursuant to Section 5.2(a)(i) above. In such event, the right of any Holder to
registration pursuant to this Section 5.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders of securities of the Company
with registration rights to participate therein distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the representative of the underwriter or underwriters selected by the
Company.
(c) Notwithstanding any other provision of this Section 5.2, if the
representative of the underwriters in good faith advises the Company in writing
that marketing factors require a limitation on the number of shares to be
underwritten, the number of shares to be included in the underwriting or
registration shall be allocated as set forth in Section 5.13. If any person does
not agree to the terms of any such underwriting, he, she or it shall be excluded
therefrom by written notice from the Company or the underwriter. Any Registrable
Securities or other securities excluded or withdrawn from such underwriting
shall be withdrawn from such registration.
(d) If shares are so withdrawn from the registration or if the number
of shares of Registrable Securities to be included in such registration was
previously reduced as a result of marketing factors, the Company shall then
offer to all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among the persons requesting additional inclusion in accordance
with Section 5.12 hereof.
(e) This Section 5.2 shall not apply to a registration on any
registration form that does not permit secondary sales or to registrations
relating solely to (i) employee benefit plans, (ii) transactions pursuant to
Rule 145 or any other similar rule promulgated under the Securities Act or (iii)
securities issued in connection with mergers with or acquisitions of other
corporations by the Company.
5.3 REGISTRATIONS ON FORM S-3
(a) After its initial public offering, the Company shall use its best
efforts to qualify and remain qualified for registration on Form S-3 or any
comparable or successor form or forms. After the Company has qualified for the
use of Form S-3, in addition to the rights contained in the foregoing provisions
of this Agreement, the Holders of Registrable Securities shall have the right to
request registrations on Form S-3 (such requests shall be in writing and shall
state the number of shares of Registrable Securities to be disposed of and the
intended methods of disposition of such shares by such Holders or Holders);
provided, however, that the Company shall not be obligated to effect any such
registration if (i) the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such registration, propose to
sell Registrable Securities and such other securities (if any) on Form S-3 at an
aggregate price to the public of less than or equal to $500,000 (net of any
underwriters' discounts or commissions); (ii) the Company shall furnish the
certification described in Section 5.1(c) (but subject to the limitations set
forth therein); or (iii) in a given twelve-month period, the Company has already
effected two (2) such registrations pursuant to this Section 5.3.
(b) If a request complying with the requirements of Section 5.3(a)
hereof is delivered to the Company, the provisions of Sections 5.1(c) and (d)
hereof shall apply to such registration. If the registration is for an
underwritten offering, the provisions of Sections 5.1(e) and (f) hereof shall
apply to such registration. Registrations effected pursuant to this Section 5.3
shall not be counted as demands for registration or registrations effected
pursuant to Sections 5.1 and 5.2.
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5.4 EXPENSES
In the case of any registration under Sections 5.1, 5.2 and 5.3 hereof,
the Company shall bear all costs and expenses of each such registration,
including, but not limited to, printing, legal and accounting expenses,
Securities and Exchange Commission ("SEC") filing fees and "blue sky" fees and
expenses (the "Registration Expenses"); provided, however, that the Company
shall have no obligation to pay or otherwise bear (i) any portion of the fees or
disbursements of more than one (1) counsel for the selling Holders of
Registrable Securities in connection with the registration of their Registrable
Securities, and in any event shall not responsible for fees for such counsel in
excess of $20,000, or (ii) any portion of the underwriter's commissions or
discounts attributable to the Registrable Securities being offered and sold by
the Holders of Registrable Securities; and, provided further, that if the
Holders bear the Registration Expenses for any registration proceeding commenced
pursuant to this Agreement and if the registration request is subsequently
withdrawn by the Holders registering shares therein, such registration
proceeding shall not be counted as a requested registration pursuant to Section
5.1 hereof. Furthermore, in the event that a withdrawal by the Holders is based
upon material adverse information relating to the Company that is different from
the information known or available (upon request from the Company or otherwise)
to the Holders requesting registration at the time of their request for
registration under Section 5.1, such registration shall not be treated as a
counted registration for purposes of Section 5.1 hereof and the Holders shall
not be required to pay any of the Registration Expenses for such registration.
5.5 OBLIGATIONS OF THE COMPANY
In the case of each registration effected by the Company pursuant to
this Agreement, the Company will keep each Holder advised in writing as to the
initiation of each registration and as to the completion thereof.
At its expense, the Company will use its best efforts to:
(a) Prepare and file with the SEC a registration statement with respect
to such Registrable Securities and use its best efforts to cause such
registration statement to become effective;
(b) Keep such registration effective for a period of one hundred twenty
(120) days or until the Holder or Holders have completed the distribution
described in the registration statement relating thereto, whichever first
occurs;
(c) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement;
(d) Furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as a Holder
from time to time may reasonably request, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them;
(e) Notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such seller, prepare and
furnish to such seller a reasonable number of copies of a supplement or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such shares, such prospectus shall not include
any untrue
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statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
incomplete in the light to the circumstances then existing;
(f) Enter into any reasonable underwriting agreement required by the
proposed underwriter, if any, in such form and containing such terms as are
customary; provided, however, that no Holder shall be required to make any
representations or warranties other than with respect to its title to the
Registrable Securities and any written information provided by the Holder to the
Company, and if the underwriter requires that representations or warranties be
made and that indemnification be provided, the Company shall make all such
representations and warranties and provide all such indemnities, including,
without limitation, in respect of the Company's business, operations and
financial information and the disclosures relating thereto in the prospectus;
(g) Use its best efforts to register or qualify the securities covered
by said registration statement under the securities or "blue sky" laws of such
jurisdictions as any selling Holder may reasonably request, provided that the
Company shall not be required to register or qualify the securities in any
jurisdictions which require it to qualify to do business therein;
(h) Cause all such Registrable Securities to be listed on each
securities exchange or quotation system on which similar securities issued by
the Company are then listed or quoted;
(i) Otherwise use its best efforts to comply with the securities laws
of the United States and other applicable jurisdictions and all applicable rules
and regulations of the SEC and comparable governmental agencies in other
applicable jurisdictions and make generally available to its stockholders, in
each case as soon as practicable, but not later than 45 days after the close of
the period covered thereby, an earnings statement of the Company which will
satisfy the provisions of Section 11(a) of the Securities Act;
(j) Obtain and furnish to each selling Holder, immediately prior to the
effectiveness of the registration statement (and, in the case of an underwritten
offering, at the time of delivery of any Registrable Securities sold pursuant
thereto), (i) a cold comfort letter from the Company's independent public
accountants in customary form and covering such matters of the type customarily
covered by cold comfort letters as the Holders of a majority of the Registrable
Securities being sold may reasonably request and (ii) an opinion of counsel
representing the Company in form and substance as is customary given to the
underwriters in an underwritten public offering;
(k) Otherwise cooperate with the underwriter or underwriters, the
Commission and other regulatory agencies and take all actions and execute and
deliver or cause to be executed and delivered all documents necessary to effect
the registration of any Registrable Securities under this Agreement; and
(l) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
5.6 SUSPENSION
In the case of a registration for the sale of Registrable Securities,
upon receipt of any notice (a "Suspension Notice") from the Company of the
happening of any event which makes any statement made in the registration
statement or related prospectus untrue or which requires the making of any
changes in such registration statement or prospectus so that they will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
in light of the circumstances under which they were made not misleading, each
Holder of
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Registrable Securities registered under such registration statement shall
forthwith discontinue disposition of such Registrable Securities pursuant to
such registration statement until such Holder's receipt of the copies of the
supplemented or amended prospectus or until it is advised in writing (the
"Advice") by the Company that the use of the prospectus may be resumed, and has
received copies of any additional or supplemental filings which are incorporated
by reference in the prospectus; provided, however, that the Company shall not
give a Suspension Notice until after the registration statement has been
declared effective and shall not give more than one Suspension Notice to the
Holders in respect to all Registrable Securities and pursuant to this Section
5.6 during any period of 12 consecutive months and in no event shall the period
from the date on which any Holder receives a Suspension Notice to the date on
which any Holder receives either the Advice or copies of the supplemented or
amended prospectus (the "Suspension Period") exceed 60 days. In the event that
the Company shall give any Suspension Notice, the Company shall use its best
efforts and take such actions as are reasonably necessary to render the Advice
and end the Suspension Period as promptly as practicable.
5.7 INDEMNIFICATION
(a) Incident to any registration statement referred to herein, the
Company will indemnify and hold harmless each Holder who offers or sells any
such Registrable Securities in connection with such registration statement
(including its partners (including partners of partners and stockholders of any
such partners), and directors, officers, employees and agents of any of them (a
"Selling Holder"), and each person who controls any of them within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act (a
"Controlling Person"), from and against any and all losses, claims, damages,
expenses and liabilities, joint or several (including any investigation, legal
and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, as the same
are incurred), to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities arise out of or are based on (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement
(including any related preliminary or definitive prospectus, or any amendment or
supplement to such registration statement or prospectus), (ii) any omission or
alleged omission to state in such document a material fact required to be stated
in it or necessary to make the statements in it not misleading, or (iii) any
violation or alleged violation by the Company of the Securities Act, any state
securities or "blue sky" laws or any rule or regulation thereunder in connection
with such registration; provided, however, that the Company will not be liable
to the extent that such loss, claim, damage, expense or liability arises from
and is based on an untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information furnished in
writing to the Company by such underwriter, Selling Holder or Controlling Person
expressly for use in such registration statement. With respect to such untrue
statement or omission or alleged untrue statement or omission in the information
furnished in writing to the Company by such Selling Holder expressly for use in
such registration statement, such Selling Holder will indemnify and hold
harmless each underwriter, the Company (including its directors, officers,
employees and agents), each other Holder (including its partners (including
partners of partners and stockholders of such partners) and directors, officers,
employees and agents of any of them, and each person who controls any of them
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act)), from and against any and all losses, claims, damages, expenses
and liabilities, joint or several, to which they, or any of them, may become
subject under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, at common law or otherwise to the same extent
provided in the immediately preceding sentence.
(b) The foregoing indemnity provisions are subject to the condition
that, insofar as they relate to any violation made in a preliminary prospectus
but eliminated or remedied in the amended prospectus on file with the SEC at the
time the registration statement in question becomes effective
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or in the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the
"Final Prospectus"), such indemnity provisions shall not inure to the benefit of
any person if a copy of the Final Prospectus was furnished to the indemnified
party and was not furnished to the person asserting the loss, liability, claim
or damage at or prior to the time such action is required by the Securities Act.
(c) If the indemnification provided for in Section 5.7(a) above for any
reason is held by a court of competent jurisdiction to be unavailable to an
indemnified party in respect of any losses, claims, damages, expenses or
liabilities referred to therein, then each indemnifying party under this Section
5.7, in lieu of indemnifying such indemnified party thereunder, shall contribute
to the amount paid or payable by such indemnified party as a result of such
losses, claims, damages, expenses or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, the other
Selling Holders and the underwriters from the offering of the Registrable
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company, the other Selling Holders and the underwriters in
connection with the statements or omissions which resulted in such losses,
claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company, the
Selling Holders and the underwriters shall be deemed to be in the same
respective proportions that the net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Holders and the underwriting
discount received by the underwriters, in each case as set forth in the table on
the cover page of the applicable prospectus, bear to the aggregate public
offering price of the Registrable Securities. The relative fault of the Company,
the Selling Holders and the underwriters shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company, the Selling Holders or the underwriters and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Company and the Selling Holders agree that it would not
be just and equitable if contribution pursuant to this Section 5.7(c) were
determined by pro rata or per capita allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in the immediately preceding paragraph. In no event, however, shall a Selling
Holder be required to contribute any amount under this Section 5.7(c) in excess
of the lesser of (i) that proportion of the total of such losses, claims,
damages or liabilities indemnified against equal to the proportion of the total
Registrable Securities sold under such registration statement which are being
sold by such Selling Holder or (ii) the net proceeds received by such Selling
Holder from its sale of Registrable Securities under such registration
statement. No person found guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not found guilty of such fraudulent
misrepresentation.
