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LYNUXWORKS INC - S-1 - 20001025 - CERTAIN_TRANSACTIONS
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:
Shares of Shares of Shares of
Purchaser Series E-1 Stock Series E-2 Stock Series F Stock
--------- ---------------- ---------------- --------------
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
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(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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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:
Number of Shares
Name Issuable upon Exercise
---- ----------------------
Inder M. Singh........................................... 188,100
Entities affiliated with M. Yaqub Mirza(1)............... 185,110
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(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:
Number of Shares
Name Issuable upon Exercise
---- -----------------------
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
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(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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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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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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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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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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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.
Percentage of Shares
Beneficially Owned
------------------------
Number of Shares Before After
Name of Beneficial Owner Beneficially Owned Offering Offering
------------------------ ------------------ ---------- ----------
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
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* Less than 1% of the outstanding shares of common stock.
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(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
85
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
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.
Number of Shares
Eligible for
Sale Date Eligible for Sale
---------------- ----------------------
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
|
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
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
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
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:
Number
of
Underwriter Shares
----------- ------
Deutsche Bank Securities Inc. ........................................
Prudential Securities Incorporated....................................
Dain Rauscher Incorporated............................................
ABN AMRO Rothschild LLC...............................................
----
Total.................................................................
====
|
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
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:
Discounts Total Discounts and Commissions
and -------------------------------------------
Commissions Without Exercise of With Full Exercise of
Per Share Over-Allotment Option Over-Allotment Option
----------- --------------------- ---------------------
Discounts and
Commissions paid by
LynuxWorks............ $ $ $
|
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
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
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
INDEX TO FINANCIAL STATEMENTS
Page
----
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
|
F-1
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
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
Pro Forma
As of April 30, As of as of
----------------- July 31, July 31,
1999 2000 2000 2000 (note 1)
------- -------- ----------- -------------
(unaudited) (unaudited)
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
======= ======== ========
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The accompanying notes are an integral part of these consolidated financial
statements.
F-3
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months
Year Ended April 30, Ended July 31,
-------------------------- ----------------
1998 1999 2000 1999 2000
------- ------- -------- ------- -------
(unaudited)
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
======== =======
|
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
CONSOLIDATED STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
(in thousands, except share data)
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
---------- ------- --------- ------ ---------- ------------ ------------ ----------- -------------
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)
========== ======= ========= === ======= ======= ===== ======== ========
|
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months
Year Ended April 30, Ended July 31,
-------------------------- ----------------
1998 1999 2000 1999 2000
------- -------- ------- ------- -------
(unaudited)
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
|
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
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
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:
Three Months
Year Ended Ended
April 30, July 31,
---------------- ---------------
1998 1999 2000 1999 2000
---- ---- ---- ------ ------
(unaudited)
A........................................... 19% 17% -- -- --
B........................................... 14% -- -- -- --
C........................................... -- 13% -- 13% 11%
D........................................... -- -- -- -- 12%
E........................................... -- -- -- 13% --
|
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
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
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
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:
Three Months Ended
Year Ended April 30, July 31,
------------------------------- ---------------------
1998 1999 2000 1999 2000
--------- ---------- ---------- ---------- ----------
(unaudited)
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
========= ========== ========== ========== ==========
|
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
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):
Three Months
Year Ended Ended
April 30, July 31,
2000 2000
---------- ------------
(unaudited)
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)
======== =======
|
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
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:
As of April 30,
------------------------------------
As of July 31,
1999 2000 2000
----------------- ------------------ ------------------
Cost Fair Value Cost Fair Value Cost Fair Value
------ ---------- ------- ---------- ------- ----------
(unaudited)
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 $ -- $ -- $ -- $ --
====== ====== ======= ======= ======= =======
|
F-13
LYNUXWORKS, INCORPORATED
(FORMERLY LYNX REAL-TIME SYSTEMS, INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and equipment, net:
As of April 30, As of
----------------- July 31,
1999 2000 2000
------- -------- -----------
(unaudited)
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:
As of April 30, As of
----------------- July 31,
1999 2000 2000
------- -------- -----------
(unaudited)
Equipment................................... $ 94 $ 91 $ 91
Less: Accumulated depreciation and
amortization............................... (72) (58) (62)
------- -------- -------
$ 22 $ 33 $ 29
======= ======== =======
Accounts payable and accrued liabilities:
As of April 30, As of
----------------- July 31,
1999 2000 2000
------- -------- -----------
(unaudited)
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
======= ======== =======
|
NOTE 3--COMMITMENTS:
Capital leases
The Company leases equipment under capital leases expiring in fiscal year
2001 through fiscal year 2005.
F-14
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):
As of
April 30,
Fiscal Year: 2000
------------ ---------
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
====
|
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):
As of
April 30,
Fiscal Year: 2000
------------ ---------
2001............................................................... $ 906
2002............................................................... 855
2003............................................................... 854
2004............................................................... 865
2005............................................................... 758
------
$4,238
======
|
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
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):
Common
Shares
Reserved
Issued and for Liquidation
Series Amount Authorized Outstanding Conversion Value
------ ------- ---------- ----------- ---------- -----------
(in thousands, except share data)
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
======= ========== ========== ========== =======
|
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
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
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):
Outstanding Shares
-----------------------------
Weighted
Average
Exercise
Shares Price
Available Number of Price Per Per
for Grant Shares Share Total Share
---------- --------- ----------- ------ --------
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
========== ========= ======
|
The options outstanding and exercisable for the Plans by exercise price at
April 30, 2000 are as follows:
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
-------- ----------- ----------- -------- ----------- --------
$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
========= =========
|
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
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):
Year Ended April 30,
--------------------------
1998 1999 2000
------- ------- --------
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)
|
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
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):
As of April 30,
----------------
1999 2000
------- -------
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)
------- -------
$ -- $ --
======= =======
|
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):
Three
Months
Year ended Ended
April 30, July 31,
-------------- ------------
1998 1999 2000 1999 2000
---- ---- ---- ----- -----
(unaudited)
State............................................ $- $- $ 48 $ 4 $ 2
Foreign.......................................... 98 91 194 15 27
--- --- ---- ----- -----
$98 $91 $242 $ 19 $ 29
=== === ==== ===== =====
|
F-20
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:
Three
Months
Year ended Ended
April 30, July 31,
------------------ --------------
1998 1999 2000 1999 2000
---- ---- ---- ----- -----
(unaudited)
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 %
=== === === ===== =====
|
At April 30, 2000, the following net operating loss and credit carryforwards
were available to the Company to reduce future taxable income:
Federal State
------- ------
(in thousands)
Regular and alternative maximum tax reporting................ $15,300 $4,103
General business and foreign tax credits..................... 2,146 959
|
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
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):
Three Months Ended
Year Ended April 30, July 31,
----------------------- -------------------
1998 1999 2000 1999 2000
------- ------- ------- --------- ---------
(unaudited)
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
======= ======= ======= ========= =========
|
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
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
INTEGRATED SOFTWARE & DEVICES CORPORATION
BALANCE SHEETS
(in thousands, except share data)
As of
December 31, As of
------------- June 30,
1998 1999 2000
------ ------ -----------
(unaudited)
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
====== ====== =======
|
The accompanying notes are an integral part of these financial statements.
F-24
INTEGRATED SOFTWARE & DEVICES CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December Six Months
31, Ended June 30,
---------------------- ---------------
1997 1998 1999 1999 2000
------ ------ ------ ------ -------
(unaudited)
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
====== ====== ====== ====== =======
|
The accompanying notes are an integral part of these financial statements.
F-25
INTEGRATED SOFTWARE & DEVICES CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
Notes Retained Total
Common Stock Deferred Receivable Earnings Shareholders'
------------- Stock-Based from (Accumulated Equity
Shares Amount Compensation Shareholders Deficit) (Deficit)
------ ------ ------------ ------------ ------------ -------------
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)
====== ====== ======= ===== ======= =======
|
The accompanying notes are an integral part of these financial statements.
F-26
INTEGRATED SOFTWARE & DEVICES CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended Six Months Ended
December 31, June 30,
---------------------- ------------------
1997 1998 1999 1999 2000
----- ------ ------- -------- ---------
(unaudited)
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
|
The accompanying notes are an integral part of these financial statements.
F-27
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
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:
Six Months
Year Ended Ended
December 31, June 30,
---------------- -------------
Customer 1997 1998 1999 1999 2000
-------- ---- ---- ---- ----- -----
(unaudited)
A........................................... 70% 40% 15% 19% 52%
B........................................... -- 24% 54% 61% 11%
C........................................... -- -- -- -- 19%
D........................................... -- -- -- 14% --
|
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
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
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
INTEGRATED SOFTWARE & DEVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 2--BALANCE SHEET DETAIL (in thousands):
Property and equipment, net:
As of
December
31, As of
---------- June 30,
1998 1999 2000
---- ---- -----------
(unaudited)
Computer equipment...................................... $290 $377 $452
Furniture and fixtures.................................. 206 243 246
---- ---- ----
496 620 698
Less: Accumulated depreciation.......................... (136) (239) (301)
---- ---- ----
$360 $381 $397
==== ==== ====
|
Accrued liabilities:
As of
December
31, As of
--------- June 30,
1998 1999 2000
---- ---- -----------
(unaudited)
Accrued payroll and related expenses...................... $150 $189 $393
Accrued vacation.......................................... 64 104 298
Other accrued expenses.................................... 76 45 96
---- ---- ----
$290 $338 $787
==== ==== ====
|
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):
Fiscal Year
-----------
2000.................................................................... $370
2001.................................................................... 382
2002.................................................................... 111
2003.................................................................... 7
----
$870
====
|
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
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:
As of
June 30, 2000
-------------
(unaudited)
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....................................... $ --
=====
|
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
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):
Weighted
Outstanding Shares Average
----------------------- Exercise
Shares Price Price
Available Number of per per
for Grant Shares Share Total Share
---------- ---------- ----- ----- --------
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
========== ========== =====
|
The options outstanding and exercisable for the Plans by exercise price at
June 30, 2000 are as follows (unaudited):
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
-------------- ----------- ----------- --------- ----------- ---------
$0.40............... 2,643,500 9.60 $0.40 970,271 $0.40
========= ==== ===== ======= =====
|
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
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):
Period ended
June 30, 2000
-------------
(unaudited)
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)
|
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
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
LYNUXWORKS, INCORPORATED
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
As of July 31, 2000
(in thousands)
Pro
Pro Forma Forma
LynuxWorks ISDCorp Adjustments Combined
---------- ------- ----------- --------
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
======== ======= ======= ========
|
See accompanying notes to the pro forma financial information.
F-37
LYNUXWORKS, INCORPORATED
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Year Ended April 30, 2000
(in thousands, except per share data)
Pro Forma Pro Forma
LynuxWorks ISDCorp Adjustment Combined
---------- ------- ---------- ---------
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
======== ======= ========
|
See accompanying notes to the pro forma financial information.
F-38
LYNUXWORKS, INCORPORATED
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Three Months Ended July 31, 2000
(in thousands, except per share data)
Pro Forma Pro Forma
LynuxWorks ISDCorp Adjustment Combined
---------- ------- ---------- ---------
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
======= ======= ========
|
See accompanying notes to the pro forma financial information.
F-39
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:
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
==========
|
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):
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
=======
|
The preliminary purchase price allocation is as follows (in thousands):
Annual Three Months Useful
Amount Amortization Amortization Lives (years)
------- ------------ ------------ -------------
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
======= ======= ======
|
* N/A means not applicable
F-40
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
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."
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
Page
----
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
|
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
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.
Amount
To Be Paid
----------
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........................................................... $ *
=======
|
* 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
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:
Exhibit
Document Number
-------- -------
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
|
II-2
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
Number Description
------ -----------------------------------------------------------------------
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.
|
II-3
Number Description
------ -----------------------------------------------------------------------
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.
|
II-4
Number Description
------ ---------------------------------------------------------------------
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.
|
* 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
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.
Signature Title Date
--------- ----- ----
/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
|
II-6
Signature Title Date
--------- ----- ----
/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.
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II-7
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
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S-1
SCHEDULE II
LynuxWorks, Incorporated
VALUATION AND QUALIFYING ACCOUNTS
Years Ended April 30, 1998, 1999 and 2000
(in thousands)
Allowance for Doubtful Accounts Receivable
Additions-
Balance at Charged Balance at
Beginning to Costs Deductions- End of
Year Ended April 30, of Period and Expenses Write-off Period
-------------------- ---------- ------------ ----------- ----------
1998............................. $100 -- $19 $81
1999............................. 81 30 -- 111
2000............................. 111 6 -- 117
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S-2
EXHIBIT INDEX
Number Description
------ -----------------------------------------------------------------------
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.
|
Number Description
------ ----------------------------------------------------------------------
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.
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* To be supplied by amendment.
+ Confidential treatment requested.
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
LYNUXWORKS, INC.
LWORKS, INC.
INTEGRATED SOFTWARE & DEVICES CORPORATION
AND WITH RESPECT TO ARTICLES VII AND X ONLY
REZA SOLIMAN-NOORI
AS SHAREHOLDER REPRESENTATIVE
AND
FIRSTAR BANK, N.A.
AS ESCROW AGENT
Dated as of July 21, 2000
TABLE OF CONTENTS
Page
----
ARTICLE I THE MERGER...................................................................... 1
1.1 The Merger..................................................................... 1
----------
1.2 Effective Time................................................................. 2
--------------
1.3 Effect of the Merger........................................................... 2
--------------------
1.4 Articles of Incorporation; Bylaws.............................................. 2
---------------------------------
1.5 Directors and Officers......................................................... 2
----------------------
1.6 Effect of Merger on Capital Stock of the Constituent Corporations.............. 3
-----------------------------------------------------------------
1.7 Dissenting Shares.............................................................. 4
-----------------
1.8 Surrender of Certificates...................................................... 5
-------------------------
1.9 No Further Ownership Rights in Company Capital Stock........................... 5
----------------------------------------------------
1.10 Lost, Stolen or Destroyed Certificates......................................... 6
--------------------------------------
1.11 Tax and Accounting Treatment................................................... 6
----------------------------
1.12 Taking of Necessary Action; Further Action..................................... 6
------------------------------------------
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................................. 6
2.1 Organization and Authority of the Company...................................... 6
-----------------------------------------
2.2 Company Capital Structure...................................................... 7
-------------------------
2.3 Subsidiaries................................................................... 8
------------
2.4 Authority...................................................................... 8
---------
2.5 No Conflict.................................................................... 9
-----------
2.6 Consents....................................................................... 9
--------
2.7 Company Financial Statements................................................... 9
----------------------------
2.8 Accounts Receivable............................................................ 10
-------------------
2.9 Inventory...................................................................... 10
---------
2.10 No Undisclosed Liabilities..................................................... 10
--------------------------
2.11 No Changes..................................................................... 10
----------
2.12 Tax and Other Returns and Reports.............................................. 12
---------------------------------
2.13 Restrictions on Business Activities............................................ 14
-----------------------------------
2.14 Title of Properties; Absence of Liens and Encumbrances; Condition of
--------------------------------------------------------------------
Equipment...................................................................... 14
---------
2.15 Intellectual Property.......................................................... 15
---------------------
2.16 Agreements, Contracts and Commitments.......................................... 16
-------------------------------------
2.17 Interested Party Transactions.................................................. 18
-----------------------------
2.18 Litigation..................................................................... 18
----------
2.19 Environmental Matters.......................................................... 18
---------------------
2.20 Brokers' and Finders' Fees; Third Party Expenses............................... 19
------------------------------------------------
2.21 Employee Matters and Benefit Plans............................................. 20
----------------------------------
2.22 Compliance with Legal Requirements............................................. 23
----------------------------------
2.23 Insurance...................................................................... 23
---------
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-i-
TABLE OF CONTENTS
(continued)
Page
----
2.24 Employees...................................................................... 23
---------
2.25 Product Warranty............................................................... 23
----------------
2.26 Product Liability; Product Recalls, etc........................................ 24
---------------------------------------
2.27 Books and Records.............................................................. 24
-----------------
2.28 Customers and Suppliers........................................................ 24
-----------------------
2.29 Complete Copies of Materials................................................... 24
----------------------------
2.30 Representations Complete....................................................... 24
------------------------
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND
MERGER SUB........................................................................... 25
3.1 Organization, Standing and Power............................................... 25
--------------------------------
3.2 Capital Structure.............................................................. 25
-----------------
3.3 Capital Resources.............................................................. 26
-----------------
3.4 Authority...................................................................... 26
---------
3.5 No Conflict.................................................................... 26
-----------
3.6 Consents....................................................................... 27
--------
3.7 Absence of Certain Changes or Events........................................... 27
------------------------------------
3.8 Absence of Liens and Encumbrances.............................................. 27
---------------------------------
3.9 Parent Financial Statements.................................................... 27
---------------------------
3.10 Minute Books................................................................... 28
------------
3.11 No Undisclosed Liabilities..................................................... 28
--------------------------
3.12 Tax and Other Returns and Reports.............................................. 28
---------------------------------
3.13 Restrictions on Business Activities............................................ 30
-----------------------------------
3.14 Intellectual Property.......................................................... 30
---------------------
3.15 Agreements, Contracts and Commitments.......................................... 30
-------------------------------------
3.16 Interested Party Transactions.................................................. 32
-----------------------------
3.17 Litigation..................................................................... 32
----------
3.18 Compliance With Laws........................................................... 33
--------------------
3.19 Environmental Matters.......................................................... 33
---------------------
3.20 Brokers' and Finders' Fees; Third Party Expenses............................... 34
------------------------------------------------
3.21 Employee Matters and Benefit Plans............................................. 34
----------------------------------
3.22 Compliance with Legal Requirements............................................. 37
----------------------------------
3.23 Insurance...................................................................... 37
---------
3.24 Product Warranty............................................................... 38
----------------
3.25 Product Liability; Product Recalls, etc........................................ 38
---------------------------------------
3.26 Books and Records.............................................................. 38
-----------------
3.27 Customers and Suppliers........................................................ 38
-----------------------
3.28 Complete Copies of Materials................................................... 38
----------------------------
3.29 Representations Complete....................................................... 38
------------------------
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME............................................ 39
4.1 Conduct of Business of the Company............................................. 39
----------------------------------
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-ii-
TABLE OF CONTENTS
(continued)
Page
----
4.2 Conduct of Business of the Parent.............................................. 41
---------------------------------
4.3 No Solicitation................................................................ 43
---------------
ARTICLE V ADDITIONAL AGREEMENTS........................................................... 44
5.1 Preparation of Permit Application, Hearing Request, Hearing Notice and
----------------------------------------------------------------------
Information Statement.......................................................... 44
---------------------
5.2 Shareholder Approval........................................................... 44
--------------------
5.3 Access to Information.......................................................... 44
---------------------
5.4 Confidentiality................................................................ 45
---------------
5.5 Expenses....................................................................... 45
--------
5.6 Public Disclosure.............................................................. 45
-----------------
5.7 Consents....................................................................... 45
--------
5.8 Reasonable Efforts............................................................. 45
------------------
5.9 Securities Laws Compliance..................................................... 45
--------------------------
5.10 Notification of Certain Matters; Financial Statements.......................... 46
-----------------------------------------------------
5.11 Additional Documents and Further Assurances.................................... 46
-------------------------------------------
5.12 Notice to Holders of Company Options and Company Warrants...................... 47
---------------------------------------------------------
5.13 Employee Plans and Benefit Arrangements........................................ 47
---------------------------------------
5.14 Reorganization under Section 368(a) of the Code................................ 47
-----------------------------------------------
5.15 Period of Employment........................................................... 47
--------------------
5.16 Shareholder Loans.............................................................. 47
-----------------
5.17 Registration on Form S-8....................................................... 47
------------------------
5.18 Offer Letters.................................................................. 48
-------------
5.19 Visa Applications.............................................................. 48
-----------------
5.20 "Market Stand-Off" Agreement................................................... 48
----------------------------
ARTICLE VI CONDITIONS TO THE MERGER....................................................... 48
6.1 Conditions to Obligations of Each Party to Effect the Merger................... 48
------------------------------------------------------------
6.2 Additional Conditions to Obligations of Company................................ 49
-----------------------------------------------
6.3 Additional Conditions to the Obligations of Parent and Merger Sub.............. 49
-----------------------------------------------------------------
ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW............................ 51
7.1 Survival of Representations, Warranties and Covenants.......................... 51
-----------------------------------------------------
7.2 Escrow Arrangements............................................................ 51
-------------------
7.3 Shareholder Representative..................................................... 54
--------------------------
7.4 Escrow Agent................................................................... 55
------------
7.5 Shareholder Claims Against Parent.............................................. 58
---------------------------------
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-iii-
TABLE OF CONTENTS
(continued)
Page
----
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER............................................ 59
8.1 Termination.................................................................... 59
-----------
8.2 Effect of Termination.......................................................... 60
---------------------
8.3 Amendment...................................................................... 60
---------
8.4 Extension; Waiver.............................................................. 60
-----------------
ARTICLE IX DEFINITIONS.................................................................... 61
9.1 Defined Terms.................................................................. 61
-------------
ARTICLE X GENERAL PROVISIONS.............................................................. 67
10.1 Notices........................................................................ 67
-------
10.2 Interpretation................................................................. 68
--------------
10.3 Counterparts................................................................... 69
------------
10.4 Entire Agreement; Assignment................................................... 69
----------------------------
10.5 Severability................................................................... 69
------------
10.6 Other Remedies................................................................. 69
--------------
10.7 Governing Law.................................................................. 69
-------------
10.8 Rules of Construction.......................................................... 69
---------------------
10.9 No Third Party Beneficiary..................................................... 70
--------------------------
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-iv-
Exhibit 2.1
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of July 21, 2000 by and among Integrated Software & Devices
Corporation, a California corporation (the "Company"), LynuxWorks, Inc., a
California corporation ("Parent"), LWorks, Inc., a California corporation and a
wholly-owned subsidiary of Parent ("Merger Sub"), and, with respect to the
matters set forth in Articles VII and X hereof only, Reza Soliman-Noori as the
Shareholder Representative and Firstar Bank, N.A. as Escrow Agent. Capitalized
terms used herein and not otherwise defined herein shall have the meanings given
to such terms in Article IX hereof.
