-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EMzIhj2dXnvGn0npim1rK5r9ONWHG+YjLLoG20sFeU9Zpwg4e+9c8E9iPIAJ9vx+ bo9e85k63C6BlPgU3xDENw== 0000912057-00-025509.txt : 20000519 0000912057-00-025509.hdr.sgml : 20000519 ACCESSION NUMBER: 0000912057-00-025509 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 34 FILED AS OF DATE: 20000518 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINEO INC CENTRAL INDEX KEY: 0001112479 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 870617792 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-37346 FILM NUMBER: 639700 BUSINESS ADDRESS: STREET 1: 390 SOUTH 400 WEST CITY: LINDON STATE: UT ZIP: 84042 BUSINESS PHONE: 8014265001 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 2000 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ LINEO, INC. (Name of issuer in its charter) DELAWARE 7371 87-0617792 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number)
390 SOUTH 400 WEST LINDON, UTAH 84042 (801) 426-5001 (Address and telephone number of principal executive offices and principal place of business) BRYAN W. SPARKS PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD 390 SOUTH 400 WEST LINDON, UTAH 84042 (801) 426-5001 (Name, address and telephone number of agent for service) -------------------------- COPIES OF ALL COMMUNICATIONS TO BE SENT TO: LAURA A. BERTIN, ESQ. LAURIE A. SMILEY, ESQ. MICHAEL J. ERICKSON, ESQ. REED W. TOPHAM, ESQ. MARK F. WORTHINGTON, ESQ. MARC S. MARCHIEL, ESQ. Summit Law Group, PLLC Stoel Rives LLP 1505 Westlake Avenue North, Suite 300 600 University Street, Suite 3600 Seattle, Washington 98109 Seattle, Washington 98101 (206) 281-9881 (206) 624-0900
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. -------------------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / __________ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / __________ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / __________ If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE Common Stock, $0.001 par value.............................. $60,000,000 $15,840
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act. Includes proceeds from the sale of shares which the Underwriters have the option to purchase to cover over-allotments, if any. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED MAY 18, 2000 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. Shares [LOGO] Common Stock ----------- Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $ and $ per share. We have applied to list our common stock on The Nasdaq Stock Market's National Market under the symbol "LNEO." The underwriters have an option to purchase a maximum of additional shares to cover over-allotment of shares. Investing in the common stock involves risks. See "Risk Factors" on page 8.
Underwriting Price to Discounts and Proceeds to Public Commissions Lineo ------------------- ------------------- ------------------- Per Share............................................ $ $ $ Total................................................ $ $ $
Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Credit Suisse First Boston Lehman Brothers Dain Rauscher Wessels Wit SoundView The date of this prospectus is , 2000. -------------- TABLE OF CONTENTS
PAGE -------- PROSPECTUS SUMMARY.................... 3 RISK FACTORS.......................... 8 SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS.......................... 18 USE OF PROCEEDS....................... 18 DIVIDEND POLICY....................... 18 CAPITALIZATION........................ 19 DILUTION.............................. 20 SELECTED ACTUAL AND PRO FORMA FINANCIAL DATA...................... 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 23 BUSINESS.............................. 32
PAGE -------- MANAGEMENT............................ 42 RELATED-PARTY TRANSACTIONS............ 49 PRINCIPAL STOCKHOLDERS................ 53 DESCRIPTION OF CAPITAL STOCK.......... 53 SHARES ELIGIBLE FOR FUTURE SALE....... 56 UNDERWRITING.......................... 58 NOTICE TO CANADIAN RESIDENTS.......... 60 LEGAL MATTERS......................... 61 EXPERTS............................... 61 WHERE TO FIND ADDITIONAL DOCUMENTS.... 61 INDEX TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS... P-1 INDEX TO FINANCIAL STATEMENTS......... F-1
-------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY BE ACCURATE ONLY ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. PROSPECTUS SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION THAT WE PRESENT MORE FULLY ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY. UNLESS OTHERWISE STATED, INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. LINEO, INC. We provide a broad range of embedded operating system products and services through a combination of our experience with embedded operating systems, expertise in Linux operating systems and involvement in the open source community. Our embedded Linux technologies and services enable microprocessor companies and original equipment manufacturers to quickly and cost-effectively develop, optimize and integrate unique embedded systems that feature high functionality, performance and reliability and ease of use. We also develop and license complete customized embedded system solutions for our customers according to their specifications. We sell our Linux products and services to original equipment manufacturers such as Bast, Inc., CIS Technology, Inc., DaiShin Information & Communications Co. and MiTAC International Corp. To further promote our technologies, we have also entered into strategic relationships with microprocessor companies such as Hitachi, Ltd., Motorola Computer Group and Samsung Electro-Mechanics Co., Ltd. Rapid technological advancements have dramatically increased the number, type and capabilities of products and systems that enable organizations and individuals to collaborate, access information and conduct business more effectively. This proliferation is largely fueled by innovations in microprocessors, which are hidden, or embedded, in a variety of products and systems. These advancements in microprocessor technology have created demand for robust, reliable and powerful embedded operating systems to manage the interaction between the various hardware and software components. Historically, most companies seeking embedded operating systems have either used internal resources to develop their own or have purchased proprietary operating systems from third parties. Open source operating systems have emerged as a compelling alternative to internally developed and third-party proprietary operating systems. The term open source applies to software that can be copied, modified and distributed without any associated fee and few restrictions. Popular open source software is continuously maintained and improved by worldwide communities of developers who share information, code and suggestions, primarily over the Internet. Linux has emerged as the leading open source operating system, enjoying acceptance by both commercial and academic communities due to its high performance and stability, low cost and broad developer support. Until recently, the growth in the use of Linux operating systems has primarily been in the server and desktop computer markets. Microprocessor companies are now promoting, and original equipment manufacturers are now adopting, Linux in the embedded systems market. However, many of these manufacturers have limited experience working with Linux, and may lack developers with the specialized skills and relationships in the open source community necessary to identify and take advantage of the many enhancements and extensions to Linux that are continuously under development. We design our embedded Linux operating systems to address the requirements of the embedded products and systems market. Our offerings are designed to be adaptable to performance, memory and storage capacity limitations, support a broad range of hardware devices and allow for rapid development and deployment of products. Our products include Embedix Linux, Embedix Software Development Kit and Embedix Browser. Embedix Linux, a combination of open source Linux and internally developed technologies, is a powerful and reliable Linux operating system that is designed specifically for embedded products and systems. We have enhanced and extended open source Linux with new technologies and advancements to enable embedded systems developers to adapt Linux to a wide range of highly customized embedded products and systems. Embedix Software Development Kit, expected to begin commercial shipment in 3 June 2000, is a package of our proprietary software and open source development tools designed to help systems developers accelerate the design, development, error detection and correction, implementation and maintenance of their embedded systems. Embedix Browser is our proprietary compact, Linux-based graphical Web browser for embedded products and systems that interact with the Internet. In addition, we provide comprehensive professional Embedix Services to our embedded systems customers. These services include customized engineering, education and technical support services. Our objective is to become the leading provider of embedded operating system products and services. We intend to enhance our technology leadership by developing technologies internally and by acquiring proprietary technologies or other companies. We are currently implementing this strategy and have recently acquired six companies with technologies complementary to our own. We also intend to continue developing strategic relationships with microprocessor companies and original equipment manufacturers to promote our offerings and plan our future product development. We plan to continue expanding sales efforts internationally by growing our internal sales force and through additional strategic acquisitions. We will also continue to enhance our operating system solutions by incorporating additional software products of independent software vendors. We began operations as a part of Caldera, Inc. in July 1996. We were incorporated as a separate entity in the State of Utah in August 1998 as Caldera Thin Clients, Inc., changed our name to Lineo, Inc. in July 1999 and reincorporated in the State of Delaware in January 2000. Our principal executive offices are located at 390 South 400 West, Lindon, Utah 84042, and our telephone number is (801) 426-5001. Our World Wide Web address is www.lineo.com. Information on our Web site does not constitute a part of this prospectus. -------------- LINEO-TM-, LINEO PARTNER CONNECT-TM-, the Lineo logo and EMBEDIX-TM- are our trademarks. We will continue to pursue registration of these and other marks. This prospectus also contains trademarks and trade names of other companies. 4 THE OFFERING Common stock offered...................... shares Common stock to be outstanding after this offering................................ shares Use of proceeds........................... For general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market Symbol.... LNEO
The number of outstanding shares after this offering above is based on: - 20,148,985 shares of our common stock outstanding on April 30, 2000; - issuance of 1,333,333 shares of our common stock, 83,334 shares of our Series C preferred stock and 1,430,482 shares of our Series D preferred stock in connection with the acquisition of material businesses subsequent to April 30, 2000; and - automatic conversion of all Series A, Series B and Series C preferred stock outstanding on April 30, 2000 and the Series C and Series D preferred stock issued subsequent to April 30, 2000 into 16,763,813 shares of our common stock upon completion of this offering. This number excludes the following: - 4,583 shares issued subsequent to April 30, 2000 upon exercise of outstanding stock options; - 1,786,326 shares issuable upon exercise of stock options outstanding on April 30, 2000 at a weighted average exercise price of $1.71 per share, excluding 4,583 shares issued subsequent to April 30, 2000 upon exercise of stock options, and 1,266,396 shares issuable upon exercise of stock options granted subsequent to April 30, 2000 through May 15, 2000 at a weighted average exercise price of $3.20 per share; and - 1,277,373 shares reserved for future issuance under our stock option plan. 5 SUMMARY ACTUAL AND PRO FORMA FINANCIAL DATA The following financial data should be read in conjunction with "Selected Actual and Pro Forma Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Unaudited Pro Forma Condensed Consolidated Financial Statements and related Notes and our Consolidated Financial Statements and related Notes included elsewhere in this prospectus. Our actual operating results for the six months ended April 30, 2000 include the operating results of Zentropic Computing, LLC, which we acquired on April 3, 2000, for the period from the acquisition date through April 30, 2000. The unaudited pro forma statement of operations data for the fiscal year ended October 31, 1999 and the six months ended April 30, 2000: - give effect to our acquisitions of Zentropic, United System Engineers, Inc., or USE, Fireplug Computers Inc., Inup S.A., Moreton Bay Ventures Pty Ltd and RT-Control, Inc. as if they had occurred on November 1, 1998; and - reflect the amortization of goodwill and other intangibles related to the acquisitions, as well as adjustments for acquired in-process research and development in connection with the Zentropic acquisition and intercompany transactions. The unaudited pro forma balance sheet data as of April 30, 2000 give effect to the acquisitions as if they occurred on April 30, 2000, except for Zentropic, which is included in our historical April 30, 2000 balance sheet. The unaudited pro forma balance sheet data: - reflect the issuance of 1,333,333 shares of our common stock, 83,334 shares of our Series C preferred stock, 1,430,482 shares of our Series D preferred stock and options to purchase 673,596 shares of our common stock in connection with the acquisitions; and - give effect to the automatic conversion of our Series A, Series B and Series C preferred stock outstanding on April 30, 2000 and the Series C and Series D preferred stock issued subsequent to April 30, 2000 into 16,763,813 shares of our common stock upon completion of this offering. The pro forma as adjusted data as of April 30, 2000 give effect to the pro forma adjustments, as well as to the receipt of the proceeds from this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses. The unaudited pro forma financial data are presented for illustrative purposes only and are not necessarily indicative of the operating results or financial position that would have resulted if these acquisitions had been in effect during the periods presented or of future operating results. 6
FISCAL YEAR ENDED OCTOBER 31, PERIOD FROM -------------------------------------------- JULY 23, 1996 1999 (INCEPTION) TO ---------------------- OCTOBER 31, 1996 1997 1998 ACTUAL PRO FORMA ----------------- -------- -------- -------- ----------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenue....................... $ 62 $ 945 $ 1,376 $ 2,801 $ 4,640 Cost of revenue............... 67 247 361 185 1,380 Gross margin.................. (5) 698 1,015 2,616 3,260 Loss from operations.......... (49) (827) (2,005) (891) (9,731) Net loss...................... (61) (877) (2,186) (1,054) (9,950) Basic and diluted net loss per common share................ $(0.00) $(0.05) $ (0.12) $ (0.06) $ (0.47) Basic and diluted weighted average common shares outstanding................. 18,000 18,000 18,000 18,000 21,079 Basic and diluted supplemental pro forma net loss per common share................ $ (0.44) Basic and diluted supplemental pro forma weighted average common shares outstanding... 22,592 SIX MONTHS ENDED APRIL 30, --------------------------------------- 1999 2000 ----------- ------------------------- ACTUAL ACTUAL PRO FORMA ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenue....................... $ 806 $ 1,751 $ 2,814 Cost of revenue............... 37 84 838 Gross margin.................. 769 1,667 1,976 Loss from operations.......... (1,033) (4,287) (8,724) Net loss...................... (1,076) (4,103) (8,515) Basic and diluted net loss per common share................ $ (0.06) $ (0.21) $ (0.38) Basic and diluted weighted average common shares outstanding................. 18,000 19,660 22,478 Basic and diluted supplemental pro forma net loss per common share................ $ (0.30) Basic and diluted supplemental pro forma weighted average common shares outstanding... 28,277
APRIL 30, 2000 ----------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ----------- ------------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................... $30,464 $30,355 $ Working capital............................................. 31,284 30,407 Total assets................................................ 41,202 62,021 Long-term liabilities....................................... 115 936 Total stockholders' equity.................................. 39,511 57,514
