<PAGE>
As filed with the Securities and Exchange Commission on October 25, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
LYNUXWORKS, INCORPORATED
(Exact name of registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
California 7371 77-0181528
(pending reincorporation in
Delaware) (Primary Standard Industrial (I.R.S. Employer
(State or other jurisdiction Classification Code Number) Identification No.)
of incorporation or
organization)
</TABLE>
2239 Samaritan Drive
San Jose, CA 95124
(408) 879-3900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Inder M. Singh
President, Chief Executive Officer and Chairman
LynuxWorks, Incorporated
2239 Samaritan Drive
San Jose, CA 95124
(408) 879-3900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
Steven E. Bochner Eric S. Haueter
Steven V. Bernard Brown & Wood llp
Eveline Mutsaers 555 California Street
Wilson Sonsini Goodrich & Rosati San Francisco, CA 94104
Professional Corporation (415) 772-1200
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300
</TABLE>
Approximate date of commencement of proposed sale to public:
As soon as practicable after the effective date of this Registration
Statement.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Amount of
Securities to Be Registered Offering Price(1) Registration Fee
------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.001 par value.......................... $70,000,000 $18,480
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o).
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is declared effective. This +
+preliminary prospectus is not an offer to sell these securities and we are +
+not soliciting an offer to buy these securities in any state where the offer +
+or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated October 25, 2000
[LYNUXWORKS, INCORPORATED LOGO]
--------------------------------------------------------------------------------
Shares
Common Stock
--------------------------------------------------------------------------------
This is the initial public offering of LynuxWorks, Incorporated. We are
offering shares of our common stock. We anticipate the initial public
offering price will be between $ and $ per share. We have applied for
quotation of our common stock on the Nasdaq National Market under the symbol
"LNWX."
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary
is a criminal offense.
<TABLE>
<CAPTION>
Price
to Underwriting Discounts Proceeds to
Public and Commissions LynuxWorks
<S> <C> <C> <C>
Per Share $ $ $
Total $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to
additional shares to cover any over-allotments.
Deutsche Banc Alex. Brown
Prudential Volpe Technology
a unit of Prudential Securities
Dain Rauscher Wessels
ABN AMRO Rothschild LLC
The date of this prospectus is , 2001
<PAGE>
EDGAR DESCRIPTION OF INSIDE FRONT COVER ARTWORK:
The top of the page contains a heading which reads "Orchestrating
Embedded Linux Solutions". The center of the page contains the Lynuxworks logo
surrounded by an ellipse. This ellipse is in turn surrounded by eight
rectangles. Each rectangle contains a photograph, and indicates an industry
segment.
On the far top left of the ellipse is a photograph of an airplane
in flight; below this photograph are the words "Aerospace and Defense." To the
right of that photograph is a photograph of a computer screen; below this
photograph are the words "Internet Infrastructure." To the right of that
photograph is a photograph of a satellite dish; below this photograph is the
word "Communications." To the right of that photograph is a photograph of a hand
holding a credit card; below this photograph is the word "Retail." On the far
right of the bottom of the ellipse is a photograph of the front end of a car;
below this photograph are the words "Automotive Transportation." To the left of
this photograph is a photograph of a person wearing a lab coat, seated before a
computer; below this photograph are the words "Medical Devices." To the left of
this photograph is a photograph of a copier; below this photograph are the words
"Consumer and Business Electronics." To the left of this photograph is a
photograph of an industrial tool which is throwing off sparks;
below this photograph are the words "Industrial Control Systems."
At the foot of the page is the following text: "LynuxWorks is a provider
of scalable operating systems and development tools. We offer professional
services and access to a global network of value-added strategic relationships
through our Synergy Partners Program. LynuxWorks enables customers to develop
embedded systems for real-time and open-source Linux applications."
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information that you
should consider before investing in our common stock. You should carefully read
the entire prospectus, including "Risk Factors" and the financial statements,
before making an investment decision.
Our Business
We provide operating systems and related products and services designed for
the embedded systems market. Our operating systems and development tools enable
our customers to develop embedded systems based on open standards that are
compatible with Linux products, which can significantly reduce total
development costs and time to market. Our embedded operating systems feature
performance and scalability and can support complex applications without
compromising reliability. We also provide software development tools and
applications that are important for developing and enhancing the performance
and functionality of our embedded operating systems, and we offer custom
engineering and consulting services to enable our customers to develop and
customize our products for their specific needs. We have a twelve year history
in the embedded operating systems market, which we believe gives us the
experience necessary to better understand our customers' needs. Our customers
are primarily embedded systems developers in the communications and Internet
infrastructure, aerospace and defense, office equipment and consumer
electronics, and industrial controls and medical devices industries. Our
customers include Boeing, Hewlett-Packard, Lucent Technologies, Marconi
Communications, Motorola, NEC, United Defense and Xerox.
Our solutions provide customers with the capabilities of both a real-time
operating system and an open source Linux operating system through our two
principal products, LynxOS and BlueCat Linux. LynxOS is an embedded real-time
operating system that is based on open standards and is Linux compatible.
BlueCat Linux is a Linux-based operating system specifically tailored for
embedded systems that do not require real-time performance. To promote adoption
of our products, we have engaged in co-marketing initiatives with industry
leaders such as Hewlett-Packard and Motorola Computer Group and joint
development efforts with Force Computers and Trillium Digital Systems. We
believe that our products, services and strategic alliances provide a
comprehensive solution to address the rapidly growing embedded systems market.
We were originally incorporated in California on March 18, 1988 as Singh Lynx
Corporation. We changed our name to Lynx Real-Time Systems, Incorporated in
March 1988 and changed our name to LynuxWorks, Incorporated in May 2000. We
intend to reincorporate in Delaware prior to the completion of this offering.
Our principal executive offices are located at 2239 Samaritan Drive, San Jose,
California 95124. Our telephone number at that location is (408) 879-3900.
LynxOS is a registered trademark of LynuxWorks, Incorporated. We have applied
for federal trademark registrations for LynuxWorks and BlueCat. All other brand
names or trademarks appearing in this prospectus are the property of their
respective holders.
Proposed Acquisition of ISDCorp
On July 21, 2000, we entered into an agreement to acquire Integrated Software
& Devices Corporation, or ISDCorp, a California corporation. ISDCorp was
incorporated in 1994 and has its principal offices located at 2160 Lundy
Avenue, Suite 100, San Jose, California 95125. Upon completion of the
acquisition, ISDCorp will become a wholly-owned subsidiary of LynuxWorks.
1
<PAGE>
ISDCorp provides services and software for the embedded computing market,
including embedded Linux applications. ISDCorp specializes in adapting
operating systems to specific microprocessors, developing software device
drivers and providing embedded system integration. Customers of ISDCorp include
Cirrus Logic, Hewlett-Packard, IBM, Sony and Sun Microsystems.
The agreement provides that we are to effect the acquisition by issuing
shares of our common stock and by assuming ISDCorp's obligations under its
outstanding stock options. The exact number of shares and options to be issued
is dependent on the number of shares of ISDCorp's common stock and the number
of options that will be outstanding as of the completion of the acquisition.
Based on ISDCorp's capitalization as of October 19, 2000, we expect to issue a
total of 5,022,776 shares of our common stock to ISDCorp shareholders and we
expect to convert outstanding options to purchase ISDCorp's common stock into
options to purchase 981,757 shares of our common stock. We will account for the
acquisition using the purchase method of accounting.
The effectiveness of the acquisition is subject to obtaining tax clearance
from the California Franchise Tax Board with respect to the acquisition
vehicle. We expect to obtain this tax clearance and effect the acquisition
prior to completion of this offering. Unless otherwise indicated, the
information in this prospectus assumes the completion of the acquisition.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by LynuxWorks.................. shares
Common stock to be outstanding after this offering.. shares
Use of proceeds..................................... For general corporate
purposes, including
working capital and
capital expenditures.
Proposed Nasdaq National Market symbol.............. LNWX
</TABLE>
The number of shares of common stock to be outstanding upon completion of
this offering is based on the number of shares outstanding as of October 19,
2000. This number assumes the conversion of all of our preferred stock
outstanding on that date into 20,176,461 shares of common stock. This number
excludes as of October 19, 2000:
. 7,150,668 shares subject to outstanding options under our prior stock
option plans with a weighted average exercise price of $1.70 per share;
. 981,757 shares of our common stock subject to outstanding options under
ISDCorp's stock option plans with a weighted average exercise price of
$2.30 per share;
. 1,130,666 shares available for future option grants under our 1997 Stock
Option Plan plus any shares that may be returned to our 1988 and 1992
stock option plans;
. 4,000,000 shares plus annual increases that will be reserved for
issuance under our 2000 Stock Option Plan upon completion of this
offering; and
. 1,500,000 shares plus annual increases that will be reserved for
issuance under our 2000 Employee Stock Purchase Plan upon completion of
this offering.
3
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
The pro forma data in the following table assumes that our acquisition of
ISDCorp was completed on the first day of the respective periods presented and
includes additional pro forma amortization of goodwill and other intangible
assets and deferred stock-based compensation resulting from the acquisition
totaling $12.5 million for fiscal 2000 and $3.1 million for the three months
ended July 31, 2000.
<TABLE>
<CAPTION>
Pro
Forma
Pro Forma Three
Year Three Months Months
Year Ended April 30, Ended Ended July 31, Ended
------------------------- April 30, ---------------- July 31,
1998 1999 2000 2000 1999 2000 2000
------- ------- ------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Total revenues.......... $11,130 $14,860 $17,196 $ 20,809 $ 4,341 $ 5,108 $ 6,283
Total cost of revenues.. 2,923 4,279 4,504 7,395 936 1,827 2,895
Gross profit............ 8,207 10,581 12,692 13,414 3,405 3,281 3,388
Total
operating expenses..... 9,742 13,981 21,424 36,893 4,516 8,098 12,742
Operating loss.......... (1,535) (3,400) (8,732) (23,479) (1,111) (4,817) (9,354)
Net loss................ (1,849) (3,095) (8,604) (23,367) (1,030) (4,355) (8,939)
Net loss attributable to
common stockholders.... (1,849) (3,095) (10,598) (25,361) (1,030) (6,022) (10,606)
</TABLE>
Pro forma net loss per share and shares used in computing pro forma net loss
per share appearing in the following table:
. assume that our acquisition of ISDCorp was completed and 5,022,776
shares of our common stock were issued to ISDCorp's shareholders on the
first day of the respective periods presented and include additional pro
forma amortization of goodwill and other intangible assets and deferred
stock-based compensation resulting from the acquisition totaling $12.5
million for fiscal 2000 and $3.1 million for the three months ended July
31, 2000;
. assume the conversion of all outstanding shares of preferred stock into
20,176,461 shares of common stock as if each share of preferred stock
converted as of its original issue date; and
. assume the exercise of warrants to purchase 373,210 shares of our common
stock at an exercise price of $0.50 per share, which took place in
August 2000 as if that exercise occurred on the date of issuance of the
warrants.
<TABLE>
<CAPTION>
Pro
Forma
Pro Forma Three Months Three
Year Ended Months
Year Ended April 30, Ended July 31, Ended
---------------------- April 30, -------------- July 31,
1998 1999 2000 2000 1999 2000 2000
------ ------ ------ --------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss attributable to
common stockholders per
share--basic and
diluted ............... $(0.38) $(0.54) $(1.78) $(1.06) $(0.17) $(0.97) $(0.34)
Shares used in computing
net loss attributable
to stockholders per
share--basic and
diluted................ 4,906 5,781 5,959 23,845 5,886 6,207 31,334
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
As of July 31, 2000
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................... $ 31,411 $31,858 $
Working capital............................... 29,382 28,108
Total assets.................................. 38,319 70,460
Long term obligations, less current portion... 21 21
Mandatorily redeemable convertible preferred
stock........................................ 55,101 --
Total stockholders' equity (deficit).......... (23,962) 60,853
</TABLE>
The pro forma balance sheet data summarized above assumes:
. the completion of our acquisition of ISDCorp as if the acquisition was
completed as of July 31, 2000;
. the conversion of all outstanding shares of our preferred stock into
20,176,461 shares of common stock as if that conversion occurred at July
31, 2000; and
. the exercise of warrants to purchase 373,210 shares of our common stock
at an exercise price of $0.50 per share which took place in August 2000
as if that exercise occurred at July 31, 2000.
The pro forma as adjusted balance sheet data summarized above reflects our
pro forma balance sheet data, computed as described above, adjusted to give
effect to our receipt of the estimated net proceeds of this offering, assuming
an initial public offering price of $ per share and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses.
The pro forma financial data appearing on this page and on the prior page is
subject to a number of estimates, assumptions and uncertainties and does not
purport to be indicative of the results of operations or financial position
that would have resulted had the acquisition been completed on the dates
referred to above, nor does it purport to be indicative of our future results
of operations or financial condition.
--------
Unless otherwise indicated, all information in this prospectus assumes:
. that the underwriters have not exercised their option to purchase
additional shares;
. conversion of all outstanding shares of preferred stock into shares of
common stock upon completion of this offering;
. our reincorporation in Delaware and the filing of our amended and
restated certificate of incorporation upon completion of this offering
to increase our authorized common stock, authorize a class of ten
million shares of undesignated preferred stock and to make further
changes in our certificate of incorporation; and
. the completion of our acquisition of ISDCorp.
5
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties and the other information in this prospectus before
deciding whether to invest in shares of our common stock. Any of the following
risks could cause the trading price of our common stock to decline.
Risks Related To Our Business
Because we recently substantially changed our business plan, our historical
operating results provide little or no basis upon which to evaluate the
prospects for our business.
Although we began operations in 1988, during the past twelve months we have
substantially revised our business plan to focus on developing embedded
operating systems based on and compatible with Linux. As a result, we believe
that our historical financial results are not indicative of our future
performance, and provide little or no basis upon which to evaluate our business
prospects.
Our two principal products are LynxOS, an embedded real-time operating system
that is Linux-compatible, and BlueCat Linux, a Linux-based operating system
specifically tailored for embedded systems.
As part of our new business plan, we have begun to market LynxOS as a "Linux-
compatible" product. The success of this part of our business plan primarily
depends on two principal assumptions. First, that existing and potential
customers will conclude that compatibility with other Linux-based products
increases the attractiveness of LynxOS. Second, that the recent introduction of
our Linux-based embedded operating system, BlueCat Linux, will result in
increased sales of LynxOS because customers that are initially targeted for
BlueCat Linux may migrate to LynxOS or choose LynxOS for products requiring a
real-time embedded operating system as a result of our cross marketing efforts
and the compatibility of our products. Because we have only recently begun to
implement this business plan, you have little or no basis upon which to
evaluate whether this part of our business plan will be successful.
The other significant aspect of our new business plan is based on our recent
development and release of our BlueCat Linux product. Because BlueCat Linux is
an open source product, we market it on a royalty-free basis and typically
receive only nominal revenues for each sale. Thus, this portion of our business
plan depends upon generating substantial revenues from the sale of software
development tools, software applications and engineering, consulting and
training services related to BlueCat Linux. We completed our first sale of
BlueCat Linux in March 2000 and we have not yet generated any meaningful
revenues from software or services related to BlueCat Linux. In addition,
although we have a number of software applications related to BlueCat Linux
under development, only a few related software applications are currently
available. As a result, you have only a limited basis, if any, upon which to
evaluate whether this part of our business plan will be successful.
We expect to focus a substantial portion of our sales, marketing, research
and development efforts on our new strategy, and we expect to continue to
substantially increase our expenses to execute this business plan. If we do not
successfully implement our new business plan, or if the new business plan does
not result in significantly increased revenue, the value of your investment
will decline significantly.
6
<PAGE>
Because our operating results substantially depend upon sales of LynxOS and
related software tools and engineering services, our business will be
materially adversely affected if demand for these products and services does
not significantly increase.
Substantially all of our historical revenues have been generated by sales of
our real-time operating system, LynxOS, and related software tools and by
providing engineering, consulting and training services related to LynxOS. Our
new business plan depends, to a significant extent, upon our ability to
substantially increase revenues attributable to sales of LynxOS and related
tools and services. Thus, the success of our new business plan significantly
depends on the success of our new strategy of marketing LynxOS as a "Linux-
compatible" product and our ability to increase sales of LynxOS by expanding
our direct sales force and cross-marketing with our BlueCat Linux product.
These marketing efforts may not result in increased sales of LynxOS.
Additionally, our sales force, even if it is significantly expanded, and these
other marketing efforts may not succeed in increasing sales of LynxOS to the
level necessary to achieve our business plan. Any reduction in the demand for
LynxOS and related services, or the failure to significantly increase revenues
generated by this product and these services, would materially adversely affect
our operating results and cause the price of our common stock to decline
significantly.
Our new business plan presents additional challenges that we will need to
overcome to be successful.
In addition to the risks associated with evaluating our prospects with
limited historical information and the risk that we may not be able to
significantly increase sales of our LynxOS product, operating with a new and
unproven business model presents additional risks. For example, we may not be
able to:
. increase market acceptance of our BlueCat Linux product, which we first
introduced in November 1999 and which to date has been acquired by only
a limited number of customers;
. increase revenues from the sale of software development tools and
applications and engineering, consulting and training services related
to BlueCat Linux;
. achieve a higher level of compatibility between LynxOS and BlueCat Linux
within the time frame required to execute our new business model;
. broaden awareness of the LynuxWorks brand; and
. maintain our current, and develop new, strategic relationships with
technology partners, solution providers, microprocessor and original
equipment manufacturers and independent software vendors.
If we are unable to execute our strategy, we will not be successful and our
revenues may not grow and may decline, which would significantly reduce the
value of your investment.
We have a history of net losses and expect to continue to incur net losses for
the foreseeable future.
We incurred net losses attributable to common stockholders of $10.6 million
in fiscal 2000 and $6.0 million for the three months ended July 31, 2000. We
had an accumulated deficit of $22.5 million as of July 31, 2000. On a pro forma
basis, after giving effect to the acquisition of ISDCorp as if that transaction
occurred on May 1, 1999, our net losses attributable to common stockholders for
the fiscal year ended April 30, 2000 would have been $25.4 million, our net
losses attributable to common stockholders for the three months ended July 31,
2000 would
7
<PAGE>
have been $10.6 million and our accumulated deficit as of July 31, 2000 would
have been $23.1 million. We expect to continue to incur net losses for the
foreseeable future as we incur significant expenses in connection with product
development, sales and marketing and hiring and training employees, as well as
expenses relating to our acquisition of ISDCorp. Goodwill and other intangibles
resulting from the ISDCorp acquisition are approximately $30.6 million in
total, and we expect to amortize that amount over approximately two to three
years. Deferred stock-based compensation resulting from the acquisition is
approximately $6.1 million, and we expect to amortize that amount over
approximately 3 years. Amortization of these amounts will substantially
increase our operating expenses. For example, amortization of goodwill and
other intangible assets arising as a result of the ISDCorp acquisition will
increase our expenses by approximately $5.2 million in the second half of
fiscal 2001, $10.5 million in fiscal 2002, $10.0 million in fiscal 2003 and
$4.4 million in fiscal 2004. Our net losses may also be increased by any
expenses we incur to acquire, license or integrate any other new technologies
or businesses. We know of no company that has built a profitable business based
wholly or largely on open source software. If our revenues decline or grow at a
slower rate than we anticipate, or if our expenses exceed our expectations or
cannot be adjusted to respond to slower revenue growth, we may not be able to
achieve or sustain profitability or generate positive cash flow.
We may not accurately forecast our revenues, which may result in volatility of
our stock price.
The market for Linux-based and Linux-compatible embedded operating systems in
general, and our products in particular, is new and rapidly evolving and is
difficult to forecast. Our ability to accurately forecast our quarterly
revenues is made more difficult by the fact that we have recently begun to
offer embedded operating systems and related professional services based on
Linux. Thus, we have little or no operating history with respect to BlueCat
Linux and related products and services upon which we can develop forecasts.
Also, the shift in our marketing strategy with respect to LynxOS and related
products and services significantly limits the relevance of our historical
operating results. In addition, during fiscal 2000, we greatly increased our
operating expenses. We do not know whether our business will grow rapidly
enough to absorb these increased expenses and we expect that our operating
expenses will continue to increase substantially. We also recently acquired
ISDCorp, which was a significant acquisition and which will result in
significant additional expense relating to the amortization of goodwill and
other intangibles and deferred stock-based compensation arising in connection
with the acquisition. We do not know if we will be able successfully to
integrate ISDCorp's business with our own. As a result, we expect our quarterly
operating results to fluctuate significantly and they may be below expectations
of public market analysts or investors. If this occurs, the price of our common
stock would likely drop rapidly and significantly.
As a result of the introduction of BlueCat Linux, demand for LynxOS may be
reduced, which could cause our revenues to decline.
During the fiscal year ended April 30, 2000, our LynxOS product and related
services generated substantially all of our revenue. Sales of LynxOS may
decrease as a result of the introduction of BlueCat Linux because our customers
may choose BlueCat Linux over LynxOS if they believe that their embedded
operating system requirements can be met by BlueCat Linux, particularly because
BlueCat Linux is a royalty-free product. Since we derive significant income
from run-time license fees on our LynxOS product, whereas our BlueCat Linux
product is royalty free, a decline in the demand for LynxOS may result in a
decline in our revenue, which would reduce the value of your investment.
8
<PAGE>
If additional software applications and embedded software components compatible
with Linux are not developed, the market for our products will not grow, and
our product sales will be harmed.
For Linux, in general, and our products, in particular, to gain market
acceptance, more third-party software applications and embedded software
components designed to operate on Linux-based embedded operating systems must
be introduced and achieve market acceptance. If third parties do not introduce
software applications able to operate on Linux-based embedded operating
systems, or if those applications do not achieve mainstream business and
consumer acceptance, our products will not gain market acceptance, and we may
not be able to increase our product sales. In addition, if multiple,
incompatible versions of Linux are developed, application developers could be
less likely to develop Linux compatible applications which could reduce sales
of our LynxOS and BlueCat Linux products. We may be required to offer and
support more versions of Linux, which could increase our operating expenses.
One customer accounted for a significant portion of our combined historical
revenues, and our operations would be harmed by the loss of this customer.
We and ISDCorp have contracts with various divisions of Hewlett Packard. The
combined historical revenues of LynuxWorks and ISDCorp under these contracts
accounted for approximately 14% of the combined historical revenues of
LynuxWorks and ISDCorp for the six months ended June 30, 2000. The loss of
Hewlett-Packard as a customer could have an adverse impact on our business.
We sell a significant portion of our products to customers dependent upon
government funding and expenditures, which may not continue to be available.
We have derived a significant portion of our revenues from sales of systems
used in military, telecommunications, space and research applications. For
example, in fiscal year 2000, revenues from systems used in these applications
accounted for approximately 22% of our total revenues. Academic institutions
and defense industry participants, which are the source of most of these
revenues, are dependent on government funding and on sales of their products to
governmental entities. Any termination of government funding for these
customers or governmental purchases of their products would reduce our
revenues, perhaps substantially.
We may not be able to integrate ISDCorp successfully, which could adversely
impact our operating results.
We have recently acquired ISDCorp. We may not successfully integrate the
operations, technologies, personnel and customers of ISDCorp. Specifically, we
may have difficulty retaining ISDCorp's key technical and managerial personnel
and we may experience a loss of ISDCorp's customers. In addition, there may be
a disruption in our business because of the substantial resources necessary to
integrate ISDCorp's business and personnel and the resulting diversion of our
management's attention. Further, this acquisition will result in substantial
ongoing expenses from the amortization of goodwill and other intangibles and
deferred stock-based compensation resulting from the acquisition, and may have
a further negative impact on our business and financial condition as we are
required to assume ISDCorp's ongoing expenses and liabilities.
Members of our management team have only recently begun working together and we
are seeking key personnel in other areas.
Our business is highly dependent on our ability to recruit and retain
necessary members of our management team and on our management team's ability
to work together effectively.
9
<PAGE>
Some members of our current management, including our Vice President,
Engineering and our Vice President, Marketing, have been employed by us for a
relatively short period of time. Our Vice President, Engineering was appointed
in February 2000 and our Vice President, Marketing was appointed in August
2000. Additionally, our former President resigned in August 2000. Our Vice
President, World Wide Sales was appointed in July 2000 after serving as our
Managing Director of Europe, Middle East and Africa. We have added additional
management personnel upon our recent acquisition of ISDCorp, including a Vice
Chairman of the Board, a Chief Operating Officer and a Vice President, Business
Development, all of whom were formerly members of ISDCorp's management. Several
members of our management team have not previously worked together, and our
management team as a whole has only limited experience managing a rapidly
growing company on either a public or private basis. The failure of our
management team to work together effectively could negatively affect our
decision-making, product development, sales and marketing efforts and the
management of our financial and other resources, which would negatively impact
our operating results.
We depend on the continued services of our Chief Executive Officer and key
personnel, whose knowledge of our business and technical expertise would be
difficult to replace.
Our products and technologies are complex, and we are dependent upon the
continued services of our existing engineering personnel and executive
management, especially Inder M. Singh, our Chief Executive Officer. These key
personnel can terminate their employment relationship with us at any time
without notice. The loss of any, or a group, of our key personnel, particularly
to a competitor, could adversely affect our business, reduce our market share,
slow our product development processes and diminish our brand identity.
Additionally, members of the open source community are not our employees and
have no obligation to perform services on our behalf. We do not have key person
life insurance on our Chief Executive Officer or any of our other personnel.
If we are unable to hire and retain additional research and development,
customer service and support, sales and marketing staff, we will not have
sufficient resources to compete and grow our revenues.
We will seek to hire a significant number of key personnel during fiscal
2001. Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain highly qualified personnel. Our future success
and ability to increase our revenues also depends upon the continued service of
our executive officers and other key engineering, sales, marketing and support
personnel. Competition for qualified personnel in our industry and in the San
Francisco Bay Area, as well as in the other geographic markets in which we
recruit, is extremely intense and characterized by rapidly increasing salaries,
which may increase our operating expenses or hinder our ability to recruit
qualified candidates.
Stock options and other stock-based compensation are significant factors in
recruiting and retaining our officers and employees. Our ability to use stock
options and stock-based incentives to recruit and retain personnel will be
adversely affected if our stock price declines.
Our reliance on independent third parties who develop certain portions of the
software included in our products could result in delays or unreliable products
and damage to our reputation.
Our products consist of many different open source and proprietary software
components and applications, certain portions of which are developed by
independent third parties over whom we have no control. In particular, the
Linux "kernel", which is the core of the Linux operating system, was originally
developed by Linus Torvalds and the ongoing development
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of the kernel is controlled by a small group of individuals over whom we have
no control. We cannot guarantee that the software we incorporate into our
products will perform reliably or in accordance with specifications or that we
will successfully integrate third-party software components into our products.
In addition, if any of these third-party products is not reliable or available,
we may have to develop substitute applications ourselves, which would likely
significantly increase our development expenses and delay our time to market.
If these third-party products fail to work as designed, or adequate product
support is not provided, our products could malfunction, which would likely
lead to dissatisfaction among our customers and could damage our reputation and
lead to potential litigation.
A significant portion of our revenues is derived from run-time license fees and
the amounts we receive under these licenses depend upon the efforts of third
parties outside our control.
Our customers incorporate our embedded operating systems into their products
and then sell their products to their customers. Except for BlueCat Linux and
other open source products, we receive run-time license fees based upon the
number of units of those products sold by our customers. Thus, our run-time
license revenues depend upon our customers' successful commercialization of
their products. We cannot control their product development or predict their
ability to successfully market their products. If our customers are not
successful, our run-time license revenues will decline significantly.
Our business will be harmed if we are unable to protect our intellectual
property rights from misuse by third parties.
Although our BlueCat Linux product is based on open source Linux, our LynxOS
and BlueCat Linux products and many aspects of our other products include
intellectual property that is proprietary to us. Our success depends
significantly on our ability to protect our trademarks and trade secrets and
the internally developed proprietary technologies contained in our products.
We rely on a combination of patent, copyright, trademark and trade secret
laws and on confidentiality and other contractual provisions to protect our
proprietary rights. These measures afford only limited protection. Effective
intellectual property protection may not be available in every country in which
we offer our products and services. Our means of protecting our proprietary
rights and technologies in the United States or abroad may not be adequate, and
competitors may develop similar technologies or unauthorized parties may copy
aspects of our products or obtain and use trade secrets or other information
that we regard as proprietary. In addition, a third party could attempt to
interpret the GNU General Public License which governs the usage of the Linux
operating system in a manner that could put the protection of our intellectual
property at risk because some of our products include both our own intellectual
property and intellectual property covered by the GNU General Public License.
Legal proceedings to enforce our intellectual property rights could be
burdensome and expensive and involve a high degree of uncertainty. These legal
proceedings may also divert management's attention from our core business. If
we do not effectively protect intellectual property rights important to our
business, our business may be harmed.
We are vulnerable to claims that our products infringe third-party intellectual
property rights, especially because our products incorporate many distinct
software components developed by third parties. Any resulting claims against us
could be costly to defend or subject us to significant damages.
We may be exposed to future costly litigation based on claims that our
products infringe the intellectual property rights of others or intellectual
property rights covered by the GNU General Public License. This risk is
exacerbated by the fact that a significant portion of the code in our
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products is developed by our engineers, who may not be aware of the legal
requirements that need to be complied with when using third party or GNU
General Public License intellectual property, and by independent parties, over
whom we exercise no supervision or control and who, themselves, might not have
the same financial resources as us to pay damages to a successful litigant. Any
litigation, with or without merit, could be time consuming to defend, result in
high litigation costs, divert our management's attention and resources, or
cause product shipment delays. We also could be required to remove or replace
infringing technology, which could be costly and delay product development and
shipment, or we could be required to publicly disclose some or all of the
proprietary source code of the relevant products.
If we do not introduce new products and services in a timely manner, demand for
our products and services will decline, and our operating results will suffer.
The market for embedded operating systems is characterized by rapidly
changing technology, evolving industry standards, frequent new service and
product introductions, and a complex development and testing environment. As a
result, we cannot accurately estimate the life cycles of our products.
Significant delays in new product releases or significant problems in
installing or implementing new products could seriously damage our business. We
have experienced delays in the scheduled introduction of new and enhanced
products and may experience similar delays in the future. For example, we
experienced a four month delay in the distribution of version 3.1 of our LynxOS
product, which was scheduled to be distributed in January 2000 but which was in
fact distributed for the first time in April 2000. Our success depends upon our
ability to enhance existing products, develop and introduce new products,
satisfy customer requirements and respond to technological advances and
emerging industry standards in a timely and cost-effective manner. This process
is made more challenging by the fact that much of the software development for
our products is done by members of the open source community who are not our
employees and over whom we have no control, and we must work with a large
number of developers who are not our employees in this process. You should be
aware that:
. our technology or systems may become obsolete upon the introduction of
alternative technologies or new industry standards;
. the technological life cycles of our products have been historically
short and are difficult to accurately estimate;
. we may not have sufficient resources to develop or acquire new
technologies or to introduce new services capable of competing with
future technologies or service offerings; and
. the price of the products and services we provide may decline as rapidly
as, or more rapidly than, the cost of any competitive alternatives.
To the extent we determine that new technologies and equipment are required
to remain competitive, the development, acquisition or licensing, and
implementation of those technologies and equipment are likely to continue to
require significant expenditures by us. We may not have sufficient funds for
this purpose, and even if funds are available, investments in new technologies
may not result in commercially viable products. If we do not develop and
introduce new products and services and achieve market acceptance in a timely
manner, demand for our products and services will drop and our business will
suffer.
We may require additional financing to sustain our operations and execute our
business strategy.
We currently believe that the net proceeds from this offering, together with
our current cash and cash equivalents, will be sufficient to fund our currently
anticipated working capital
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and capital expenditure requirements for at least the next twelve months,
although it is possible that we may require additional financing within the
next twelve months if our capital expenditures or other cash needs exceed our
expectations. We expect that our operating expenses, particularly research and
development and sales and marketing expenses, and our capital expenditures will
increase significantly in order to execute our business strategy. We also
anticipate that our operating expenses will increase significantly as a result
of our acquisition of ISDCorp. We anticipate that these operating expenses and
capital expenditures will constitute a material use of our cash resources. In
addition, following the next twelve months, we may need to obtain substantial
additional financing in order to sustain our operations and execute our
business strategy. Moreover, we also may need to raise substantial additional
funds to support more rapid expansion, respond to competitive pressures,
acquire or invest in other businesses or technologies or respond to
unanticipated requirements. We cannot assure you that additional financing will
be available to us in amounts or on terms acceptable to us, or at all. If
sufficient financing is not available or is not available on acceptable terms,
our ability to sustain our operations, execute our business strategy, take
advantage of acquisition opportunities, develop or enhance our products or
services, or otherwise respond to competitive pressures would be significantly
impaired.
Attempts to expand by means of business combinations and strategic alliances
may not be successful and may disrupt our operations or harm our revenues.
In addition to our acquisition of ISDCorp, we may seek in the future to make
investments in or acquire other companies, products or technologies. Our
competitive position could decline if we are unable to identify and acquire
businesses or technologies that are strategic for our success in this market.
As a result of our acquisition of ISDCorp, or in the event of any future
acquisitions or investments, we will face additional financial and operational
risks, including:
. difficulty in assimilating the operations, technology and personnel of
acquired companies;
. disruption in our business because of the allocation of resources to
consummate these transactions and the diversion of management's
attention from our core business;
. difficulty in retaining key technical and managerial personnel from
acquired companies;
. assumption of net operating losses, if any, increased expenses and
liabilities of acquired businesses;
. our relationships with existing employees, customers and business
partners may be weakened or terminated as a result of these
transactions; and
. we may experience one-time in-process research and development charges
and ongoing expenses associated with amortization of goodwill and other
purchased intangible assets.
Expanding our services business will be costly and may not result in sufficient
new revenues to offset these costs.
We believe that the expansion of our business and the acceptance of Linux are
dependent upon the availability of high quality engineering and consulting
services to assist customers in designing and implementing Linux-based systems.
If we are unable to successfully provide these services, our revenues will not
grow and we may lose customers. We have recently expanded our strategic focus
to place additional emphasis on providing engineering and
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consulting services and one of the primary purposes of our acquisition of
ISDCorp is to enhance our ability to provide these services. This expansion has
required, and will continue to require, significant additional expenses and
resources. We may not generate sufficient services revenues to offset the
expenses of providing these services. We may not attract or retain a sufficient
number of the highly qualified service personnel we need to support the
expansion of our engineering and consulting services organization. In addition,
this expansion will place further strain on our management and operational
resources.
If we are unable to implement appropriate systems, procedures and controls to
manage our growth, we may not be able to successfully offer our services and
grow our business.
Our ability to successfully offer our services and grow our business requires
an effective planning and management process. Since we began operations, we
have significantly increased the size of our operations and our recent
acquisition of ISDCorp has further significantly increased the size of our
company. This growth has placed, and we expect that any future growth we
experience will continue to place, a significant strain on our management,
systems and resources. Our key personnel have limited experience managing this
type of growth. In order to manage growth effectively, we will need to continue
to implement or update operational and financial systems, procedures and
controls.
Our service revenues are difficult to predict because they will in part be
generated on a project-by-project basis.
We have in the past and expect to continue to derive revenues from our
consulting and engineering services primarily from fees generated on a project-
by-project basis. These projects will likely vary in size and scope. Therefore,
a customer that accounts for a significant portion of our service revenues in a
given period may not generate a similar amount of revenues, if any, in
subsequent periods. In addition, after we complete a project, we have no
assurance that a customer will retain our services in the future. Furthermore,
our existing clients can generally reduce the scope of our engagement or cancel
their use of our services without penalty and with little or no notice. If
clients terminate existing engagements or if we are unable to enter into new
engagements, our revenues could be substantially lower than amounts anticipated
by us, financial analysts and investors, which could cause the price of our
stock to drop rapidly and significantly.
If we do not achieve a sufficient number of design wins for our products, or if
we fail to generate revenues from design wins, our business will be seriously
harmed.
We rely on design wins with manufacturers to predict and generate revenues
for our products. However, the development of our LynxOS and BlueCat Linux
products and related products and product enhancements is a complex and
uncertain process. Achieving a design win with a customer does not mean that
the customer will order large volumes of our products. A design win is not a
binding commitment by a customer to purchase our products. Rather, it is a
decision by a customer to use our products in the design process of that
customer's products. In addition, our customers can choose at any time to
discontinue using our products in their designs or product development efforts.
If customers choose to incorporate our products, we may still not realize
significant revenues from that customer if that customer's products are not
commercially successful. Any failures on our part to obtain additional design
wins, or any failure by our customers to either incorporate our products or to
successfully market their own products, could harm our business, financial
condition and results of operations.
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We will face additional operational and financial risks related to our
international operations, any one of which could harm our international market
share and revenues.
In the fiscal year ended April 30, 2000 approximately 32% of our revenues
were generated from customers located outside North America, principally in
Europe. We face a number of challenges associated with maintaining and
expanding our business overseas. For example:
. we may have difficulty managing and administering a globally-dispersed
business;
. fluctuations in exchange rates may negatively affect our operating
results;
. we may encounter greater difficulty in collecting accounts receivable
resulting in longer collection periods;
. we may not be able to repatriate the earnings of our foreign operations;
. changes in import/export duties and quotas could affect the competitive
pricing of our products and services and reduce our market share in some
countries; and
. economic or political instability in some international markets could
result in the forfeiture of some foreign assets and the loss of sums
spent developing and marketing those assets.
Our products may contain defects that could be costly to correct, delay market
acceptance of our products and expose us to litigation.
Despite testing by us and our customers, errors may be found in our products.
Portions of the software code in our products are developed by independent
parties over whom we exercise no supervision or control. Because our operating
systems are incorporated into microprocessors which are in turn incorporated
into other products, it is difficult to correct defects and to provide software
upgrades for our embedded operating systems. If errors are discovered, we may
have to make significant expenditures to eliminate them and may not be able to
correct them in a timely manner, if at all. Errors and failures in our products
could result in a loss of, or delay in, market acceptance of our products and
could damage our reputation and our ability to convince commercial users of the
benefits of our products.
Failures in our products could also cause failures in our customers' systems,
including in critical business systems. If such failures occur, our customers
may assert warranty and other claims for substantial damages against us.
Although our warranties typically contain provisions designed to limit our
exposure to potential product liability claims, it is possible that these
provisions may not be effective or enforceable. Our insurance policies may not
provide coverage sufficient to materially limit our exposure to this type of
claim. These claims, even if unsuccessful, could be costly and time consuming
to defend.
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Risks Related To Our Industry
The Linux-based and the real-time embedded operating systems industries are
intensely competitive and we may be unable to compete effectively with other
providers of Linux-based or real-time embedded operating systems.
The market for embedded operating systems and related products and services
is becoming increasingly competitive. We face competition from:
. the internal research and development departments of our current and
potential customers who develop their own embedded operating systems;
. companies that have developed proprietary embedded real-time operating
systems, such as Wind River Systems, QNX Software Systems and Microsoft;
. companies that have developed Linux-based embedded operating systems,
such as Lineo and MontaVista;
. companies that have developed proprietary general purpose desktop
operating systems that can be used in some embedded systems, such as
Microsoft and Sun Microsystems; and
. companies that have developed Linux-based general purpose desktop
operating systems that can be used in some embedded systems, such as Red
Hat, Caldera, SuSE and Turbolinux.
Failure to compete successfully in any of these areas against current or
potential competitors could harm our business.
The commercial companies with whom we compete may be able to undertake more
extensive promotional activities, adopt more aggressive pricing policies, and
offer more attractive terms to their customers than we can. In addition, most
of these companies have greater resources, stronger brand awareness and larger
customer bases than we do and have already achieved or could quickly achieve
significant market share. This may result in price fluctuations and lower
product prices. Furthermore, because Linux-based operating systems can be
downloaded from the Internet for free or purchased at a nominal cost and
modified and re-sold with few restrictions, traditional barriers to entry are
minimal. Accordingly, new competitors or alliances among existing competitors
may emerge and rapidly acquire significant market share. There is also the
possibility that traditional embedded real-time operating systems competitors
will introduce Linux-based embedded products. In addition, to the extent that
competing companies which have developed proprietary operating systems make
their source code available to the public, software developers will be able to
customize these systems and solutions more quickly and easily than if these
technologies remain proprietary, which could greatly increase the competitive
threat posed by these proprietary operating systems.
If the Linux embedded operating system does not continue to gain market
acceptance or if Linux developers do not continue to enhance the source code of
the Linux operating system, we will not be able to grow and our business could
fail.
Our strategy is to focus our sales, marketing, research and development
efforts on Linux-based and Linux-compatible embedded operating systems and the
provision of services and support for these systems. The use of Linux as a
general operating system has only recently gained market acceptance. The use of
Linux in embedded systems is even more recent. Our success depends on the
continued and increased rate of adoption of Linux in the embedded operating
systems market. If this does not occur, our business will suffer.