RECITALS
A. The Boards of Directors of each of the Company, Parent and Merger Sub
believe it is in the best interests of each company and their respective
shareholders that Parent acquire the Company through the statutory merger of
Merger Sub with and into the Company (the "Merger") and, in furtherance thereof,
have approved the Merger.
B. Pursuant to the Merger, among other things, (i) all of the issued and
outstanding shares of capital stock of the Company (other than Dissenting
Shares) shall be converted into the right to receive consideration from Parent,
(ii) all of the issued and outstanding options to acquire any shares of Company
Common shall be assumed by Parent at the Effective Time, and (iii) all of the
issued and outstanding warrants and other rights to acquire any shares of
capital stock of the Company shall be assumed by Parent at the Effective Time.
C. Concurrent with the execution of this Agreement, as a material
inducement to Parent and Merger Sub to enter into this Agreement, certain
employees of the Company are entering into employment and non-competition
agreements with Parent (the "Employment and Non-Competition Agreements") in the
form of Exhibit B attached hereto.
D. The Company, Parent and Merger Sub desire to make certain
representations and warranties and other agreements in connection with the
Merger.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Subject to and upon the terms and conditions of this
Agreement and the applicable provisions of the California General Corporation
Law ("California Law"), Merger Sub shall be merged with and into the Company,
the separate corporate existence of Merger Sub shall cease and the Company shall
continue as the surviving corporation and as a wholly-owned
subsidiary of Parent. The surviving corporation after the Merger is sometimes
referred to hereinafter as the "Surviving Corporation."
1.2 Effective Time. Unless this Agreement is earlier terminated
pursuant to Section 8.1, the closing of the Merger (the "Closing") will take
place as promptly as practicable, but no later than five (5) business days,
following satisfaction or waiver of the conditions set forth in Article VI, at
the offices of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo
Alto, California, unless another place or time is agreed to in writing by Parent
and the Company. The date upon which the Closing actually occurs is herein
referred to as the "Closing Date." On the Closing Date, the parties hereto shall
cause the Merger to be consummated by filing an Agreement of Merger (or like
instrument) and the accompanying officers' certificates, each in the form agreed
to by the parties, with the Secretary of State of the State of California (the
"Agreement of Merger"), in accordance with the relevant provisions of California
Law (the time of acceptance by the Secretary of State of the State of California
of such filing being referred to herein as the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of California Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, all the property, rights, privileges, powers and franchises of the Company
and Merger Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Merger Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 Articles of Incorporation; Bylaw
(a) The articles of incorporation of Merger Sub, as in effect
immediately prior to the Effective Time, shall be the articles of incorporation
of the Surviving Corporation at the Effective Time until thereafter amended in
accordance with California Law and as provided in such articles of
incorporation; provided, however, that Article I of the articles of
incorporation of the Surviving Corporation shall be amended to read as follows:
"The name of the corporation is Integrated Software & Devices Corporation."
(b) The bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the bylaws of the Surviving Corporation at the
Effective Time until thereafter amended in accordance with California Law and as
provided in such bylaws.
1.5 Directors and Officers.
(a) The director(s) of Merger Sub immediately prior to the Effective
Time shall be the initial director(s) of the Surviving Corporation immediately
after the Effective Time, each to hold the office of a director of the surviving
corporation in accordance with the provisions of California Law and the articles
of incorporation and bylaws of the Surviving Corporation until his or her
successor is duly qualified and elected. The officers of Merger Sub immediately
prior to the Effective Time shall be the initial officers of the Surviving
Corporation immediately after the Effective Time, (except that Reza Soliman-
Noori, shall, at the Effective Time, become the President
-2-
of the Surviving Corporation) each to hold office in accordance with the by laws
of the Surviving Corporation.
(b) As of the Effective Time, Reza Soliman-Noori shall be elected a
director of Parent.
1.6 Effect of Merger on Capital Stock of the Constituent Corporations
(a) Company Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of Parent, Merger Sub, the Company or
the Shareholders, each share of Company Capital Stock issued and outstanding
immediately prior to the Effective Time (other than Dissenting Shares) will be
cancelled and extinguished and be converted automatically into the right to
receive, upon surrender of the certificate representing such share of Company
Capital Stock and upon the terms and subject to the conditions set forth below
and throughout this Agreement, including without limitation, this Section 1.6,
Section 1.8 hereof and the provisions of Article VII hereof, the number of
shares of Parent Common Stock equal to the Exchange Ratio.
(b) Company Options. At the Effective Time, each issued and
outstanding Company Option not yet exercised, whether vested or unvested, will
be assumed by Parent in connection with the Merger. Each Company Option so
assumed by Parent under this Agreement shall continue to have, and be subject
to, the same terms and conditions set forth in the Option Plans and/or as
provided in the respective option agreements immediately prior to the Effective
Time (including, without limitation, any vesting schedule or repurchase rights),
except that (i) each Company Option will be exercisable for that number of whole
shares of Parent Common Stock equal to the product of the number of shares of
Company Common Stock that were issuable upon exercise of such Company Option
immediately prior to the Effective Time multiplied by the Exchange Ratio,
rounded down to the nearest whole number of shares of Parent Common Stock, and
(ii) the per share exercise price for the shares of Parent Common Stock issuable
upon exercise of such assumed Company Option will be equal to the quotient
determined by dividing the exercise price per share of Company Capital Stock at
which such Company Option was exercisable immediately prior to the Effective
Time by the Exchange Ratio, rounded up to the nearest whole cent. No cash will
be paid in lieu of fractional shares which are rounded down pursuant to this
Section 1.6(b). It is the intention of the parties hereto that the Company
Options assumed by Parent pursuant to this Section 1.6(b) will, to the extent
permitted by applicable law, qualify as incentive stock options as defined in
Section 422 of the Code, to the extent any such Company Options qualified as
incentive stock options immediately prior to the Effective Time.
(c) Assumption Agreement. As soon as administratively practicable
following the Closing, Parent shall issue to each holder of a Company Option to
be assumed by Parent a document evidencing the assumption of such Company Option
by Parent, and each former holder of a Company Option so assumed by Parent shall
acknowledge the receipt of the same in exchange for the assumption of such
holder's Company Option.
(d) Company Warrants. Parent shall assume any Company Warrants in
connection with the Merger at the Effective Time.
-3-
(e) Capital Stock of Merger Sub. At the Effective Time, by virtue
of the Merger and without any action on the part of Parent, Merger Sub or the
Company, each share of common stock of Merger Sub issued and outstanding
immediately prior to the Effective Time shall be converted into and exchanged
for one validly issued, fully paid and nonassessable share of common stock of
the Surviving Corporation, then comprising all of the issued and outstanding
capital stock of the Surviving Corporation.
(f) Shareholder Loans. In the event that any Shareholder has
outstanding loans from the Company as of the Effective Time, the number of
shares of Parent Common Stock issuable pursuant to Section 1.6(a) hereof shall
be reduced by an amount equal to the outstanding principal plus accrued interest
of such Shareholder loans as of the Effective Time; provided, however, that
loans made to Shareholders in connection with the exercise of Company stock
options, as disclosed on the Company Schedule, shall be assumed by the Surviving
Corporation and not cause a reduction in the number of shares of Parent Common
Stock issuable pursuant to Section 1.6(a).
(g) Fractional Shares. No fraction of a share of Parent Common
Stock will be issued in the Merger. In lieu thereof, any fractional share
resulting from the conversion pursuant to Section 1.6(a) hereof shall be rounded
to the nearest whole share of Parent Common Stock (with a fraction greater than
.5 being rounded up).
(h) Adjustments to Parent Common Stock. The number of shares of
Parent Common Stock issuable pursuant to Section 1.6(a) hereof shall be adjusted
to reflect fully the effect of any stock split, reverse stock split, stock
dividend (including any dividend or distribution of securities convertible into
Parent Common Stock or Company Capital Stock), reorganization, recapitalization
or the other like change with respect to Parent Common Stock or Company Capital
Stock after the date hereof.
1.7 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary,
any shares of Company Capital Stock held by a holder who has exercised and
perfected dissenters' rights for such shares in accordance with California Law
and who, as of the Effective Time, has not effectively withdrawn or lost such
dissenters' rights ("Dissenting Shares"), shall not be converted into or
represent a right to receive the consideration for Company Capital Stock set
forth in Section 1.6(a) hereof, but the holder thereof shall only be entitled to
such rights as are provided by California Law.
(b) Notwithstanding the provisions of Section 1.7(a) hereof, if any
holder of Dissenting Shares shall effectively withdraw or lose (through failure
to perfect or otherwise) such holder's dissenters' rights under California Law,
then, as of the later of the Effective Time and the occurrence of such event,
such holder's shares shall automatically be converted into and represent only
the right to receive the consideration for Company Capital Stock set forth in
Section 1.6(a) hereof, without interest thereon, upon surrender of the
certificate representing such shares.
(c) The Company shall give Parent (i) prompt notice of any written
demand for appraisal received by the Company pursuant to the applicable
provisions of California Law and
-4-
(ii) the opportunity to participate in all negotiations and proceedings with
respect to such demands. The Company shall not, except with the prior written
consent of Parent, voluntarily make any payment with respect to any such demands
or offer to settle or settle any such demands. To the extent that Parent or the
Company makes any payment or payments in respect of any Dissenting Shares,
Parent shall be entitled to recover under the terms of Article VII hereof the
aggregate amount by which such payment or payments exceed the aggregate
consideration that otherwise would have been payable in respect of such shares
pursuant to Section 1.6(a) hereof.
1.8 Surrender of Certificates
(a) Exchange Agent. A designee of Parent shall serve as the exchange
agent ("Exchange Agent") for the Merger.
(b) Parent to Provide Common Stock; Escrow Amount. At the Effective
Time, Parent shall deposit with the Exchange Agent for exchange in accordance
with this Article I, the Merger Consideration issuable pursuant to Section
1.6(a) hereof in exchange for all of the outstanding shares of Company Capital
Stock, less 600,459 shares of Parent Common Stock (the "Escrow Amount"), which
shall be deducted from the Merger Consideration and shall be available to Parent
to set off any Losses in accordance with Article VII.
(c) Exchange Procedures. Promptly after the Effective Time, the
Exchange Agent shall cause to be mailed to each holder of record of a
certificate or certificates (each a "Certificate" and collectively, the
"Certificates") representing shares of Company Capital Stock that were
outstanding immediately prior to the Effective Time, (i) a letter of transmittal
in such form and having such other provisions as Parent may reasonably request
and (ii) instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration. Upon surrender of a Certificate for
cancellation to the Exchange Agent, together with such letter of transmittal,
duly completed and validly executed in accordance with the instructions thereto,
the holder of such Certificate shall be entitled to receive in exchange therefor
that portion of the Merger Consideration pursuant to Section 1.6(a) hereof
represented by such Certificate and the Certificate so surrendered shall be
canceled. Until so surrendered, each outstanding Certificate that, prior to the
Effective Time, represented shares of Company Capital Stock, will be deemed from
and after the Effective Time to evidence only the right to receive the Merger
Consideration in respect of each such share.
(d) Transfers of Ownership. If any Parent Common Stock is to be
issued to a person other than the holder in whose name the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and accompanied by all documents required to evidence and effect such transfer
and to evidence that any applicable stock transfer taxes have been paid.
1.9 No Further Ownership Rights in Company Capital Stock. The right to
receive the Merger Consideration upon the surrender for exchange of shares of
Company Capital Stock in accordance with the terms hereof shall be deemed to be
full satisfaction of all rights pertaining to such shares of Company Capital
Stock, and there shall be no further registration of transfers on the records of
the Surviving Corporation of shares of Company Capital Stock which were
outstanding
-5-
immediately prior to the Effective Time. If, after the Effective Time,
certificates evidencing shares of Company Capital Stock are presented to the
Surviving Corporation for any reason, they shall be cancelled and the right of
the holder or holders of such certificates shall be limited to the right to
receive that portion of the Merger Consideration represented by such
certificate, which portion shall be delivered to the person entitled thereto.
1.10 Lost, Stolen or Destroyed Certificates. In the event any certificates
evidencing shares of Company Capital Stock shall have been lost, stolen or
destroyed, Parent shall, in exchange for such lost, stolen or destroyed
certificates, upon the making of an affidavit of that fact by the holder
thereof, issue such Parent Common Stock as may be required pursuant to Section
1.6(a) hereof; provided, however, that Parent may, in its sole discretion and as
a condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificates to deliver an agreement (in form and substance
satisfactory to it) to indemnify Parent against any claim that may be made
against Parent with respect to the certificates alleged to have been lost,
stolen or destroyed.
1.11 Tax and Accounting Treatment. The Merger is intended to constitute a
tax-free reorganization within the meaning of Section 368(a)(2)(E) of the Code,
and will be treated as a purchase for financial accounting purposes.
1.12 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Merger Sub, Parent and the Surviving
Corporation are fully authorized in the name of their respective corporations or
otherwise to take, and will take, all such lawful and necessary and/or desirable
action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub, subject to
such exceptions as are specifically disclosed in the disclosure letter
(referencing the appropriate section and paragraph numbers and any other section
and/or paragraph number to which it is reasonably apparent on the face of such
disclosure that such disclosure relates) supplied by the Company to Parent (the
"Company Schedule") and dated as of the date hereof, that on the date hereof
(provided, that the representations and warranties made as of a specified date
will be true and correct as of such date):
2.1 Organization and Authority of the Company. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all necessary corporate power and authority
to own, operate or lease the properties and assets now owned, operated or leased
by it and to carry on its business as it has been and is currently being
conducted. The Company is duly licensed or qualified to do business and is in
good standing in each jurisdiction in which the failure to be so qualified or
licensed would have a Company Material Adverse Effect. The term "Material
Adverse Effect" when used in connection with an entity means
-6-
any change, event, violation, inaccuracy, circumstance or effect that is, or
could reasonably be expected to be, materially adverse to (a) the business,
assets (including intangible assets), financial condition or results of
operations of such entity, and (b) the ability of such person to perform its
obligations under this Agreement and to consummate the transactions provided for
hereunder, or (c) the ability of such entity to conduct its business as
presently conducted; provided, however, that none of the following shall be
deemed by itself or by themselves, either alone or in combination, to constitute
a Material Adverse Effect on such person: (a) with respect to the Company, any
adverse effect on the bookings, revenues, gross margins or earnings of the
Company, or any delay in or reduction or cancellation of orders of the Company's
products or services, following execution of this Agreement which is primarily
attributable to the announcement of the execution of this Agreement and the
transactions contemplated hereby; (b) any change arising out of conditions
affecting the economy or industry of such person in general which does not
affect such person in a materially disproportionate manner relative to other
participants in the economy or industry, respectively; or (c) with respect to
the Company, employee attrition which is primarily attributable to (X) the
announcement of the execution of this Agreement and the transactions
contemplated hereby or (Y) any action directly required of the Company by Parent
under Section 4.1 or any omission of the Company directly resulting from
Parent's failure to consent to actions requested to be taken by the Company
under Section 4.1. "Company Material Adverse Effect" means a Material Adverse
Effect with respect to the Company, and "Parent Material Adverse Effect" means a
Material Adverse Effect with respect to Parent. All jurisdictions in which the
Company conducts its business are set forth on the Company Schedule. The Company
has not taken any action that in any respect conflicts with, constitutes a
default under or results in a violation of any provision of its Organizational
Documents. The Company Schedule sets forth (i) true and correct copies of the
Organizational Documents of the Company, each as in effect on the date hereof,
and (ii) the directors and officers of the Company. The operations now being
conducted by the Company are not now and have never been conducted by the
Company under any other name.
2.2 Company Capital Structure
(a) The authorized capital stock of the Company consists of:
35,000,000 shares of Common Stock, 21,860,000 shares of which are issued and
outstanding as of the date hereof. The Company has no other capital stock
authorized, issued or outstanding. The Company Capital Stock is held by the
persons with the domicile addresses and in the amounts set forth on the Company
Schedule. The Company Schedule sets forth, as of the date hereof, the total
number of shares of Company Common Stock outstanding assuming the conversion,
exercise or exchange of all securities convertible into, or exercisable or
exchangeable for, shares of Company Common Stock, and the exercise of all
Company Options and Company Warrants. All outstanding shares of Company Capital
Stock are duly authorized, validly issued, fully paid and non-assessable and not
subject to preemptive rights created by statute, the Organizational Documents of
the Company, or any agreement to which the Company is a party or by which it is
bound, and have been issued in compliance with the registration or qualification
requirements of applicable securities laws. Except as set forth on the Company
Schedule, there are no declared or accrued but unpaid dividends with respect to
any shares of Company Capital Stock.