7 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. ANY OF THE FOLLOWING RISKS COULD HARM OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION AND COULD RESULT IN A COMPLETE LOSS OF YOUR INVESTMENT. RISKS RELATED TO OUR OPERATIONS OUR LIMITED OPERATING HISTORY AND THE RECENT FOCUS OF OUR BUSINESS STRATEGY ON LINUX-BASED PRODUCTS MAY MAKE IT DIFFICULT FOR YOU TO EVALUATE AN INVESTMENT IN OUR COMPANY. We began operations as a separate entity in September 1998 and consequently have only a limited operating history on which you can rely in evaluating an investment in our company. Moreover, prior to January 1999, the focus of our business was on our embedded disk operating system, or DR DOS. In January 1999, we began focusing our strategy on developing embedded operating systems based on Linux and other open source technologies and commercially released the first version of our embedded Linux operating system in January 2000. Nonetheless, to date, a significant portion of our revenue has been generated from sales of DR DOS. We expect to generate substantially all of our future revenue from sales of our Linux-based operating systems and related products and services. As a result, we believe that our financial history to date is not indicative of our future performance. WE HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE FORESEEABLE FUTURE. We have incurred losses since our inception. At April 30, 2000, we had an accumulated deficit of $10.2 million. We expect to continue to incur losses for at least the next 15 months as we incur significant expenses in connection with developing our products, hiring and training employees and building awareness of our brand. If our revenue declines or grows at a slower rate than we anticipate, or if our expenses exceed our expectations or cannot be adjusted to respond to slower revenue growth, we may not be able to achieve or sustain profitability or generate positive cash flow within our expected timeframe, if at all. WE MAY NOT BE ABLE TO INTEGRATE OUR RECENT ACQUISITIONS SUCCESSFULLY, WHICH COULD ADVERSELY IMPACT OUR OPERATING RESULTS. Since March 2000, we have acquired six companies. We may not successfully integrate the operations, technologies and personnel of these acquired companies. Specifically, we may experience difficulty in integrating acquired technologies with our Embedix products. Moreover, we may have difficulty retaining key technical and managerial personnel from the acquired companies. In addition, there may be a disruption in our business because of the allocation of resources necessary to integrate these companies and the resulting diversion of management's attention. Further, these acquisitions may have a negative impact on our business and financial condition as we are required to assume their ongoing expenses and liabilities. IF WE ARE UNABLE TO IMPLEMENT APPROPRIATE SYSTEMS, PROCEDURES AND CONTROLS, WE MAY NOT BE ABLE TO OFFER OUR SERVICES AND GROW OUR BUSINESS AS CURRENTLY ANTICIPATED. Our ability to offer our products and services and grow our business as currently anticipated requires an effective planning and management process. Since July 1999, we have significantly increased the size of our operations. This growth has placed, and we expect that any future growth we experience will continue to place, a significant strain on our management, systems and resources. Our key personnel have limited experience managing this type of growth. In addition, five of our ten executive officers have only recently joined us, and they have limited experience working together as a team to date, which may make it more difficult for them to manage our growth. To manage growth effectively, 8 we will need to continue to implement or update our operational and financial systems, procedures and controls. Any failure to manage this growth could harm our business. WE EXPECT TO ENGAGE IN FUTURE ACQUISITIONS, WHICH COULD HARM OUR OPERATING RESULTS, DILUTE OUR STOCKHOLDERS AND CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES. In addition to our recent acquisitions, as part of our business strategy we expect to continue to make investments in or acquire complementary companies, products or technologies. If we acquire a company, we could have difficulty integrating that company's technologies or products into our operations or integrating and retaining its key personnel. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. Furthermore, we may issue equity securities to pay for any future acquisitions, which could be dilutive to our existing stockholders. We may also incur debt, assume contingent liabilities or incur charges associated with amortization of goodwill and other assets in connection with future acquisitions, which could harm our operating results. OUR REVENUE MAY DECREASE IF WE LOSE ANY OF OUR SIGNIFICANT CUSTOMERS. There are a limited number of original equipment manufacturers with a significant share of the embedded system market. Because of their strong market position, these original equipment manufacturers are typically able to secure favorable terms, including favorable pricing, in their technology licensing and service agreements. If we are not able to secure contracts on profitable terms with these original equipment manufacturers, our operating results may suffer. Moreover, the loss of any significant customer could cause our revenue to decline. Historically, a relatively small number of customers have accounted for a significant portion of our total revenue. In the fiscal year ended October 31, 1999, our three largest customers accounted for 48% of our total revenue, with Sun Microsystems, Inc. accounting for 23%, Brooktrout Inc. accounting for 13% and Symbol Technologies, Inc. accounting for 12%. In the six months ended April 30, 2000, our seven largest customers accounted for 77% of our total revenue, with DaiShin accounting for 34%. We anticipate that sales of our products and services to relatively few customers will continue to account for a significant portion of our total revenue. We generally do not enter into long-term purchase commitments with our significant customers. Therefore, these customers could cease purchasing our products and services with limited notice and with little or no penalty. WE MAY EXPERIENCE QUARTERLY FLUCTUATIONS IN OUR REVENUE AND RESULTS OF OPERATIONS, WHICH COULD RESULT IN VOLATILITY IN OUR STOCK PRICE. Our quarterly revenue and results of operations may vary significantly in the future due to a number of factors, many of which are outside of our control. Factors that may affect our quarterly results include: - the development, introduction, competitive pricing and market acceptance of our products and services as well as those of our competitors; - adverse changes in general economic conditions, such as recessions, that could affect capital expenditures and recruiting efforts in the software industry in general and specifically in the embedded operating systems market; - our ability to forecast revenue accurately, which is constrained by our limited operating experience selling our embedded Linux-based products and services; - changes in the length of our sales cycle due to factors such as our customers' budgetary constraints and changing product evaluation processes; 9 - our ability to integrate and retain the additional personnel, operations, technologies and products of the six companies we recently acquired; - acceptance of Linux as a viable embedded operating system alternative to other competing operating systems; - the development and maintenance of our strategic relationships with microprocessor and original equipment manufacturers and independent software vendors; - the difficulties associated with attracting, retaining and training key personnel; and - our ability to manage our anticipated growth and expansion. If our quarterly operating results fluctuate due to these or any other factors, we may not meet the expectations of public market analysts or investors, and the price of our common stock could decline. RISKS RELATED TO LINUX AND OUR INTELLECTUAL PROPERTY IF THE LINUX OPERATING SYSTEM DOES NOT CONTINUE TO GAIN MARKET ACCEPTANCE, WE MAY NOT BE ABLE TO GENERATE REVENUE AND OUR BUSINESS COULD FAIL. We expect that substantially all of our future revenue will be derived from sales of Linux-based embedded operating systems and related products and professional services. The Linux operating system has only recently begun to gain broad market acceptance, and its use has been mostly limited to servers, desktop computers, Internet infrastructure applications and scientific research environments. Our success depends on the continued and increased rate of adoption of Linux in these and other markets, and especially the market for embedded operating systems, and the continued development of Linux-compatible products, applications and utilities. If this does not occur, our business will suffer. Moreover, if multiple incompatible versions of Linux are developed, customers may become less likely to purchase Linux products, and our sales could suffer. OUR BUSINESS MODEL, WHICH RELIES ON A COMBINATION OF OPEN SOURCE SOFTWARE AND PROPRIETARY TECHNOLOGIES, IS UNPROVEN. Our business model relies on a combination of open source software, proprietary technologies and commercial products. We know of no company that has built a profitable business based on open source software. In addition, because Linux is open source software, customers may be unwilling to pay royalties to license our Linux-based products. By incorporating open source software in our offerings, we cannot provide our customers with the same or similar warranties on products and services that customers of proprietary systems may typically receive. In addition, by developing products based on proprietary technology that is not freely available, we may alienate the open source community. Because we rely on our relationships within the open source community, negative reaction to our use of the Linux operating system could harm our reputation, impair our ability to capitalize on the development efforts of the open source community, diminish our brand and harm our business. OUR ABILITY TO INTRODUCE NEW PRODUCTS OR PRODUCT ENHANCEMENTS WOULD BE IMPAIRED IF LINUX DEVELOPERS DO NOT CONTINUE TO ENHANCE THE SOURCE CODE OF LINUX AND DEVELOP LINUX-BASED UTILITIES AND APPLICATIONS. As open source software, the Linux source code is open to the public and can be copied, modified and distributed without an associated fee. Our success depends in part on the continued efforts of the open source development community to enhance the source code of Linux and Linux-based utilities and applications to make Linux compatible for use across multiple software and hardware platforms. If Linus Torvalds, the initial developer of Linux, and other third-party developers fail to further develop or improve the functionality of Linux or to introduce new open source software or software 10 enhancements, our ability to market our existing and future Linux products and services would suffer. In this event, we may be forced to rely to a greater extent on our own development efforts or the development efforts of third-party consultants, which would significantly increase our costs. WE COULD BE PREVENTED FROM SELLING OR DEVELOPING OUR PRODUCTS IF THE GNU GENERAL PUBLIC LICENSE AND SIMILAR LICENSES ARE NOT ENFORCEABLE OR IF WE ARE DEEMED TO BE IN VIOLATION OF THESE LICENSES. The Linux-based components of our products have been developed and licensed under the GNU General Public License and similar licenses. These licenses state that any program licensed under them may be liberally copied, used, modified and distributed freely, so long as all modifications are also freely made available and licensed under the same conditions. We know of no instance in which a party has challenged the validity of these licenses or in which these licenses have been interpreted in a legal proceeding. To date, compliance with these licenses has been voluntary. It is possible that a court would hold one or more of these licenses to be unenforceable. Any ruling by a court that these licenses are not enforceable, or that the Linux operating system may not be liberally copied, modified or distributed freely, would have the effect of preventing us from selling or developing our Linux products and services, unless we are able to negotiate a license to use the software. Any licenses could be expensive, which could impair our ability to price our offerings competitively. Moreover, it is possible that a party may argue that the GNU General Public License places restrictions on the types of fees that can be charged in connection with the distribution and licensing of derivative Linux programs. Because some of our products include both open source and proprietary technologies, we charge our customers a fee to license our products from us. These fees could be deemed to be a violation of the GNU General Public License, which could result in the termination of this license. Without this license, we could be subject to claims for infringement of copyrights and other intellectual property rights covered by the GNU General Public License, which could subject us to damages and impact our ability to market our existing and future Linux-based products. WE ARE VULNERABLE TO CLAIMS THAT OUR PRODUCTS INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS, PARTICULARLY BECAUSE OUR PRODUCTS ARE COMPRISED OF MANY DISTINCT SOFTWARE COMPONENTS DEVELOPED BY A BROAD COMMUNITY OF INDEPENDENT PARTIES. We may be exposed to future litigation based on claims that our products infringe the intellectual property rights of others. This risk is magnified by the fact that a significant portion of the software code in our products is developed by a community of independent parties over whom we exercise no supervision or control and who might not have the same financial resources as us to pay damages to a successful litigant. Claims of infringement could require us to re-engineer our products or seek to obtain licenses from third parties in order to continue offering our products. Moreover, we have agreed in many cases to provide our customers with protection from third-party infringement claims. An adverse legal decision affecting our intellectual property, or the use of significant resources to defend against this type of claim, could place a significant strain on our financial resources and harm our reputation. FAILURE TO ADEQUATELY PROTECT INTELLECTUAL PROPERTY RIGHTS THAT ARE KEY TO OUR BUSINESS COULD RESULT IN SIGNIFICANT HARM TO OUR OPERATING RESULTS. Although our Embedix platform is based on open source Linux, many aspects of our products include intellectual property that is proprietary to us. Our success depends significantly on our ability to protect our trademarks, trade secrets and the internally developed proprietary technologies contained in our products. We rely on a combination of patent, copyright, trademark and trade secret laws and on confidentiality and other contractual provisions to protect our proprietary rights. These measures afford only limited protection. Effective intellectual property protection may not be available in every country in which we intend to offer our products and services. Our means of protecting our proprietary rights 11 and technologies in the United States or abroad may not be adequate, and competitors may independently develop similar technologies or unauthorized parties may copy aspects of our products or obtain and use trade secrets or other information that we regard as proprietary. In addition, a third party could attempt to interpret the GNU General Public License in a manner that could put the protection of our intellectual property at risk because of the interaction between our intellectual property and the intellectual property covered by the GNU General Public License. Moreover, because we rely in part on open source intellectual property, we may find it necessary to defend the open source community from attempts by others to misappropriate, whether by patent, copyright or otherwise, technology which belongs to the open source community. Legal proceedings to enforce our intellectual property rights or the rights of the open source community could be burdensome and expensive and involve a high degree of uncertainty. These legal proceedings may also divert management's attention from our core business. If we do not enforce and protect intellectual property rights important to our business, our business may be harmed. BECAUSE WE DO NOT OWN THE LINUX TRADEMARK, WE MAY BE PROHIBITED FROM USING IT IN CONNECTION WITH OUR PRODUCTS, WHICH COULD DAMAGE OUR BRAND AWARENESS. We use the term "Linux" in our advertising and marketing materials, in our product documentation and for other commercial uses. Mr. Torvalds owns the Linux trademark, however, and we do not have any ownership of, or contractual right to use, this trademark. If the Linux trademark is invalidated through legal action, or if we are otherwise prohibited from using it, our reputation and brand awareness could suffer. Also, the use by others of the Linux trademark could lead to confusion about the source, quality, reputation and dependability of Linux in general, which could negatively affect the market for Linux products. RISKS RELATED TO COMPETITION WITHIN OUR INDUSTRY WE FACE INTENSE COMPETITION IN THE EMBEDDED OPERATING SYSTEMS MARKET, WHICH MAY RESULT IN PRICE REDUCTIONS AND LOWER PROFIT MARGINS. The market for embedded operating systems products and services is becoming increasingly competitive. Failure to compete successfully with current or potential competitors would harm our business. We face competition from: - our current and potential customers' internal research and development departments that may seek to develop their own proprietary embedded operating systems; - established companies that have developed proprietary embedded operating systems, such as Mentor Graphics Corporation, Microsoft Corporation, Microware Systems Corporation, Palm Computing, Inc., QNX Software Systems Ltd., Sun Microsystems, Inc., Symbian, PLC and Wind River Systems, Inc.; - companies that have developed, or may in the future develop, Linux embedded operating systems, such as Caldera Systems, Inc., Coollogic, Inc., Information Storage Devices, Inc., LynuxWorks, Inc., MontaVista Software, Inc., Red Hat Software, Inc., SuSE Inc. and TurboLinux Inc.; and - companies that have developed Web browsers, such as Microsoft, Netscape Communications Corporation and Spyglass, Inc. (which recently announced its merger with OpenTV, Inc.). Many of these competitors are larger companies that have greater financial resources, more established direct and indirect sales channels and greater name recognition than we do. These companies also have larger and more established service organizations to support these products and operating systems. These companies may be able to leverage their existing organizations and provide a wider offering of products and higher levels of support on a more cost-effective basis than we can. In 12 addition, these companies may be able to undertake more extensive promotional activities, adopt more aggressive pricing policies and offer more attractive terms to their customers than we can. Any pricing pressures or loss of potential customers resulting from our failure to compete effectively would reduce our revenue. Furthermore, because Linux distributions can be downloaded from the Internet for free or purchased at a nominal cost, modified and resold with few restrictions, some traditional barriers to market entry are minimized. Accordingly, it is possible that new competitors or alliances among existing competitors may emerge and acquire significant market share. In addition, to the extent that competing proprietary operating systems companies make their source code available to the public, software developers will be able to customize these systems and solutions more quickly and easily than if these technologies remain proprietary, which could harm our ability to compete. IF WE DO NOT INTRODUCE NEW OR UPDATED PRODUCTS AND SERVICES IN A TIMELY MANNER, OUR OFFERINGS MAY BECOME OBSOLETE, AND OUR OPERATING RESULTS WILL SUFFER. The embedded operating systems market is characterized by rapid technological change, frequent new product enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. Our products could be rendered obsolete if products based on new technologies are introduced or new industry standards emerge. Moreover, computing environments are inherently complex, and, as a result, we cannot accurately estimate the life cycles of our products. New products and product enhancements can require long development and testing periods, which requires us to hire and retain increasingly scarce, technically competent personnel. Significant delays in new product releases or significant problems in installing or implementing new products could seriously damage our business. In addition, our future success depends upon our ability to enhance existing products, develop and introduce new products, satisfy customer requirements and achieve market acceptance. This process is made more challenging by the fact that much of the software development for our products is done by the open source community, and we must work with a large number of developers who are not our employees in this process. We may not be able to successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner. Moreover, we may be required to license technologies from third parties to remain competitive, which could increase our expenses and harm our operating