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Our ability to introduce new products or product enhancements would be
impaired if Linus Torvalds, the original developer of Linux, and other third-
party developers fail to further develop the Linux kernel, which is the core of
the Linux operating system, or if the development community does not continue
to improve the functionality of the Linux operating system or introduce new
open source software or software enhancements. Mr. Torvalds and other members
of the open source community are not our employees and we have no ability to
control or direct their development activities.
Negative reaction within the open source community to our business strategy
could harm our reputation and business.
By developing products based on proprietary technology that is not freely
available we may run counter to the perception of Linux as an open source model
and alienate the Linux community. Because we rely on our relationships with the
open source community, this type of negative reaction, particularly if widely
shared by our customers, developers or the rest of the open source community,
could harm our reputation, impair our ability to capitalize on the development
efforts of the open source community, diminish the LynuxWorks brand and harm
our business.
If we are prohibited from using the Linux trademark, our business could be
adversely affected.
Like many other companies, we market Linux-based products, systems and
services. We use the term "Linux" in our advertising and marketing materials,
in our product documentation and for other commercial uses. We do not own the
trademark to "Linux." We believe that the continued use of the "Linux"
trademark is important to our business. If the "Linux" trademark is invalidated
through a legal action, or if we are no longer permitted to use it, our
business will likely suffer. In addition, we cannot control the use of this
trademark, and use by others may lead to confusion about the source, quality,
reputation and dependability of Linux, which may harm our business.
We could be prevented from selling or developing our products if the GNU
General Public License and similar licenses are not enforceable, or are not
effectively enforced, or if we are deemed to be in violation of these licenses.
The Linux kernel and the Linux operating system incorporated into our
products have been developed and licensed under the GNU General Public License
and similar open source licenses. These licenses require that any software
program licensed under them may be copied, used, modified and distributed
freely, so long as all modifications are also freely made available and
licensed under the same conditions. We know of no instance in which a party has
challenged the validity of these licenses or in which these licenses have been
interpreted in a legal proceeding. To date, all compliance with these licenses
has been voluntary. It is possible that a court would hold one or more of these
licenses to be unenforceable in the event that someone were to file a claim
asserting proprietary rights in a program developed and distributed under them.
Any ruling by a court that these licenses are not enforceable, or that Linux-
based operating systems, or significant portions of them, may not be copied,
modified or distributed freely, would have the effect of preventing us from
selling or developing our Linux products and services, unless we are able to
negotiate a license for the use of the software or replace the affected
portions. Any licenses could be expensive, which could impair our ability to
price our offerings competitively.
Moreover, it is possible that a party may argue that the GNU General Public
License places restrictions on the types of fees that can be charged in
connection with the distribution
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and licensing of products, such as LynxOS and BlueCat Linux, that incorporate
both Linux-based and proprietary elements. Because some of our products include
proprietary technologies in addition to open source technology, we charge our
customers a fee to license these products from us. These fees could be deemed
to be a violation of the GNU General Public License, which could result in the
termination of our right to use Linux software. Without this license, we could
be subject to claims for infringement of copyrights and other intellectual
property rights covered by the GNU General Public License, which could subject
us to damages and impact our ability to market our existing and future Linux-
based products.
Risks Related To This Offering
Our stock price may be extremely volatile.
Our common stock has never been sold in a public market and an active trading
market for our common stock may not develop or be sustained upon the completion
of this offering. We are negotiating the initial public offering price of the
common stock with the underwriters. However, you should not consider the
initial public offering as being indicative of the prices that will prevail in
the public market after the offering, and the market price of the common stock
could fall below the initial public offering price. You should read the
"Underwriting" section for a discussion of the factors to be considered in
determining the initial public offering price.
In addition, the market price of our common stock could fluctuate widely in
response to the following factors:
. variations in operating results or failure to meet stock market
analysts' projections;
. announcements of technological innovations, new products or new services
by us or by our competitors or customers;
. changes in financial estimates or recommendations by stock market
analysts regarding us or our competitors;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel;
. future equity or debt offerings by us or our announcements of these
offerings; and
. general market and economic conditions.
In addition, in recent years, the stock market in general, and the Nasdaq
National Market and the securities of technology companies in particular, have
experienced extreme price and volume fluctuations. These fluctuations have
often been unrelated or disproportionate to the operating performance of
individual companies. These broad market fluctuations may materially adversely
affect our stock price, regardless of our operating results.
We may invest or spend the proceeds of this offering in ways with which you may
not agree and in ways that may not yield a return.
We will retain broad discretion over the use of proceeds from this offering.
Stockholders may not deem the actual uses desirable, and our use of the
proceeds may not yield a significant return or any return at all. We intend to
use the net proceeds from this offering for general corporate purposes,
including working capital and capital expenditures. A portion of the proceeds
may also be used to acquire or invest in businesses or products or to obtain
the right to use technologies, although we have no current commitments or
agreements for any of these transactions, other than licensing arrangements we
expect to enter into in the ordinary
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course of business. Because of the number and variability of factors that will
determine our use of the net proceeds from this offering, we cannot assure you
that these uses will not vary substantially from our currently planned uses.
Some of our existing stockholders can exert control over us, and they may not
make decisions that reflect the interests of all stockholders.
After this offering, our officers, directors and our current 5% or greater
stockholders will together control approximately % of our outstanding
common stock. This includes Motorola, who will control % of our outstanding
common stock, Inder M. Singh, who will control % of our outstanding common
stock, and Reza Soliman-Noori, who will control % of our outstanding common
stock. As a result, these stockholders, if they act together, will be able to
exert a significant degree of influence over our management and affairs and
will control matters requiring stockholder approval, including the election of
all of our directors and approval of significant corporate transactions. This
concentration of ownership may also delay or prevent a change in control of
LynuxWorks and might affect the market price of our common stock, even when a
change may be in the best interests of all stockholders. In addition, the
interests of these stockholders may not always coincide with our interests or
the interests of other stockholders. In addition, we have entered into voting
and other agreements with Motorola, increasing Motorola's influence with
respect to the election of directors and limiting our ability to enter into
certain exclusive licensing and strategic transactions with third parties. See
"Certain Transactions--Agreements with Motorola."
Our charter and bylaws and Delaware law contain provisions that may delay or
prevent a change of control.
Provisions of our charter and bylaws may have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of us. These provisions could limit the price
that investors might be willing to pay for shares of our common stock. These
provisions include:
. division of the board of directors into three separate classes serving
staggered three-year terms;
. elimination of cumulative voting in the election of directors;
. prohibitions on our stockholders from acting by written consent and
calling special meetings;
. procedures for advance notification of stockholder nominations and
proposals; and
. the ability of the board of directors to alter our bylaws without
stockholder approval.
In addition, upon completion of this offering, our board of directors will
have the authority to issue up to ten million shares of preferred stock and to
determine the rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The issuance of preferred stock, while providing flexibility in
connection with possible financings or acquisitions or other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire a majority of our outstanding voting stock or otherwise take control
of our company.
We are subject to Section 203 of the Delaware General Corporation Law that,
subject to exceptions, prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three
years following the date that this stockholder became an interested
stockholder. The preceding provisions of our charter and bylaws, as well
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as Section 203 of the Delaware General Corporation Law, could discourage
potential acquisition proposals, delay or prevent a change of control and
prevent changes in our management.
Future sales of our common stock may depress our stock price.
Upon completion of this offering and based on the shares outstanding as of
2001, we will have shares of common stock outstanding. All the
shares sold in this offering can be freely traded unless they are held by our
affiliates. Substantially all of the remaining 32,181,769 shares of common
stock that will be outstanding immediately after this offering are subject to
lock-up agreements that prohibit the sale of the shares for 180 days after the
date of this prospectus. Immediately after expiration of the 180 day lock-up
period, 30,758,349 of these shares will become eligible for public sale subject
to the limitations and requirements of Rule 144. The remaining shares will
become eligible for public sale at various times thereafter upon the expiration
of applicable holding periods. In addition, all shares of our common stock
issuable upon the exercise of outstanding options are subject to a 180-day
lock-up period. After the expiration of the 180-day lock-up, 3,927,962 shares
subject to vested options will be available for immediate sale assuming those
options are exercised. Sales of a substantial number of shares of common stock
in the public market, or the perception that those sales may occur, could cause
the market price of our common stock to decline. See "Shares Eligible for
Future Sale" for a discussion of potential future sales of our common stock.
We do not intend to pay dividends on our common stock.
We currently intend to retain future earnings, if any, for funding our
business and, therefore, do not anticipate paying any dividends in the
foreseeable future.
Investors in this offering will suffer immediate and substantial dilution.
We expect the initial public offering price per share of common stock offered
by this prospectus to be substantially higher than the pro forma net tangible
book value per share of our common stock. Our pro forma net tangible book value
per share is computed by assuming that the conversion of all outstanding shares
of preferred stock into shares of common stock, the exercise of warrants to
purchase 373,210 shares of our common stock at an exercise price of $0.50 per
share and our acquisition of ISDCorp had all occurred as of July 31, 2000.
Based on our pro forma net tangible book value as of July 31, 2000, the net
tangible book value of a share of common stock purchased at an assumed initial
public offering price of $ per share will be only $ .
Additional dilution may be incurred if holders of options or warrants to
purchase our common stock, whether currently outstanding or subsequently
granted, exercise their options or warrants.
If we seek additional equity financing in the future, stockholders may
experience additional dilution.
We may be required, or could elect, to seek additional equity financing in
the future, particularly if we elect to acquire other businesses, products or
technologies, or if our net losses are greater than we expect. If we issue new
equity securities, stockholders may experience dilution and the holders of new
equity securities may have rights, preferences or privileges senior to those of
existing holders of common stock.
20
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
or other performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expect,"
"forecasts," "anticipate," "intend," "plan," "believe," "estimate,"
"potential," or "continue," the negative of these terms or other comparable
terminology. These statements are only predictions and you should not rely on
them. Actual events or results may differ materially from any forward-looking
statement. In evaluating these statements, you should specifically consider the
various factors discussed in this prospectus, including the risks outlined
under "Risk Factors." We undertake no obligation to update publicly any
forward-looking statements for any reason after the date of this prospectus to
conform these statements to actual results or to changes in our expectations or
otherwise.
In addition, this prospectus contains forecasts and estimates regarding the
embedded systems and Linux markets and related matters. These forecasts and
estimates have been derived from studies published by market research firms. We
have not independently verified this information. These forecasts and estimates
are subject to inherent uncertainties and we cannot assure you that they are
accurate.
21
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of
common stock we are offering will be approximately $ , assuming an
initial public offering price of $ per share and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses. If the underwriters over-allotment option is exercised in full, we
estimate that our net proceeds will be approximately $ million.
We intend to use the net proceeds from this offering for general corporate
purposes, including working capital and capital expenditures. A portion of the
proceeds may also be used to acquire or invest in other businesses or products
or to obtain the right to use technologies, although we have no current
commitments or agreements for any of these transactions, other than licensing
arrangements we expect to enter into in the ordinary course of business.
Pending use of the net proceeds for the above purposes, we intend to invest
these funds in short-term investments.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We
currently anticipate that we will retain all of our future earnings, if any,
for use in the expansion and operation of our business and do not anticipate
paying any cash dividends in the foreseeable future. Any determination to pay
dividends in the future will be at the discretion of our board of directors and
will depend upon our financial condition and operating results and any
contractual and legal restrictions to which we may be subject.
22
<PAGE>
CAPITALIZATION
The following table shows as of July 31, 2000:
. our actual capitalization;
. our capitalization on a pro forma basis assuming:
. the completion of our acquisition of ISDCorp as if the acquisition
was completed as of July 31, 2000;
. the conversion of all outstanding shares of our preferred stock into
20,176,461 shares of common stock as if that conversion occurred at
July 31, 2000;
. the exercise of warrants to purchase 373,210 shares of our common
stock at an exercise price of $0.50 per share which took place in
August 2000 as if that exercise occurred at July 31, 2000;
. our capitalization on a pro forma as adjusted basis to reflect the pro
forma adjustments described above and the receipt of the estimated net
proceeds from the sale of the common stock offered by us at an assumed
initial public offering price of $ per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses.
The following table does not include:
. 7,150,668 shares subject to outstanding options under our prior stock
option plans with a weighted average exercise price of $1.70 per share;
. 981,757 shares of our common stock subject to outstanding options under
ISDCorp's stock option plans with a weighted average exercise price of
$2.30 per share;
. 1,130,666 shares available for future option grants under our 1997 Stock
Option Plan plus any shares that may be returned to our 1988 and 1992
stock option plans;
. 4,000,000 shares plus annual increases that will be reserved for
issuance under our 2000 Stock Option Plan upon completion of this
offering; and
. 1,500,000 shares plus annual increases that will be reserved for
issuance under our 2000 Employee Stock Purchase Plan upon completion of
this offering.
This information should be read in conjunction with the historical and pro
forma financial statements and related notes included elsewhere in this
prospectus. The pro forma data reflecting the acquisition of ISDCorp is subject
to a number of estimates, assumptions and uncertainties and is not necessarily
indicative of our capitalization that would have resulted had the acquisition
been completed on the date referred to above.
23
<PAGE>
<TABLE>
<CAPTION>
As of July 31, 2000
------------------------------
Pro Forma
As
Actual Pro Forma Adjusted
-------- --------- ---------
(in thousands, unaudited)
<S> <C> <C> <C>
Long-term obligation, less current portion....... $ 21 $ 21 $
======== ======== ====
Mandatorily redeemable convertible preferred
stock, $0.001 par value; 22,000,000 shares
authorized, 20,176,461 shares issued and
outstanding actual and no shares issued and
outstanding pro forma; 10,000,000 shares
authorized, no shares issued and outstanding pro
forma as adjusted............................... 55,101 -- --
-------- -------- ----
Stockholders' equity (deficit):
Common stock, $0.001 par value; 48,000,000
shares authorized, 6,229,514 shares issued and
outstanding actual, 31,801,961 shares issued
and outstanding pro forma; 250,000,000 shares
authorized, shares issued and outstanding
pro forma as adjusted.......................... 6 31
Additional paid-in capital...................... 5,646 97,185
Deferred stock-based compensation............... (6,451) (12,590)
Notes receivable from stockholders.............. (705) (705)
Accumulated deficit............................. (22,458) (23,068)
-------- -------- ----
Total stockholders' equity (deficit)........... (23,962) 60,853
-------- -------- ----
Total capitalization.......................... $ 31,139 $ 60,853 $
======== ======== ====
</TABLE>
24
<PAGE>
DILUTION
If you acquire our common stock at the initial public offering price, your
interest will be diluted to the extent of the difference between the public
offering price per share of our common stock and the pro forma as adjusted net
tangible book value per share of our common stock after this offering.
Our pro forma net tangible book value as of July 31, 2000 was approximately
$31.3 million or $0.98 per share of common stock. Pro forma net tangible book
value per share represents the amount of our total pro forma tangible assets
reduced by the amount of our total pro forma liabilities divided by the pro
forma number of outstanding shares of common stock. This pro forma data is
computed by assuming that the conversion of all outstanding shares of preferred
stock into shares of common stock, the exercise of warrants to purchase 373,210
shares of our common stock at an exercise price of $0.50 per share and our
acquisition of ISDCorp had all occurred as of July 31, 2000.
After giving effect to our sale of the shares of common stock offered by
this prospectus, based upon an assumed initial public offering price of $ per
share and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us, our pro forma net tangible book
value at July 31, 2000 calculated as described above would have been $ , or
$ per share. This represents an immediate increase in pro forma net tangible
book value of $ per share to existing stockholders and an immediate dilution
to new investors of $ per share. Dilution is determined by subtracting pro
forma net tangible book value per share after the offering from the assumed
initial public offering price per share. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $
Pro forma net tangible book value per share before the offering
as of July 31, 2000........................................... $
Increase in pro forma net tangible book value per share
attributable to new investors.................................
----
Pro forma net tangible book value per share after this offering..
----
Dilution per share to new investors.............................. $
====
</TABLE>
The following table sets forth, on a pro forma basis as of July 31, 2000
calculated as described above, the difference between the number of shares of
common stock purchased from us, the total consideration paid, and the average
price per share paid by existing stockholders and by investors purchasing
shares in this offering (based upon an assumed initial public offering price of
$ per share before deducting estimated underwriting discounts and commissions
and estimated offering expenses).
<TABLE>
<CAPTION>
Shares Total
Purchased Consideration
-------------- -------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... % $ % $
New investors....................... $
---- ----- ----- -----
Total............................. 100.0% $ 100.0% $
==== ===== ===== =====
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to , or % of the total
shares of common stock outstanding immediately after this offering.
25
<PAGE>
In the event that we issue additional shares of common stock in the future,
purchasers of common stock in this offering may experience further dilution. As
of July 31, 2000, there were options outstanding to purchase 5,830,603 shares
of common stock at a weighted average exercise price of approximately $1.06 per
share, and 830,546 shares of common stock available for future option grants
under our stock option plans. In addition, we issued options to purchase
981,757 shares of our common stock in connection with the ISDCorp acquisition
at a weighted average exercise price of approximately $2.30 per share. Upon
completion of this offering, an additional 5,500,000 shares of common stock,
plus annual increases and increases resulting from options that are or will
become available for issuance under the 1997 Stock Option Plan, will be
reserved for issuance under our 2000 Stock Option Plan and our 2000 Employee
Stock Purchase Plan. To the extent that these outstanding options are
exercised, new investors will experience further dilution and, to the extent
that new options or rights are issued under our stock plans, new investors may
experience further dilution.
Assuming that our acquisition of ISDCorp was completed as of July 31, 2000,
assuming the exercise in full of all options and warrants outstanding at July
31, 2000 and of all options issued in connection with the ISDCorp acquisition,
and further assuming the conversion of all outstanding shares of preferred
stock into shares of common stock, after giving effect to the sale of
shares of common stock at an assumed initial public offering price of $ per
share and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us, our pro forma as adjusted net
tangible book value at July 31, 2000 would be $ per share, representing an
immediate increase in net tangible book value of $ per share to our existing
stockholders, and an immediate decrease in the net tangible book value per
share of $ to the new investors.
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated selected financial data should be read in
conjunction with the historical and pro forma financial statements and related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The consolidated
statements of operations data for the years ended April 30, 1998, 1999 and 2000
and the consolidated balance sheet data as of April 30, 1999 and 2000 have been
derived from consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP, independent accountants, included elsewhere in this
prospectus. The consolidated statements of operations data for the years ended
April 30, 1996 and 1997 and the consolidated balance sheet data as of April 30,
1996, 1997 and 1998 have been derived from audited consolidated financial
statements not included in this prospectus. The consolidated statements of
operations data for the three months ended July 31, 1999 and 2000 and the
consolidated balance sheet data as of July 31, 2000 have been derived from
unaudited consolidated financial statements included elsewhere in this
prospectus. In the opinion of our management, those unaudited consolidated
financial statements reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly in all material respects our
consolidated financial position and results of operations as of and for those
interim periods. Our results of operations and financial condition as of and
for the fiscal quarter ended July 31, 2000 are not necessarily indicative of
our results of operations or financial position for any future period.
27
<PAGE>
<TABLE>
<CAPTION>
Three Months
Year Ended April 30, Ended July 31,
------------------------------------------- ----------------
1996 1997 1998 1999 2000 1999 2000
------ ------- ------- ------- -------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
Product license........ $7,070 $ 8,608 $ 7,943 $ 9,145 $ 11,541 $ 3,051 $ 3,245
Service................ 1,882 2,575 3,187 5,715 5,655 1,290 1,863
------ ------- ------- ------- -------- ------- -------
Total revenues......... 8,952 11,183 11,130 14,860 17,196 4,341 5,108
------ ------- ------- ------- -------- ------- -------
Cost of revenues:
Product license........ 739 1,038 1,249 1,305 1,221 252 367
Service................ 858 1,219 1,674 2,974 3,170 684 1,334
Amortization of
deferred stock-based
compensation related
to the service
organization ......... -- -- -- -- 113 -- 126
------ ------- ------- ------- -------- ------- -------
Total cost of
revenues.............. 1,597 2,257 2,923 4,279 4,504 936 1,827
------ ------- ------- ------- -------- ------- -------
Gross profit............ 7,355 8,926 8,207 10,581 12,692 3,405 3,281
------ ------- ------- ------- -------- ------- -------
Operating expenses:
Research and
development*.......... 2,473 3,255 3,530 4,584 7,061 1,564 1,892
Sales and marketing*... 3,461 3,975 4,646 7,624 11,422 2,293 4,703
General and
administrative*....... 1,163 1,215 1,566 1,727 2,343 563 761
Amortization of
deferred stock-based
compensation.......... -- -- -- 46 598 96 742
------ ------- ------- ------- -------- ------- -------
Total operating
expenses.............. 7,097 8,445 9,742 13,981 21,424 4,516 8,098
------ ------- ------- ------- -------- ------- -------
Operating income
(loss)................ 258 481 (1,535) (3,400) (8,732) (1,111) (4,817)
Other income (expense),
net................... (27) (28) (216) 396 370 100 491
------ ------- ------- ------- -------- ------- -------
Income (loss) before
provision for income
taxes.................. 231 453 (1,751) (3,004) (8,362) (1,011) (4,326)
Provision for income
taxes.................. 100 205 98 91 242 19 29
------ ------- ------- ------- -------- ------- -------
Net income (loss)....... $ 131 $ 248 $(1,849) $(3,095) $ (8,604) $(1,030) $(4,355)
Dividend associated with
beneficial conversion
feature of Series F
preferred stock........ -- -- -- -- (1,994) -- (1,667)
------ ------- ------- ------- -------- ------- -------
Net income (loss)
attributable to common
stockholders........... $ 131 $ 248 $(1,849) $(3,095) $(10,598) $(1,030) $(6,022)
====== ======= ======= ======= ======== ======= =======
Net income (loss)
attributable to common
stockholders per
share--basic and
diluted............... $ 0.03 $ 0.05 $ (0.38) $ (0.54) $ (1.78) $ (0.17) $ (0.97)
====== ======= ======= ======= ======== ======= =======
Shares used in computing
net income (loss)
attributable to common
stockholders per share:
Basic.................. 4,620 4,753 4,906 5,781 5,959 5,886 6,207
====== ======= ======= ======= ======== ======= =======
Diluted................ 4,799 4,998 4,906 5,781 5,959 5,886 6,207
====== ======= ======= ======= ======== ======= =======
Pro forma net loss
attributable to common
stockholders per
share--basic and
diluted** (unaudited).. $ (1.06) $ (0.34)
======== =======
Shares used in computing
pro forma net loss
attributable to common
stockholders per
share--basic and
diluted** (unaudited).. 23,845 31,334
======== =======
</TABLE>
--------
* Exclusive of amortization of deferred stock-based compensation.
** Pro forma data assumes that our acquisition of ISDCorp was completed on the
first day of the periods presented, the conversion of all outstanding shares
of our preferred stock into shares of common stock as if each share of
preferred stock was converted as of its original issue date, and the
exercise of warrants to purchase 373,210 shares of our common stock at an
exercise price of $0.50 per share as if that exercise had occurred on the
date of issuance of the warrants. The pro forma data is subject to a number
of estimates, assumptions and uncertainties and does not purport to be
indicative of the results of operations that would have resulted had the
acquisition been completed on the dates referred to above, nor does it
purport to be indicative of our future results of operations.
28
<PAGE>
<TABLE>
<CAPTION>
As of April 30,
-------------------------------------------- As of
1996 1997 1998 1999 2000 July 31, 2000
------- ------- ------- ------- -------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 305 $ 104 $ 366 $ 1,946 $ 18,519 $ 31,411
Working capital
(deficit).............. 125 (45) (409) 6,325 17,171 29,382
Total assets............ 2,715 4,101 5,244 13,463 24,587 38,319
Long term obligations,
less current portion... 104 42 1,305 7 25 21
Mandatorily redeemable
convertible preferred
stock.................. 5,204 5,204 5,204 16,514 37,520 55,101
Total stockholders'
deficit................ (4,601) (4,257) (6,004) (9,029) (18,874) (23,962)
</TABLE>
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the historical and pro forma
financial statements and notes included elsewhere in this prospectus. The
discussion in this Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve
risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. The cautionary statements made in this prospectus
should be read as being applicable to all forward-looking statements wherever
they appear in this prospectus. Our actual results could differ materially from
those discussed here. Factors that could cause or contribute to the differences
include those discussed in "Risk Factors," as well as those discussed elsewhere
in this prospectus.
Our fiscal year ends on April 30. When we refer to our revenues, expenses or
similar operating results for a year such as 1999, we mean our fiscal year
ended April 30 of that year unless we state otherwise.
Overview
We provide operating systems and related products and services designed for
the embedded systems market. Our operating systems and development tools enable
our customers to develop embedded systems based on open standards that are
compatible with Linux products.
We began operations in 1988 as Lynx Real-Time Systems, Incorporated. In May
2000, we changed our name to LynuxWorks, Incorporated to reflect the revision
of our business strategy to focus on developing embedded operating systems
based on or compatible with the open source Linux operating system. We have
financed our activities to date primarily from the proceeds of private sales of
our preferred stock and, to a lesser extent, bank borrowings and capital
leases. We market and sell our operating system products and related products
and services on a worldwide basis through our direct sales force and
distributors. We provide sales and product support for foreign customers
through wholly-owned subsidiary companies in selected countries in Europe and
through distributors in Asia.
We adopted the provisions of Statement of Position 97-2, or SOP 97-2,
effective May 1, 1998. SOP 97-2 supersedes Statement of Position 91-1, Software
Revenue Recognition, and delineates the accounting for software product and
maintenance revenues. Under SOP 97-2, we recognize product license revenue,
including prepaid run-time license fees, upon shipment if a signed contract
exists, the fee is fixed and determinable, collection of resulting receivables
is probable and product returns are reasonably estimable. Revenues from
software licenses sold through distributors are recognized under the same SOP
97-2 criteria because distributors typically only purchase products to fulfill
specific customer orders and do not hold inventory of our products. The
adoption of SOP 97-2 did not have any material impact on our results of
operations or financial position.
Service revenues are derived from software development, engineering and
consulting contracts, software maintenance and support contracts, and customer
training. We recognize revenues from software development and engineering and
consulting contracts as the services are performed or, when collection of the
fee is subject to final acceptance by the customers, on the completed contract
method. We recognize revenues from ongoing customer support and upgrades and
enhancements ratably over the period of the contract, which is typically twelve
months. Payments for maintenance and support fees are generally made in advance
and are non-refundable. Revenues from education and consulting services are
recognized as the related services are performed.
30
<PAGE>
For contracts with multiple components, such as deliverable and undeliverable
products or maintenance or other services, we allocate revenues to each
component of the contract based on vendor specific objective evidence of its
fair value and recognize revenues as described in the preceding paragraphs.
When contracts include a significant modification or customization of our
software, revenues are recognized on the completed contract method. The
completed contract method is used because the collection of the fee is subject
to final acceptance by customers. Revenue is recognized under the completed
contract method when final acceptance is obtained from the customer.
Cost of product license revenues consists primarily of royalty payments to
third parties for inclusion of their software products in our product
offerings, product media costs and fulfillment and shipment costs, as well as
amortization of capitalized software development costs. Cost of product license
revenues as a percentage of product license revenues fluctuates from period to
period depending upon the mix of software development tool products and run-
time license fees in the respective periods. Cost of service revenues consists
primarily of salaries and benefits and the associated overhead of our customer
service and support organization, including costs to recruit, develop and
retain services professionals.
Research and development expenses consist primarily of salaries and benefits
for software engineers, technical writers, quality assurance engineers and
management personnel, as well as the cost of materials used by these employees
in the development of new or enhanced product offerings. We expense
substantially all of our research and development costs as they are incurred.
Sales and marketing expenses consist primarily of salaries, commissions and
benefits and the associated overhead of our sales and marketing organization,
as well as costs associated with trade shows, advertising, promotional
activities and marketing promotional materials.
General and administrative expenses consist primarily of salaries and
benefits and related costs for accounting, administration, finance, human
resources and information systems, as well as professional fees and expenses
associated with implementing and expanding our internal information and
management reporting systems.
Deferred stock-based compensation represents the difference between the
exercise price of stock options granted and the deemed fair market value of the
underlying common stock on the date of grant. Deferred stock-based compensation
is amortized over the vesting period of the options. We recorded total deferred
stock-based compensation of $195,000 in fiscal 1999 and $2.0 million in fiscal
2000 in connection with the issuance of options to various employees, which is
being amortized over a four-year period from the dates the options were issued.
Amortization expense based on options granted through July 31, 2000 is expected
to be approximately $4.1 million in fiscal 2001, $2.0 million in fiscal 2002,
$0.9 million in fiscal 2003 and $0.3 million in fiscal 2004.
We have incurred substantial costs to develop our products, to recruit and
train personnel and to establish an administrative infrastructure. We have
incurred net losses during the last three years of our operations and had an
accumulated deficit of $22.5 million at July 31, 2000. In addition to the
effect of the acquisition of ISDCorp discussed below, we expect that our
operating expenses will increase substantially in future periods as we continue
to increase our research and development and sales and marketing expenses. We
will also incur expenses relating to the amortization of deferred stock-based
compensation, goodwill and other intangible assets.
Between March and May 2000, we sold an aggregate of 8.1 million shares of our
Series F preferred stock for an aggregate purchase price of approximately $34.9
million. As a result of
31
<PAGE>
the Series F deemed preferred stock dividend, we recorded a non-cash charge
against earnings attributable to common stockholders of $2.0 million in the
fourth quarter of fiscal 2000 and a similar non-cash charge of approximately
$1.7 million in the first quarter of fiscal 2001.
Acquisition of ISDCorp
We recently acquired ISDCorp. We effected the acquisition by issuing shares
of our common stock to ISDCorp's shareholders and by assuming ISDCorp's
obligations under its outstanding stock options. We issued a total of 5,022,776
shares of our common stock to ISDCorp shareholders and we converted outstanding
options to purchase ISDCorp's common stock into options to purchase 981,757
shares of our common stock. We will account for the acquisition using the
purchase method of accounting.
In connection with the acquisition, we agreed to repay principal of and
interest accrued on loans previously made by Mr. Reza Soliman-Noori to ISDCorp.
As of October 19, 2000, the total principal amount outstanding under these
loans was $280,000.
In connection with the acquisition, we expect to record goodwill and other
intangible assets of approximately $30.6 million, which we intend to amortize
over two to three years, as well as deferred stock-based compensation of
approximately $6.1 million, which we intend to amortize over three years. The
amortization of goodwill and other intangible assets arising from the
acquisition will increase our expenses by approximately $5.2 million in the
second half of fiscal 2001, $10.5 million in fiscal 2002, $10.0 million in
fiscal 2003 and $4.4 million in fiscal 2004. We also intend to record a non-
cash charge of approximately $610,000 for in-process research and development
expense at the date of the acquisition.
Assuming that the acquisition of ISDCorp occurred on May 1, 1999, for fiscal
2000 we would have had pro forma combined revenues of $20.8 million, pro forma
combined costs and expenses of $44.3 million, including $10.5 million of
amortization of goodwill and other intangible assets, $3.8 million of
amortization of deferred stock-based compensation, and a pro forma net loss
attributable to common stockholders of $25.4 million. Likewise, had the
acquisition occurred on May 1, 2000, for the three months ended July 31, 2000,
we would have had pro forma combined revenues of $6.3 million, pro forma
combined costs and expenses of $15.6 million, including $2.6 million of
amortization of goodwill and other intangible assets, $1.7 million of
amortization of deferred stock-based compensation and a pro forma net loss
attributable to common stockholders of $10.6 million. All of this pro forma
data is subject to a number of uncertainties and assumptions and should be read
in conjunction with the historical and pro forma financial statements and
related notes included elsewhere in this prospectus. This pro forma data does
not purport to be indicative of the results of operations that would have
occurred had the acquisition occurred as of dates referred to above, nor does
it purport to be indicative of our results of operations or financial condition
for any future period.
In ISDCorp's fiscal year 1999, which ended December 31, 1999, ISDCorp derived
approximately 2% of its revenues from work related to an operating system
developed by one of our competitors. In the six months ended June 30, 2000,
approximately 19% of ISDCorp's revenues was attributable to this work. We do
not expect these revenues to continue.
As a result of this acquisition, we increased the number of our personnel by
42 employees and seven independent contractors (as of October 19, 2000), which
will significantly increase our operating expenses.
Because of the significance of this acquisition, our historical financial
condition and results of operations should not be considered as indicative of
our future performance. Likewise, our
32
<PAGE>
financial condition and results of operations for periods after the acquisition
will not necessarily be comparable to our financial condition and results of
operations before the acquisition.
Results of Operations
The following table shows selected statements of operations data expressed as
a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
April 30, July 31,
--------------------- --------------
1998 1999 2000 1999 2000
----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Revenues:
Product license................... 71.4% 61.5% 67.1% 70.3% 63.5%
Service........................... 28.6 38.5 32.9 29.7 36.5
----- ----- ----- ----- ------
Total revenues.................. 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ------
Cost of revenues:
Product license................... 11.3 8.8 7.1 5.8 7.2
Service........................... 15.0 20.0 18.4 15.8 26.1
Amortization of deferred stock-
based compensation related to the
service organization ............ -- -- 0.7 -- 2.5
----- ----- ----- ----- ------
Total cost of revenues.......... 26.3 28.8 26.2 21.6 35.8
----- ----- ----- ----- ------
Gross profit....................... 73.7 71.2 73.8 78.4 64.2
----- ----- ----- ----- ------
Operating expenses:
Research and development*......... 31.7 30.9 41.1 36.0 37.0
Sales and marketing*.............. 41.7 51.3 66.4 52.8 92.1
General and administrative*....... 14.1 11.6 13.6 13.0 14.9
Amortization of deferred stock-
based compensation............... -- 0.3 3.5 2.2 14.5
----- ----- ----- ----- ------
Total operating expenses........ 87.5 94.1 124.6 104.0 158.5
----- ----- ----- ----- ------
Operating loss..................... (13.8) (22.9) (50.8) (25.6) (94.3)
Other income (expense), net........ (1.9) 2.7 2.2 2.3 9.6
----- ----- ----- ----- ------
Loss before provision for income
taxes............................. (15.7) (20.2) (48.6) (23.3) (84.7)
Provision for income taxes......... 0.9 0.6 1.4 0.4 0.6
----- ----- ----- ----- ------
Net loss........................... (16.6) (20.8) (50.0) (23.7) (85.3)
Dividend associated with beneficial
conversion feature of Series F
preferred stock................... -- -- (11.6) -- (32.6)
----- ----- ----- ----- ------
Net loss attributable to common
stockholders...................... (16.6)% (20.8)% (61.6)% (23.7)% (117.9)%
===== ===== ===== ===== ======
</TABLE>
--------
* Exclusive of amortization of deferred stock-based compensation.
33
<PAGE>
Three Months Ended July 31, 1999 and 2000
Revenues
Revenues increased approximately 17.7% from $4.3 million in the first quarter
of fiscal 2000 to $5.1 million in the first quarter of fiscal 2001, an increase
of $767,000. The increase in revenues was due to increases in product license
and service revenues. Product license revenues accounted for approximately
70.3% of total revenues in the first quarter of fiscal 2000 and approximately
63.5% in the same quarter of fiscal 2001, with service revenues accounting for
the balance of total revenues in each period. For the first quarter of fiscal
2000, 12.8% of total revenues was attributable to Xerox and 12.5% was
attributable to Rockwell Collins. For the first quarter of fiscal 2001, 10.7%
of total revenues was attributable to Xerox and 12.0% was attributable to
Motorola.
Revenues from international sales accounted for 27.3% of total revenues for
the first quarter of fiscal 2000 and 29.6% of total revenues for the same
quarter of fiscal 2001. All of our revenues were denominated in U.S. dollars.
We expect international sales to continue to represent a significant portion of
revenues, although the percentage may fluctuate from period to period.
Product license revenues increased approximately 6.4% from $3.1 million in
the first quarter of fiscal 2000 to $3.2 million in the same quarter of fiscal
2001, an increase of $194,000. The increase in product license revenues in the
first quarter of fiscal 2001 resulted from higher sales of LynxOS development
licenses and related tools, partially offset by a reduction in run-time license
fee revenues.
Service revenues increased approximately 44.4% from $1.3 million in the first
quarter of fiscal 2000 to $1.9 million in the same quarter of fiscal 2001, an
increase of $573,000. This increase was attributable to higher consulting,
support and training revenues.
Cost of Revenues
Cost of revenues increased approximately 95.2% from $936,000 in the first
quarter of fiscal 2000 to $1.8 million in the same quarter of fiscal 2001, an
increase of $891,000. Cost of product license revenues accounted for
approximately 26.9% of total cost of revenues in the first quarter of fiscal
2000 and approximately 20.1% of total cost of revenues in the first quarter of
fiscal 2001. Cost of service revenues, including amortization of deferred
stock-based compensation related to the service organization, accounted for the
balance of total cost of revenues in each period. As a percentage of revenues,
cost of revenues increased from 21.6% for the first quarter of fiscal 2000 to
35.8% for the same quarter of fiscal 2001.
Cost of product license revenues increased approximately 45.6% from $252,000
in the first quarter of fiscal 2000 to $367,000 in the same quarter of fiscal
2001, an increase of $115,000. The increase was related to costs incurred in
new product releases and higher royalties paid to third parties as a result of
increased sales by our customers of products containing our embedded operating
systems. Cost of product license revenues as a percentage of product license
revenues increased from 8.3% for the first quarter of fiscal 2000 to 11.3% for
the same quarter of fiscal 2001.
Cost of service revenues, excluding amortization of deferred stock-based
compensation, increased approximately 95.0% from $684,000 in the first quarter
of fiscal 2000 to $1.3 million in the same quarter of fiscal 2001, an increase
of $650,000. Cost of service revenues in the first quarter of fiscal 2001
reflected an increase in support, consulting and training costs. This increase
resulted from higher service revenues and increased investment in our
consulting,
34
<PAGE>
training and technical support infrastructure. During the first quarter of
fiscal 2001, total cost of revenues also included $126,000 in amortization of
deferred stock-based compensation related to our service organization, while
amortization of stock-based compensation related to our service organization in
the first quarter of fiscal 2000 was zero. Cost of service revenues, excluding
amortization of deferred stock-based compensation, as a percentage of service
revenues was 53.0% for the first quarter of fiscal 2000 and 71.6% for the same
quarter of fiscal 2001.
Gross Profit
Gross profit remained relatively flat at $3.4 million and $3.3 million in the
first quarters of fiscal 2000 and fiscal 2001, respectively. Gross profit as a
percentage of total revenues decreased from 78.4% in the first quarter fiscal
2000 to 64.2% in the same quarter of fiscal 2001. The decrease was due to
increased expenses as we continued to build our consulting, training and
technical support infrastructure.
Operating Expenses
Research and development. Research and development expenses increased
approximately 21.0% from $1.6 million in the first quarter of fiscal 2000 to
$1.9 million in the same quarter of fiscal 2001, an increase of $328,000. The
increase in research and development expenses was due to higher costs resulting
from increased salaries and additional personnel and related costs to support
our growth. As a percentage of total revenues, research and development
expenses increased from 36.0% in the first quarter of fiscal 2000 to 37.0% in
the same quarter of fiscal 2001.
Sales and marketing. Sales and marketing expenses increased approximately
105.1% from $2.3 million in the first quarter of fiscal 2000 to $4.7 million in
the same quarter of fiscal 2001, an increase of $2.4 million. The increase in
sales and marketing expenses was primarily due to increases in sales and
marketing salaries and related costs of approximately $1.2 million. Advertising
and promotional expenses associated with marketing our products added expenses
of approximately $900,000. As a percentage of total revenues, sales and
marketing expenses increased from 52.8% in the first quarter of fiscal 2000 to
92.1% in the same quarter of fiscal 2001.
General and administrative. General and administrative expenses increased
approximately 35.2% from $563,000 in the first quarter of fiscal 2000 to
$761,000 in the same quarter of fiscal 2001, an increase of $198,000. The
increase was due primarily to additional personnel and expenses associated with
improving our corporate infrastructure. As a percentage of total revenues,
general and administrative expenses increased from 13.0% in the first quarter
of fiscal 2000 to 14.9% in the same quarter of fiscal 2001.
Amortization of deferred stock-based compensation. We amortized $96,000 of
deferred stock-based compensation attributable to operating expenses during the
first quarter of fiscal 2000 and $742,000 of deferred stock-based compensation
attributable to operating expenses during the first quarter of fiscal 2001.