(d) Promptly after receipt by the indemnified party under this Section
5.7 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against the indemnifying party under this Section 5.7, deliver to the
indemnifying party a written notice of the commencement thereof, and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, to assume the defense thereof with counsel
mutually satisfactory to the parties; provided, however, that the indemnified
party (together with all other indemnified parties that may be represented
without conflict by one counsel) shall have the right to retain its own counsel,
with the fees and expenses to be paid by the indemnifying party, if, in the
opinion of counsel for the indemnifying party, representation of such
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the
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commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 5.7, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 5.7. No
indemnifying party, in the defense of any such claim or litigation, shall,
except with the consent of each indemnified party, consent to entry of any
judgment or entry into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party a
release from all liability in respect to such claim or litigation.
(e) The amount paid by an indemnifying party or payable to an
indemnified party as a result of the losses, claims, damages and liabilities
referred to in this Section 5.7 shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim, payable as the same are incurred. The indemnification and
contribution provided for in this Section 5.7 will remain in full force and
effect regardless of any investigation made by or on behalf of the indemnified
parties or any officer, director, employee, agent or controlling person of the
indemnified parties, and the obligations of the Company and Holders under this
Section 5.7 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 5, and otherwise.
(f) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
5.8 INFORMATION BY HOLDER
Each Holder of Registrable Securities shall furnish to the Company such
information regarding such Holder and the distribution proposed by such Holder
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
referred to in this Agreement.
5.9 REPORTS UNDER RULE 144, SECURITIES EXCHANGE ACT 1934
With a view to making available to the Holders the benefits of Rule 144
promulgated under the Securities Act and any other rule or regulation of the SEC
that may at any time permit a Holder to sell securities of the Company to the
public without registration or pursuant to a registration on Form S-3, the
Company agrees to:
(i) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public so long as the
Company remains subject to the reporting requirements under Sections 13 or 15(d)
of the Exchange Act;
(ii) use its best efforts to take such action, including the voluntary
registration of its Common Stock under Section 12 of the Exchange Act, as is
necessary to enable the Holders to utilize Form S-3 for the sale of their
Registrable Securities, such action to be taken as soon as practicable after the
end of the fiscal year in which the first registration statement filed by the
Company for the offering of its securities to the general public is declared
effective;
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(iii) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(iv) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company as to
the steps it has taken to comply with the current public information
requirements of SEC Rule 144 (at any time after ninety (90) days after the
effective date of the first registration statement filed by the Company), the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements), or to qualify as a registrant whose securities may
be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy
of the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other information
as may be reasonably requested in availing any Holder of any rule or regulation
of the SEC which permits the selling of any such securities without registration
or pursuant to such form.
5.10 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS
The registration rights of the Holders of Registrable Securities under
this Agreement may be transferred or assigned by any Holder to (i) any general
or limited partner or other comparable affiliate of such Holder, (ii) any fund
managed by or associated with such Holder or (iii) any transferee or assignee of
such Holder's Registrable Securities who after such transfer or assignment will
hold at least fifty percent (50%) of the Registrable Securities owned by such
Holder on the date hereof; provided that the Company is given prior written
notice of such transfer or assignment setting forth the name and address of the
transferee or assignee and identifying the number of Registrable Securities so
transferred or assigned, and, provided further, that the transferee or assignee
of such rights assumes in writing the obligations of such Holder under this
Agreement.
5.11 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS.
From and after the date of this Agreement, the Company shall not,
without the prior written consent of the Holders of a majority of the
outstanding Registrable Securities, enter into any agreement with any holder or
prospective holder of any securities of the Company which would allow such
holder or prospective holder (a) to include such securities in any registration
filed under Section 5.1 hereof, unless under the terms of such agreement, such
holder or prospective holder may include such securities in any such
registration only to the extent that the inclusion of his Securities will not
reduce the amount of the Registrable Securities of the Holders which is included
or (b) to make a demand registration which could result in such registration
statement being declared effective prior to the earlier of either of the dates
set forth in subsection 5.1(a) or within one hundred eighty (180) days of the
effective date of any registration effected pursuant to Section 5.1.
5.12 MARKET STAND-OFF AGREEMENT
In connection with a public offering by the Company, the Holders, if
requested in good faith by the Company and the managing underwriter of the
public offering, shall agree not to sell or otherwise transfer or dispose of any
securities of the Company held by them (except for any securities sold pursuant
to such registration statement) for a period following the effective date of the
first such registration statement of the Company that covers Common Stock (or
other securities) that in no event shall exceed one hundred eighty (180) days.
Notwithstanding the foregoing, such an agreement shall not be required unless
all of the officers and directors and one percent (1%) or greater stockholders
of the Company and all other persons with registration rights enter into similar
agreements. In order to enforce the foregoing, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares of securities of every other person subject to the
foregoing restriction) until the end
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of such period. This Section 5.12 shall not be amended without the consent of
each Investor that is an investment company as that term is defined in the
Investment Company Act of 1940.
5.13 ALLOCATION OF REGISTRATION OPPORTUNITIES
In any circumstance in which all of the Registrable Securities and
other shares of Common Stock of the Company (including shares of Common Stock
issued or issuable upon conversion of shares of any currently unissued series of
Preferred Stock of the Company) with registration rights (the "Other Shares")
requested to be included in a registration on behalf of the Holders or other
selling stockholders cannot be so included as a result of limitations of the
aggregate number of shares of Registrable Securities and Other Shares that may
be so included, the number of shares of Registrable Securities and Other Shares
that may be so included shall be allocated among the Holders and other selling
stockholders requesting inclusion of shares as follows:
(i) If a requested registration pursuant to Section 5.1 involves an
underwritten offering, and the managing underwriter shall advise the Company in
writing (with a copy to each Holder requesting registration) that, in its
opinion, the number of securities requested to be included in such registration
exceeds the number which can be sold in such offering, then the Registrable
Securities requested to be registered pursuant to Section 5.1 shall be reduced
to the number of Registrable Securities which the Company is so advised can be
sold in (or during the time of) such offering by (i) first decreasing the Other
Shares requested to be registered (pro rata among the persons requesting such
registration on the basis of the percentage of Other Shares held by such person
immediately prior to the filing of the registration statement with respect to
such registration) and (ii) then, to the extent necessary, by decreasing the
Registrable Securities (other than the Other Shares) requested to be registered
(pro rata on the basis of the percentage of Registrable Securities (other than
Other Shares) held by such Holder immediately prior to the filing of the
registration statement with respect to such registration).
(ii) If (a) a registration pursuant to Section 5.2 involves an
underwritten offering of the securities so being registered, whether or not for
sale for the account of the Company, to be distributed (on a firm commitment
basis) by or through one or more underwriters of recognized standing, whether or
not the Registrable Securities so requested to be registered for sale for the
account of Holders of Registrable Securities are also to be included in such
underwritten offering, and (b) the managing underwriter of such underwritten
offering shall inform the Company and the Holders of the Registrable Securities
requesting such registration by letter of its belief that the number of
securities requested to be included in such registration exceeds the number
which can be sold in (or during the time of) such offering, then the Company may
include in such offering all securities proposed by the Company to be sold for
its own account and may decrease the number of Registrable Securities and Other
Shares that have been requested to be included in such registration by
decreasing the securities requested to be included in such registration (whether
Registrable Securities or Other Shares) pro rata among the Holders and other
persons requesting such registration on the basis of the percentage held by such
Holder or other person immediately prior to the filing of the registration
statement with respect to such registration of the securities so requested to be
included in such registration, or in any other manner determined by the managing
underwriter of such registration; provided, however, that if such offering is
not an initial public offering and is a registration statement filed on behalf
of the Company, no such reduction may reduce the number of Registrable
Securities to less than 30% of the shares being sold in the offering. No
Registrable Securities shall be included in such registration if not also
included in such underwritten offering unless the managing underwriter thereof
so determines.
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5.14 TERMINATION OF REGISTRATION RIGHTS
The rights of any Holder to request registration or inclusion in any
registration pursuant to this Agreement shall terminate upon the earlier of (i)
five (5) years after the closing of the Company's first Public Offering or (ii)
as to any Investor on such date after the closing of the Company's first Public
Offering as such Investor owns less then thirty percent (30%) of the number of
Registrable Securities originally purchased by such Investor.
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EXHIBIT B
INFORMATION AND INSPECTION RIGHTS
3.1 INFORMATION RIGHTS
The Company shall deliver to the Investors the following:
(a) as soon as practicable, but in any event within ninety (90) days
after the end of each fiscal year of the Company, an income
statement for such fiscal year, a balance sheet of the Company
and statement of shareholder's equity as of the end of such year,
and a schedule as to the sources and applications of funds for
such year, such year-end financial reports to be in reasonable
detail, prepared in accordance with U.S. generally accepted
accounting principles ("GAAP"), and audited and certified by
independent public accountants of nationally recognized standing
selected by the Company; and
(b) as soon as practicable, but in any event within forty-five (45)
days after the end of each of the first three (3) quarters of
each fiscal year of the Company, an unaudited profit or loss
statement, a schedule showing the sources and application of
funds for such fiscal quarter and an unaudited balance sheet as
of the end of such fiscal quarter prepared in accordance with
GAAP.
3.2 INSPECTION RIGHTS Each Investor or its authorized representative or agent
shall have the right to inspect the books and records of the Company during
normal business hours upon written request made at least one (1) business day in
advance; provided, that the Investors shall avail themselves of such right no
more often than once every month.
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EXHIBIT C
CONFIDENTIALITY AGREEMENT
4. CONFIDENTIALITY AGREEMENT.
Each Investor, and any successor or assign of such Investor, who
receives from the Company or its agents, directly or indirectly, any information
that the Company has not made generally available to the public, pursuant to the
preparation and execution of this Agreement or disclosure in connection
therewith or pursuant to the provisions of Section 3: (a) acknowledges and
agrees that such information is confidential and for its use only in connection
with evaluating and servicing its investment in the Company and (b) agrees that
it will not disseminate such information to any person other than (i) its
accountant, attorney, investment advisor, limited partners, board of directors,
consultants and other similar professionals and that such dissemination shall be
only for purposes of evaluating its investment or its strategic alliance with
the Company, (ii) to any Affiliates, provided that such Affiliates agree to hold
such information confidential as provided in this Section 4, and (iii) as
required by applicable law or regulation, regulatory body, stock exchange, court
or administrative order, or any listing or trading agreement concerning the
Investor or the Company.
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EXHIBIT 10.19
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the "Agreement") is made and entered into
this ___ day of _________, 2000, by and between Lineo, Inc., a Delaware
corporation (the "Company"), and _____________________ ("Indemnitee").
A. Indemnitee, as a member of the Company's Board of Directors and/or an
officer of the Company, performs valuable services for the Company;
B. The Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for corporate directors, officers, employees,
controlling persons, agents and fiduciaries, the significant increases in the
cost of such insurance and the general reductions in the coverage of such
insurance.
C. The Company and Indemnitee further recognize the substantial increase
in corporate litigation in general, subjecting directors, officers, employees,
controlling persons, agents and fiduciaries to expensive litigation risks at the
same time as the availability and coverage of liability insurance has been
severely limited.
D. The stockholders of the Company have adopted Bylaws (the "Bylaws")
providing for the indemnification of the officers, directors, agents and
employees of the Company to the maximum extent authorized by Section 145 of the
Delaware Corporations Code, as amended ("Code").
E. Indemnitee does not regard the current protection available for the
Company's directors, officers, employees, controlling persons, agents and
fiduciaries as adequate under the present circumstances, and Indemnitee and
other directors, officers, employees, controlling persons, agents and
fiduciaries of the Company may not be willing to serve or continue to serve in
such capacities without additional protection.