results. OTHER RISKS RELATED TO OUR BUSINESS WE FACE OPERATIONAL AND FINANCIAL RISKS AS WE MAINTAIN AND EXPAND OUR INTERNATIONAL OPERATIONS, ANY OF WHICH COULD HARM OUR RESULTS OF OPERATIONS. In the six months ended April 30, 2000, over 65% of our revenue was generated from customers located outside the United States, principally in South Korea and Taiwan. As we maintain and expand our international operations, we face a number of challenges, including: - difficulties in managing and administering a globally-dispersed business; - fluctuations in exchange rates that may negatively affect our operating results; - difficulties in collecting accounts receivable resulting in longer collection periods; - compliance with a wide variety of foreign laws and regulatory environments with which we have limited familiarity; - protecting our trademarks and other intellectual property due to the uncertainty of laws and enforcement in certain countries relating to the protection of intellectual property rights; 13 - seasonality in business activity in certain parts of the world, which could negatively impact the operating results of our foreign operations; - multiple and possibly overlapping tax structures, which could reduce the financial performance of our foreign operations; - changes in import and export duties and quotas, which could affect the competitive pricing of our products and services and reduce our market share in some countries; and - economic or political instability in some international markets, including political instability in South Korea and Taiwan, the threat of hostilities in Taiwan and economic fluctuations in other Asian markets, which could negatively affect our operating results, especially given the concentration of our customers in this region. THE LOSS OF KEY EMPLOYEES OR OUR INABILITY TO ATTRACT, TRAIN AND RETAIN OTHER QUALIFIED PERSONNEL COULD HARM OUR BUSINESS. Our products and technologies are complex, and we depend upon the continued services of our existing software engineering personnel and executive management, especially Bryan Sparks, our president, chief executive officer and chairman of the board. Although we have employment agreements with Mr. Sparks and a limited number of our key software engineering personnel, their employment may nonetheless be terminated by them or us at any time. The loss of Mr. Sparks or any of our key software engineering personnel, especially to a competitor, could adversely affect our business, slow our product development and diminish our brand identity. We depend on our ability to attract, train and retain qualified personnel, specifically those with management, Linux and embedded systems development skills. Competition for such personnel is intense, particularly for qualified developers of Linux and embedded systems. We may not be able to attract, train or retain additional qualified personnel in the future, which could require us to use outside contractors, a more costly alternative. OUR PRODUCTS MAY CONTAIN DEFECTS THAT COULD BE COSTLY TO CORRECT, DELAY MARKET ACCEPTANCE OF OUR PRODUCTS AND EXPOSE US TO LITIGATION. Despite testing by us and our customers, errors may be found in our products. A portion of the software code in our products is developed by independent parties over whom we exercise no supervision or control. If errors are discovered, we may have to make significant capital expenditures to eliminate them and yet may not be able to correct them in a timely manner, if at all. Errors and failures in our products could result in a loss of, or delay in, market acceptance of our products and could damage our reputation. Failures in our products could also cause system failures, including failures in critical business systems, and our customers may assert common law warranty or other claims for substantial damages against us. Our insurance policies may not provide sufficient coverage to adequately limit our exposure to these types of claims. These claims, even if unsuccessful, could be costly and time consuming to defend. 14 WE MAY NOT BE ABLE TO RAISE SUFFICIENT FUNDS TO EXECUTE OUR BUSINESS STRATEGY. We believe that the net proceeds from this offering, together with our current cash and cash equivalents, will be sufficient to fund our current working capital and capital expenditure requirements for at least the next 15 months. We may need to raise additional funds, however, to support more rapid expansion, respond to competitive pressures, acquire complementary businesses or technologies or respond to unanticipated developments. Additional funding may not be available to us in amounts, or on terms, acceptable to us. If sufficient funds are not available or are not available on acceptable terms, our ability to fund our expansion, execute our strategy, take advantage of acquisition opportunities, develop or enhance our services or products, or otherwise respond to competitive pressures would be significantly limited. RISKS RELATED TO THIS OFFERING A SMALL NUMBER OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US AND THEIR INTERESTS MAY CONFLICT WITH THOSE OF OUR OTHER STOCKHOLDERS. Our executive officers, directors and principal stockholders holding more than 5% of our common stock, consisting of 9 persons and the several entities affiliated with these persons, together hold approximately 61.1% of our outstanding common stock before this offering and will together hold % of our outstanding common stock after completion of this offering. As a result, these stockholders, if they act together, will be able to control our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Moreover, of these stockholders, Mr. Yarro beneficially holds 46.7% of our outstanding common stock, or % after this offering, and Mr. Noorda beneficially holds 44.4% of our outstanding common stock, % after this offering. The concentration of ownership among our existing stockholders may have the effect of delaying or preventing a change in our control and might reduce the market price of our common stock. IT MIGHT BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE BENEFICIAL TO OUR STOCKHOLDERS. Certain provisions of our certificate of incorporation and Delaware law may discourage, delay or prevent a change in our control or a change in our management even if doing so would be beneficial to our stockholders. Our board of directors has the authority under our certificate of incorporation to issue preferred stock without stockholder approval with rights superior to the rights of the holders of common stock. As a result, preferred stock could be issued quickly and easily with terms calculated to delay or prevent a change in control of our company or make removal of our management more difficult. In addition, as of the first annual meeting of stockholders following the closing of this offering, our board of directors will be divided into three classes. The directors in each class will serve for three-year terms, one class being elected each year by our stockholders. This system of electing and removing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of our company because it generally makes it more difficult for stockholders to replace a majority of our directors. AN ACTIVE TRADING MARKET MAY NOT DEVELOP FOR OUR SHARES, WHICH MAY HAVE A NEGATIVE IMPACT ON THE PRICE OF OUR COMMON STOCK AND INHIBIT YOUR ABILITY TO SELL YOUR SHARES AT A PROFIT OR AT ALL. Prior to this offering, investors could not buy or sell our common stock publicly. An active public market for our common stock may not develop or be sustained after the offering. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters. The market price of our common stock may decline below the initial public offering price after this offering. 15 THE MARKET FOR OUR SHARES OF COMMON STOCK MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS, WHICH COULD RESULT IN LEGAL CLAIMS AGAINST US. The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including: - variations in quarterly operating results; - changes in market valuations of technology companies, especially companies focusing on embedded systems; - our or our competitors' announcements of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; - additions or departures of key personnel; - active "day" trading in our stock; - future issuances of our capital stock or the effect of the substantial number of shares that will be eligible for sale in the public market in the future; and - changes in financial estimates by public market analysts. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their common stock. In the future, we may be the target of similar litigation. Such claims, even if unsuccessful, could result in substantial costs and divert management's attention and resources. OUR MANAGEMENT WILL HAVE BROAD DISCRETION IN THE USE OF THE PROCEEDS OF THIS OFFERING, AND OUR FAILURE TO APPLY SUCH FUNDS EFFECTIVELY COULD HARM OUR BUSINESS. We have not designated any specific use for the net proceeds from this offering. We intend to use the net proceeds primarily for general corporate purposes, including working capital. In addition, we may use a portion of the proceeds for potential acquisitions. Management will have significant flexibility in applying the net proceeds of the offering. Our failure to apply such funds effectively could harm our business. THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE FUTURE MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. Sales of a substantial number of shares of our common stock in the public market following this offering could adversely affect the market price of the common stock. As additional shares of our common stock become available for resale in the public market, the supply of our common stock will increase, which could decrease the price of our common stock. The number of shares of common stock available for sale in the public market is limited by restrictions under the federal securities laws and under agreements that some of our stockholders, directors and employees have entered into with the 16 underwriters. The following table shows the timing of when shares outstanding on May 15, 2000 first become eligible for resale in the public market:
NUMBER OF SHARES COMMENT --------------------- --------------------------------- - - upon effectiveness of this prospectus..................... - Freely tradable shares sold in this offering - - 90 days after date of this prospectus..................... 669,905 - Shares eligible for sale under Rules 144 and 701 and not previously registered on Form S-8 or locked up - - 181 days after date of this prospectus..................... 18,000,000 - Freely tradable upon expiration of lock-up agreements, subject to the provisions of Rule 144 - - at various times thereafter upon expiration of one-year holding periods................ 19,580,809 - Freely tradable, subject to the provisions of Rule 144
17 SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus constitute forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms and other comparable terminology. These statements involve known and unknown risks, uncertainties and factors, including those listed under "Risk Factors," that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot and do not guarantee future results, levels of activity, performance or achievements. This prospectus also contains citations to industry sources on which our market projections are based. These projections are based in part on assumptions about technological developments and preferences of microprocessor companies and original equipment manufacturers, among other things, and are subject to change due to a number of factors, including economic and market conditions, technological advancements and changes in customer preferences. As a result, we cannot assure you that these market projections will actually be realized. USE OF PROCEEDS We expect to receive approximately $ million in net proceeds from the sale of shares of common stock in this offering, or $ if the underwriters exercise their over-allotment option in full, based upon an assumed initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses. We expect to use the net proceeds from this offering for general corporate purposes, including working capital. Pending such uses, we intend to invest the net proceeds of this offering in investment grade, interest-bearing securities. We may also use a portion of the net proceeds to acquire additional businesses, products and technologies that we believe will complement our current or future business. We have no specific agreements or commitments to do so, however, and are not currently engaged in any negotiations with respect to any acquisition. DIVIDEND POLICY We have never paid cash dividends on our common stock. We currently intend to retain any future earnings to fund the development and growth of our business. Therefore, we do not anticipate paying any cash dividends in the foreseeable future. 18 CAPITALIZATION The following table sets forth our capitalization as of April 30, 2000: - on an actual basis; - on a pro forma basis to reflect: (1) issuance of 1,333,333 shares of our common stock, 83,334 shares of our Series C preferred stock, 1,430,482 shares of our Series D preferred stock and options to purchase 673,596 shares of our common stock in connection with the acquisition of material businesses subsequent to April 30, 2000 and (2) automatic conversion of all Series A, Series B and Series C preferred stock outstanding on April 30, 2000 and the Series C and Series D preferred stock issued subsequent to April 30, 2000 into 16,763,813 shares of our common stock upon completion of this offering; and - on a pro forma as adjusted basis to reflect the pro forma adjustments, as well as the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. The capitalization information set forth in the table below is qualified by and should be read in conjunction with our Consolidated Financial Statements and related Notes, the Unaudited Pro Forma Condensed Consolidated Financial Statements and related Notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
APRIL 30, 2000 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS) Long-term debt, net of current maturities................... $ -- $ 821 $ 821 -------- ------- ------- Stockholders' equity: Preferred stock, $0.001 par value: 30,000,000 shares authorized (actual, pro forma and pro forma as adjusted); 15,249,997 shares outstanding (actual); no shares outstanding (pro forma and pro forma as adjusted)............................................... 15 -- -- Common stock, $0.001 par value: 100,000,000 shares authorized (actual, pro forma and pro forma as adjusted); 20,148,985 shares outstanding (actual); 38,246,131 outstanding (pro forma); shares outstanding (pro forma as adjusted)..................... 20 38 Additional paid-in capital................................ 52,612 72,673 Deferred compensation..................................... (2,911) (2,911) Accumulated deficit....................................... (10,225) (12,286) -------- ------- ------- Total stockholders' equity.............................. 39,511 57,514 -------- ------- ------- Total capitalization.................................. $ 39,511 $58,335 $ ======== ======= =======
The share information in this table does not include the following: - 4,583 shares issued subsequent to April 30, 2000 upon exercise of outstanding stock options; - 1,786,326 shares issuable upon exercise of stock options outstanding on April 30, 2000 at a weighted average price of $1.71 per share, excluding 4,583 shares issued subsequent to April 30, 2000 upon exercise of stock options, and 1,266,396 shares issuable upon exercise of stock options granted subsequent to April 30, 2000 through May 15, 2000 at a weighted average price per share of $3.20 per share; and - 1,277,373 shares reserved for future issuance under our stock option plan. 19 DILUTION If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. At April 30, 2000, our pro forma net tangible book value was $32.6 million, or $0.85 per share of common stock. We calculate pro forma net tangible book value per share by dividing the pro forma net tangible book value, which equals total assets less intangible assets and total liabilities, by the number of pro forma outstanding shares of common stock. After giving effect to the sale of the shares of common stock in this offering at an assumed initial public offering price of $ per share, less estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value at April 30, 2000 would have been $ million, or $ per share. This represents an immediate increase in the pro forma as adjusted net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors, or approximately % of the assumed offering price of $ per share. The following table illustrates this dilution on a per share basis: Assumed initial public offering price per share......... $ Pro forma net tangible book value per share at April 30, 2000.................................................. $ 0.85 Increase per share attributable to new investors........ -------- Pro forma as adjusted net tangible book value per share after this offering................................... -------- Dilution per share to new investors..................... $
The following table shows on a pro forma as adjusted basis at April 30, 2000, after giving effect to the conversion of all outstanding preferred stock as of April 30, 2000 and shares of preferred stock issued subsequent to April 30, 2000 into 16,763,813 shares of common stock upon completion of this offering, the number of shares of common stock purchased from us, the aggregate effective cash consideration paid to us and the average price paid per share by existing stockholders and by new investors purchasing common stock in this offering, before deducting estimated underwriting discounts and commissions and estimated offering expenses:
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- -------- ----------- -------- ------------- Existing stockholders.................... 38,246,131 % $66,380,977 % $1.81 New investors............................ $ ---------- ---- ----------- ---- Total.................................. 100% 100% ========== ==== =========== ====