Other Income (Expense), Net
Other income (expense), net for the first quarter of fiscal 2000 and 2001
consisted primarily of interest income from our investments offset by interest
expense on borrowings. We had interest income of $102,000 for the first quarter
of fiscal 2000 and $492,000 for the same quarter of fiscal 2001. The increase
in interest income was primarily due to an increase in cash invested in short
term investments.
35
<PAGE>
Provision for Income Taxes
We recorded a provision for income taxes of $19,000 for the first quarter of
fiscal 2000 and $29,000 for the first quarter of fiscal 2001.
Years Ended April 30, 1999 and 2000
Revenues
Revenues increased approximately 15.7% from $14.9 million in fiscal 1999 to
$17.2 million in fiscal 2000, an increase of $2.3 million. The increase in
revenues was due to an increase in product license revenues. Product license
revenues accounted for approximately 61.5% of the total revenues in fiscal 1999
and approximately 67.1% in fiscal 2000, with service revenues accounting for
the balance of total revenues in each period. For fiscal 1999, 16.7% of total
revenues was attributable to Hewlett-Packard and 13.3% was attributable to
Xerox. No customer accounted for more than 10% of our total revenues in fiscal
2000.
Revenues from international sales accounted for 28.5% of total revenues for
fiscal 1999 and 32.3% of total revenues for fiscal 2000. All of our revenues
were denominated in U.S. dollars.
Product license revenues increased approximately 26.2% from $9.1 million in
fiscal 1999 to $11.5 million in fiscal 2000, an increase of $2.4 million. The
increase in product license revenues was primarily due to an increase in run-
time license fee revenues resulting from increased sales by our customers of
products containing our embedded operating systems. The increase was partially
offset by a reduction in sales of our development licenses and related tools.
We believe that this decrease primarily occurred because our customers
postponed purchases of our products in anticipation of the introduction of
version 3.1 of our LynxOS product and related tools, which were released at the
end of fiscal 2000.
Service revenues remained relatively flat at approximately $5.7 million in
fiscal 1999 and 2000. For fiscal 2000, support, consulting and training
revenues increased by approximately $1.1 million, which was offset by a $1.4
million decrease in non-recurring engineering revenues. Non-recurring
engineering revenues may fluctuate significantly from period to period.
Cost of Revenues
Cost of revenues increased approximately 5.3% from $4.3 million in fiscal
1999 to $4.5 million in fiscal 2000, an increase of $225,000. Cost of product
license revenues accounted for approximately 30.5% of total cost of revenues in
fiscal 1999 and approximately 27.1% of total cost of revenues in fiscal 2000.
Cost of service revenues, including amortization of deferred stock-based
compensation related to the service organization, accounted for the balance of
total cost of revenues in each period. As a percentage of revenues, total cost
of revenues decreased from 28.8% for fiscal 1999 to 26.2% for fiscal 2000.
Cost of product license revenues decreased approximately 6.4% from $1.3
million in fiscal 1999 to $1.2 million in fiscal 2000, a decrease of $84,000.
The decrease primarily related to a decrease in amortization of capitalized
software of $200,000. The decrease was partially offset by higher royalties
paid to third parties as a result of increased sales by our customers of
products containing our embedded operating systems. Cost of product license
revenues as a percentage of product revenues decreased from 14.3% for fiscal
1999 to 10.7% for fiscal 2000. The decrease as a percentage of product revenues
was primarily due to factors described above and the increase in product
revenues in fiscal 2000.
36
<PAGE>
Cost of service revenues, excluding amortization of deferred stock-based
compensation, increased approximately 6.6% from $3.0 million in fiscal 1999 to
$3.2 million in fiscal 2000, an increase of $196,000. Cost of service revenues
in fiscal 2000 reflected an increase in support, consulting and training costs
of approximately $575,000, partially offset by a decrease of approximately
$375,000 of non-recurring engineering costs. During fiscal 2000, total cost of
revenues also included $113,000 in amortization of deferred stock-based
compensation related to our service organization. Cost of service revenues as a
percentage of service revenues, excluding amortization of deferred stock-based
compensation, was 52.0% for fiscal 1999 and 56.1% for fiscal 2000.
Gross Profit
Gross profit increased approximately 20.0% from $10.6 million in fiscal 1999
to $12.7 million in fiscal 2000, an increase of $2.1 million. Gross profit as a
percentage of total revenues increased from 71.2% in fiscal 1999 to 73.8% in
fiscal 2000.
Operating Expenses
Research and development. Research and development expenses increased
approximately 54.0% from $4.6 million in fiscal 1999 to $7.1 million in fiscal
2000, an increase of $2.5 million. The increase in research and development
expenses was primarily due to increased costs of approximately $800,000
resulting from increased salaries and additional personnel, as well as
approximately $1.2 million of additional expenses resulting from the increased
use of independent contractors associated with product development efforts
related to expanded development of LynxOS and related products and the initial
release of our BlueCat Linux product. As a percentage of total revenues,
research and development expenses increased from 30.9% in fiscal 1999 to 41.1%
in fiscal 2000.
Sales and marketing. Sales and marketing expenses increased approximately
49.8% from $7.6 million in fiscal 1999 to $11.4 million in fiscal 2000, an
increase of $3.8 million. The increase in sales and marketing expenses was
primarily due to increases in sales and marketing salaries and related costs of
approximately $2.8 million, both domestically and internationally. The addition
of new sales offices in Michigan, Colorado, Minnesota, Georgia and Pennsylvania
during fiscal 2000 contributed to this increase. Advertising and trade show
expenses, including expenses associated with the release of the BlueCat Linux
product, added expenses of approximately $600,000 in fiscal 2000. Consulting
expenses related to the implementation of a new sales management system and
costs to redesign our web site added expenses of approximately $300,000 in
fiscal 2000. As a percentage of total revenues, sales and marketing expenses
increased from 51.3% in fiscal 1999 to 66.4% in fiscal 2000.
General and administrative. General and administrative expenses increased
approximately 35.7% from $1.7 million in fiscal 1999 to $2.3 million in fiscal
2000, an increase of $616,000. The increase was due primarily to additional
personnel and expenses associated with improving our corporate infrastructure.
As a percentage of total revenues, general and administrative expenses
increased from 11.6% in fiscal 1999 to 13.6% in fiscal 2000.
Amortization of deferred stock-based compensation. We amortized $46,000 of
deferred stock-based compensation attributable to operating expenses during
fiscal 1999 and $598,000 of deferred stock-based compensation attributable to
operating expenses during fiscal 2000.
Other Income (Expense), Net
Other income (expense), net for fiscal 1999 and 2000 consisted primarily of
interest income from our investments offset by interest expense on borrowings.
We had interest
37
<PAGE>
income of $428,000 for fiscal 1999 and $375,000 for fiscal 2000. The decrease
in interest income was primarily due to a decrease in cash invested in short
term investments.
Provision for Income Taxes
We recorded a provision for income taxes of $91,000 in fiscal 1999 and
$242,000 in fiscal 2000.
Years Ended April 30, 1998 and 1999
Revenues
Revenues increased approximately 33.5% from $11.1 million in fiscal 1998 to
$14.9 million in fiscal 1999, an increase of $3.7 million. Product license
revenues accounted for approximately 71.4% of total revenues in fiscal 1998 and
61.5% of total revenues in fiscal 1999, with service revenues accounting for
the balance of total revenues in each period. For fiscal 1999, 16.7% of total
revenues was attributable to Hewlett-Packard and 13.3% was attributable to
Xerox. For fiscal 1998, 18.9% of total revenues was attributable to Hewlett-
Packard and 13.8% was attributable to Nissin Software, one of our distributors.
Revenues from international sales accounted for 39.3% of total revenues for
fiscal 1998 and 28.5% of total revenues for fiscal 1999. All of our revenues
were denominated in U.S. dollars.
Product license revenues increased approximately 15.1% from $7.9 million in
fiscal 1998 to $9.1 million in fiscal 1999, an increase of $1.2 million. The
increase in product license revenues was due to an increase in sales of our
development products and related tools and in run-time license fee revenues
resulting from increased sales by our customers of products containing our
embedded systems.
Service revenues increased approximately 79.3% from $3.2 million in fiscal
1998 to $5.7 million in fiscal 1999, an increase of $2.5 million. Of this
increase, $1.5 million was related to non-recurring engineering revenues from a
single customer. The remaining increase in service revenues was primarily due
to an increase in support, consulting and training revenues from both new and
existing customers.
Cost of Revenues
Cost of revenues increased approximately 46.4% from $2.9 million in fiscal
1998 to $4.3 million in fiscal 1999, an increase of $1.4 million. Cost of
product license revenues accounted for approximately 42.7% of the total cost of
revenues in fiscal 1998 and 30.5% of the total cost of revenues in fiscal 1999,
with cost of service revenues accounting for the balance of the total cost of
revenues for both of these periods. As a percentage of revenues, cost of
revenues increased from 26.3% for fiscal 1998 to 28.8% for fiscal 1999.
Cost of product license revenues increased approximately 4.5% from $1.2
million in fiscal 1998 to $1.3 million in fiscal 1999, an increase of $56,000.
Amortization of capitalized software amounted to $330,000 in fiscal 1998 and
$316,000 in fiscal 1999. Cost of product license revenues as a percentage of
product revenues was 15.7% for fiscal 1998 and 14.3% for fiscal 1999.
Cost of service revenues increased approximately 77.7% from $1.7 million in
fiscal 1998 to $3.0 million in fiscal 1999, an increase of $1.3 million. The
increase in cost of service revenues resulted from increased expenses from
building our consulting, training and technical support infrastructure. Cost of
service revenues as a percentage of service revenues was 52.5% for fiscal 1998
and 52.0% for fiscal 1999.
38
<PAGE>
Gross Profit
Gross profit increased approximately 28.9% from $8.2 million in fiscal 1998
to $10.6 million in fiscal 1999, an increase of $2.4 million. Gross profit, as
a percentage of revenues, was 73.7% in fiscal 1998 and 71.2% in fiscal 1999.
Operating Expenses
Research and development. Research and development expenses increased
approximately 29.9% from $3.5 million in fiscal 1998 to $4.6 million in fiscal
1999, an increase of $1.1 million. The increase in research and development
expenses was partially the result of increased costs of approximately $450,000
resulting from increased salaries and additional personnel. Use of independent
contractors associated with product development efforts related to the release
of the 3.0 and 3.01 versions of our LynxOS products added costs of
approximately $600,000 in fiscal 1999. As a percentage of revenues, research
and development expenses decreased from 31.7% for fiscal 1998 to 30.9% for
fiscal 1999.
Sales and marketing. Sales and marketing expenses increased approximately
64.1% from $4.6 million in fiscal 1998 to $7.6 million in fiscal 1999, an
increase of $3.0 million. The increase in sales and marketing expenses was
primarily due to increases in sales and marketing salaries and related costs of
approximately $2.5 million, both domestically and internationally. The addition
of new offices in Washington, Maryland, Canada and Sweden during the latter
part of fiscal 1999 contributed to this increase. Advertising, trade shows and
public relations expenses, and marketing expenses related to the release of our
3.0 and 3.01 versions of our LynxOS products in fiscal 1999, added expenses of
approximately $320,000 in fiscal 1999. As a percentage of revenues, sales and
marketing were 41.7% for fiscal 1998 and 51.3% for fiscal 1999.
General and administrative. General and administrative expenses increased
approximately 10.3% from $1.6 million in fiscal 1998 to $1.7 million in fiscal
1999, an increase of $161,000. This increase was due primarily to additional
personnel and expenses associated with expanding our corporate structure. As a
percent of revenues, general and administrative expenses decreased from 14.1%
in fiscal 1998 to 11.6% in fiscal 1999.
Amortization of deferred stock-based compensation. We amortized no deferred
stock-based compensation during fiscal 1998 and $46,000 of deferred stock-based
compensation during fiscal 1999.
Other Income (Expense), Net
Other income (expense), net for fiscal 1998 and 1999 consisted primarily of
interest income from our investments, offset by interest expense on borrowings,
and expenses associated with the amortization of a discount on warrants. We had
interest income of $25,000 in fiscal 1998 and $428,000 for fiscal 1999. The
increase in interest income was primarily due to an increase in short term
investments following our receipt of the net proceeds from the issuance of our
Series E preferred stock in June 1998. We had interest expense of $241,000 in
fiscal 1998 and $32,000 for fiscal 1999. The decrease in interest expense was
primarily due to the amortization of a discount related to warrants issued in
connection with a related party convertible promissory note paid in fiscal
1998, the repayment of borrowings outstanding under our bank line of credit in
the first quarter of fiscal 1999 and the buyout of various equipment leases in
the first and second quarters of fiscal 1999.
Provision for Income Taxes
We recorded a provision for income taxes of $98,000 in fiscal 1998 and
$91,000 in fiscal 1999.
39
<PAGE>
Quarterly Results of Operations
The following table presents a summary of our consolidated operating results
for each of the five quarters during the period from May 1, 1999 through July
31, 2000. The following table also presents this information expressed as a
percentage of our total consolidated revenues for the periods indicated. The
information for each of these quarters is unaudited and has been prepared on a
basis consistent with our audited consolidated financial statements appearing
elsewhere in this prospectus. In our opinion, all necessary adjustments,
consisting only of normal recurring adjustments, have been included to present
fairly the unaudited quarterly results when read in conjunction with our
audited consolidated financial statements and related notes appearing elsewhere
in this prospectus. Operating results for any quarter are not necessarily
indicative of results for any future period.
We believe that period to period comparisons of our operating results are not
necessarily meaningful and you should not rely on them to predict future
performance. The amount and timing of our revenues and expenses may fluctuate
significantly in the future as a result of a variety of factors. Because of a
number of factors, including our acquisition of ISDCorp, our historical results
of operations and financial condition do not purport to be indicative of our
future results of operations or financial condition. In particular, our
expenses in future periods will include substantial deferred stock-based
compensation expense and amortization of goodwill and other intangibles. We
face a number of risks and uncertainties encountered by early stage companies,
particularly those in rapidly evolving markets. We may not be able to
successfully address these risks and uncertainties due to a number of factors,
including those discussed under "Risk Factors" and elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------
Jul. 31, Oct. 31, Jan. 31, Apr. 30, Jul. 31,
1999 1999 2000 2000 2000
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Product license................. $ 3,051 $ 2,595 $ 2,755 $ 3,140 $ 3,245
Service......................... 1,290 1,642 1,162 1,561 1,863
------- ------- ------- ------- -------
Total revenues.................. 4,341 4,237 3,917 4,701 5,108
------- ------- ------- ------- -------
Cost of revenues:
Product license................. 252 363 339 267 367
Service......................... 684 696 888 902 1,334
Amortization of deferred stock-
based compensation related to
the service organization....... -- 32 35 46 126
------- ------- ------- ------- -------
Total cost of revenues.......... 936 1,091 1,262 1,215 1,827
------- ------- ------- ------- -------
Gross profit..................... 3,405 3,146 2,655 3,486 3,281
------- ------- ------- ------- -------
Operating expenses:
Research and development........ 1,564 1,544 1,953 2,000 1,892
Sales and marketing............. 2,293 2,533 2,947 3,649 4,703
General and administrative...... 563 543 594 643 761
Amortization of deferred stock-
based compensation............. 96 100 118 284 742
------- ------- ------- ------- -------
Total operating expenses........ 4,516 4,720 5,612 6,576 8,098
------- ------- ------- ------- -------
Operating loss................... (1,111) (1,574) (2,957) (3,090) (4,817)
Other income, net................ 100 72 68 130 491
------- ------- ------- ------- -------
Loss before provision for income
taxes........................... (1,011) (1,502) (2,889) (2,960) (4,326)
Provision for income taxes....... 19 40 89 94 29
------- ------- ------- ------- -------
Net loss......................... (1,030) (1,542) (2,978) (3,054) (4,355)
Dividend associated with
beneficial conversion feature of
Series F preferred stock........ -- -- -- (1,994) (1,667)
------- ------- ------- ------- -------
Net loss attributable to common
stockholders.................... $(1,030) $(1,542) $(2,978) $(5,048) $(6,022)
======= ======= ======= ======= =======
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------
Jul. 31, Oct. 31, Jan. 31, Apr. 30, Jul. 31,
1999 1999 2000 2000 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Product license................ 70.3 % 61.2 % 70.3 % 66.8 % 63.5 %
Service........................ 29.7 38.8 29.7 33.2 36.5
----- ----- ----- ------ ------
Total revenues................. 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ------ ------
Cost of revenues:
Product license................ 5.8 8.6 8.6 5.6 7.2
Service........................ 15.8 16.4 22.7 19.2 26.1
Amortization of deferred stock-
based compensation related to
the service organization...... -- 0.7 0.9 1.0 2.5
----- ----- ----- ------ ------
Total cost of revenues......... 21.6 25.7 32.2 25.8 35.8
----- ----- ----- ------ ------
Gross profit.................... 78.4 74.3 67.8 74.2 64.2
----- ----- ----- ------ ------
Operating expenses:
Research and development....... 36.0 36.4 49.9 42.6 37.0
Sales and marketing............ 52.8 59.8 75.2 77.6 92.1
General and administrative..... 13.0 12.8 15.2 13.7 14.9
Amortization of deferred stock-
based compensation............ 2.2 2.4 3.0 6.0 14.5
----- ----- ----- ------ ------
Total operating expenses....... 104.0 111.4 143.3 139.9 158.5
----- ----- ----- ------ ------
Operating loss.................. (25.6) (37.1) (75.5) (65.7) (94.3)
Other income, net............... 2.3 1.7 1.7 2.7 9.6
----- ----- ----- ------ ------
Loss before provision for income
taxes.......................... (23.3) (35.4) (73.8) (63.0) (84.7)
Provision for income taxes...... 0.4 1.0 2.2 2.0 0.6
----- ----- ----- ------ ------
Net loss........................ (23.7) (36.4) (76.0) (65.0) (85.3)
Dividend associated with
beneficial conversion feature
of Series F preferred stock.... -- -- -- (42.4) (32.6)
----- ----- ----- ------ ------
Net loss attributable to common
stockholders................... (23.7)% (36.4)% (76.0)% (107.4)% (117.9)%
===== ===== ===== ====== ======
</TABLE>
Revenues
Product license revenues have fluctuated over the past five quarters
primarily due to the timing and size of run-time license fee revenues and
product sales. Because we receive run-time license fees based on the number of
products that contain our embedded operating systems sold by our customers,
revenues attributable to run-time license fees have fluctuated significantly
due to circumstances outside of our control, and this trend will likely
continue. The timing and size of product sales have also varied significantly
from period to period, and will likely continue to do so in the future.
Service revenues have fluctuated significantly from period to period due to
the uneven revenue stream of project-oriented work and the timing of completion
of projects and will likely continue to do so in the future.
Cost of Revenues
Cost of revenues have generally increased over the last five fiscal quarters.
Cost of product license revenues was higher in the fiscal quarters ended
October 31, 1999 and January 31, 2000 due to the costs related to the release
of version 3.01 of our LynxOS product, such as product media and documentation
updates.
Cost of service revenues increased consistently over the last five fiscal
quarters due to expenses incurred in providing our consulting services. Cost of
service revenues was also
41
<PAGE>
affected by increased investment in our consulting and technical support
infrastructure, especially over the three fiscal quarters ended July 31, 2000.
Operating expenses
Our total operating expenses increased in each of the last five quarters.
Operating expenses have increased as we continued to add employees to our sales
and marketing, research and development and administration organizations.
Operating expenses have also increased due to an increase in amortization of
deferred stock-based compensation over the five fiscal quarters ended July 31,
2000 and, over the more recent quarters, as a result of salary increases.
Liquidity and Capital Resources
We have financed our activities to date primarily from the proceeds of
private sales of our preferred stock and, to a lesser extent, bank borrowings
and capital leases. As of July 31, 2000, we had cash and cash equivalents of
$31.4 million, an accumulated deficit of $22.5 million and working capital of
$29.4 million. We terminated our bank credit facility in April 2000 and ISDCorp
terminated its credit facility in September 2000.
To finance operating activities, we used cash of $846,000 in fiscal 1998,
$2.2 million in fiscal 1999, $6.3 million in fiscal 2000, and $2.6 million in
the three months ended July 31, 2000. Year over year increases in the use of
cash for operating activities were primarily due to increases in our net
losses. Use of cash to finance operating activities during the three months
ended July 31, 2000 was primarily due to our net loss, partially offset by the
amortization of deferred stock based compensation.
Our investing activities used cash of $301,000 in fiscal 1998 and $5.7
million in fiscal 1999, provided net cash of $3.9 million in fiscal 2000, and
used cash of $456,000 during the three months ended July 31, 2000. In fiscal
1998, our investing activities included purchases of property, plant and
equipment and capitalized software development costs. In fiscal 1999 and 2000
our investing activities consisted of purchases of property, plant and
equipment, capitalized software development costs and, solely in 1999,
purchases of short-term investments, offset in both fiscal 1999 and 2000 by
proceeds from the sales and maturities of short-term investments. In the three
months ended July 31, 2000, our investing activities included purchases of
property, plant and equipment.
Our financing activities provided cash of $1.4 million in fiscal 1998, $9.5
million in fiscal 1999, $19.0 million in fiscal 2000, and $16.0 million in the
three months ended July 31, 2000. In fiscal 1998, cash provided by financing
activities consisted primarily of borrowings under our bank line of credit and
proceeds from the issuance of convertible promissory notes to affiliates,
partially offset by payments made on the bank borrowings. In fiscal 1999,
fiscal 2000 and the three months ended July 31, 2000, cash provided by
financing activities was primarily due to net proceeds received from the
issuance of preferred stock of $10.0 million, $19.0 million and $15.9 million,
respectively.
We currently believe that the net proceeds from this offering, together with
our current cash and cash equivalents, will be sufficient to fund our currently
anticipated working capital and capital expenditure requirements for at least
the next twelve months, although it is possible that we may require additional
financing within the next twelve months if our capital expenditures or other
cash needs exceed our expectations. We expect that our operating expenses,
particularly research and development and sales and marketing expenses, and our
capital expenditures will increase significantly in order to execute our
business strategy. We
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also anticipate that our operating expenses will increase significantly as a
result of our acquisition of ISDCorp. We anticipate that these operating
expenses and capital expenditures will constitute a material use of our cash
resources. In addition, following the next twelve months, we may need to obtain
substantial additional financing in order to sustain our operations and execute
our business strategy. Moreover, we also may need to raise substantial
additional funds to support more rapid expansion, respond to competitive
pressures, acquire or invest in other businesses or technologies or respond to
unanticipated requirements. We cannot assure you that additional financing will
be available to us in amounts or on terms acceptable to us, or at all.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities," or SFAS 133, that requires companies to
record derivative financial instruments on their balance sheets as assets or
liabilities measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative instrument and whether it qualifies for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
In June 1999, the FASB issued Statement of Financial Accounting Standard No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133," or SFAS 137, that amends SFAS
133 to be effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. In June 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 138. "Accounting for Derivative
Instruments and Hedging Activities--An Amendment of FASB No. 133," or SFAS 138.
SFAS 138 amends the accounting and reporting standards for certain derivatives
and hedging activities such as net settlement contracts, foreign currency
translations and intercompany derivatives. We will adopt SFAS 133 in our fiscal
quarter ending October 30, 2000. To date, we have not engaged in derivatives or
hedging activities.
In December 1999, the Securities and Exchange Commision issued Staff
Accounting Bulletin 101, or SAB 101, which summarizes the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 101 is effective December 2000. We have analyzed SAB
101 and its current interpretation and believe its adoption will not have a
material effect on our financial position, results of operations or cash flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation" or FIN 44, an interpretation of APB Opinion No. 25. FIN 44
clarifies the application of Opinion 25 for:
. the definition of employee for purposes of applying Opinion 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.
FIN 44 is effective July 1, 2000, but certain conclusions cover specific
events that occur after either December 15, 1998, or January 12, 2000. The
adoption of certain of the provisions of FIN 44 prior to March 31, 2000 did not
and we do not expect that it will have a material
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impact on our consolidated financial statements. We do not expect that the
adoption of the remaining provisions will have a material effect on our
consolidated financial statements.
Qualitative and Quantitative Disclosures about Market Risk
Our revenues have been denominated in U.S. dollars. As a result, we have not
had any material exposure to changes in foreign currency exchange rates.
However, part of our strategy is to increase our selling efforts in foreign
markets, including Europe and Asia. Because our sales are made in U.S. dollars,
a strengthening of the U.S. dollar could make our products less competitive in
foreign markets. In the fiscal year ended April 30, 2000, approximately 32% of
our revenues were generated from customers located outside North America,
principally in Europe.
At July 31, 2000, our cash and cash equivalents consisted primarily of money
market funds and commercial paper. We did not hold any derivative financial
instruments or long-term investments. Our interest income and expenses are
sensitive to changes in the general level of interest rates. In this regard,
changes in interest rates can affect the interest earned on our cash
equivalents.
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BUSINESS
Overview
We provide operating systems and related products and services designed for
the embedded systems market. Our operating systems and development tools enable
our customers to develop embedded systems based on open standards that are
compatible with Linux products, which can significantly reduce total
development costs and time to market. Our embedded operating systems feature
performance and scalability and can support complex applications without
compromising reliability. We also provide software development tools and
applications that are important for developing and enhancing the performance
and functionality of our embedded operating systems, and we offer custom
engineering and consulting services to enable our customers to develop and
customize our products for their specific needs. We have a twelve year history
in the embedded operating systems market, which we believe gives us the
experience necessary to better understand our customers' needs. Our customers
are primarily embedded systems developers in the communications and Internet
infrastructure, aerospace and defense, office equipment and consumer
electronics, and industrial controls and medical devices industries. Our
customers include Boeing, Hewlett-Packard, Lucent Technologies, Marconi
Communications, Motorola, NEC, United Defense and Xerox.
Our solutions provide customers with the capabilities of both a real-time
operating system and an open source Linux operating system through our two
principal products, LynxOS and BlueCat Linux. LynxOS is an embedded real-time
operating system that is based on open standards and is Linux compatible.
BlueCat Linux is a Linux-based operating system specifically tailored for
embedded systems that do not require real-time performance. To promote adoption
of our products, we have engaged in co-marketing initiatives with industry
leaders such as Hewlett-Packard and Motorola Computer Group and joint
development efforts with Force Computers and Trillium Digital Systems. We
believe that our products, services and strategic alliances provide a
comprehensive solution to address the rapidly growing embedded systems market.
Industry Background
Embedded systems are special purpose computers found within a wide range of
intelligent products such as:
. communications and Internet infrastructure equipment, including
switches, network routers and Internet servers;
. office equipment and consumer electronics, including Internet enabled
devices;
. automotive, aerospace and defense systems; and
. industrial controls systems and medical devices.
An embedded system includes a microprocessor, memory, an operating system and
application software dedicated to a specialized task or set of tasks.
Rapid technological advancement has resulted in a significant increase in the
processing power and a reduction in the costs of the microprocessors and memory
used in embedded systems. This trend has resulted in the increased use of
embedded systems in a growing range of products. The embedded systems market
has been further expanded by the growth of the Internet, wireless devices, and
demand for more intelligent, functional and easy to use products. Thus,
embedded systems are not only being used in a greater variety and number of
products, but are also becoming more complex. Gartner Group estimates that the
market for embedded microprocessors will grow from approximately 254 million
units in 2000 to 380 million units in 2003.
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Embedded Operating Systems
An embedded operating system runs on a microprocessor and manages the
interaction between the application software, which provides device-specific
functions, and the underlying hardware. A real-time operating system, or RTOS,
is a special type of embedded operating system that was developed to provide
"real-time" performance, which means that it enables embedded systems to
respond predictably and consistently to external events in a specified amount
of time. An RTOS is required for systems, such as air traffic control systems,
medical equipment and streaming video systems, where failure to meet response
time and predictability requirements could lead to a catastrophic system
failure or severely degraded system performance. A non real-time operating
system is suitable for embedded systems where response time is less critical,
such as a handheld personal digital assistant or a point of sale terminal. We
believe that most embedded applications historically have required real-time
performance but that many new embedded systems can use non real-time operating
systems.
Embedded operating systems have a number of characteristics that distinguish
them from non-embedded operating systems. These characteristics typically
include the ability to support a wider range of hardware, the ability to
operate without a hard disk, standard keyboard or display, the availability of
development tools suitable for application software development and the ability
to be configured to use a small amount of memory.
Original equipment manufacturers currently have three principal alternatives
to meet their needs for embedded operating systems:
. Internally developed embedded operating systems;
. Commercially available embedded operating systems; and
. Commercially available general purpose operating systems such as those
designed for use on desktop computers.
Internally developed embedded operating systems are usually designed for use
in a limited set of applications and devices and therefore are generally
expensive to update or migrate to new products. A commercially available
embedded operating system typically uses a proprietary software application
interface that only supports software applications designed specifically for
that operating system. General purpose operating systems generally require too
much memory or lack the appropriate functionality for use in embedded systems.
As a result of these shortcomings, we believe that embedded systems
developers are increasingly seeking commercially available embedded operating
systems that are based on open standards. The term "open standards" means that
the operating system uses a broadly adopted and available software application
interface, which allows application software written for that operating system
to be used with another operating system using the same interface without
significant modification.
Linux and Open Source Software in the Embedded Systems Market
The term "open source" means that the source code of the software is
available to the public and can be copied, modified, customized and distributed
without the payment of any license fees. Open source software is generally
developed, maintained and enhanced by multiple groups of developers around the
world, commonly referred to as the open source community. The growth of the
Internet has greatly increased the scale and efficiency of open source software
development by creating the channels for developers to collaborate. Linux
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conforms to industry accepted application interfaces and its growing popularity
and availability is making it an accepted open standard.
According to International Data Corporation, or IDC, Linux was the fastest
growing operating system for servers in 1999, with the number of shipments
growing over 91%. Recently, Linux has begun to be adopted in the embedded
systems market and we believe that Linux will be increasingly used in consumer
information appliances, which IDC estimates will exceed consumer PCs in total
units shipped in the United States by 2002. According to IDC, worldwide
shipments of information appliances are expected to grow from approximately 11
million units shipped in 1999 to over 89 million units shipped in 2004.
Information appliances represent just one class of embedded system products and
include Internet-enabled game consoles and smart handheld devices as well as
NetTVs, web terminals and other Internet-enabled devices. We also believe that
Linux will be used in other embedded systems, including telecommunications
infrastructure products.
We believe that several characteristics of Linux make it attractive to
developers of embedded systems:
. There is a growing base of Linux applications, development tools and
engineers with Linux expertise, which can reduce the development effort
required for designing embedded software applications;
. Linux is based on open standards, which means that software applications
can be moved with relative ease among Linux operating systems from
different suppliers, as well as other compatible operating systems;
. There are no license fees associated with Linux, which reduces the cost
of embedded systems, and the source code is freely available, which
allows developers to make modifications to the source code and
facilitates debugging;
. Linux can interface with a wide variety of microprocessors and hardware
devices, which facilitates integration of the operating system into a
given product; and
. Linux is a robust and reliable operating system.
Opportunity for LynuxWorks
Original equipment manufacturers face a number of challenges in effectively
developing embedded systems, including:
. Increased technical complexity of embedded systems, especially if real-
time performance is required, because they are being designed to perform
an increasing variety of functions, including Internet connectivity;
. Shorter product life cycles, which result in greater time to market
pressures because embedded system design typically requires significant
development hours and engineering resources can be scarce;
. Limited availability of off-the-shelf applications and development tools
that are compatible with in-house or third-party operating systems,
which requires developers to independently develop software
applications;
. Rapid technological advancement of embedded microprocessors and other
related devices, for which the availability of compatible software is
limited; and
. Limited engineering resources available to assist in development
efforts, which can make it difficult to keep pace with rapid
technological change.
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Because of these challenges, we believe that there is an opportunity for
embedded systems developers to reduce their software development efforts and
time to market by moving away from proprietary and in-house developed embedded
operating systems and turning to open standards embedded operating systems,
including Linux. By using these operating systems, embedded systems developers
gain access to software that is compatible with a wide range of microprocessors
and hardware devices used in embedded systems, along with broad availability of
development tools and software from third parties.
Our Solution
We provide a suite of open standards software products and engineering
services designed for the embedded systems market. Our solutions deliver to
customers both the capabilities of a real-time operating system and an open
source Linux operating system through our two principal products:
. LynxOS, a commercially available proprietary embedded real-time
operating system that is based on open standards and is Linux
compatible, meaning that application software written for Linux
operating systems, including BlueCat Linux, can work with it without
needing to make significant modifications; and
. BlueCat Linux, a Linux-based operating system specifically tailored for
embedded systems that is used by embedded systems developers who choose
the open source and open standards model but do not require real-time
performance.
Key advantages of our solutions include:
Open standards. Our embedded operating systems have open standards interfaces
that are compatible with Linux products. This can significantly reduce the
effort required to develop embedded systems, helping to lower costs and provide
faster time to market.
Comprehensive solution. Because our products are compatible with each other,
customers requiring both a Linux compatible RTOS and a Linux-based operating
system either in a single system or across different products can use us as a
single vendor to provide both. In addition, because our products have a common
development environment, they provide a developer of embedded software with the
ability to migrate portions of an application from one operating system to the
other. Embedded systems development can be a dynamic process and system
requirements may change during development. Our products allow our customers
the flexibility to migrate from BlueCat Linux to LynxOS, if real-time
performance becomes a requirement.
Ability to support complex applications reliably. Our products feature
performance, reliability and robustness and can support complex applications
without compromising reliability. LynxOS, which has patented technology for
real-time event handling, has been used for over a decade in critical
applications in aerospace and telecommunications systems. As an open source
product, BlueCat Linux offers the benefits of Linux and can also support large
applications.
Reduced cost and time to market. Many manufacturers of intelligent equipment
have used different RTOSs or general-purpose operating systems across different
products or within the same product. LynxOS enables customers to use a single
set of development tools and reuse application software across products,
allowing it to be used for an entire line of products. This can result in
reductions in costs and quicker time to market. BlueCat Linux, as a royalty-
free solution for developers who do not require a real-time operating system,
can also reduce the cost of embedded systems. Because of the growing popularity
of Linux, we believe
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that there is also a growing body of consultants, system integrators and
support organizations that can provide resources for embedded development
projects based on Linux.
Scalable memory. We have developed a patented technology that enables LynxOS
to be configured to leave out portions of the operating system not required for
a given application, thereby reducing the amount of memory used. This allows
the embedded system developer to scale the operating system from very small, or
simple applications, to larger, or more complex applications, whatever is
required.
Value added products and services. We provide development tools and
applications that are important for developing and enhancing the performance of
embedded systems. We also offer training, support and consulting services for
our products, providing our customers with support throughout their embedded
systems development process. We have a twelve year history in the real-time
operating systems market, which we believe gives us the experience necessary to
better understand our customers' needs.
Our Strategy
Our objective is to become a leading provider of Linux-based and Linux-
compatible embedded operating systems, software tools and training and support
services. Our strategy to achieve this objective consists of the following
elements:
Enhance product compatibility. We plan to further enhance the compatibility
of our LynxOS and BlueCat Linux products. Enhanced compatibility is intended to
allow our customers to develop software applications that will run on both
operating systems with a single set of development tools. Enhanced
compatibility is expected to allow many third party applications designed for
Linux to run on either operating system without rebuilding of the code. This
can streamline and shorten the development process as well as provide access to
a greater number of software applications, furthering our strategy of being a
single source for our customers' embedded operating system needs.
Continue to embrace open standards and open source software. Since our
inception, our products have been based on open standards and we intend to
continue this strategy. We have long embraced and used selected open source
software in our products, including compilers and debuggers. We are a founding
member of the Embedded Linux Consortium, an organization formed to promote the
use of Linux in embedded systems, and we actively participate in the Linux
Standard Base organization, which is formalizing a set of open standard
specifications for the Linux application programming interface. We intend to
continue to design our products to be compatible with Linux and other open
standards and to remain an active participant in the open source community in
order to enhance the adoption of Linux and open standards applications in the
embedded systems market.
Provide a comprehensive solution by expanding our offering of value-added
products. We are committed to offering comprehensive embedded operating system
solutions to our customers. As a result, we plan to provide additional software
tools and applications, such as integrated development environments, event and
data visualization tools, debugging tools, embedded graphical user interfaces,
advanced power management, embedded web technologies, and advanced networking
software. When appropriate, we will seek to supplement our internal development
efforts by licensing or acquiring third-party technology or products.
Capitalize on cross-marketing our products. Our dual offerings of LynxOS and
BlueCat Linux provide embedded system designers with the flexibility to choose
the operating system
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best suited for their needs. In fiscal 2000, approximately 365 companies
purchased our LynxOS product for use in their products. We plan to continue to
cross-market our BlueCat Linux product to this installed base of customers to
provide them with a Linux-based embedded operating system solution to
complement our RTOS product. We also plan to leverage the interest generated by
the introduction of our BlueCat Linux product to cross-market our LynxOS
product and expand our base of LynxOS customers.
Expand our engineering and consulting services. We provide engineering and
consulting services to assist our customers in the development and
customization of software applications and other aspects of their embedded
systems. We also provide training and technical support to assist our customers
in incorporating our products into their embedded systems. We intend to expand
our engineering and consulting services organization and to broaden our range
of support and service offerings.
Extend our network of strategic relationships. We established our Synergy
Partners Program in 1992 to build strong relationships with key hardware and
software vendors, integrators and consultants in the embedded software market.
In addition, we have engaged in co-marketing initiatives with industry leaders
such as Hewlett-Packard and Motorola Computer Group and joint development
efforts with Force Computers and Trillium Digital Systems. We will seek to
establish new strategic relationships with developers of complementary
technologies and products in order to enhance our products' compatibility and
interoperability with their products. In addition, we plan to continue to build
marketing partnerships with integrated circuit and circuit board vendors. By
providing these vendors with evaluation copies of BlueCat Linux to bundle with
their evaluation boards, we believe that we can leverage their distribution
networks to promote use and awareness of our BlueCat Linux products.
Products and Services
We provide a suite of open standards software products and engineering
services designed and marketed for the embedded systems market. We classify our
products into two broad categories: LynxOS, our real-time operating system, and
BlueCat Linux, our open source operating system. For both these categories we
also offer software development tools and add-on applications as well as
engineering services such as consulting, training and support. We charge our
customers up-front license fees for each seat purchased for the development
phase of their products, license fees for add-on applications and development
tools and run-time license fees. Run-time license fees are the fees that our
customers pay us based upon their sales of products that incorporate our
embedded operating systems or applications. Our engineering services are
provided on a project-by-project basis or, with respect to support, over the
term of the contracted period.
LynxOS. LynxOS is a Linux compatible real-time operating system designed for
embedded products and systems. LynxOS is based on open standards and features
performance, reliability and scalability combined with patented technology for
real-time event handling.
LynxOS conforms to standards like POSIX, the Portable Operating System
Interface that is the industry standard for the widely used operating system
UNIX, which defines the interface between applications and an operating system
for enhanced compatibility and portability across implementations. Because
Linux is also based on UNIX and POSIX interfaces, our customers can take
application code from the Linux environment and use it on LynxOS without
needing to make significant modifications. Similarly, Linux software that
controls specific hardware devices can be adapted to run on LynxOS.
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We have developed a patented technology in which LynxOS can easily be
configured to leave out the portions of the operating system not required for a
given application, thereby reducing the amount of memory used. This flexible
scalability makes LynxOS well suited for applications ranging from large and
complex systems down to small systems with limited memory capacity.
LynxOS supports embedded systems built using the Intel x86/Pentium, the
Motorola/IBM PowerPC and the MIPS microprocessors. Earlier versions of LynxOS
are available for the Motorola 68K and Sun microSPARC microprocessors.
Customers building LynxOS-based embedded systems can use Microsoft Windows-
based PCs, Linux-based PCs, Sun workstations, HP workstations and LynxOS based
computers to develop their application software.
BlueCat Linux. BlueCat Linux is an open source, royalty-free operating system
tailored and enhanced for embedded applications. Like LynxOS, and because it is
a Linux product, BlueCat Linux conforms to POSIX and UNIX standards. BlueCat
Linux is designed for embedded systems developers who do not require real-time
performance but a solution that is a pre-configured and pre-tested embedded
Linux operating system, offering scalability and robustness.
BlueCat Linux has been modified to use less memory than desktop Linux
operating systems yet it still has the functionality to support large
applications. It is also able to run on many of the microprocessors and
hardware devices used in embedded systems.
The BlueCat Linux development tools run on a desktop Linux operating system
on a standard Intel-based PC. They support cross development for x86/Pentium
and PowerPC embedded microprocessors. In addition to the standard development
tools of Linux, BlueCat Linux includes tools to support the cross development
model that is typical of embedded development. These include, for example,
utilities for kernel configuration, the creation of downloadable run-time
images consisting of the kernel, drivers and applications, support for ROM and
flash memory systems, and cross debugging.