-7-
(b) Except for the Option Plans, the Company has never adopted or
maintained any stock option plan or other plan providing for equity compensation
of any person. The Company has reserved 4,071,428 shares of Company Common
Stock for issuance to employees, directors and consultants of the Company upon
the exercise of options granted under the 2000 Plan, under which options to
purchase 2,636,700 shares are outstanding and under which no shares have been
issued upon the exercise of options. The Company has reserved 4,500,000 shares
of Company Common Stock for issuance to employees, directors and consultants of
the Company upon the exercise of options granted under the 2000 Executive Plan,
under which options to purchase 1,875,000 shares are outstanding and under which
1,860,000 shares have been issued upon the exercise of options. The Company
Schedule sets forth for each outstanding Company Option and Company Warrant, the
name of the holder of such security, the domicile address of such holder, the
number of shares of Company Capital Stock issuable upon the exercise of such
option, the exercise price of such option, the vesting schedule for such option,
including the extent vested to date and whether the vesting of such option will
be accelerated by the transactions contemplated by this Agreement and whether
such option is intended to qualify as an incentive stock option as defined in
Section 422 of the Code. Except for the Company Options and the Company
Warrants, there are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which the Company is a party or
by which it is bound obligating the Company to issue, deliver, sell, repurchase
or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of the capital stock of the Company or obligating the Company to grant,
extend, accelerate the vesting of, change the price of, otherwise amend or enter
into any such option, warrant, call, right, commitment or agreement. There are
no outstanding or authorized stock appreciation, phantom stock, profit
participation, or other similar rights with respect to the Company. Except as
contemplated hereby, there are no voting trusts, proxies, or other agreements or
understandings with respect to the voting stock of the Company. As a result of
the Merger, and assuming Parent owns all outstanding shares of Merger Sub and
all rights to acquire any shares of Merger Sub, Parent will be the sole record
and beneficial holder of all issued and outstanding Company Capital Stock and
all rights to acquire or receive any shares of Company Capital Stock, whether or
not such shares of Company Capital Stock are outstanding.
2.3 Subsidiaries. Except as set forth on the Company Schedule, the Company
does not have, and has never had, any subsidiaries or affiliated companies and
does not otherwise own, and has not otherwise owned, any shares of capital stock
or any interest in, or control, directly or indirectly, any other corporation,
partnership, association, joint venture or other business entity.
2.4 Authority. The Company has all requisite power and authority to enter
into this Agreement and any Related Agreements (as hereinafter defined in this
Section 2.4) to which it is a party and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and any Related Agreements to which the Company is a party and the consummation
of the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action on the part of the Company, and no further action
is required on the part of the Company to authorize the Agreement and any
Related Agreements to which it is a party and the transactions contemplated
hereby and thereby, subject only to the approval of this Agreement by the
Shareholders. This Agreement and the Merger have been unanimously approved by
the Board of Directors of the Company. This Agreement and each of the Related
Agreements to which the
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Company is a party has been duly executed and delivered
by the Company, and assuming the due authorization, execution and delivery by
the other parties hereto and thereto, constitute valid and binding obligations
of the Company, enforceable against the Company in accordance with their
respective terms, except as such enforceability may be subject to the laws of
general application relating to bankruptcy, insolvency and the relief of debtors
and rules of law governing specific performance, injunctive relief or other
equitable remedies. For all purposes of this Agreement, the term "Related
Agreements" shall mean the Agreement of Merger.
2.5 No Conflict. The execution and delivery by the Company of this
Agreement and any Related Agreement to which the Company is a party, and the
consummation of the transactions contemplated hereby and thereby, will not
conflict with or result in any violation of or default under (with or without
notice or lapse of time, or both) or give rise to a right of termination,
cancellation, modification or acceleration of any obligation or loss of any
benefit under (any such event, a "Conflict") (i) any provision of the
Organizational Documents of the Company,-(ii) any Contract, or (iii) any
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to the Company or any of its properties (tangible and intangible) or assets. The
Company is in material compliance with and has not materially breached, violated
or defaulted under, or received notice that it has breached, violated or
defaulted under, any of the terms or conditions of any Contract, nor is the
Company aware of any event that would constitute such a material breach,
violation or default with the lapse of time, giving of notice or both. Each
Contract is in full force and effect and the Company is not in default
thereunder, and to the Company's knowledge, no other party obligated to the
Company pursuant to any such Contract in material default thereunder. The
Company has obtained, or will obtain prior to the Effective Time, all necessary
consents, waivers and approvals of parties to any Contract as are required (i)
thereunder in connection with the Merger, (ii) and for any such Contract to
remain in full force and effect without limitation, modification or alteration
after the Effective Time. After the Effective Time, Parent, and/or the Surviving
Corporation, will be permitted to exercise all of the rights under the Contracts
that were vested in the Company prior to the Effective Time without the payment
of any additional amounts or consideration other than ongoing fees, royalties or
payments which the Company would otherwise be required to pay pursuant to the
terms of such Contracts had the transactions contemplated by this Agreement not
occurred.
2.6 Consents. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with any Governmental Entity, is required by
or with respect to the Company in connection with the execution and delivery of
this Agreement and any Related Agreement to which the Company is a party or the
consummation of the transactions contemplated hereby and thereby, except for (i)
such consents, waivers, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable securities laws;
(ii) the filing of the Agreement of Merger with the Secretary of State of the
State of California; and (iii) such other consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings that are not material.
2.7 Company Financial Statements. The Company Schedule sets forth the
Company's (i) compiled balance sheets as of December 31, 1999 and as of December
31, 1998, and the related compiled statements of income, cash flow and
stockholders' equity for the twelve (12) month periods ended December 31, 1999
and December 31, 1998, respectively (collectively, the "Year-End
-9-
Financials"), and (ii) unaudited balance sheet as of March 31, 2000, and the
related unaudited statements of income, cash flow and stockholders' equity for
the three-month period then ended (the "Interim Financials"). The Year-End
Financials have been prepared in accordance with GAAP consistently applied on a
basis consistent throughout the periods indicated and consistent with each
other. The Year-End Financials and Interim Financials present fairly the
financial condition, operating results and cash flows of the Company as of the
dates and during the periods indicated therein, subject in the case of the
Interim Financials to normal year-end adjustments, which are not material in
amount in any individual case or in the aggregate. The Company's unaudited
balance sheet as of March 31, 2000 is referred to hereinafter as the "Current
Balance Sheet." -------
2.8 Accounts Receivable. The Company Schedule sets forth a list of all
accounts receivable of the Company (collectively the "Accounts Receivable") as
of May 31, 2000 along with a range of days elapsed since invoice. Except as set
forth on the Company Schedule, the Accounts Receivable (net of allowances for
doubtful accounts as reflected on the Current Balance Sheet and as determined in
accordance with GAAP consistently applied or, for Accounts Receivable arising
subsequent to May 31, 2000, as reflected on the books and records of the
Company, which are prepared in accordance with GAAP) are or shall be valid
Accounts Receivable arising in the ordinary course of business, and, to the
Company's knowledge, are or shall be collectible within one hundred fifty (150)
days after the day on which each Account Receivable first becomes due and
payable, subject to no counterclaims or set-offs. If Accounts Receivable are
collected more than 150 days after the day on which they became due and payable
but during the Escrow Period, any Loss to Parent shall be limited to an amount
equal to the amount of interest on the amount of the Account Receivable not so
collected, calculated at a rate of ten (10)% per annum from such 150-day date
until the date such amount is collected. No third party has any Lien on the
Accounts Receivable or any part thereof, and no agreement for deduction, free
goods, discount or other deferred price or quantity adjustment has been made
with respect to any of the Accounts Receivable .
2.9 Inventory. Except as set forth on the Company Schedule and subject to
any reserve as reflected on the Current Balance Sheet, all inventory (including
raw materials, work-in-process, and finished goods) of the Company consists of a
quality and quantity usable and salable in the ordinary course of business, and
is not excess, obsolete or damaged. The presentation of inventory on the Current
Balance Sheet conforms to GAAP and such inventory is stated at the lower of cost
(determined using the first-in, first-out method) or net realizable value.
2.10 No Undisclosed Liabilities. The Company does not have any material
liability, indebtedness, obligation, expense, claim, deficiency, guaranty or
endorsement of any type, whether accrued, absolute, contingent, matured,
unmatured or other (whether or not required to be reflected in financial
statements in accordance with GAAP), which has not been reflected on the Current
Balance Sheet. The Company Schedule sets forth a schedule of all Company
indebtedness (including the amounts of Company indebtedness, names of creditors,
and a summary of the pertinent terms of such Company indebtedness) as of the
date of this Agreement. The parties shall mutually agree upon any changes made
to the Company Schedule after the date of this Agreement.
2.11 No Changes. Except as set forth on the Company Schedule, since March
31, 2000, there has not been, occurred or arisen any:
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(a) transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past practices;
(b) capital expenditure or commitment by the Company in excess of USD
$50,000 individually or USD $100,000 in the aggregate;
(c) destruction of, damage to or loss of any material assets, business
or customer of the Company (whether or not covered by insurance);
(d) claim of wrongful discharge or other unlawful labor practice or
action;
(e) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company, except as may be
required by GAAP;
(f) amendments or changes to the Organizational Documents of the
Company;
(g) revaluation by the Company of any of its assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of the Company, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
Company Capital Stock;
(i) acquisition, sale, license or other disposition or transfer of any
of the assets or properties of the Company or any creation of any security
interest in such assets or properties, except for sales of inventory in the
ordinary course of business as conducted on that date and consistent with past
practices;
(j) amendment or termination of any material contract, agreement or
license to which the Company is a party or by which it or its properties or
assets is bound;
(k) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of any
debt securities of others;
(l) waiver or release of any right or claim of the Company, including
any write-off or other compromise of any account receivable of the Company other
than in accordance with the Company's allowance for doubtful accounts as
reflected on the Current Balance Sheet;
(m) the commencement, settlement, notice or, to the knowledge of the
Company threat of, any lawsuit or proceeding by or against the Company or
investigation of the Company or its affairs;
(n) notice of any claim (i) of ownership by a third party of any of
the Company's Intellectual Property Rights or (ii) of infringement by the
Company of any third party's Intellectual Property Rights;
-11-
(o) issuance or sale by the Company of any of its shares of capital
stock, or securities exchangeable, convertible or exercisable therefor, or of
any other of its securities, or acceleration of vesting of any option or other
security of the Company;
(p) sales returns, notice of product deficiency, obsolescence or other
indication that any product sold by the Company did not perform as expected or
was defective in some manner;
(q) increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, shareholders,
employees or advisors (other than normal annual raises for non-officers in
accordance with past practice), or the declaration, payment or commitment or
obligation of any kind for the payment, by the Company, of a bonus or other
additional salary or compensation to any such person;
(r) adoption of, or increase in the payments to or benefits under, any
profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement, or other employee benefit plan for or with any employees of the
Company;
(s) change in any material election in respect of Taxes, adoption or
change in any accounting method in respect of Taxes, agreement or settlement of
any claim or assessment in respect of Taxes, or extension or waiver of the
limitation period applicable to any claim or assessment in respect of Taxes;
(t) entry into, termination, modification or extension of, or receipt
of notice of termination of (i) any license, lease, distributorship, dealer,
sales representative, joint venture, credit, customer, supplier or similar
agreement of at least USD $50,000, or (ii) any contract or transaction involving
a total remaining commitment by or to the Company of at least USD $50,000; or
(u) agreement, whether oral or written, by the Company or any officer
or employee thereof to do any of the foregoing (other than negotiations with
Parent and its representatives regarding the transactions contemplated by this
Agreement) except for agreements with customers in the ordinary course of
business.
2.12 Tax and Other Returns and Reports
(a) Tax Returns and Audits. Except as set forth on the Company
Schedule:
(i) As of the Effective Time, the Company will have prepared and
timely filed all required federal, state, local and foreign returns, estimates,
information statements and reports, including amendments thereto ("Returns")
that are required to have been filed before the Effective Time relating to any
and all Taxes concerning or attributable to the Company or its operations,
including the calculations of net operating losses for purposes of such Returns,
and such Returns are true and correct in all material respects and have been
completed in accordance with applicable law.
(ii) As of the Effective Time, the Company (A) will have paid all
Taxes it is required to pay and will have withheld with respect to its
employees, independent contractors and
-12-
other persons (and paid over to the appropriate taxing authority), all federal
and state income taxes, FICA, FUTA and other Taxes required to be withheld, and
(B) will have accrued on the Current Balance Sheet all Taxes attributable to the
periods preceding the Current Balance Sheet and will not have incurred any
liability for Taxes for the period commencing after the date of the Current
Balance Sheet and ending immediately prior to the Effective Time, other than in
the ordinary course of business.
(iii) The Company has not been delinquent in the payment of any
Tax, nor is there any Tax deficiency outstanding, assessed or proposed against
the Company, nor has the Company executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of any
Tax which is still outstanding. There are no powers of attorney with respect to
Taxes of the Company currently in force. No claim has ever been made by an
authority in a jurisdiction where the Company does not file Returns that the
Company is or may be subject to taxation by that jurisdiction.
(iv) No audit or other examination of any Return of the Company is
presently in progress, nor has the Company been notified of any request for such
an audit or other examination.
(v) As of the date of the Current Balance Sheet the Company does not
have any material liabilities for unpaid Taxes which have not been accrued or
reserved on the Current Balance Sheet, whether asserted or unasserted,
contingent or otherwise, and the Company has not incurred any liability for
Taxes since the date of the Current Balance Sheet other than in the ordinary
course of business.
(vi) The Company has made available to Parent or its legal counsel,
copies of all foreign, federal, state and local income and all state and local
sales and use Returns for the Company filed for all periods since its inception.
(vii) There are (and immediately following the Effective Time
there will be) no Liens on the assets of the Company relating to or attributable
to Taxes other than Liens for Taxes not yet due and payable.
(viii) The Company has no knowledge of any basis for the assertion
of any claim relating or attributable to Taxes which, if adversely determined,
would result in any material Lien on the assets of the Company.
(ix) None of the Company's assets is treated as "tax-exempt use
property," within the meaning of Section 168(h) of the Code.
(x) The Company has not filed any consent agreement under Section
341(f) of the Code or agreed to have Section 341(f)(4) of the Code apply to any
disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the
Code) owned by the Company.
(xi) The Company is not a party to any Tax sharing, indemnification
or allocation agreement nor does the Company owe any amount under any such
agreement.
-13-
(xii) The Company's Tax basis in its assets for purposes of
determining its future amortization, depreciation and other federal income Tax
deductions is accurately reflected on the Company's tax books and records.
(xiii) The Company is not, and has not been at any time, a
"United States Real Property Holding Corporation" within the meaning of Section
897(c)(2) of the Code.
(xiv) No adjustment relating to any Return filed by the
Company has been proposed formally or, to the Company's knowledge, informally by
any taxing authority to the Company or any representative thereof.
(xv) The Company has (a) never been a member of an
affiliated group (within the meaning of Code (S)1504(a)) filing a consolidated
federal income Tax Return (other than a group the common parent of which was
Company), (b) no liability for the Taxes of any person (other than Company or
any of its Subsidiaries) under Treas. Reg. (S) 1.1502-6 (or any similar
provision of state, local or foreign law), as a transferee or successor, by
contract, or otherwise and (c) never been a party to any joint venture,
partnership or other agreement that could be treated as a partnership for Tax
purposes.
(xvi) The Company has not constituted either a "distributing
corporation" or a "controlled corporation" in a distribution of stock qualifying
for tax-free treatment under Section 355 of the Code (x) in the two years prior
to the date of this Agreement or (y) in a distribution which could otherwise
constitute part of a "plan" or "Series of related transactions" (within the
meaning of Section 355(e) of the Code) in conjunction with the Merger.
(b) Executive Compensation Tax. There is no contract, agreement,
plan or arrangement to which the Company is a party, including, without
limitation, the provisions of this Agreement, covering any employee or former
employee of the Company, which, individually or collectively, could give rise to
the payment of any amount that would not be deductible pursuant to Sections
280G, 404 or 162(m) of the Code.
2.13 Restrictions on Business Activities. There is no agreement (non-
compete or otherwise), commitment, judgment, injunction, order or decree to
which the Company is a party or, to the Company's knowledge, is otherwise
binding upon the Company which has or may reasonably be expected to have the
effect of prohibiting or impairing any business practice of the Company, any
acquisition of property (tangible or intangible) by the Company, the conduct of
business by the Company or otherwise limiting the freedom of the Company to
engage in any line of business or to compete with any person, other than
customary non-disclosure and confidentiality obligations contained in non-
disclosure agreements, license agreements or customer agreements entered into in
the ordinary course of business, and other than customary license restrictions
that may be contained in Contracts entered into in the ordinary course of
business and which would not have a Material Adverse Effect on the Company's
business as conducted.
2.14 Title of Properties; Absence of Liens and Encumbrances; Condition of
Equipment
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(a) The Company does not own any real property, nor has it ever owned
any real property. The Company Schedule sets forth a list of all real property
currently leased by the Company, the name of the lessor, the date of the lease
and each amendment thereto and, with respect to any current lease, the aggregate
annual rental and/or other fees payable under any such lease. All such current
leases are in full force and effect, are valid and effective in accordance with
their respective terms, and there is not, under any of such leases, any existing
default or event of default (or event which with notice or lapse of time, or
both, would constitute a default).
(b) The Company has good and valid title to, or, in the case of
leased properties and assets, valid leasehold interests in, all of its tangible
properties and assets used or held for use in its business, free and clear of
any Liens, except as reflected on the Current Balance Sheet and except for Liens
for Taxes not yet due and payable and such imperfections of title and
encumbrances, if any, which are not material in character, amount or extent, and
which do not materially detract from the value, or materially interfere with the
present use, of the property subject thereto or affected thereby.
(c) The Company Schedule lists all material items of equipment owned
or leased by the Company and such equipment is (i) adequate for the conduct of
the business of the Company as currently conducted and (ii) in good operating
condition, regularly and properly maintained, subject to normal wear and tear.
2.15 Intellectual Property.
(a) The Company Schedule lists all of Company's United States and
foreign: (i) patents, patent applications (including provisional applications);
(ii) registered trademarks, applications to register trademarks, intent-to-use
applications, or other registrations related to trademarks; (iii) registered
copyrights and applications for copyright registration; (iv) any other
Intellectual Property Rights of the Company that is the subject of an
application, certificate or registration filed with, issued by, or recorded by,
any state, government or other public legal authority (all of the foregoing, the
"Registered Intellectual Property").
(b) Each item of Registered Intellectual Property is valid and
subsisting, all necessary registration, maintenance and renewal fees in
connection with such Registered Intellectual Property have been paid and all
necessary documents and certificates in connection with such Registered
Intellectual Property have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign jurisdictions, as
the case may be, for the purposes of maintaining such Registered Intellectual
Property.
(c) (i) Except for ordinary license grants which are non-exclusive
contained in customer Contracts, no third party has any rights to use any of the
Company's Intellectual Property Rights; and (ii) the Company has not granted to
any third party, nor authorized any third party to retain, any of the Company's
Intellectual Property Rights.
(d) (i) The Company owns and has good and exclusive title to each
item of Registered Intellectual Property listed on the Company Schedule, free
and clear of any Liens; and
-15-
(ii) the Company owns, or has the right, pursuant to a valid Contract to use or
operate under, all other Intellectual Property Rights of the Company.
(e) To the Company's knowledge, the operation of the business of the
Company as it currently is conducted does not infringe or misappropriate the
Intellectual Property Rights of any other third party, violate the rights of any
third party (including rights to privacy or publicity), or constitute unfair
competition nor has the Company received notice from any third party claiming
that such operation constitutes any such infringement, misappropriation,
violation or unfair competition.
(f) The Company owns or has the right to all Intellectual Property
Rights necessary to the conduct of its business as it currently is conducted.
(g) There are no Contracts between the Company and any other third
party with respect to Intellectual Property Rights of the Company under which
there is any dispute, to the Company's knowledge, regarding the scope of such
agreement, or performance under such agreement including with respect to any
payments to be made or received by the Company thereunder.
(h) To the Company's knowledge, no third party is infringing or
misappropriating any of the Company's Intellectual Property Rights.
(i) No Intellectual Property Right of the Company or product or
service of the Company is subject to any outstanding decree, order, judgment, or
stipulation restricting in any manner the licensing or use thereof by the
Company.