The above computations assume no exercise of options after April 30, 2000. The number of shares outstanding at April 30, 2000 excludes 1,790,909 shares of common stock issuable upon exercise of options outstanding as of April 30, 2000, having a weighted average exercise price of $1.71 per share, and 1,266,396 shares issuable upon exercise of stock options granted subsequent to April 30, 2000 through May 15, 2000 having a weighted average price of $3.20 per share. To the extent the option holders exercise these outstanding options, or any options we grant in the future, or the underwriters exercise their over-allotment option, there will be further dilution to new investors. For a more detailed discussion of our stock option plan and outstanding options to purchase common stock, see Note 6 of Notes to our Consolidated Financial Statements. 20 SELECTED ACTUAL AND PRO FORMA FINANCIAL DATA You should read the selected financial data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Unaudited Pro Forma Condensed Consolidated Financial Statements and related Notes and our Consolidated Financial Statements and related Notes included elsewhere in this prospectus. The statements of operations data for the fiscal years ended October 31, 1997, 1998 and 1999 and the balance sheet data as of October 31, 1998 and 1999 are derived from, and are qualified by reference to, the audited Consolidated Financial Statements and related Notes included in this prospectus. The statement of operations data for the period from July 23, 1996 (inception) to October 31, 1996 and the balance sheet data as of October 31, 1996 and 1997 are derived from unaudited financial statements not included in this prospectus. The statements of operations data for the six months ended April 30, 1999 and 2000 and the balance sheet data as of April 30, 2000 are derived from unaudited financial statements included in this prospectus. Our actual operating results for the six months ended April 30, 2000 include the operating results of Zentropic, which we acquired on April 3, 2000, for the period from the acquisition date through April 30, 2000. The unaudited pro forma statement of operations data for the fiscal year ended October 31, 1999 and the six months ended April 30, 2000: - give effect to our acquisitions of Zentropic, USE, Fireplug, Inup, Moreton Bay and RT-Control as if they had occurred on November 1, 1998; and - reflect the amortization of goodwill and other intangibles related to the acquisitions, as well as adjustments for acquired in-process research and development in connection with the Zentropic acquisition and intercompany transactions. The unaudited pro forma balance sheet data as of April 30, 2000 give effect to the acquisitions as if they occurred on April 30, 2000, except for Zentropic, which is included in our historical April 30, 2000 balance sheet. The unaudited pro forma balance sheet data: - reflect the issuance of 1,333,333 shares of our common stock, 83,334 shares of our Series C preferred stock, 1,430,482 shares of our Series D preferred stock and options to purchase 673,596 shares of our common stock in connection with the acquisitions; and - give effect to the automatic conversion of our Series A, Series B and Series C preferred stock outstanding on April 30, 2000 and the Series C and Series D preferred stock issued subsequent to April 30, 2000 into 16,763,813 shares of our common stock upon completion of this offering. The pro forma as adjusted data as of April 30, 2000 give effect to the pro forma adjustments, as well as to the receipt of the proceeds from this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses. The unaudited pro forma financial data are presented for illustrative purposes only and are not necessarily indicative of the operating results or financial position that would have resulted if these acquisitions had been in effect during the periods presented or of future operating results. 21
YEAR ENDED OCTOBER 31, PERIOD FROM -------------------------------------------- JULY 23, 1996 1999 (INCEPTION) TO ---------------------- OCTOBER 31, 1996 1997 1998 ACTUAL PRO FORMA ----------------- -------- -------- -------- ----------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenue......................... $ 62 $ 945 $ 1,376 $ 2,801 $ 4,640 Cost of revenue................. 67 247 361 185 1,380 ------- ------- ------- ------- -------- Gross margin (deficit).......... (5) 698 1,015 2,616 3,260 ------- ------- ------- ------- -------- Operating expenses: Research and development...... -- 655 1,357 1,304 1,784 Sales and marketing........... 13 663 1,024 729 1,036 General and administrative.... 31 207 639 1,224 2,664 Non-cash stock-related compensation*............... -- -- -- 250 382 Amortization of goodwill and other intangibles........... -- -- -- -- 7,125 Acquired in-process research and development............. -- -- -- -- -- ------- ------- ------- ------- -------- Total operating expenses.... 44 1,525 3,020 3,507 12,991 ------- ------- ------- ------- -------- Loss from operations............ (49) (827) (2,005) (891) (9,731) Other income (expense), net..... (12) (50) (181) (163) (236) ------- ------- ------- ------- -------- Loss before income taxes........ (61) (877) (2,186) (1,054) (9,967) Benefit for income taxes........ -- -- -- -- 17 ------- ------- ------- ------- -------- Net loss........................ $ (61) $ (877) $(2,186) (1,054) $ (9,950) ======= ======= ======= ======= ======== Basic and diluted net loss per common share.................. $ (0.00) $ (0.05) $ (0.12) $ (0.06) $ (0.47) ======= ======= ======= ======= ======== Basic and diluted weighted average common shares outstanding................... 18,000 18,000 18,000 18,000 21,079 ======= ======= ======= ======= ======== Basic and diluted supplemental pro forma net loss per common share (unaudited)............. $ (0.44) ======== Basic and diluted supplemental pro forma weighted average common shares outstanding (unaudited)................... 22,592 ======== SIX MONTHS ENDED APRIL 30, --------------------------------------- 1999 2000 ----------- ------------------------- ACTUAL ACTUAL PRO FORMA ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenue......................... $ 806 $ 1,751 $ 2,814 Cost of revenue................. 37 84 838 ------- ----------- ------- Gross margin (deficit).......... 769 1,667 1,976 ------- ----------- ------- Operating expenses: Research and development...... 786 1,736 1,968 Sales and marketing........... 321 1,098 1,419 General and administrative.... 695 1,108 2,288 Non-cash stock-related compensation*............... -- 1,046 1,462 Amortization of goodwill and other intangibles........... -- 166 3,563 Acquired in-process research and development............. -- 800 -- ------- ----------- ------- Total operating expenses.... 1,802 5,954 10,700 ------- ----------- ------- Loss from operations............ (1,033) (4,287) (8,724) Other income (expense), net..... (43) 45 19 ------- ----------- ------- Loss before income taxes........ (1,076) (4,242) (8,705) Benefit for income taxes........ -- 139 190 ------- ----------- ------- Net loss........................ $(1,076) $ (4,103) $(8,515) ======= =========== ======= Basic and diluted net loss per common share.................. $ (0.06) $ (0.21) $ (0.38) ======= =========== ======= Basic and diluted weighted average common shares outstanding................... 18,000 19,660 22,478 ======= =========== ======= Basic and diluted supplemental pro forma net loss per common share (unaudited)............. $ (0.30) ======= Basic and diluted supplemental pro forma weighted average common shares outstanding (unaudited)................... 28,277 =======
OCTOBER 31, APRIL 30, 2000 ----------------------------------------------- ------------------------- 1996 1997 1998 1999 ACTUAL PRO FORMA ----------- ----------- -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents........................... $ 5 $ 44 $ 117 $ 68 $ 30,464 $30,355 Working capital (deficit)........................... 31 (380) (1,354) (2,157) 31,284 30,407 Total assets........................................ 521 363 465 1,134 41,202 62,021 Long-term liabilities............................... -- -- -- -- 115 936 Total stockholders' equity (deficit)................ 364 (129) (1,184) (1,983) 39,511 57,514
SIX MONTHS ENDED YEAR ENDED OCTOBER 31, 1999 APRIL 30, 2000 ------------------------------- ------------------------- ACTUAL PRO FORMA ACTUAL PRO FORMA -------------- -------------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS) (*) NON-CASH STOCK-RELATED COMPENSATION HAS BEEN EXCLUDED FROM THE FOLLOWING EXPENSES: Research and development.............................. $ 16 $ 60 $ 67 $ 156 Sales and marketing................................... 26 85 23 117 General and administrative............................ 208 237 956 1,189
22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES AND THE PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES, INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. SEE "SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS" FOR MORE INFORMATION ABOUT THESE STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS." OVERVIEW We provide a broad range of embedded operating system products and services through a combination of our experience with embedded operating systems, expertise in Linux operating systems and involvement in the open source community. Our offerings enable microprocessor companies and original equipment manufacturers to develop and optimize unique embedded systems and integrate those systems into their products. We began operations as part of Caldera, Inc. in July 1996 when Caldera purchased assets relating to a disk operating system, known as DR DOS. Caldera marketed DR DOS technology primarily as an embedded operating system for microprocessors to be used in products and systems other than desktop personal computers. In August 1998, we were incorporated as a separate entity, and in September 1998, Caldera transferred to us licensing rights and assets relating to the DR DOS and embedded system businesses. At the same time, Caldera transferred certain assets not related to those businesses to a separate entity, Caldera Systems. Starting in January 1999, we began focusing our strategy on developing embedded operating systems based on Linux. We commercially released the first version of our embedded Linux operating system, Embedix Linux, in January 2000. Since March 2000, we have acquired businesses with technologies that are complementary to our own, including Zentropic, USE, Fireplug, Inup, Moreton Bay and RT-Control. In connection with these acquisitions, we issued an aggregate of 3,078,559 shares of our common stock, 1,513,816 shares of our preferred stock and paid an aggregate of $1.3 million, including direct expenses of approximately $418,000. We also granted to employees of the acquired companies options to purchase an aggregate of 673,596 shares of common stock at a weighted average exercise price of $2.82 per share. With these acquisitions, we currently have established development groups both domestically and in Australia, Canada, France, Japan, Taiwan and the United Kingdom. SOURCES OF REVENUE Historically, we have generated revenue primarily from licenses of DR DOS-based embedded operating systems. With the commercial release of the first version of Embedix Linux in January 2000, we began generating revenue from licenses of Linux-based products and the provision of related professional services. Sales of our Linux-based products and services accounted for 69% of total revenue in the six months ended April 30, 2000. We expect that the majority of our future revenue will be derived from the licensing of our embedded Linux operating system and related software products, in particular Embedix Browser. A relatively small number of customers account for a significant portion of our total revenue. Sales to our seven largest customers accounted for approximately 77% of total revenue in the six months ended April 30, 2000, with DaiShin accounting for approximately 34% of total revenue. During that same period, no other customer accounted for more than 10% of total revenue. Through fiscal 2001, we expect that revenue from our ten largest customers will continue to account for a majority of our revenue. We market and sell our operating system and related software products and services both domestically and internationally. Revenue from sales to customers outside the United States 23 represented 68% of our total revenue in the six months ended April 30, 2000. To date, all revenue transactions have been denominated in U.S. dollars. We expect revenue from sales to customers outside the United States to remain a significant percentage of our total revenue in the future. We generate a majority of our revenue from licenses of our operating system and related software products to original equipment manufacturers. We recognize this revenue when an agreement has been executed, the product has been delivered, no significant implementation obligations remain, the fee is fixed and determinable and collection is probable. Through April 30, 2000, some of our license agreements were bundled with maintenance and support services. Because we had not established the necessary vendor specific objective evidence until the second quarter of fiscal 2000, we could not recognize separately the service revenue. Accordingly, revenue for these licenses was deferred and recognized over the term of the support and maintenance services. As we have now established this evidence, we intend to unbundle service revenue components on our future contracts and to report separately service revenue in the future. We had no material service revenue in the six months ended April 30, 2000. We have recently begun to give our customers the option of entering into separate service contracts for maintenance and support. We recognize revenue from maintenance and support services over the term of the agreement. If maintenance and support services offered in connection with a software license agreement are provided for a period of one year or less, the estimated cost of the services is insignificant and there is no commitment to provide upgrades or enhancements, we recognize this service revenue upon our delivery of the software and accrue the estimated costs of providing these services. If the service period is greater than one year, or if upgrades or enhancements are included, we defer the revenue and recognize it either over the period that the services are to be provided or when no significant performance obligations remain. In addition, we have recently begun to enter into engineering and training contracts with our customers. Under our engineering contracts, we offer custom engineering services to customers purchasing our embedded operating system, or we may develop and license a complete custom embedded software solution at a customer's request. Under our training contracts, we offer instructor-led training to provide developers access to information and resources to assist with design and implementation. We recognize revenue from engineering and training services as the services are performed. RECENT ACQUISITIONS AND PRO FORMA RESULTS OF OPERATIONS From April 3, 2000 to May 12, 2000, we acquired six businesses with technologies that are complementary to our own. Each acquisition was accounted for using purchase accounting. On April 3, 2000, we acquired Zentropic for total consideration of $6.7 million, consisting of 1,745,226 shares of our common stock, and including $112,000 in costs directly associated with the acquisition. Zentropic provides Linux software for industrial and other time-sensitive applications, that it refers to as real-time technology. Zentropic is headquartered in Herndon, Virginia and also has an engineering office located in the United Kingdom. For the fiscal year ended October 31, 1999, Zentropic had revenue of approximately $85,000 and an operating loss of approximately $752,000. For the period from November 1, 1999 to April 2, 2000, Zentropic had revenue of approximately $256,000 and an operating loss of approximately $390,000. As of April 3, 2000, Zentropic had assets of approximately $276,000 and liabilities of approximately $160,000. The value assigned to the in-process research and development acquired in the Zentropic acquisition of $800,000 was determined by an independent valuation which included, but was not limited to, an analysis of estimating the costs to develop the purchased in-process research and development into commercially viable products, the market for the developed products and technologies, and discounting the resulting net cash flows related to these projects and technologies. The valuation was based upon assumptions management 24 believed to be reasonable at the time of the valuation. However, the underlying assumptions used to estimate expected revenue, development costs or profitability, or the events associated with such projects, may not transpire as estimated. At the date of the acquisition of Zentropic, management estimated that the acquired in-process research and development projects of Zentropic were approximately 60% complete and that an additional $150,000 would be required to develop these projects and technologies to commercial viability. At the date of the acquisition, the acquired in-process research and development had not yet reached technological feasibility and had no alternative future uses. On May 1, 2000, we acquired all of the outstanding capital stock of USE, in connection with which we paid approximately $373,000 in cash, including $50,000 in estimated costs directly associated with the acquisition. We also granted to employees of USE options to purchase 682,335 shares of common stock at an exercise price of $3.00 per share. USE is a custom systems engineering company and is based in Shiojiri, Nagano, Japan. For the year ended December 31, 1999, USE had revenue of $1.5 million and an operating loss of approximately $509,000. For the six months ended March 31, 2000, USE had revenue of approximately $764,000 and an operating loss of approximately $557,000. As of March 31, 2000, USE had assets of $1.4 million and liabilities of $2.1 million. On May 1, 2000, we acquired all of the outstanding capital stock of Fireplug, in connection with which we issued 69,998 shares of our Series D convertible preferred stock and paid approximately $581,000 in cash, including $81,000 in estimated costs directly associated with the acquisition. We also granted to employees of Fireplug options to purchase 62,220 shares of our common stock at an exercise price of $1.50 per share. Fireplug develops embedded Linux network systems and tools and is based in Vancouver, Canada. For the year ended December 31, 1999, Fireplug had revenue of approximately $145,000 and an operating loss of approximately $33,000. For the six months ended March 31, 2000, Fireplug had revenue of approximately $128,000 and an operating loss of approximately $110,000. As of March 31, 2000, Fireplug had assets of approximately $51,000 and liabilities of approximately $122,000. On May 1, 2000, we acquired all of the outstanding capital stock of Inup, in connection with which we issued 1,333,333 shares of our common stock and 83,334 shares of our Series C preferred stock and paid approximately $60,000 in cash, including $50,000 in estimated costs directly associated with the acquisition. Inup develops Linux-based software that compensates for hardware failures and is based in Saint-Ouen, France. For the year ended December 31, 1999, Inup had revenue of approximately $8,000 and an operating loss of approximately $125,000. For the six months ended March 31, 2000, Inup had revenue of approximately $8,000 and an operating loss of approximately $306,000. As of March 31, 2000, Inup had assets of approximately $776,000 and liabilities of approximately $139,000. On May 10, 2000, we acquired all of the outstanding capital stock of Moreton Bay, in connection with which we issued 956,315 shares of our Series D preferred stock and paid approximately $60,000 in cash, including $50,000 in estimated costs directly associated with the acquisition. We also granted to employees of Moreton Bay options to purchase 209,474 shares of our common stock at an exercise price of $3.00 per share. Moreton Bay develops embedded virtual private network solutions for Internet appliances and provides engineering development services for the Motorola ColdFire