BlueCat Linux supports embedded systems built using the Intel x86/Pentium and
the Motorola/IBM PowerPC microprocessors. We are developing new versions of
BlueCat Linux to run on ARM's ARM720T, Intel's StrongARM, and Hitachi's SH3
microprocessors. Customers building BlueCat Linux-based embedded systems can
use Linux-based PCs to develop their application software.
There are no royalties associated with the BlueCat Linux embedded operating
system because it is an open source product. We charge a nominal fee for the
use of our embedding and debugging tools with each development seat our
customers purchase. We also charge run-time license fees for any add-on
applications we provide.
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Other Products. The following table summarizes our principal software
development tools and add-on applications.
<TABLE>
<CAPTION>
Product Description
-------------------------------------------------------------------------------
Software Development Tools
-------------------------------------------------------------------------------
<C> <S>
VisualLynx A Microsoft Windows-based integrated development
environment, or IDE, available bundled without
additional charge with versions of LynxOS that use
Windows for development. An IDE includes a set of
software tools operating within a graphical user
interface framework. This product is used in
conjunction with Microsoft Visual C++.
-------------------------------------------------------------------------------
VisualLynux A Microsoft Windows-based integrated development
environment, or IDE, sold separately for our
BlueCat Linux product that uses the Windows
environment for development. This tool can also be
used with any standard Linux kernel version
2.2.12. This product is used in conjunction with
Microsoft Visual C++.
-------------------------------------------------------------------------------
TotalView Debugger designed to fix code errors in multiple
applications simultaneously running on one or more
microprocessors. Our customers use TotalView to
debug complex embedded systems where multiple
major embedded system tasks or processes are
required to be running simultaneously. It is sold
separately for LynxOS for the Intel x86/Pentium,
Motorola/IBM PowerPC, and MIPS microprocessors. We
license this technology from Etnus.
-------------------------------------------------------------------------------
TimeScan An event and data visualization tool that collects
information about a running embedded system and
then displays that information using a graphical
user interface. This allows our customers to
visualize system behavior, including certain
classes of software bugs, to be able to optimize
and debug their embedded systems. It is sold
separately for LynxOS for the Intel x86/Pentium
and Motorola/IBM PowerPC microprocessors. We
license this technology from Etnus.
-------------------------------------------------------------------------------
Embedded Software Products
-------------------------------------------------------------------------------
Board Support Packages Software packages including either LynxOS or
BlueCat Linux prepackaged with additional hardware
specific software required to operate on certain
"reference platforms." These reference platforms
are generally off-the-shelf circuit boards
produced by commercial board and system vendors.
-------------------------------------------------------------------------------
LynuxWorks Messenger A software package designed to provide support for
inter-application messaging in a CompactPCI-based
embedded system. This software is used by our
customers to build complex embedded systems with
multiple microprocessors. LynuxWorks Messenger
runs on the Intel x86/Pentium and Motorola/IBM
PowerPC microprocessors and is separately sold for
both LynxOS and, at a nominal fee, BlueCat Linux.
-------------------------------------------------------------------------------
High Availability Package A software package that allows our customers to
build embedded systems such as digital subscriber
line, or DSL, routers or phone switches, that are
highly reliable due to their ability to detect and
recover from hardware and software faults. Using
the High Availability Package, our customers are
able to replace certain failed hardware components
without shutting down their hardware, a process
known as "hot swapping". The High Availability
Package is separately sold for LynxOS running the
Intel x86/Pentium and Motorola/IBM PowerPC
microprocessors.
-------------------------------------------------------------------------------
Chai A Java-compatible software package designed and
optimized for running Java applications on
embedded systems. It is separately sold for LynxOS
running on the Intel x86/Pentium and Motorola/IBM
PowerPC microprocessors. Chai technology is
licensed from Hewlett-Packard.
</TABLE>
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In addition to the software development tools and applications listed above,
we are in the process of researching and developing a number of additional
tools and applications to complement our LynxOS and BlueCat Linux products.
Customer Service and Support. We offer comprehensive service and support to
our embedded systems customers, including consulting, training, education and
technical support services. Our service and support personnel have significant
experience with embedded systems and participate actively in the Linux
community.
. Engineering and Consulting Services. We offer custom engineering and
consulting services that span a broad range of capabilities including
device driver development, custom enhancements of LynxOS or BlueCat
Linux, adapting customer applications to run on LynxOS or BlueCat Linux,
and providing general embedded systems engineering services. We offer
these services on a fixed price per project basis and to a limited
extent on an hourly basis.
In addition, we provide customized engineering services to design,
develop and integrate the BlueCat Linux operating system tailored for
specific customers. This service is designed for embedded systems
developers who need extensive software customizations, but prefer to
have a Linux-knowledgeable vendor provide these customizations. These
services are performed by the engineering team we acquired in connection
with the ISDCorp acquisition. This team, which, as of October 19, 2000
had 26 employees and seven independent contractors, also provides
engineering services for other commercially-available embedded operating
systems and UNIX systems. We offer these services on a fixed price per
project basis and to a limited extent on an hourly basis.
. Training and Education. We offer a range of training and educational
programs to assist our customers with the design and implementation of
embedded products and systems. The areas covered include embedded
applications development, device driver development and adaptation of
our operating systems to the customer's hardware. We offer these
training programs at our facility or at the customer's location. We
typically offer these programs on a fixed price per student basis that
varies according to the program topic.
. Technical Support. We offer a range of technical support programs to
allow customers to choose the level of support they need. These programs
range from basic telephonic support to premium engineering assistance to
address problems experienced by the customer. We offer a long-term
support program, offering support on selected versions of the LynxOS or
BlueCat Linux operating systems for up to 15 years. We also offer a
program including a 24 hours a day, 7 days a week telephonic call-back
support service.
As of October 19, 2000, we had 58 employees and 21 independent contractors in
our customer service, support and engineering services organization.
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Customers
Our customers are primarily embedded systems developers in the communications
and Internet infrastructure, aerospace and defense, office equipment and
consumer electronics, and industrial controls and medical devices industries.
We have listed below customers from whom we derived more than $100,000 in
revenues in at least one of the two fiscal years ended April 30, 1999 and 2000.
<TABLE>
<CAPTION>
Communications and Internet Infrastructure
Equipment Automotive, Aerospace and Defense Systems
------------------------------------------ -----------------------------------------
<S> <C>
3Com Aerospatiale Matra
Alcatel USA Alenia Marconi Systems
ECI Boeing
Ericsson Cetia
Interphase Creative Electronic System
ION Networks Federal Aviation Administration
Jetstream Communications Jet Propulsion Laboratory
Lucent Technologies Lockheed Martin
Marconi Communications Marconi Aerospace
Matsushita Communications Naval Undersea Warfare Center
Motorola Raytheon
NEC Rockwell Collins
Nortel Networks SPX
Procket Networks Thomson Marconi Sonar
Tellium Thomson Training & Simulation
United Defense
</TABLE>
<TABLE>
<CAPTION>
Industrial Control Systems and Medical
Devices Office Equipment and Consumer Electronics
-------------------------------------- -----------------------------------------
<S> <C>
Acuson Hewlett-Packard
Creative Electronic Systems SA Xerox
CNI Informatica
Elgems
Hewlett-Packard
Marquette Medical Systems
Mitsubishi Electric
NEC
Nissin Software
Sensormatic Electronics
Tokyo Electron
TRW
</TABLE>
We have listed below customers from whom ISDCorp derived more than $100,000
in revenues in ISDCorp's fiscal year ended December 31, 1999 or the six months
ended June 30, 2000.
Cirrus Logic
Hewlett-Packard
IBM
Lucent Technologies
Sony
Sun Microsystems
Wyse Technology
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<PAGE>
Customer Case Studies
These examples illustrate how customers use our software products and
services. These customer case studies are not intended to be an endorsement by
those customers of LynuxWorks or our software products and services.
Cirrus Logic. Cirrus Logic, a customer of ISDCorp, designs and manufactures
integrated circuits that employ high-performance analog and digital signal
processing technologies that enable system-level applications in the analog,
Internet, and magnetic storage markets. Many of Cirrus Logic's system-on-chip
products, including the Maverick product brands, include a sophisticated 32-bit
embedded microprocessor on a chip. The Maverick products are optimized for low
power portable applications such as personal digital assistants, Internet
appliances, global positioning systems and MP3 players. Cirrus Logic needed a
royalty-free embedded Linux port and the development of associated peripheral
device drivers to enable sales of the Maverick processor family into key target
market segments. Cirrus Logic selected ISDCorp's consulting team to customize
Linux for the Maverick family because of its ability to provide timely turn-key
customization and support their downstream end-equipment customers with
additional engineering services.
Hewlett-Packard Company. Hewlett-Packard Company, through its Boise, Idaho
office, produces the HP LaserJet printer family of office products. HP LaserJet
printers are manufactured and sold worldwide. In 1998, HP began the design of
their next generation mid-range and high-end LaserJet printers and needed a
flexible and powerful embedded operating system to support their long-term
development plans. HP selected our LynxOS real-time operating system due to its
open standard interface and for its reputation for high performance and
reliability.
VeriFone, a division of Hewlett-Packard. VeriFone is a leading global
provider of secure electronic payment solutions for financial institutions,
merchants and consumers. When designing their next generation point-of-sale
terminals, VeriFone wanted to move to an off-the-shelf open standard embedded
operating system. VeriFone selected our BlueCat Linux product for several
reasons including cost, availability of Microsoft Windows-based software
development tools, and reliability. Another group at VeriFone was already using
our LynxOS real-time operating system in another product line. This group's
positive experiences with LynxOS contributed to the selection of our BlueCat
Linux product.
Marconi Communications. Marconi Communications, a division of Marconi, plc,
is a worldwide supplier of key technologies, equipment and services for the
Internet, enterprise networks and telecommunications systems. Among their
products are telephone switching systems that require a high-performance, high
availability real-time operating system based on open standards. Marconi
Communications selected our LynxOS real-time operating system for its System X
family of central office switches because it offered an attractive combination
of reliability, performance and functional fit with their proprietary real-time
operating system used in previous generations of their product.
Nortel Networks. In early 2000, Nortel Networks, a global leader in
telephony, data, and wireless and wireline solutions for the Internet, acquired
Promatory Communications, a developer of digital subscriber line platforms for
high-speed Internet access. Nortel is using technology acquired from Promatory
to develop their next generation Digital Access and Cross-Connect System, or
DACS, a high-speed communications device used in telephone systems. Promatory
had used our LynxOS real-time operating system in other products, and had
developed application software to run on LynxOS. Nortel selected LynxOS for
their next generation DACS because they are able to reuse this application
software with a goal of achieving faster time to market.
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<PAGE>
Xerox Corporation. Xerox is the leading supplier of office copiers worldwide.
In 1993, Xerox began the design of their advanced Document Centre line of
workgroup digital copiers. They needed a real-time operating system that
supported open standards to be able to use third party application software.
Xerox selected our LynxOS real-time operating system due to its scalability,
reliability, and adherence to open standards.
ZF Linux Devices. ZF Linux Devices has developed highly integrated, PC-
compatible device controller modules for the embedded systems market. In June
2000, ZF Linux Devices announced the newest member of its device controller
modules, the MachZ PC-on-a-chip, which provides full embedded PC hardware and
software functionality integrated into a single microprocessor. When designing
the MachZ Integrated Development System, or IDS, a software development package
for the MachZ, ZF Linux Devices needed to provide support for both embedded
Linux and for real-time operating systems. ZF Linux Devices selected our
BlueCat Linux as the operating system which is supplied with their evaluation
board for the MachZ IDS. BlueCat Linux was selected due to its embedded
features and because of the existence of a compatible real-time operating
system, LynxOS, available from the same vendor.
Strategic Relationships
We established our Synergy Partners Program in 1992. This program is intended
to build strong marketing and development relationships in order to better
serve key account requirements and co-market jointly developed offerings. We
have established relationships with vendors in three key industry groups in the
embedded systems market:
. Software vendors in order to port, or integrate, their products to our
products;
. Hardware product vendors which supply device drivers and board support
packages for product development efforts; and
. Integrators and consultants in the embedded software market for co-
marketing and project consulting engagements.
We have over 100 companies in our program. We have engaged in co-marketing
initiatives with industry leaders such as Hewlett-Packard and Motorola Computer
Group and joint development efforts with Force Computers and Trillium Digital
Systems. Other Synergy Partners include Cetia, Etnus, Go Ahead Software,
Intoto, Metro Link, Radstone Technology, Spider Software and Znyx.
Sales and Marketing
Our global marketing efforts target embedded systems developers in
established and emerging embedded systems markets. Established markets include
communications equipment, office equipment and aerospace and defense systems.
Emerging markets include Internet connected devices, information and
entertainment systems for automotive applications, and hand-held consumer
devices. Part of our strategy is to increase our visibility as a leader in the
embedded Linux market in order to build brand awareness and increase adoption
of our Linux-based and Linux-compatible products. In addition to ongoing
communications with customers and prospects, we:
. Participate in industry trade shows, technical conferences and technical
seminars;
. Publish technical articles and white papers in industry magazines;
. Advertise in technical magazines, industry publications and on-line Web
sites;
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. Publish and distribute technical product literature to prospective
customers; and
. Communicate with the trade press, market research firms and industry
analysts.
We market and sell our products and services through both a direct sales
force, which consists of salespersons and field applications engineers, and
through distributors overseas. Our direct sales force is located in 15 cities
in North America and three cities in Europe. We have 17 distributors in 16
countries in Europe and Asia. We also have a telesales group in our
headquarters that handles smaller orders.
As of October 19, 2000, we had 72 employees in our sales and marketing
organization, including 48 direct salespersons and field applications engineers
in North America and twelve in Europe.
Research and Development
We invest in the development of new products and additional features and
improvements to our existing products in response to the evolving market for
open standards, open source, real-time and embedded operating systems and input
from customers, circuit board vendors and microprocessor companies. Our
engineers have significant experience with real-time and embedded systems and
we participate actively in the Linux community. We analyze and incorporate the
development and support efforts of the open source community into our products
on an ongoing basis.
Our software development engineers utilize our ISO 9001 software development
processes to develop and test our products. These processes require a rigorous
software development methodology, including requirements and design
specifications, development reviews, and quality assurance. Our engineers use
our corporate call tracking system to log customer reported problems or
enhancement requests.
New versions of LynxOS and BlueCat Linux, along with other products that
operate with these operating systems, are released periodically. Our software
development processes incorporate an advanced integration and testing system
where the entire product lines are recreated from source code and tested twice
weekly, which simplifies isolating and correcting problems.
As of October 19, 2000, we had 45 employees and 25 independent contractors in
our research and development organization, of which 59 were software
development engineers and documentation specialists and eleven were quality
assurance engineers.
Technology and Intellectual Property
Our products are based on a combination of internally developed proprietary
technology, open source software code and technology licensed from third-
parties.
We have three patented pieces of technology that are incorporated into our
LynxOS product: real-time interrupt scheduling, automatic ROM-ability and
kernel scalability. Our real-time interrupt scheduling technology is designed
to permit applications to respond quickly and consistently to external events
even if the system is under heavy load. Our automatic ROM-ability technology
allows the developer to take disk-based application programs and automatically
create a version that allows an application program to execute from read-only
memory without copying it into random access memory, which conserves computer
memory in an embedded system. Our kernel scalability technology allows the
embedded system designer to configure LynxOS to have only the features required
by the embedded application
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<PAGE>
software, which conserves system memory. In addition, we have filed a patent
that covers technology that allows the developer to extend the functionality of
the LynxOS kernel without modifying the source code by adding modules for new
functionality.
Our ISO 9001 quality assurance program is used to build and test our embedded
operating systems from program source code. The key feature of our quality
assurance program is our Automated Test System, which consists of an automated
testing framework and over 50 test suites for testing embedded operating
systems, libraries, utilities and tools.
Competition
The market for embedded operating systems and related products and services
is becoming increasingly competitive. We compete with a number of other
suppliers principally on the basis of the following:
. product performance and functionality;
. reputation;
. quality of support and customer services;
. breadth of products and services;
. availability of hardware support and software applications;
. price;
. relationships with microprocessor companies;
. distribution; 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:
. the internal research and development departments of our current and
potential customers who develop their own embedded operating systems;
. companies that have developed proprietary embedded real-time operating
systems, such as Wind River Systems, QNX Software Systems and Microsoft;
. companies that have developed Linux-based embedded operating systems,
such as Lineo and MontaVista;
. companies that have developed proprietary general purpose desktop
operating systems that can be used in some embedded systems, such as
Microsoft and Sun Microsystems; and
. companies that have developed Linux-based general purpose desktop
operating systems that can be used in some embedded systems, such as Red
Hat, Caldera, SuSE and Turbolinux.
Employees
As of October 19, 2000, we had 202 employees, including 72 in sales and
marketing, 45 in research and development, 58 in customer service, support and
engineering services
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and 27 in general and administrative. None of our employees is subject to a
collective bargaining agreement. We believe that our relations with our
employees are good.
Facilities
Our current headquarters are located in San Jose, California in two buildings
in which we lease an aggregate of approximately 26,000 square feet. Our leases
expire in 2005. We also lease approximately 11,500 square feet of office space
in San Jose, California, the location of ISDCorp's former headquarters. This
lease expires in March 2002. We also lease approximately 962 square feet of
office space in Dallas, Texas, approximately 3,100 square feet of office space
in Fontenay Le Fleury, France (near Paris) and approximately 4,100 square feet
of office space in Littleton, Colorado. We also lease office space for our
regional sales offices in eleven other cities in North America and Europe. We
do not own any real estate.
In October, 2000, we entered into an agreement with our current landlords to
release us, without penalty, from our largest lease in San Jose, California and
enter into a new lease for a new, 69,000 square foot facility in San Jose,
California. The new facility is currently under construction. We plan to
consolidate all three San Jose locations into this facility when construction
is completed.
Legal Proceedings
We are not currently a party to any material litigation. However, we may from
time to time become involved in litigation, including litigation relating to
claims arising in the ordinary course of our business. These claims, even if
not meritorious, could result in the expenditure of significant financial and
managerial resources.
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MANAGEMENT
Executive Officers and Directors
The names, ages and positions of our current executive officers and directors
as of October 19, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Inder M. Singh............ 55 President, Chief Executive Officer and Chairman
of the Board
Reza Soliman-Noori........ 49 Vice Chairman of the Board and President of
ISDCorp
Arthur L. Swift........... 41 Chief Operating Officer
Mitchell P. Bunnell....... 38 Chief Technology Officer
Bhupindarpal Singh........ 48 Vice President, Finance and Chief Financial
Officer
Luke C. Dion.............. 45 Vice President, Technology and Strategic
Planning
George A. (Skip) Forster.. 47 Vice President, Engineering
Gurjot Singh.............. 47 Vice President, Professional Services and
Quality Assurance
Albert J. McCabe.......... 49 Vice President, World Wide Sales
Robert N. Morris.......... 42 Vice President, Marketing
Daniel Wald............... 52 Vice President, Business Development
Steven E. Bochner......... 45 Director
M. Yaqub Mirza(1)(2)...... 53 Director
Kapil K. Nanda(1)(2)...... 55 Director
Robert F. Weber, Jr.(2)... 46 Director
Phillip E. White(1)....... 57 Director
</TABLE>
--------
(1) Member of audit committee.
(2) Member of compensation committee.
Executive Officers
Inder M. Singh has served as our Chairman of the Board since our
incorporation in March 1988, as our Chief Executive Officer from March 1988
until June 1999 and from February 2000 to date and as our President since
August 2000. From March 1988 until June 1996, Mr. Singh also served as our
Chief Financial Officer. From May 1985 to March 1988, Mr. Singh acted as an
independent consultant. Mr. Singh founded and served as Chief Executive Officer
of Excelan, a local area network, or LAN, company, from May 1982 to April 1985.
In April 1997, Mr. Singh co-founded Kalpana, a LAN switch company. Mr. Singh
currently serves as Chairman and President of the Embedded Linux Consortium and
he is also a board member of Packet Stream, a communications technology company
and PocketPass.com, an Internet commerce company. Mr. Singh is a first cousin
of Gurjot Singh, our Vice President, Professional Services. Mr. Singh holds a
B.S. in Electrical Engineering from the Indian Institute of Technology, Delhi,
India, an M.S. in Electrical Engineering and Computer Science from Polytechnic
Institute of New York and a Ph.D. in computer science from Yale University.
Reza Soliman-Noori has served as our Vice Chairman of the Board and President
of ISDCorp since October 2000. Mr. Soliman-Noori was a founder of ISDCorp in
January 1994; from March 2000 to October 2000, Mr. Soliman-Noori served as
Chairman and Chief Executive Officer of ISDCorp and, from January 1994 to March
2000, served as President and Chief Executive Officer. Prior to founding
ISDCorp, Mr. Soliman-Noori was the founder and President of The Soliman Group,
a consulting company that focused on embedded systems in the UNIX environment.
Mr. Soliman-Noori holds a B.S. in Computer and Information Systems from the
University of Illinois and a M.S. in Computer Engineering from Santa Clara
University.
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Arthur L. Swift has served as our Chief Operating Officer since October 2000.
From March 2000 to October 2000, Mr. Swift served as President and Chief
Operating Officer of ISDCorp. From August 1999 to March 2000, Mr. Swift was
Vice President and General Manager of the Magnetic Storage Division of Cirrus
Logic, a semiconductor company. From October 1996 to August 1999, Mr. Swift
held several senior positions at Cirrus Logic, including Vice President and
General Manager of the Optical Storage Division, Vice President and General
Manager of the PC Products Division, Vice President of Marketing of the PC
Products Division, and Vice President of Marketing for Cirrus Logic's graphics
business. From January 1996 to October 1996, Mr. Swift was self-employed as a
marketing consultant. From October 1994 to January 1996, Mr. Swift served as
Vice President of Marketing of the microelectronics business unit of Sun
Microsystems. Mr. Swift holds a B.S. in Electrical Engineering from
Pennsylvania State University and jointly owns three patents relating to
programmable logic architecture.
Mitchell P. Bunnell is a co-founder of LynuxWorks and has served as our Chief
Technology Officer since June 1993. From March 1998 to October 2000,
Mr. Bunnell served as a director and, from February 1988 to June 1993, as our
Vice President, Engineering. Mr. Bunnell developed the patented technology
incorporated in our LynxOS product. Mr. Bunnell holds a B.S. in Electrical
Engineering Summa Cum Laude from the University of Houston.
Bhupindarpal Singh has served as our Vice President, Finance and Chief
Financial Officer since June 1996. From June 1989 to June 1996, Mr. Singh was
senior director of finance for Apple Computer. Mr. Singh holds a Bachelor of
Accountancy from the University of Singapore, is a Chartered Management
Accountant in the United Kingdom and is a Certified Public Accountant in
Australia.
Luke C. Dion has served as our Vice President, Technology and Strategic
Planning since February 2000. From March 1998 to February 2000, Mr. Dion served
as our Vice President, Engineering. From March 1996 to March 1998, Mr. Dion was
Vice President, Fixed Network Development and Manufacturing at Itron, a
developer of wireless communication products for the utilities industry. From
January 1991 to March 1996, Mr. Dion was Vice President, Engineering for
Microtec Research, an embedded software company. Prior to that, Mr. Dion was a
senior software engineering manager for Motorola Computer Group, a hardware
systems company. Mr. Dion holds B.A. degrees in Mathematics and Computer
Science from the University of California at Berkeley.
George A. (Skip) Forster has served as our Vice President, Engineering since
February 2000. From December 1999 to February 2000, Mr. Forster served as our
Director, Product Development. From June 1996 to October 1999, Mr. Forster was
Managing Director, Fixed Network Development at Itron, a developer of wireless
communication products for the utilities industry. From January 1994 to June
1996, Mr. Forster was President of Results Pilot Training, Inc., a company Mr.
Forster founded to develop computer-based simulation and flight training
programs. Prior to that, Mr. Forster was Chief Executive Officer of Azure
Technology, an aviation software company. Mr. Forster holds a B.S. in
Electrical Engineering from Oregon State University and a M.S. in Electrical
Engineering and Computer Science from Santa Clara University.
Gurjot Singh has served as our Vice President, Professional Services and
Quality Assurance since March 1994. From September 1991 to March 1994, Mr.
Singh held several senior positions at LynuxWorks, including Vice President,
Marketing, Director of Marketing and Customer Services and Director of Product
Development. Prior to joining LynuxWorks, Mr. Singh founded iN Machines, a
software consulting firm. Mr. Singh is a first cousin of Inder M. Singh, our
President, Chief Executive Officer and Chairman of the Board. Mr. Singh holds a
B.S. in Electrical Engineering from the Indian Institute of Technology, Delhi,
India.
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Albert J. McCabe has served as our Vice President, World Wide Sales since
July 2000. From January 1999 to July 2000, Mr. McCabe also served as our
Managing Director of Europe, Middle East and Africa for LynuxWorks S.A. and as
our Central Region Manager for North America. From September 1996 to December
1998, Mr. McCabe was Director of International Indirect Channel Sales for the
Software Division of Texas Instruments Software. Prior to that, Mr. McCabe was
the Channel Marketing Executive and Channel Sales Manager at IBM Corporation.
Mr. McCabe holds a B.S. in Business Data Processing from Ferris State College
in Michigan.
Robert N. Morris has served as our Vice President, Marketing since August
2000. From September 1999 to August 2000, Mr. Morris was the Vice President of
Marketing for Chaparral Network Storage, a fibre channel networking company.
From August 1998 to September 1999, Mr. Morris was the President and Chief
Operating Officer of Gambit Automated Design, a software and services company.
From July 1996 to July 1998, Mr. Morris was Vice President of Marketing of
Vanguard Technology, a systems integration and internet solutions company. From
October 1995 to July 1996, Mr. Morris was Vice President of Marketing of ATG
Cygnet, an automated optical disc and tape library systems company. From
September 1994 to October 1995, Mr. Morris was Vice President of Marketing of
Conner Peripherals, a disk drive and software company.
Daniel Wald has served as our Vice President, Business Development since
October 2000. From January 2000 to October 2000, Mr. Wald served as Vice
President, Business Development of ISDCorp. From July 1995 to December 1996,
Mr. Wald was General Manager of Advanced Recognition Technologies, Inc., a
handwriting and voice recognition software company. Mr. Wald holds a B.S. in
Electrical Engineering and a M.S. in Electrical Engineering from Syracuse
University.
Directors
Steven E. Bochner has served as our director since January 1992. Mr. Bochner
is a member of Wilson Sonsini Goodrich & Rosati, a law firm focused on
representing emerging technology companies. Mr. Bochner joined Wilson Sonsini
Goodrich & Rosati in 1981. Mr. Bochner is also a lecturer at the Stanford Law
School. Mr. Bochner holds a B.A. in Political Science and Economics from San
Jose State University and a J.D. from the University of California, Berkeley,
Boalt Hall.
Dr. M. Yaqub Mirza has served as our director since August 1992. Since June
1998, Dr. Mirza has served as President and Chief Executive Officer of Sterling
Management Group, a business development and management consulting services
company. Since March 1995, Mr. Mirza has served as President and Chief
Executive Officer of MarJac Investments, an international investment firm, and
served as its Executive Vice President from April 1987 to March 1995. Dr. Mirza
also serves as Chairman of the Board of Directors of Jugos Concentrados, a
Chilean manufacturer of juice concentrates, and as Trustee and Chairman of
Amana Mutual Funds Trust. Dr. Mirza holds a B.Sc. in Physics and Mathematics
from the University of Punjab, Pakistan, a M.Sc. in Physics from the University
of Karachi, Pakistan, and a Ph.D. in Physics and M.A. in Teaching Science from
the University of Texas at Dallas.
Kapil K. Nanda has served as our director since July 1993. Since August 1990,
Mr. Nanda has served as President and CEO of InfoGain, a software application
development and integration company. Mr. Nanda holds a B.S. in Engineering from
University of Punjab, India, a M.S. in Engineering from University of Kansas,
and an M.B.A. from University of Southern California.
Robert F. Weber, Jr. has served as our director since June 2000. Since May
1998, Mr. Weber has served as the Corporate Vice President and Director of
Finance for the Integrated Electronic
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Systems Sector of Motorola. From June 1996 to May 1998, Mr. Weber served as
Motorola's Vice President and Director of Finance for the Component Products
Group and, from March 1993 to June 1996, Mr. Weber was the Sector Controller of
ACCESS, a division of Motorola. Prior to that, Mr. Weber held several senior
management positions at Motorola and at KPMG, a worldwide accounting and
consulting services firm. Mr. Weber holds a B.S. in Business Administration
from Bowling Green State University in Ohio and an M.B.A. from the University
of Chicago.
Phillip E. White has served as our director since July 1993. Since July 1997,
Mr. White has served as Chief Executive Officer of White Consulting, a
marketing consulting company. From January 1989 to July 1997, Mr. White was
Chief Executive Officer of Informix Software, a database software company. Mr.
White currently serves on the board of directors of Legato Systems, a storage
management software provider, Adaptec, a computer hardware company, and Tibco
Software, a provider of software products. Mr. White holds a B.A. in Business
from Illinois Wesleyan University and an M.B.A. from Illinois State University.
Board of Directors
Our board of directors is currently comprised of seven directors. In
accordance with the terms of our amended and restated certificate of
incorporation to be filed upon the closing of this offering, the terms of
office of our board of directors will be divided into three classes upon the
closing of this offering: Class I, whose term will expire at the first annual
meeting of stockholders to be held after April 30, 2001; Class II, whose term
will expire at the first annual meeting of stockholders to be held after April
30, 2002; and Class III, whose term will expire at the first annual meeting of
stockholders to be held after April 30, 2003. The Class I directors will be
Reza Soliman-Noori and Robert F. Weber, Jr., the Class II directors will be
Phillip E. White and Kapil K. Nanda, and the Class III directors will be Inder
M. Singh, M. Yaqub Mirza and Steven E. Bochner. At each succeeding annual
meeting of stockholders after the initial classification, the successors to
directors whose terms will then expire will be elected to serve from the time
of their election and qualification until the third annual meeting following
their election. Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of our directors. This
classification of the board of directors may have the effect of delaying or
preventing changes in control of our company. We also entered into voting and
other agreements with Motorola, increasing Motorola's influence with respect to
the election of directors. See "Certain Transactions--Agreements with
Motorola."
Board Committees
Our board of directors has a compensation committee and an audit committee.
As of October 19, 2000, the compensation committee consisted of Robert F.
Weber, Jr., M. Yaqub Mirza and Kapil K. Nanda. The compensation committee makes
recommendations regarding our stock option plans and all matters concerning
executive compensation. As of October 19, 2000, the audit committee consisted
of M. Yaqub Mirza, Kapil K. Nanda and Phillip E. White. The audit committee
approves our independent auditors, reviews the results and scope of annual
audits and other accounting related services, and evaluates our internal audit
and control functions. The compensation committee and the audit committee were
established in July 1996.
Director Compensation
We do not pay any cash compensation to directors for serving in that
capacity, although directors are reimbursed for expenses in connection with
attendance at board of directors and committee meetings. Pursuant to our 2000
Stock Plan, all non-employee directors will
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automatically be granted an option to purchase 30,000 shares of common stock
when that person first becomes a non-employee director on or after the
effective date of this offering (except for those directors who became non-
employee directors by ceasing to be employee directors). In addition, all non-
employee directors who have been directors for at least six months will receive
a subsequent option to purchase 12,000 shares following each annual meeting of
our stockholders, unless the next annual meeting is held within six months of
the effective date of this offering. Employee directors are eligible to
participate in our 2000 Employee Stock Purchase Plan. In addition, our board of
directors has previously granted and has the discretion to grant additional
options and rights to directors pursuant to our stock plans. See "Stock Plans"
and "Certain Transactions" for information relating to stock options granted to
our directors and a description of the terms of the stock plans.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended April 30, 2000, our compensation committee
consisted of M. Yaqub Mirza, Inder M. Singh, Phillip E. White and John Hughes.
Each is a member of our board of directors with the exception of Mr. Hughes who
resigned from the board of directors and the compensation committee in June
2000. With the exception of Mr. Singh, none is an employee. None of our
executive officers serves as a director or member of the compensation committee
or other board committee performing equivalent functions of another entity that
has one or more executive officers serving on the board of directors or
compensation committee of LynuxWorks. See "Certain Transactions" for a
description of the transactions we entered into with our executive officers,
directors and greater than 5% stockholders during the last three years.
Employment Agreements and Change of Control Arrangements
We have entered into an employment agreement with Reza Soliman-Noori that:
. in the case of any termination of employment, provides for payment of
earned but unpaid base salary and any earned but unpaid bonus, payment
for accrued but unused vacation and reimbursement for certain expenses,
and
. if Mr. Soliman-Noori resigns for good reason or is terminated without
cause, in each case as defined in the employment agreement, provides for
payment of severance benefits, including payment of twelve months salary
if resignation or termination occurs within twelve months of the
effective date of the acquisition of ISDCorp, or six months salary if
resignation or termination occurs more than twelve months but less than
eighteen months following the effective date of the acquisition of
ISDCorp.
We have entered into an employment agreement with Arthur L. Swift that:
. in the case of any termination of employment, provides for payment of
earned but unpaid base salary and any earned but unpaid bonus, payment
for accrued but unused vacation and reimbursement for certain expenses,
and
. if Mr. Swift resigns for good reason or is terminated without cause, in
each case as defined in the employment agreement, prior to February 28,
2002, provides for payment of severance benefits, including a payment of
six months salary and the acceleration of 25% of Mr. Swift's options.
We have entered into an employment agreement with Daniel Wald that:
. in the case of any termination of employment, provides for payment of
earned but unpaid base salary and any earned but unpaid bonus, payment
for accrued but unused vacation and reimbursement for certain expenses,
and
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. if Mr. Wald resigns for good reason or is terminated without cause, in
each case as defined in the employment agreement, provides for payment
of severance benefits, including payment of six months salary and the
acceleration of 25% of Mr. Wald's options if resignation or termination
occurs within six months of the effective date of the acquisition of
ISDCorp, or three months salary if resignation or termination occurs
within more than six months but less than twelve months of the effective
date of the acquisition of ISDCorp.
We have entered into a change-of-control severance agreement with each of
Inder M. Singh, Reza Soliman-Noori, Arthur Swift, Mitchell P. Bunnell,
Bhupindarpal Singh, Luke C. Dion, George A. (Skip) Forster, Gurjot Singh,
Albert J. McCabe, Robert N. Morris and Daniel Wald which provides that each of
these executive officers is entitled to a maximum of six months severance pay,
continued benefits and acceleration of options in the event of the involuntary
termination, as defined, of that individual within twelve months of a change of
control of LynuxWorks. We had entered into similar change-of-control severance
agreements with William A. Hogan and Ed McCurtain which agreements terminated
upon their resignation from LynuxWorks.
Executive Compensation
The following table shows in summary form information concerning the
compensation paid to or earned by our Chief Executive Officer and each of our
four other most highly compensated executive officers during the fiscal year
ended April 30, 2000. These individuals are referred to as the named executive
officers in this prospectus. In accordance with the rules of the Securities and
Exchange Commission, the compensation described in the table below does not
include perquisites or other personal benefits received by the named executive
officers that do not exceed the lesser of $50,000 or 10% of the total salary
and bonus reported for these officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
---------------- ------------
Securities
Underlying All Other
Name and Principal Position Salary Bonus Options Compensation
--------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Inder M. Singh...................... $224,413 -- 100,000 --
President, Chief Executive Officer
and Chairman of the Board
William A. Hogan(1)................. $226,285 -- 100,000 --
President
Gurjot Singh........................ $185,000 $25,000 125,000 --
Vice President, Professional
Services and Quality Assurance
Bhupindarpal Singh.................. $184,519 $25,000 33,000 --
Chief Financial Officer and Vice
President, Finance
Ed McCurtain(2)..................... $150,000 $10,000 75,000 $62,225(3)
Vice President, World Wide Sales
</TABLE>
--------
(1) Effective August 4, 2000, Mr. Hogan resigned his position as President.
(2) Effective July 25, 2000, Mr. McCurtain resigned his position as Vice
President, World Wide Sales.
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<PAGE>
(3) Represents $61,867 in commissions earned and $358 in term life insurance
premiums that we paid on behalf of Mr. McCurtain.
Option Grants in Last Fiscal Year
The following table provides summary information regarding stock options
granted to each of the named executive officers during the fiscal year ended
April 30, 2000. The information regarding stock options granted to named
executive officers as a percentage of total options granted to employees during
the fiscal year ended April 30, 2000 is based on options to purchase a total of
1,230,050 shares that were granted to employees, consultants and directors
during the fiscal year ended April 30, 2000, all pursuant to our 1997 Stock
Plan. No stock appreciation or stock purchase rights were granted during the
fiscal year ended April 30, 2000.
Options were granted at an exercise price equal to the fair market value of
our common stock, as determined by our board of directors, on the date of
grant.
The potential realizable values appearing in the table below assume that the
fair market value of our common stock on the date of grant will appreciate at
the indicated rate compounded annually for the entire ten-year term of the
option and that the option is exercised and the common stock is sold on the
last day of its term. The 5% and 10% assumed annual rates of compounded stock
price appreciation are mandated by rules of the Securities and Exchange
Commission and do not reflect our projections or estimates of future stock
price growth.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------
Potential
Realizable Value
at Assumed
Annual Rate of
Number of Percent of Total Stock Price
Securities Options Exercise Appreciation for
Underlying Granted to Price Option Term
Options Employees in Per Expiration ----------------
Name Granted Fiscal Year Share Date 5% 10%
---- ---------- ---------------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Inder M. Singh.......... 100,000 8.1% $1.37(3) 6/1/04 $86,159 $218,343
William A. Hogan(1)..... 100,000 8.1 $1.25(3) 6/1/09 78,612 199,218
Gurjot Singh............ 50,000 4.1 $1.50(3) 2/17/10 47,167 119,531
75,000 6.1 $1.25(3) 6/1/09 58,959 149,413
Bhupindarpal Singh...... 33,000 2.7 $1.25(3) 6/1/09 25,942 65,742
Ed McCurtain(2)......... 75,000 6.1 $1.25(3) 6/1/09 58,959 149,413
</TABLE>
--------
(1) Effective August 4, 2000, Mr. Hogan resigned his position as President.
(2) Effective July 25, 2000, Mr. McCurtain resigned his position as Vice
President, World Wide Sales.
(3) The exercise price of this option may be reduced or repriced in the future
if the fair market value of our common stock has declined since the date
the option was granted.
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<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table shows for each of the named executive officers certain
information concerning the number of shares subject to both exercisable and
unexercisable stock options as of April 30, 2000. Also reported are values for
"in-the-money" options that represent the positive spread between the
respective exercise prices of outstanding stock options and $2.00, or the fair
market value of the common stock as of April 30, 2000 as determined in good
faith by the board of directors. No shares were acquired by the named executive
officers upon exercise of stock options in the fiscal year ended April 30,
2000.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options as of April In-the-Money Options
30, 2000 as of April 30, 2000
---------------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Inder M. Singh.......... 130,208 219,792 $182,291 $223,521
William A. Hogan(1)..... 476,666 223,334 781,832 263,168
Gurjot Singh............ 237,335 175,765 375,623 168,877
Bhupindarpal Singh...... 205,730 102,270 323,272 130,478
Ed McCurtain(2)......... 117,709 157,291 155,990 180,260
</TABLE>
--------
(1) Effective August 4, 2000, Mr. Hogan resigned his position as President.
(2) Effective July 25, 2000, Mr. McCurtain resigned his position as Vice
President, World Wide Sales.
Stock Plans
1988 Stock Option Plan
Our 1988 Stock Option Plan, referred to as the "1988 Plan," was adopted by
our board of directors in April 1988 and approved by our stockholders in April
1988. Our board of directors has decided that no further options will be
granted under the 1988 Plan and has terminated the 1988 Plan effective December
1991. However, the provisions of our 1988 Plan will still govern outstanding
options. Our 1988 Plan provides for the grant of incentive stock options,
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, referred to as the Code, to our employees and for the grant of
nonstatutory stock options to our employees, directors and consultants.
Number of Shares of Common Stock Available Under the 1988 Plan.
The maximum number of shares that are authorized for issuance under the 1988
Plan is 871,194 shares of our common stock. As of October 19, 2000, options to
purchase 10,000 shares of our common stock were outstanding under the 1988
Plan.
Adjustments upon Corporate Transaction.