F. The Bylaws and the Code, by their non-exclusive nature, permit
contracts between the Company and its directors, officers, employees,
controlling persons, agents or fiduciaries with respect to indemnification of
such directors.
G. The Company (i) desires to attract and retain the involvement of
highly qualified individuals, such as Indemnitee, to serve the Company and, in
part, in order to induce Indemnitee to be involved with the Company, and (ii)
wishes to provide for the indemnification and advancing of expenses to
Indemnitee to the maximum extent permitted by law.
H. In view of the considerations set forth above, the Company desires
that Indemnitee be indemnified by the Company as set forth herein.
NOW, THEREFORE, in consideration of Indemnitee's service to the Company,
the parties hereto agree as follows:
1. INDEMNITY OF INDEMNITEE. The Company hereby agrees to indemnify
Indemnitee to the fullest extent permitted by law, even if such indemnification
is not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation
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(the "Certificate"), the Company's Bylaws or by statute. In the event of any
change after the date of this Agreement in any applicable law, statute or rule
which expands the right of a Delaware corporation to indemnify a member of its
Board of Directors or an officer, employee, controlling person, agent or
fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by
this Agreement the greater benefits afforded by such change. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its Board of Directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 9(a) hereof.
2. Additional Indemnity. The Company hereby agrees to hold harmless and
indemnify the Indemnitee:
(a) against any and all expenses incurred by Indemnitee, as set forth in
Section 3(a) below; and
(b) otherwise to the fullest extent not prohibited by the Certificate, the
Bylaws or the Code.
3. INDEMNIFICATION RIGHTS.
(a) Indemnification of Expenses. The Company shall indemnify and hold
harmless Indemnitee, together with Indemnitee's partners, affiliates, employees,
agents and spouse and each person who controls any of them or who may be liable
within the meaning of Section 15 of the Securities Act of 1933, as amended (the
"Securities Act"), or Section 20 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), to the fullest extent permitted by law if
Indemnitee was or is or becomes a party to or witness or other participant in,
or is threatened to be made a party to or witness or other participant in, any
threatened, pending or completed action, suit, proceeding or alternative dispute
resolution mechanism, or any hearing, inquiry or investigation that Indemnitee
and the Company believe might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other (hereinafter a "Claim") against any and
all expenses (including attorneys' fees and all other costs, expenses and
obligations incurred in connection with investigating, defending, being a
witness in or participating in (including on appeal), or preparing to defend, be
a witness in or participate in, any such action, suit, proceeding, alternative
dispute resolution mechanism, hearing, inquiry or investigation, judgments,
fines, penalties and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld) of
such Claim and any federal, state, local or foreign taxes imposed on Indemnitee
as a result of the actual or deemed receipt of any payments under this Agreement
(collectively, hereinafter "Expenses"), including all interest, assessments and
other charges paid or payable in connection with or in respect of such Expenses,
incurred by Indemnitee by reason of (or arising in part out of) any event or
occurrence related to the fact that Indemnitee is or was a director, officer,
employee, controlling person, agent or fiduciary of the Company or any
subsidiary of the Company, or is or was serving at the request of the Company as
a director, officer, employee, controlling person, agent or fiduciary of another
corporation, partnership, joint venture, trust or other enterprise, or by reason
of any action or inaction on the part of Indemnitee while serving in such
capacity including, without limitation, any and all losses, claims, damages,
expenses and liabilities, joint or several (including any investigation, legal
and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit, proceeding or any claim asserted) under the
Securities Act, the Exchange Act or other
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federal or state statutory law or regulation, at common law or otherwise, which
relate directly or indirectly to the registration, purchase, sale or ownership
of any securities of the Company or to any fiduciary obligation owed with
respect thereto (hereinafter an "Indemnification Event"). Such payment of
Expenses shall be made by the Company as soon as practicable but in any event no
later than 25 days after written demand by Indemnitee therefor is presented to
the Company.
(b) Reviewing Party. Notwithstanding the foregoing, (i) the obligations of
the Company under Section 2 shall be subject to the condition that the Reviewing
Party (as described in Section 11(e) hereof) shall not have determined (in a
written opinion, in any case in which the Independent Legal Counsel as defined
in Section 11(d) hereof is involved) that Indemnitee would not be permitted to
be indemnified under applicable law, and (ii) and Indemnitee acknowledges and
agrees that the obligation of the Company to make an advance payment of Expenses
to Indemnitee pursuant to Section 4(a) (an "Expense Advance") shall be subject
to the condition that, if, when and to the extent that the Reviewing Party
determines that Indemnitee would not be permitted to be so indemnified under
applicable law, the Company shall be entitled to be reimbursed by Indemnitee
(who hereby agrees to reimburse the Company) for all such amounts theretofore
paid; provided, however, that if Indemnitee has commenced or thereafter
commences legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law, any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to
reimburse the Company for any Expense Advance shall be unsecured and no interest
shall be charged thereon. If there has not been a Change in Control (as defined
in Section 11(c) hereof), the Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a Change
in Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control), the
Reviewing Party shall be the Independent Legal Counsel referred to in Section
3(e) hereof. If there has been no determination by the Reviewing Party or if the
Reviewing Party determines that Indemnitee substantively would not be permitted
to be indemnified in whole or in part under applicable law, Indemnitee shall
have the right to commence litigation seeking an initial determination by the
court or challenging any such determination by the Reviewing Party or any aspect
thereof, including the legal or factual bases therefor, and the Company hereby
consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
(c) Contribution. If the indemnification provided for in Section 3(a)
above for any reason is held by a court of competent jurisdiction to be
unavailable to an Indemnitee in respect of any losses, claims, damages, expenses
or liabilities referred to therein, then the Company, in lieu of indemnifying
Indemnitee thereunder, shall contribute to the amount paid or payable by
Indemnitee as a result of such losses, claims, damages, expenses or liabilities
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Company and Indemnitee, or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and Indemnitee in connection
with the action or inaction which resulted in such losses, claims, damages,
expenses or liabilities, as well as any other relevant equitable considerations.
In connection with the registration of the Company's securities, the relative
benefits received by the Company and Indemnitee shall be deemed to be in the
same respective proportions that the net proceeds from the offering (before
deducting expenses) received by the Company and the Indemnitee, in each case as
set forth in the
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table on the cover page of the applicable prospectus, bear to the aggregate
public offering price of the securities so offered. The relative fault of the
Company and Indemnitee shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or Indemnitee and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and Indemnitee agree that it would not be just and equitable if
contribution pursuant to this Section 3(c) were determined by pro rata or per
capita allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraph. In connection with the registration of the Company's securities, in
no event shall an Indemnitee be required to contribute any amount under this
Section 3(c) in excess of the lesser of (i) that proportion of the total of such
losses, claims, damages or liabilities indemnified against equal to the
proportion of the total securities sold under such registration statement which
is being sold by Indemnitee or (ii) the proceeds received by Indemnitee from its
sale of securities under such registration statement. No person found guilty of
fraudulent misrepresentation (within the meaning of Section 10(f) of the
Securities Act) shall be entitled to contribution from any person who was not
found guilty of such fraudulent misrepresentation.
(d) Survival Regardless of Investigation. The indemnification and
contribution provided for herein will remain in full force and effect regardless
of any investigation made by or on behalf of Indemnitee or any officer,
director, employee, agent or controlling person of Indemnitee.
(e) Change in Control. After the date hereof, the Company agrees that if
there is a Change in Control of the Company (other than a Change in Control
which has been approved by a majority of the Company's Board of Directors who
were directors immediately prior to such Change in Control) then, with respect
to all matters thereafter arising concerning the rights of Indemnitee to
payments of Expenses under this Agreement or any other agreement or under the
Company's Certificate or Bylaws as now or hereafter in effect, Independent Legal
Counsel (as defined in Section 11(d) hereof) shall be selected by Indemnitee and
approved by the Company (which approval shall not be unreasonably withheld).
Such counsel, among other things, shall render its written opinion to the
Company and Indemnitee as to whether and to what extent Indemnitee would be
permitted to be indemnified under applicable law. The Company agrees to abide by
such opinion and to pay the reasonable fees of the Independent Legal Counsel
referred to above and to fully indemnify such counsel against any and all
reasonable expenses (including attorneys' fees), claims, liabilities and damages
arising out of or relating to this Agreement or its engagement pursuant hereto.
(f) Mandatory Payment of Expenses. Notwithstanding any other provision of
this Agreement, to the extent that Indemnitee has been successful on the merits
or otherwise, including, without limitation, the dismissal of an action without
prejudice, in the defense of any action, suit, proceeding, inquiry or
investigation referred to in Section 3(a) hereof or in the defense of any claim,
issue or matter therein, Indemnitee shall be indemnified against all Expenses
incurred by Indemnitee in connection herewith.
4. EXPENSES; INDEMNIFICATION PROCEDURE.
(a) Advancement of Expenses. The Company shall advance all Expenses
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee
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<PAGE>
as soon as practicable but in any event no later than ten business days after
written demand by Indemnitee therefor to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall give the Company
notice in writing in accordance with Section 15 of this Agreement as soon as
practicable of any Claim made against Indemnitee for which indemnification will
or could be sought under this Agreement.
(c) No Presumptions; Burden of Proof. For purposes of this Agreement, the
termination of any Claim by judgment, order, settlement (whether with or without
court approval) or conviction, or upon a plea of nolo contendere, or its
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has met any particular standard of conduct or had any
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law, shall be a defense to Indemnitee's claim or create a presumption that
Indemnitee has not met any particular standard of conduct or did not have any
particular belief. In connection with any determination by the Reviewing Party
or otherwise as to whether Indemnitee is entitled to be indemnified hereunder,
the burden of proof shall be on the Company to establish that Indemnitee is not
so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the Company of a
notice of a Claim pursuant to Section 4(b) hereof, the Company has liability
insurance in effect which may cover such Claim, the Company shall give prompt
notice of the commencement of such Claim to the insurers in accordance with the
procedures set forth in each of the Company's policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of Indemnitee, all amounts payable as a result of such action, suit,
proceeding, inquiry or investigation in accordance with the terms of such
policies.
(e) Selection of Counsel. In the event the Company shall be obligated
hereunder to pay the Expenses of any Claim, the Company shall be entitled to
assume the defense of such Claim, with counsel approved by the Indemnitee (which
approval shall not be unreasonably withheld) upon the delivery to Indemnitee of
written notice of its election to do so. After delivery of such notice, approval
of such counsel by Indemnitee and the retention of such counsel by the Company,
the Company will not be liable to Indemnitee under this Agreement for any fees
of counsel subsequently incurred by Indemnitee with respect to the same Claim;
provided that (i) Indemnitee shall have the right to employ Indemnitee's counsel
in any such Claim at Indemnitee's expense and (ii) if (A) the employment of
counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there is a conflict of interest
between the Company and Indemnitee in the conduct of any such defense, or (C)
the Company shall not continue to retain such counsel to defend such Claim, then
the fees and expenses of Indemnitee's counsel shall be at the expense of the
Company.
5. NONEXCLUSIVITY. The indemnification provided by this Agreement shall
be in addition to any rights to which Indemnitee may be entitled under the
Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of
stockholders or disinterested directors, the General Corporation Law of the
State of Delaware, or otherwise. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action Indemnitee took or did
not
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<PAGE>
take while serving in an indemnified capacity even though Indemnitee may have
ceased to serve in such capacity.
6. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under this
Agreement to make any payment in connection with any Claim made against any
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, Certificate of Incorporation, Bylaw or otherwise)
of the amounts otherwise indemnifiable hereunder.
7. PARTIAL INDEMNIFICATION. If any Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for any portion of
Expenses incurred in connection with any Claim, but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such Expenses to which Indemnitee is entitled.