2.16 Agreements, Contracts and Commitments.
(a) Except as set forth on the Company Schedule, or included in the
Current Balance Sheet, or footnotes thereto, provided to the Parent, the Company
does not have, is not a party to nor is it bound by:
(i) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson or
consulting or sales agreement, contract or commitment with a firm or other
organization;
(ii) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased by, or the vesting of benefits of which
will be accelerated by, or which would require the consent of any party thereto
as a result of, the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement;
(iii) any fidelity or surety bond or completion bond;
(iv) any lease of personal property having a value in excess of
USD $25,000 individually or USD $50,000 in the aggregate;
-16-
(v) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of USD $25,000 individually
or USD $50,000 in the aggregate;
(vi) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business enterprise
outside the ordinary course of the Company's business;
(vii) any licensing agreement or other contract with respect to
Intellectual Property Rights;
(viii) any joint venture, partnership, and other contract
involving a sharing of profits, losses, costs, or liabilities by the Company
with any third party;
(ix) any contract containing covenants that in any way purport
to restrict the business activity of the Company or any affiliate or limit the
freedom of the Company or any affiliate of the Company to engage in any line of
business or to compete with any third party, other than customary non-disclosure
and confidentiality obligations contained in non-disclosure agreements, license
agreements or customer agreements entered into in the ordinary course of
business, and other than customary license restrictions that may be contained in
Contracts entered into in the ordinary course of business and which would not
have a Material Adverse Effect on the Company's business as conducted.
(x) any power of attorney or other similar agreement or grant
of agency;
(xi) any contract entered into other than in the ordinary
course of business that contains or provides for an express undertaking by the
Company to be responsible for consequential damages;
(xii) any oral or written warranty, guaranty, and or other
similar undertaking with respect to product or contractual performance sold or
extended by the Company other than in the ordinary course of business; or
(xiii) any amendment, supplement, and modification (whether oral
or written) in respect of any of the foregoing.
(b) All of the Contracts set forth or required to be set forth on the
Company Schedule ("Contracts") are valid, binding and enforceable in accordance
with their respective terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and other laws of general
application effecting enforcement of creditors' rights generally, rules of law
governing specific performance, injunctive relief or other equitable remedies,
and limitations of public policy, and shall be in full force and effect without
penalty in accordance with their terms upon consummation of the transactions
contemplated hereby. The Company has performed all material obligations
required to be performed by it and is not in default in any material respect
under or in breach in any material respect of nor in receipt of any claim of
default or breach under any Contract set forth or required to be set forth on
the Company Schedule; no event has occurred which,
-17-
with the passage of time or the giving of notice or both, would result in a
default, breach or event of noncompliance by the Company in any material respect
under any such Contract; the Company does not have any present expectation or
intention of not fully performing on a timely basis in all material respects all
such obligations required to be performed by the Company under any Contract set
forth or required to be set forth on the Company Schedule; no partially-filled
or unfilled material customer purchase order or sales order is subject to
cancellation or any other material modification by the other party thereto or is
subject to any penalty, right of set-off or other charge by the other party
thereto for late performance or delivery; and the Company does not have any
knowledge of any cancellation or anticipated cancellation or any breach by the
other parties to any Contract set forth or required to be set forth on the
Company Schedule. The Company is not a party to any Contract the performance of
which could reasonably be expected to have a Company Material Adverse Effect.
(c) Parent has been given access to a true and correct copy of each
of the written Contracts that are set forth on the Company Schedule, together
with all amendments, waivers or other changes thereto.
2.17 Interested Party Transactions. No officer, director or, to the
Company's knowledge, shareholder of the Company (nor any ancestor, sibling,
descendant or spouse of any of such persons, or any trust, partnership or
corporation in which any of such persons has or has had an interest), has or has
had, directly or indirectly, (i) an interest in any entity which furnished or
sold, or furnishes or sells, services or products that the Company furnishes or
sells, or proposes to furnish or sell, or (ii) any interest in any entity that
purchases from or sells or furnishes to the Company, any goods or services, or
(iii) a beneficial interest in any Contract to which the Company is a party;
provided, however, that ownership of no more than five percent (5%) of the
outstanding voting stock of a publicly traded corporation shall not be deemed to
be an "interest in any entity" for purposes of this Section 2.17.
2.18 Litigation. There is no action, suit, investigation, claim,
arbitration or proceeding ("Action") of any nature pending, or to the Company's
knowledge threatened, against the Company, its properties (tangible or
intangible) or any of its officers or directors by or before any third party,
nor to the Company's knowledge is there any reasonable basis therefor. No third
party has at any time challenged or questioned the legal right of the Company to
conduct its operations as previously or presently conducted.
2.19 Environmental Matters.
(a) Condition of Property. As of the Closing, except in compliance
with Environmental Laws in a manner that could not reasonably be expected to
subject the Company to liability, to the knowledge of the Company after
reasonable inquiry, no Hazardous Materials are present on any Business Facility
currently owned, operated, occupied, controlled or leased by the Company or were
present on any other Business Facility at the time it ceased to be owned,
operated, occupied, controlled or leased by the Company. Except as set forth on
the Company Schedule, there are no underground storage tanks, asbestos which is
friable or likely to become friable or PCBs present on any Business Facility
currently owned, operated, occupied, controlled or leased by the Company or as a
consequence of the acts of the Company or its agents.
-18-
(b) Hazardous Materials Activities. The Company has conducted all
Hazardous Material Activities relating to its business in compliance in all
material respects with all applicable Environmental Laws, and the Hazardous
Materials Activities of the Company prior to the Closing have not resulted in
the exposure of any person to a Hazardous Material in a manner which has caused
or could reasonably be expected to cause an adverse health effect to any such
person.
(c) Permits. The Company Schedule accurately describes all of the
Environmental Permits currently held by the Company and relating to its business
and the listed Environmental Permits are all of the Environmental Permits
necessary for the continued conduct of any Hazardous Material Activity of the
Company relating to its business as such activities are currently being
conducted. All such Environmental Permits are valid and in full force and
effect. The Company has complied in all material respects with all covenants
and conditions of any Environmental Permit which is or has been in force with
respect to its Hazardous Materials Activities. No circumstances exist which
could cause any Environmental Permit to be revoked, modified, or rendered non-
renewable upon payment of the permit fee. All Environmental Permits and all
other consents and clearances required by any Environmental Law have been
obtained or will be obtained prior to the Closing at no cost to Parent or Merger
Sub.
(d) Environmental Litigation. Except as set forth on the Company
Schedule, no Action, proceeding, revocation proceeding, amendment procedure,
writ, injunction or claim is pending, or to the best of the Company's knowledge,
threatened, concerning or relating to any Environmental Permit or any Hazardous
Materials Activity of the Company relating to its business, or any Business
Facility.
(e) Offsite Hazardous Material Disposal. The Company has
transferred or released Hazardous Materials only to those Disposal Sites set
forth on the Company Schedule; and no Action, proceeding, liability or claim
exists or is threatened against any Disposal Site or against the Company with
respect to any transfer or release of Hazardous Materials relating to the
business of the Company to a Disposal Site which could reasonably be expected to
subject the Company to liability.
(f) Environmental Liabilities. The Company is not aware of any fact
or circumstance, which could reasonably be expected to result in an
environmental liability having a Material Adverse Effect on the Company.
(g) Reports and Records: The Company has delivered to Parent or made
available for inspection by Parent and its agents, representatives and employees
all records in the Company's possession concerning the Hazardous Materials
Activities of the Company relating to its business and all environmental audits
and environmental assessments of any Business Facility conducted at the request
of, or otherwise in the possession of the Company. To its knowledge, the
Company has complied with all environmental disclosure obligations imposed by
applicable law with respect to this transaction.
2.20 Brokers' and Finders' Fees; Third Party Expenses. Except as set forth
on the Company Schedule, the Company has not incurred, nor will it incur,
directly or indirectly, any
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liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with the Agreement or any transaction contemplated hereby.
The Company Schedule sets forth the principal terms and conditions of any
agreement, written or oral, with respect to such fees. The Company Schedule sets
forth the Company's current reasonable estimate of all Third Party Expenses
expected to be incurred by the Company in connection with the negotiation and
effectuation of the terms and conditions of this Agreement and the transactions
contemplated hereby.
2.21 Employee Matters and Benefit Plans.
(a) Schedule. The Company Schedule contains an accurate and
complete list of each Company Employee Plan, and each Employment Agreement. The
Company does not have any plan or commitment to establish any new Company
Employee Plan, International Employee Plan, or Employment Agreement, to modify
any Company Employee Plan or Employment Agreement (except to the extent required
by law or to conform any such Company Employee Plan or Employment Agreement to
the requirements of any applicable law, in each case as previously disclosed to
Parent in writing, or as required by this Agreement), or to adopt or enter into
any Company Employee Plan, International Employee Plan, or Employment Agreement.
(b) Documents. The Company has provided to Parent access to correct
and complete copies of: (i) all documents embodying each Company Employee Plan,
International Employee Plan, and each Employment Agreement including (without
limitation) all amendments thereto and all related trust documents,
administrative service agreements, group annuity contracts, group insurance
contracts, and policies pertaining to fiduciary liability insurance covering the
fiduciaries for each Plan; (ii) the most recent annual actuarial valuations, if
any, prepared for each Company Employee Plan; (iii) the three (3) most recent
annual reports (Form Series 5500 and all schedules and financial statements
attached thereto), if any, required under ERISA or the Code in connection with
each Company Employee Plan; (iv) if the Company Employee Plan is funded, the
most recent annual and periodic accounting of Company Employee Plan assets; (v)
the most recent summary plan description together with the summary(ies) of
material modifications thereto, if any, required under ERISA with respect to
each Company Employee Plan; (vi) all IRS determination, opinion, notification
and advisory letters, and all applications and correspondence to or from the IRS
or the DOL with respect to any such application or letter; (vii) all
communications material to any Company Group Employee or Company Group Employees
relating to any Company Employee Plan and any proposed Company Employee Plans,
in each case, relating to any amendments, terminations, establishments,
increases or decreases in benefits, acceleration of payments or vesting
schedules or other events which would result in any material liability to the
Company; (viii) all correspondence to or from any governmental agency relating
to any Company Employee Plan; (ix) all COBRA forms and related notices (or such
forms and notices as required under comparable law); and (x) the three (3) most
recent plan years discrimination tests for each Company Employee Plan.
(c) Employee Plan Compliance. Except as set forth on the Company
Schedule, (i) the Company has performed in all material respects all obligations
required to be performed by it under, is not in default or violation of, and has
no knowledge of any default or violation by any other party to each Company
Employee Plan, and each Company Employee Plan has been established and
maintained in all material respects in accordance with its terms and in
compliance with all applicable
-20-
laws, statutes, orders, rules and regulations, including but not limited to
ERISA or the Code; (ii) each Company Employee Plan intended to qualify under
Section 401(a) of the Code and each trust intended to qualify under Section
501(a) of the Code has either received a favorable determination, opinion,
notification or advisory letter from the IRS with respect to each such Company
Employee Plan as to its qualified status under the Code, including all
amendments to the Code effected by the Tax Reform Act of 1986 and subsequent
legislation, or has remaining a period of time under applicable Treasury
regulations or IRS pronouncements in which to apply for such a letter and make
any amendments necessary to obtain a favorable determination as to the qualified
status of each such Company Employee Plan; (iii) no "prohibited transaction",
within the meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA,
and not otherwise exempt under Section 4975 of the Code or Section 408 of ERISA
(or any administrative class exemption issued thereunder), has occurred with
respect to any Company Employee Plan; (iv) there are no actions, suits or claims
pending, or, to the knowledge of the Company, threatened or reasonably
anticipated (other than routine claims for benefits) against any Company
Employee Plan or against the assets of any Company Employee Plan; (v) each
Company Employee Plan (other than any stock option plan) can be amended,
terminated or otherwise discontinued after the Effective Time, without material
liability to the Parent, the Company or any of its Related Parties (other than
ordinary administration expenses); (vi) there are no audits, inquiries or
proceedings pending or, to the knowledge of the Company or any Related Parties,
threatened by the IRS or DOL with respect to any Company Employee Plan; and
(vii) neither the Company nor any Related Party is subject to any penalty or tax
with respect to any Company Employee Plan under Section 502(i) of ERISA or
Sections 4975 through 4980 of the Code.
(d) Pension Plan. Neither the Company nor any Related Party has ever
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Title IV of ERISA or Section 412 of the Code.
(e) Collectively Bargained, Multiemployer and Multiple Employer
Plans. At no time has the Company or any Related Party contributed to or been
obligated to contribute to any Multiemployer Plan. Neither the Company, nor any
Related Party has at any time ever maintained, established, sponsored,
participated in, or contributed to any multiple employer plan, or to any plan
described in Section 413 of the Code.
(f) No Post-Employment Obligations. Except as set forth on the
Company Schedule, no Company Employee Plan provides, or reflects or represents
any liability to provide retiree health to any person for any reason, except as
may be required by COBRA or other applicable statute, and the Company has never
represented, promised or contracted (whether in oral or written form) to any
Company Group Employee (either individually or to Company Group Employees as a
group) or any other person that such Company Group Employee(s) or other person
would be provided with retiree health, except to the extent required by statute.
(g) Health Care Compliance. Neither the Company nor any Related
Party has, prior to the Effective Time and in any material respect, violated any
of the health care continuation requirements of COBRA, the requirements of FMLA,
the requirements of the Health Insurance Portability and Accountability Act of
1996, the requirements of the Women's Health and Cancer
-21-
Rights Act of 1998, the requirements of the Newborns' and Mothers' Health
Protection Act of 1996, or any amendment to each such act, or any similar
provisions of state law applicable to its Company Group Employees.
(h) Effect of Transaction.
(i) Except as set forth on the Company Schedule, the execution
of this Agreement and the consummation of the transactions contemplated hereby
will not (either alone or upon the occurrence of any additional or subsequent
events) constitute an event under any Company Employee Plan, Employment
Agreement, trust or loan that will or may result in any payment (whether of
severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits with respect
to any Company Group Employee.
(ii) Except as set forth on the Company Schedule, no payment or
benefit which will or may be made by the Company or its Related Parties with
respect to any Company Group Employee will be characterized as a "parachute
payment", within the meaning of Section 280G(b)(2) of the Code.
(i) Employment Matters. The Company: (i) is in compliance in all
respects with all applicable foreign, federal, state and local laws, rules and
regulations respecting employment, employment practices, terms and conditions of
employment and wages and hours, in each case, with respect to Company Group
Employees; (ii) has withheld and reported all amounts required by law or by
agreement to be withheld and reported with respect to wages, salaries and other
payments to Company Group Employees; (iii) is not liable for any arrears of
wages or any taxes or any penalty for failure to comply with any of the
foregoing; and (iv) is not liable for any payment to any trust or other fund
governed by or maintained by or on behalf of any governmental authority, with
respect to unemployment compensation benefits, social security or other benefits
or obligations for Company Group Employees (other than routine payments to be
made in the normal course of business and consistent with past practice). There
are no pending, threatened or reasonably anticipated claims or actions against
the Company under any worker's compensation policy or long-term disability
policy.
(j) Labor. No work stoppage or labor strike against the Company is
pending, threatened or reasonably anticipated. The Company does not know of any
activities or proceedings of any labor union to organize any Company Group
Employees. Except as set forth on the Company Schedule, there are no actions,
suits, claims, labor disputes or grievances pending, or, to the knowledge of the
Company, threatened or reasonably anticipated relating to any labor, safety or
discrimination matters involving any Company Group Employee, including, without
limitation, charges of unfair labor practices or discrimination complaints,
which, if adversely determined, would, individually or in the aggregate, result
in any material liability to the Company. Neither the Company nor any of its
subsidiaries has engaged in any unfair labor practices within the meaning of the
National Labor Relations Act. Except as set forth on the Company Schedule, the
Company is not presently, nor has it been in the past, a party to, or bound by,
any collective bargaining agreement or union contract with respect to Company
Group Employees and no collective bargaining agreement is being negotiated by
the Company.
-22-
(k) International Employee Plan. The Company does not now, nor has
it ever had the obligation to, maintain, establish, sponsor, participate in, or
contribute to any International Employee Plan.
(l) No Interference or Conflict. To the Company's knowledge, no
shareholder, officer, employee or consultant of the Company is obligated under
any contract or agreement subject to any judgment, decree or order of any court
or administrative agency that would interfere with such person's efforts to
promote the interests of the Company or that would interfere with the Company's
business. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business as presently conducted nor any activity of
such officers, directors, employees or consultants in connection with the
carrying on of the Company's business as presently conducted will, to the
Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract or
agreement under which any of such officers, directors, employees or consultants
is now bound.
2.22 Compliance with Legal Requirements. To the best of the Company's
knowledge, and after diligent inquiry, the Company has complied in all material
respects with, is not in violation of, and has not received any notices of
violation with respect to, any foreign, federal, state or local statute, law or
regulation.
2.23 Insurance. The Company Schedule sets forth a list of all insurance
policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company or any
affiliate. There is no claim by the Company or any affiliate pending under any
of such policies or bonds as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds. All premiums due and
payable under all such policies and bonds have been paid, and the Company and
its affiliates are otherwise in material compliance with the terms of such
policies and bonds (or other policies and bonds providing substantially similar
insurance coverage). The Company has no knowledge of threatened termination of,
or premium increase with respect to, any of such policies.
2.24 Employees. The Company Schedule contains a complete and accurate list
of the following information for each employee (including full-time, part-time
and contract employees) and director of the Company, including each employee on
leave of absence; employer (for contract employees); name; job title; age;
gender; current compensation paid or payable and any change in compensation
since January 1, 2000; vacation accrued; number of options held (if any); and
service credited for purposes of vesting and eligibility to participate under
the Company's various benefit plans. To the Company's knowledge, except as set
forth on the Company Schedule, no employee of the Company has the immediate
intention to terminate his or her employment with the Company.
2.25 Product Warranty. All products and equipment manufactured, sold,
leased or delivered by the Company and all services rendered by the Company have
been in conformity with all applicable contractual commitments and all express
and implied warranties, and the Company does not have any liability for
replacement or repair thereof or other damages in connection therewith in excess
of any warranty reserve established with respect thereto and included on the
Current Balance Sheet. Except as set forth on the Company Schedule, no products
or equipment
-23-
manufactured, sold, leased or delivered by the Company and no services rendered
by the Company are subject to any guaranty, warranty or other indemnity beyond
the applicable standard terms and conditions of such sale, lease or service
(including as a result of any course of conduct between the Company and any
third party or as a result of any statements in any of the Company's product or
promotional literature). The Company Schedule includes copies of such standard
terms and conditions of sale, lease and service for the Company (containing
applicable guaranty, warranty and indemnity provisions). The Company has not
been notified in writing of any claims for (and the Company has no knowledge of
any threatened claims for) any extraordinary product returns, warranty
obligations or product services relating to any of its products or services.
2.26 Product Liability; Product Recalls, etc. To the Company's knowledge,
except as set forth on the Company Schedule, the Company does not have any
liability arising out of any injury to individuals or property as a result of
the ownership, possession or use of any products or equipment manufactured,
sold, leased or delivered by the Company or with respect to any services
rendered by the Company. Except as set forth on the Company Schedule, there
have been no product or equipment recalls, withdrawals or seizures with respect
to any products or equipment manufactured, sold, leased or delivered by the
Company or with respect to any services rendered by the Company.
2.27 Books and Records. The minute books of the Company contain accurate
and complete records of all meetings held of, and material corporate action
taken by, the shareholders and the Board of Directors. No material action has
been taken by a committee of the Board of Directors of the Company for which
minutes have not been prepared and are not contained in such minute books. As of
the Closing, no meeting of the Boards of Directors or the shareholders will have
been held for which minutes have not been prepared and are not contained in such
minute books. At the Closing, all of the minute books will be in the possession
of the Company.
2.28 Customers and Suppliers. The Company Schedule sets forth the names
and addresses of the ten (10) most significant customers and suppliers of the
Company by dollar volume of sale and purchases, respectively for the fiscal year
ended December 31, 1999. Except as set forth on the Company Schedule, the
Company has not received any notice that any such customer of the Company has
ceased, or will cease, to use the products, equipment, goods or services of the
Company, or has substantially reduced, or will substantially reduce, the use of
such products, equipment, goods or services at any time. Except as set forth on
the Company Schedule, the Company has not received any notice from any of such
suppliers of the Company to the effect that such supplier will stop, materially
decrease the rate of, or materially change the terms (whether related to
payment, price or otherwise) with respect to, supplying materials, products or
services to the Company (whether as a result of the consummation of the
transactions contemplated hereby or otherwise).