Our 1988 Plan provides that in the event of our merger with or into another
corporation, a sale of substantially all of our assets or a reverse merger
where we are the surviving entity, the successor corporation will assume or
substitute each option. If the outstanding options are not assumed or
substituted, the 1988 Plan administrator will provide notice to the optionee
that he or she has the right to exercise the option as to all of the shares
subject to the option, including shares which would not otherwise be
exercisable, for a period of five business days prior to the corporate
transaction. However, an outstanding option will not be so accelerated if the
successor entity assumes the option or issues a replacement option or if the
acceleration would cause the option to constitute an "excess parachute payment"
under the Code. Any option not exercised, assumed or replaced will terminate
upon the consummation of the corporate transaction.
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<PAGE>
1992 Stock Option Plan
Our 1992 Stock Option Plan, referred to as the "1992 Plan," was adopted by
our board of directors in November 1992 and approved by our stockholders in
January 1993. Our board of directors has decided that no further options will
be granted under the 1992 Plan. However, the provisions of our 1992 Plan will
still govern outstanding options. Our 1992 Plan provides for the grant of
incentive stock options, within the meaning of Section 422 of the Code, to our
employees and for the grant of nonstatutory stock options and stock purchase
rights to our employees and consultants.
Number of Shares of Common Stock Available Under the 1992 Plan.
The maximum number of shares that are authorized for issuance under the 1992
Plan is 3,879,571 shares of our common stock. As of October 19, 2000, options
to purchase 1,582,762 shares of our common stock were outstanding under the
1992 Plan.
Adjustments upon Merger or Asset Sale.
Our 1992 Plan provides that in the event of our merger with or into another
corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute each option.
1997 Stock Option Plan
Our 1997 Stock Option Plan, referred to as the "1997 Plan," was adopted by
our board of directors and approved by our stockholders in February 1997. Our
board of directors has decided that, upon completion of this offering, no
further options will be granted under the 1997 Plan. However, the provisions of
our 1997 Plan will still govern outstanding options. Our 1997 Plan provides for
the grant of incentive stock options, within the meaning of Section 422 of the
Code, to our employees and for the grant of nonstatutory stock options and
stock purchase rights to our employees, directors and consultants.
Number of Shares of Common Stock Available Under the 1997 Plan.
As of October 19, 2000, the maximum number of shares that are authorized for
issuance under the 1997 Plan was 7,122,203 shares of our common stock, plus any
shares which have been or will be returned to the 1988 Plan or the 1992 Plan
because of terminations and which become available for issuance. As of October
19, 2000, options to purchase 5,557,906 shares of our common stock were
outstanding under the 1997 Plan.
Adjustments upon Merger or Asset Sale.
Our 1997 Plan provides that in the event of our merger with or into another
corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute each option. If the outstanding options
are not assumed or substituted, the 1997 Plan administrator will provide notice
to the optionee that he or she has the right to exercise the option as to all
of the shares subject to the option, including shares which would not otherwise
be exercisable, for a period of 15 days from the date of the notice. The option
will terminate upon the expiration of the 15-day period.
2000 Stock Option Plan
Our board of directors adopted the 2000 Stock Option Plan, referred to as the
"2000 Plan," in August 2000 and the stockholders approved our 2000 Plan in
2000. Our 2000 Plan provides for the grant of incentive stock options,
within the meaning of Section 422 of the Code, to our employees, and for the
grant of nonstatutory stock options to our employees, directors and
consultants.
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<PAGE>
Number of Shares of Common Stock Available under the 2000 Plan.
As of the date of this prospectus, a total of 4,000,000 shares of our common
stock were reserved for issuance pursuant to the 2000 Plan, of which no options
to acquire shares were issued and outstanding as of that date. In addition, our
2000 Plan provides for:
. annual increases in the number of shares available for issuance under
our 2000 Plan on the first day of each year, beginning on January 1,
2002, equal to the lesser of 5% of the outstanding shares of common
stock on such date, 3,000,000 shares or such other amount as our board
may determine;
. the issuance of any shares that were reserved but unissued under the
1997 Plan, including any shares which have been or will be returned to
the 1988 Plan or the 1992 Plan because of terminations and which become
available for issuance; and
. the issuance of any shares that have been or will be returned to the
1997 Plan because of terminations and become available for issuance.
In no event, however, shall more than 10,670,990 shares, plus the annual
increases, be issued upon the exercise of incentive stock options under the
2000 Plan.
Administration of the 2000 Plan.
Our board of directors or a committee of our board administers the 2000 Plan.
In the case of options intended to qualify as "performance-based compensation"
within the meaning of Section 162(m) of the Code, the committee will consist of
two or more "outside directors" within the meaning of Section 162(m) of the
Code. The 2000 Plan administrator has the power to determine the terms of the
options granted, including the exercise price, the number of shares subject to
each option, the exercisability of the options and the form of consideration
payable upon exercise.
Options.
The 2000 Plan administrator determines the exercise price of options granted
under the 2000 Plan, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Internal Revenue Code and all incentive stock options, the
exercise price must at least be equal to the fair market value of our common
stock on the date of grant. The term of an incentive stock option may not
exceed ten years, except that with respect to any participant who owns 10% of
the voting power of all classes of our outstanding capital stock, the term must
not exceed five years and the exercise price must equal at least 110% of the
fair market value on the grant date. The 2000 Plan administrator determines the
term of all other options.
No optionee may be granted an option to purchase more than 1,500,000 shares
in any fiscal year. However, in connection with his or her initial service, an
optionee may be granted an additional option to purchase up to 1,500,000
shares.
After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for twelve months. In all other cases, the option will
generally remain exercisable for three months. However, an option may never be
exercised later than the expiration of its term.
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<PAGE>
Automatic Option Grants to Non-employee Directors.
All grants of options to our non-employee directors under the 2000 Plan are
automatic. We will grant each non-employee director an initial option to
purchase 30,000 shares when that person first becomes a non-employee director
on or after the effective date of this offering (except for those directors who
became non-employee directors by ceasing to be employee directors). In
addition, all non-employee directors who have been directors for at least six
months will receive a subsequent option to purchase 12,000 shares following
each annual meeting of our stockholders, unless the next annual meeting is held
within six months of the effective date of this offering.
All options granted to non-employee directors have a term of ten years and an
exercise price equal to fair market value on the date of grant. Each initial
option becomes exercisable as to 25% of the shares subject to the option on
each anniversary of the date of grant, provided the non-employee director
remains a director on that date. Each subsequent option becomes exercisable as
to 100% of the shares subject to the option on the anniversary of the date of
grant, provided the non-employee director remains a director on that date.
Transferability of Options.
Our 2000 Plan generally does not allow for the transfer of options and only
the optionee may exercise an option during his or her lifetime.
Adjustments upon Merger or Asset Sale.
Our 2000 Plan provides that in the event of our merger with or into another
corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute each option. If the outstanding options
are not assumed or substituted, the 2000 Plan administrator will provide notice
to the optionee that he or she has the right to exercise the option as to all
of the shares subject to the option, including shares which would not otherwise
be exercisable, for a period of 15 days from the date of the notice. The option
will terminate upon the expiration of the 15-day period. In the event of a
change of control each outstanding non-employee director option will become
fully vested and exercisable. Options granted to non-employee directors
pursuant to the automatic grant provision will fully vest if the non-employee
director's status as a director is terminated, other than upon a voluntary
resignation, following the consummation of the merger or asset sale.
Amendment and Termination of our 2000 Plan.
Our 2000 Plan will automatically terminate in 2010, unless we terminate it
sooner. In addition, our board of directors has the authority to amend, suspend
or terminate the 2000 Plan provided it does not adversely affect any option
previously granted under our 2000 Plan.
2000 Employee Stock Purchase Plan
Concurrently with this offering, we intend to establish an Employee Stock
Purchase Plan, referred to as the "Purchase Plan." The Purchase Plan was
adopted by our board in August 2000 and was approved by our stockholders in
2000.
Number of Shares of Common Stock Available under the Purchase Plan.
A total of 1,500,000 shares of our common stock will be made available for
sale. In addition, our Purchase Plan provides for annual increases in the
number of shares available for issuance under the Purchase Plan on the first
day of each year, beginning on January 1, 2002, equal to the lesser of 1.5% of
the outstanding shares of our common stock on that date, 1,000,000 shares, or
another amount as the Purchase Plan administrator may determine.
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<PAGE>
Administration of the Purchase Plan.
Our board of directors or a committee of our board administers the Purchase
Plan. Our board of directors or its committee has full and exclusive authority
to interpret the terms of the Purchase Plan and determine eligibility.
Eligibility to Participate.
All of our employees are eligible to participate if they are customarily
employed by us or any participating subsidiary for at least 20 hours per week
and more than five months in any calendar year. However, an employee may not be
granted an option to purchase stock under the Purchase Plan if that employee:
. immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock or
the capital stock of a subsidiary, or
. has rights to purchase stock under all of our employee stock purchase
plans which accrue at a rate that exceeds $25,000 worth of stock for
each calendar year.
Offering Periods and Contributions.
Our Purchase Plan is intended to qualify under Section 423 of the Code and
contains consecutive, overlapping 24-month offering periods. Each offering
period includes four 6-month purchase periods, except for the first purchase
period which will end on June 14, 2001 and the second purchase period which
will begin on June 15, 2001. The offering periods generally start on the first
trading day on or after June 15th and December 15th of each year, except for
the first offering period which will commence on the first trading day on or
after the effective date of this offering and will end on the earlier of:
. the last trading day on or before December 14, 2002, or
. the date 27 months later.
Our Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 15% of their eligible compensation which includes a
participant's base salary and commissions, but excludes all other compensation.
A participant may purchase a maximum of 10,000 shares during a 6-month purchase
period.
Purchase of Shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of our common stock at the end of each six-month purchase period. The
price is 85% of the lower of the fair market value of our common stock at the
beginning of an offering period or after a purchase period end. If the fair
market value at the end of a purchase period is less than the fair market value
at the beginning of the offering period, participants will be withdrawn from
the current offering period following their purchase of shares on the purchase
date and will be automatically re-enrolled in a new offering period.
Participants may end their participation at any time during an offering period,
and will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with us.
Transferability of Rights.
A participant may not transfer rights granted under the Purchase Plan other
than by will, the laws of descent and distribution or as otherwise provided
under the Purchase Plan.
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<PAGE>
Adjustments upon Merger or Asset Sale.
In the event of our merger with or into another corporation or a sale of all
or substantially all of our assets, a successor corporation may assume or
substitute each outstanding option. If the successor corporation refuses to
assume or substitute for the outstanding options, the offering period then in
progress will be shortened, and a new exercise date will be set.
Amendment and Termination of the Purchase Plan.
Our Purchase Plan will terminate in 2010. However, our board of directors has
the authority to amend or terminate our Purchase Plan, except that, subject to
certain exceptions described in the Purchase Plan, no action may adversely
affect any outstanding rights to purchase stock under our Purchase Plan.
ISDCorp 2000 Executive Equity Incentive Plan
In connection with the acquisition of ISDCorp, we assumed the outstanding
options under the ISDCorp 2000 Executive Equity Incentive Plan, referred to as
the "Executive Plan." The options to purchase ISDCorp's common stock that were
granted under the Executive Plan were converted into options to purchase shares
of our common stock. In all other respects, the outstanding options that were
granted under the Executive Plan will be governed by the Executive Plan and the
applicable option agreements.
The Executive Plan was adopted by the ISDCorp board of directors and approved
by the ISDCorp shareholders in January 2000. Our board of directors has decided
that no further options will be granted under the Executive Plan. The Executive
Plan provides for the grant of incentive stock options, within the meaning of
Section 422 of the Code, to ISDCorp employees and for the grant of nonstatutory
stock options to ISDCorp employees, directors and consultants.
Number of Shares of Common Stock Available Under the Executive Plan.
The maximum number of shares that are authorized for issuance under the
Executive Plan is 986,369 shares of our common stock, which represents the
conversion of 4,500,000 shares of ISDCorp common stock. As of October 19, 2000,
options to purchase 410,986 shares of our common stock were outstanding under
the Executive Plan.
Adjustments upon Corporate Transaction.
The Executive Plan provides that in the event of ISDCorp's merger with or
into another corporation, the successor corporation will assume or substitute
each option. If the outstanding options are not assumed or substituted, the
options will terminate upon the consummation of the corporate transaction.
ISDCorp 2000 Equity Incentive Plan
In connection with the acquisition of ISDCorp, we assumed the outstanding
options under the ISDCorp 2000 Equity Incentive Plan, referred to as the
"Equity Plan." The options to purchase ISDCorp's common stock that were granted
under the Equity Plan were converted into options to purchase shares of our
common stock. In all other respects, the outstanding options that were granted
under the Equity Plan will be governed by the Equity Plan and the applicable
option agreements.
The Equity Plan was adopted by the ISDCorp board of directors and approved by
the ISDCorp shareholders in January 2000. Our board of directors has decided
that no further
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<PAGE>
options will be granted under the Equity Plan. The Equity Plan provides for the
grant of incentive stock options, within the meaning of Section 422 of the
Code, to ISDCorp employees and for the grant of nonstatutory stock options to
ISDCorp employees, directors and consultants.
Number of Shares of Common Stock Available Under the Equity Plan.
The maximum number of shares that are authorized for issuance under the
Equity Plan is 892,429 shares of our common stock, which represents the
conversion of 4,071,428 shares of ISDCorp common stock. As of October 19, 2000,
options to purchase 570,771 shares of our common stock were outstanding under
the Equity Plan.
Adjustments upon Corporate Transaction.
The Equity Plan provides that in the event of ISDCorp's merger with or into
another corporation, the successor corporation will assume or substitute each
option. If the outstanding options are not assumed or substituted, the options
will terminate upon the consummation of the corporate transaction.
401(k) Retirement Plan
We maintain a tax-qualified retirement and deferred savings plan for our
eligible employees, commonly known as a 401(k) plan. The 401(k) plan provides
that each participant may contribute from 1% to 20% of his or her pre-tax gross
compensation up to statutory limits, which was $10,500 in calendar year 2000.
Under the 401(k) plan, we may make discretionary matching contributions. No
contributions were made in fiscal year 1999 or 2000.
Limitation of Liability and Indemnification Matters
Our amended and restated certificate of incorporation, which will become
effective after the closing of this offering, limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for:
. breach of their duty of loyalty to the corporation or its stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. any transaction from which the director derives an improper personal
benefit.
Our amended and restated bylaws, which will become effective after the
closing of this offering, provide that we shall indemnify our directors and
officers, and that we may indemnify our employees and agents to the maximum
extent permitted by the Delaware General Corporation Law. We believe that
indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any current or former officer, director, employee
or other agent of our company, or of another enterprise if serving at our
request, for any liability arising out of his or her actions in that capacity,
regardless of whether we would have the power to indemnify him or her against
liability under the provisions of the Delaware General Corporation Law.
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<PAGE>
We intend to enter into agreements to indemnify our directors and officers,
in addition to the indemnification provided for in our bylaws. These
agreements, among other things, require us to indemnify our directors and
officers for any and all expenses (including attorneys fees), judgments, fines,
penalties and amounts paid in settlement (if such settlement is approved in
advance by us, which approval shall not be unreasonably withheld) in connection
with any action, suit or proceeding arising out of the individual's status as a
director, officer, employee, agent or fiduciary of LynuxWorks, or any
subsidiary of LynuxWorks or any other company or enterprise to which the
individual provides services at our request, and any federal, state, local or
foreign taxes imposed on the individual as a result of the actual or deemed
receipt of any payments under these agreements. In addition, we are obligated
to advance expenses incurred by the individual in connection with any
proceeding against the individual with respect to which the individual may be
entitled to indemnification by us upon receipt of a written undertaking by the
individual to repay those amounts if it is determined that the person was not
entitled to be so indemnified. We believe that the indemnity provided by our
certificate of incorporation, bylaw provisions and indemnification agreements
is necessary to attract and retain qualified persons as directors and officers.
Upon completion of this offering, we intend to maintain directors and officers
liability insurance.
At present, we are not aware of any pending litigation or proceeding
involving a director or officer in which indemnification is required or
permitted, and we are not aware of any threatened litigation or proceeding that
may result in a claim for indemnification by a director or officer.
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<PAGE>
CERTAIN TRANSACTIONS
The following is a description of transactions since May 1, 1997 to which we
have been a party, in which the amount involved in the transaction exceeds
$60,000 and in which any director, executive officer or holder of more than 5%
of our capital stock had or will have a direct or indirect material interest
other than compensation arrangements which are otherwise described under
"Management."
We believe that each of the transactions described below was on terms no less
favorable than could have been obtained from unaffiliated third parties.
Preferred Stock Issuances to Directors, Executive Officers and 5% Stockholders
In October 1997, we issued convertible promissory notes for an aggregate
principal amount of $1,244,000. In June 1998, $1,244,000 of principal and
$66,000 of interest under the convertible promissory notes were converted to
857,988 shares of our Series E-1 preferred stock at a price of $1.5103 per
share. In June 1998, we sold an aggregate of 6,621,268 shares of our Series E-2
preferred stock at a price of $1.5103 per share. Between March 2000 and May
2000, we sold an aggregate of 8,071,207 of our Series F preferred stock at a
price of $4.33 per share. The following officers, directors and 5% stockholders
purchased shares in these financings:
<TABLE>
<CAPTION>
Shares of Shares of Shares of
Purchaser Series E-1 Stock Series E-2 Stock Series F Stock
--------- ---------------- ---------------- --------------
<S> <C> <C> <C>
Executive Officers and
Directors
Inder M. Singh and affiliated
entities(1)................. 437,073 -- 461,894
Entities affiliated with M.
Yaqub Mirza(2).............. 420,915 -- 690,448
Entities affiliated with
Robert F. Weber, Jr.(3)..... -- 6,621,268 230,947
5% Stockholders
Motorola..................... -- 6,621,268 230,947
Intel........................ -- -- 1,616,629
</TABLE>
--------
(1) All shares held by Inder M. Singh and Raman R. Singh, Trustees of Singh
Family Trust--1999 U/i Dtd. July 27, 1999.
(2) Includes 299,496 shares of Series E-1 Preferred Stock held by Humana
Charitable Trust, 86,458 shares of Series E-1 Preferred Stock held by
Reston Investments, 27,559 shares of Series E-1 Preferred Stock held by
SAFA Trust, Inc., 7,402 shares of Series E-1 Preferred Stock held by Tafy
Enterprises, Inc. and 690,448 shares of Series F Preferred Stock held by
Sterling Lynux Works, LLC. Mr. Mirza disclaims beneficial ownership of the
shares held by the Humana Charitable Trust and by SAFA Trust, Inc., except
to the extent of his pecuniary interest in these shares.
(3) Includes 6,621,268 shares of Series E-2 Preferred Stock and 230,947 shares
of Series F Preferred Stock held by Motorola, Mr. Weber disclaims
beneficial ownership of these shares, except to the extent of his pecuniary
interest in these shares.
Common Stock Issuances, Warrant Issuances and Option Grants to Directors,
Executive Officers and 5% Stockholders
In October 2000, in connection with our acquisition of ISDCorp, we issued a
total of 5,022,776 shares of our common stock to ISDCorp's shareholders. Of the
5,022,776 shares of our common stock issued to ISDCorp's shareholders, we
issued 4,575,658 shares of our
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<PAGE>
common stock to Reza Soliman-Noori and his wife, 43,838 shares of our common
stock to Arthur Swift and 13,151 shares of our common stock to Daniel Wald.
In addition, we assumed outstanding options of ISDCorp exercisable for
981,757 shares of our common stock, of which options to purchase 380,299 shares
were issued to Arthur Swift and options to purchase 162,202 shares were issued
to Daniel Wald.
In October 1997, we issued warrants exercisable for common stock at an
exercise price of $0.50 per share to the following officers, directors and 5%
stockholders:
<TABLE>
<CAPTION>
Number of Shares
Name Issuable upon Exercise
---- ----------------------
<S> <C>
Inder M. Singh........................................... 188,100
Entities affiliated with M. Yaqub Mirza(1)............... 185,110
</TABLE>
--------
(1) In August 2000, an entity affiliated with M. Yaqub Mirza transferred its
warrant to purchase 7,500 shares of our common stock to a natural person
not affiliated with LynuxWorks.
In August 2000, all warrants described above were exercised to purchase
373,210 shares of common stock for an aggregate exercise price of $186,605.
Since May 1, 1997, we have issued options, including options issued in
connection with our acquisition of ISDCorp, exercisable for common stock to the
following officers, directors and 5% stockholders:
<TABLE>
<CAPTION>
Number of Shares
Name Issuable upon Exercise
---- -----------------------
<S> <C>
Inder M. Singh.......................................... 1,600,000
Reza Soliman-Noori...................................... 150,000
Arthur L. Swift......................................... 480,299
Mitchell P. Bunnell..................................... 452,500
Bhupindarpal Singh...................................... 238,000
Luke C. Dion............................................ 250,000
George A. (Skip) Forster................................ 250,000
Gurjot Singh............................................ 305,100
Albert McCabe........................................... 226,200
Robert N. Morris........................................ 250,000
William A. Hogan(1)..................................... 300,000
Ed McCurtain(2)......................................... 350,000
Daniel Wald............................................. 162,202
Phillip E. White........................................ 105,000
Steven E. Bochner....................................... 55,000
M. Yaqub Mirza.......................................... 55,000
Kapil K. Nanda.......................................... 55,000
Robert F. Weber, Jr. ................................... 25,000
</TABLE>
--------
(1) Effective August 4, 2000, Mr. Hogan resigned his position as President.
(2) Effective July 25, 2000, Mr. McCurtain resigned his position as Vice
President, World Wide Sales.
For further information regarding the grant of stock options to directors and
named executive officers, please see "Management--Director Compensation" and
"Management--Executive Compensation."
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<PAGE>
Indebtedness of Management
In August 1994, we loaned $195,000 to Inder M. Singh, our President, Chief
Executive Officer and Chairman of the Board, in two separate transactions
($135,000 and $60,000) to allow him to purchase shares of our common stock. In
connection with each of these loans, Mr. Singh delivered full recourse
promissory notes to us. These notes are secured by the purchased shares and
accrue interest at a rate of 6.93% per annum, compounded annually. These
promissory notes become due August 2004. As of September 30, 2000, the
outstanding indebtedness on these notes was $293,179.
In April 1998, we loaned $286,000 to Inder M. Singh to allow him to purchase
shares of our common stock. In connection with this loan, Mr. Singh delivered a
full recourse promissory note to us. This note is secured by the purchased
shares and accrues interest at a rate of 5.98% per annum, compounded annually.
This promissory note becomes due April 2008. As of September 30, 2000, the
outstanding indebtedness on this note was $329,446.
In August 2000, we loaned $550,000 to Inder M. Singh in two separate
transactions ($285,888 and $264,112) to allow him to purchase shares of our
common stock. In connection with each of these loans, Mr. Singh delivered a
full recourse promissory note to us. This note is secured by the purchased
shares and accrues interest at a rate of 6.23% per annum, compounded
semiannually. This promissory note becomes due August 2010. As of September 30,
2000, the outstanding indebtedness on this note was $555,045.
In August 1994, we loaned $60,000 to Mitchell P. Bunnell, our Chief
Technology Officer, to allow him to purchase shares of our common stock. In
connection with this loan, Mr. Bunnell delivered a non-recourse promissory note
to us. This note is secured by the purchased shares and accrues interest at a
rate of 6.93% per annum, compounded semiannually. This promissory note becomes
due December 2001. As of September 30, 2000, the outstanding indebtedness on
this note was $91,340.
In August 2000, we loaned $49,000 to Bhupindarpal Singh to allow him to
purchase shares of our common stock. In connection with this loan, Mr. Singh
delivered a full recourse promissory note to us. This note is secured by the
purchased shares and accrues interest at a rate of 6.23% per annum, compounded
semiannually. This promissory note becomes due August 2010. As of September 30,
2000, the outstanding indebtedness on this note was $49,466.
In August 2000, we loaned $30,000 to Gurjot Singh to allow him to purchase
shares of our common stock. In connection with this loan, Mr. Singh delivered a
full recourse promissory note to us. This note is secured by the purchased
shares and accrues interest at a rate of 6.23% per annum, compounded
semiannually. This promissory note becomes due August 2010. As of September 30,
2000, the outstanding indebtedness on this note was $30,275.
In August 2000, we loaned $7,740 to Gurjot Singh to allow him to purchase
shares of our common stock. In connection with this loan, Mr. Singh delivered a
full recourse promissory note to us. This note is secured by the purchased
shares and accrues interest at a rate of 6.23% per annum, compounded
semiannually. This promissory note becomes due August 2010. As of September 30,
2000, the outstanding indebtedness on this note was $7,811.
In August 2000, we loaned $24,218 to George A. Forster to allow him to
purchase shares of our common stock. In connection with this loan, Mr. Forster
delivered a full recourse promissory note to us. This note is secured by the
purchased shares and accrues interest at a rate of 6.23% per annum, compounded
semiannually. This promissory note becomes due August 2010. As of September 30,
2000, the outstanding indebtedness on this note was $24,449.
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<PAGE>
In May 2000, ISDCorp., our wholly owned subsidiary, loaned $40,000 to Arthur
L. Swift to allow him to purchase shares of our common stock. In connection
with this loan, Mr. Swift delivered a full recourse promissory note to us. This
note is secured by the purchased shares and accrues interest at a rate of 6.30%
per annum, compounded annually. This promissory note becomes due April 30,
2005. As of September 30, 2000, the outstanding indebtedness on this note was
$41,050.
Indebtedness of LynuxWorks
In December 1999, ISDCorp issued two promissory notes to Reza Soliman-Noori
for a total of $1,250,000. The notes are to be repaid on or before December 31,
2000, and accrue interest at a rate of 10% per annum, compounded annually. As
of October 19, 2000, the total amount outstanding under these loans was
$280,000.
Amended and Restated Investors' Rights Agreement
In March 2000, we entered into an Amended and Restated Investors' Rights
Agreement with holders of our Series E-2 and Series F preferred stock pursuant
to which those stockholders have registration rights with respect to the shares
of common stock issuable upon conversion of their shares of preferred stock.
For a description of these registration rights, see "Description of Capital
Stock--Registration Rights." Upon the completion of this offering, all shares
of our outstanding preferred stock will be automatically converted into an
equal number of shares of common stock.
Agreements with Motorola
License Agreements
In November 1997, we entered into a License and Distribution Agreement with
Motorola which, among other things, granted to Motorola a perpetual, worldwide,
non-exclusive, nontransferable, non-assignable (with certain exceptions)
license to use, and in the case of certain software products, to reproduce,
market, sublicense and distribute some of our software. In addition, this
agreement requires that the prices, benefits, warranties and terms granted to
Motorola with respect to the products which are the subject of this agreement
be comparable to or more favorable than any prices, benefits, warranties and
terms that we offer during the term of this agreement for the same products
under substantially similar terms and conditions to any supplier of wireless
telecommunications products, to companies who have affiliates who are suppliers
of wireless telecommunication products or to companies which make, have made or
sell products relating to wireless communications. As of July 31, 2000, we had
received $690,000 under this agreement. The stated term of this contract is
five years, renewable for successive one-year terms by the written consent of
LynuxWorks and Motorola.
In February 2000, we entered into a License and Distribution Agreement with
Motorola, Inc. which, among other things, granted to Motorola a perpetual,
worldwide, non-exclusive right to use, distribute, market, sell or sublicense
derivative works of some of our software. As of July 31, 2000, we had received
$191,250 under this agreement. The stated term of this contract is three years,
renewable for successive two-year terms by the written consent of LynuxWorks
and Motorola.
In fiscal year 1998, 1999 and 2000 and for the three months ended July 31,
2000, we recorded sales of $513,294, $1,357,000, $826,000 and $614,284
(unaudited), respectively, from Motorola, including the amounts we received
under the License and Distribution Agreements described above.
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<PAGE>
We also had amounts receivable from Motorola representing 18%, 6% and 12%
(unaudited) of our accounts receivable at April 30, 1999 and 2000 and at July
31, 2000, respectively.
Motorola June 1998 Voting Agreement
In June 1998, we entered into a Voting Agreement with Motorola, Inder M.
Singh and Mitchell P. Bunnell. Pursuant to this Agreement Mr. Singh and Mr.
Bunnell may not, at any time prior to a qualified public offering, vote their
shares in favor of increasing or decreasing the authorized size of our Board of
Directors, except if Motorola and the Board members elected by Motorola vote in
favor thereof. In addition, Mr. Singh and Mr. Bunnell agreed to vote their
shares so as to elect such number of directors nominated by Motorola as shall
be proportionate to Motorola's interest in LynuxWorks acquired pursuant to the
Series E-2 Preferred Stock Purchase Agreement. Motorola acquired 6,621,268
shares of Series E-2 Preferred Stock which will represent approximately % of
our outstanding capital stock immediately after this offering. The current
director on our Board of Directors elected by Motorola is Robert F. Weber.
Also, pursuant to this Agreement, Mr. Singh and Mr. Bunnell agreed to use their
best efforts to cause the Board members elected by them to vote in the same
manner as the directors elected by Motorola will vote in respect of resolutions
of our board of directors pertaining to:
. the entering into of material joint ventures in which Motorola has not
been offered the first opportunity to participate on at least as
favorable terms as proposed to any other party; and
. the exclusive licensing by us of any of our key or core technology.
This agreement will terminate on the date upon which Motorola ceases to own
at least 75% of the Series E-2 Preferred Stock or common stock issued upon
conversion of the Series E-2 Preferred Stock acquired by Motorola pursuant to
the Series E-2 Preferred Stock Purchase Agreement.
Motorola June 2000 Voting Agreement
In June 2000, we entered into a Voting Agreement with Motorola pursuant to
which we are entitled to exercise certain voting rights with respect to 42.64%
of the Series E-2 and all of the Series F Preferred Stock (or common stock
issued upon conversion of the Series E-2 and F Preferred Stock) held by
Motorola and vote these shares in any matter other than the election of
directors, in proportion to the manner in which all holders of our shares other
than Motorola vote on the relevant matter. This agreement will terminate at
such time as Motorola is no longer the beneficial and/or record owner of any
LynuxWorks capital stock, including common stock issued upon conversion of
preferred stock, held by Motorola as of the date of that Agreement.
Motorola June 1998 Purchase Agreement
In June 1998, we entered into a Series E-2 Preferred Stock Purchase Agreement
with Motorola pursuant to which we agreed to provide Motorola or any of its
designated affiliates pricing with respect to our products which is no less
favorable than the pricing offered to any of our other customers. This clause
stays effective until the disposition by Motorola of at least 90% of its
interest in LynuxWorks, whether acquired pursuant to the Series E-2 Stock
Purchase Agreement or after the Series E preferred stock financing.
In addition, this Agreement provides that so long as Motorola owns at least
75% of the outstanding Series E-2 Preferred Stock acquired by Motorola pursuant
to the Series E-2 Preferred Stock Purchase Agreement, we will not enter into
material joint ventures or separate
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<PAGE>
legal entities in which Motorola has not been offered the first opportunity to
participate on at least as favorable terms and conditions as proposed to any
other party and has declined to participate in such transaction, unless two-
thirds of the members of our board of directors and the members elected by the
holders of Series E-2 Preferred Stock (the only holder of which is Motorola)
assent.
In addition, this Agreement provides that, if we propose to grant an
exclusive license of any of our key or core technology, we need the approval of
at least two-thirds of the members of our board of directors and two-thirds of
the members elected by the holders of Series E-2 Preferred Stock (the only
holder of which is Motorola).
Indemnification and Other Agreements; Other Matters
We plan to enter into an indemnification agreement with each of our current
and future executive officers and directors. For a description of the terms of
these agreements, see "Limitation of Liability and Indemnification Matters."
See the description of certain change of control agreements entered into with
some of our officers described above under "Management--Employment Agreements
and Change of Control Arrangements."
We have paid and will continue to pay legal fees to our counsel, Wilson
Sonsini Goodrich & Rosati, of which Steven E. Bochner is a member. Mr. Bochner
is a director of LynuxWorks. See "Common Stock Issuances, Warrant Issuances and
Option Grants to Directors, Executive Officers and 5% Stockholders" for
information relating to stock options granted to Mr. Bochner.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of October 19, 2000 and as adjusted to
reflect the sale of the shares of common stock offered by this prospectus,
information with respect to the beneficial ownership of our common stock by:
. each person known by us to own beneficially more than 5% of the
outstanding shares of our common stock;
. each of the named executive officers;
. each of our directors; and
. all of our directors and executive officers as a group.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named below have sole voting and investment power with
respect to all shares of common stock held by them.
Applicable percentage ownership in the table is based on 32,181,769 shares of
common stock outstanding as of October 19, 2000. The number of shares
outstanding before this offering has been calculated by assuming the automatic
conversion of our outstanding preferred stock into common stock and includes
the shares of common stock issued in connection with our acquisition of
ISDCorp. Beneficial ownership is determined in accordance with the rules of the
SEC. Shares of common stock subject to options that were exercisable on or
within 60 days of October 19, 2000 are deemed outstanding for the purpose of
computing the percentage ownership of the person or entity holding options, but
are not treated as outstanding for the purpose of computing the percentage
ownership of any other person or entity.
Unless otherwise indicated below, each person or entity named below has an
address in care of LynuxWorks' principal executive offices at 2239 Samaritan
Drive, San Jose, California, 95124.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
------------------------
Number of Shares Before After
Name of Beneficial Owner Beneficially Owned Offering Offering
------------------------ ------------------ ---------- ----------
<S> <C> <C> <C>
Inder M. Singh and affiliated
entities(1)................... 7,398,984 22.2% %
Motorola(2).................... 6,852,215 21.3
Reza Soliman-Noori(3).......... 4,725,658 14.6
M. Yaqub Mirza(4).............. 4,213,587 13.1
Intel(5)....................... 1,616,629 5.0
William A. Hogan(6)............ 535,416 1.6
Gurjot Singh(7)................ 366,745 1.1
Bhupindarpal Singh(8).......... 359,957 1.1
Ed McCurtain(9)................ 152,083 *
Steven E. Bochner(10).......... 115,833 *
Kapil K. Nanda................. 144,412 *
Robert F. Weber, Jr.(2)........ 6,877,215 21.4
Phillip E. White............... 108,542 *
All directors and officers as a
group (16 persons)(11)........ 24,993,354 68.8
</TABLE>
--------
* Less than 1% of the outstanding shares of common stock.
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<PAGE>
(1) Includes 438,100 shares held by Inder M. Singh, 250,000 of which are
subject to our right of repurchase as of October 19, 2000, 3,707,970
shares held by Inder M. Singh and Raman R. Singh, Trustees of Singh Family
Trust--1999 U/i Dtd. July 27, 1999, 60,000 shares held by Inder M. Singh
as Custodian for Gurtej Singh, 60,000 shares held by Inder M. Singh as
Custodian for Harliv Singh, 60,000 shares held by Inder M. Singh as
Custodian for Simran Singh, and 1,866,664 shares held as co-trustee with
M. Yaqub Mirza and Raman R. Singh of The Singh Family Heritage Trust U/i
Dtd. October 13, 1998, The Gurtej Singh Trust--1998 U/i Dtd. October 13,
1998, The Harliv Singh Trust--1998 U/i Dtd. October 13, 1998 and The
Simran K. Trust--1998, U/i Dtd. October 13, 1998 which shares are also
listed as beneficially owned by M. Yaqub Mirza, one of our directors,
108,333 of which are subject to our right of repurchase as of October 19,
2000. Also includes 1,206,250 shares issuable upon exercise of immediately
exercisable options within 60 days of October 19, 2000. 1,000,000 of the
shares underlying these options would be subject to our right of
repurchase as of October 19, 2000 had those options been exercised as of
October 19, 2000.
(2) Principal address is 1303 E. Algonquin Road, Schaumberg, IL, 60196-8890.
Robert F. Weber, Jr. one of our directors, is the Corporate Vice President
and Director of Finance for the Integrated Electronic Systems sector of
Motorola, and as such may be deemed to share voting and investment power
with respect to such shares. Mr. Weber disclaims beneficial ownership of
such shares, except to the extent of his pecuniary interest in such
shares.
(3) Includes 4,356,465 shares held by Reza Soliman-Noori and 219,193 shares
held by Binesh Sahel, Mr. Soliman-Noori's wife; all 219,193 shares owned
by Binesh Sahel are subject to our right of repurchase as of October 19,
2000. Also includes 150,000 shares issuable upon exercise of immediately
exercisable options within 60 days of October 19, 2000. All of the shares
underlying these options would be subject to our right of repurchase as of
October 19, 2000 had those options been exercised as of October 19, 2000.
(4) Includes 830,830 shares held by Humana Charitable Trust, 690,448 shares
held by Sterling LynuxWorks, LLC, 365,669 shares held by SAFA Trust, Inc.,
157,000 shares held by Mena Investments, Inc., 86,458 shares held by
Reston Investments, Inc., 70,000 shares held by Mirza Family Trust, 60,735
shares held by Tafy Enterprises, Inc., 22,500 shares held by Mar-Jac
Investments, Inc., as well as 1,866,664 shares held as co-trustee with
Inder M. Singh and Raman R. Singh of The Singh Family Heritage Trust U/i
Dtd. October 13, 1998, The Gurtej Singh Trust--1998 U/i Dtd. October 13,
1998, The Harliv Singh Trust--1998 U/i Dtd. October 13, 1998 and The
Simran K. Trust--1998, U/i Dtd. October 13, 1998 which shares are also
listed as beneficially owned by Inder M. Singh, our President, Chief
Executive Officer and Chairman, 108,333 of which are subject to our right
of repurchase as of October 19, 2000. Mr. Mirza disclaims beneficial
ownership of the shares held by these trusts except to the extent of his
pecuniary interest in these shares. Also includes 63,283 shares issuable
to Mr. Mirza upon exercise of immediately exercisable options within 60
days of October 19, 2000.
(5) Principal address is 2200 Mission College Blvd., Santa Clara, CA, 95052.
(6) Includes 10,000 shares held by William A. Hogan and 525,416 shares
issuable upon exercise of immediately exercisable options. Mr. Hogan
resigned his position as President effective August 4, 2000 and may
exercise his option until November 4, 2000.
(7) Includes 30,870 shares held by Gurjot Singh, 18,870 of which are subject
to our right of repurchase as of October 19, 2000, and 335,875 shares
issuable upon exercise of immediately exercisable options within 60 days
of October 19, 2000. 56,130 of the shares underlying these options would
be subject to our right of repurchase as of October 19, 2000 had those
options been exercised as of October 19, 2000.
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(8) Includes 36,500 shares held by Bhupindarpal Singh, 24,500 of which are
subject to our right of repurchase as of October 19, 2000, and 323,457
shares issuable upon exercise of immediately exercisable options within 60
days of October 19, 2000. 75,500 of the shares underlying these options
would be subject to our right of repurchase as of October 19, 2000 had
those options been exercised as of October 19, 2000.
(9) Includes 152,083 shares issuable upon exercise of immediately exercisable
options within 60 days of October 19, 2000. Mr. McCurtain resigned his
position as Vice President, World Wide Sales effective July 25, 2000.
(10) Includes 99,666 shares held by Steven E. Bochner, 4,500 shares held by WS
Investment Company 93C and 11,667 shares issuable upon exercise of
immediately exercisable options within 60 days of October 19, 2000.
(11) Includes 20,849,293 shares held by current directors and executive
officers, of which 470,801 shares are subject to our right of repurchase,
and 4,144,061 shares issuable upon exercise of immediately exercisable
options within 60 days of October 19, 2000. 2,446,107 of the shares
underlying these options would be subject to our right of repurchase as of
October 19, 2000 had those options been exercised as of October 19, 2000.
Does not include shares held by William A. Hogan and Ed McCurtain who were
named executive officers in fiscal 2000 but who are not our current
executive officers. The 1,866,664 shares beneficially owned by both Inder
M. Singh and M. Yaqub Mirza, who both serve as trustee together with Raman
R. Singh to the Singh Family Heritage Trust U/i Dtd. October 13, 1998, The
Gurtej Singh Trust--1998 U/i Dtd. October 13, 1998, The Harliv Singh
Trust--1998 U/i Dtd. October 13, 1998 and The Simran K. Trust--1998, U/i
Dtd. October 13, 1998, are counted once in this calculation only.
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DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will consist
of 250,000,000 shares of common stock, $0.001 par value per share, and
10,000,000 shares of preferred stock, $0.001 par value per share.
The following summary does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of our amended and restated
certificate of incorporation, our amended and restated bylaws and our Amended
and Restated Investor Rights Agreement, all of which are included as exhibits
to the registration statement of which this prospectus is a part, and by the
provisions of applicable law. This summary assumes the effectiveness of our
amended and restated charter and amended and restated bylaws, which is expected
to occur upon completion of this offering.
Common Stock
Based on shares outstanding as of October 19, 2000 and assuming the
conversion of all outstanding shares of preferred stock into common stock as of
October 19, 2000, there were 32,181,769 shares of common stock outstanding held
of record by 283 stockholders.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of common
stock 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 upon
completion of this offering will be fully paid and non-assessable.