8. MUTUAL ACKNOWLEDGEMENT. The Company and Indemnitee acknowledge that in
certain instances, Federal law or applicable public policy may prohibit the
Company from indemnifying its directors, officers, employees, controlling
persons, agents or fiduciaries under this Agreement or otherwise. Each
Indemnitee understands and acknowledges that the Company has undertaken or may
be required in the future to undertake with the Securities and Exchange
Commission to submit the question of indemnification to a court in certain
circumstances for a determination of the Company's rights under public policy to
indemnify Indemnitee.
9. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses to
any Indemnitee with respect to Claims initiated or brought voluntarily by
Indemnitee and not by way of defense, except (i) with respect to actions or
proceedings to establish or enforce a right to indemnify under this Agreement or
any other agreement or insurance policy or under the Company's Certificate of
Incorporation or Bylaws now or hereafter in effect relating to Claims for
Indemnifiable Events, (ii) in specific cases if the Board of Directors has
approved the initiation or bringing of such Claim, or (iii) as otherwise
required under Section 145 of the Delaware General Corporation Law, regardless
of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be; or
(b) Claims Under Section 16(b). To indemnify Indemnitee for expenses and
the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Exchange Act or any similar
successor statute; or
(c) Claims Excluded Under Section 145 of the Delaware General Corporation
Law. To indemnify Indemnitee if (i) Indemnitee did not act in good faith or in a
manner reasonably believed by such Indemnitee to be in or not opposed to the
best interests of the Company, or (ii) with respect to any criminal action or
proceeding, Indemnitee had reasonable cause to believe Indemnitee's conduct was
unlawful, or (iii) Indemnitee shall have been adjudged to be liable to the
Company unless and only to the extent the court in which such action was brought
shall permit indemnification as provided in Section 145(b) of the Delaware
General Corporation Law.
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10. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against any
Indemnitee, any Indemnitee's estate, spouse, heirs, executors or personal or
legal representatives after the expiration of five years from the date of
accrual of such cause of action, and any claim or cause of action of the Company
shall be extinguished and deemed released unless asserted by the timely filing
of a legal action within such five-year period; provided, however, that if any
shorter period of limitations is otherwise applicable to any such cause of
action, such shorter period shall govern.
11. CONSTRUCTION OF CERTAIN PHRASES.
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees, agents or
fiduciaries, so that if Indemnitee is or was a director, officer, employee,
agent, control person, or fiduciary of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee, control person, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise,
Indemnitee shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as Indemnitee
would have with respect to such constituent corporation if its separate
existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on any Indemnitee with respect to an employee benefit
plan; and references to "serving at the request of the Company" shall include
any service as a director, officer, employee, agent or fiduciary of the Company
which imposes duties on, or involves services by, such director, officer,
employee, agent or fiduciary with respect to an employee benefit plan, its
participants or its beneficiaries; and if any Indemnitee acted in good faith and
in a manner Indemnitee reasonably believed to be in the interests of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall be deemed
to have occurred if (i) any "person" (as such term is used in Sections 13(d)(3)
and 14(d)(2) of the Exchange Act), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
(A) who is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 10% or more of the combined voting power
of the Company's then outstanding Voting Securities, increases his or her
beneficial ownership of such securities by 5% or more over the percentage so
owned by such person, or (B) becomes the "beneficial owner" (as defined in Rule
13d-3 under said Exchange Act), directly or indirectly, of securities of the
Company representing more than 20% of the total voting power represented by the
Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof, or (iii) the
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stockholders of the Company approve a merger or consolidation of the Company
with any other corporation other than a merger or consolidation which would
result in the Voting Securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into Voting Securities of the surviving entity) at least 80% of the
total voting power represented by the Voting Securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, or
the stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of transactions) all or substantially all of the
Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel" shall mean
an attorney or firm of attorneys, selected in accordance with the provisions of
Section 3(d) hereof, who shall not have otherwise performed services for the
Company or any Indemnitee within the last three years (other than with respect
to matters concerning the right of any Indemnitee under this Agreement, or of
other indemnitees under similar indemnity agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall mean any
appropriate person or body consisting of a member or members of the Company's
Board of Directors or any other person or body appointed by the Board of
Directors who is not a party to the particular Claim for which Indemnitee are
seeking indemnification, or Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities" shall mean any
securities of the Company that vote generally in the election of directors.
12. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
13. BINDING EFFECT; SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect with respect to Claims relating to Indemnifiable Events
regardless of whether any Indemnitee continues to serve as a director, officer,
employee, agent, controlling person, or fiduciary of the Company or of any other
enterprise, including subsidiaries of the Company, at the Company's request.
14. ATTORNEYS' FEES. In the event that any action is instituted by an
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, any Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee with respect to such action if Indemnitee is ultimately successful in
such action, and shall be entitled to the advancement of Expenses with respect
to such action, unless, as a part of such action, a court of competent
jurisdiction over such action determines that the material assertions made by
Indemnitee as a basis for such action were not made in good faith or were
frivolous. In the event of an action instituted by or in the name of the Company
under this Agreement to enforce or interpret any of the terms of this Agreement,
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Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in
defense of such action (including costs and expenses incurred with respect to
Indemnitee counterclaims and cross-claims made in such action), and shall be
entitled to the advancement of Expenses with respect to such action, unless, as
a part of such action, a court having jurisdiction over such action determines
that the Indemnitee's material defenses to such action were made in bad faith or
were frivolous.
15. NOTICE. All notices and other communications required or permitted
hereunder shall be in writing, shall be effective when given, and shall in any
event be deemed to be given (a) five calendar days after deposit with the U.S.
Postal Service or other applicable postal service, if delivered by first class
mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business
day after the business day of deposit with Federal Express or similar overnight
courier, freight prepaid, or (d) one day after the business day of delivery by
facsimile transmission, if deliverable by facsimile transmission, with copy by
first class mail, postage prepaid, and shall be addressed if to Indemnitee, at
Indemnitee's address as set forth beneath Indemnitee's signature to this
Agreement and if to the Company at the address of its principal corporate
offices (attention: Chief Executive Officer) or at such other address as such
party may designate by ten calendar days' advance written notice to the other
party hereto.
16. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
17. SEVERABILITY. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this
Agreement (including, without limitations, each portion of this Agreement
containing any provision held to be invalid, void or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, illegal or
unenforceable.
18. CHOICE OF LAW. This Agreement shall be governed by and its provisions
construed and enforced in accordance with the laws of the State of Delaware, as
applied to contracts between Delaware residents, entered into and to be
performed entirely within the State of Delaware, without regard to the conflict
of laws principles thereof.
19. SUBROGATION. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee who shall execute all documents required and shall do all
acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
20. AMENDMENT AND TERMINATION. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless it is in writing signed
by all parties hereto. No waiver of any of the provisions of this Agreement
shall
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be deemed or shall constitute a waiver of any other provisions hereof (whether
or not similar) nor shall such waiver constitute a continuing waiver.
21. INTEGRATION AND ENTIRE AGREEMENT. This Agreement sets forth the entire
understanding between the parties hereto and supersedes and merges all previous
written and oral negotiations, commitments, understandings and agreements
relating to the subject matter hereof between the parties hereto.
22. NO CONSTRUCTION AS EMPLOYMENT AGREEMENT. Nothing contained in this
Agreement shall be construed as giving the Indemnitee any right to be retained
in the employ of the Company or any of its subsidiaries.
23. CORPORATE AUTHORITY. The Board of Directors of the Company has
approved the terms of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year first above written.
COMPANY:
LINEO, INC.,
a Delaware corporation
By:
--------------------------------
Bryan Sparks, President
INDEMNITEE:
Signature:
-------------------------
Name:
------------------------------
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SUBLEASE
This Sublease is entered into as of January 31, 2000 by and between
SwitchSoft Systems, Inc., a Delaware corporation ("Sublessor") and Lineo, Inc.,
a Delaware corporation ("Sublessee"). Terms not specifically defined herein are
as defined in the Master Lease.
A. Sublessor, as Tenant is leasing from EsNet Properties. L.C., a Utah
limited liability company ("Master Lessor") those certain premises located at
380 South 400 West Lindon, Utah 84042 ("Premises") pursuant to that certain
lease dated July 20, 1998, (the "Master Lease"). Sublessee acknowledges having
reviewed a copy of the Master Lease, which is attached hereto as EXHIBIT A.
B. Sublessor desires to lease to Sublessee and Sublessee desires to
lease from Sublessor the Sublease Premises (as defined below) on the terms and
conditions set forth in this Sublease.
1. SUBLEASE PREMISES
a. Sublessor leases to Sublessee and Sublessee hires from Sublessor the
following described portion of the Premises together with the appurtenances
thereto, situated in the City of Lindon, County of Utah, State of Utah commonly
known and described as 380 South 400 West, Suite B, located on the first floor
("Sublease Premises"). The Sublease Premises shall consist of approximately
10,000 rentable square feet, which are outlined on EXHIBIT B.
b. Sublessee will be taking possession of the Sublease Premises "as
is," in its condition existing on the date of delivery of the Sublease Premises
to Sublessee. Sublessee acknowledges that Sublessee is leasing the Sublease
Premises based on its own inspection of the Sublease Premises and those of its
agents, and is not relying on any representations or warranties of the Sublessor
regarding the physical condition of the Sublease Premises. Sublessee's taking of
possession of the Sublease Premises shall constitute conclusive evidence that
the Sublease Premises were, as of that date, in good, clean and tenantable
condition. Sublessee acknowledges that the square footages of the Sublease
Promises as specified in Subparagraph 1.a are estimates and that Sublessor does
not warrant the exact square footage of the Sublease Premises. By taking
possession of the Sublease Premises, Sublessee accepts the square footages of
the Sublease Premises as those specified in Subparagraph 1.a above.
c. The Sublease Premises shall have its own separate entrance and
security system as of the Sublease Commencement Date.
2. INCORPORATION OF MASTER LEASE
This Sublease is subject to all of the terms and conditions of the
Master Lease and Sublessee hereby accepts, assumes and agrees to perform all of
the obligations of Sublessor as Sublessee under the Master Lease to the extent
such obligations are applicable to the Sublease Premises and all of the terms
and conditions of the Master Lease are incorporated herein as terms and
conditions of this Sublease (with each reference therein to Landlord, Tenant and
Premises to
<PAGE>
be deemed to refer to Sublessor, Sublessee, and Sublease Premises
respectively), excepting only Article 2, Article 3, Section 5.1, Section 5.4,
Article 6, Article 7, Section 8.2, Section 9.1, Section 24.18, Section 24.19,
Exhibit C, Exhibit E and Exhibit G of the Master Lease and as set forth in
Paragraph 9 below. In the event of any conflict or inconsistency between the
incorporated terms of the Master Lease and the terms of the Sublease which
are set forth in full, the terms of the Sublease which are set forth in full
shall prevail to the extent of any such inconsistency, it being understood
that in any event the Sublease provisions are subject to the Master Lease
provisions.
3. TERM AND RENTAL COMMENCEMENT
a. The term of this Sublease shall be for a period of twenty-four (24)
months, plus any partial month at the beginning of the Sublease Term ("Sublease
Term"), commencing on February 1, 2000 ("Commencement Date").
b. In the event of the termination for any reason of Sublessor's
interest as tenant under the Master Lease, then this Sublease shall terminate
therewith without any liability of Sublessor to Sublessee; provided, however,
that Sublessor may be liable to Sublessee for any termination of the Sublease
that results from Sublessor's breach of the Master Lease, so long as such breach
is not caused in whole or in part by Sublessee.
c. In the event the Commencement Date has not occurred by March 31,
2000 for any reason, then Sublessor shall not be liable for any damage caused
thereby, but either party may, by notice in writing to Sublessor within ten (10)
days thereafter, cancel this Sublease, in which event the parties shall be
discharged from all obligations under this Sublease, and Sublessor shall return
to Sublessee any prepaid rent and security deposit.