microprocessor platform. Moreton Bay is based in Brisbane, Australia and has a sales and service office in San Jose, California. Prior to the acquisition, Moreton Bay transferred the assets, liabilities and operations of one of its unrelated product lines to a separate legal entity. For the year ended October 31, 1999, the acquired operations of Moreton Bay had no revenue and an operating loss of approximately $200,000. For the six months ended April 30, 2000, the acquired operations of Moreton Bay had revenue of approximately $27,000 and an operating loss of approximately $230,000. As of April 30, 2000, Morton Bay had assets of approximately $609,000 and liabilities of approximately $151,000. On May 12, 2000, we acquired all of the outstanding capital stock of RT-Control, in connection with which we issued 404,169 shares of our Series D preferred stock and paid approximately $90,000 in 25 cash, including $75,000 in estimated costs directly associated with the acquisition. We also granted to employees of RT-Control options to purchase 16,667 shares of our common stock at an exercise price of $1.50 per share. RT-Control was the principal developer of the mcLinux version of Linux for microcontrollers and is based in Toronto, Canada. For the period from its inception (June 30, 1999) to December 31, 1999, RT-Control had revenue of approximately $67,000 and an operating loss of approximately $96,000. For the six months ended March 31, 2000, RT-Control had revenue of approximately $79,000 and an operating loss of approximately $246,000. As of March 31, 2000, RT-Control had assets of approximately $130,000 and liabilities of approximately $206,000. The unaudited pro forma condensed consolidated statements of operations for the fiscal year ended October 31, 1999 and for the six months ended April 30, 2000 are included elsewhere in this prospectus and reflect our acquisitions of Zentropic, USE, Fireplug, Inup, Moreton Bay, and RT-Control as if these transactions had occurred on November 1, 1998. Pro forma revenues were $4.6 million in the fiscal year ended October 31, 1999 and $2.8 million in the six months ended April 30, 2000. Pro forma losses from operations were $9.7 million in the fiscal year ended October 31, 1999 and $8.7 million in the six months ended April 30, 2000. The pro forma statements of operations reflect the amortization of goodwill and other intangibles related to the acquisitions and adjustments for acquired in-process research and development as part of the Zentropic acquisition and intercompany transactions. Pro forma amortization of goodwill and other intangibles was $7.1 million in the fiscal year ended October 31, 1999 and $3.6 million in the six months ended April 30, 2000. Acquired in-process research and development expense in connection with the Zentropic acquisition on April 3, 2000 was $800,000 in the six months ended April 30, 2000, and is not included in the pro forma results of operations for that period. Intercompany revenue, net of the cost of that revenue, between Zentropic and us prior to the acquisition was approximately $118,000 in the six months ended April 30, 2000, and is not included in the pro forma results of operations for that period. HISTORICAL RESULTS OF OPERATIONS We have included a discussion of our results of operations for the fiscal years ended October 31, 1997, 1998 and 1999 and the six months ended April 30, 1999 and 2000. As a result of focusing our strategy on Linux-based embedded systems starting in January 1999, commercially releasing the first version of Embedix Linux in January 2000 and our six recent acquisitions, we believe that period-to-period comparisons of our historical results are not indicative of our future performance. COMPARISON OF THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 REVENUE AND COST OF REVENUE REVENUE. Revenue increased 117% from approximately $806,000 in the six months ended April 30, 1999 to $1.8 million in the six months ended April 30, 2000. This increase was due to additional licensing revenue from the sale of our Linux-based operating system and related software products. We began selling Linux-based products and services in the six months ended April 30, 2000, and those sales accounted for 69% of total revenue in that period. We believe that sales of our Linux-based operating system and related software products and services will represent an increasing portion of our total revenue. COST OF REVENUE. Cost of revenue consists of our costs of production, fulfillment and shipment of our operating system software products, as well as salaries, benefits and related expenses of systems engineers. Also included in cost of revenue are any royalties paid to third parties for inclusion of their software products in our product offerings. Cost of revenue was approximately $37,000 in the six months ended April 30, 1999 and approximately $84,000 in the six months ended April 30, 2000. This increase was due to additional costs associated with an increase in the number of customer support personnel together with increased costs of production, fulfillment and shipping. As we begin to report 26 service revenue separately, we will report the costs associated with those services separately as well. As our service offerings increase in the future, we expect total cost of revenue as a percentage of total revenue to increase. OPERATING EXPENSES RESEARCH AND DEVELOPMENT. Research and development expenses consist of payroll and related expenses for software engineers, technical writers and quality assurance and management personnel and the costs of materials used by these employees in the development of new or enhanced product offerings. We expense all of our research and development costs as they are incurred. Research and development expenses were approximately $786,000 in the six months ended April 30, 1999 and $1.7 million in the six months ended April 30, 2000. This increase was due to our hiring of additional research and development personnel in connection with the development of our Linux-based products and services. We believe that a significant level of investment in Linux-based product development and other research and development initiatives will be required as we integrate and complete the development of the technologies we recently acquired. Accordingly, we expect research and development expenses to continue to increase in absolute dollars. SALES AND MARKETING. Sales and marketing expenses consist of salaries, commissions and related expenses for personnel engaged in marketing, sales and sales support functions, as well as costs associated with trade shows, advertising and promotional activities. Sales and marketing expenses were approximately $321,000 in the six months ended April 30, 1999 and $1.1 million in the six months ended April 30, 2000. This increase was due to our hiring of additional sales and marketing personnel and increased expenses incurred in connection with our branding efforts following the commercial release of our Embedix Linux product in January 2000. We intend to continue to expand our sales and marketing activities, both domestically and internationally, to increase market awareness and sales of our products and services. Accordingly, we expect our sales and marketing expenses to continue to increase in absolute dollars. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of professional fees, salaries and related costs for accounting, administrative, finance, human resources, information systems and legal personnel, as well as expenses associated with implementing and expanding our internal information and management reporting systems. General and administrative expenses were approximately $695,000 in the six months ended April 30, 1999 and $1.1 million in the six months ended April 30, 2000. This increase was due to our hiring of additional general and administrative personnel and additional expenses associated with improving our corporate infrastructure. We expect general and administrative expenses to continue to increase in absolute dollars as we add administrative personnel to support our business expansion. NON-CASH STOCK-RELATED COMPENSATION. Non-cash stock-related compensation reflects the amortized portion of the difference between the deemed fair market value of the common stock for accounting purposes and the sales price or exercise price of the stock or stock options as of the date of sale or grant. Deferred compensation is presented as a reduction of stockholders' equity and is amortized over the vesting period of the applicable options. In connection with stock option grants, we recorded deferred compensation of $3.0 million in the six months ended April 30, 2000. We amortized approximately $157,000 of deferred compensation in the six months ended April 30, 2000 and recorded $825,000 of compensation expense related to the sale of our common stock to our officers. There were no non-cash stock-related compensation amounts in the six months ended April 30, 1999. Based on option grant activity through May 15, 2000, we expect to expense $1.1 million of deferred compensation in the remainder of fiscal 2000, $1.8 million in fiscal 2001, approximately $886,000 in fiscal 2002, approximately $434,000 in fiscal 2003 and approximately $108,000 in fiscal 2004. 27 AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill and other intangibles occurs when the purchase price of an acquired company exceeds the net assets and any in-process research and development costs. Our acquisition of Zentropic on April 3, 2000 resulted in $6.0 million of goodwill and other intangibles, which is being amortized over the expected lives of the assets, ranging from two to five years. We recorded amortization expense of approximately $166,000 for the six months ended April 30, 2000. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Acquired in-process research and development expense relates to the portion of the purchase price of an acquired company that is attributable to in-process technology that has not reached the requirements of technological feasibility at the closing date. In connection with our acquisition of Zentropic on April 3, 2000 we expensed $800,000 of acquired in-process research and development in the six months ended April 30, 2000. OTHER INCOME (EXPENSE), NET Other income (expense), net consists primarily of interest income from our cash investments offset by interest expense on borrowings. Other expense, net was approximately $43,000 in the six months ended April 30, 1999, and other income, net was approximately $45,000 in the six months ended April 30, 2000. The net increase was due to an increase in interest income of approximately $91,000 as a result of increased cash balances, offset by an increase in interest expense of approximately $9,000. On April 30, 2000, we repaid all outstanding principal and interest due under a borrowing arrangement with one of our principal stockholders, The Canopy Group. This repayment resulted in a decreased borrowing level in the six months ended April 30, 2000 compared to the same period in 1999. INCOME TAX BENEFIT In connection with the acquisition of Zentropic, we recorded a deferred income tax liability of approximately $717,000 related to acquired intangible assets that are not deductible for income tax purposes and we reduced the valuation allowance on our deferred income tax assets as of the date of the acquisition by approximately $575,000. As a result of the remaining deferred income tax liability of approximately $142,000, we recorded a benefit for income taxes of approximately $134,000 during the six months ended April 30, 2000 principally due to the net operating loss generated from the date of the Zentropic acquisition through April 30, 2000. See Note 7 of Notes to our Consolidated Financial Statements. COMPARISON OF THE FISCAL YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999 REVENUE AND COST OF REVENUE REVENUE. Revenue increased from approximately $945,000 in fiscal 1997, to $1.4 million in fiscal 1998, to $2.8 million in fiscal 1999. Historically, we generated revenue primarily from licenses of DR DOS-based embedded operating systems. The increase in revenue in each year was due to increased market acceptance of these products. COST OF REVENUE. Cost of revenue was approximately $248,000 in fiscal 1997, approximately $361,000 in fiscal 1998 and approximately $185,000 in fiscal 1999. As a percentage of total revenue, these costs were 26% in each of fiscal 1997 and fiscal 1998 and 7% in fiscal 1999. The increase in absolute dollars from fiscal 1997 to fiscal 1998 was due to additional costs incurred as a result of additional license sales. During each of fiscal 1997 and fiscal 1998, cost of revenue included the amortization expense associated with the acquisition of the DR DOS assets. The decrease from fiscal 1998 to fiscal 1999 was due to these amounts being fully amortized at the end of fiscal 1998. 28 OPERATING EXPENSES RESEARCH AND DEVELOPMENT. Research and development expenses were approximately $655,000 in fiscal 1997, $1.4 million in fiscal 1998 and $1.3 million in fiscal 1999. The increase from fiscal 1997 to fiscal 1998 was due to our hiring of software developers and quality assurance personnel to expand our DR DOS offerings and to support development and testing activities. This increase was also the result of the separation of our business from Caldera. The decrease from fiscal 1998 to fiscal 1999 was due to our decreased spending on DR DOS-based development offsetting any increases in research and development costs associated with Linux-based products. SALES AND MARKETING. Sales and marketing expenses were approximately $663,000 in fiscal 1997, $1.0 million in fiscal 1998 and approximately $729,000 in fiscal 1999. The increase from fiscal 1997 to fiscal 1998 was due to additional expenditures related to selling and marketing DR DOS-based products and the separation of our business from Caldera. The decrease from fiscal 1998 to fiscal 1999 was due to our decreased spending on selling and marketing DR DOS-based products offsetting any increases in costs associated with selling and marketing Linux-based products. GENERAL AND ADMINISTRATIVE. General and administrative expenses were approximately $208,000 in fiscal 1997, approximately $640,000 in fiscal 1998 and $1.2 million in fiscal 1999. The increase from fiscal 1997 to fiscal 1998 was due to significant costs incurred in connection with our separation from Caldera. The increase from fiscal 1998 to fiscal 1999 was due to the hiring of additional administrative, executive and finance personnel. NON-CASH STOCK-RELATED COMPENSATION. In connection with grants of stock options to employees and directors, we recorded approximately $311,000 of deferred compensation in the last six months of fiscal 1999, of which approximately $250,000 was expensed. We did not grant any options, and had no deferred stock compensation, in fiscal 1997 or 1998. OTHER INCOME (EXPENSE), NET Other expense, net, which consists principally of interest expense, was approximately $50,000 in fiscal 1997, approximately $181,000 in fiscal 1998 and approximately $163,000 in fiscal 1999. The increase from fiscal 1997 to fiscal 1998 was the result of increased borrowings to fund the carved-out operations of Caldera. Subsequent to our incorporation in August 1998, we funded our operations through borrowings from Canopy. The decrease from fiscal 1998 to fiscal 1999 was due to an overall reduction in borrowings resulting from the separation of our business from Caldera. LIQUIDITY AND CAPITAL RESOURCES Since our establishment as a separate entity in August 1998, we have funded our operations primarily through loans from Canopy and through sales of our common and preferred stock. As of April 30, 2000, we had $30.5 million of cash. This represents an increase of $30.4 million over October 31, 1999. Our working capital at April 30, 2000 was $31.3 million compared to a working capital deficit of $2.2 million at October 31, 1999. The increase in cash and working capital from October 31, 1999 is primarily a result of the sale of our common and preferred stock and the exercise of stock options. During the six months ended April 30, 2000, we received proceeds of: - $1.2 million from the sale of 1,500,000 shares of our common stock at a purchase price of $0.80 per share; - $532,000 from the exercise of outstanding stock options; 29 - $3.7 million from the sale of 2,500,000 shares of Series A Class 2 preferred stock at a purchase price of $1.50 per share; - $14.5 million from the sale of 4,833,331 shares of Series B preferred stock at a purchase price of $3.00 per share; and - $17.5 million from the sale of 2,916,666 shares of Series C preferred stock at a purchase price of $6.00 per share, including a $1.5 million stock subscription receivable, which was paid subsequent to April 30, 2000. During the six months ended April 30, 2000, we used approximately $2.5 million of the proceeds from these stock sales to repay in full a convertible promissory note and accrued interest payable to Canopy. Net cash used in operating activities during the six months ended April 30, 2000 was $1.7 million. Cash used in operating activities was primarily attributed to the net loss of $4.1 million during that period, offset by non-cash expenses associated with acquired in-process research and development of $800,000, amortization of intangible assets of approximately $166,000 and amortization of deferred compensation of $1.0 million. Net cash used in operating activities was approximately $185,000 in fiscal 1997, $1.2 million in fiscal 1998 and $1.8 million in fiscal 1999. Cash used in operating activities was primarily attributed to the net loss of approximately $877,000 in fiscal 1997, $2.2 million in fiscal 1998 and $1.1 million in fiscal 1999, each offset by non-cash expenses and changes in working capital. Our investing activities have historically consisted of purchases of equipment. Purchases of equipment totaled approximately $108,000 in fiscal 1997, approximately $72,000 in fiscal 1998, approximately $190,000 in fiscal 1999 and approximately $284,000 in the six months ended April 30, 2000. During the six months ended April 30, 2000, we sold office equipment for $75,000. In addition, during the second quarter of fiscal 2000, we purchased Zentropic, acquiring net assets of approximately $116,000, including cash of approximately $113,000. Subsequent to April 30, 2000, we acquired net assets of approximately $335,000, including cash of $1.1 million, from USE, Fireplug, Inup, Moreton Bay and Rt-Control. In connection with the acquisition of USE we assumed aggregate loans payable of $1.9 million, of which $1.1 million is a current liability. The loans bear interest that is payable monthly, at rates ranging from 2.3% to 3.2%. The aggregate purchase price for these acquisitions consisted of 1,333,333 shares of our common stock, 83,334 shares of our Series C preferred stock, 1,430,482 shares of our Series D preferred stock, options to purchase 673,596 shares of our common stock and cash of $1.2 million, including approximately $306,000 in estimated costs directly associated with the acquisitions. We currently anticipate that we will continue to experience significant increases in our operating expenses for the foreseeable future as we enter new markets for our products and services, increase research and development activities and sales and marketing activities, develop new distribution channels and broaden our professional service capabilities. Our operating expenses will consume a material amount of our capital resources, including a portion of the net proceeds of this offering. We believe that the net proceeds of this offering, together with our existing cash, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 15 months. Although we believe that we will be able to meet our anticipated cash needs after that time from cash generated from operations and do not currently anticipate the need to raise additional capital, if we do seek to raise additional capital, additional financing may not be available on acceptable terms, if at all. We currently intend to use the net proceeds of this offering for general corporate purposes and working capital. We may also use a portion of the net proceeds to acquire additional businesses, products and technologies that we believe will complement our current or future business, although we have no specific plans, agreements or commitments to do so, and are not currently engaged in any 30 negotiations for any acquisition. Pending these uses, we will invest the net proceeds of this offering in government securities and other short-term, investment grade, interest-bearing instruments. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as a part of a hedge transaction and, if it is, the type of hedge transaction. This statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. We do not use derivative instruments, therefore the adoption of this statement will not have any effect on our results of operations or financial position. In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101, or SAB No. 101, "Revenue Recognition in Financial Statements." This pronouncement summarizes certain of the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues. We are required to adopt SAB No. 101 during the first quarter of fiscal year 2001. Although management is currently evaluating the impact, if any, of SAB No. 101, management does not presently believe it will have a material impact on our results of operations, financial position or liquidity. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 "Accounting for Certain Transactions involving Stock Compensation, an interpretation of Accounting Principles Board Opinion No. 25," or APB No. 25. This interpretation clarifies the definition of employee for purposes of applying APB No. 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. This interpretation is effective July 1, 2000, but some conclusions in this interpretation cover specific events that occur after either December 15, 1998 or January 12, 2000. To the extent that this interpretation covers events occurring during the period after December 15, 1998 or January 12, 2000, but before the effective date of July 1, 2000, the effects of applying this interpretation are recognized on a prospective basis from July 1, 2000. Although we are currently evaluating the impact, if any, of this interpretation, we do not presently believe it will have a material impact on our results of operations, financial position or liquidity. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK As we maintain and expand our international operations, our financial results will be affected by factors such as changes in foreign currency rates or weak economic conditions in foreign markets. Because all of our revenue is currently denominated in U.S. dollars, a strengthening of the dollar could make our products and services less competitive in international markets. With our recent acquisitions of Zentropic, USE, Fireplug, Inup, Moreton Bay and RT-Control, we currently have operations both domestically and in Australia, Canada, France, Japan, Taiwan and the United Kingdom. To date, foreign currency fluctuations have had little effect on our business. In the future, more of our sales transactions may be denominated in local currencies. As we expand operations internationally, we will continue to evaluate our foreign currency exposures and risks and develop appropriate hedging or other strategies to manage those risks. We have not revised our current business practices or modified any of our products to conform to Europe's conversion to the euro. 31 BUSINESS OVERVIEW We provide a broad range of embedded operating system products and services through a combination of our experience with embedded operating systems, expertise in Linux operating systems and involvement in the open source community. Our offerings enable microprocessor companies and original equipment manufacturers to develop and optimize unique embedded operating systems and integrate those technologies into their products and systems. We also develop and license complete customized embedded systems solutions for our customers according to their specifications. Our products and services are designed to reduce the time and expense associated with the development of embedded systems and to assist our customers in creating systems that feature high functionality, performance and reliability and ease of use. We offer embedded Linux operating system solutions, called Embedix, including an operating system, a software development kit and a compact graphical Web browser. Our products feature proprietary extensions of the Linux open source software. In addition, we offer comprehensive professional services, or Embedix Services, including customized engineering, training and technical support services. We sell our Linux products and services to original equipment manufacturers such as Bast, CIS Technology, DaiShin and MiTAC International. To further promote our technologies, we have also entered into strategic relationships with microprocessor companies such as Hitachi, Motorola and Samsung. INDUSTRY BACKGROUND Rapid technological advancements have dramatically increased the number, type and capabilities of products and systems that enable organizations and individuals to collaborate, access information and conduct business more effectively. This proliferation is largely fueled by innovations in microprocessors, which are hidden, or embedded, in a variety of products and systems. Complex tasks, such as Internet access, network traffic routing and graphics display, require a high level of computing power, which is currently delivered by 16-, 32- and 64-bit embedded microprocessors. Based on information provided by an industry research firm, worldwide unit shipments of 16-, 32- and 64-bit embedded microprocessors will grow from approximately 390 million in 1998 to approximately 1.2 billion in 2003. Products and systems containing embedded microprocessors play a role in virtually every aspect of modern life and include: - Internet and communications infrastructure equipment such as routers, modems and switches; - consumer-oriented devices such as personal digital assistants, smart cellular phones, entertainment systems, Internet-enabled television set-top boxes, home automation systems, automated teller machines and Internet kiosks; - retail business products such as handheld point-of-sale terminals, bar code scanners, smart cash registers, credit card readers and other systems that provide real-time inventory tracking and automate procurement processes; - transportation-related systems such as automobile and aviation navigation and safety systems; and - industrial control and automation systems such as manufacturing equipment and components as well as maintenance and repair machinery. Microprocessors require an operating system to manage the interaction between various hardware and software components. The growth in products and systems with embedded microprocessors has created demand for more robust, reliable and customizable embedded operating systems that are adaptable to product memory and storage limitations. In addition, as the development of embedded 32 operating systems has significantly increased in complexity, software developers often require specialized software tools to customize and integrate these embedded operating systems. Many original equipment manufacturers use internal resources to develop their own operating systems for their embedded microprocessor projects. We believe that these internal development efforts have generally not proven to be cost-effective, in part because the programmers of these systems may not possess the requisite operating system expertise. Alternatively, manufacturers seeking more sophisticated operating systems for their embedded microprocessors have purchased proprietary operating systems from third parties. However, because of the proprietary nature of these operating systems, they typically cannot be easily and cost-effectively customized to meet the unique requirements of specific embedded systems. In addition, both internally developed and third-party proprietary operating systems are frequently designed for use with a limited set of applications and devices, and, as a result, we believe the companies that create these proprietary systems have largely been unable to achieve cost-saving economies of scale in production. Because many of these operating systems were originally created several years ago, and are therefore based on earlier microprocessor technology, the ability of companies using these operating systems to take full advantage of increasing microprocessor functionality may be limited. Further, because the companies that create these proprietary operating systems may be limited by the cost, expertise and availability of the developers that they employ, it is difficult for them to keep pace with innovations in microprocessor technology. Open source operating systems have emerged as a compelling alternative to internally developed or third-party proprietary operating systems. The term open source applies to software that can be copied, modified and distributed without any associated fee and with few restrictions. As such, the source code for these operating systems is open to the public and can be customized for a specific application or use. The growth of the Internet has greatly increased the scale and efficiency of open source software development through the availability of collaborative technologies such as e-mail lists, news groups and Web sites. Popular open source software is continuously maintained and improved by worldwide communities of developers who share information, code and suggestions, primarily over the Internet, increasing the frequency of software releases and the speed of feature development and error correction. Linux has emerged as the leading open source operating system, enjoying acceptance by both commercial and academic communities due to its high performance and stability, low cost and broad developer support. Until recently, the growth in the use of the Linux operating system has primarily been in the server and desktop computer markets. Microprocessor companies are now promoting, and original equipment manufacturers are now adopting, Linux in the embedded systems market. However, many of these manufacturers have only limited experience working with Linux, and may lack developers with the specialized skills and relationships in the open source community necessary to identify and take advantage of the many enhancements and extensions to Linux that are continuously under development. In addressing the increased complexity and functionality of products and systems with embedded microprocessors, microprocessor and original equipment manufacturers are faced with a number of challenges. As a result, we believe that there is a significant market opportunity for an embedded operating system that: - is powerful, reliable and full-featured, yet minimizes product memory and storage requirements; - can easily be customized across a variety of platforms to support a broad range of hardware devices; - allows for rapid development and deployment of the original equipment manufacturer's products, thereby reducing time-to-market; 33 - provides increased functionality, connectivity and performance, including real-time capabilities, consistent with ongoing technological innovation; - is supported by a broad developer base; and - is complemented by a sophisticated set of development tools to enable integration, support services and value-added applications. THE LINEO SOLUTION We provide a broad range of embedded operating system software products and services through a combination of our experience with embedded operating systems, expertise in Linux operating systems and involvement in the open source community. Our offerings enable microprocessor companies and original equipment manufacturers to develop and optimize unique embedded systems and integrate those technologies into their products. We also develop and license complete customized embedded systems for our customers according to their specifications. Our products and services are designed to reduce the time and expense associated with the development of embedded systems and to assist our customers in creating systems with greater functionality, enhanced performance, improved reliability and greater ease of use as compared to currently available internally developed or third-party proprietary systems. The key benefits of our solution include: FULL-FEATURED EMBEDDED OPERATING SYSTEM. Embedix Linux, our embedded Linux operating system, not only provides the capabilities currently offered by existing embedded operating systems but also leverages the numerous advantages of Linux. Our proprietary process for identifying and customizing modular components of Linux enables the development of unique, reliable, full-featured embedded Linux variations with reduced memory and storage requirements and attributes appropriate for each customer's needs. In addition, our experience and long-standing relationships with the open source community allow us to combine its broad development and support resources with our internal expertise to fix errors and develop enhancements to our Linux-based products across various platforms in a quick and cost-effective manner. BROAD PLATFORM COMPATIBILITY. We work closely with microprocessor companies and original equipment manufacturers in developing our embedded Linux operating system solutions. As a result, these solutions are designed to operate on a broad range of embedded system platforms and meet diverse functionality requirements. Each embedded system has its own spectrum of performance, size and memory requirements. We offer solutions appropriate for products and systems ranging from small industrial components, to handheld consumer devices, to large networking infrastructure equipment. VALUE-ADDED DEVELOPMENT TOOLS AND APPLICATIONS. Our Embedix Software Development Kit, or SDK, is a package of proprietary software development tools designed to facilitate the design, development, error detection and correction, implementation and maintenance of embedded systems. Embedix SDK has been released as a beta version and is being tested by several of our key customers. We currently expect to begin commercial shipments of Embedix SDK in June 2000. We also offer our Embedix Linux customers our proprietary Embedix Browser, a compact, Linux-based graphical Web browser that provides a user interface for embedded products and systems that interact with the Internet. In addition, by incorporating third-party software applications from independent software vendors into our products, we can expand the functionality and features of products and systems that include our operating system. PROFESSIONAL ENGINEERING AND SUPPORT SERVICES. We offer our original equipment manufacturer customers and microprocessor companies a broad range of engineering, implementation, deployment and support services. Our engineers have significant experience with embedded systems, participate actively in the Linux community and contribute enhancements and additions to the Linux open source technology. In addition, we offer professional engineering, training and education services and technical 34 support. Because we leverage the expertise of the extensive open source community, we believe that our services enable our customers to reduce their cost to implement, maintain and support embedded systems. THE LINEO STRATEGY Our objective is to become the leading provider of embedded operating system software products and services. To achieve this objective, we are implementing the following strategies: ENHANCE OUR TECHNOLOGY LEADERSHIP AND MARKET AWARENESS. We intend to continue to introduce technology that is compatible with existing embedded operating system software and to develop solutions specific to selected vertical markets. To support this effort, we plan both to develop technologies internally and to acquire proprietary technologies or other companies. For example, we are currently developing an extension to our Embedix Linux that is designed to enable applications originally written to run on Microsoft's Windows CE operating system to be modified, or ported, to run on our Embedix Linux operating system. In addition, through acquisitions, we have acquired a number of other technologies such as hard real-time operating system technology, proprietary high-availability extensions to Linux and Linux technology for microcontrollers. We also intend to enhance our brand awareness and increase the demand for our products through targeted advertising and will continue our active involvement in, and support of, the open source community to further enhance our reputation as one of the leading providers of embedded Linux solutions. CONTINUE TO DEVELOP STRATEGIC RELATIONSHIPS WITH MICROPROCESSOR COMPANIES. We intend to expand our strategic relationships with microprocessor companies to establish our brand of Linux-based software and services with the customers of these companies. We plan to continue to develop close relationships with microprocessor companies through our research and development efforts and by educating the employees of these companies about our products so that they may promote our products and be able to provide more comprehensive solutions to their customers. Through these relationships, we intend to further enhance our understanding of microprocessor and embedded circuit board configurations and to continue to understand future technology developments. EXPAND STRATEGIC RELATIONSHIPS WITH ORIGINAL EQUIPMENT MANUFACTURERS. We intend to continue to develop, strengthen and expand our relationships with original equipment manufacturers of products and systems that require embedded operating systems. By establishing close relationships with these manufacturers, we are better able to understand their future product development plans. Through these collaborative efforts, original equipment manufacturers can help ensure that their future products will have embedded Linux operating system support and we are able to integrate their requirements into our future product plans. EXPAND SALES EFFORTS INTERNATIONALLY. We intend to continue to expand our sales efforts internationally by growing our internal sales force and through additional strategic acquisitions. We believe that as the proliferation of digital consumer devices and other electronic products and systems continues, significant international demand for our embedded operating system solutions will