2.29 Complete Copies of Materials. The Company has delivered or made
available true and complete copies of each document (or summaries of same) that
has been requested by Parent or its counsel.
2.30 Representations Complete. Neither any of the representations or
warranties made by the Company (as modified by the Company Schedules) in this
Agreement, nor any statements made
-24-
in any exhibit, schedule or certificate furnished by the Company pursuant to
this Agreement taken as a whole contains any untrue statement of a material
fact, or omits to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading. The information regarding the Company furnished in
any documents mailed, delivered or otherwise furnished to Shareholders in
connection with the solicitation of their consent to this Agreement and the
Merger, will not contain, at or prior to the Effective Time, any untrue
statement of a material fact and will not omit to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which made, not misleading with respect to the Company.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub hereby represent and warrant to the Company, subject
to such exceptions as are specifically disclosed in the disclosure letter
(referencing the appropriate section and paragraph numbers and any other section
and/or paragraph number to which it is reasonably apparent on the face of such
disclosure that such disclosure relates) supplied by the Parent to Company (the
"Parent Schedule") and dated as of the date hereof, that on the date hereof
(provided, that the representations and warranties made as of a specified date
will be true and correct as of such date):
3.1 Organization, Standing and Power. Each of Parent and Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the State of California. Each of Parent and Merger Sub has the corporate
power to own its properties and to carry on its business as now being conducted
and is duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the failure to be so qualified or licensed would have a
Parent Material Adverse Effect. Parent has not taken any action that in any
respect conflicts with, constitutes a default under or results in a violation of
any provision of its Organizational Documents. The Parent Schedule sets forth
(i) true and correct copies of the Organizational Documents of Parent, each as
in effect on the date hereof, and (ii) the directors and officers of Parent.
3.2 Capital Structure.
(a) The authorized stock of Parent consists of 48,000,000 shares of
Common Stock, USD $.001 par value, of which approximately 6,205,559 shares were
issued and outstanding as of July 12, 2000, 1,300,000 shares of Series A
Preferred Stock, all of which are issued and outstanding as of the date hereof,
1,281,000 shares of Series B Preferred Stock, all of which are issued and
outstanding as of the date hereof, 544,998 shares of Series C Preferred Stock,
all of which are issued and outstanding as of the date hereof, 1,500,000 shares
of Series D Preferred Stock, all of which are issued and outstanding as of the
date hereof, 857,988 shares of Series E-1 Preferred Stock, all of which are
issued and outstanding as of the date hereof, 6,621,268 shares of Series E-2
Preferred Stock, all of which are issued and outstanding as of the date hereof,
and 8,071,207 shares of Series F Preferred Stock, all of which are issued and
outstanding as of the date hereof. All such
-25-
shares have been duly authorized, and all such issued and outstanding shares
have been validly issued, are fully paid and nonassessable and are free of any
liens or encumbrances other than any liens or encumbrances created by or imposed
upon the holders thereof. Parent has also reserved 9,872,968 shares of Common
Stock for issuance pursuant to its employee and director stock and option plans.
Other than warrants to purchase 373,210 shares of Common Stock, there are no
other options, warrants, calls, rights, commitments or agreements of any
character to which Parent is a party or by which it is bound obligating Parent
to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered,
sold, repurchased or redeemed, any shares of the capital stock of Parent or
obligating Parent to grant, extend or enter into any such option, warrant, call,
right, commitment or agreement. There are no outstanding or authorized stock
appreciation, phantom stock, profit participation, or other similar rights with
respect to Parent.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger will be duly authorized, validly issued, fully paid, non-assessable, free
of any liens or encumbrances and not subject to any preemptive rights or rights
of first refusal created by statute or the certificate of incorporation or
bylaws of Parent or any agreement to which Parent is a party or is bound except
as provided in this Agreement.
3.3 Capital Resources. Parent has sufficient capital resources to perform
its obligations with respect to the Merger Consideration and to consummate all
of the transactions contemplated by the Agreement and the Related Agreements.
3.4 Authority. Each of Parent and Merger Sub has all requisite corporate
power and authority to enter into this Agreement and any Related Agreements to
which it is a party and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and any Related Agreements
to which it is a party and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of Parent and Merger Sub. This Agreement and any Related Agreements
to which Parent and Merger Sub are parties have been duly executed and delivered
by Parent and Merger Sub and constitute the valid and binding obligations of
Parent and Merger Sub, enforceable in accordance with their terms, except as
such enforceability may be limited by principles of public policy and merger
subject to the laws of general application relating to bankruptcy, insolvency
and the relief of debtors and rules of law governing specific performance,
injunctive relief or other equitable remedies.
3.5 No Conflict. The execution and delivery by the Parent and Merger Sub
of this Agreement and any Related Agreement to which the Parent and Merger Sub
are a party, and the consummation of the transactions contemplated hereby and
thereby, will not conflict with or result in any violation of or default under
(with or without notice or lapse of time, or both) or give rise to a right of
termination, cancellation, modification or acceleration of any obligation or
loss of any benefit under (any such event, a "Conflict") (i) any provision of
the Organizational Documents of the Parent or Merger Sub, (ii) any Contract, or
(iii) any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Parent or Merger Sub any of its properties (tangible and
intangible) or assets. Parent and Merger Sub are in material compliance with
and have not materially breached, violated or defaulted under, or received
notice that they have breached, violated
-26-
or defaulted under, any of the terms or conditions of any Contract, nor is the
Parent or Merger Sub aware of any event that would constitute such a material
breach, violation or default with the lapse of time, giving of notice or both.
Each Contract is in full force and effect and, to the Parent's knowledge, no
other party is obligated to the Parent or Merger Sub pursuant to any such
Contract in material default thereunder. The Parent has obtained, or will obtain
prior to the Effective Time, all necessary consents, waivers and approvals of
parties to any Contract as are required (i) thereunder in connection with the
Merger, (ii) and for any such Contract to remain in full force and effect
without limitation, modification or alteration after the Effective Time.
3.6 Consents. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity, or any third
party is required by or with respect to Parent or Merger Sub in connection with
the execution and delivery of this Agreement and any Related Agreements to which
Parent or Merger Sub is a party or the consummation of the transactions
contemplated hereby and thereby, except for (i) such consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable securities laws; (ii) the filing of the
Agreement of Merger with the Secretary of State of the State of California; and
(iii) such other consents, waivers, approvals, orders, authorizations,
registrations, declarations and filings which, if not obtained or made, would
not have a Parent Material Adverse Effect.
3.7 Absence of Certain Changes or Events. Since the date of Parent's
balance sheet provided to the Company (the "Parent Balance Sheet"), except with
respect to the actions contemplated by this Agreement, Parent and its
subsidiaries have conducted their businesses only in the ordinary course and in
a manner consistent with past practice and, since such date, there has not been
(i) any Parent Material Adverse Effect, or any development that reasonably would
be expected to cause a Parent Material Adverse Effect; (ii) any damage,
destruction or loss (whether or not covered by insurance) having a Parent
Material Adverse Effect; (iii) any material change by Parent in its accounting
methods, principles or practices, except as required by concurrent changes in
GAAP; or (iv) any material revaluation by Parent of any of its assets including,
without limitation, writing down the value of capitalized software or inventory
or writing off notes or accounts receivable other than in the ordinary course of
business.
3.8 Absence of Liens and Encumbrances. Parent has good and valid title
to, or, in the case of leased properties and assets, valid leasehold interests
in, all of its material tangible properties and assets, real, personal and
mixed, used in its business, free and clear of any liens or encumbrances except
as reflected in Parent's financial statements provided to the Company and except
for liens for taxes not yet due and payable and such imperfections of title and
encumbrances, if any, which are not material in character, amount or extent, and
which do not materially detract from the value, or materially interfere with the
present use, of the property subject thereto or affected thereby.
3.9 Parent Financial Statements. The Parent has made available to the
Company the Parent's (i) audited balance sheets as of April 30, 1999 and as of
April 30, 1998, and the related audited statements of income, cash flow and
stockholders' equity for the twelve (12) month periods ended April 30, 1999 and
April 30, 1998, respectively (collectively, the "Year-End Financials"), and (ii)
unaudited balance sheet as of April 30, 2000, and the related unaudited
statements of income,
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cash flow and stockholders' equity for the twelve (12) month period then ended
(the "Interim Financials"). The Year-End Financials and the Interim Financials
have been prepared in accordance with GAAP consistently applied on a basis
consistent throughout the periods indicated and consistent with each other. The
Year-End Financials and Interim Financials present fairly the financial
condition, operating results and cash flows of the Parent as of the dates and
during the periods indicated therein, subject in the case of the Interim
Financials to normal year-end adjustments, which are not material in amount in
any individual case or in the aggregate. The Parent's unaudited balance sheet as
of April 30, 2000 is referred to hereinafter as the "Current Balance Sheet."
3.10 Minute Books. The Parent has made available to the Company, records
reflecting the actions taken by Parent's board of directors prior and subsequent
to Parent's most recent preferred financing.
3.11 No Undisclosed Liabilities. The Parent does not have any material
liability, indebtedness, obligation, expense, claim, deficiency, guaranty or
endorsement of any type, whether accrued, absolute, contingent, matured,
unmatured or other (whether or not required to be reflected in financial
statements in accordance with GAAP), which has not been reflected on the Current
Balance Sheet. The Parent Schedule sets forth a schedule of all Parent
indebtedness (including the amounts of Parent indebtedness, names of creditors,
and a summary of the pertinent terms of such Parent indebtedness) as of the date
of this Agreement.
3.12 Tax and Other Returns and Reports.
(a) Tax Returns and Audits. Except as set forth on the Parent
Schedule:
(i) As of the Effective Time, the Parent will have prepared
and timely filed all required federal, state, local and foreign returns,
estimates, information statements and reports, including amendments thereto
("Returns") that are required to have been filed before the Effective Time
relating to any and all Taxes concerning or attributable to the Parent or its
operations, including the calculations of net operating losses for purposes of
such Returns, and such Returns are true and correct in all material respects and
have been completed in accordance with applicable law.
(ii) As of the Effective Time, the Parent (A) will have paid
all Taxes it is required to pay and will have withheld with respect to its
employees, independent contractors and other persons, all federal and state
income taxes, FICA, FUTA and other Taxes required to be withheld, and (B) will
have accrued on the Current Balance Sheet all Taxes attributable to the periods
preceding the Current Balance Sheet and will not have incurred any liability for
Taxes for the period commencing after the date of the Current Balance Sheet and
ending immediately prior to the Effective Time, other than in the ordinary
course of business.
(iii) The Parent has not been delinquent in the payment of
any Tax, nor is there any Tax deficiency outstanding, assessed or proposed
against the Parent, nor has the Parent executed any waiver of any statute of
limitations on or extending the period for the assessment or
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collection of any Tax which is still outstanding. There are no powers of
attorney with respect to Taxes of the Parent currently in force. No claim has
ever been made by an authority in a jurisdiction where the Parent does not file
Returns that the Parent is or may be subject to taxation by that jurisdiction.
(iv) No audit or other examination of any Return of the
Parent is presently in progress, nor has the Parent been notified of any request
for such an audit or other examination.
(v) As of the date of the Current Balance Sheet Date, the
Parent does not have any material liabilities for unpaid Taxes have not been
accrued or reserved on the Current Balance Sheet, whether asserted or
unasserted, contingent or otherwise, and the Parent has not incurred any
liability for Taxes since the date of the Current Balance Sheet other than in
the ordinary course of business.
(vi) The Parent has made available to Company or its legal
counsel, copies of all foreign, federal, state and local income and all state
and local sales and use Returns for the Parent filed for all periods since its
inception.
(vii) There are (and immediately following the Effective Time
there will be) no Liens on the assets of the Parent relating to or attributable
to Taxes other than Liens for Taxes not yet due and payable.
(viii) The Parent has no knowledge of any basis for the
assertion of any claim relating or attributable to Taxes which, if adversely
determined, would result in any material Lien on the assets of the Parent.
(ix) The Parent is not a party to any Tax sharing,
indemnification or allocation agreement nor does the Parent owe any amount under
any such agreement.
(x) The Parent's Tax basis in its assets for purposes of
determining its future amortization, depreciation and other federal income Tax
deductions is accurately reflected on the Parent 's tax books and records.
(xi) The Parent is not, and has not been at any time, a
"United States Real Property Holding Corporation" within the meaning of Section
897(c)(2) of the Code.
(xii) No adjustment relating to any Return filed by the
Parent has been proposed formally or, to the Parent's knowledge, informally by
any taxing authority to the Parent or any representative thereof.
(b) Executive Compensation Tax. There is no contract, agreement,
plan or arrangement to which the Parent is a party, including, without
limitation, the provisions of this Agreement, covering any employee or former
employee of the Parent, which, individually or collectively, could give rise to
the payment of any amount that would not be deductible pursuant to Sections
280G, 404 or 162(m) of the Code.
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3.13 Restrictions on Business Activities. There is no agreement (non-
compete or otherwise), commitment, judgment, injunction, order or decree to
which the Parent is a party or, to the Parent's knowledge, is otherwise binding
upon the Parent which has or may reasonably be expected to have the effect of
prohibiting or impairing any business practice of the Parent , any acquisition
of property (tangible or intangible) by the Parent, the conduct of business by
the Parent or otherwise limiting the freedom of the Parent to engage in any line
of business or to compete with any person, other than customary non-disclosure
and confidentiality obligations contained in non-disclosure agreements, license
agreements or customer agreements entered into in the ordinary course of
business, and other than customary license restrictions that may be contained in
Contracts entered into in the ordinary course of business.
3.14 Intellectual Property.
(a) Parent and its subsidiaries own, or have the right to use, sell
or license all material intellectual property rights necessary or required for
the conduct of their respective businesses as presently conducted (such
intellectual property rights are collectively referred to as the "Parent IP
Rights");
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
material breach of any instrument or agreement governing any Parent IP Right
(the "Parent IP Rights Agreements"), will not cause the forfeiture or
termination or give rise to a right of forfeiture or termination of any Parent
IP Right or materially impair the right of Parent and its subsidiaries or the
Surviving Corporation to use, sell or license any Parent IP Right or portion
thereof.
(c) Neither the manufacture, marketing, license, sale or intended use
of any product currently licensed or sold by Parent or any of its subsidiaries
or currently under development by Parent or any of its subsidiaries violates any
license or agreement between Parent or any of its subsidiaries and any third
party or infringes any intellectual property right of any other party; and there
is no pending or, to the best knowledge of Parent, threatened claim or
litigation contesting the validity, ownership or right to use, sell, license or
dispose of any Parent IP Right nor, to the best knowledge of Parent, is there
any basis for any such claim, nor has Parent received any notice asserting that
any Parent IP Right or the proposed use, sale, license or disposition thereof
conflicts or will conflict with the rights of any other party, nor, to the best
knowledge of Parent, is there any basis for any such assertion.
(d) Parent has taken reasonable and practicable steps designed to
safeguard and maintain the secrecy and confidentiality of, and its proprietary
rights in, all material Parent IP Rights.
3.15 Agreements, Contracts and Commitments.
(a) Except as set forth on the Parent Schedule, the Parent does not
have, is not a party to nor is it bound by:
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(i) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson or
consulting or sales agreement, contract or commitment with a firm or other
organization;
(ii) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased by, or the vesting of benefits of which
will be accelerated by, or which would require the consent of any party thereto
as a result of, the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement;
(iii) any fidelity or surety bond or completion bond;
(iv) any lease of personal property having a value in excess of
USD $50,000 individually or USD $100,000 in the aggregate;
(v) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of USD $100,000
individually or USD $250,000 in the aggregate;
(vi) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business enterprise
outside the ordinary course of the Parent's business;
(vii) any licensing agreement or other contract with respect to
Intellectual Property Rights;
(viii) any joint venture, partnership, and other contract
involving a sharing of profits, losses, costs, or liabilities by the Parent with
any third party;
(ix) any contract containing covenants that in any way purport
to restrict the business activity of the Parent or any affiliate or limit the
freedom of the Parent or any affiliate of the Parent to engage in any line of
business or to compete with any third party, other than customary non-disclosure
and confidentiality obligations contained in non-disclosure agreements entered
into in the ordinary course of business, license agreements or customer
agreements, and other than customary license restrictions that may be contained
in Contracts entered into in the ordinary course of business;
(x) any power of attorney or other similar agreement or grant
of agency;
(xi) any contract entered into other than in the ordinary
course of business that contains or provides for an express undertaking by the
Parent to be responsible for consequential damages;
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(xii) any oral or written warranty, guaranty, and or other
similar undertaking with respect to product or contractual performance sold or
extended by the Parent other than in the ordinary course of business; or
(xiii) any amendment, supplement, and modification (whether oral
or written) in respect of any of the foregoing.
(b) All of the Contracts set forth or required to be set forth on the
Parent Schedule ("Contracts") are valid, binding and enforceable in accordance
with their respective terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and other laws of general
application effecting enforcement of creditors' rights generally, rules of law
governing specific performance, injunctive relief or other equitable remedies,
and limitations of public policy; and shall be in full force and effect without
penalty in accordance with their terms upon consummation of the transactions
contemplated hereby. The Parent does not have any present expectation or
intention of not fully performing on a timely basis in all material respects all
such obligations required to be performed by the Parent under any Contract set
forth or required to be set forth on the Parent Schedule; no partially-filled or
unfilled material customer purchase order or sales order is subject to
cancellation or any other material modification by the other party thereto or is
subject to any penalty, right of set-off or other charge by the other party
thereto for late performance or delivery; and the Parent does not have any
knowledge of any cancellation or anticipated cancellation or any breach by the
other parties to any Contract set forth or required to be set forth on the
Parent Schedule. The Parent is not a party to any Contract the performance of
which could reasonably be expected to have a Parent Material Adverse Effect.
(c) Company has been given access to a true and correct copy of each
of the written Contracts that are set forth on the Parent Schedule, together
with all amendments, waivers or other changes thereto.
3.16 Interested Party Transactions. No officer, director or, to the
Parent's knowledge, shareholder of the Parent (nor any ancestor, sibling,
descendant or spouse of any of such persons, or any trust, partnership or
corporation in which any of such persons has or has had an interest), has or has
had, directly or indirectly, (i) an interest in any entity which furnished or
sold, or furnishes or sells, services or products that the Parent furnishes or
sells, or proposes to furnish or sell, or (ii) any interest in any entity that
purchases from or sells or furnishes to the Parent , any goods or services, or
(iii) a beneficial interest in any Contract to which the Parent is a party;
provided, however, that ownership of no more than five percent (5%) of the
outstanding voting stock of a publicly traded corporation shall not be deemed to
be an "interest in any entity" for purposes of this Section 3.16.
3.17 Litigation. There is no action, suit, proceeding, claim, arbitration
or investigation pending, or as to which Parent or any of its subsidiaries has
received any notice of assertion nor, to Parent's best knowledge, is there a
threatened action, suit, proceeding, claim, arbitration or investigation against
Parent or any of its subsidiaries which reasonably would be expected to be
material to Parent, or which in any manner challenges or seeks to prevent,
enjoin, alter or delay any of the transactions contemplated by this Agreement or
Parent's business.
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3.18 Compliance With Laws. Parent has complied in all material respects
with, is not in material violation of, and has not received any notices of
violation with respect to, any foreign, federal, state or local statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business, except in any such case as reasonably would not be
expected to be material to Parent.