4. USE
a. Sublessee shall use the Sublease Premises solely for general office
use and for no other purpose without the consent of Sublessor. Sublessee agrees
that its use shall comply with all applicable governmental laws and ordinances,
and that it shall not use or permit the Sublease Premises to be used for any
purposes other than those described above. Sublessee shall not commit or permit
to be committed on the Sublease Premises any act or omission which shall violate
any term or condition of the Master Lease.
b. Sublessee shall be responsible for the installation and cost of any
and all improvements, alterations or other work on or to the Sublease Premises
or to any other portion of the property and/or building of which the Sublease
Premises are a part, required by applicable governmental laws, rules, orders and
ordinances because of the particular use to which the Sublease Premises are put
by Sublessee, including any improvements, alterations or other work required
under the Americans With Disabilities Act of 1990 due to Sublessee's particular
use of the Sublease Premises or due to changes or alterations to the Sublease
Premises made or proposed to be made by Sublessee.
2
<PAGE>
5. RENTAL
a. Sublessee shall pay Rent Sublessor as follows, without offset or
deduction for the Sublease Premises, in advance, on the first day of each month,
in lawful money of the United States. Rent for the partial month shall be
prorated on the basis of the number of days in such month.
RENT
$ 16,667.00 per month
b. Sublessor acknowledges receipt from Sublessee, on the execution
hereof the sum of $16,667.00 to be applied against rent for the first month of
the Sublease Term to be paid hereunder.
c. In addition to the Rent indicated in Section 5.a above, Sublessee
shall procure and pay directly for its own telephone costs and shall procure its
own janitorial service at Sublessee's cost. Sublessor shall pay for Sublessee's
other utilities. Sublessee shall not be responsible for the payment of Common
Area Expenses (such as taxes, Master Lessor's insurance and common area
maintenance costs), for which Sublessor is responsible under Section 8.2 of the
Master Lease.
6. NOTICES
All notices and demands of any kind required to be given by
Sublessor or Sublessee hereunder shall be in writing and effective the next
business day after depositing with a nationally recognized overnight courier
service such as Federal Express or three (3) days after depositing in the
United States certified mail, return receipt requested, postage prepaid, and
addressed to Sublessor or Sublessee, as the case may be, at the address set
forth below their respective signatures or at such other address as they may
designate from time to time. All rent and other payments due under this
Sublease or the Master Lease shall be made to Sublessor it the same address.
7. HAZARDOUS MATERIALS
Sublessee will indemnify, defend and hold Sublessor harmless from any
judgment, damages, losses, claims, actions, attorneys' fees, consultant's fees,
costs or expenses which result from Sublessee's or any of Sublessee's agents
(including employees, contractors and visitors) use, storage, or disposal of
Hazardous Materials in or about the Sublease Premises. As used herein the term
"Hazardous Materials" will mean and include asbestos, petroleum products and any
and all toxic or hazardous substances, materials or wastes listed in the United
States Department of Transportation Table (49 CFR 172.101) or by the
Environmental Protection Agency as hazardous substances (40 CFR 302) and in any
and all amendments to such lists or such substances, materials or wastes
otherwise regulated under applicable local, state or federal law. The provisions
of this paragraph shall survive the expiration or termination of the Sublease.
To the best of Sublessor's knowledge, no Hazardous Materials are currently on
the Premises.
3
<PAGE>
8. DEFAULTS
The default provisions are articulated in the Master Lease. In
addition, in the event of Sublessee's failure to pay Rent under this Sublease,
which failure is not cured within ten (10) days after Sublessor delivers a
written notice to Sublessee stating the nature and amount of such past due
Rent, then Sublessor shall have no continuing obligation to Sublessee to
maintain the Master Lease for Sublessee's benefit.
9. PROVISIONS OF MASTER LEASE
Notwithstanding anything to the contrary contained in this Sublease:
a. Sublessee shall indemnify and hold both Sublessor and Master Lessor
harmless pursuant to the provisions of Article 18 and any other indemnity
provision of the Master Lease (with reference therein to "Premises" being
replaced with "Sublease Premises");
b. The obligations of Master Lessor under the Master Lease to repair
or replace the Premises shall remain the obligations of Master Lessor and
shall not be assumed by Sublessor;
c. The right of entry of Master Lessor under Article 13 of the Master
Lease shall be the right of each of Master Lessor and Sublessor;
d. Sublessee shall pay Sublessor interest and late charges as provided
in Section 5.3 of the Master Lease, if rent is not received by Sublessor when
due; and
e. Any assignment or subletting by Sublessee of the Sublease or the
Sublease Premises shall be governed by Article 10 of the Master Lease, and the
term "Landlord" in Article 10 shall mean each of Master Lessor and Sublessor.
f. Sublessee shall provide Sublessor with a certificate of Sublessee's
insurance, as required under the Master Lease, naming Sublessor as an additional
insured, prior to Sublessee's occupancy of the Sublease Premises.
10. ALTERATIONS
The current design for configuration of the cubicles in the Sublease
Premises shall not be altered by Sublessee. Sublessee shall make no
alterations, additions or improvements in or to the Sublease Premises without
the prior written consent of Sublessor and Master Lessor. Any Such approved
alterations, additions or improvements shall be installed in accordance with
the terms of the Master Lease. Sublessee shall restore the Premises at the
expiration or earlier termination of the Sublease Term to its condition
existing as of the Commencement Date (including the removal of all
alterations and equipment installed by Sublessee and the repairing of any
resulting damage), reasonable wear and tear excepted.
11. SURRENDER AND HOLDOVER
Upon the expiration or earlier termination of this Sublease,
Sublessee shall promptly quit and surrender to Sublessor the Sublease
Premises broom clean, in the same condition as
4
<PAGE>
received, ordinary wear and tear and loss by fire and other casualty excepted.
Sublessee shall removal all of its movable furniture and other effects. If
Sublessee fails to so vacate the Sublease Premises on a timely basis as
required, Sublessee shall pay holdover rent at the rate of 150% of Rent, and
shall be responsible to Sublessor and to Master Lessor for all costs, expenses,
attorneys fees and damages (including but not limited to any amounts required to
be paid to third parties who were to have occupied the Sublease Premises)
incurred by Sublessor and/or Master Lessor as a result of such failure to
vacate, plus interest thereon at the rate of the lesser of 18% per annum or the
maximum rate allowed by law, on all amounts not paid by Sublessee within ten
(10) days of demand.
12. SECURITY DEPOSIT
Concurrently with Sublessee's execution of this Sublease, Sublessee
shall deposit With Sublessor the sum of $16,667.00 as a non-interest bearing
security deposit for Sublessee's performance under this Sublease. The amount
paid as a security deposit shall be returned to Sublessee within 14 days
after Sublessee's vacating the Sublease Premises, after first deducting any
sums owing to Sublessor due to a breach by Sublessee of any obligation,
covenant, term or condition of this Sublease. Simultaneously with the return
of the security deposit (less any deductions as described in the preceding
sentence) Sublessor shall provide Sublessee with a reasonably detailed
accounting of any deduction from the security deposit. In the event Sublessee
breaches any obligation, term, condition or covenant under this Sublease,
Sublessor will be entitled but not obligated to use or retain some or all of
this security deposit to compensate for any loss, expense or risk associated
with the breach, all without seeking judicial relief In the event of such
recourse to the security deposit, Sublessor is entitled to require Sublessee
to replenish the security deposit funds on thirty days' written notice. In no
event will Sublessee be entitled to have access to or require any portion of
Sublessor's deposit with the Master Lessor.
13. SIGNAGE
Sublessee shall have the right to have a "Lineo, Inc" sign on the
front door to the Building and in the lobby on the wall adjacent to
Sublessee's office, subject to Sublessor's and Master Lessor's approval as to
size, design and location. Sublessor's approval shall not be unreasonably
withheld.
14. MISCELLANEOUS
a. Each of Sublessor and Sublessee represents and warrants to the
other that it has not had dealings with any real estate broker, finder or
other person who could claim a commission or finder's fee with respect to
this Sublease. Each of Sublessor and Sublessee shall hold the other harmless
from all damages resulting from its breach of the foregoing representation
and warranty.
5
<PAGE>
b. This Sublease (and delivery of possession of the Sublease Premises
to Sublessee) is subject to Master Lessor approval pursuant to a written letter
of consent. Sublessor $hall use all reasonable efforts to obtain Master Lessor's
approval of this Sublease as soon as possible following execution of this
Sublease but in no event later than twenty (20) days after such execution. In
the event that Master Lessor's approval as stated herein is not obtained within
said twenty (20) day period, then either party may, by written notice to the
other, terminate this Sublease, and each party shall be relieved of any further
obligation to the other with respect to this Sublease.
<TABLE>
<CAPTION>
<S> <C>
"SUBLESSOR" "SUBLESSEE"
SwitchSoft Systems, Inc. LINEO, INC
a Delaware corporation a Delaware corporation
By: [ILLEGIBLE] By: /s/ Bryan Sparks
------------------------------------------- -------------------------------------------
Print Name: [ILLEGIBLE] Print Name: Bryan Sparks
----------------------------------- -----------------------------------
Title: CEO Title: President and CEO
---------------------------------------- ----------------------------------------
Date Executed: 1-31-00 Date Executed: Jan 24, 2000
-------------------------------- --------------------------------
ADDRESS: ADDRESS:
805 Veterans Blvd, Suite 316 383 South 520 West
Redwood City, CA 94063 Lindon, Utah 84042
Attn: Kurt Johnson, Vice President Finance and Attn: Greg Hill, Chief Financial Officer
Administration and Chief Financial Officer
</TABLE>
6
<PAGE>
EXHIBITS TO BE ATTACHED TO SUBLEASE
Exhibit A Master Lease
Exhibit B Site Plan of Sublease Premises
<PAGE>
[GRAPHICS]
Exhibit B - Expansion
Sublease Premises
<PAGE>
SUBLEASE
380 SOUTH 400 WEST, SUITE C
This Sublease is entered into as of February 21, 2000 by and between
VPNX.com, a Delaware corporation ("Sublessor") and Lineo, Inc., a Delaware
corporation ("Sublessee"). Terms not specifically defined herein are as
defined in the Master Lease.
A. Sublessor, as Tenant, as successor-in-interest to SwitchSoft
Systems, Inc., is leasing from EsNet Properties, L.C., a Utah limited
liability company ("Master Lessor") those certain premises located at 380
South 400 West Lindon, Utah 84042 ("Premises") pursuant to that certain lease
dated July 20, 1998, (the "Master Lease"). Sublessee acknowledges having
reviewed a copy of the Master Lease, which is attached hereto as Exhibit A.
B. Sublessor desires to lease to Sublessee and Sublessee desires to
lease from Sublessor the Sublease Premises (as defined below) on the terms and
conditions set forth in this Sublease.
1. SUBLEASE PREMISES
a. Sublessor leases to Sublessee and Sublessee hires from Sublessor
the following described portion of the Premises together with the
appurtenances thereto, situated in the City of Lindon, County of Utah, State
of Utah commonly known and described as 380 South 400 West, Suite C, located
on the second floor ("Sublease Premises"). The Sublease Premises shall
consist of approximately 10,000 rentable square feet, which are outlined on
Exhibit B.
b. Sublessee will be taking possession of the Sublease Premises "as
is," in its condition existing on the date of delivery of the Sublease
Premises to Sublessee. Sublessee, acknowledges that Sublessee is leasing the
Sublease Premises based on its own inspection of the Sublease Premises and
those of its agents, and is not relying on any representations or warranties
of the Sublessor regarding the physical condition of the Sublease Premises.