In addition, we entered into voting agreements with Motorola, which increase
Motorola's influence with respect to the election of our directors but also
entitle us to exercise certain voting rights with respect to a portion of the
shares held by Motorola. See "Certain Transactions--Agreements with Motorola."
Preferred Stock
Pursuant to our amended and restated certificate of incorporation that will
be filed upon completion of this offering, our board of directors will have the
authority, without further action by the stockholders, to designate and issue
up to 10,000,000 shares of preferred stock in one or more series. Our board of
directors may also designate the powers, preferences, privileges and relative
participating, optional or other rights and the qualifications, limitations or
restrictions of each series of preferred stock, including dividend rights,
conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights of the common
stock. Our board, without stockholder approval, can issue preferred stock with
voting, conversion or other rights that could adversely affect the voting power
and other rights of the holders of common stock. Preferred stock could thus be
issued quickly with terms calculated to delay or prevent a change in control of
LynuxWorks or make removal of management more difficult. Additionally, the
issuance of preferred stock may have the effect of decreasing the market price
of the common stock. Upon the closing of this offering, there will be no shares
of preferred stock outstanding and we have no present plans to issue any of the
preferred stock.
Registration Rights
Assuming the conversion of all outstanding preferred stock into common stock
upon completion of this offering, the holders of 14,692,475 shares of common
stock or their
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transferees are entitled to registration rights with respect to these shares
under the Securities Act. These rights are provided under the terms of an
Amended and Restated Investors' Rights Agreement between LynuxWorks and the
holders of these securities. Subject to limitations in the agreement, these
registration rights include the following:
. The holders of at least 40% of these securities then outstanding may
require, on two occasions, that we use our best efforts to register
these securities for public resale, provided that the anticipated
aggregate offering price of that public resale would exceed $10,000,000.
. If we register any of our common stock either for our own account or for
the account of other security holders, the holders of these securities
are entitled to include their shares of common stock in that
registration, subject to the ability of the underwriters to limit the
number of shares included in the offering, provided that after this
offering these holders may not be reduced below 25% of the total number
of shares included in the offering.
. The holders of these securities may also require us, not more than twice
in any 12 month period, to register all or a portion of these securities
on Form S-3 when use of that form becomes available to us, provided,
among other limitations, that the proposed aggregate offering price is
at least $1,000,000.
We will be responsible for paying all registration expenses other than
underwriting discounts and commissions and other than for registrations
withdrawn by such holders, and the holders selling their shares will be
responsible for paying all selling expenses.
Anti-Takeover Effects of Provisions of Our Certificate of Incorporation, Bylaws
and of Delaware Law
Charter Documents
Provisions of our amended and restated certificate of incorporation and
amended and restated bylaws, which will take effect upon completion of this
offering, may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control
of us. These provisions are expected to discourage coercive takeover practices
and inadequate takeover bids and to encourage persons seeking to acquire
control of LynuxWorks to first negotiate with us. These provisions could limit
the price investors might be willing to pay in the future for our common stock.
We believe that the benefits of increased protection of our ability to
negotiate with the proponent of an unfriendly or unsolicited acquisition
proposal outweigh the disadvantages of discouraging these proposals. These
provisions include:
. division of the board of directors into three separate classes serving
staggered three-year terms;
. elimination of cumulative voting in the election of directors;
. prohibitions on our stockholders from acting by written consent and
calling special meetings;
. procedures for advance notification of stockholder nominations and
proposals; and
. the ability of the board of directors to alter our bylaws without
stockholder approval.
As described above, our board of directors will have the authority to issue
up to 10,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges
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and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The issuance of preferred stock, while
providing flexibility in connection with possible financings or acquisitions or
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of our outstanding voting stock.
These and other provisions contained in our amended and restated certificate
of incorporation and amended and restated bylaws could have the effect of
delaying or preventing a change in control of LynuxWorks.
Delaware Law
We are also subject to Section 203 of the Delaware General Corporation Law,
an anti-takeover law. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date the
person became an interested stockholder, unless:
. prior to the date of the transaction, the board of directors approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder; or
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced excluding for purposes of determining the
number of shares outstanding (a) shares owned by persons who are
directors and also officers and (b) shares owned by employee stock plans
in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered
in a tender or exchange offer; or
. on or following the date of the transaction, the business combination is
approved by the board of directors and authorized at an annual or
special meeting of stockholders by the affirmative vote of at least two-
thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Generally, a "business combination" includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns or, within three years prior to the
determination of interested stockholder status, did own 15% or more of a
corporation's outstanding voting securities.
We expect the existence of this provision to have an anti-takeover effect
with respect to transactions that our board of directors does not approve in
advance. We also anticipate that Section 203 may also discourage takeover
attempts that might result in payment of a premium over the market price for
the shares of common stock held by stockholders. A Delaware corporation may opt
out of Section 203 with an express provision in its original certificate of
incorporation or an express provision in its certification of incorporation or
bylaws resulting from amendments approved by the holders of at least a majority
of the corporation's outstanding voting shares. We have not opted out of
Section 203.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Chase Mellon
Shareholder Services.
86
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock
and any sale of substantial amounts of common stock in the open market, or the
perception that these sales may occur, may adversely affect the market price of
our common stock. Furthermore, since only a limited number of shares, in
addition to the shares sold in this offering, will be available for public sale
shortly after this offering because of contractual and legal restrictions on
resale described below, sales of substantial amounts of our common stock in the
public market after the restrictions lapse, or the perception that those sales
may occur, could adversely affect the prevailing market price of our common
stock and our ability to raise equity capital in the future.
Based on shares outstanding as of October 19, 2000, we will have shares
of common stock outstanding upon completion of this offering, assuming no
exercise of the underwriters' over-allotment option and no exercise of options
after October 19, 2000 but including the shares of common stock we issued in
the ISDCorp acquisition. Of these shares, the shares sold in this
offering will be freely tradeable without restriction or further registration
under the Securities Act, except for shares acquired by our "affiliates," as
that term is defined in Rule 144 of the Securities Act. In addition, the
5,022,776 shares of common stock issued to stockholders of ISDCorp in
connection with the acquisition of ISDCorp will be freely tradeable without
restrictions, except for shares subject to lock-up agreements, shares acquired
by "affiliates" of ISDCorp or shares acquired by our "affiliates," which shares
would be subject to limitations and restrictions on resale that are described
below.
The remaining 27,158,993 shares of common stock held by existing stockholders
were issued and sold by us in reliance on exemptions from the registration
requirements of the Securities Act. Of 32,181,769 shares held by existing
stockholders as of October 19, 2000, 31,437,038 shares will be subject to lock-
up agreements described below. On the effective date of the registration
statement of which this prospectus forms a part, 744,731 shares not subject to
the lock-up agreements described below will be eligible for sale pursuant to
Rule 144(k) or as a result of our acquisition of ISDCorp. Upon expiration of
the 180-day lock-up agreements, 30,758,349 shares will become eligible for sale
pursuant to Rule 701, Rule 145 or Rule 144, subject in some cases to the
limitations of Rule 144.
<TABLE>
<CAPTION>
Number of Shares
Eligible for
Sale Date Eligible for Sale
---------------- ----------------------
<C> <S>
744,731 On the effective date of the registration statement of
which this prospectus forms a part
30,758,349 181st day after the date of this prospectus
678,689 Various dates after the date of this prospectus
</TABLE>
Lock-Up Agreements
Each of our officers and directors and the holders of substantially all of
the outstanding shares of our capital stock have agreed, subject to limited
exceptions, not to sell or otherwise dispose of any of their shares for a
period of 180 days after the date of this prospectus without the prior written
consent of Deutsche Bank Securities Inc. Deutsche Bank Securities Inc. may in
its sole discretion, at any time and without notice, release all or any portion
of the shares subject to these lock-up agreements.
Stock Options
In addition, as of October 19, 2000, we had 1,130,666 shares of our common
stock available for future grant pursuant to our prior stock option plans and
8,132,425 shares subject to outstanding options, including options we issued in
the ISDCorp acquisition.
87
<PAGE>
Upon closing of this offering, a total of 5,500,000 additional shares of common
stock, plus annual increases and increases resulting from options that are or
will become available for issuance under the 1997 Stock Option Plan, will be
available for issuance under our 2000 Stock Option Plan and 2000 Employee Stock
Purchase Plan. All of the shares issuable upon exercise of the outstanding
options are subject to a 180-day lock-up pursuant to the lock-up agreements
described above or pursuant to the prior stock options plans and 3,927,962
shares subject to vested options will be available for immediate sale after the
expiration of the 180-day lock-up assuming those options are exercised.
We intend to register, prior to the expiration of the lock-ups, all of the
shares of common stock reserved for issuance under our stock option plans and
under our employee stock purchase plan. This registration will permit the
resale of vested shares by non-affiliates in the public market without
restriction beginning on expiration of the lock-up.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the registration statement, a person who has beneficially
owned shares of our common stock for at least one year would be entitled to
sell, within any three-month period, a number of shares that does not exceed
the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume of our common stock on the Nasdaq
National Market System during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to other requirements regarding the
manner of sale, notice filing and the availability of current public
information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been our "affiliate" at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, would be entitled
to sell these shares without regard to the Rule 144 volume limitations
described above. Therefore, unless otherwise restricted, "144(k) shares" may be
sold immediately upon the completion of this offering.
Rule 145
In general, under Rule 145 as currently in effect, beginning 90 days after
the effective date of the registration statement of which this prospectus is a
part, a person who was issued shares of our common stock in connection with the
acquisition of another company in reliance on Section 3(a)(10) of the
Securities Act ("3(a)(10) Shares"), and who was an "affiliate" of the acquired
or the acquiring company before the transaction or is an "affiliate" of the
acquiring company after the transaction, would be entitled to sell these shares
according to all of the requirements of Rule 144 described above except the
one-year holding period requirement. If the person receiving the 3(a)(10)
Shares was not an "affiliate" of the acquiring or acquired company before the
transaction and is not an "affiliate" of the acquiring company after the
transaction, that person may sell their 3(a)(10) Shares immediately upon the
completion of this offering.
Rule 701
In general, any employee, director, officer, consultant or advisor who
purchases shares from us in connection with a compensatory stock or option plan
or other written agreement
88
<PAGE>
before the effective date of the registration statement is entitled to resell
these shares beginning 90 days after the effective date of the registration
statement in reliance on Rule 701, without having to comply with certain
restrictions, including the holding period, contained in Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of these options, including exercises after the effective date of the
registration statement of which this prospectus is a part. Securities issued in
reliance on Rule 701 are restricted securities and, subject to any lock-up
agreements described above, beginning 90 days after the effective date of the
registration statement, may be sold by persons other than our "affiliates"
subject only to the manner of sale restrictions of Rule 144 and by our
"affiliates" under Rule 144 without compliance with its one-year minimum
holding requirement.
89
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
the underwriters named below, through their representatives Deutsche Bank
Securities Inc., Prudential Securities Incorporated, Dain Rauscher Incorporated
and ABN AMRO Rothschild LLC, have severally agreed to purchase from us the
numbers of shares of common stock appearing opposite their names in the
following table at the initial public offering price less the underwriting
discounts and commissions specified on the cover page of this prospectus:
<TABLE>
<CAPTION>
Number
of
Underwriter Shares
----------- ------
<S> <C>
Deutsche Bank Securities Inc. ........................................
Prudential Securities Incorporated....................................
Dain Rauscher Incorporated............................................
ABN AMRO Rothschild LLC...............................................
----
Total.................................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to specified conditions and that the underwriters will purchase all
of the shares of common stock offered by this prospectus, other than those
covered by the over-allotment option described below, if any of the shares are
purchased.
We have been advised by the representatives of the underwriters that the
underwriters propose to offer the shares of common stock to the public at the
initial public offering price specified on the cover page of this prospectus
and to selected dealers at a price that represents a concession not in excess
of $ per share below the initial public offering price. The underwriters may
allow, and those dealers may re-allow, a concession of not more than $ per
share to other dealers. After the initial public offering, the representatives
of the underwriters may change the offering price and other selling terms.
We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to additional
shares of common stock at the public offering price less the underwriting
discounts and commissions specified on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered by this prospectus. To the
extent that the underwriters exercise this option, each underwriter will become
obligated, subject to conditions, to purchase approximately the same percentage
of these additional shares of common stock as the number of shares of common
stock to be purchased by that underwriter as specified in the above table bears
to the total number of shares of common stock offered by this prospectus. We
will be obligated, pursuant to the option, to sell those additional shares of
common stock to the underwriters to the extent the option is exercised. If any
additional shares of common stock are purchased, the underwriters will offer
the additional shares on the same terms as those on which the shares are
being offered.
90
<PAGE>
The underwriting discounts and commissions per share are equal to the initial
public offering price per share of common stock less the amount paid by the
underwriters to us per share of common stock. The underwriting discounts and
commissions are % of the initial public offering price. We have agreed to pay
the underwriters the following discounts and commissions, assuming either no
exercise or full exercise by the underwriters of the underwriters' over-
allotment option:
<TABLE>
<CAPTION>
Discounts Total Discounts and Commissions
and -------------------------------------------
Commissions Without Exercise of With Full Exercise of
Per Share Over-Allotment Option Over-Allotment Option
----------- --------------------- ---------------------
<S> <C> <C> <C>
Discounts and
Commissions paid by
LynuxWorks............ $ $ $
</TABLE>
In addition, we estimate that the total expenses of this offering, all of
which are payable by us, excluding underwriting discounts and commissions will
be approximately $ .
We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act, and to contribute to any
payments the underwriters may be required to make in respect of these
liabilities.
Each of our officers and directors and the holders of substantially all of
the outstanding shares of our capital stock have agreed not to offer, sell,
contract to sell or otherwise dispose of any shares of our common stock or any
securities convertible into or exchangeable or exercisable for shares of our
common stock, other than shares of common stock purchased in open market
transactions after the pricing of this offering or pursuant to the directed
share program referred to below, for a period of 180 days after the date of
this prospectus without the prior written consent of Deutsche Bank Securities
Inc. This consent may be given at any time without public notice.
Notwithstanding these agreements, our officers and directors and these holders
will be permitted to make transfers:
. by gift, will or intestacy,
. to any trust for their benefit or for the benefit of family members, and
. in the case of partnerships and corporations, to their partners and
subsidiaries,
in each case so long as the transferee agrees in writing that it is subject to
the lock-up agreement. We have entered into a similar agreement with the
representatives of the underwriters, except that we may grant options and issue
shares under our stock option plans and our employee stock purchase plan, and
also may issue shares of common stock upon the exercise of outstanding options,
without the consent of Deutsche Bank Securities Inc.
The representatives of the underwriters have advised us that the underwriters
do not intend to confirm sales to any account over which they exercise
discretionary authority.
In order to facilitate the offering of our common stock, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the market
price of our common stock. Specifically, the underwriters may over-allot shares
of our common stock in connection with this offering, thus creating a short
position in our common stock for their own account. A short position results
when an underwriter sells more shares of common stock than that underwriter is
committed to purchase. A short position may involve either "covered" short
sales or "naked" short sales. Covered short sales are sales of shares made in
an amount not greater than the underwriters' over-allotment option to purchase
additional shares in the offering. The underwriters may close out any covered
short position by either exercising their over-allotment option or purchasing
shares in the open market. In determining the source of shares to close out any
covered short position, the underwriters may consider, among other
91
<PAGE>
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the over-
allotment option. Naked short sales are sales in excess of the over-allotment
option. The underwriters will have to close out any naked short position by
purchasing shares in the open market. A naked short position is more likely to
be created if the underwriters are concerned that there may be downward
pressure on the price of the shares in the open market after pricing that could
adversely affect investors who purchase in the offering.
Accordingly, to cover these short positions or to stabilize the market price
of our common stock, the underwriters may bid for, and purchase, shares of our
common stock in the open market. These transactions may be effected on the
Nasdaq National Market or otherwise. Additionally, the representatives, on
behalf of the underwriters, may reclaim selling concessions allowed to an
underwriter or dealer if the underwriting syndicate repurchases shares
distributed by that underwriter or dealer. Similar to other purchase
transactions, any purchases by the underwriters to cover any syndicate short
position or to stabilize the market price of our common stock may have the
effect of raising or maintaining the market price of our common stock or
preventing or mitigating a decline in the market price of our common stock. As
a result, the price of the shares of our common stock may be higher than the
price that might otherwise exist in the open market. The underwriters are not
required to engage in these activities and, if commenced, may end any of these
activities at any time.
At our request, the underwriters have reserved for sale, at the public
offering price, up to shares of the common stock being sold in this
offering for sale to our vendors, employees, family members of employees,
customers and other third parties through a directed share program. The number
of shares of our common stock available for sale to the general public in this
offering will be reduced to the extent these reserved shares are purchased. Any
reserved shares not purchased by these persons will be offered by the
underwriters to the general public on the same basis as the other shares in
this offering.
Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
Advisor SM, a full service brokerage firm program, may view offering terms and
a prospectus online and place orders through their financial advisors.
Other than the prospectus in electronic format, the information on any
underwriter's web site and any information contained in any other web site
maintained by an underwriter is not part of the prospectus or the registration
statement of which the prospectus forms a part.
Pricing of this Offering
Prior to this offering, there has been no public market for our common stock.
Consequently, the initial public offering price for our common stock will be
determined by negotiation between us and the representatives of the
underwriters. Among the primary factors to be considered in determining the
initial public offering price will be:
. prevailing market conditions;
. our results of operations in recent periods;
. the present stage of our development;
. the market capitalizations and stages of development of other companies
that we and the representatives of the underwriters believe to be
comparable to us; and
. estimates of our business potential.
The estimated initial public offering price range appearing on the cover of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
92
<PAGE>
LEGAL MATTERS
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California, will pass upon the validity of the common stock offered hereby for
LynuxWorks. Steven E. Bochner, a member at Wilson Sonsini Goodrich & Rosati,
serves as Secretary and a director of LynuxWorks. As of October 19, 2000,
certain investment partnerships composed of current and former members of and
persons associated with Wilson Sonsini Goodrich & Rosati, Professional
Corporation, as well as certain individual attorneys in this firm, beneficially
owned an aggregate of 115,833 shares of common stock of LynuxWorks. Brown &
Wood llp, San Francisco, California, will act as counsel for the underwriters.
EXPERTS
The financial statements of LynuxWorks, Incorporated (formerly Lynx Real-Time
Systems, Incorporated) as of April 30, 2000 and 1999 and for each of the three
years in the period ended April 30, 2000 included in this prospectus and
registration statement have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Integrated Software & Devices Corporation as of
December 31, 2000 and 1999 and for each of the three years in the period ended
December 31, 2000 included in this prospectus and registration statement have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION AVAILABLE TO YOU
We have filed with the SEC a registration statement on Form S-1, including
exhibits, schedules and amendments, with respect to the shares of our common
stock to be sold in this offering. Prior to the offering we were not required
to file reports with the SEC. This prospectus does not contain all the
information included in the registration statement. For further information
about us and the shares of our common stock to be sold in the offering, please
refer to the registration statement. Statements made in this prospectus
concerning the contents of any contract, agreement or other document filed as
an exhibit to the registration statement are summaries of the terms of that
contract, agreement or document and are not necessarily complete.
The registration statement and exhibits may be inspected, without charge, and
copies may be obtained at prescribed rates, at the SEC's Public Reference
facility at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The registration statement and other information filed
with the SEC is available at the web site maintained by the SEC on the
worldwide web at http://www.sec.gov.
93
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
LYNUXWORKS, INCORPORATED
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Mandatorily Redeemable Convertible Preferred
Stock and Stockholders' Deficit......................................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
INTEGRATED SOFTWARE & DEVICES CORPORATION
Report of Independent Accountants........................................ F-23
Balance Sheets........................................................... F-24
Statements of Operations................................................. F-25
Statements of Shareholders' Equity (Deficit)............................. F-26
Statements of Cash Flows................................................. F-27
Notes to Financial Statements............................................ F-28
LYNUXWORKS, INCORPORATED
Unaudited Pro Forma Combined Financial Information....................... F-36
Unaudited Pro Forma Combined Balance Sheet, as of July 31, 2000.......... F-37
Unaudited Pro Forma Combined Statement of Operations, for the year ended
April 30, 2000.......................................................... F-38
Unaudited Pro Forma Combined Statement of Operations, for the three
months ended July 31, 2000.............................................. F-39
Notes to Unaudited Pro Forma Combined Financial Information.............. F-40
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of LynuxWorks, Incorporated
(formerly--Lynx Real-Time Systems, Incorporated)
The reincorporation of LynuxWorks, Incorporated in the State of Delaware,
described in Note 9 to the financial statements, has not been consummated at
October 24, 2000. When it has been consummated, we will be in a position to
furnish the following report:
"In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of mandatorily redeemable convertible
preferred stock and stockholders' deficit and of cash flows present fairly, in
all material respects, the financial position of LynuxWorks, Incorporated
(formerly Lynx Real-Time Systems, Incorporated) and its subsidiaries at April
30, 1999 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended April 30, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
consolidated financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion."
/s/ PricewaterhouseCoopers LLP
San Jose, California
May 30, 2000
F-2
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma
As of April 30, As of as of
----------------- July 31, July 31,
1999 2000 2000 2000 (note 1)
------- -------- ----------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 1,946 $ 18,519 $ 31,411
Short-term investments.......... 4,890 -- --
Accounts receivable, less
allowance for doubtful accounts
of $111 in 1999, $117 in 2000
and $137 (unaudited) at July
31, 2000....................... 4,928 3,452 3,434
Prepaid expenses and other
current assets................. 532 1,116 1,696
------- -------- --------
Total current assets........... 12,296 23,087 36,541
Property and equipment, net....... 796 1,300 1,583
Capitalized software costs, net... 120 41 30
Other assets...................... 251 159 165
------- -------- --------
Total assets................... $13,463 $ 24,587 $ 38,319
======= ======== ========
LIABILITIES, MANDATORILY
REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued
liabilities.................... $ 3,006 $ 2,680 $ 3,680
Deferred revenue................ 2,886 3,224 3,467
Bank notes payable.............. 60 -- --
Current portion of long-term
obligations.................... 19 12 12
------- -------- --------
Total current liabilities...... 5,971 5,916 7,159
Long-term obligations, less
current portion.................. 7 25 21
------- -------- --------
Total liabilities.............. 5,978 5,941 7,180
------- -------- --------
Commitments (Note 3)
Mandatorily redeemable convertible
preferred stock, $0.001 par
value:
Authorized: 22,000,000 shares
Issued and outstanding:
12,105,254 shares at April 30,
1999, 16,500,951 shares at
April 30, 2000 and 20,176,461
(unaudited) shares at July 31,
2000........................... 16,514 37,520 55,101
------- -------- --------
(Liquidation value at July 31,
2000: $51,132 (unaudited))
Stockholders' equity (deficit):
Common stock, $0.001 par value:
Authorized: 48,000,000 shares;
Issued and outstanding:
5,859,214 shares at April 30,
1999, 6,087,577 shares at April
30, 2000 and 6,229,514
(unaudited) shares at July 31,
2000; pro forma at July 31,
2000: 26,779,185 (unaudited)
shares......................... 6 6 6 $ 27
Additional paid-in capital........ 1,262 1,321 5,646 60,913
Deferred stock-based
compensation..................... (149) (1,404) (6,451) (6,451)
Notes receivable from
stockholders..................... (649) (694) (705) (705)
Accumulated deficit............... (9,499) (18,103) (22,458) (22,458)
------- -------- -------- --------
Total stockholders' equity
(deficit)..................... (9,029) (18,874) (23,962) $ 31,326
------- -------- -------- ========
Total liabilities, mandatorily
redeemable convertible
preferred stock and
stockholders' deficit......... $13,463 $ 24,587 $ 38,319
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Year Ended April 30, Ended July 31,
-------------------------- ----------------
1998 1999 2000 1999 2000
------- ------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product license................. $ 7,943 $ 9,145 $ 11,541 $ 3,051 $ 3,245
Service......................... 3,187 5,715 5,655 1,290 1,863
------- ------- -------- ------- -------
Total revenues................ 11,130 14,860 17,196 4,341 5,108
------- ------- -------- ------- -------
Cost of revenues:
Product license................. 1,249 1,305 1,221 252 367
Service ........................ 1,674 2,974 3,170 684 1,334
Amortization of deferred stock-
based compensation related to
the service organization....... -- -- 113 -- 126
------- ------- -------- ------- -------
Total cost of revenues........ 2,923 4,279 4,504 936 1,827
------- ------- -------- ------- -------
Gross profit..................... 8,207 10,581 12,692 3,405 3,281
------- ------- -------- ------- -------
Operating expenses:
Research and development
(exclusive of amortization of
deferred stock-based
compensation of $71 in the
year ended April 30, 2000, and
$76 (unaudited) in the three
months ended July 31, 2000
reported below)................ 3,530 4,584 7,061 1,564 1,892
Sales and marketing (exclusive
of amortization of deferred
stock-based compensation of
$138 in the year ended April
30, 2000, and $148 (unaudited)
in the three months ended July
31, 2000 reported below)....... 4,646 7,624 11,422 2,293 4,703
General and administrative
(exclusive of amortization of
deferred stock-based
compensation of $46 and $389
in the years ended April 30,
1999 and 2000, respectively,
and $96 (unaudited) and $518
(unaudited) in the three
months ended July 31, 1999 and
2000, respectively, reported
below)......................... 1,566 1,727 2,343 563 761
Amortization of deferred stock-
based compensation............. -- 46 598 96 742
------- ------- -------- ------- -------
Total operating expenses...... 9,742 13,981 21,424 4,516 8,098
------- ------- -------- ------- -------
Operating loss................... (1,535) (3,400) (8,732) (1,111) (4,817)
------- ------- -------- ------- -------
Other income, net................ 25 428 375 102 492
Interest expense................. (241) (32) (5) (2) (1)
------- ------- -------- ------- -------
Loss before provision for income
taxes........................... (1,751) (3,004) (8,362) (1,011) (4,326)
Provision for income taxes....... 98 91 242 19 29
------- ------- -------- ------- -------
Net loss......................... (1,849) (3,095) (8,604) (1,030) (4,355)
Dividend associated with
beneficial conversion feature of
Series F preferred stock........ -- -- (1,994) -- (1,667)
------- ------- -------- ------- -------
Net loss attributable to common
stockholders.................... $(1,849) $(3,095) $(10,598) $(1,030) $(6,022)
======= ======= ======== ======= =======
Net loss attributable to common
stockholders per share--basic
and diluted..................... $ (0.38) $ (0.54) $ (1.78) $ (0.17) $ (0.97)
======= ======= ======== ======= =======
Shares used in computing net loss
attributable to common
stockholders per share--basic
and diluted..................... 4,906 5,781 5,959 5,886 6,207
======= ======= ======== ======= =======
Pro forma net loss attributable
to common stockholders per share
(Note 1)--basic and diluted
(unaudited)..................... $ (0.56) $ (0.23)
======== =======
Shares used in computing pro
forma net loss attributable to
common stockholders per share--
(Note 1) basic and diluted
(unaudited)..................... 18,822 26,310
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
CONSOLIDATED STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
(in thousands, except share data)
<TABLE>
<CAPTION>
Mandatorily
Redeemable
Convertible Deferred Notes
Preferred Stock Common Stock Additional Stock- Receivable Total
------------------ ---------------- Paid-In Based from Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Stockholders Deficit Deficit
---------- ------- --------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, April 30,
1997................ 4,625,998 $ 5,204 4,832,883 $ 5 $ 598 $ -- $(305) $ (4,555) $ (4,257)
Issuance of common
stock upon exercise
of stock options for
cash and notes
receivable.......... -- -- 775,916 1 305 -- (286) -- 20
Exercise of
warrants............ -- -- 36,667 -- 11 -- -- -- 11
Warrants issued in
connection with
related party
convertible
promissory notes.... -- -- -- -- 92 -- -- -- 92
Interest receivable
from stockholders... -- -- -- -- -- -- (21) -- (21)
Net loss............ -- -- -- -- -- -- -- (1,849) (1,849)
---------- ------- --------- --- ------- ------- ----- -------- --------
Balances, April 30,
1998................ 4,625,998 5,204 5,645,466 6 1,006 -- (612) (6,404) (6,004)
Issuance of Series
E-2 preferred
stock............... 6,621,268 10,000 -- -- -- -- -- -- --
Conversion of
related party
convertible
promissory notes
payable and accrued
interest to Series
E-1 preferred
stock............... 857,988 1,310 -- -- -- -- -- -- --
Issuance of common
stock upon exercise
of stock options for
cash................ -- -- 213,748 -- 61 -- -- -- 61
Deferred stock-based
compensation related
to stock options
granted............. -- -- -- -- 195 (195) -- -- --
Amortization of
deferred stock-based
compensation........ -- -- -- -- -- 46 -- -- 46
Interest receivable
from stockholders... -- -- -- -- -- -- (37) -- (37)
Net loss............ -- -- -- -- -- -- -- (3,095) (3,095)
---------- ------- --------- --- ------- ------- ----- -------- --------
Balances, April 30,
1999................ 12,105,254 16,514 5,859,214 6 1,262 (149) (649) (9,499) (9,029)
Issuance of Series F
preferred stock, net
of issuance costs... 4,395,697 19,012 -- -- -- -- -- -- --
Issuance of common
stock upon exercise
of stock options for
cash................ -- -- 228,363 -- 87 -- -- -- 87
Deferred stock-based
compensation related
to stock options
granted............. -- -- -- -- 1,966 (1,966) -- -- --
Amortization of
deferred stock-based
compensation........ -- -- -- -- -- 711 -- -- 711
Allocation of
discount on Series F
preferred stock..... -- 1,994 -- -- -- -- -- -- --
Dividend association
with beneficial
conversion feature
of Series F
preferred stock..... -- -- -- -- (1,994) -- -- -- (1,994)
Interest receivable
from stockholders... -- -- -- -- -- -- (45) -- (45)
Net loss............ -- -- -- -- -- -- -- (8,604) (8,604)
---------- ------- --------- --- ------- ------- ----- -------- --------
Balances, April 30,
2000................ 16,500,951 37,520 6,087,577 6 1,321 (1,404) (694) (18,103) (18,874)
Issuance of Series F
preferred stock..... 3,675,510 15,914 -- -- -- -- -- -- --
Issuance of common
stock upon exercise
of stock options for
cash................ -- -- 141,937 -- 77 -- -- -- 77
Allocation of
discount on
preferred stock..... -- -- -- -- 5,915 (5,915) -- -- --
Amortization of
deferred stock-based
compensation........ -- -- -- -- -- 868 -- -- 868
Allocation of
discount on
preferred stock..... -- 1,667 -- -- -- -- -- -- --
Dividend associated
with beneficial
conversion feature
of Series F
preferred stock..... -- -- -- -- (1,667) -- -- -- (1,667)
Interest receivable
from stockholders... -- -- -- -- -- -- (11) -- (11)
Net loss............ -- -- -- -- -- -- -- (4,355) (4,355)
---------- ------- --------- --- ------- ------- ----- -------- --------
Balances, July 31,
2000 (unaudited).... 20,176,461 $55,101 6,229,514 $ 6 $ 5,646 $(6,451) $(705) $(22,458) $(23,962)
========== ======= ========= === ======= ======= ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended April 30, Ended July 31,
-------------------------- ----------------
1998 1999 2000 1999 2000
------- -------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss........................ $(1,849) $ (3,095) $(8,604) $(1,030) $(4,355)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization... 602 675 641 103 184
Provision for (reduction in)
allowance for doubtful
accounts....................... (19) 30 6 8 20
Amortization of deferred stock-
based compensation............. -- 46 711 96 868
Accrued interest on related
party convertible promissory
notes payable.................. -- 66 -- -- --
Interest on notes receivable
from stockholders.............. (21) (37) (45) (9) (11)
Amortization of discount
related to warrants issued in
connection with related party
convertible promissory note
payable........................ 92 -- -- -- --
Changes in assets and
liabilities:
Accounts receivable............. (1,112) (1,322) 1,470 1,922 (2)
Prepaid expenses and other
current assets................. 130 (204) (584) (147) (580)
Other assets.................... (74) (98) 92 137 (6)
Accounts payable and accrued
liabilities.................... 421 1,346 (326) (773) 1,000
Deferred revenue................ 984 393 338 (405) 243
------- -------- ------- ------- -------
Net cash flows used in
operating activities......... (846) (2,200) (6,301) (98) (2,639)
------- -------- ------- ------- -------
Cash flows from investing
activities:
Purchases of property and
equipment...................... (126) (777) (1,001) (223) (456)
Capitalized software development
costs.......................... (175) (53) (34) (1) --
Purchase of short term
investments.................... -- (52,891) -- -- --
Proceeds from sales and
maturities of short-term
investments.................... -- 48,001 4,890 4,890 --
------- -------- ------- ------- -------
Net cash flows provided by
(used in) investing
activities................... (301) (5,720) 3,855 4,666 (456)
------- -------- ------- ------- -------
Cash flows from financing
activities:
Borrowings on bank lines of
credit......................... 1,286 -- -- -- --
Payments on bank lines of
credit......................... (1,080) (459) (60) (60) --
Payments of capital lease
obligations.................... (72) (102) (20) (5) (4)
Proceeds from issuance of
related party convertible
promissory notes payable....... 1,244 -- -- -- --
Proceeds from issuance of
preferred stock, net of
issuance costs................. -- 10,000 19,012 -- 15,914
Proceeds from issuance of common
stock.......................... 31 61 87 13 77
------- -------- ------- ------- -------
Net cash flows provided by
(used in) financing
activities................... 1,409 9,500 19,019 (52) 15,987
------- -------- ------- ------- -------
Net increase in cash and cash
equivalents..................... 262 1,580 16,573 4,516 12,892
Cash and cash equivalents at
beginning of period............. 104 366 1,946 1,946 18,519
------- -------- ------- ------- -------
Cash and cash equivalents at end
of period....................... $ 366 $ 1,946 $18,519 $ 6,462 $31,411
======= ======== ======= ======= =======
Supplemental disclosure of cash
flow information:
Cash paid during the period for
interest....................... $ 82 $ 18 $ 2 $ 1 $ 1
Supplemental disclosure of non-
cash investing and financing
activities:
Equipment acquired under capital
lease obligation............... $ 107 $ -- $ 31 $ -- $ --
Common stock issued in exchange
for notes receivable from
stockholder.................... $ 286 $ -- $ -- $ -- $ --
Conversion of related party
convertible promissory notes
payable and accrued interest to
Series E-1 preferred stock..... $ -- $ 1,310 $ -- $ -- $ --
Deferred stock-based
compensation................... $ -- $ 195 $ 1,966 $ 503 $ 5,915
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of business
LynuxWorks, Incorporated, formerly Lynx Real-Time Systems, Incorporated (the
"Company") develops and markets software operating systems and related products
and services designed for the embedded systems market. The Company's operating
system and development tools enable its customers to develop embedded systems
based on open standards that are compatible with Linux products. The Company
markets and sells its products and services to distributors and original
equipment manufacturers primarily in North America, Europe and Asia.
Basis of presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. The subsidiaries are located both domestically
and internationally and are intended to be sales offices. All significant
intercompany balances and transactions have been eliminated.
Unaudited interim results
The accompanying interim consolidated financial statements at July 31, 2000
and for the three months ended July 31, 1999 and 2000 are unaudited. The
unaudited interim financial statements have been prepared on the same basis as
the annual financial statements and, in the opinion of management reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly in all material respects the Company's consolidated financial
position at July 31, 2000 and consolidated results of operations and its cash
flows for the three months ended July 31, 1999 and 2000. The consolidated
financial data and other information disclosed in these notes to the
consolidated financial statements related to these periods are unaudited.
Foreign currency translation
The currency of the primary economic environment in which the operation of
the Company and its subsidiaries are conducted is the U.S. dollar. Transactions
and balances denominated in dollars are presented at their original amounts.
Remeasurement gains and losses which have been insignificant are included in
the statements of operations.
Cash and cash equivalents
Cash and cash equivalents is comprised of highly liquid investments with
original or remaining maturities of three months or less at the date of
purchase. Management has classified all short-term investments as available for
sale. These investments are comprised of commercial paper and United States
government agency obligations with maturities of 30 to 150 days. Realized gains
and losses are calculated using the specific identification method. Realized
gains and losses in fiscal years 1999 and 2000 and unrealized holding gains and
losses at April 30, 1999 were not significant.
F-7
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentrations
At April 30, 1999, 2000 and July 31, 2000, substantially all of the Company's
cash and cash equivalents and short-term investments were invested with one
financial institution. At April 30, 2000, the Company had $103,000 of
restricted cash.
The Company sells its software applications to high technology equipment
manufacturers and distributors located in North America, Europe and Asia. The
Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The
Company records an allowance for doubtful accounts for credit losses at the end
of each period based on analysis of individual aged accounts receivable
balances. As a result of this analysis, the Company believes its allowances for
doubtful accounts is adequate but not excessive at April 30, 1999, 2000 and at
July 31, 2000.
At April 30, 1999, three customers accounted for 20%, 19% and 18% of accounts
receivable and at April 30, 2000 two other customers accounted for 20% and 10%
of accounts receivable. At July 31, 2000, one customer accounted for 12%
(unaudited) of accounts receivable. The following table sets forth customers
comprising 10% or more of the revenue for each of the periods reported:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
April 30, July 31,
---------------- ---------------
1998 1999 2000 1999 2000
---- ---- ---- ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
A........................................... 19% 17% -- -- --
B........................................... 14% -- -- -- --
C........................................... -- 13% -- 13% 11%
D........................................... -- -- -- -- 12%
E........................................... -- -- -- 13% --
</TABLE>
Advertising
The Company expenses advertising costs as they are incurred. Advertising
expense for fiscal year 1998, 1999, 2000 and the three months ended July 31,
1999 and 2000 was $191,000, $196,000, $875,000, $60,000 (unaudited), and
$527,000 (unaudited), respectively.
Fair value of financial instruments
The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued liabilities approximate fair value due
to their short maturities (see Note 2).
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Computer equipment and furniture and fixtures are depreciated on
a straight-line basis over estimated useful lives of three years. Leasehold
improvements and equipment leased under capital lease obligations are amortized
over the lesser of the useful life of the asset or the period of the lease.
When assets are sold or retired, the cost and related
F-8
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accumulated depreciation is removed from the accounts and the resulting gains
or losses are included in the statement of operations. Gains and losses from
the disposal of property and equipment are taken into income in the year of
disposition. Repairs and maintenance costs are expensed as incurred.
Research and development costs
Costs related to research, design and development of products are charged to
research and development expenses as incurred. Software development costs are
capitalized beginning when a product's technological feasibility has been
established, generally using the working model approach to date, and ending
when a product is available for general release to customers. Amortization of
capitalized software begins when the product is available for general release
to customers and is amortized using the greater of the amount computed using
the ratio that current gross revenues for a product bear to the total of
current and anticipated future gross revenues for that product, or on a
straight-line basis over two years. Capitalized software development costs are
reported at the lower of unamortized cost or net realizable value. The Company
evaluates the estimated net realizable value of each software product at each
balance sheet date and records write-downs to net realizable value for any
products for which the net book value is in excess of net realizable value. Net
realizable value for each software product is the estimated future gross
revenues from that product reduced by the estimated future costs of completing
and disposing of that product.
For the fiscal years 1998, 1999, 2000 and the three months ended July 31,
1999 and 2000, the Company amortized $330,000, $316,000, $114,000, $29,000
(unaudited) and $11,000 (unaudited) of capitalized software development costs,
respectively, which are included in cost of revenue in the accompanying
consolidated statements of operations. Total accumulated amortization of
capitalized software development costs was $847,000, $961,000 and
$972,000 (unaudited) at April 30, 1999 and 2000 and at July 31, 2000,
respectively.
Income taxes
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue recognition
The Company's revenue is derived from primarily two sources, across many
industries: (i) product licenses revenue, derived primarily from sales of
licenses to distributors and original
F-9
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
equipment manufacturers, and (ii) service revenue, derived primarily from
software development, engineering and consulting contracts, software
maintenance and support contracts and customer training.
The Company adopted the provisions of Statement of Position 97-2, or SOP 97-
2, effective May 1, 1998. SOP 97-2 supersedes Statement of Position 91-1,
Software Revenue Recognition, and delineates the accounting for software
product and maintenance revenues. Under SOP 97-2, the Company recognizes
product license revenue, including prepaid royalties, upon shipment if a signed
contract exists, the fee is fixed and determinable, collection of resulting
receivables is probable and product returns are reasonably estimable. Revenues
from software licenses sold through distributors are recognized under the same
SOP 97-2 criteria because distributors typically only purchase products to
fulfill specific customer orders and do not hold inventory of the Company's
products. The adoption of SOP 97-2 did not have any material impact on the
Company's results of operations or financial position.