3.19 Environmental Matters.
(a) Condition of Property. As of the Closing, except in compliance
with Environmental Laws in a manner that could not reasonably be expected to
subject the Parent to liability, to the knowledge of the Parent after reasonable
inquiry, no Hazardous Materials are present on any Business Facility currently
owned, operated, occupied, controlled or leased by the Parent or were present on
any other Business Facility at the time it ceased to be owned, operated,
occupied, controlled or leased by the Parent. Except as set forth on the Parent
Schedule, there are no underground storage tanks, asbestos which is friable or
likely to become friable or PCBs present on any Business Facility currently
owned, operated, occupied, controlled or leased by the Parent or as a
consequence of the acts of the Parent or its agents.
(b) Hazardous Materials Activities. The Parent has conducted all
Hazardous Material Activities relating to its business in compliance in all
material respects with all applicable Environmental Laws, and the Hazardous
Materials Activities of the Parent prior to the Closing have not resulted in the
exposure of any person to a Hazardous Material in a manner which has caused or
could reasonably be expected to cause an adverse health effect to any such
person.
(c) Permits. The Parent Schedule accurately describes all of the
Environmental Permits currently held by the Parent and relating to its business
and the listed Environmental Permits are all of the Environmental Permits
necessary for the continued conduct of any Hazardous Material Activity of the
Parent relating to its business as such activities are currently being
conducted. All such Environmental Permits are valid and in full force and
effect. The Parent has complied in all material respects with all covenants and
conditions of any Environmental Permit which is or has been in force with
respect to its Hazardous Materials Activities. No circumstances exist which
could cause any Environmental Permit to be revoked, modified, or rendered non-
renewable upon payment of the permit fee. All Environmental Permits and all
other consents and clearances required by any Environmental Law have been
obtained or will be obtained prior to the Closing at no cost to Parent or Merger
Sub.
(d) Environmental Litigation. Except as set forth on the Parent
Schedule, no Action, proceeding, revocation proceeding, amendment procedure,
writ, injunction or claim is pending, or to the best of the Parent's knowledge,
threatened, concerning or relating to any Environmental Permit or any Hazardous
Materials Activity of the Parent relating to its business, or any Business
Facility.
(e) Offsite Hazardous Material Disposal. The Parent has transferred
or released Hazardous Materials only to those Disposal Sites set forth on the
Parent Schedule; and no Action, proceeding, liability or claim exists or is
threatened against any Disposal Site or against the Parent
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with respect to any transfer or release of Hazardous Materials relating to the
business of the Parent to a Disposal Site which could reasonably be expected to
subject the Parent to liability.
(f) Environmental Liabilities. The Parent is not aware of any fact
or circumstance, which could reasonably be expected to result in an
environmental liability having a Material Adverse Effect on the Parent.
(g) Reports and Records: The Parent has delivered to Parent or made
available for inspection by Parent and its agents, representatives and employees
all records in the Parent's possession concerning the Hazardous Materials
Activities of the Parent relating to its business and all environmental audits
and environmental assessments of any Business Facility conducted at the request
of, or otherwise in the possession of the Parent. To its knowledge, the Parent
has complied with all environmental disclosure obligations imposed by applicable
law with respect to this transaction.
3.20 Brokers' and Finders' Fees; Third Party Expenses. Except as set forth
on the Parent Schedule, the Parent has not incurred, nor will it incur, directly
or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with the Agreement or any
transaction contemplated hereby. The Parent Schedule sets forth the principal
terms and conditions of any agreement, written or oral, with respect to such
fees. The Parent Schedule sets forth the Parent's current reasonable estimate of
all Third Party Expenses expected to be incurred by the Parent in connection
with the negotiation and effectuation of the terms and conditions of this
Agreement and the transactions contemplated hereby.
3.21 Employee Matters and Benefit Plans.
(a) Schedule. The Parent Schedule contains an accurate and complete
list of each Parent Employee Plan and each Employment Agreement. The Parent does
not have any plan or commitment to establish any new Parent Employee Plan,
International Employee Plan, or Employment Agreement, to modify any Parent
Employee Plan or Employment Agreement (except to the extent required by law or
to conform any such Parent Employee Plan or Employment Agreement to the
requirements of any applicable law, in each case as previously disclosed to
Parent in writing, or as required by this Agreement), or to adopt or enter into
any Parent Employee Plan, International Employee Plan, or Employment Agreement.
(b) Documents. The Parent has provided to the Company access to
correct and complete copies of: (i) all documents embodying each Parent Employee
Plan, International Employee Plan, and each Employment Agreement including
(without limitation) all amendments thereto and all related trust documents,
administrative service agreements, group annuity contracts, group insurance
contracts, and policies pertaining to fiduciary liability insurance covering the
fiduciaries for each Plan; (ii) the most recent annual actuarial valuations, if
any, prepared for each Parent Employee Plan; (iii) the three (3) most recent
annual reports (Form Series 5500 and all schedules and financial statements
attached thereto), if any, required under ERISA or the Code in connection with
each Parent Employee Plan; (iv) if the Parent Employee Plan is funded, the most
recent annual and periodic accounting of Parent Employee Plan assets; (v) the
most recent summary
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plan description together with the summary(ies) of material modifications
thereto, if any, required under ERISA with respect to each Parent Employee Plan;
(vi) all IRS determination, opinion, notification and advisory letters, and all
applications and correspondence to or from the IRS or the DOL with respect to
any such application or letter; (vii) all communications material to any Parent
Group Employee or Parent Group Employees relating to any Parent Employee Plan
and any proposed Parent Employee Plans, in each case, relating to any
amendments, terminations, establishments, increases or decreases in benefits,
acceleration of payments or vesting schedules or other events which would result
in any material liability to the Parent; (viii) all correspondence to or from
any governmental agency relating to any Parent Employee Plan; (ix) all COBRA
forms and related notices (or such forms and notices as required under
comparable law); and (x) the three (3) most recent plan years discrimination
tests for each Parent Employee Plan.
(c) Employee Plan Compliance. Except as set forth on the Parent
Schedule, (i) the Parent has performed in all material respects all obligations
required to be performed by it under, is not in default or violation of, and has
no knowledge of any default or violation by any other party to each Parent
Employee Plan, and each Parent Employee Plan has been established and maintained
in all material respects in accordance with its terms and in compliance with all
applicable laws, statutes, orders, rules and regulations, including but not
limited to ERISA or the Code; (ii) each Parent Employee Plan intended to qualify
under Section 401(a) of the Code and each trust intended to qualify under
Section 501(a) of the Code has either received a favorable determination,
opinion, notification or advisory letter from the IRS with respect to each such
Parent Employee Plan as to its qualified status under the Code, including all
amendments to the Code effected by the Tax Reform Act of 1986 and subsequent
legislation, or has remaining a period of time under applicable Treasury
regulations or IRS pronouncements in which to apply for such a letter and make
any amendments necessary to obtain a favorable determination as to the qualified
status of each such Parent Employee Plan; (iii) no "prohibited transaction",
within the meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA,
and not otherwise exempt under Section 4975 of the Code or Section 408 of ERISA
(or any administrative class exemption issued thereunder), has occurred with
respect to any Parent Employee Plan; (iv) there are no actions, suits or claims
pending, or, to the knowledge of the Parent, threatened or reasonably
anticipated (other than routine claims for benefits) against any Parent Employee
Plan or against the assets of any Parent Employee Plan; (v) each Parent Employee
Plan (other than any stock option plan) can be amended, terminated or otherwise
discontinued after the Effective Time, without material liability to the Parent,
the Parent or any of its Related Parties (other than ordinary administration
expenses); (vi) there are no audits, inquiries or proceedings pending or, to the
knowledge of the Parent or any Related Parties, threatened by the IRS or DOL
with respect to any Parent Employee Plan; and (vii) neither the Parent nor any
Related Party is subject to any penalty or tax with respect to any Parent
Employee Plan under Section 502(i) of ERISA or Sections 4975 through 4980 of the
Code.
(d) Pension Plan. Neither the Parent nor any Related Party has ever
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Title IV of ERISA or Section 412 of the Code.
(e) Collectively Bargained, Multiemployer and Multiple Employer
Plans. At no time has the Parent or any Related Party contributed to or been
obligated to contribute to any
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Multiemployer Plan. Neither the Parent, nor any Related Party has at any time
ever maintained, established, sponsored, participated in, or contributed to any
multiple employer plan, or to any plan described in Section 413 of the Code.
(f) No Post-Employment Obligations. Except as set forth on the
Parent Schedule, no Parent Employee Plan provides, or reflects or represents any
liability to provide retiree health to any person for any reason, except as may
be required by COBRA or other applicable statute, and the Parent has never
represented, promised or contracted (whether in oral or written form) to any
Parent Group Employee (either individually or to Parent Group Employees as a
group) or any other person that such Parent Group Employee(s) or other person
would be provided with retiree health, except to the extent required by statute.
(g) Health Care Compliance. Neither the Parent nor any Related
Party has, prior to the Effective Time and in any material respect, violated any
of the health care continuation requirements of COBRA, the requirements of FMLA,
the requirements of the Health Insurance Portability and Accountability Act of
1996, the requirements of the Women's Health and Cancer Rights Act of 1998, the
requirements of the Newborns' and Mothers' Health Protection Act of 1996, or any
amendment to each such act, or any similar provisions of state law applicable to
its Parent Group Employees.
(h) Effect of Transaction.
(i) Except as set forth on the Parent Schedule, the execution of
this Agreement and the consummation of the transactions contemplated hereby will
not (either alone or upon the occurrence of any additional or subsequent events)
constitute an event under any Parent Employee Plan, Employment Agreement, trust
or loan that will or may result in any payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness, vesting, distribution,
increase in benefits or obligation to fund benefits with respect to any Parent
Group Employee.
(ii) Except as set forth on the Parent Schedule, no payment or
benefit which will or may be made by the Parent or its Related Parties with
respect to any Parent Group Employee will be characterized as a "parachute
payment", within the meaning of Section 280G(b)(2) of the Code.
(i) Employment Matters. The Parent: (i) is in compliance in all
respects with all applicable foreign, federal, state and local laws, rules and
regulations respecting employment, employment practices, terms and conditions of
employment and wages and hours, in each case, with respect to Parent Group
Employees; (ii) has withheld and reported all amounts required by law or by
agreement to be withheld and reported with respect to wages, salaries and other
payments to Parent Group Employees; (iii) is not liable for any arrears of wages
or any taxes or any penalty for failure to comply with any of the foregoing; and
(iv) is not liable for any payment to any trust or other fund governed by or
maintained by or on behalf of any governmental authority, with respect to
unemployment compensation benefits, social security or other benefits or
obligations for Parent Group Employees (other than routine payments to be made
in the normal course of business and
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consistent with past practice). There are no pending, threatened or reasonably
anticipated claims or actions against the Parent under any worker's compensation
policy or long-term disability policy.
(j) Labor. No work stoppage or labor strike against the Parent is
pending, threatened or reasonably anticipated. The Parent does not know of any
activities or proceedings of any labor union to organize any Parent Group
Employees. Except as set forth on the Parent Schedule, there are no actions,
suits, claims, labor disputes or grievances pending, or, to the knowledge of the
Parent, threatened or reasonably anticipated relating to any labor, safety or
discrimination matters involving any Parent Group Employee, including, without
limitation, charges of unfair labor practices or discrimination complaints,
which, if adversely determined, would, individually or in the aggregate, result
in any material liability to the Parent. Neither the Parent nor any of its
subsidiaries has engaged in any unfair labor practices within the meaning of the
National Labor Relations Act. Except as set forth on the Parent Schedule, the
Parent is not presently, nor has it been in the past, a party to, or bound by,
any collective bargaining agreement or union contract with respect to Parent
Group Employees and no collective bargaining agreement is being negotiated by
the Parent.
(k) International Employee Plan. The Parent does not now, nor has
it ever had the obligation to, maintain, establish, sponsor, participate in, or
contribute to any International Employee Plan.
No Interference or Conflict. To the Parent's knowledge, no shareholder,
officer, employee or consultant of the Parent is obligated under any contract or
agreement subject to any judgment, decree or order of any court or
administrative agency that would interfere with such person's efforts to promote
the interests of the Parent or that would interfere with the Parent's business.
Neither the execution nor delivery of this Agreement, nor the carrying on of the
Parent's business as presently conducted nor any activity of such officers,
directors, employees or consultants in connection with the carrying on of the
Parent's business as presently conducted will, to the Parent's knowledge,
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract or agreement under which any of such
officers, directors, employees or consultants is now bound.
3.22 Compliance with Legal Requirements. The Parent has complied in all
material respects with, is not in violation of, and has not received any notices
of violation with respect to, any foreign, federal, state or local statute, law
or regulation.
3.23 Insurance. The Parent Schedule sets forth a list of all insurance
policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Parent or any
affiliate. There is no claim by the Parent or any affiliate pending under any of
such policies or bonds as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds. All premiums due and
payable under all such policies and bonds have been paid, and the Parent and its
affiliates are otherwise in material compliance with the terms of such policies
and bonds (or other policies and bonds providing substantially similar insurance
coverage). The Parent has no knowledge of threatened termination of, or premium
increase with respect to, any of such policies.
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3.24 Product Warranty. All products and equipment manufactured, sold,
leased or delivered by the Parent and all services rendered by the Parent have
been in material conformity with all applicable contractual commitments and all
express and implied warranties, and the Parent does not have any liability for
replacement or repair thereof or other damages in connection therewith in excess
of any warranty reserve established with respect thereto and included on the
Current Balance Sheet. Except as set forth on the Parent Schedule, no products
or equipment manufactured, sold, leased or delivered by the Parent and no
services rendered by the Parent are subject to any guaranty, warranty or other
indemnity beyond the applicable standard terms and conditions of such sale,
lease or service (including as a result of any course of conduct between the
Parent and any third party or as a result of any statements in any of the
Parent's product or promotional literature). The Parent Schedule includes copies
of such standard terms and conditions of sale, lease and service for the Parent
(containing applicable guaranty, warranty and indemnity provisions). The Parent
has not been notified in writing of any claims for (and the Parent has no
knowledge of any threatened claims for) any extraordinary product returns,
warranty obligations or product services relating to any of its products or
services.
3.25 Product Liability; Product Recalls, etc. To the Parent's knowledge,
except as set forth on the Parent Schedule, the Parent does not have any
liability arising out of any injury to individuals or property as a result of
the ownership, possession or use of any products or equipment manufactured,
sold, leased or delivered by the Parent or with respect to any services rendered
by the Parent. Except as set forth on the Parent Schedule, there have been no
product or equipment recalls, withdrawals or seizures with respect to any
products or equipment manufactured, sold, leased or delivered by the Parent or
with respect to any services rendered by the Parent.
3.26 Books and Records. The minute books of the Parent contain accurate
and complete records of all meetings held of, and material corporate action
taken by, the shareholders and the Board of Directors. No material action has
been taken by a committee of the Board of Directors of the Parent for which
minutes have not been prepared and are not contained in such minute books. As of
the Closing, no meeting of the Boards of Directors or the shareholders will have
been held for which minutes have not been prepared and are not contained in such
minute books. At the Closing, all of the minute books will be in the possession
of the Parent.
3.27 Customers and Suppliers. Except as set forth on the Parent Schedule,
the Parent has not received any notice that any of customers of the Parent has
ceased, or will cease, to use the products, equipment, goods or services of the
Parent, or has substantially reduced, or will substantially reduce, the use of
such products, equipment, goods or services at any time.
3.28 Complete Copies of Materials. The Parent has delivered or made
available true and complete copies of each document (or summaries of same) that
has been requested by Company or its counsel.
3.29 Representations Complete. Neither any of the representations or
warranties made by the Parent (as modified by the Parent Schedule) in this
Agreement, nor any statements made in any exhibit, schedule or certificate
furnished by the Parent pursuant to this Agreement taken as a whole contains,
any untrue statement of a material fact, or omits to state any material fact
necessary in
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order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading. The information regarding the
Parent furnished in any documents mailed, delivered or otherwise furnished to
Shareholders in connection with the solicitation of their consent to this
Agreement and the Merger, will not contain, at or prior to the Effective Time,
any untrue statement of a material fact and will not omit to state any material
fact necessary in order to make the statements made therein, in light of the
circumstances under which made, not misleading with respect to the Parent.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Effective Time, the Company agrees, except to the extent
that Parent shall otherwise consent in writing, to use all reasonable efforts to
carry on the Company's business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, to pay the debts and
Taxes of the Company when due, to pay or perform other obligations when due,
and, to the extent consistent with such business, use commercially reasonable
efforts consistent with past practice and policies to preserve intact the
Company's present business organizations, keep available the services of the
Company's present officers and key employees and preserve the Company's
relationships with customers, suppliers, distributors, licensors, licensees, and
others having business dealings with it, all with the goal of preserving
unimpaired the Company's goodwill and ongoing business at the Effective Time.
The Company shall promptly notify Parent of any event or occurrence or emergency
not in the ordinary course of business of the Company and any material event
involving the Company. From and after the date hereof, the Company will use
commercially reasonable efforts to collect any and all appropriate and necessary
reseller certificates on a timely basis from any reseller to whom sales are
made. Except as expressly contemplated by this Agreement as set forth on the
Company Schedule hereto, the Company shall not without the prior written consent
of Parent:
(a) make any expenditures or enter into (i) any purchase commitment
exceeding USD $25,000 individually or USD $50,000 in the aggregate or (ii) any
other commitment or transaction of the type described in Section 2.11 hereof
which is outside the ordinary course of business;
(b) except in the ordinary course of business or as previously
disclosed in writing to Parent, (i) sell, license or transfer to any person or
entity any rights to any of the Company's Intellectual Property Rights or enter
into any agreement with respect to any of the Company's Intellectual Property
Rights with any third party or with respect to any Intellectual Property Right
of any third party, (ii) buy or license any Intellectual Property Rights or
enter into any agreement with respect to the Intellectual Property Rights of any
third party, (iii) enter into any agreement with respect to the development of
any Intellectual Property Rights with a third party, (iv) or change
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pricing or royalties charged by the Company to its customers or licensees, or
the pricing or royalties set or charged by third parties who have licensed
Intellectual Property Rights to the Company;
(c) enter into or amend any Contract pursuant to which any other
party is granted marketing, distribution, development or similar rights of any
type or scope with respect to any products or technology of the Company, except
in the ordinary course of business consistent with past practice;
(d) amend, modify or terminate (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the Contracts;
(e) commence or settle any litigation;
(f) declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any Company
Capital Stock, or split, combine or reclassify any Company Capital Stock or
issue or authorize the issuance of any other securities in respect of, in lieu
of or in substitution for, shares of Company Capital Stock, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of Company
Capital Stock (or options, warrants or other rights exercisable therefor) except
for (i) repurchases of Company Capital Stock upon the termination of service of
any service providers of the Company in accordance with the standard terms set
forth in the agreements governing such repurchases, all of which agreements have
been provided or made available to Parent, and (ii) the exercise of Company
Warrants;
(g) issue, grant, deliver or sell or authorize or propose the
issuance, grant, delivery or sale of, or purchase or propose the purchase of,
any shares of Company Capital Stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue or purchase any such shares
or other convertible securities, except for the exercise of stock options or
Company Warrants, or accelerate the vesting of any outstanding option or other
security; provided, that this restriction shall not apply to stock option grants
to new employees and any other stock option grants mutually agreeable to the
Parent and the Company;
(h) cause or permit any amendments to the Organizational Documents of
the Company;
(i) acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to the Company's
business;
(j) sell, lease, license or otherwise dispose of any of its
properties or assets, except in the ordinary course of business and consistent
with past practices;
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(k) incur any indebtedness or guarantee any indebtedness or issue or
sell any debt securities or guarantee any debt securities of others except for
borrowings under existing credit facilities;
(l) grant any loans to others or purchase debt securities of others
or amend the terms of any outstanding loan agreement;
(m) grant any severance or termination pay to any director or
officer, or to any other employee, except for obligations under existing
agreements which have been previously delivered to Parent's legal counsel;
(n) adopt or amend any employee benefit plan, or enter into any
employment contract, pay or agree to pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
of its employees, provided that this restriction shall not apply to salary
adjustments in the ordinary course of business, or as mutually agreed between
Parent and the Company;
(o) revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or Accounts Receivable other
than in the ordinary course of business;
(p) pay, waive, discharge or satisfy, in an amount in excess of USD
$25,000 in any one case, or USD $50,000 in the aggregate, any claim, liability
or obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction of liabilities
incurred in the ordinary course of business or the repayment of shareholder
loans pursuant to Section 5.16;
(q) make or change any material election in respect of Taxes, adopt
or change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(r) enter into any strategic alliance or joint marketing arrangement
or agreement;
(s) hire any employee, except to replace a terminated employee or
except as reasonably necessary consistent with the needs of the business of the
Company; not terminate the employment of any employee other than for "cause"; or
(t) take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through 4.1(s) hereof, or any other action
that would prevent the Company from performing or cause the Company not to
perform its covenants hereunder.