Sublessee's taking of possession of the Sublease Premises shall constitute
conclusive evidence that the Sublease Premises were, as of that date, in
good, clean and tenantable condition. Sublessee acknowledges that the square
footages of the Sublease Premises as specified in Subparagraph 1.a are
estimates and that Sublessor does not warrant the exact square footage of the
Sublease Premises. By taking possession of the Sublease Premises, Sublessee
accepts the square footages of the Sublease Premises as those specified in
Subparagraph 1.a above.
c. The Sublease Premises shall have its own separate entrance and
security system as of the Sublease Commencement Date.
2. INCORPORATION OF MASTER LEASE
This Sublease is subject to all of the terms and conditions of the
Master Lease and Sublessee hereby accepts, assumes and agrees to perform all of
the obligations of Sublessor as Sublessee under the Master Lease to the extent
such obligations are applicable to the Sublease Premises and all of the terms
and conditions of the Master Lease are incorporated herein as terms
<PAGE>
and conditions of this Sublease (with each reference therein to Landlord,
Tenant and Premises to be deemed to refer to Sublessor, Sublessee, and
Sublease Premises respectively), excepting only Article 2, Article 3, Section
5.1, Section 5.4, Article 6, Article 7, Section 8.2, Section 9.1, Section
24.18, Section 24.19, Exhibit C, Exhibit E and Exhibit G of the Master Lease
and as set forth in Paragraph 9 below. In the event of any conflict or
inconsistency between the incorporated terms of the Master Lease and the
terms of the Sublease which are set forth in full, the terms of the Sublease
which are set forth in full shall prevail to the extent of any such
inconsistency, it being understood that in any event the Sublease provisions
are subject to Master Lease provisions.
3. TERM AND RENTAL COMMENCEMENT
a. The term of this Sublease shall be for a period of twelve (12)
months ("Sublease Term"), commencing on March 1, 2000 ("Commencement Date").
b. In the event of the termination for any reason of Sublessor's
interest as tenant under the Master Lease, then this Sublease shall terminate
therewith without any liability of Sublessor to Sublessee; provided, however,
that Sublessor may be liable to Sublessee for any termination of the Sublease
that results from Sublessor's breach of the Master Lease, so long as such
breach is not caused in whole or in part by Sublessee.
c. In the event the Commencement Date has not occurred by March 31,
2000 for any reason, then Sublessor shall not be liable for any damage caused
thereby, but either party may, by notice in writing to Sublessor within ten
(10) days thereafter, cancel this Sublease, in which event the parties shall
be discharged from all obligations under this Sublease, and Sublessor shall
return to Sublessee any prepaid rent and security deposit.
4. USE
a. Sublessee shall use the Sublease Premises solely for general
office use and for no other purpose without the consent of Sublessor.
Sublessee agrees that its use shall comply with all applicable governmental
laws and ordinances, and that it shall not use or permit the Sublease
Premises to be used for any purposes other than those described above.
Sublessee shall not commit or permit to be committed on the Sublease Premises
any act or omission which shall violate any term or condition of the Master
Lease.
b. Sublessee shall be responsible for the installation and cost of
any and all improvements, alterations or other work on or to the Sublease
Premises or to any other portion of the property and/or building of which the
Sublease Premises are a part, required by applicable governmental laws,
rules, orders and ordinances because of the particular use to which the
Sublease Premises are put Sublessee, including any improvements, alterations
or other work required under the Americans With Disabilities Act of 1990 due
to Sublessee's particular use of the Sublease Premises or due to changes or
alterations to the Sublease Premises made or proposed to be made by Sublessee.
2
<PAGE>
5. RENTAL
a. Sublessee shall pay Rent to Sublessor as follows, without offset
or deduction for the Sublease Premises, in advance, on the first day of each
month, in lawful money of the United States. Rent for the partial month shall
be prorated on the basis of the number of days in such month.
RENT
$16,667.00 per month
b. Sublessor acknowledges receipt from Sublessee, on the execution
hereof the sum of $16,667.00 to be applied against rent for the first month of
the Sublease Term to be paid hereunder.
c. In addition to the Rent indicated in Section 5.a above, Sublessee
shall procure and pay directly for its own telephone costs and shall procure
its own janitorial service at Sublessee's cost. Sublessor shall pay for
Sublessee's other utilities. Sublessee shall not be responsible for the
payment of Common Area Expenses (such as taxes, Master Lessor's insurance and
common area maintenance costs), for which Sublessor is responsible under
Section 8.2 of the Master Lease.
6. NOTICES
All notices and demands of any kind required to be given by
Sublessor or Sublessee hereunder shall be in writing and effective the next
business day after depositing with a nationally recognized overnight courier
service such as Federal Express or three (3) days after depositing in the
United States certified mail, return receipt requested, postage prepaid, and
addressed to Sublessor or Sublessee, as the case may be, at the address set
forth below their respective signatures or at such other address as they may
designate from time to time. All rent and other payments due under this
Sublease or the Master Lease shall be made to Sublessor at the same address.
7. HAZARDOUS MATERIALS
Sublessee will indemnify, defend and hold Sublessor harmless from
any judgment, damages, losses, claims, actions, attorneys' fees, consultant's
fees, costs or expenses which result from Sublessee's or any of Sublessee's
agents (including employees, contractors and visitors) use, storage, or
disposal of Hazardous Materials in or about the Sublease Premises. As used
herein the term "Hazardous Materials" will mean and include asbestos,
petroleum products and any and all toxic or hazardous substances, materials
or wastes listed in the United States Department of Transportation Table (49
CFR 172.101) or by the Environmental Protection Agency as hazardous
substances (40 CFR 302) and in any and all amendments to such lists or such
substances, materials or wastes otherwise regulated under applicable local,
state or federal law. The provisions of this paragraph shall survive the
expiration or termination of the Sublease. To the best of Sublessor's
knowledge, no Hazardous Materials are currently on the Premises.
3
<PAGE>
8. DEFAULTS
The default provisions are articulated in the Master Lease. In
addition, in the event of Sublessee's failure to pay Rent under this
Sublease, which failure is not cured within ten (10) days after Sublessor
delivers a written notice to Sublessee stating the nature and amount of such
past due Rent, then Sublessor shall have no continuing obligation to
Sublessee to maintain the Master Lease for Sublessee's benefit.
9. PROVISIONS OF MASTER LEASE
Notwithstanding anything to the contrary contained in this Sublease:
a. Sublessee shall indemnify and hold both Sublessor and Master
Lessor harmless pursuant to the provisions of Article 18 and any other
indemnity provision of the Master Lease (with reference therein to "Premises"
replaced with "Sublease Premises");
b. The obligations of Master Lessor under the Master Lease to repair
or replace the Premises shall remain the obligations of Master Lessor and
shall not be assumed by Sublessor;
c. The right of entry of Master Lessor under Article 13 of the
Master Lease shall be the right of each of Master Lessor and Sublessor;
d. Sublessee shall pay Sublessor interest and late charges as
provided in Section 5.3 of the Master Lease, if rent is not received by
Sublessor when due; and
e. Any assignment or subletting by Sublessee of the Sublease or the
Sublease Premises shall be governed by Article 10 of the Master Lease, and
the term "Landlord" in Article 10 shall mean each of Master Lessor and
Sublessor.
f. Sublessee shall provide Sublessor with a certificate of Sublessee's
insurance, as required under the Master Lease, naming Sublessor as an additional
insured, prior to Sublessee's occupancy of the Sublease Premises.
10. ALTERATIONS
The current design for configuration of the cubicles in the Sublease
Premises shall not be altered by Sublessee. Sublessee shall make no
alterations, additions or improvements in or to the Sublease Premises without
the prior written consent of Sublessor and Master Lessor. Any such approved
alterations, additions or improvements shall be installed in accordance with
the terms of the Master Lease. Sublessee shall restore the Premises at the
expiration or earlier termination of the Sublease Term to its condition
existing as of the Commencement Date (including the removal of all
alterations and equipment installed by Sublessee and the repairing of any
resulting damage), reasonable wear and tear excepted.
11. SURRENDER AND HOLDOVER
Upon the expiration or earlier termination of this Sublease,
Sublessee shall promptly quit and surrender to Sublessor the Sublease
Premises broom clean, in the same condition as
4
<PAGE>
received, ordinary wear and tear and loss by fire and other casualty
excepted. Sublessee shall removal all of its movable furniture and other
effects. If Sublessee fails to so vacate the Sublease Premises on a timely
basis as required, Sublessee shall pay holdover rent at the rate of 150% of
Rent and shall be responsible to Sublessor and to Master Lessor for all
costs, expenses, attorneys fees and damages (including but not limited to any
amounts required to be paid to third parties who were to have occupied the
Sublease Premises) incurred by Sublessor and/or Master Lessor as a result of
such failure to vacate, plus interest thereon at the rate of the lesser of
18% per annum or the maximum rate allowed by law, on all amounts not paid by
Sublessee within ten (10) days of demand.
12. SECURITY DEPOSIT
Concurrently with Sublessee's execution of this Sublease, Sublessee
shall deposit with Sublessor the sum of $16,667.00 as a non-interest bearing
security deposit for Sublessee's performance under this Sublease. The amount
paid as a security deposit shall be returned to Sublessee within 14 days
after Sublessee's vacating the Sublease Premises, after first deducting any
sums owing to Sublessor due to a breach by Sublessee of any obligation,
covenant, term or condition of this Sublease. Simultaneously with the return
of the security deposit (less any deductions as described in the preceding
sentence) Sublessor shall provide Sublessee with a reasonably detailed
accounting of any deduction from the security deposit. In the event Sublessee
breaches any obligation, term, condition or covenant under this Sublease,
Sublessor or will be entitled but not obligated to use or retain some or all
of this security deposit to compensate for any loss, expense or risk
associated with the breach, all without seeking judicial relief. In the event
of such recourse to the security deposit, Sublessor is entitled to require
Sublessee to replenish the security deposit funds on thirty days' written
notice. In no event will Sublessee be entitled to have access to or require
any portion of Sublessor's deposit with the Master Lessor.
13. SIGNAGE
Sublessee shall have the right to have a "Lineo, Inc." sign on the
wall adjacent to Sublessee's office entrance on the second floor, subject to
Sublessor's and Master Lessor's approval as to size, design and location.
Sublessor's approval shall not be unreasonably withheld.
14. MISCELLANEOUS
a. Each of Sublessor and Sublessee represents and warrants to the
other that it has not had dealings with any real estate broker, finder or
other person who could claim a commission or finder's fee with respect to
this Sublease. Each of Sublessor and Sublessee shall hold the other harmless
from all damages resulting from its breach of the foregoing representation
and warranty.
5
<PAGE>
b. This Sublease (and delivery of possession of the Sublease
Premises to Sublessee) is subject to Master Lessor approval pursuant to a
written letter of consent. Sublessor shall use all reasonable efforts to
obtain Master Lessor's approval of this Sublease as soon as possible
following execution of this Sublease, but in no event later than twenty (20)
days after such execution. In the event that Master Lessor's approval as
stated herein is not obtained within said twenty (20) day period, then either
party may, by written notice to the other, terminate this Sublease, and each
party shall be relieved of any further obligation to the other with respect
to this Sublease.
<TABLE>
<S> <C>
"SUBLESSOR" "SUBLESSEE"
VPNX.com LINEO, INC.
a Delaware corporation a Delaware corporation
By: /s/ Tyrone Farrar Pike By: /s/ Bryan Sparks
------------------------------------------- -------------------------------------------
Print Name: Tyrone Farrar Pike Print Name: Bryan Sparks
----------------------------------- -----------------------------------
Title: President & CEO Title: President & CEO
---------------------------------------- ----------------------------------------
Date Executed: 2/28/2000 Date Executed: 2/14/2000
-------------------------------- --------------------------------
ADDRESS: ADDRESS:
805 Veterans Blvd, Suite 316 383 South 520 West
Redwood City, CA 94063 Lindon, Utah 84042
Attn: Kurt Johnson, Vice President Finance and Attn: Greg Hill, Chief Financial Officer
Administration and Chief Financial Officer
</TABLE>
6
<PAGE>
EXHIBITS TO BE ATTACHED TO SUBLEASE
Exhibit A Master Lease
Exhibit B Site Plan of Sublease Premises
<PAGE>
EXHIBIT 10.22
EMPLOYMENT AGREEMENT (U.S.)