The Company recognizes revenue from software development and engineering and
consulting contracts as the services are performed or, when collection of the
fee is subject to final acceptance by the customers on the completed contract
method.
The Company recognizes fees for ongoing customer support and upgrades and
enhancements ratably over the period of the contract. Payments for maintenance
fees are generally made in advance and are non-refundable. Education and
consulting service revenues are recognized as the related services are
performed.
For contracts with multiple obligations (e.g. deliverable and undeliverable
products, maintenance and other services), the Company determines revenue from
each component of the contract based on Vendor Specific Objective Evidence of
its fair value. The Company recognizes revenue allocated to undelivered
products when the criteria for product revenue set forth above are met.
Stock-based compensation
The Company uses the intrinsic value method which requires that deferred
stock-based compensation be recorded for the difference between an option's
exercise price and fair value of the underlying common stock on the date both
the number of shares and exercise price of the option grant are known. The
resulting deferred stock-based compensation is amortized in the statement of
operations over the vesting period of the option, generally four years, using
the multiple option approach. Disclosures are made in the accompanying notes to
consolidated financial statements as required by Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." Under SFAS 123, disclosures are required, assuming all options
granted since January 1, 1996 were valued using the minimum value method and
the resulting deferred stock-based compensation is amortized in the statement
of operations over the vesting period of the option.
Comprehensive income
The Company has adopted Statement of Financial Accounting Standards No. 130
or SFAS 130, "Reporting Comprehensive Income." SFAS 130 establishes standards
for reporting
F-10
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and display of comprehensive income and its components in a full set of
general-purpose financial statements. There was no material difference between
the Company's net loss and its total comprehensive loss for all reported
periods.
Historical net loss per share
The Company computes net loss per share in accordance with SFAS 128,
"Earnings per Share." and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS 128 and SAB 98, basic net loss per share is
computed by dividing the net loss attributable to common stockholders for the
period by the weighted average number of common shares outstanding during the
period. Dilutive net loss per share is computed by dividing the net loss
attributable to common stockholders for the period by the weighted average
number of common and common equivalent shares outstanding during the period, if
dilutive. Common share equivalents consisting of options, warrants, and
mandatorily redeemable convertible preferred stock were not included in the
computation of dilutive net loss per share because their effect would be
antidilutive.
Antidilutive securities not included in net loss per share calculation:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended April 30, July 31,
------------------------------- ---------------------
1998 1999 2000 1999 2000
--------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Mandatorily redeemable
convertible preferred
stock.................. 4,625,998 12,105,254 16,500,951 12,105,284 20,176,461
Common stock options.... 3,949,108 3,801,982 4,465,987 4,448,300 5,830,603
Warrants................ 373,210 373,210 373,210 373,210 373,210
--------- ---------- ---------- ---------- ----------
Total................... 8,948,316 16,280,446 21,340,148 16,926,794 26,380,274
========= ========== ========== ========== ==========
</TABLE>
Pro forma at July 31, 2000 (unaudited)
As contemplated upon closing of the Company's initial public offering, the
outstanding shares of Series A, Series B, Series C, Series D, Series E-1,
Series E-2, and Series F mandatorily redeemable convertible preferred stock
will convert into 20,176,461 shares of common stock. Warrants to purchase
373,210 shares of the Company's common stock will expire if not exercised prior
to the closing of the Company's initial public offering. The pro forma at July
31, 2000 gives effect to the conversion of the mandatorily redeemable
convertible preferred stock into common stock and the exercise of the warrants.
F-11
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma net loss per share
Pro forma net loss per share is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the conversion of
the Company's preferred stock into shares of the Company's common stock
effective upon the closing of the Company's initial public offering as if such
conversion occurred on date of original issuance and the pro forma effect of
the exercise of the warrants to purchase 373,210 shares of common stock at an
exercise price of $0.50 per share as if such exercise occurred on the date of
original issue as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
April 30, July 31,
2000 2000
---------- ------------
(unaudited)
<S> <C> <C>
Historical net loss attributable to common
stockholders.......................................... $(10,598) $(6,022)
======== =======
Shares used in computing net loss per share--basic
and diluted......................................... 5,959 6,207
-------- -------
Pro forma adjustment to reflect weighted effect of
assumed conversion of mandatorily redeemable
convertible preferred stock:
Series A mandatorily redeemable convertible preferred
stock............................................... 1,300 1,300
Series B mandatorily redeemable convertible preferred
stock............................................... 1,281 1,281
Series C mandatorily redeemable convertible preferred
stock............................................... 545 545
Series D mandatorily redeemable convertible preferred
stock............................................... 1,500 1,500
Series E-1 mandatorily redeemable convertible
preferred stock..................................... 858 858
Series E-2 mandatorily redeemable convertible
preferred stock..................................... 6,621 6,621
Series F mandatorily redeemable convertible preferred
stock............................................... 385 7,625
-------- -------
12,490 19,730
-------- -------
Exercise of warrants................................. 373 373
-------- -------
Weighted average shares used in computing pro forma
basic and diluted loss per share...................... 18,822 26,310
======== =======
Pro forma net loss per share, basic and diluted........ $ (0.56) $ (0.23)
======== =======
</TABLE>
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133") that requires companies to
record derivative financial instruments on their balance sheets as assets or
liabilities measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be recorded depending on the use of the
derivative instrument and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. In June
1999, the FASB issued Statement of Financial Accounting Standard No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," ("SFAS 137") that amends SFAS 133 to
be effective for all fiscal quarters of fiscal years beginning after June 15,
2000. In June 2000, the Financial Accounting Standards Board issued SFAS No.
138,
F-12
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
"Accounting for Derivative Instruments and Hedging Activities--An Amendment of
FASB No. 133" ("SFAS 138"). SFAS 138 amends the accounting and reporting
standards for certain derivatives and hedging activities such as net settlement
contracts, foreign currency translations and intercompany derivatives. The
Company will adopt SFAS 133 in its quarter ending October 31, 2000. To date,
the Company has not engaged in derivatives or hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin 101 ("SAB 101"), which summarizes the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 101 is effective December 2000. The Company has
analyzed the impact of SAB 101 and believes that the adoption of SAB 101 will
not have a material effect on its financial position, results of operations or
cash flows.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44")
"Accounting for Certain Transactions involving Stock Compensation," an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion 25 for (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and (d) the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of certain of the provisions of FIN 44 prior to March 31, 2000 did
not have a material impact on the consolidated financial statements. Management
does not expect that the adoption of the remaining provisions will have a
material effect on the consolidated financial statements.
NOTE 2--BALANCE SHEET DETAIL (in thousands):
Cash, cash equivalents and short-term investments:
<TABLE>
<CAPTION>
As of April 30,
------------------------------------
As of July 31,
1999 2000 2000
----------------- ------------------ ------------------
Cost Fair Value Cost Fair Value Cost Fair Value
------ ---------- ------- ---------- ------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents:
Cash.................. $ 303 $ 303 $ 915 $ 915 $ 994 $ 994
Commercial paper...... 1,145 1,145 17,604 17,604 30,417 30,417
Federal Home Loan Bank
Obligations.......... 498 498 -- -- -- --
------ ------ ------- ------- ------- -------
$1,946 $1,946 $18,519 $18,519 $31,411 $31,411
====== ====== ======= ======= ======= =======
Short-term investments:
Commercial paper...... $1,963 $1,963 $ -- $ -- $ -- $ --
Federal Home Loan Bank
Obligations.......... 2,927 2,927 -- -- -- --
------ ------ ------- ------- ------- -------
$4,890 $4,890 $ -- $ -- $ -- $ --
====== ====== ======= ======= ======= =======
</TABLE>
F-13
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and equipment, net:
<TABLE>
<CAPTION>
As of April 30, As of
----------------- July 31,
1999 2000 2000
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Computer equipment.......................... $ 1,463 $ 2,127 $ 2,570
Furniture and fixtures...................... 253 337 347
Leasehold improvements...................... 64 109 112
------- -------- -------
1,780 2,573 3,029
Less: Accumulated depreciation and
amortization............................... (984) (1,273) (1,446)
------- -------- -------
$ 796 $ 1,300 $ 1,583
======= ======== =======
Depreciation and amortization expense for fiscal years 1998, 1999, 2000 and
for the three months ended July 31, 2000 was $272,000, $359,000, $528,000 and
$173,000 (unaudited), respectively.
Equipment acquired under capital lease obligations included in property and
equipment comprised:
<CAPTION>
As of April 30, As of
----------------- July 31,
1999 2000 2000
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Equipment................................... $ 94 $ 91 $ 91
Less: Accumulated depreciation and
amortization............................... (72) (58) (62)
------- -------- -------
$ 22 $ 33 $ 29
======= ======== =======
Accounts payable and accrued liabilities:
<CAPTION>
As of April 30, As of
----------------- July 31,
1999 2000 2000
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Accounts payable............................ $ 623 $ 419 $ 1,040
Accrued payroll and related expenses........ 1,180 509 972
Accrued vacation............................ 335 607 543
Other accrued expenses...................... 868 1,145 1,125
------- -------- -------
$3,006 $ 2,680 $ 3,680
======= ======== =======
</TABLE>
NOTE 3--COMMITMENTS:
Capital leases
The Company leases equipment under capital leases expiring in fiscal year
2001 through fiscal year 2005.
F-14
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Minimum future lease payments at April 30, 2000 under capital leases are as
follows (in thousands):
<TABLE>
<CAPTION>
As of
April 30,
Fiscal Year: 2000
------------ ---------
<S> <C>
2001............................................................... $ 16
2002............................................................... 8
2003............................................................... 8
2004............................................................... 8
2005............................................................... 7
----
Total minimum lease payments....................................... 47
Less: Amounts representing interest................................ (10)
----
Present value of future minimum lease payments..................... 37
Less: Current portion.............................................. (12)
----
Long-term obligations.............................................. $ 25
====
</TABLE>
Operating leases
The Company leases its facilities under noncancelable operating leases which
expire between May 2000 and March 2005. The Company is responsible for
maintenance, insurance and taxes.
Minimum lease payments at April 30, 2000 for these noncancelable operating
leases are as follows (in thousands):
<TABLE>
<CAPTION>
As of
April 30,
Fiscal Year: 2000
------------ ---------
<S> <C>
2001............................................................... $ 906
2002............................................................... 855
2003............................................................... 854
2004............................................................... 865
2005............................................................... 758
------
$4,238
======
</TABLE>
Rent expense for fiscal years 1998, 1999, 2000 and the three months ended
July 31, 1999 and 2000 was $317,000, $378,000, $556,000, $107,000 (unaudited)
and $244,000 (unaudited), respectively.
NOTE 4--RELATED PARTIES:
Related party convertible promissory notes payable
In October 1997, the Company issued convertible promissory notes payable to
certain stockholders for a total principal amount of $1,244,000 and issued
warrants to purchase up to an aggregate of 373,210 shares of the Company's
common stock (See Note 5--"Warrants"). The fair value of the warrants was
estimated at $92,000 using the Black-Scholes model and the
F-15
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
following assumptions; dividend yield of 0%, volatility of 60%, risk free
interest rate of 5.97% and a term of five years.
In June 1998, $1,244,000 of principal and $66,000 of interest under the
convertible promissory notes were converted to 857,988 shares of Series E-1
preferred stock at a conversion price of $1.5103 per share based on the terms
defined in the original notes agreement.
In fiscal years 1998, 1999 and 2000 and for the three months ended July 31,
2000, the Company recorded sales of $513,294, $1,357,000, $826,000 and $614,000
(unaudited), respectively, from one major stockholder.
The Company had amounts receivable from the same stockholder representing
18%, 6% and 12% (unaudited) of accounts receivable at April 30, 1999 and 2000
and at July 31, 2000, respectively.
NOTE 5--PREFERRED AND COMMON STOCK:
Mandatorily Redeemable Convertible Preferred Stock
At July 31, 2000, the amounts, terms and liquidation values of Series A,
Series B, Series C, Series D, Series E-1, Series E-2 and Series F preferred
stock are as follows (unaudited):
<TABLE>
<CAPTION>
Common
Shares
Reserved
Issued and for Liquidation
Series Amount Authorized Outstanding Conversion Value
------ ------- ---------- ----------- ---------- -----------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
A..................... $ 650 1,300,000 1,300,000 1,300,000 $ 650
B..................... 1,449 1,281,000 1,281,000 1,281,000 1,089
C..................... 1,612 544,998 544,998 544,998 1,635
D..................... 1,493 1,500,000 1,500,000 1,500,000 1,500
E-1................... 1,310 857,988 857,988 857,988 1,310
E-2................... 10,000 6,621,268 6,621,268 6,621,268 10,000
F..................... 38,587 8,071,207 8,071,207 8,071,207 34,948
Undesignated.......... -- 1,823,539 -- -- --
------- ---------- ---------- ---------- -------
$55,101 22,000,000 20,176,461 20,176,461 $51,132
======= ========== ========== ========== =======
</TABLE>
Each share of preferred stock is convertible into common stock on a one-for-
one basis subject to adjustment for certain changes in capitalization and
certain dilutive issuances. Each series of preferred stock automatically
converts into common stock, as to each series, upon (1) the consent of the
holders of at least 66 2/3% of the shares of such series of or (2) upon the
closing of a public offering in which the public offering price is equal to or
greater than $8.00 per share of the Company's common stock and aggregate gross
proceeds of at least $20,000,000.
The holders of preferred stock may receive noncumulative dividends of $0.50,
$0.85, $3.00, $1.00, $1.5103, $1.5103 and $4.33 per share per annum for Series
A, Series B, Series C, Series D, Series E-1, Series E-2, and Series F preferred
stock, respectively, when and if declared by the
F-16
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Board of Directors. No cash dividends may be paid to holders of common stock
during any fiscal year until dividends of $0.50, $0.85, $3.00, $1.00, $1.5103,
$1.5103 and $4.33 per share for Series A, Series B, Series C, Series D, Series
E-1, Series E-2, and Series F preferred stock, respectively, have been paid in
that fiscal year. No dividends have been declared to date.
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of preferred stock have
preference over the holders of common stock in liquidation to the extent of
$0.50, $0.85, $3.00, $1.00, $1.5103, $1.5103 and $4.33 per share for Series A,
Series B, Series C, Series D, Series E-1, Series E-2, and Series F preferred
stock, respectively, plus all declared but unpaid dividends. The holders of
common stock are then entitled to receive the amount of $0.05 per share after
which the holders of preferred stock and common stock share ratably in any
further distribution of assets.
The holders of each series of preferred stock, with the exception of the
voting rights of 2,823,176 shares of Series E-2 preferred stock and 98,472
shares of Series F preferred stock, are entitled to the number of votes equal
the number of shares of common stock into which shares of such series convert.
The holders of 2,823,176 shares of Series E-2 and 98,472 shares of Series F
shall vote in proportion to the manner in which all holders of the company's
capital stock vote on all matters except the election of directors.
Stock Option Plans
The Company has adopted the 1988 Stock Option Plan, the 1992 Stock Option
Plan and the 1997 Stock Option Plan (collectively the "Plans"), under which a
total of 9,832,968 shares of the Company's common stock were reserved for
issuance to employees, directors and consultants. The Board of Directors
approved the termination of the 1988 Stock Option Plan effective December 31,
1991.
The Company's 1992 and 1997 Stock Option Plans provide for the grants of
options to purchase the Company's common stock at exercise prices of no less
than 100% and 85% of the fair market value of the Company's common stock at the
date of grant, as determined by the Board of Directors, for incentive and
nonqualified stock options, respectively. The Board of Directors determines
vesting terms on option grants, but in no case can the vesting rate be less
than 20% per year over five years from the option grant date. Options generally
vest over four years, at a rate of 25% one year from the date of grant and
monthly thereafter over three years. Unexercised options under the 1992 Plan
and 1997 Stock Option Plans expire three months after termination of employment
with the Company and have a term of ten years.
F-17
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Activity under the Plans is as follows (in thousands, except share and per
share amounts):
<TABLE>
<CAPTION>
Outstanding Shares
-----------------------------
Weighted
Average
Exercise
Shares Price
Available Number of Price Per Per
for Grant Shares Share Total Share
---------- --------- ----------- ------ --------
<S> <C> <C> <C> <C> <C>
Balances, April 30,
1997................... 1,102,507 3,194,317 $0.05-$0.40 $ 988 $0.31
Shares reserved....... 1,719,500 -- $ -- -- $ --
Options granted....... (1,999,850) 1,999,850 $0.40-$0.60 1,115 $0.56
Options exercised..... -- (775,916) $0.05-$0.44 (306) $0.40
Options canceled...... 469,143 (469,143) $0.05-$0.50 (97) $0.21
---------- --------- ------
Balances, April 30,
1998................... 1,291,300 3,949,108 $0.05-$0.60 1,700 $0.43
Options granted....... (409,875) 409,875 $0.60-$1.00 341 $0.83
Options exercised..... -- (213,748) $0.05-$0.60 (61) $0.29
Options canceled...... 343,253 (343,253) $0.05-$0.60 (151) $0.44
---------- --------- ------
Balances, April 30,
1999................... 1,224,678 3,801,982 $0.05-$1.00 1,829 $0.48
Shares reserved....... 2,004,782 -- $ -- -- $ --
Options granted....... (1,235,050) 1,235,050 $1.00-$1.50 1,689 $1.37
Options exercised..... -- (228,363) $0.10-$1.25 (87) $0.38
Options canceled...... 342,682 (342,682) $0.30-$1.50 (330) $0.96
---------- --------- ------
Balances, April 30,
2000................... 2,337,092 4,465,987 $0.10-$1.50 3,101 $0.69
Options granted....... (1,568,800) 1,568,800 $2.00-$2.20 3,246 $2.07
Options exercised..... -- (141,930) $0.30-$1.50 (77) $0.47
Options canceled...... 62,254 (62,254) $0.40-$2.00 (92) $1.48
---------- --------- ------
Balances, July 31, 2000
(unaudited)............ 830,546 5,830,603 $0.15-$2.20 $6,178 $1.06
========== ========= ======
</TABLE>
The options outstanding and exercisable for the Plans by exercise price at
April 30, 2000 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of Contractual Price Price
Exercise Number Life Per Number Per
Price Outstanding (Years) Share Exercisable Share
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.10-$0.40 1,473,126 5.43 $0.34 1,302,710 $0.34
$0.50-$0.66 1,775,530 7.88 $0.57 1,110,377 $0.57
$1.00-$1.50 1,217,331 9.16 $1.35 73,708 $1.14
--------- ---------
$0.10-$1.50 4,465,987 7.42 $0.69 2,486,795 $0.47
========= =========
</TABLE>
Options to purchase 2,030,040 shares of common stock were exercisable under
the Plans at April 30, 1999, with a weighted average exercise price of $0.42
per share.
F-18
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma stock-based compensation
The Company has adopted the disclosure-only provisions of SFAS 123. Had
compensation expense for the Plans been determined based on the fair value at
the grant date for options granted for the four month period ended April 30,
1996 and in fiscal years 1997, 1998, 1999 and 2000 consistent with the
provisions of SFAS 123, the pro forma net loss would have been as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------
1998 1999 2000
------- ------- --------
<S> <C> <C> <C>
Net loss attributable to common stockholders--
as reported................................... $(1,849) $(3,095) $(10,598)
Net loss attributable to common stockholders--
pro forma..................................... $(1,904) $(3,201) $(10,676)
Basic and diluted net loss attributable to
common stockholders per share................. $ (0.38) $ (0.54) $ (1.78)
Basic and diluted net loss attributable to
common stockholders per share--pro forma...... $ (0.39) $ (0.55) $ (1.79)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method assuming an expected life of four years and a weighted
average risk-free interest rate of 5.91%, 5.91% and 6.12% for fiscal years
1998, 1999 and 2000, respectively. The weighted average expected life was
calculated based on the vesting period and the exercise behavior of each option
granted. The risk-free interest rate was calculated in accordance with the
grant date and expected life calculated for each option granted.
The weighted average fair value of stock options granted in fiscal years
1998, 1999 and 2000 was $0.13, $0.16 and $0.40 per share, respectively.
Warrants
In connection with the issuance of the related party convertible promissory
notes (see Note 4), the Company issued to an officer of the Company and to a
member of the Board of Directors immediately exercisable warrants to purchase
373,210 shares of the Company's common stock which have an exercise price $0.50
per share and expire on the earlier of November 14, 2001 or the closing of the
Company's initial public offering. At April 30, 2000 none of these warrants had
been exercised.
Deferred stock-based compensation
During fiscal years 1999 and 2000 and the three months ended July 31, 2000
(unaudited), the Company issued options to purchase 409,875, 1,235,050 and
1,568,800 shares of its common stock to certain employees and consultants under
its 1997 Stock Option Plan with exercise prices below the deemed fair market
value of the Company's common stock at the date of grant. At April 30, 1999 and
2000 and July 31, 2000, the Company had recorded deferred stock-based
compensation related to these options in an amount of $195,000, $1,966,000 and
$5,915,000 (unaudited), of which $46,000, $711,000 and $868,000 (unaudited) had
been amortized to expense during fiscal years 1999, 2000 and the three months
ended July 31, 2000, respectively.
F-19
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6--INCOME TAXES:
The components of the net deferred tax asset comprise (in thousands):
<TABLE>
<CAPTION>
As of April 30,
----------------
1999 2000
------- -------
<S> <C> <C>
Accrued liabilities........................................ $ 191 $ 185
Allowances for doubtful accounts........................... 41 45
Deferred revenue........................................... 17 179
Other...................................................... 155 144
Net operating loss carryforward............................ 2,804 5,385
Research and development credit carryforwards.............. 1,544 2,002
Foreign tax credit carryforward............................ 432 764
Valuation allowance........................................ (5,184) (8,704)
------- -------
$ -- $ --
======= =======
</TABLE>
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Management periodically evaluates the recoverability of the deferred tax assets
and the level of the valuation allowance. At such time as it is determined that
it is more likely than not that deferred tax assets are realizable, the
valuation allowance will be reduced.
The valuation allowance increased by $1,098,000, $1,582,000 and $3,520,000 in
fiscal years 1998, 1999 and 2000, respectively.
The provision for income taxes is current and is composed of the following
(in thousands):
<TABLE>
<CAPTION>
Three
Months
Year ended Ended
April 30, July 31,
-------------- ------------
1998 1999 2000 1999 2000
---- ---- ---- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
State............................................ $- $- $ 48 $ 4 $ 2
Foreign.......................................... 98 91 194 15 27
--- --- ---- ----- -----
$98 $91 $242 $ 19 $ 29
=== === ==== ===== =====
</TABLE>
F-20
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's effective tax rate differs from the statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
Three
Months
Year ended Ended
April 30, July 31,
------------------ --------------
1998 1999 2000 1999 2000
---- ---- ---- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Income tax benefit at statutory
rate................................ (34)% (34)% (34)% (34)% (34)%
Net operating loss and deferred tax
assets ............................. 34 34 34 34 34
Foreign technology transfer taxes.... 6 4 3 3 1
Other................................ -- -- -- -- --
--- --- --- ----- -----
6 % 4 % 3 % 3% 1 %
=== === === ===== =====
</TABLE>
At April 30, 2000, the following net operating loss and credit carryforwards
were available to the Company to reduce future taxable income:
<TABLE>
<CAPTION>
Federal State
------- ------
(in thousands)
<S> <C> <C>
Regular and alternative maximum tax reporting................ $15,300 $4,103
General business and foreign tax credits..................... 2,146 959
</TABLE>
The carryforwards and credits expire between 2000 and 2020 for both federal
and state purposes, if not used before such time to offset future taxable
income or tax liabilities.
For federal and state tax purposes, a portion of the Company's net operating
loss and tax credit carryforwards may be subject to certain limitations on
annual utilization due to an "Ownership Change," as defined by federal and
state tax law.
NOTE 7--PROFIT-SHARING PLAN:
The Company's 401(k) Profit-Sharing Plan provides for tax deferred automatic
salary deductions. Under the terms of the plan, eligible employees and the
Company are permitted to make contributions to the plan as determined by the
Board of Directors. No Company contributions were made in fiscal years 1999 or
2000.
F-21
<PAGE>
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8--GEOGRAPHIC REVENUE REPORTING:
The Company operates in one industry segment. The Company's geographic sales
data based on customer destination is defined by region: North America, Europe
and Asia. Revenue by geographic region was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
Year Ended April 30, July 31,
----------------------- -------------------
1998 1999 2000 1999 2000
------- ------- ------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
North America.................... $ 6,755 $10,621 $11,647 $ 3,156 $ 3,598
Europe........................... 2,842 2,647 3,618 832 984
Asia............................. 1,533 1,592 1,931 353 526
------- ------- ------- --------- ---------
$11,130 $14,860 $17,196 $ 4,341 $ 5,108
======= ======= ======= ========= =========
</TABLE>
NOTE 9--SUBSEQUENT EVENTS: (unaudited)
Acquisition of Integrated Software & Devices Corporation ("ISDCorp")
In October 2000, pending tax clearance from the California Franchise Tax
Board, the Company acquired all the common stock of Integrated Software &
Devices Corporation ("ISDCorp") for 5,022,776 shares of LynuxWorks common stock
and 981,757 options to acquire LynuxWorks common stock. The acquisition will be
accounted for using the purchase method of accounting. The excess of the
purchase price over the fair value of the net identifiable assets of
approximately $30.6 million represents goodwill and other intangible assets and
will be amortized on a straight-line basis over two to three years.
Approximately $610,000 was allocated to purchased in-process research and
development and will be expensed at the date of acquisition.
Initial public offering
In October 2000, the Company's Board of Directors authorized management of
the Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock to the
public. If the initial public offering is closed under the terms presently
anticipated, all of the convertible preferred stock outstanding will convert
into shares of common stock, subject to the approval of the holders of
preferred stock. Unaudited pro forma stockholders' equity, as adjusted for the
assumed conversion of the preferred stock and exercise of warrants, is set
forth on the balance sheets.
Following the initial public offering, the Company will be authorized to
issue 250,000,000 shares of $0.001 par value common stock and 10,000,000 shares
of $0.001 par value preferred stock. The board of directors will have the
authority to issue the undesignated preferred stock in one or more series and
to fix the rights, preferences, privileges and restrictions thereof.
Reincorporation
In May 2000, the board of directors authorized the reincorporation of the
Company in the State of Delaware. The reincorporation will be effective prior
to the closing of the Company's initial public offering.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Integrated Software & Devices Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations, of shareholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of Integrated Software &
Devices Corporation at December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America. 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 of these statements in accordance with auditing standards generally
accepted in the United States of America, 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 audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
July 27, 2000,
F-23
<PAGE>
INTEGRATED SOFTWARE & DEVICES CORPORATION
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
As of
December 31, As of
------------- June 30,
1998 1999 2000
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 925 $ 892 $ 260
Accounts receivable............................... 524 221 557
Prepaid expenses and other current assets......... 48 230 149
------ ------ -------
Total current assets............................ 1,497 1,343 966
Property and equipment, net......................... 360 381 397
Other assets........................................ 28 28 28
------ ------ -------
Total assets.................................... $1,885 $1,752 $ 1,391
====== ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 36 $ 24 $ 87
Cash overdrafts................................... 128 -- --
Line of credit.................................... -- -- 285
Accrued liabilities............................... 290 338 787
Deferred revenue.................................. 853 563 520
Related party notes payable....................... -- 1,250 300
------ ------ -------
Total current liabilities....................... 1,307 2,175 1,979
Convertible note payable............................ -- -- 1,000
------ ------ -------
Total liabilities............................... 1,307 2,175 2,979
------ ------ -------
Commitments (Note 3)
Shareholders' equity (deficit):
Common stock, no par value:
Authorized: 35,000,000 shares;
Issued and outstanding: 20,000,000 shares at
December 31, 1998 and 1999 and 21,860,000
(unaudited) shares at June 30, 2000.............. 5 5 3,416
Deferred stock-based compensation................. -- -- (1,519)
Notes receivable from shareholders................ -- -- (256)
Retained earnings (accumulated deficit)........... 573 (428) (3,229)
------ ------ -------
Total shareholders' equity (deficit)............ 578 (423) (1,588)
------ ------ -------
Total liabilities and shareholders' equity
(deficit)...................................... $1,885 $1,752 $ 1,391
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
INTEGRATED SOFTWARE & DEVICES CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December Six Months
31, Ended June 30,
---------------------- ---------------
1997 1998 1999 1999 2000
------ ------ ------ ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues.............................. $2,116 $2,903 $4,594 $3,048 $ 1,880
Cost of revenues...................... 1,149 1,619 2,296 1,375 1,525
Amortization of deferred stock-based
compensation related to the service
organization......................... -- -- -- -- 607
------ ------ ------ ------ -------
Gross profit (loss)................... 967 1,284 2,298 1,673 (252)
------ ------ ------ ------ -------
Operating expenses:
Research and development (exclusive
of amortization of deferred stock-
based compensation of $154 in the
six months ended June 30, 2000
(unaudited), reported below)....... 50 109 527 116 387
Sales and marketing (exclusive of
amortization of deferred stock-
based compensation of $239 in the
six months ended June 30, 2000
(unaudited), reported below)....... 147 296 534 237 602
General and administrative
(exclusive of amortization of
deferred stock-based compensation
of $376 in the six months ended
June 30, 2000 (unaudited), reported
below)............................. 433 725 922 395 945
Amortization of deferred stock-based
compensation....................... -- -- -- -- 769
Interest associated with beneficial
conversion feature on convertible
note payable....................... -- -- -- -- 200
------ ------ ------ ------ -------
Total operating expenses.......... 630 1,130 1,983 748 2,903
------ ------ ------ ------ -------
Operating income (loss)............... 337 154 315 925 (3,155)
Other income (expense), net........... 10 9 36 27 (69)
------ ------ ------ ------ -------
Income before provision for income
taxes................................ 347 163 351 952 (3,224)
Provision for income taxes............ (2) (2) (14) (2) (5)
------ ------ ------ ------ -------
Net income (loss)..................... $ 345 $ 161 $ 337 $ 950 $(3,229)
====== ====== ====== ====== =======
Net income (loss) per share--basic and
diluted.............................. $ 0.02 $ 0.01 $ 0.02 $ 0.05 $ (0.16)
====== ====== ====== ====== =======
Shares used in computing net income
(loss) per share--basic and diluted.. 20,000 20,000 20,000 20,000 20,619
====== ====== ====== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
INTEGRATED SOFTWARE & DEVICES CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Notes Retained Total
Common Stock Deferred Receivable Earnings Shareholders'
------------- Stock-Based from (Accumulated Equity
Shares Amount Compensation Shareholders Deficit) (Deficit)
------ ------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1996................... 20,000 $ 5 $ -- $ -- $ 304 $ 309
Dividends distribution.. -- -- -- -- (152) (152)
Net income.............. -- -- -- -- 345 345
------ ------ ------- ----- ------- -------
Balances, December 31,
1997................... 20,000 5 -- -- 497 502
Dividends distribution.. -- -- -- -- (85) (85)
Net income.............. -- -- -- -- 161 161
------ ------ ------- ----- ------- -------
Balances, December 31,
1998................... 20,000 5 -- -- 573 578
Dividends distribution.. -- -- -- -- (1,338) (1,338)
Net income.............. -- -- -- -- 337 337
------ ------ ------- ----- ------- -------
Balances, December 31,
1999................... 20,000 5 -- -- (428) (423)
Conversion from S-corp
status to C-corp....... -- (428) -- -- 428 --
Issuance of common stock
upon exercise of stock
options for cash and
notes receivable....... 1,860 744 -- (256) -- 488
Deferred stock-based
compensation........... -- 2,895 (2,895) -- -- --
Amortization of deferred
stock-based
compensation........... -- -- 1,376 -- -- 1,376
Interest associated with
beneficial conversion
feature on convertible
note payable........... -- 200 -- -- -- 200
Net loss................ -- -- -- -- (3,229) (3,229)
------ ------ ------- ----- ------- -------
Balances, June 30, 2000
(unaudited)............ 21,860 $3,416 $(1,519) $(256) $(3,229) $(1,588)
====== ====== ======= ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
INTEGRATED SOFTWARE & DEVICES CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
---------------------- ------------------
1997 1998 1999 1999 2000
----- ------ ------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................. $ 345 $ 161 $ 337 $ 950 $ (3,229)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Interest associated with
beneficial conversion feature on
convertible note payable........ -- -- -- -- 200
Depreciation..................... 43 64 103 55 62
Amortization of deferred stock-
based compensation.............. -- -- -- -- 1,376
Changes in assets and liabilities:
Accounts receivable.............. (127) (157) 303 (130) (336)
Prepaid expenses and other
current assets.................. -- (48) (182) 6 81
Other assets..................... -- (24) -- -- --
Accounts payable................. (11) 36 (12) 16 63
Accrued expenses................. 32 181 48 (47) 449
Deferred revenue................. -- 853 (290) (770) (43)
----- ------ ------- ------- ---------
Net cash flows provided by (used
in) operating activities....... 282 1,066 307 80 (1,377)
----- ------ ------- ------- ---------
Cash flows from investing
activities:
Purchases of property and
equipment........................ (77) (316) (124) (76) (78)
----- ------ ------- ------- ---------
Cash flows from financing
activities:
Proceeds from exercise of stock
options.......................... -- -- -- -- 488
Cash overdraft.................... -- 128 (128) (128) --
Dividends distribution............ (152) (85) (1,338) (37) --
Proceeds from borrowings on line
of credit ....................... -- -- -- -- 285
Proceeds from issuance of
promissory notes................. -- -- -- -- 1,000
Proceeds from issuance of related
party note payable............... -- -- 1,250 -- --
Payments on related party note
payable.......................... -- -- -- -- (950)
----- ------ ------- ------- ---------
Net cash flows (used in)
provided by financing
activities..................... (152) 43 (216) (165) 823
----- ------ ------- ------- ---------
Net increase (decrease) in cash and
cash equivalents.................. 53 793 (33) (161) (632)
Cash and cash equivalents,
beginning of period............... 79 132 925 925 892
----- ------ ------- ------- ---------
Cash and cash equivalents, end of
period............................ $ 132 $ 925 $ 892 $ 764 $ 260
===== ====== ======= ======= =========
Supplemental disclosure of cash
flow information:
Cash paid during the year for
interest......................... $ -- $ 9 $ -- $ -- $ 1
Supplemental disclosure of non-cash
information:
Deferred stock-based
compensation..................... $ -- $ -- $ -- $ -- $ 2,895
Issuance of notes receivable upon
exercise of stock options........ $ -- $ -- $ -- $ -- $ 256
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
INTEGRATED SOFTWARE & DEVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of business
Integrated Software & Devices Corporation (the "Company") provides services
and software for the embedded computing market, including embedded Linux
applications. The Company specializes in adapting operating systems to specific
microprocessors, developing software devices drivers and providing embedded
systems integration.
Stock split
On December 9, 1999, the Company effected a 1,000-for-one common stock split.
All common stock data in the accompanying financial statements has been
retroactively adjusted to reflect the stock split.
Unaudited interim financial information
The accompanying financial statements as of June 30, 2000 and for the six
month periods ended June 30, 1999 and 2000, together with the related notes,
are unaudited but include all adjustments, consisting only of recurring
adjustments which, in the opinion of management, are necessary for a fair
presentation, in all material respects, of the operating results and cash flows
for the period presented.
Cash and cash equivalents
The Company considers all investments purchased with an original or remaining
maturity of three months or less at the date of purchase to be cash
equivalents.
Concentrations
At December 31, 1998 and 1999, substantially all of the Company's cash and
cash equivalents were invested with two financial institutions.
The Company performs ongoing credit evaluations of its customers' financial
conditions and generally requires no collateral from its customers. The Company
records an allowance for doubtful accounts at the end of each period based on
an analysis of individual aged accounts receivable balances. As a result of
this analysis, the Company has determined that no allowance for doubtful
accounts was necessary at December 31, 1998, 1999, and at June 30, 2000
(unaudited).
At December 31, 1998, three customers accounted for 16%, 22% and 47% of
accounts receivable and at December 31, 1999 three different customers
accounted for 11%, 12% and 71% of accounts receivable. At June 30, 2000
(unaudited), three customers accounted for 12%, 24%, and 37% of accounts
receivable.
F-28
<PAGE>
INTEGRATED SOFTWARE & DEVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table sets forth customers comprising 10% or more of the
revenue for each of the periods reported:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
---------------- -------------
Customer 1997 1998 1999 1999 2000
-------- ---- ---- ---- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
A........................................... 70% 40% 15% 19% 52%
B........................................... -- 24% 54% 61% 11%
C........................................... -- -- -- -- 19%
D........................................... -- -- -- 14% --
</TABLE>
Fair value of financial instruments
The carrying amounts of certain of the Company's financial instruments,
including cash, cash equivalents, trade accounts receivable, accounts payable
and accrued liabilities approximate fair value due to their short maturities.
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of its long-term debt approximates fair
value.
Advertising
The Company expenses advertising costs as they are incurred. Advertising
expense for the years ended December 31, 1997, 1998 and 1999 and the six months
ended June 30, 1999 and 2000 was $4,000, $9,000, $74,000, $18,000 (unaudited)
and $64,000 (unaudited), respectively.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Computer and equipment and furniture and fixtures are depreciated
on a straight-line basis over estimated useful lives of three years. When
assets are sold or retired, the cost and related accumulated depreciation is
removed from the accounts and the resulting gains or losses are included in the
statement of operations. Gains and losses from the disposal of property and
equipment are taken into income in the period of disposition. Repairs and
maintenance costs are expensed as incurred.
Research and development costs
Costs related to research and development are charged to expenses as
incurred.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue recognition
The Company's revenue is derived primarily from providing software consulting
services to original equipment manufacturers.
F-29
<PAGE>
INTEGRATED SOFTWARE & DEVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company performs services under two types of contracts, fixed fee
contracts and time and materials contracts. For fixed fee contracts, the
Company recognizes revenue using the completed contract method of accounting.
The completed contact method has been used, as the collection of the fee is
subject to final acceptance by the customer. Revenue is recognized under the
completed contact method when final acceptance is obtained by the customer.
Direct and indirect costs are deferred until revenue is recognized. For time
and material contracts where no customer acceptance is required, the Company
recognizes revenue as services are performed.
Comprehensive income
The Company has adopted Statement of Financial Accounting Standards No. 130
or SFAS 130, "Reporting Comprehensive Income." SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. There was no difference between
the Company's net income (loss) and its total comprehensive income (loss) for
the years ended 1997, 1998 and 1999 and the six months ended June 30, 1999 and
2000 (unaudited).
Stock-based compensation
Pursuant to SFAS 123, "Accounting for Stock-Based Compensation," the Company
accounts for employee stock options under Accounting Principles Board Opinion
("APB") No. 25 and follows the disclosure-only provisions of SFAS 123. Under
APB No. 25, compensation expense is based on the difference, if any, on the
date of the grant, between the estimated fair value of the Company's shares and
the exercise price of options to purchase that stock.
Income taxes
The Company elected to be taxed under the "S" corporation provisions of the
Internal Revenue Code. Under "S" corporation status, the current annual taxable
income or losses of the Company are reported by the shareholders on their
individual federal and state tax returns. Therefore, no Federal income tax
provision or liability related to the Company is reflected in the accompanying
combined financial statements for the years ended December 31, 1997, 1998 and
1999. California has imposed a 1.5% surtax on the corporate profits of an "S"
Corporation. In February 2000 (unaudited), the Company converted from an "S"
corporation to a C corporation, effective as of January 1, 2000. Accordingly,
the Company will be subject to regular federal and state income taxes
commencing January 1, 2000.
Upon termination of "S" corporation status, the accumulated deficit has been
reclassified to common stock.
Historical net income (loss) per share
The Company computes historical net income (loss) per share in accordance
with SFAS No. 128, "Earnings per Share." Basic earnings per share is computed
by dividing net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities by including stock options in the weighted average
number of common shares outstanding for a period, if dilutive. Common
F-30
<PAGE>
INTEGRATED SOFTWARE & DEVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
share equivalents consisting of 2,643,500 options (unaudited) at June 30, 2000
were not included in the computation of dilutive net loss per share because
their effect would be antidilutive.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," that requires companies to
record derivative financial instruments on their balance sheets as assets or
liabilities measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative instrument and whether it qualifies for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133," that amends SFAS 133 to be effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. In June 2000, the Financial Accounting
Standards Board issued SFAS 138, "Accounting for Derivative Instruments and
Hedging Activities--An Amendment of FASB No. 133." SFAS 138 amends the
accounting and reporting standards for certain derivatives and hedging
activities such as net settlement contracts, foreign currency translations and
intercompany derivatives. The Company will adopt SFAS 133 in its quarter ending
September 30, 2000. To date, the Company has not engaged in derivatives or
hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin 101, or SAB 101, which summarizes the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 101 is effective December 2000. The Company has
analyzed SAB 101 and its current interpretation and believes its adoption will
not have a material effect on its financial position, results of operations or
cash flow.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN44") "Accounting for Certain Transactions involving
Stock Compensation," an interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion 25 for (a) the definition of employee for purposes
of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998 or January 12, 2000.