4.2 Conduct of Business of the Parent. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Parent agrees, except to the extent that
Company shall otherwise consent in writing, to use all reasonable efforts to
carry on the Parent's business in the usual, regular and ordinary course in
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substantially the same manner as heretofore conducted, to pay the debts and
Taxes of the Parent when due, to pay or perform other obligations when due, and,
to the extent consistent with such business, use commercially reasonable efforts
consistent with past practice and policies to preserve intact the Parent's
present business organizations, keep available the services of the Parent's
present officers and key employees and preserve the Parent's relationships with
customers, suppliers, distributors, licensors, licensees, and others having
business dealings with it, all with the goal of preserving unimpaired the
Parent's goodwill and ongoing business at the Effective Time. The Parent shall
promptly notify Company of any event or occurrence or emergency not in the
ordinary course of business of the Parent and any material event involving the
Parent. From and after the date hereof, the Parent will use commercially
reasonable efforts to collect any and all appropriate and necessary reseller
certificates on a timely basis from any reseller to whom sales are made. Except
as expressly contemplated by this Agreement as set forth on the Parent Schedule
hereto, the Parent shall not without the prior written consent of Company:
(a) declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any Parent
Capital Stock, or split, combine or reclassify any Parent Capital Stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for, shares of Parent Capital Stock, or repurchase, redeem or
otherwise acquire, directly or indirectly, any shares of Parent Capital Stock
(or options, warrants or other rights exercisable therefor) except for (i)
repurchases of Parent Capital Stock upon the termination of service of any
service providers of the Parent in accordance with the standard terms set forth
in the agreements governing such repurchases, all of which agreements have been
provided or made available to Company, and (ii) the exercise of warrants;
(b) issue, grant, deliver or sell or authorize or propose the
issuance, grant, delivery or sale of, or purchase or propose the purchase of,
any shares of Parent Capital Stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue or purchase any such shares
or other convertible securities, except for the exercise of stock options or
warrants, or accelerate the vesting of any outstanding option or other security;
provided that this restriction shall not apply to stock option grants to new
employees;
(c) cause or permit any amendments to the Organizational Documents of
the Parent unless appropriately disclosed to the Shareholder Representative;
(d) acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to the Parent's
business;
(e) sell, lease, license or otherwise dispose of any of its
properties or assets, except in the ordinary course of business and consistent
with past practices;
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(f) grant any severance or termination pay to any director or
officer, or to any other employee, except for obligations under existing
agreements which have been previously made available to Company's legal counsel;
(g) adopt or amend any employee benefit plan, or enter into any
employment contract, pay or agree to pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
of its employees provided that this restriction shall not apply to adjustments
in salary in the normal course of business;
(h) revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or Accounts Receivable other
than in the ordinary course of business;
(i) take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.2(a) through 4.2(h) hereof, or any other action
that would prevent the Parent from performing or cause the Parent not to perform
its covenants hereunder.
4.3 No Solicitation. Until the earlier of (i) the Effective Time, or
(ii) the date of termination of this Agreement pursuant to the provisions of
Section 8.1 hereof, the Company shall not (nor shall the Company permit, as
applicable, any of the Company's officers, directors, employees, agents, or
representatives to), directly or indirectly, take any of the following actions
with any party other than Parent and its designees: (a) solicit, encourage,
initiate or participate in any inquiry, negotiations or discussions, or enter
into any agreement, with respect to any offer or proposal to acquire all or any
material part of the Company's business, properties or technologies, or any
material amount of the Company Capital Stock (whether or not outstanding),
whether by merger, purchase of assets, tender offer or otherwise, or effect any
such transaction, (b) disclose any information not customarily disclosed to any
third party concerning the Company's business, technologies or properties, or
afford to any person or entity access to its properties, technologies, books or
records, not customarily afforded such access, (c) assist or cooperate with any
third party to make any proposal to purchase all or any material part of the
Company Capital Stock or assets of the Company other than inventory in the
ordinary course of business, or (d) enter into any agreement with any third
party providing for the acquisition of the Company, whether by merger, purchase
of assets, tender offer or otherwise. In the event that the Company or any of
the Company's affiliates shall receive, prior to the Effective Time or the
termination of this Agreement, any offer, proposal, or request, directly or
indirectly, of the type referenced in clause (a) or (c) above, or any request
for disclosure or access pursuant to clause (b) above, the Company shall
immediately notify Parent thereof, including information as to the identity of
the offeror or the party making any such offer or proposal and the specific
terms of such offer or proposal, as the case may be, and such other information
related thereto as Parent may reasonably request. The parties hereto agree that
irreparable damage would occur in the event that the provisions of this Section
4.3 were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed by the parties hereto that Parent shall be
entitled to seek an injunction or injunctions to prevent breaches of the
provisions of this Section 4.3 and to enforce specifically the terms and
provisions hereof in any court of the United States or any state having
jurisdiction, this being in addition to any other remedy to which Parent may be
entitled at law or in equity.
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ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of Permit Application, Hearing Request, Hearing Notice and
Information Statement. As promptly as practicable after execution of this
Agreement, Parent shall prepare and file with the California Commissioner of
Corporations the documents required by the California Corporate Securities Law
of 1968, as amended (the "CCSL"), including, but not limited to, any required
"Permit Application," "Hearing Request," and "Hearing Notice", pursuant to
Sections 25121 and 25142 of the CCSL (collectively, the "Notice Materials"), in
connection with the Merger, in order to perfect the exemption from registration
provided by Section 3(a)(10) of the 1933 Act. Each of Parent and the Company
shall use reasonable efforts to have the Permit Application, Hearing Request and
Hearing Notice declared effective under the CCSL as promptly as practicable
after such filing. In addition, Parent and the Company will prepare and the
Company will distribute an information statement or proxy statement (the
"Information Statement") along with the Notice Materials, as may be required by
California Law, at the earliest practicable date to submit this Agreement, the
Merger and related matters for the consideration and approval of the Company's
Shareholders, which approval will be recommended by the Board of Directors and
management of the Company. Such Information Statement will contain information
and will be solicited in compliance with applicable law. Parent and the Company
will promptly provide all information relating to their respective business and
operations necessary for inclusion in the Notice Materials to satisfy all
requirements of applicable state and federal securities laws. Each of Parent and
the Company shall be solely responsible for any statement, information or
omission in the Notice Materials relating to it or its affiliates based upon
written information furnished by it.
5.2 Shareholder Approval. Upon compliance with applicable federal and
state securities laws, the Company shall promptly submit this Agreement and the
transactions contemplated hereby to the Shareholders for approval and adoption
as provided by California Law and the Organizational Documents of the Company.
The Company shall use its commercially reasonable efforts to obtain the consent
of the Shareholders sufficient to approve the Merger and this Agreement and to
enable the Closing to occur as promptly as practicable. The materials to be
submitted to the Shareholders in connection with the solicitation of their
approval of the Merger and this Agreement shall be subject to review and
approval by Parent and shall include information regarding the Company, Parent,
the terms of the Merger and this Agreement and the recommendation of the Board
of Directors of the Company in favor of the Merger and this Agreement.
5.3 Access to Information. Each party shall afford the other party and
its accountants, counsel and other representatives, reasonable access during the
period prior to the Effective Time to (i) all of the party's properties, books,
contracts, commitments and records, (ii) all other information concerning the
business, properties and personnel of the party as the requesting party may
reasonably request, and (iii) all employees of the party. Each party agrees to
provide to the other party and its accountants, counsel and other
representatives copies of internal financial statements (including Returns and
supporting documentation) promptly upon request. No information or knowledge
obtained in any investigation pursuant to this Section 5.2 shall affect or be
deemed to modify any
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representation or warranty contained herein or the conditions to the obligations
of the parties to consummate the Merger in accordance with the terms and
provisions hereof.
5.4 Confidentiality. Each of the parties hereto hereby agrees that the
information obtained in any investigation pursuant to Section 5.2 hereof, or
pursuant to the negotiation and execution of this Agreement or the effectuation
of the transactions contemplated hereby, shall be governed by the terms of the
Confidentiality Agreement.
5.5 Expenses. Whether or not the Merger is consummated, all fees and
expenses incurred in connection with the Merger including, without limitation,
all legal, accounting, financial advisory, consulting and all other fees and
expenses of third parties ("Third Party Expenses") incurred by a party in
connection with the negotiation and effectuation of the terms and conditions of
this Agreement and the transactions contemplated hereby, shall be the obligation
of the respective party incurring such fees and expenses. Upon consummation of
the Merger, the Surviving Corporation and/or Parent shall promptly pay, on
behalf of the Company, any Third Party Expenses of the Company in an amount up
to $250,000 that have not been paid before the Effective Time.
5.6 Public Disclosure. Unless otherwise required by law, prior to the
Effective Time, no disclosure (whether or not in response to an inquiry) shall
be made by any party hereto regarding the subject matter of this Agreement
unless approved by the other party hereto prior to release.
5.7 Consents. The Company shall use commercially reasonable efforts to
obtain the consents, waivers, assignments and approvals under any of the
Contracts as may be required in connection with the Merger so as to preserve all
rights of, and benefits to, the Company thereunder.
5.8 Reasonable Efforts. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use commercially reasonable
efforts to take promptly, or cause to be taken, all actions, and to do promptly,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated hereby, to obtain all necessary waivers, consents and approvals and
to effect all necessary registrations and filings and to remove any injunctions
or other impediments or delays, legal or otherwise, in order to consummate and
make effective the transactions contemplated by this Agreement for the purpose
of securing to the parties hereto the benefits contemplated by this Agreement;
provided that Parent shall not be required to agree to any divestiture by Parent
or the Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its
subsidiaries or affiliates or of the Company or its affiliates, or the
imposition of any material limitation on the ability of any of them to conduct
their businesses or to own or exercise control of such assets, properties and
stock.
5.9 Securities Laws Compliance. Parent shall take such steps as may be
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable to the issuance of the Merger Consideration and the
assumption of stock options and warrants of the Company as contemplated by this
Agreement. The Company shall use its reasonable efforts to assist Parent as may
be necessary to comply with the securities and blue sky laws of all
jurisdictions which are applicable in connection with the issuance of the Merger
Consideration in connection with the
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Merger, including but not limited to using its reasonable efforts to cause each
Shareholder to execute and deliver to Parent an investor suitability
questionnaire or other form deemed necessary by Parent.
5.10 Notification of Certain Matters; Financial Statements.
(a) The Company shall give prompt notice to Parent of (i) any Action
initiated by or against the Company or threatened against the Company, (ii) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company contained
in this Agreement to be untrue or inaccurate at or prior to the Effective Time
and (iii) any failure of the Company to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder in each
case such that the conditions contained in Section 6.3(a) would not be
satisfied; provided, however, that the delivery of any notice pursuant to this
Section 5.10 shall not (x) limit or otherwise affect any remedies available to
the party receiving such notice or (y) constitute an acknowledgment or admission
of a breach of this Agreement by the Company. No disclosure by the Company
pursuant to this Section 5.10, however, shall be deemed to amend or supplement
the Company Schedule or prevent or cure any misrepresentations, breach of
warranty or breach of covenant.
(b) Parent shall give prompt notice to the Company of (i) any Action
initiated by or against the Parent or threatened against the Parent, (ii) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of Parent contained in
this Agreement to be untrue or inaccurate at or prior to the Effective Time and
(iii) any failure of Parent to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder in each case such
that the conditions contained in Section 6.2(a) would not be satisfied;
provided, however, that the delivery of any notice pursuant to this Section 5.10
shall not limit or otherwise affect any remedies available to the party
receiving such notice or constitute an acknowledgment or admission of a breach
of this Agreement by Parent. No disclosure by Parent pursuant to this Section
5.10, however, shall be deemed to prevent or cure any misrepresentations, breach
of warranty or breach of covenant.
(c) Each of the Company and Parent shall deliver to the other party,
as soon as practicable but in any event within forty-five (45) calendar days
after the end of each monthly accounting period beginning with the month ended
April 30, 2000 and ending with the monthly accounting period occurring before
the earlier of the Closing Date or the termination of this Agreement in
accordance with its terms, an unaudited consolidated balance sheet and a
statement of operations for that party, which financial statements shall be
prepared in the ordinary course of business, in accordance with the party's
books and records and shall fairly present the consolidated financial position
of the party as of their respective dates and the results of the party's
operations for the periods then ended.
5.11 Additional Documents and Further Assurances. Each party hereto, at
the request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
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5.12 Notice to Holders of Company Options and Company Warrants. The
Company shall give notice of the transactions contemplated hereby to holders of
Company Options and Company Warrants in accordance with the terms of such
Company Options and Company Warrants or otherwise obtain the written waiver of
such notice obligations.
5.13 Employee Plans and Benefit Arrangements. The Company and its
Affiliates, as applicable, shall each terminate, effective as of the day
immediately preceding the Effective Time: (i) any and all group severance,
separation or salary continuation plans, programs, or arrangements, and (ii) any
and all 401(k) plans, unless Parent provides notice to the Company that such
401(k) plan(s) shall not be terminated. Parent shall receive from Company
evidence that Company's and each Affiliate's, as applicable, plan(s) and/or
program(s) have been terminated pursuant to resolutions of each such entity's
Board of Directors (the form and substance of such resolutions shall be subject
to review and approval of Parent), effective as of the day immediately preceding
the Effective Time. In the event that distribution or rollover of assets from
the trust of a 401(k) plan which is terminated is reasonably anticipated to
trigger liquidation charges, surrender charges, or other fees to be imposed upon
the account of any participant or beneficiary of such terminated plan, or upon
the Company or plan sponsor, then the Company shall take such actions as are
necessary to reasonably estimate the amount of such charges and/or fees and
provide such estimate in writing to Parent prior to the Effective Time.
5.14 Reorganization under Section 368(a) of the Code. None of the Company,
Parent or Merger Sub, nor any of their affiliates, shall engage in any action
that could reasonably be expected to cause the Merger to fail to qualify as a
"reorganization" under Section 368(a) of the Code, whether or not otherwise
permitted by the provisions of this Agreement.
5.15 Period of Employment. Each Company employee's period of employment
with the Company will be fully credited for all purposes, including seniority,
benefits and vesting of prior option grants, under any Parent Employee Plan.
5.16 Shareholder Loans. On or before the Closing, the Company may repay
principal and accrued interest on loans (up to $900,000 of principal and accrued
interest through the Closing Date) previously made by Reza Soliman-Noori to the
Company, as disclosed in the Company Schedule. Parent and Surviving Corporation
shall assume such obligations and pay the remaining balance of such loans by
December 31, 2000.
5.17 Registration on Form S-8. All Company Stock Options that are assumed
by Parent will be treated similarly to other LynuxWorks stock options with
respect to registration of such shares on Form S-8 (including any Form S-3
resale prospectus included therein). If LynuxWorks becomes a public reporting
company, then in connection with the first Form S-8 registration statement that
LynuxWorks files, LynuxWorks agrees to include (if allowed by applicable SEC
rules and regulations) a Form S-3 resale prospectus registering the public
resale of shares acquired by former shareholders of the Company pursuant to the
exercise of Company Options, to the same extent as such a Form S-3 resale
prospectus is included for LynuxWorks employees.
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5.18 Offer Letters. All of the employees listed on the Company Schedule
shall have received employment offer letters from the Parent.
5.19 Visa Applications. Parent will continue to process certain H-1 visa
and permanent residency applications for individuals previously agreed upon
between the Company and Parent.
5.20 "Market Stand-Off" Agreement. In connection with the initial public
offering of Parent, if requested by Parent and the managing underwriter of such
offering, and only to the same extent as executive officers and directors of the
Parent, the Shareholders agree not to sell or otherwise transfer or dispose of
any Common Stock (or other securities) of Parent held by the Shareholders
without the prior written consent of Parent or such managing underwriter for
such period of time as may be requested by Parent or such managing underwriter
(not to exceed one hundred eighty (180) days after the effective date of such
registration statement). The Shareholders agree to use their best efforts to
cause all employees of the Company who become employees of the Parent to enter
into the same Market Stand-Off Agreement to the same extent as employees of the
Parent. The employment offer letters contemplated by Section 5.18 will contain
7such a Market Stand-off Agreement.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of the Company and Parent to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect; provided, that
Parent, Merger Sub and the Company have used reasonable efforts to remove such
injunction, order, restraint or prohibition; nor shall any proceeding brought by
a Governmental Entity, domestic or foreign, seeking any of the foregoing be
pending; nor shall there be any action taken, or any statute, rule, regulation
or order enacted, entered, enforced or deemed applicable to the Merger, which
makes the consummation of the Merger illegal.
(b) Permit. The California Commissioner of Corporations shall have
issued a permit declaring the Permit Application, Hearing Request, and Hearing
Notice effective with respect to the Merger.
(c) Parent and the Company shall each have received written opinions
from their counsel, Wilson Sonsini Goodrich & Rosati, Professional Corporation,
and Fenwick & West LLP, respectively, in form and substance reasonably
satisfactory to them, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code. The parties to
this
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Agreement agree to make reasonable representations as requested by such counsel
for the purpose of rendering such opinions.
6.2 Additional Conditions to Obligations of Company. The obligations of
the Company to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by the Company:
(a) Representations, Warranties and Covenants. (i) The
representations and warranties of Parent and Merger Sub in this Agreement shall
be true and correct as of the date hereof and shall be true and correct in all
material respects on and as of the Closing Date as though made on and as of the
Closing Date, except that, to the extent such representations and warranties
address matters only as of a particular date, such representations and
warranties shall, to such extent, be true and correct on and as of such
particular date as if made on and as of such particular date, and (ii) Parent
shall have performed and complied with all covenants, obligations and conditions
of this Agreement required to be performed and complied with by it as of the
Effective Time.
(b) Certificate of Parent. Company shall have been provided with a
certificate executed on behalf of Parent by an authorized officer to the effect
that, as of the Effective Time:
(i) All representations and warranties of Parent and Merger
Sub in this Agreement (other than the representations and warranties of Parent
and Merger Sub as of a specified date, which will be true and correct as of such
date) shall be true and correct in all material respects on and as of the
Effective Time as though such representations and warranties were made on and as
of such time; and
(ii) all covenants, obligations and conditions of this
Agreement to be performed by Parent on or before such date have been so
performed.
(iii) the condition set forth in Section 6.2(c) has been
satisfied.
(c) No Material Adverse Changes. There shall not have occurred any
change in the business, assets, prospects, financial condition or results of
operations of Parent that would cause a Parent Material Adverse Effect.
(d) Legal Opinion. The Company shall have received a legal opinion
from Wilson Sonsini Goodrich & Rosati, legal counsel to Parent, in the form
attached as Exhibit D hereto.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub.
The obligations of Parent and Merger Sub to consummate and effect this Agreement
and the transactions contemplated hereby shall be subject to the satisfaction at
or prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Parent:
(a) Representations, Warranties and Covenants. (i) The
representations and warranties of the Company in this Agreement shall be true
and correct as of the date hereof and shall be true and correct in all material
respects on and as of the Closing Date as though made on and as of
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the Closing Date, except that, to the extent such representations and warranties
address matters only as of a particular date, such representations and
warranties shall, to such extent, be true and correct on and as of such
particular date as if made on and as of such particular date, and (ii) the
Company shall have performed and complied with all covenants, obligations and
conditions of this Agreement required to be performed and complied with by it as
of the Effective Time.