THIS EMPLOYMENT AGREEMENT ("Agreement") by and between Lineo, Inc., a
Delaware corporation (the "Company"), and Bryan Sparks ("Employee") is dated and
entered into as of this 16th day of May 2000.
RECITALS
A. The Company desires to employ and ensure itself of the continued
services of Employee.
B. Employee is willing to render services to the Company in accordance
with and subject to the terms and conditions of this Agreement.
ACCORDINGLY, the parties hereby agree as follows:
AGREEMENT
1. EMPLOYMENT. The Company will employ Employee and Employee, upon
accepting such employment, agrees to perform and discharge his duties hereunder
diligently, faithfully, and in accordance with the highest professional
standards. Employee's initial assignment shall be as President and Chief
Executive Officer and he will perform such duties as are customarily associated
with such position. Employee will have the authority as may be granted from time
to time by the President of the Company. Employee may be reassigned or required
to perform such other duties of a similar nature as the Company in its sole
discretion may request.
2. DEVOTION OF TIME AND ENERGY. Employee will devote his entire working
time, ability, effort, and attention to the affairs of the Company and will
skillfully serve its interests during the term of this Agreement; provided,
however, that the foregoing shall not prevent Employee from serving as a member
of the board of directors of a corporation if the Company determines that such
membership is not adverse to the interests of the Company.
3. DUTY OF LOYALTY. During Employee's engagement with the Company,
Employee will bring to the Company any bona fide corporate opportunity of which
Employee becomes aware that relates to the Company's current or potential
business.
4. COMPENSATION. During the term of this Agreement, the Company agrees to
pay or cause to be paid to Employee, and Employee agrees to accept in exchange
for the services rendered hereunder by him, the following compensation:
4.1 BASE SALARY. Employee's compensation shall consist of an annual
base salary of one hundred fifty thousand ($150,000.00) before all customary
payroll deductions. Such annual base salary shall be paid in substantially
equal installments and at the same intervals as other employees of the
Company are paid. The Company shall determine increases, if any, in the
amount of the annual base salary in future years.
4.2 BENEFITS. The Company also agrees to provide Employee with
benefits pursuant to Company policy and practice for its employees and their
dependents, including participation in the Company's group health, life, and
disability insurance plans. Details about these benefits will be provided to
Employee.
<PAGE>
4.3 BONUS. The Company may, but has no obligation to, also award
Employee discretionary compensation or bonuses ("Additional Compensation"). The
amount of any Additional Compensation, if any, and the criteria for determining
the amount of the Additional Compensation, if any, shall be at the sole
discretion of the Company.
5. TERM. The period of employment under this agreement shall be deemed to
have commenced as of the ____ day of May 2000, and shall continue for a period
of 24 full calendar months thereafter, unless or until it ceases or is
terminated sooner as provided in Section 6 ("Termination"); provided, however,
that the employment hereunder may be renewed one or more times upon agreement
between the Company and Employee, on such terms and conditions as agreed between
them.
6. TERMINATION. Employment of Employee pursuant to this Agreement may be
terminated as follows, but in any case, the provisions of Sections 7, 8, and 9
hereof shall survive the termination of this Agreement and the termination of
Employee's employment hereunder:
6.1 UPON NOTICE. Either party may terminate the employment of
Employee at any time during the term of employment upon mailing or delivering
written notice not less than two weeks prior to the date when termination
is to become effective; provided, however, that during such period, the Company
will not be obligated to provide any work for Employee, or to assign to or vest
in Employee any powers, duties, or functions, and may in its discretion suspend
Employee on full salary and other contractual benefits. During such period, the
Company may also require Employee:
6.1.1 not to enter any premises of the Company or any subsidiary,
division, or affiliated company; and
6.1.2 to abstain from contacting any customers, clients,
employees, or suppliers of the Company or any subsidiary, division,
or affiliated company.
Employee shall not be employed by or provide services to any third party during
the period for which he is suspended with compensation pursuant to this clause.
6.2 AUTOMATIC TERMINATION. This Agreement and Employee's employment
hereunder shall terminate automatically upon the death or total disability of
Employee. The term "total disability" as used herein shall mean Employee's
inability to perform, even with reasonable accommodation, substantially all of
the duties required of him as set forth in Section 1 hereof as a result of
physical or mental illness, loss of legal capacity, or any other cause beyond
Employee's control, and such inability shall continue for a period or periods
aggregating 120 calendar days in any 12-month period. Termination hereunder
shall be deemed to be effective (a) at the end of the calendar month in which
Employee's death occurs or (b) immediately upon a determination by the Company
of Employee's total disability, as defined herein.
6.3 FOR CAUSE. Either party may terminate this agreement for cause.
Cause shall include any material breach of the terms of this Agreement by either
party. Actions by Employee that may constitute cause include, but are not
limited to, actions taken in conflict with the Company's best interests or that
may tend to damage the Company's business or reputation, violations of any
material Company policy or practice, the failure or refusal to carry out the
lawful duties of Employee as described in Section 1 herein (for reasons other
than "total disability"), or actions in violation of Employee's fiduciary duties
to the Company.
6.4 SEVERANCE. In the event that Employee is terminated pursuant to
Section 6.1 herein, the Company will continue Employee's salary (minus all
deductions required by law) for twelve
2
<PAGE>
(12) months from the date of termination; provided, however, that Employee
will not be entitled to any such compensation for any period during which he
is receiving comparable compensation from a third party.
7. CONFIDENTIALITY.
7.1 CONFIDENTIAL INFORMATION. Employee recognizes that the Company
now possesses or will possess information of a confidential or secret nature
that has commercial value in the business in which the Company is engaged
(hereinafter referred to as "Confidential Information"). Confidential
Information for this purpose is information that Employee obtains during and in
the course of his employment, including, but not limited to, trade secrets,
processes, formulas, computer programs, data, know-how, inventions,
improvements, techniques, marketing plans, product plans, strategies, forecasts,
and customer lists. Employee understands that his employment with the Company
creates a relationship of trust and confidence between him and the Company with
respect to the Confidential Information that he may learn or develop during the
period of his employment with the Company.
7.2 OBLIGATION NOT TO DISCLOSE. At all times, both during and after
the termination of Employee's employment with the Company, Employee agrees to
keep in strict confidence all Confidential Information and not to use or
disclose any Confidential Information or anything relating to it in whole or in
part, nor permit others to use or disclose it in any way, without the prior
written consent of the Company, except as may be necessary in the ordinary
course of performing Employee's duties under this Agreement.
7.3 THIRD PARTY INFORMATION. Employee recognizes that the Company has
received and in the future will receive from third parties their confidential or
proprietary information subject to a duty on the Company's part to maintain
confidentiality of such information and to use it only for limited purposes.
Employee agrees to hold all such confidential or proprietary information in the
strictest confidence and not to disclose it to any person, firm, or corporation,
or to use it except as necessary in carrying out his work for the Company in a
manner consistent with the Company's agreement with the third party.
7.4 RETURN OF MATERIALS. Upon termination of employment with the
Company, or at any other time at the Company's request, Employee agrees to
promptly deliver to the Company all drawings, blueprints, manuals, letters,
notes, notebooks, reports, sketches, formulas, computer programs or files,
memoranda, customer lists, and all other materials, and all copies thereof,
relating in any way to the Company's business and in any way obtained by
Employee during the period of employment with the Company, that are in
Employee's possession or control. Employee further agrees not to make or retain
any copies of any of the foregoing and will so represent to the Company upon
termination of employment.
7.5 REVERSE ENGINEERING. Employee agrees that Employee will not
engage, nor cause any other person, firm, corporation or other entity to engage,
in the reproduction of Confidential Information through the techniques of
"reverse engineering," as described in Title 17, United States Code, Section
906, as such statute may be amended from time to time.
8. COVENANT NOT TO COMPETE/NONSOLICITATION.
8.1 COVENANT. Employee agrees not to directly or indirectly compete
(as defined in Section 8.2, below) with the Company in the noncompetition area
(as defined in Section 8.3, below) during the term of employment with the
Company and for a period of twelve (12) months from the date of termination of
employment for any reason. This twelve-month period will be tolled during the
period of any breach of the covenants herein.
3
<PAGE>
8.2 DIRECT AND INDIRECT COMPETITION. Employee agrees that the phrase
"directly or indirectly compete" shall include:
8.2.1 owning, managing, operating, or controlling, or
participating in the ownership, management, operation, or control of,
or being connected with or having any interest in, as a stockholder,
director, officer, employee, agent, consultant, assistant, advisor,
sole proprietor, partner, or otherwise, any business (other than the
Company's) that is involved in the development, marketing, and/or sale
of Linux-based embedded software components and applications
(including, but not limited to, traditional embedded devices, handheld
devices, personal digital assistants, thin clients, and thin servers),
provided, however, that this prohibition shall not apply to the
ownership of less than five percent (5%) of the voting stock in
companies whose stock is traded on a national securities exchange or
in the over-the-counter market;
8.2.2 soliciting, causing to be solicited, contracting with, or
otherwise engaging in business with any person or business entity,
whom or which at the time is a current client of the Company, and whom
or which is known to Employee and with whom or which Employee has
dealt, directly or indirectly, in the 12 months prior to the
termination of employment, for the purpose of the development,
marketing, and/or sale of Linux-based embedded software components or
applications;
8.2.3 soliciting, persuading, inducing, or otherwise causing
employees of the Company to leave the Company's employ; or
8.2.4 while an employee of the Company, soliciting or engaging in
any employment or other activity that is the same or similar to any
business in which the Company is now, or has plans to become, engaged.
8.3 NONCOMPETITION AREA. Employee agrees that the phrase
"noncompetition area" means any national market in which the Company, during
employment and as of the date of termination of employment hereunder, (a) has
developed, marketed, or sold Linux-based embedded software components or
applications, or (b) has made material commitments to do so; provided, however,
that the "noncompetition area" shall not include any such national market in
which the Company, as of the date of commencement of any directly or indirectly
competitive action(s), has ceased such activities or withdrawn such commitments.
9. INVENTIONS.
9.1 DISCLOSURE OF INVENTIONS. If Employee conceives, learns, makes,
or first reduces to practice either alone or jointly with others, any
inventions, improvements, original works or authorship, formulas, processes,
computer programs, techniques, know-how, or data (hereinafter referred to as
"Inventions") relating to the business and/or technology of the Company while
employed by the Company, Employee will promptly disclose such Inventions to the
Company or to any person designated by it.
9.2 MAINTENANCE OF RECORDS. Employee agrees to keep, maintain, and
ensure proper and secure storage of adequate and current written records of all
Inventions made by Employee (alone or jointly with others) during the term
employment. The records may be in the form of notes, sketches, drawings, flow
charts, electronic data or recordings, laboratory notebooks, or any other
format. The records will be available to and remain the sole property of the
Company at all times. Employee agrees not to remove such records from the
Company's place of business except as expressly permitted by
4
<PAGE>
Company policy, which may, from time to time, be revised at the sole election of
the Company for the purpose of furthering the Company's business.
9.3 OWNERSHIP, ASSIGNMENT, ASSISTANCE, AND POWER OF ATTORNEY. All
Inventions that are related to or useful in the Company's business or in the
research and development of the Company's business and that result from work
performed by Employee for the Company during the period of employment shall be
the sole and exclusive property of the Company, and the Company shall have the
right to use and to apply for patents, copyrights, or other statutory or common
law protections for such Inventions in any country. Employee hereby assigns to
the Company any rights that he has acquired or may acquire in such Inventions.