The adoption of certain of the provisions of FIN 44 prior to March 31, 2000 did
not have a material impact on the consolidated financial statements. Management
does not expect that the adoption of the remaining provisions will have a
material effect on the consolidated financial statements.
F-31
<PAGE>
INTEGRATED SOFTWARE & DEVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 2--BALANCE SHEET DETAIL (in thousands):
Property and equipment, net:
<TABLE>
<CAPTION>
As of
December
31, As of
---------- June 30,
1998 1999 2000
---- ---- -----------
(unaudited)
<S> <C> <C> <C>
Computer equipment...................................... $290 $377 $452
Furniture and fixtures.................................. 206 243 246
---- ---- ----
496 620 698
Less: Accumulated depreciation.......................... (136) (239) (301)
---- ---- ----
$360 $381 $397
==== ==== ====
</TABLE>
Accrued liabilities:
<TABLE>
<CAPTION>
As of
December
31, As of
--------- June 30,
1998 1999 2000
---- ---- -----------
(unaudited)
<S> <C> <C> <C>
Accrued payroll and related expenses...................... $150 $189 $393
Accrued vacation.......................................... 64 104 298
Other accrued expenses.................................... 76 45 96
---- ---- ----
$290 $338 $787
==== ==== ====
</TABLE>
NOTE 3--COMMITMENTS:
Operating leases
The Company leases its facilities and certain equipment under noncancelable
operating leases expiring in fiscal year 2001 through fiscal year 2003. The
Company is responsible for maintenance, insurance and taxes.
Minimum lease payments as of December 31, 1999 for these noncancelable
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
2000.................................................................... $370
2001.................................................................... 382
2002.................................................................... 111
2003.................................................................... 7
----
$870
====
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 1999 and 2000 was $44,000, $249,000, $324,000, $156,000
(unaudited) and $162,000 (unaudited) respectively.
F-32
<PAGE>
INTEGRATED SOFTWARE & DEVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 4--DEBTS:
Related party notes payable
In 1999, the Company issued two promissory notes to an officer of the
Company, who is also a related party, for a total of $1,250,000. The notes are
to be repaid on or before December 31, 2000, and accrue interest at a rate of
10% per annum, compounded annually. In April 2000 (unaudited), two repayments
were made for a total of $950,000.
Line of credit
The Company has had a line of credit with a financial institution since April
1998. The credit limits were $300,000 and $500,000 as of December 31, 1998 and
1999, respectively. The line of credit is collateralized by substantially all
of the assets of the Company. There was no outstanding balance under the line
of credit at December 31, 1998 and 1999, respectively. The line of credit
expires in September 2000 and bears interest at the bank reference rate
plus 3% (11.5% at December 31, 1999).
Convertible Note Payable
In March 2000, the Company issued a convertible note payable in the amount of
$1,000,000, which bears interest at 6% per annum, and is convertible into
common stock at the option of the holder, and is automatically convertible into
common stock upon: (1) closing of another round of financing by the Company (2)
a definitive merger agreement. In the event of a merger, any unpaid accrued
interest shall be forgiven by the lender.
In connection with the issuance of the convertible note payable, the Company
incurred a non-cash charge (interest associated with beneficial conversion
feature) of $421,000 (unaudited) in the six months ended June 30, 2000.
NOTE 5--INCOME TAXES:
<TABLE>
<CAPTION>
As of
June 30, 2000
-------------
(unaudited)
<S> <C>
Net operating loss carryforwards............................. $ 381
Research and development credit and other credits
carryforwards............................................... 22
Accrual to cash basis adjustment............................. 363
-----
Total deferred tax assets.................................... 766
Less: Valuation allowance.................................... (766)
-----
Net deferred tax asset....................................... $ --
=====
</TABLE>
The Company has established a valuation allowance against its deferred tax
asset as it is more likely than not that this asset will not be realized.
At June 30, 2000 (unaudited), the Company had available net operating loss
carryforwards of approximately $956,000 to offset future federal and state
taxable income. If unused, these carryforwards will expire in 2020. The Company
also has federal and state research and development credit carryforwards of
approximately $14,000 (unaudited), at June 30, 2000. These carryforwards expire
in the year 2020 if not utilized.
F-33
<PAGE>
INTEGRATED SOFTWARE & DEVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. If the Company should have an ownership change, as
defined, utilization of the carryforwards could be restricted.
NOTE 6--CAPITAL STOCK:
In January 2000 the Company has adopted the 2000 Equity Incentive Plan and
the 2000 Executive Equity Incentive Plan (collectively the "Plans"), under
which a total of 8,571,428 shares of the Company's common stock were reserved
for issuance to employees, directors and consultants.
The Company's Plans provide for the grants of options to purchase the
Company's common stock at exercise prices of no less than 100% and 85% of the
fair market value of the Company's common stock at the date of grant, as
determined by the Board of Directors, for incentive and nonqualified stock
options, respectively. The Board of Directors determines vesting terms on
option grants, but in no case can the vesting rate be less than 20% per year
over five years from the option grant date. Options generally vest over four
years.
Activity under the Plans is as follows (in thousands, except share and per
share data) (unaudited):
<TABLE>
<CAPTION>
Weighted
Outstanding Shares Average
----------------------- Exercise
Shares Price Price
Available Number of per per
for Grant Shares Share Total Share
---------- ---------- ----- ----- --------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 2000
Shares reserved............... 8,571,428
Options granted............... (4,578,500) 4,578,500 $0.40 1,831 $0.40
Options exercised............. -- (1,860,000) $0.40 (744) $0.40
Options cancelled............. 75,000 (75,000) $0.40 (30) $0.40
---------- ---------- -----
Balances, June 30, 2000....... 4,067,928 2,643,500 $0.40 1,057 $0.40
========== ========== =====
</TABLE>
The options outstanding and exercisable for the Plans by exercise price at
June 30, 2000 are as follows (unaudited):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Exercise Price Outstanding (Years) per Share Exercisable per Share
-------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.40............... 2,643,500 9.60 $0.40 970,271 $0.40
========= ==== ===== ======= =====
</TABLE>
During the six months ended June 30, 2000, the Company issued options to
purchase 4,578,500 (unaudited) shares of its common stock under its Plans with
exercise prices below the deemed fair market value of the Company's common
stock at the date of grant. At June 30, 2000, the Company had recorded deferred
stock-based compensation related to these options in the amount of $2,895,000
(unaudited), of which $1,376,000 had been amortized during the period ended
June 30, 2000.
F-34
<PAGE>
INTEGRATED SOFTWARE & DEVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pro forma stock-based compensation
The Company has adopted the disclosure-only provision of SFAS 123. Had
compensation expense for the Plans been recorded based on the fair value at the
grant date for options granted during the six months ended June 30, 2000
consistent with the provisions of SFAS 123, the pro forma net loss would have
been reported as follows (in thousands):
<TABLE>
<CAPTION>
Period ended
June 30, 2000
-------------
(unaudited)
<S> <C>
Net loss attributable to common shareholders--as reported.... $(3,229)
Net loss attributable to common shareholders--pro forma...... $(3,346)
Basic and diluted net loss per share......................... $ (0.15)
Basic and diluted net loss per share--pro forma.............. $ (0.16)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black Scholes model assuming an expected life of four years and a risk-free
interest rate of 5.93%-6.29%. The weighted expected life was calculated based
on the vesting period. The risk-free interest rate was calculated in accordance
with the grant date and expected life.
The weighted average fair value of stock options granted for the period ended
June 30, 2000, (unaudited) was $0.92.
NOTE 7--SUBSEQUENT EVENTS:
Acquisition of the Company (unaudited)
In October 2000, pending tax clearance from the California Franchise Tax
Board, the Company was acquired by LynuxWorks, Incorporated for a total of
5,022,776 shares of LynuxWorks, Incorporated's common stock and options to
purchase 981,757 shares of LynuxWorks, Incorporated's common stock to replace
the Company's outstanding stock options.
Conversion of Note Payable (unaudited)
On July 31, 2000, the principal under the convertible promissory note was
converted to 1,057,868 shares of common stock at a conversion price of $0.95
per share and the accrued interest has been forgiven based on the terms of the
original note agreement.
F-35
<PAGE>
LYNUXWORKS, INCORPORATED
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements give effect
to the acquisition of Integrated Software & Devices Corporation ("ISDCorp") by
LynuxWorks, Incorporated ("LynuxWorks") using the purchase method of accounting
and include pro forma adjustments described in the accompanying notes.
The unaudited pro forma combined balance sheet as of July 31, 2000 reflects
the combination of the consolidated balance sheet of LynuxWorks as of July 31,
2000 with the balance sheet of ISDCorp as of June 30, 2000. The unaudited pro
forma combined statement of operations for the three months ended July 31, 2000
reflects the combination of the consolidated statement of operations of
LynuxWorks for the three months ended July 31, 2000 with the statement of
operations of ISDCorp for the three months ended June 30, 2000. The unaudited
pro forma combined statement of operations for the year ended April 30, 2000
reflects the combination of the consolidated statement of operations of
LynuxWorks for the year ended April 30, 2000 with the statement of operations
of ISDCorp for the year ended March 31, 2000.
The unaudited pro forma combined financial information does not give effect
to the conversion of LynuxWork's preferred stock into common stock upon
completion of the offering contemplated by this prospectus.
The accompanying unaudited pro forma combined financial statements have been
presented in accordance with Article 11 of Regulation S-X.
The unaudited pro forma combined financial information is subject to a number
of estimates, assumptions and uncertainties. This financial information does
not purport to reflect the results of operations or financial condition which
would have occurred had the acquisition taken place on the dates assumed for
the purposes of this financial information, nor do they purport to be
indicative of LynuxWorks' results of operations or financial condition for any
future period. The unaudited pro forma combined financial information should be
read in conjunction with the historical financial statements of LynuxWorks and
ISDCorp and related notes included elsewhere in this prospectus.
F-36
<PAGE>
LYNUXWORKS, INCORPORATED
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
As of July 31, 2000
(in thousands)
<TABLE>
<CAPTION>
Pro
Pro Forma Forma
LynuxWorks ISDCorp Adjustments Combined
---------- ------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 31,411 $ 260 $ -- $ 31,671
Accounts receivable, net........... 3,434 557 -- 3,991
Prepaid expenses and other current
assets............................ 1,696 149 -- 1,845
-------- ------- ------- --------
Total current assets............. 36,541 966 -- 37,507
Property and equipment, net.......... 1,583 397 -- 1,980
Other assets......................... 195 28 -- 223
Goodwill and other intangible
assets.............................. -- -- 30,563 30,563
-------- ------- ------- --------
Total assets..................... $ 38,319 $ 1,391 $30,563 $ 70,273
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued
liabilities....................... $ 3,680 $ 874 $ 500 $ 5,054
Line of credit..................... -- 285 -- 285
Deferred revenue................... 3,467 520 (52) 3,935
Current portion of long-term
obligations....................... 12 300 -- 312
-------- ------- ------- --------
Total current liabilities........ 7,159 1,979 448 9,586
Long-term obligations, net of current
portion............................. 21 1,000 (1,000) 21
-------- ------- ------- --------
Total liabilities................ 7,180 2,979 (552) 9,607
-------- ------- ------- --------
Mandatorily redeemable convertible
preferred stock..................... 55,101 -- -- 55,101
-------- ------- ------- --------
Stockholders' equity (deficit):
Stock and additional paid-in
capital........................... 5,652 3,416 32,860 41,928
Deferred stock-based compensation.. (6,451) (1,519) (4,620) (12,590)
Notes receivable from
stockholders...................... (705) (256) 256 (705)
Accumulated deficit................ (22,458) (3,229) 2,619 (23,068)
-------- ------- ------- --------
Total stockholders' equity
(deficit)....................... (23,962) (1,588) 31,115 5,565
-------- ------- ------- --------
Total liabilities, mandatorily
redeemable convertible
preferred stock and
stockholders' equity
(deficit)..................... $ 38,319 $ 1,391 $30,563 $ 70,273
======== ======= ======= ========
</TABLE>
See accompanying notes to the pro forma financial information.
F-37
<PAGE>
LYNUXWORKS, INCORPORATED
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Year Ended April 30, 2000
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
LynuxWorks ISDCorp Adjustment Combined
---------- ------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product license..................... $ 11,541 $ -- $ -- $ 11,541
Service............................. 5,655 3,613 -- 9,268
-------- ------- -------- --------
Total revenues.................... 17,196 3,613 -- 20,809
-------- ------- -------- --------
Cost of revenues:
Product license..................... 1,221 -- -- 1,221
Service............................. 3,170 2,218 -- 5,388
Amortization of deferred stock-based
compensation related to the service
organization....................... 113 673 -- 786
-------- ------- -------- --------
Total cost of revenues............ 4,504 2,891 -- 7,395
-------- ------- -------- --------
Gross profit.......................... 12,692 722 -- 13,414
Operating expenses:
Research and development............ 7,061 691 -- 7,752
Sales and marketing................. 11,422 676 -- 12,098
General and administrative.......... 2,343 1,236 -- 3,579
Amortization of goodwill and other
intangible assets.................. -- -- 10,479 10,479
Amortization of deferred stock-based
compensation....................... 598 341 2,046 2,985
-------- ------- -------- --------
Total operating expenses.......... 21,424 2,944 12,525 36,893
-------- ------- -------- --------
Operating loss........................ (8,732) (2,222) (12,525) (23,479)
Other income (expense), net........... 370 (2) -- 368
-------- ------- -------- --------
Loss before provision for income
taxes................................ (8,362) (2,224) (12,525) (23,111)
Provision for income taxes............ 242 14 -- 256
-------- ------- -------- --------
Net loss.............................. (8,604) (2,238) (12,525) (23,367)
Dividend associated with beneficial
conversion feature of Series F
preferred stock...................... (1,994) -- -- (1,994)
-------- ------- -------- --------
Net loss attributable to common
stockholders......................... $(10,598) $(2,238) $(12,525) $(25,361)
======== ======= ======== ========
Net loss attributable to common
stockholders per share--basic and
diluted ............................. $ (1.78) $ (0.11) $ (2.31)
======== ======= ========
Shares used in computing net loss
attributable to common stockholders
per share--basic and diluted......... 5,959 20,000 10,982
======== ======= ========
</TABLE>
See accompanying notes to the pro forma financial information.
F-38
<PAGE>
LYNUXWORKS, INCORPORATED
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Three Months Ended July 31, 2000
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
LynuxWorks ISDCorp Adjustment Combined
---------- ------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product license..................... $ 3,245 $ -- $ -- $ 3,245
Service............................. 1,863 1,175 -- 3,038
------- ------- ------- --------
Total revenues.................... 5,108 1,175 -- 6,283
------- ------- ------- --------
Cost of revenues:
Product license..................... 367 -- -- 367
Service............................. 1,334 950 -- 2,284
Amortization of deferred stock-based
compensation related to the service
organization....................... 126 118 -- 244
------- ------- ------- --------
Total cost of revenues............ 1,827 1,068 -- 2,895
------- ------- ------- --------
Gross profit.......................... 3,281 107 -- 3,388
Operating expenses:
Research and development............ 1,892 168 -- 2,060
Sales and marketing................. 4,703 354 -- 5,057
General and administrative.......... 761 546 -- 1,307
Amortization of goodwill and other
intangible assets.................. -- -- 2,620 2,620
Amortization of deferred stock-based
compensation....................... 742 244 512 1,498
Deemed dividend on convertible note
payable............................ -- 200 -- 200
------- ------- ------- --------
Total operating expenses.......... 8,098 1,512 3,132 12,742
------- ------- ------- --------
Operating loss........................ (4,817) (1,405) (3,132) (9,354)
Other income (expense), net........... 491 (42) -- 449
------- ------- ------- --------
Loss before provision for income
taxes................................ (4,326) (1,447) (3,132) (8,905)
Provision for income taxes............ 29 5 -- 34
------- ------- ------- --------
Net loss.............................. (4,355) (1,452) (3,132) (8,939)
Dividend associated with beneficial
conversion feature of Series F
preferred stock...................... (1,667) -- -- (1,667)
------- ------- ------- --------
Net loss attributable to common
stockholders......................... $(6,022) $(1,452) $(3,132) $(10,606)
======= ======= ======= ========
Net loss attributable to common
stockholders per share--basic and
diluted.............................. $ (0.97) $ (0.07) $ (0.94)
======= ======= ========
Shares used in computing net loss
attributable to common stockholders
per share--basic and diluted......... 6,207 21,640 11,230
======= ======= ========
</TABLE>
See accompanying notes to the pro forma financial information.
F-39
<PAGE>
LYNUXWORKS, INCORPORATED
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
NOTE 1--PRO FORMA BASIS OF PRESENTATION:
The unaudited pro forma combined balance sheet as of July 31, 2000 reflects
the balance sheet of LynuxWorks as of July 31, 2000 and balance sheet of
ISDCorp as of June 30, 2000 as if the acquisition had taken place on July 31,
2000. The unaudited pro forma combined statements of operations for the three
month period ended July 31, 2000 and for the year ended April 30, 2000 reflect
the combined results of operations of LynuxWorks and ISDCorp as if the
acquisition had taken place on May 1, 2000 and May 1, 1999, respectively.
These unaudited pro forma combined financial statements reflect the issuance
of 5,022,776 shares of LynuxWorks common stock in exchange for 22,914,868
shares of ISDCorp common stock (outstanding at October 19, 2000) in connection
with the acquisition, based on the exchange ratio of approximately 0.21919
shares of LynuxWorks common stock for each outstanding share of ISDCorp common
stock as set forth in the following table:
<TABLE>
<S> <C>
ISDCorp common stock outstanding as of October 19, 2000......... 22,914,868
Exchange ratio.................................................. 0.21919
Number of shares of LynuxWorks common stock exchanged........... 5,022,776
Number of shares of LynuxWorks common stock outstanding at July
31, 2000....................................................... 26,405,975
----------
Number of shares of LynuxWorks common stock outstanding after
the completion of the acquisition.............................. 31,428,751
==========
</TABLE>
The actual number of shares of LynuxWorks common stock to be issued will be
determined at the effective time of the acquisition based on the number of
shares of ISDCorp common stock outstanding at that date.
The total estimated purchase price of ISDCorp has been calculated as follows
(in thousands):
<TABLE>
<S> <C>
Value of securities issued.......................................... $30,137
Assumption of ISDCorp stock options................................. 6,139
-------
36,276
Estimated transaction costs and expenses............................ 500
-------
Total estimated purchase price.................................... $36,776
=======
</TABLE>
The preliminary purchase price allocation is as follows (in thousands):
<TABLE>
<CAPTION>
Annual Three Months Useful
Amount Amortization Amortization Lives (years)
------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Tangible net liabilities.. $ (536) N/A* N/A* N/A*
In-process research and
development.............. 610 N/A* N/A* N/A*
Options assumed........... 6,139 2,046 512 3
Intangible asset related
to workforce............. 1,750 875 219 2
Goodwill and other
intangible assets........ 28,813 9,604 2,401 3
------- ------- ------
$36,776 $12,525 $3,132
======= ======= ======
</TABLE>
--------
* N/A means not applicable
F-40
<PAGE>
LYNUXWORKS, INCORPORATED
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION--(Continued)
NOTE 2--PRO FORMA ADJUSTMENTS:
The unaudited pro forma combined financial information gives effect to the
allocation of the total purchase price to the assets and liabilities of ISDCorp
based on their estimated fair values and the related amortization over the
estimated useful lives of amounts allocated to intangible assets, including
goodwill. The unaudited pro forma combined balance sheet reflects the write off
of in-process research and development and the conversion of the convertible
note payable into shares of ISDCorp's common stock at July 31, 2000.
F-41
<PAGE>
EDGAR DESCRIPTION OF INSIDE BACK COVER ARTWORK:
This page is divided lengthwise into two even halves. At the top of the
left half is the heading "Orchestrating Embedded Linux Solutions." Below this
heading is the LynxOS logo. Below this is the BlueCat logo.
At the top of the right half of the page is the Lynuxworks logo. Below
this is a list of bullet-pointed text broken up into eight categories by
headings. The first heading is "Communications"; below this heading are five
bullet points reading: "Cellular infrastructure equipment"; "Wireless base
stations and central office switches"; "Multimedia exchanges and DSL"; "Internet
infrastructure equipment"; and "Hot swap and high-availability systems." The
second heading is "Aerospace and Defense"; below this heading are five bullet
points reading: "Aircraft"; "Satellites, GPS"; "Military equipment"; "Field
command tools"; and "Avionics". The third heading is "Consumer and Business
Electronics"; below this heading are four bullet points reading: "Printers";
"Copiers"; "Entertainment systems"; and "Video systems".
The fourth heading is "Industrial Control Systems"; below this heading are three
bullet points reading: "Manufacturing Equipment"; "Process control";
and "Robotics." The fifth heading is "Internet Infrastructure"; below this
heading are four bullet points reading: "Routers"; "Switches"; "Voice-over IP";
and "Gateways." The sixth heading is "Automotive/Transportation"; below this
heading are three bullet points reading: "Automotive systems"; "Radar controls";
and "Sonar systems". The seventh heading is "Medical Devices"; below this
heading are two bullet points reading: "Monitors"; and "Diagnostic equipment."
The eighth heading is "Retail"; below this heading are two bullet points
reading: "POS scanners"; and "Credit card readers."
<PAGE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. We are offering to sell, and seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only for the date of this
prospectus, regardless of the time of delivery of this prospectus or of any
sale of our common stock.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
Special Note Regarding
Forward-Looking Statements.............................................. 21
Use of Proceeds.......................................................... 22
Dividend Policy.......................................................... 22
Capitalization........................................................... 23
Dilution................................................................. 25
Selected Consolidated Financial Data..................................... 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 30
Business................................................................. 45
Management............................................................... 60
Certain Transactions..................................................... 75
Principal Stockholders................................................... 81
Description of Capital Stock............................................. 84
Shares Eligible For Future Sale.......................................... 87
Underwriting............................................................. 90
Legal Matters............................................................ 93
Experts.................................................................. 93
Additional Information Available to You.................................. 93
Index to Consolidated Financial Statements............................... F-1
</TABLE>
Until , 2001, 25 days after the date of this prospectus, all
dealers that buy, sell or trade in these securities, whether or not
participating in this offering, may be required to deliver a prospectus.
Dealers are also obligated to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
--------------------------------------------------------------------------------
[LynuxWorks LOGO]
Shares
Common Stock
Deutsche Banc Alex. Brown
Prudential Volpe Technology
a unit of Prudential Securities
Dain Rauscher Wessels
ABN AMRO Rothschild LLC
Prospectus
, 2001
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<CAPTION>
Amount
To Be Paid
----------
<S> <C>
Securities and Exchange Commission Registration fee............... $18,480
NASD filing fee................................................... 7,500
Nasdaq National Market listing fee................................ *
Blue sky fees and expenses........................................ *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... *
Printing and engraving expenses................................... *
Transfer agent and registrar fees................................. *
Miscellaneous..................................................... *
-------
Total........................................................... $ *
=======
</TABLE>
--------
* To be filed by amendment
Item 14. Indemnification of Directors and Officers
As permitted by Section 145 of the Delaware General Corporation Law, our
Amended and Restated Certificate of Incorporation includes a provision that
eliminates the personal liability of our directors for monetary damages for
breach of their fiduciary duty as a director to the fullest extent permitted
under Delaware General Corporation Law. In addition, as permitted by Section
145 of the Delaware General Corporation Law, our Amended and Restated Bylaws
provide that: (1) we are required to indemnify our directors and executive
officers and persons serving in these capacities in other business enterprises
(including, for example, our subsidiaries) at our request, to the fullest
extent permitted by Delaware General Corporation Law, including in those
circumstances in which indemnification would otherwise be discretionary; (2) we
may, in our discretion, indemnify our employees and agents in those
circumstances where indemnification is not required by law; (3) the rights
conferred in the Amended and Restated Bylaws are not exclusive, and we are
authorized to enter into indemnification agreements with our directors,
executive officers and employees; and (4) we may not retroactively amend these
provisions in the Amended and Restated Bylaws in a way that is adverse to the
directors, executive officers and employees who benefit from these protections.
Our policy is to enter into indemnification agreements with each of its
directors and executive officers that provide the maximum indemnity allowed to
directors and executive officers by Section 145 of the Delaware General
Corporation Law and the Amended and Restated Bylaws, as well as certain
additional procedural protections. In addition, these indemnity agreements
provide that parties to the indemnification agreements will be indemnified to
the fullest possible extent not prohibited by law against any and all expenses
(including any federal, state, local or foreign taxes imposed on the indemnitee
as a result of the actual or deemed receipt of any payments under the
indemnification agreement), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by us, which approval
shall not be unreasonably withheld), actually and reasonably incurred in
relation to the Indemnitee's position as a director, officer, employee, agent
or fiduciary of the
II-1
<PAGE>
Registrant, or any subsidiary of the Registrant, or in relation to the
Indemnitee's service at the request of the Registrant as a director, officer,
employee, agent or fiduciary of another corporation, partnership, joint
venture, trust or other enterprise or in relation to Indemnitee's action or
inaction while serving in such a capacity. LynuxWorks will not be obligated
pursuant to the indemnity agreements to indemnify or advance expenses to an
indemnified party with respect to proceedings or claims initiated by the
indemnified party and not by way of defense, counterclaim or crossclaim, except
with respect to proceedings specifically authorized by the Registrants' Board
of Directors or brought to enforce a right to indemnification under the
indemnity agreement, the Registrant's Amended and Restated Bylaws or any
statute or law. Under the agreements, the Registrant is not obligated to
indemnify the indemnified party (1) for any expenses incurred by the
indemnified party with respect to any proceeding instituted by the indemnified
party to enforce or interpret the agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
indemnified party in such proceeding was not made in good faith or was
frivolous; (2) for any amounts paid in settlement of a proceeding unless the
Registrant consents to such settlement; (3) with respect to any proceeding
brought by the Registrant against the indemnified party for willful misconduct,
unless a court determines that each of such claims was not made in good faith
or was frivolous; (4) on account of any suit in which judgment is rendered
against the indemnified party for an accounting of profits made from the
purchase or sale by the indemnified party of securities of the Registrant
pursuant to the provisions of (S) 16(b) of the Securities Exchange Act of 1934
and related laws; (5) on account of the indemnified party's conduct which is
finally adjudged to have been knowingly fraudulent or deliberately dishonest,
or to constitute willful misconduct or a knowing violation of the law; (6) on
account of any conduct from which the indemnified party derived an improper
personal benefit; (7) on account of conduct the indemnified party believed to
be contrary to the best interests of the Registrant or its stockholders; (8) on
account of conduct that constituted a breach of the indemnified party's duty of
loyalty to the Registrant or its stockholders; or (9) if a final decision by a
court having jurisdiction in the matter shall determine that such
indemnification is not lawful.
The indemnification provision in the Amended and Restated Certificate of
Incorporation, Amended and Restated Bylaws and the indemnification agreements
entered into between us and our directors and executive officers, may be
sufficiently broad to permit indemnification of the our officers and directors
for liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act")
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Exhibit
Document Number
-------- -------
<S> <C>
Form of Underwriting Agreement........................................ 1.1
Seventh Amended and Restated Articles of Incorporation of LynuxWorks,
Incorporated, as currently in effect................................. 3.1
Certificate of Incorporation of LynuxWorks, Incorporated, in
connection with our reincorporation in Delaware...................... 3.2
Form of Amended and Restated Certificate of Incorporation of
LynuxWorks, Incorporated, to be filed upon the closing of the
offering made under this Registration Statement...................... 3.3
Amended and Restated Bylaws of LynuxWorks, Incorporated, as currently
in effect............................................................ 3.4
Bylaws of LynuxWorks, Incorporated, in connection with our
reincorporation in Delaware.......................................... 3.5
Form of Amended and Restated Bylaws of LynuxWorks, Incorporated, to be
in effect upon the closing of the offering made under this
Registration Statement............................................... 3.6
Form of Indemnification Agreement to be entered into by LynuxWorks,
Incorporated with each of its directors and executive officers....... 10.1
</TABLE>
II-2
<PAGE>
Item 15. Recent Sales of Unregistered Securities
During the past three years, the Registrant has issued and sold the following
securities:
(a) During the past three years, the Registrant has granted an aggregate of
6,708,975 options (consisting of 0 options from 1988 Stock Plan, 310,000
options from 1992 Stock Plan and 6,398,975 options from 1997 Stock Plan) to
purchase shares of common stock to directors, officers, employees, former
employees and consultants at exercise prices ranging from $.50 to $3.30 per
share. These shares were sold pursuant to the exercise of options granted by
the Board of Directors. As to each director, officer, employee and consultant
of the Registrant who was issued these securities, the Registrant relied upon
Rule 701 of the Securities Act. Each such person was granted such options
pursuant to a written contract between such person and the Registrant. In
addition, the Registrant met the conditions imposed under Rule 701(b) as
transactions pursuant to compensatory benefit plans and contracts related to
compensation.
(b) On November 14, 1997, the Registrant issued warrants to purchase an
aggregate of 373,210 shares of unregistered common stock to 6 investors at an
exercise price of $0.50 per share. The Registrant relied upon Section 4(2) of
the Securities Act in connection with the issuance of these warrants as
transactions by an issuer not involving a public offering.
(c) On June 9, 1998, the Registrant sold 857,988 shares of unregistered
Series E-1 preferred stock to 5 investors for an aggregate consideration of
$1,295,819. The Registrant relied upon Section 4(2) of the Securities Act in
connection with the sale of these shares as transactions by an issuer not
involving a public offering.
(d) On June 9, 1998, the Registrant sold 6,621,268 shares of unregistered
Series E-2 preferred stock to 1 investor for an aggregate consideration of
$10,000,101. The Registrant relied upon Section 4(2) of the Securities Act in
connection with the sale of these shares as transactions by an issuer not
involving a public offering.
(e) Between March 9, 2000 and May 30, 2000, the Registrant sold 8,071,207
shares of unregistered Series F preferred stock to 66 investors for aggregate
cash consideration of $34,948,326. The Registrant relied upon Section 4(2) of
the Securities Act in connection with the sale of these shares as transactions
by an issuer not involving a public offering.
Appropriate legends were affixed to the share certificates issued in the
transactions described above. All recipients had adequate access, through their
relationships with the Registrant, to adequate information about the
Registrant.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Reorganization, dated July 21, 2000, by and among
LynuxWorks, Incorporated, Lworks, Inc., Integrated Software & Devices
Corporation and, with respect to Articles VII and X only, Reza Soliman-
Noori as Shareholder Representative.
3.1 Seventh Amended and Restated Articles of Incorporation of LynuxWorks,
Incorporated, as currently in effect.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------------------------------------------------------------------
<C> <S>
3.2 Certificate of Incorporation of LynuxWorks, Incorporated, in connection
with our reincorporation in Delaware.
3.3 Form of Amended and Restated Certificate of Incorporation of
LynuxWorks, Incorporated, to be filed upon the closing of the offering
made under this Registration Statement.
3.4 Amended and Restated Bylaws of LynuxWorks, Incorporated, as currently
in effect.
3.5 Bylaws of LynuxWorks, Incorporated, in connection with our
reincorporation in Delaware.
3.6 Form of Amended and Restated Bylaws of LynuxWorks, Incorporated, to be
in effect upon the closing of the offering made under this Registration
Statement.
4.1* Form of LynuxWorks, Incorporated common stock certificate.
4.2 Amended and Restated Investors' Rights Agreement, dated March 9, 2000,
among LynuxWorks, Incorporated and the parties named therein.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 Form of Indemnification Agreement to be entered into by LynuxWorks,
Incorporated with each of its directors and executive officers.
10.2 1988 Stock Option Plan and related agreements.
10.3 1992 Stock Plan and related agreements.
10.4 1997 Stock Plan and related agreements.
10.5 ISDCorp 2000 Equity Incentive Plan and related agreements.
10.6 ISDCorp 2000 Executive Equity Incentive Plan and related agreements.
10.7 Form of 2000 Employee Stock Purchase Plan and related agreements.
10.8 Form of 2000 Stock Option Plan and related agreements.
10.9 Form of Change of Control Severance Agreement between LynuxWorks,
Incorporated and each of Inder M. Singh, Reza Soliman-Noori, Arthur
Swift, Mitchell P. Bunnell, Bhupindarpal Singh, Luke C. Dion, George A.
(Skip) Forster, Albert J. McCabe, Gurjot Singh, Robert N. Morris and
Daniel Wald.
10.10 Lease Agreement, dated January 31, 1995, as amended on July 30, 1999,
by and between LynuxWorks, Incorporated and Mission West Properties,
L.P. II.
10.11 Lease, dated October 2, 2000, by and between LynuxWorks, Incorporated
and Mission West Properties, L.P.
10.12+ Software Licensing Agreement, dated June 8, 1999, by and between
LynuxWorks, Incorporated and Rockwell Collins, Inc.
10.13+ Software Development Agreement, dated May 25, 2000, by and between
LynuxWorks, Incorporated and Hewlett-Packard Company.
10.14+ License and Distribution Agreement, dated February 2000 by and between
LynuxWorks, Incorporated and Motorola, Inc.
10.15+ OEM Software Licensing Agreement, dated April 30, 1999, by and between
LynuxWorks, Incorporated and Xerox Corporation.
10.16+ International Distributor Agreement, dated November 20, 1991, as
amended on March 24, 1994, by and between LynuxWorks, Incorporated and
Nissin Software Corporation.
10.17+ Software License Agreement, dated December 4, 1998, by and between
LynuxWorks, Incorporated and Hewlett-Packard Company.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ ---------------------------------------------------------------------
<C> <S>
11.1 Statement of computation of net loss per share and pro forma net loss
per share (see Note 1 of Notes to Financial Statements).
21.1 Subsidiaries of LynuxWorks, Incorporated.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLC, Independent Accountants.
24.1 Power of Attorney (see page II-6).
27.1 Financial Data Schedule.
</TABLE>
--------
* To be supplied by amendment.
+ Confidential treatment requested.
(b) Financial Statement Schedules
Schedule I--Report of Independent Accountants
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned 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 provisions referenced in Item 14 of this
Registration Statement or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
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 Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Jose,
State of California, on this 25th day of October, 2000.
LYNUXWORKS, INCORPORATED
By: /s/ Inder M. Singh
----------------------------------
Inder M. Singh
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature to this
Registration Statement appears below constitutes and appoints Inder M. Singh
and Bhupindarpal Singh, or any one or more of them, as such person's true and
lawful attorney-in-fact and agents, each with full power of substitution, for
such person and in such person's name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and any registration statement
related to the offering contemplated by this registration statement that is to
be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, and to file the same, with all exhibits thereto and all other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that each of said attorneys-in-fact and agents or any of them, or his or their
substitute or substitutes, may lawfully do or cause to be done or 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 and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Inder M. Singh President, Chief Executive Officer October 25, 2000
_________________________________ and Chairman of the Board
Inder M. Singh (Principal Executive Officer)
/s/ Bhupindarpal Singh Vice President of Finance and Chief October 25, 2000
_________________________________ Financial Officer (Principal
Bhupindarpal Singh Financial and Accounting Officer)
/s/ Reza Soliman-Noori Vice Chairman of the Board October 25, 2000
_________________________________
Reza Soliman-Noori
/s/ Phillip E. White Director October 25, 2000
_________________________________
Phillip E. White
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Steven E. Bochner Director October 25, 2000
_________________________________
Steven E. Bochner
/s/ Kapil Nanda Director October 25, 2000
_________________________________
Kapil Nanda
/s/ M. Yaqub Mirza Director October 25, 2000
_________________________________
M. Yaqub Mirza
/s/ Robert F. Weber, Jr. Director October 25, 2000
_________________________________
Robert F. Weber, Jr.
</TABLE>
II-7
<PAGE>
SCHEDULE I
REPORT OF INDEPENDENT ACCOUNTS
In connection with our audits of the consolidated financial statements of
LynuxWorks, Incorporated (formerly Lynx Real-Time Systems, Incorporated) and
its subsidiaries as of April 30, 1999 and 2000 and for each of the three years
in the period ended April 30, 2000, which consolidated financial statements are
included in the Registration Statement, we have also audited the financial
statement schedule listed in Item 16 herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ PricewaterhouseCoopers LLP
San Jose, California
May 30, 2000
S-1
<PAGE>
SCHEDULE II
LynuxWorks, Incorporated
VALUATION AND QUALIFYING ACCOUNTS
Years Ended April 30, 1998, 1999 and 2000
(in thousands)
Allowance for Doubtful Accounts Receivable
<TABLE>
<CAPTION>
Additions-
Balance at Charged Balance at
Beginning to Costs Deductions- End of
Year Ended April 30, of Period and Expenses Write-off Period
-------------------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
1998............................. $100 -- $19 $81
1999............................. 81 30 -- 111
2000............................. 111 6 -- 117
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Reorganization, dated July 21, 2000, by and among
LynuxWorks, Incorporated, Lworks, Inc., Integrated Software & Devices
Corporation and, with respect to Articles VII and X only, Reza Soliman-
Noori as Shareholder Representative.
3.1 Seventh Amended and Restated Articles of Incorporation of LynuxWorks,
Incorporated, as currently in effect.
3.2 Certificate of Incorporation of LynuxWorks, Incorporated, in connection
with our reincorporation in Delaware.
3.3 Form of Amended and Restated Certificate of Incorporation of
LynuxWorks, Incorporated, to be filed upon the closing of the offering
made under this Registration Statement.
3.4 Amended and Restated Bylaws of LynuxWorks, Incorporated, as currently
in effect.
3.5 Bylaws of LynuxWorks, Incorporated, in connection with our
reincorporation in Delaware.
3.6 Form of Amended and Restated Bylaws of LynuxWorks, Incorporated, to be
in effect upon the closing of the offering made under this Registration
Statement.
4.1* Form of LynuxWorks, Incorporated common stock certificate.
4.2 Amended and Restated Investors' Rights Agreement, dated March 9, 2000,
among LynuxWorks, Incorporated and the parties named therein.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 Form of Indemnification Agreement to be entered into by LynuxWorks,
Incorporated with each of its directors and executive officers.
10.2 1988 Stock Option Plan and related agreements.
10.3 1992 Stock Plan and related agreements.
10.4 1997 Stock Plan and related agreements.
10.5 ISDCorp 2000 Equity Incentive Plan and related agreements.
10.6 ISDCorp 2000 Executive Equity Incentive Plan and related agreements.
10.7 Form of 2000 Employee Stock Purchase Plan and related agreements.
10.8 Form of 2000 Stock Option Plan and related agreements.
10.9 Form of Change of Control Severance Agreement between LynuxWorks,
Incorporated and each of Inder M. Singh, Reza Soliman-Noori, Arthur
Swift, Mitchell P. Bunnell, Bhupindarpal Singh, Luke C. Dion, George A.
(Skip) Forster, Albert J. McCabe, Gurjot Singh, Robert N. Morris and
Daniel Wald.
10.10 Lease Agreement, dated January 31, 1995, as amended on July 30, 1999,
by and between LynuxWorks, Incorporated and Mission West Properties,
L.P. II.
10.11 Lease, dated October 2, 2000, by and between LynuxWorks, Incorporated
and Mission West Properties, L.P.
10.12+ Software Licensing Agreement, dated June 8, 1999, by and between
LynuxWorks, Incorporated and Rockwell Collins, Inc.
10.13+ Software Development Agreement, dated May 25, 2000, by and between
LynuxWorks, Incorporated and Hewlett-Packard Company.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ ----------------------------------------------------------------------
<C> <S>
10.14+ License and Distribution Agreement, dated February 2000 by and between
LynuxWorks, Incorporated and Motorola, Inc.
10.15+ OEM Software Licensing Agreement, dated April 30, 1999, by and between
LynuxWorks, Incorporated and Xerox Corporation.
10.16+ International Distributor Agreement, dated November 20, 1991, as
amended on March 24, 1994, by and between LynuxWorks, Incorporated and
Nissin Software Corporation.
10.17+ Software License Agreement, dated December 4, 1998, by and between
LynuxWorks, Incorporated and Hewlett-Packard Company.
11.1 Statement of computation of net loss per share and pro forma net loss
per share (see Note 1 of Notes to Financial Statements).
21.1 Subsidiaries of LynuxWorks, Incorporated.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLC, Independent Accountants.
24.1 Power of Attorney (see page II-6).
27.1 Financial Data Schedule.
</TABLE>
--------
* To be supplied by amendment.
+ Confidential treatment requested.