(b) Certificate of the Company. Parent shall have been provided
with a certificate executed on behalf of the Company by its President to the
effect that, as of the Effective Time:
(i) All representations and warranties of the Company in this
Agreement (other than the representations and warranties of the Company as of a
specified date, which will be true and correct as of such date) shall be true
and correct in all material respects on and as of the Effective Time as though
such representations and warranties were made on and as of such time;
(ii) all covenants, obligations and conditions of this Agreement
to be performed by the Company on or before such date have been so performed;
(iii) the conditions set forth in Sections 6.3(b), (d), (e), (f)
and (g) have been satisfied.
(c) Employment and Non-Competition Agreements. Each of the persons
set forth on Schedule 6.3(c) hereto (collectively, the "Key Employees") shall
have executed and delivered to Parent an Employment and Non-Competition
Agreement in the form attached as Exhibit C hereto, each such Employment and
Non-Competition Agreement shall be in full force and effect, and each of the Key
Employees shall be employed by the Company immediately prior to the Effective
Time.
(d) Employment Offers. Each Key Employee and eighty percent (80%)
of the other employees listed on the Company Schedule who shall have received an
offer of employment from Parent shall have accepted such offer of employment
from Parent on the terms and subject to the conditions set forth in such offer;
and each such person shall be employed by the Company immediately prior to the
Effective Time.
(e) Third Party Consents. The consents, waivers, assignments and
approvals listed on the Company Schedule hereto shall have been obtained.
(f) Shareholder Approval; Dissenters' Rights. Shareholders holding
at least ninety-five percent (95%) of the Company Capital Stock, including not
less than the requisite vote of outstanding shares of each series or class of
Company Capital Stock necessary to approve this Agreement, the Merger and the
transactions contemplated hereby and thereby, shall have approved this
Agreement, the Merger and the transactions contemplated hereby and thereby.
(g) No Material Adverse Changes. There shall not have occurred any
change in the business, assets, prospects, financial condition or results of
operations of the Company that would cause a Company Material Adverse Effect.
(h) Litigation. No Action shall have been initiated by or against
the Company.
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(i) Termination of 401(k) Plan. Parent shall be reasonably
satisfied that the Company has taken all steps necessary to terminate the
Company's 401(k) plan effective as of the day immediately preceding the Closing
Date.
(j) Legal Opinion. Parent shall have received a legal opinion from
Fenwick & West, LLP legal counsel to the Company, in the form attached as
Exhibit E hereto.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
7.1 Survival of Representations, Warranties and Covenants. The
representations, warranties and covenants of the Company and of the Parent and
Merger Sub in this Agreement or in any instrument delivered pursuant hereto
shall terminate on the one (1) year anniversary of the Closing Date (the "Escrow
Termination Date").
7.2 Escrow Arrangements
(a) Escrow Fund. As security for the representations and warranties
made by the Company in this Agreement at the Effective Time and without any act
of the Company, the Company will be deemed to have received and deposited with
Firstar Bank, N.A. (the "Escrow Agent") the Escrow Amount issued in the name of
the Escrow Agent (plus any additional shares as may be issued upon any stock
split, stock dividend or recapitalization effected by Parent after the Effective
Time with respect to the Escrow Amount), such deposit to constitute an escrow
fund (the "Escrow Fund") to be governed by the terms set forth herein. The
portion of the Escrow Amount contributed on behalf of each Shareholder shall be
in proportion to the Merger Consideration such Shareholder is otherwise entitled
to receive in the Merger by virtue of ownership of shares of Company Capital
Stock issued and outstanding immediately prior to the Effective Time. The
Escrow Agent may execute this Agreement following the date hereof and prior to
the Effective Time, and such latter execution shall not affect the binding
nature of this Agreement as of the date hereof among the signatories hereto.
The Escrow Fund shall be the sole and exclusive remedy of Parent for all Losses
incurred by Parent. Notwithstanding the preceding sentence, nothing herein
shall limit the liability of the Company for any breach of any representation,
warranty or covenant contained in this Agreement if the Merger does not close.
Parent may not receive any shares from the Escrow Fund unless and until one or
more Officer's Certificates identifying Losses in excess of One Hundred and
Fifty Thousand Dollars (USD $150,000) in the aggregate (the "Basket Amount") has
or have been delivered to the Escrow Agent as provided in Section 7.2(d) hereof,
in which case Parent shall be entitled to recover all Losses so identified,
including without limitation the Basket Amount. If, as of the Escrow
Termination Date, no Loss or Losses have been identified which, in the
aggregate, exceed the Basket Amount, then the Escrow Fund shall be released in
full to the Shareholders.
(b) Escrow Period; Distribution upon Termination of Escrow Period.
Subject to the following requirements, the Escrow Fund shall be in existence
immediately following the
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Effective Time and shall terminate at 5:00 p.m. (San Francisco Time) on the
Escrow Termination Date (the "Escrow Period"); provided, however, that the
Escrow Period shall not terminate with respect to any portion of the Escrow Fund
which, in the reasonable judgment of Parent, subject to the objection of the
Shareholder Representative, is necessary to satisfy any then pending and
unsatisfied claims specified in any Officer's Certificate timely delivered to
the Escrow Agent prior to the termination of the Escrow Period with respect to
facts and circumstances existing prior to the termination of such Escrow Period.
As soon as all such claims have been resolved and all Third Party Expenses have
been paid pursuant to Section 5.4 hereof, the Escrow Agent shall deliver to the
Shareholders the remaining portion of the Escrow Fund, if any, not required to
satisfy such claims and Third Party Expenses. Deliveries of Escrow Amounts to
the Shareholders shall be made in proportion to their respective contributions
to the Escrow Fund.
(c) Protection of Escrow Fund.
(i) The Escrow Agent shall hold and safeguard the Escrow Fund
during the Escrow Period, shall treat such fund as a trust fund in accordance
with the terms of this Agreement and not as the property of Parent and shall
hold and dispose of the Escrow Fund only in accordance with the terms hereof.
(ii) Any shares of Parent Common Stock or other equity
securities issued or distributed by Parent (including shares issued upon a stock
split) ("New Shares") in respect of Parent Common Stock in the Escrow Fund which
have not been released from the Escrow Fund shall be added to the Escrow Fund
and become a part thereof. New Shares issued in respect of shares of Parent
Common Stock which have been released from the Escrow Fund shall not be added to
the Escrow Fund but shall be distributed to the record holders thereof. Cash
dividends on Parent Common Stock shall not be added to the Escrow Fund but shall
be distributed to the record holders thereof.
(iii) Each Shareholder shall have voting rights and the right
to distributions of cash dividends with respect to the shares of Parent Common
Stock contributed to the Escrow Fund by such Shareholders (and on any voting
securities added to the Escrow Fund in respect of such shares of Parent Common
Stock). Parent shall show the Parent Common Stock contributed to the Escrow Fund
as issued and outstanding on its balance sheet.
(d) Claims Against the Escrow Fund. Upon receipt by the Escrow
Agent of an Officer's Certificate at any time on or before the last day of the
Escrow Period (but in all events within 60 days after Parent becomes aware that
it may have a claim for indemnity), the Escrow Agent shall, subject to the
provision of Section 7.2(e) hereof, deliver to Parent out of the Escrow Fund as
promptly as possible, shares of Parent Common Stock held in the Escrow Fund in
an amount equal to the Losses specified in the Officer's Certificate. For
purposes hereof, "Officer's Certificate" shall mean a certificate signed by any
officer of Parent: (A) stating that Parent has paid, incurred or properly
accrued or reasonably anticipates that it will have to pay, incur or accrue
Losses; (B) specifying in reasonable detail the individual items of Losses
included in the amount so stated, the date each such item was paid, incurred or
properly accrued, or the basis for such anticipated liability, and the nature of
the misrepresentation, breach of warranty or covenant to which such item
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is related; (C) specifying whether the Losses are subject to the Basket Amount
as provided in Section 7.2(a) hereof; and (D) specifying the number of shares of
Parent Common Stock to be delivered to Parent. For purposes of determining the
number of shares of Parent Common Stock to be delivered to Parent out of the
Escrow Fund as indemnity pursuant to Section 7.2(b) hereof and this Section, the
shares of Parent Common Stock shall be valued in good faith by the Board of
Directors of Parent as of the date of the Officer's Certificate. The Escrow
Agent may rely on the valuation of the Parent Common Stock by Parent. Parent and
the Company shall use their best efforts to provide monthly notification to the
Shareholder Representative of any known claims.
(e) Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Shareholder Representative and for a period of thirty (30) days
after such delivery, the Escrow Agent shall make no delivery to Parent of any
Escrow Amounts pursuant to Section 7.2(d) unless the Escrow Agent shall have
received written authorization from the Shareholder Representative to make such
delivery. After the expiration of such thirty (30) day period, the Escrow Agent
shall make delivery of shares of Parent Common Stock from the Escrow Fund in
accordance with Section 7.2(d) hereof; provided, however, that no such delivery
may be made if the Shareholder Representative shall object in a written
statement to the claim made in the Officer's Certificate, and such statement
shall contain specific bases upon which such objection is being made and shall
have been delivered to the Escrow Agent prior to the expiration of such thirty
(30) day period.
(f) Resolution of Conflicts; Arbitration.
(i) In case the Shareholder Representative shall object in
writing to any claim or claims made in any Officer's Certificate, the
Shareholder Representative and Parent shall attempt in good faith to agree upon
the rights of the respective parties with respect to each of such claims. If the
Shareholder Representative and Parent should so agree, a memorandum setting
forth such agreement shall be prepared and signed by Parent and the Shareholder
Representative and shall be furnished to the Escrow Agent. The Escrow Agent
shall be entitled to rely on any such memorandum and distribute shares of Parent
Common Stock from the Escrow Fund in accordance with the terms thereof.
(ii) If no such agreement can be reached after good faith
negotiation, either Parent or the Shareholder Representative may demand
arbitration of the matter unless the amount of the Loss is at issue in pending
litigation with a third party, in which event arbitration shall not be commenced
until such amount is ascertained or both parties agree to arbitration, and in
either such event the matter shall be settled by arbitration conducted by one
arbitrator mutually agreeable to Parent and the Shareholder Representative. In
the event that within forty-five (45) days after submission of any dispute to
arbitration, Parent and the Shareholder Representative cannot mutually agree on
one arbitrator, Parent and the Shareholder Representative shall each select one
arbitrator who has relevant experience and who is not affiliated with any party
hereto, and the two arbitrators so selected shall select a third arbitrator who
has relevant experience and who is not affiliated with any party hereto. The
arbitrator or arbitrators, as the case may be, shall set a limited time period
and establish procedures designed to reduce the cost and time for discovery
while allowing the parties an opportunity, adequate in the sole judgment of the
arbitrator or majority of the three arbitrators, as the
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case may be, to discover relevant information from the opposing parties about
the subject matter of the dispute. The arbitrator or a majority of the three
arbitrators, as the case may be, shall rule upon motions to compel or limit
discovery and shall have the authority to impose sanctions, including attorneys'
fees and costs, to the same extent as a competent court of law or equity, should
the arbitrator or a majority of the three arbitrators, as the case may be,
determine that discovery was sought without substantial justification or that
discovery was refused or objected to without substantial justification. The
decision of the arbitrator or a majority of the three arbitrators, as the case
may be, as to the validity and amount of any claim in such Officer's Certificate
shall be binding and conclusive upon the parties to this Agreement, and
notwithstanding anything in Section 7.2(e) hereof, the Escrow Agent shall be
entitled to act in accordance with such decision and make or withhold delivery
of shares of Parent Common Stock out of the Escrow Fund in accordance therewith.
Such decision shall be written and shall be supported by written findings of
fact and conclusions which shall set forth the award, judgment, decree or order
awarded by the arbitrator(s).
(iii) Judgment upon any award rendered by the arbitrator(s) may
be entered in any court having jurisdiction. Any such arbitration shall be held
in Santa Clara County, California, USA under the rules then in effect of the
American Arbitration Association. The arbitrator(s) shall determine how all
expenses relating to the arbitration shall be paid, including without
limitation, the respective expenses of each party, the fees of each arbitrator
and the administrative fee of the American Arbitration Association.
(g) Third-Party Claims. In the event Parent becomes aware of a
third-party claim which Parent reasonably believes may result in a demand
against the Escrow Fund, Parent shall promptly notify the Shareholder
Representative of such claim, and the Shareholder Representative and the
Shareholders of the Company shall be entitled, at their expense, to participate
in, but not to determine or conduct, the defense of such claim. Parent shall
have the right in its sole discretion to conduct the defense of and settle any
such claim; provided, however, that except with the consent of the Shareholder
Representative, no settlement of any such claim with third-party claimants shall
be determinative of the amount of any claim for Losses relating to such matter.
In the event that the Shareholder Representative has consented to any such
settlement, neither the Shareholder Representative nor the Shareholders shall
have any power or authority to object under any provision of this Article VII to
the amount of any claim by Parent against the Escrow Fund with respect to such
settlement.
(h) Fractional Shares. Fractional shares of Parent Common Stock
will not be issued. Accordingly, each Officer's Certificate shall round up
Losses so that an even number of shares can be issued.
7.3 Shareholder Representative
(a) Concurrently with approving this Agreement and the Merger, the
Shareholders shall appoint Reza Soliman-Noori as their agent and attorney-in-
fact, as the shareholder representative for and on behalf of the Shareholders
(the "Shareholder Representative"), to give and receive notices and
communications, to object to such retention, to agree to, negotiate, enter into
settlements and compromises of, and demand arbitration and comply with orders of
courts and
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awards of arbitrators with respect to such claims, and to take all other actions
that are either (i) necessary or appropriate in the judgment of the Shareholder
Representative for the accomplishment of the foregoing or (ii) specifically
mandated by the terms of this Agreement. Such agency may be changed by the
Shareholders from time to time upon not less than ten (10) days prior written
notice to Parent; provided, however, that the Shareholder Representative may not
be removed unless holders of a majority interest of the Escrow Fund agree to
such removal and to the identity of the substituted agent. The Shareholder
Representative may resign at any time upon written notice to Parent and the
Shareholders. Any vacancy in the position of Shareholder Representative may be
filled by the holders of a simple majority interest of the Escrow Fund. No bond
shall be required of the Shareholder Representative, and the Shareholder
Representative shall not receive compensation for its services. Notices or
communications to or from the Shareholder Representative shall constitute notice
to or from the Shareholders.
(b) The Shareholder Representative shall not be liable for any act
done or omitted hereunder as the Shareholder Representative while acting in good
faith and in the exercise of reasonable judgment. The Shareholders on whose
behalf the Escrow Amount is contributed to the Escrow Fund shall indemnify the
Shareholder Representative and hold the Shareholder Representative harmless
against any loss, liability or expense incurred without negligence or bad faith
on the part of the Shareholder Representative and arising out of or in
connection with the acceptance or administration of the Shareholder
Representative's duties hereunder, including the reasonable fees and expenses of
any legal counsel retained by the Shareholder Representative.
(c) A decision, act, consent or instruction of the Shareholder
Representative, including but not limited to an amendment, extension or waiver
of this Agreement pursuant to Section 8.3 and Section 8.4 hereof, shall
constitute a decision of the Shareholders and shall be final, binding and
conclusive upon the Shareholders; and Parent may rely upon any such decision,
act, consent or instruction of the Shareholder Representative as being the
decision, act, consent or instruction of the Shareholders. The Parent is hereby
relieved from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction of the Shareholder
Representative.
(d) Subject to Parent's prior claims for indemnification against the
Escrow Fund, the Shareholder Representative shall be entitled to receive payment
for its reasonable and documented expenses therefrom, prior to any payments to
the Shareholders.
7.4 Escrow Agent.
(a) Escrow Agent's Duties.
(i) The Escrow Agent shall be obligated only for the performance
of such duties as are specifically set forth herein, and as set forth in any
additional written escrow instructions which the Escrow Agent may receive after
the date of this Agreement which are signed by an officer of Parent and the
Shareholder Representative, and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed to be genuine and
to have been signed or presented by the proper party or parties. The Escrow
Agent shall not be charged with
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any knowledge of any agreements referred to herein, including this Agreement,
except for Articles VII and X hereof. The Escrow Agent shall not be liable for
any act done or omitted hereunder as Escrow Agent while acting in good faith and
in the exercise of reasonable judgment, and any act done or omitted pursuant to
the advice of legal counsel shall be conclusive evidence of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to
disregard any and all warnings given by any of the parties hereto or by any
other person, excepting only orders or process of courts of law, and is hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case the Escrow Agent obeys or complies with any such order, judgment
or decree of any court, the Escrow Agent shall not be liable to any of the
parties hereto or to any other person by reason of such compliance,
notwithstanding any such order, judgment or decree being subsequently reversed,
modified, annulled, set aside, vacated or found to have been entered without
jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect on
account of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any documents
or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration of
any rights under any statute of limitations with respect to this Agreement or
any documents deposited with the Escrow Agent.
(v) In performing any duties under this Agreement, the Escrow
Agent shall not be liable to any party for damages, losses, or expenses, except
for negligence or willful misconduct on the part of the Escrow Agent. The Escrow
Agent shall not incur any such liability for (A) any act or failure to act made
or omitted in good faith, or (B) any action taken or omitted in reliance upon
any instrument, including any written statement of affidavit provided for in
this Agreement that the Escrow Agent shall in good faith believe to be genuine,
nor will the Escrow Agent be liable or responsible for forgeries, fraud,
impersonations, or determining the scope of any representative authority. In
addition, the Escrow Agent may consult with legal counsel in connection with
performing the Escrow Agent's duties under this Agreement and shall be fully
protected in any act taken, suffered, or permitted by the Escrow Agent in good
faith in accordance with the advice of counsel. The Escrow Agent is not
responsible for determining and verifying the authority of any person acting or
purporting to act on behalf of any party to this Agreement.
(vi) If any controversy arises between the parties to this
Agreement, or with any other party, concerning the subject matter of this
Agreement, its terms or conditions, the Escrow Agent will not be required to
determine the controversy or to take any action regarding it. The Escrow Agent
may hold all documents and the Escrow Amount and may wait for settlement of any
such controversy by final appropriate legal proceedings or other means as, in
the Escrow Agent's discretion, may be required, despite what may be set forth
elsewhere in this Agreement. In such event, the Escrow Agent will not be liable
for damages. Furthermore, the Escrow Agent may at its option, file an action of
interpleader requiring the parties to answer and litigate any claims and rights
among themselves. The Escrow Agent is authorized to deposit with the clerk of
the court all
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documents and the Escrow Amounts held in escrow, except all costs, expenses,
charges and reasonable attorney fees incurred by the Escrow Agent due to the
interpleader action and which the parties jointly and severally agree to pay.
Upon initiating such action, the Escrow Agent shall be fully released and
discharged of and from all obligations and liability imposed by the terms of
this Agreement.
(vii) The parties and their respective successors and assigns
agree jointly and severally to indemnify and hold the Escrow Agent harmless
against any and all losses, claims, damages, liabilities, and expenses,
including reasonable costs of investigation, counsel fees, including allocated
costs of in-house counsel and disbursements that may be imposed on Escrow Agent
or incurred by the Escrow Agent in connection with the execution and delivery
of, and the performance of its duties under, this Agreement, including but not
limited to any litigation arising from this Agreement or involving its subject
matter, other than those arising out of the negligence or willful misconduct of
the Escrow Agent.
(viii) The Escrow Agent may resign at any time upon giving at
least thirty (30) days written notice to the Parent and the Shareholder
Representative; provided, however, that no such resignation shall become
effective until the appointment of a successor escrow agent which shall be
accomplished as follows: Parent and the Shareholder Representative shall use
their best efforts to mutual |
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