Furthermore, Employee will assist the Company in every proper way at the
Company's expense to obtain patents, copyrights, and other statutory or common
law protections for such Inventions in any country and to enforce such rights
from time to time. Specifically, Employee will execute all documents as the
Company may use in applying for, obtaining, or enforcing such patents,
copyrights, and other statutory or common law protections, together with any
assignments thereof to the Company or to any person designated by the Company.
Employee's obligations under this paragraph shall continue beyond the
termination of employment with the Company in regards to Inventions resulting
from work performed by Employee for the Company during employment with the
Company. The Company shall compensate Employee at a reasonable rate after such
termination for time spent at the Company's request in rendering such
assistance. In the event the Company is unable for any reason whatsoever to
secure Employee's signature to any lawful document required to apply for or to
enforce any patent, copyright, or other statutory or common law protections for
such Inventions, Employee hereby irrevocably and severally designates and
appoints the Company and its duly authorized officers and agents as his agents
and attorneys-in-fact to act in his stead to execute such documents. Employee
agrees that such documents or such acts shall have the same legal force and
effect as if he executed such documents or he did such acts.
9.4 WORKS MADE FOR HIRE. Employee acknowledges that all original
works of authorship that are made by Employee (solely or jointly with others)
within the scope of his employment and that are protectable by copyright are
"works made for hire," as that term is defined in the United States Copyright
Act (17 U.S.C. Section 101). To the extent that any original works of authorship
created by Employee for the Company and in furtherance of his employment by the
Company would be deemed not to be "works made for hire" unless specially ordered
or commissioned, Employee and the Company hereby mutually agree that such works
are specially ordered or commissioned. To the extent that such works are not
deemed to be "works made for hire" as that term is defined in the Copyright Act
because, for example, Employee is deemed to be an independent contractor and/or
such works do not fall within the category of works that are commissionable as
"works made for hire," Employee hereby assigns to the Company, as author, all of
Employee's right, title, and interest in the Copyright to such works.
9.5 NOTICE OF EMPLOYEE RIGHT TO INVENTIONS. This Agreement does not
apply to an invention if no equipment, supplies, facilities, or trade secret
information of the Company was used, and the invention was developed entirely on
Employee's own time, unless (a) the invention relates (i) directly to the
business of the Company, or (ii) to the Company's actual or demonstrably
anticipated research or development, or (b) results from any work that Employee
has performed for the Company.
9.6 EXCLUSION OF PRIOR INVENTIONS. Employee has identified on Exhibit
A attached hereto a complete list of all Inventions that he has conceived,
learned, made, or first reduced to practice, either alone or jointly with
others, prior to employment with the Company and that Employee desires to
exclude from the operation of this Agreement. If no Inventions are listed on
this Exhibit A, Employee represents that he has made no such Inventions at the
time of signing this Agreement.
5
<PAGE>
10. NOTIFICATION TO OTHER PARTIES. In the event that Employee leaves the
employ of the Company, he hereby consents to notification by the Company to
Employee's new employer or parties with whom Employee has a consulting
relationship about Employee's rights and obligations under Sections 7, 8, and 9
of this Agreement.
11. CONFLICTS.
11.1 PRIOR AGREEMENTS OR DUTIES. Employee represents that, to the best
of his knowledge, his performance of all the terms of this Agreement and his
work as an employee of the Company does not breach any oral or written agreement
that Employee has made, or violate a duty, to keep in confidence proprietary or
trade secret information acquired by him prior to employment with the Company.
Attached as Exhibit B to this Agreement are copies of any such written
agreements and descriptions of any such oral agreements.
11.2 MATERIALS OR CONFIDENTIAL INFORMATION OF PRIOR EMPLOYERS.
Employee represents that he has not used, nor will he use, in the performance of
his duties for the Company, any materials or documents, or confidential or trade
secret information, of a former employer that are not generally available to the
public, unless Employee has first obtained written authorization from the former
employer allowing their possession and/or use and has delivered a copy of such
written authorization to the Company before using such materials or documents,
or confidential or trade secret information, in connection with the performance
of Employee's duties for the Company.
11.3 OTHER AGREEMENTS. While employed by the Company, Employee will
not enter into any oral or written agreement that conflicts with his obligations
under this Agreement or with the performance of his work as an employee of the
Company.
12. REMEDIES.
12.1 INJUNCTIVE RELIEF. Employee acknowledges that any violation by
him of this Agreement may cause the Company irreparable injury that may not be
adequately compensated by money damages. Therefore, Employee agrees that the
Company will be entitled, in addition to any remedies it may have under this
Agreement or at law, to injunctive and other equitable relief to prevent or
curtail any breach of this Agreement by Employee. Employee consents to venue and
jurisdiction in the State of Utah in any action brought by the Company to obtain
such relief, and agrees that no bond will be required.
12.2 SEVERABILITY. If any provision (or subpart) of this Agreement
shall be held invalid, illegal, or unenforceable in any jurisdiction, for any
reason, including, without limitation, the duration of such provision, its
geographical scope, or the extent of the activities prohibited or required by
it, then, to the full extent permitted by law (a) all other provisions (or
subparts) hereof shall remain in full force and effect in such jurisdiction and
shall be liberally construed in order to carry out the intent of the parties
hereto as nearly as may be possible, (b) such invalidity, illegality or
unenforceability shall not affect the validity, legality or enforceability of
any other provision hereof, and (c) any court or arbitrator having jurisdiction
thereover shall have the power to reform such provision to the extent necessary
for such provision to be enforceable under applicable law.
12.3 SURVIVAL OF REMEDIES. Employee agrees that his covenants and
agreements made in and the requirements imposed on him by Sections 7, 8, and 9
and this Section 12 will be construed as an agreement independent of any of the
provisions of this Agreement as set forth in the respective provisions. The
existence of any claim or cause of action of Employee against the Company or any
of its affiliates, irrespective of whether predicated on the terms of this
Agreement, will not constitute a defense
6
<PAGE>
to the enforcement of the covenants and agreements of Employee contained in
Sections 7, 8, or 9 or the requirements imposed on him by this Section 12.
12.4 ATTORNEYS' FEES. If any breach of or default under this Agreement
results in litigation, the substantially prevailing party shall be entitled to
costs, expenses, and reasonable attorneys' fees.
12.5 ARMS' LENGTH AGREEMENT. The provisions of this Agreement have
been negotiated by both parties at arms' length. Employee acknowledges that he
has carefully read and reviewed the provisions of this final Agreement,
including the provisions contained in Sections 7, 8, and 9 and this Section 12,
has had an opportunity to discuss the meaning and effect of these provisions
with counsel, and agrees that they are reasonable.
12.6 ARBITRATION. Subject to the provisions of Section 12.1 hereof,
any controversies or claims arising out of or relating to this Agreement shall
be fully and finally settled by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in effect (the
"AAA RULES"), conducted by one arbitrator either mutually agreed upon by
Employer and Employee or chosen in accordance with the AAA Rules, except that
the parties thereto shall have any right to discovery as would be permitted by
the Federal Rules of Civil Procedure for a period of 90 days following the
commencement of such arbitration and the arbitrator thereof shall resolve any
dispute which arises in connection with such discovery. The prevailing party
shall be entitled to costs, expenses and reasonable attorneys' fees, and
judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof.
13. GENERAL PROVISIONS.
13.1 GOVERNING LAW. This Agreement shall in all respects, including
all matters of construction, validity, and performance, be governed by, and
construed and enforced in accordance with, the laws of the State of Utah.
13.2 ASSIGNMENT. This Agreement is personal to Employee and shall not
be assignable by Employee. The Company may assign its rights hereunder to (a)
any corporation resulting from any merger, consolidation, or other
reorganization to which the Company is a party or (b) any corporation,
partnership, association, or other person to which the Company may transfer all
or substantially all of the assets and business of the Company existing at such
time. All of the terms and provisions of this Agreement shall be binding upon
and shall inure to the benefit of and be enforceable by the parties hereto and
their respective successors and permitted assigns.
13.3 WAIVERS. No delay or failure by any party hereto in exercising,
protecting, or enforcing any of its rights, titles, interests, or remedies
hereunder, and no course of dealing or performance with respect thereto, shall
constitute a waiver thereof. The express waiver by a party hereto of any right,
title, interest, or remedy in a particular instance or circumstance shall not
constitute a waiver thereof in any other instance or circumstance. All rights
and remedies shall be cumulative and not exclusive of any other rights or
remedies.
13.4 AMENDMENTS IN WRITING. No amendment, modification, or waiver of
this Agreement will be binding or effective unless agreed by both parties. It
may not be changed orally but only by an Agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension,
or discharge is sought. The course of dealing between the parties will not be
deemed to affect, modify, amend, or discharge any provision or term of this
Agreement.
7
<PAGE>
13.5 ENTIRE AGREEMENT. This Agreement on and as of the date hereof
constitutes the entire agreement between the Company and Employee with respect
to the subject matter hereof and all prior or contemporaneous oral or written
communications, understandings or agreements between the Company and Employee
with respect to such subject matter are hereby superseded and nullified in their
entireties.
13.6 HEADINGS. All headings used herein are for convenience only and
shall not in any way affect the construction of, or be taken into consideration
in interpreting, this Agreement.
13.7 NOTICE. All notices permitted or required hereunder shall be in
writing and shall be delivered in person, sent by email, sent by electronic
facsimile (fax), or mailed by certified or registered mail, postage prepaid and
return receipt requested, and addressed as set forth immediately following the
signature blocks in this Agreement. Either party may change the address of
notice by giving proper notice to the other party according to the terms of this
section. If notice is given in person, email, or by fax, it shall be effective
upon confirmed receipt; and if notice is given by mail, it shall be effective
three business days after deposit in the mail.
IN WITNESS WHEREOF, the parties have executed and entered into this
Agreement on the date set forth above.
LINEO, INC. EMPLOYEE
By /s/ Matthew R. Harris /s/ Bryan Sparks
--------------------------------- -----------------------------------
Type Name: Matthew R. Harris Type Name: Bryan Sparks
Title: General Counsel
Address: 390 South 400 West Address: 390 South 400 West
Lindon, Utah 84042 Lindon, Utah 84042
8
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Zentropic Computing, LLC, a Virginia limited liability company
United System Engineers, Inc., a Japanese corporation
Fireplug Computers Inc., a Vancouver, B.C. corporation
INUP S.A., a societe anonyme French corporation
Moreton Bay Ventures Pty Ltd, an Australian corporation
RT-Control, Inc., a Toronto, Ontario corporation
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports relating to the financial statements and schedule of Lineo, Inc. and the
financial statements of Zentropic Computing, LLC and to all references to our
Firm included in or made part of this registration statement and prospectus.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
May 15, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report relating to the financial statements of United System Engineers, Inc. and
to all references to our Firm included in or made a part of this registration
statement.
ARTHUR ANDERSEN
Tokyo, Japan
May 15, 2000
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report relating to the financial statements of Fireplug Computers Inc. and to
all references to our Firm included in or made a part of this registration
statement.
ARTHUR ANDERSEN
Vancouver, British Columbia
May 15, 2000
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated April 28, 2000, except as to the subsequent events described in
Notes 3 and 8 which are as of May 1, 2000, relating to the financial statements
of INUP S.A., which appear in such Registration Statement. We also consent to
the references to us under the headings "Experts" in such Registration
Statement.
THE STATUTORY AUDITOR
Befec -- Price Waterhouse
Member of PricewaterhouseCoopers
Paris, France
May 17, 2000
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report relating to the financial statements of the acquired portion of Moreton
Bay Pty Ltd and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN
Brisbane, Australia
May 15, 2000
<PAGE>
EXHIBIT 23.7
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report related to the financial statements of RT-Control, Inc. and to all
references to our Firm included in or made a part of this registration
statement.
ARTHUR ANDERSEN
Toronto, Canada
May 15, 2000
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