develop. We currently have a sales or marketing presence in Australia, Canada, France, Japan, Taiwan and the United Kingdom. CONTINUE TO EXPAND OUR OFFERINGS BY INCORPORATING PRODUCTS FROM INDEPENDENT SOFTWARE VENDORS AND DEVELOPING A LIBRARY OF EMBEDDED OPERATING SYSTEM SOLUTIONS. We will continue to enhance the value of our operating system solutions by incorporating additional software products of independent software vendors. As part of our independent software vendor program, software vendors may include their products within our embedded software development kit, allowing us to introduce our customers to the benefits of these products when they are used in the embedded environment with our operating system. Original equipment manufacturers may incorporate these third-party technologies into their products under licenses obtained through us, for which we receive royalties, or under licenses obtained directly 35 from the software vendors. In addition, our experience in providing professional support services to our customers enables us to maintain a library of common problems and their resolutions. We intend to continue to develop this library to be used in conjunction with our development tools and integrated in future products. PRODUCTS AND SERVICES We offer a wide range of embedded Linux technologies and services to enable our customers to develop, optimize and implement embedded products and systems. SOFTWARE PRODUCTS Our embedded Linux products, called Embedix, includes Embedix Linux, Embedix SDK and Embedix Browser. Embedix Linux Logo Embedix Linux is a powerful and reliable Linux operating system that is designed specifically for embedded products and systems. Embedix Linux is a combination of open source Linux and internally developed technologies. We have enhanced and extended open source Linux, traditionally designed for desktop/server implementation, with new technologies and advancements to enable developers and original equipment manufacturers to utilize Linux within highly customized embedded products and systems. We have developed a proprietary process for identifying and modifying Linux source code modules, which allows us to assemble and integrate a full-feature set of customizable components. By separating Linux into components, our customers can use those specific components that their unique embedded system products and systems require. We believe this decreases costs by allowing customers to build a wide range of embedded products and systems that use less memory and less storage. Embedix Linux not only provides the features currently offered by existing proprietary embedded operating systems, but it also leverages the numerous advantages of open source software development. We are able to combine the broad development and support resources of the Linux open source community with our own engineering expertise to develop enhancements across various platforms quickly and cost-effectively. Further, we test the components that we provide both individually and as an integrated whole to maintain the quality of our products. Embedix SDK Logo Embedix SDK is a package of proprietary software and open source development tools designed to help microprocessor companies and original equipment manufacturers accelerate the design, development, error detection and correction, implementation and maintenance of embedded systems. Embedix SDK has been released as a beta version and is being tested by several of our key customers. We currently expect to begin commercial shipment of Embedix SDK in June 2000. Embedix SDK provides developers with an assortment of tools designed to manage the complex tasks of building and configuring an embedded Linux operating system. It will allow system developers to construct customized versions of Embedix Linux for a range of microprocessors and add specialized functions and services such as Internet protocol routing and mobile computing. Further, Embedix SDK allows the customization process to be automated to reduce the possibility of defects and to enhance duplication efforts. 36 One of the key features of Embedix SDK is the "Target Wizard," a tool that provides information about available system options and the effect that each component and configuration will have on the resulting product or system. It also identifies and shows interdependencies among different components, enabling our customers to select those software components necessary to achieve the functions and capabilities of their unique embedded systems and products, thereby decreasing memory and storage requirements and reducing time to market. Through our independent software vendor program, we will include in Embedix SDK a variety of third-party Linux-based software applications and components. These third-party technologies enable our original equipment manufacturer customers to enhance their embedded systems with features such as voice command-and-control, embedded databases and network management tools. Original equipment manufacturers can incorporate these third-party technologies into their products under licenses obtained through us, for which we receive royalties, or under licenses obtained directly from the software vendors. We test and certify these independent software vendors' technologies for interoperability with Embedix, providing our customers with a single source of compatible embedded system operating systems, components and third-party software technologies. Embedix Browser Logo The Embedix Browser is a compact, Linux-based graphical Web browser that provides a user interface for embedded products and systems that interact with the Internet. The Embedix Browser can be easily customized and has low memory and storage requirements. Because it has low system resource requirements and is easily adapted to meet diverse customer needs, it is well suited for a number of products and systems, including handheld devices, set-top boxes, kiosks and point-of-sale terminals. Embedix PDA Logo We are currently developing Embedix Personal Digital Assistant, or PDA. Embedix PDA is being designed as an extension to our Embedix Linux to enable applications that were originally written to run on Microsoft's Windows CE operating system to be modified, or ported, to run on our Embedix Linux operating system. We currently intend to release a commercial version of Embedix PDA in the first calendar quarter of 2001. OTHER TECHNOLOGIES In addition to our embedded Linux technologies and products, we continue to sell our embedded disk operating system, called DR DOS. Although we no longer actively develop DR DOS, this technology is sufficient for some embedded system requirements, and we continue to sell this technology to original equipment manufacturers that request it or who extend existing DR DOS contracts with us. SERVICES We provide comprehensive professional services, or Embedix Services, to our embedded systems customers, including customized engineering, training and technical support services. As of May 15, 2000, we employed approximately 33 professional services personnel. Our professional services personnel have significant experience with embedded systems, participate actively in the open source community and contribute enhancements and additions to the Linux open source technology. We 37 believe that our services enable our customers to reduce their cost to implement, maintain and support their embedded systems. ENGINEERING. We offer custom engineering services to those embedded systems customers that require assistance. Alternatively, we may develop and license a complete custom embedded system solution at a customer's request. We typically offer these services on a per-project basis, although we also may offer these services on a time-and-expense basis. Each project is reviewed by our research and development, product marketing and sales groups to determine whether we should include the resulting custom technology development in our future product line. Our contracts for custom work generally provide that all intellectual property resulting from the work is either owned by us or is contributed to the open source community. EDUCATION. We recently began offering instructor-led training on our products to assist with design and implementation of embedded products and systems. We intend to also offer Web-based and computer-based training programs in the future. TECHNICAL SUPPORT. We provide technical support by e-mail, over the telephone and onsite at our customer locations worldwide. We are also implementing a database to capture our experience from prior projects. Our customers will have access to the database through our Web site. In addition, our products include comprehensive online documentation and support materials. A basic level of technical support is provided complimentary to our customers via the Web and e-mail, and fee-based support options are also available. TECHNOLOGY Our technology is based on a combination of open source software code and internally developed and third-party proprietary technology. Embedix Linux is designed to operate on various microprocessor platforms and is currently available for the Intel and Intel-compatible x86 and Motorola PowerPC platforms. We are developing customized versions of Embedded Linux for additional microprocessors including: - various ARM microprocessor cores; - Hitachi SuperH microprocessors; - various MIPS microprocessor designs; and - Motorola's ColdFire, DragonBall and MCORE microprocessors. Key features of Embedix Linux include industry-standard communication protocols for accessing the Internet as well as routing and multi-tasking capabilities. Another key feature of Embedix Linux is that it has execute-in-place capabilities from read-only memory, which conserves memory resources, thus lowering the cost of an embedded product or system. Embedix SDK consists of a combination of proprietary and open source software tools and utilities that allows an engineer to custom configure Embedded Linux to the specific requirements of an embedded product or system. It also allows developers to create and modify applications in a wide variety of computer languages, including C, C++, Java and other scripting languages, and to incorporate third-party applications. Key features of Embedix SDK include a complete Linux development platform, graphical configuration tools and integrated development environment, and other tools for writing software code and applications. Embedix Browser, our proprietary Internet browser, runs in conjunction with Embedix Linux. Embedix Browser is compatible with industry-standard Web-based programming protocols and Javascript support and features a customizable user interface and automatic software updates. It also includes television output software to support Internet set-top boxes and standard encryption 38 technologies to enable secure electronic commerce transactions. Original equipment manufacturers can also pre-configure Embedix Browser for specific service providers to provide their customers with quicker and easier Internet access. As a result of our recent acquisitions, we are currently integrating hard real-time capabilities into our Embedix product line. Hard real-time allows applications to schedule time-critical tasks and obtain guaranteed response times. Hard real-time capabilities are critical to many embedded systems markets, including markets for medical, avionics and industrial control systems. We are also integrating high-availability embedded Linux technologies into our Embedix product line for high-end hardware and software systems. High-availability solutions are critical to embedded systems featuring significantly limited down-time tolerance, including telecommunications, aerospace and financial services systems. STRATEGIC RELATIONSHIPS INDEPENDENT SOFTWARE VENDOR PROGRAM As part of our independent software vendor program, which we call Lineo Partner Connect, software vendors may include their products within our embedded software development kit, allowing us to introduce our customers to the benefits of these products when they are used in the embedded environment with our operating systems. Current participants in this program include Jabber, Inc., NewMonics Inc. and Solid Information Technology. Original equipment manufacturers may incorporate these third-party technologies into their products under licenses obtained through us, for which we receive royalties, or under licenses obtained directly from the software vendors. Through this program, we believe that we are able to increase the appeal of our products and services by acting as a single source of Linux-based applications and components. As a result, our customers may streamline the complexity of their licensing requirements and reduce the time-to-market for any specific solution. At the same time, under this program, the independent software vendors benefit by expanding their marketing channels to a range of original equipment manufacturers. MICROPROCESSOR COMPANIES We have entered into a variety of strategic relationships with microprocessor companies to establish our brand of Linux products and services to the customers of these companies. Through these relationships, we intend to further enhance our understanding of microprocessor embedded circuit board configurations and their future technology developments. Currently, we have relationships with Hitachi, MIPS Technologies, Inc., Motorola and Samsung. We intend to develop strategic relationships with additional microprocessor companies. CUSTOMERS Our primary customers for our Linux products and services are original equipment manufacturers. As of April 30, 2000, we had generated revenue from licenses of our Linux products and services to several original equipment manufacturers, such as Bast, CIS Technology, DaiShin, and MiTAC International. In the fiscal year ended October 31, 1999, our three largest customers accounted for 48% of our total revenue, with Sun Microsystems accounting for 23%, Brooktrout accounting for 13% and Symbol Technologies accounting for 12%. In the six months ended April 30, 2000, our seven largest customers accounted for 77% of our total revenue, with DaiShin accounting for 34%. SALES AND MARKETING We market our Linux products and services to original equipment manufacturers through our direct sales force. We have a sales or marketing presence both domestically and in Australia, Canada, 39 France, Japan, Taiwan and the United Kingdom. Key elements of our sales and marketing strategy include direct advertising, event marketing, active public relations, customer and strategic alliance partner programs, co-marketing programs and a comprehensive Web site. We are also currently developing indirect sales channels, including third-party distributors and systems integrators. We believe that these additional channels will further increase our brand awareness and promote the development of Linux-based software applications and solutions for embedded systems. We intend to use these channels to educate engineers on the benefits of our products. RESEARCH AND DEVELOPMENT As of May 15, 2000, we had 108 software engineers engaged in research and development. We have invested and will continue to invest in the development of innovative new product features and technologies in response to the evolving market for embedded Linux operating systems and input from original equipment manufacturer customers and microprocessor companies. Our engineers have significant experience with embedded systems, participate actively in the Linux community and contribute enhancements and additions to the Linux open source technology. We believe our contributions to the Linux community will facilitate the development of industry standards and encourage industry cooperation. We also analyze and incorporate the development and support efforts of the Linux open source community into our products on a continual basis. COMPETITION The market for embedded operating systems products and services is becoming increasingly competitive. We compete principally on the basis of the following: - product performance and functionality; - price; - quality of support and customer services; - breadth of embedded platform support; - availability of third-party software applications; - time-to-market; - relationships with original equipment manufacturers and microprocessor companies; - distribution penetration; and - technical and financial resources. Although we believe we compete favorably in each of these areas, failure to compete successfully in any of these areas against current or potential competitors could harm our business. We face competition from: - our current and potential customers' internal research and development departments that may seek to develop their own proprietary embedded operating systems; - established companies that have developed proprietary embedded operating systems, such as Mentor Graphics, Microsoft, Microware Systems, Palm Computing, QNX Software Systems, Sun Microsystems, Symbian and Wind River Systems; - companies that have developed, or may in the future develop, embedded Linux operating systems, such as Caldera Systems, Coollogic, Information Storage Devices, LynuxWorks, MontaVista Software, Red Hat, SuSE and TurboLinux; and 40 - companies that have developed Web browsers, such as Microsoft, Netscape and Spyglass. INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS Intellectual property is critical to our success. Although our Embedix platform is based on open source Linux, many aspects of our products are based on intellectual property that is proprietary to us. This proprietary technology includes software development tools and other development resources to configure and implement Embedix Linux. We have also developed a graphical development environment that facilitates the creation and customization of embedded Linux solutions, and we have a proprietary Linux-based browser specifically for embedded systems. We take steps to protect our intellectual property rights through copyright, trademark and trade secret laws and contractual confidentiality arrangements. At the same time, because we rely in part on open source intellectual property, we may find it necessary to defend the open source community from attempts by others to misappropriate, whether by copyright or otherwise, technology which belongs to the open source community. We generally enter into confidentiality or noncompete agreements with our employees, consultants and corporate partners and generally control access to and distribution of our technologies, documentation and other proprietary information. Despite our efforts to protect our proprietary rights from unauthorized use or disclosure, parties may attempt to disclose, obtain or use our processes or technologies. The steps we have taken may not prevent misappropriation of our processes or technologies, particularly in foreign countries where the laws or law enforcement may not protect our proprietary rights as fully as in the United States. We have licensed, and may license in the future, elements of our trademarks, trade dress and similar proprietary right to third parties. While we attempt to ensure that the quality of our brand is maintained by these third parties, they may take actions that could harm the value of our proprietary rights or reputation. EMPLOYEES As of May 15, 2000, we had 200 employees, excluding independent contractors and other temporary employees, including 119 employees in engineering, 43 employees in sales and marketing and 38 employees in general and administrative services. Of these employees, 128 were in the United States, 15 were in Australia, 14 were in Canada, 7 were in France, 25 were in Japan, 6 were in Taiwan and 5 were in the United Kingdom. In addition, from time to time, we employ temporary employees and consultants. None of our employees is represented by a labor union, and we consider our relations with our employees to be good. FACILITIES Our principal executive office is located in Lindon, Utah, where we sublease a total of 20,000 square feet under two separate leases, with one lease expiring in February 2002 and the other expiring in March 2001. We also lease office space in Brighton, United Kingdom; Brisbane, Australia; Herndon, Virginia; Nagano, Japan; Saint-Ouen, France; San Jose, California; Seattle, Washington; Taipei, Taiwan; Toronto, Ontario, Canada and Vancouver, British Columbia, Canada. We believe that our existing facilities are adequate for our current requirements and that additional space can be obtained on commercially reasonable terms to meet our future requirements. 41 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The following table sets forth certain information regarding our executive officers, directors and key employees as of May 15, 2000:
NAME OF EXECUTIVE OFFICER OR DIRECTOR AGE POSITION - ------------------------------------- -------- ------------------------------------------ Bryan W. Sparks........................... 38 Chairman of the Board, President and Chief Executive Officer Gregory C. Hill........................... 50 Senior Vice President, Chief Financial Officer and Treasurer Timothy R. Bird........................... 37 Senior Vice President, Chief Technology Officer Matthew R. Harris......................... 39 Senior Vice President, Business Development, Secretary and General Counsel Bradley J. Walters........................ 35 Senior Vice President, Sales Raymond J. Noorda......................... 75 Director Ralph J. Yarro III........................ 35 Director John R. Egan.............................. 42 Director William P. Barnett........................ 41 Director NAME OF KEY EMPLOYEE - ------------------------------------------ Kim D. Clark.............................. 41 Vice President, Engineering Lyle S. Ball.............................. 31 Vice President, Communications Nathan S. Hatch........................... 37 Vice President, Marketing Allan C. Smart............................ 40 Vice President, Professional Services Christy A. Omohundro...................... 40 Vice President, Human Resources and Integration
BRYAN W. SPARKS, has been our chairman of the board, president and chief executive officer since our incorporation in August 1998. Prior to that, Mr. Sparks was president and chief executive officer of Caldera, Inc., an operating systems company and predecessor of us and Caldera Systems, Inc., which he founded in January 1995. From 1986 to 1994, Mr. Sparks was employed at Novell, Inc., a network solutions company, holding a variety of engineering and management positions during his tenure there. Mr. Sparks received a bachelor's degree in computer science from Brigham Young University. He is also a member of the board of directors of Edgemail Technologies, Inc., a provider of high performance Web-based server technology. GREGORY C. HILL has been our senior vice president, chief financial officer and treasurer since January 2000. Prior to joining us, Mr. Hill was an independent financial consultant and, before that, the chief financial officer of Sensorium Software, Incorporated, a business intelligence software company, from December 1997 to June 1998. From July 1995 to May 1997, Mr. Hill served as the corporate treasurer of Quark, Inc., a developer of professional desktop publishing applications. From July 1993 to July 1995, Mr. Hill was vice president and treasurer of Tyco Toys, Inc., a publicly held toy and entertainment company. Mr. Hill received a bachelor's degree in humanities and science from the Massachusetts Institute of Technology and a master's degree in business administration from Harvard Business School. TIMOTHY R. BIRD has been our senior vice president, chief technology officer since May 1999. Prior to joining us, from July 1995 to September 1998, Mr. Bird was a senior developer at Caldera, Inc., where he worked on numerous open source Linux projects. From January 1988 to July 1995, Mr. Bird was a software engineer at Novell. Mr. Bird became a lead engineer at Novell in November 1991. 42 Mr. Bird is the co-author of "Special Edition: Using OpenLinux" by MacMillan Publishing. Mr. Bird received both his bachelor's and master's degrees in computer science from Brigham Young University. MATTHEW R. HARRIS has been our senior vice president, business development, secretary and general counsel since January 2000. Prior to joining us, from March 1997 to January 2000, Mr. Harris was a founding partner at Summit Law Group, PLLC, a Seattle-based law firm. From October 1992 to March 1997, Mr. Harris was an attorney at Heller Ehrman White and McAuliffe, a San Francisco-based law firm. Prior to that time, Mr. Harris was a law clerk to the Honorable Eugene Wright, United States Court of Appeals for the Ninth Circuit. From 1983 to 1988, Mr. Harris worked as a software development engineer. Mr. Harris received a bachelor's degree in business administration from the University of Washington and a juris doctorate from the University of Michigan Law School. BRADLEY J. WALTERS has been our senior vice president, sales since July 1999. Prior to joining us, Mr. Walters worked at Caldera, Inc. from November 1997 to July 1999 as a regional sales manager and then director of sales. From May 1996 to November 1997, Mr. Walters worked as a regional sales manager at Engineering Geometry Systems, a computer aided design and manufacturing software company. Prior to that, from February 1996 to May 1996, Mr. Walters was employed at TurboLinux Inc., formerly Pacific HiTech, Inc., a distributor of Linux software, where he was the director of marketing and sales. From October 1995 to February 1996, Mr. Walters served as an independent consultant for sales of retail software. Prior to that, from April 1994 to October 1995, Mr. Walters was employed with LearnFrame, Inc., formerly known as Pinnacle Multimedia Inc., an online employment training and education company, where he was director of sales and later vice president. Mr. Walters received an associate's degree from Ricks College. RAYMOND J. NOORDA has served as a member of our board of directors since our incorporation in August 1998. Mr. Noorda currently serves as chairman of the board of directors of MTI Technology Corporation, a data storage and management company, and The Canopy Group, Inc., a holding company that beneficially owns 44.4% of our outstanding common stock prior to this offering, and is a member of the board of directors of Caldera Systems. From 1983 to 1994, Mr. Noorda served as president, chief executive officer and chairman of the board of Novell. He received a bachelor's degree in electrical engineering from the University of Utah. RALPH J. YARRO III has served as a member of our board of directors since our incorporation in August 1998. Mr. Yarro has served as the president and chief executive officer of The Canopy Group since April 1995 and currently serves as chairman of the board of directors of Caldera Systems. Mr. Yarro also is a member of the board of directors of MTI Technology Corporation. Mr. Yarro received a bachelor's degree in political science from Brigham Young University. JOHN R. EGAN has served as a member of our board of directors since January 2000. He currently serves as a managing partner of Egan-Managed Capital, a venture capital firm that owns 6.1% of our outstanding common stock prior to this offering, a position he has held since February 1997. Mr. Egan is also a member of the board of directors of Caldera Systems, EMC Corporation, a provider of storage-related hardware, software and service products, and several private technology companies. From April 1983 to September 1998, Mr. Egan has served in various capacities at EMC Corporation, including responsibility for developing and managing EMC's sales force and most recently as an executive vice president. He received a bachelor's degree in computer science from Boston College. WILLIAM P. BARNETT has served as a member of our board of directors since March 2000. Mr. Barnett is currently an associate professor at the Stanford Graduate School of Business, a position he has held since July 1991. Prior to joining Stanford, from 1988 to 1991, Mr. Barnett was an assistant professor of management at the University of Wisconsin at Madison. He received his bachelor's degrees in economics and political science and his Ph.D. in business administration from the University of California, Berkeley. 43 KIM D. CLARK has been our vice president, engineering since March 2000. Prior to joining us, Mr. Clark worked at Novell, from September 1988 to March 2000, in a variety of positions, most recently as the director of engineering. While at Novell, Mr. Clark was also responsible for the engineering team developing the NetWare operating system. Mr. Clark received a bachelor's degree in electrical engineering from Utah State University. LYLE S. BALL has been our vice president, communications since our incorporation in August 1998. Prior to joining us, from November 1995 to April 1998, Mr. Ball was the director of communications at Caldera, Inc. From June 1993 to October 1995, Mr. Ball worked at Novell as a corporate communications manager. Mr. Ball received a bachelor's degree in business communications from Brigham Young University. NATHAN S. HATCH has been our vice president, marketing since March 2000. Prior to joining us, from June 1998 to March 2000 Mr. Hatch served as enterprise accounts marketing manager at Novell, Inc. From June 1996 to April 1998, Mr. Hatch served as director and then vice president of marketing at Caldera, Inc. From December 1995 to June 1996, Mr. Hatch was the director of marketing at Allen Communications, a multimedia software company, and from March 1988 to November 1995, Mr. Hatch was the marketing manager for UNIX products at WordPerfect, which was acquired by Novell. Mr. Hatch received a bachelor's degree in business management from the University of Phoenix. ALLAN C. SMART has been our vice president, professional services since March 2000, and prior to that was our director of business development since September 1999. Prior to joining us, from September 1998 to September 1999, Mr. Smart served as director, education services at Caldera Systems, Inc. From July 1995 to September 1998, Mr. Smart served as director, technical services at Caldera, Inc. Mr. Smart received a bachelor's degree in computer science from Utah State University and a master's degree in business administration from the Marriott School of Management at Brigham Young University. CHRISTY A. OMOHUNDRO has been our vice president, human resources and integration since April 2000. Prior to joining us, from April 1998 to April 2000, Ms. Omohundro was the director of regulatory policy at Puget Sound Energy, an electric and gas utility corporation. From April 1997 to April 1998, Ms. Omohundro was the vice president, client services at Bright Horizons, formerly known as CorporateFamily Solutions, a work/life consulting firm. Prior to that, Ms. Omohundro was employed by Puget Sound Energy as director of strategic planning from February 1997 to April 1997 and as director of rates from February 1995 to February 1997. Ms. Omohundro received her bachelor's degree in accounting and liberal arts from Spring Hill College and her master's degree in business administration from Vanderbilt University. BOARD OF DIRECTORS We currently have authorized five directors. Currently all directors hold office until the next annual meeting of stockholders or until their successors are duly elected, and will continue to do so following the completion of this offering. However, our certificate of incorporation will provide that as of the first annual meeting of stockholders after the completion of this offering, our board of directors will be divided into three classes, each with staggered three-year terms. As a result, only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Prior to completion of this offering, we intend to increase the size of our board to seven directors and appoint two additional independent directors. COMMITTEES Our board of directors currently has an audit committee and a compensation committee. The audit committee consists of Messrs. Barnett, Egan and Yarro, and Mr. Barnett currently serves as its chairman. The audit committee makes recommendations to our board of directors regarding the 44 selection of independent auditors, reviews the scope of audit and other services by our independent auditors, reviews the accounting principles and auditing practices and procedures to be used for our financial statements and reviews the results of our audits. The compensation committee consists of Messrs. Barnett and Egan. The compensation committee reviews and approves the compensation and benefits for our executive officers, grants stock options under our stock option plan and makes recommendations to our board of directors on compensation matters. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No interlocking relationship exists between any member of our board of directors or compensation committee and any member of the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. In January 2000, we entered into a stock purchase and sale agreement with Caldera Systems, Inc. to purchase 1,250,000 shares of Caldera Systems' common stock in exchange for 3,238,437 shares of our common stock. One of the members of our compensation committee, Mr. Egan, is a member of the board of directors of Caldera Systems. In February 2000, we sold 2,000,000 shares, out of a total of 2,500,000 shares, of Series A Class 2 preferred stock at a per share price of $1.50 to Egan-Managed Capital, L.P. for aggregate consideration of $3.0 million, and in March 2000, we sold 326,667 shares, out of a total of 4,833,331 shares, of Series B preferred stock at a per share price of $3.00 to Egan-Managed Capital for aggregate consideration of $980,000. Mr. Egan is a managing partner of Egan-Managed Capital, which holds 6.1% of our outstanding common stock prior to this offering. In connection with the sale of the preferred stock, Egan-Managed Capital, along with other investors, were granted registration rights, and we may therefore become obligated to effect a registration under the Securities Act of 1933 of shares of common stock held by these investors upon the conversion of the preferred stock. See "Description of Capital Stock" on page 53 for a more complete explanation of these registration rights. We have also granted to each of Mr. Barnett, one of the members of our compensation committee, and Egan-Managed Capital, on behalf of Mr. Egan, options to purchase up to 80,000 shares of common stock at exercise prices of $0.80 and $1.50 per share, respectively, under our stock option plan. COMPENSATION Our directors are reimbursed for expenses incurred in connection with attending board and committee meetings but are not otherwise compensated for their services as board members. 45 EXECUTIVE OFFICERS Our executive officers are elected by, and serve at the discretion of, our board of directors. There are no family relationships among our directors and officers. COMPENSATION The following table sets forth information concerning compensation for services rendered to us in all capacities during the fiscal year ended October 31, 1999 by our chief executive officer and all of our other executive officers who earned or received salary and bonus in fiscal 1999 in excess of $100,000.
ANNUAL LONG TERM ALL OTHER COMPENSATION COMPENSATION COMPENSATION ------------------- ------------ ---------------------- SECURITIES HEALTH LIFE AND UNDERLYING INSURANCE DISABILITY NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (#S) PREMIUMS PREMIUMS - --------------------------- -------- -------- ------------ --------- ---------- Bryan W. Sparks .......................... $121,218 $4,800 600,000 $6,674 $360 CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER Timothy R. Bird .......................... 101,863 4,000 55,000 6,322 308 SENIOR VICE PRESIDENT, CHIEF TECHNOLOGY OFFICER Bradley J. Walters ....................... 103,675 2,343 70,000 6,176 203 SENIOR VICE PRESIDENT, SALES
OPTION GRANTS IN FISCAL YEAR 1999 The following table sets forth certain information with respect to stock options granted to each of our named executive officers during the fiscal year ended October 31, 1999. All options granted to these executive officers in the last fiscal year were granted under our stock option plan. In connection with the rules of the Securities and Exchange Commission, also shown below is the potential realizable value over the term of the option, the period from the grant date to the expiration date, based on assumed rates of stock appreciation of 5% and 10%, compounded annually. These amounts are mandated by the Securities and Exchange Commission and do not represent our estimate of future stock price. Actual gains, if any, on stock option exercises will depend on the future performance of our common stock. In fiscal year 1999, we granted options to acquire up to an aggregate of 955,700 shares of our common stock to employees and directors.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATE OF PERCENT OF TOTAL STOCK PRICE APPRECIATION NUMBER OF OPTIONS GRANTED EXERCISE FOR OPTION TERM SECURITIES UNDERLYING TO EMPLOYEES PRICE EXPIRATION ------------------------- NAME OPTIONS GRANTED # IN FISCAL 1999 PER SHARE DATE 5% ($) 10% ($) - ---- --------------------- ---------------- --------- ---------- ---------- ------------ Bryan W. Sparks...... 600,000 62.8% $0.80 9/23/09 $776,576 $1,429,938 Timothy R. Bird...... 55,000 5.8 0.80 9/23/09 71,186 131,078 Bradley J. Walters... 70,000 7.3 0.80 9/23/09 90,601 166,826
AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END OPTION VALUES None of our named executive officers exercised any options in fiscal 1999. With respect to our named executive officers, the following table sets forth information concerning exercisable and unexercisable options held as of October 31, 1999. The "Value of Unexercised In-the-Money Options at 46 October 31, 1999" is based upon an assumed initial public offering price of $ per share minus the per share exercise price multiplied by the number of shares underlying the options.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT OCTOBER 31, 1999 OCTOBER 31, 1999 ($) ----------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ------------ -------------- ----------- ------------- Bryan W. Sparks................................ 600,000 -- -- Timothy R. Bird................................ 14,895 40,105 Bradley J. Walters............................. 18,958 51,042
EMPLOYEE BENEFIT PLANS STOCK OPTION PLAN Our board of directors adopted and our stockholders approved our stock option plan in June 1999. As of May 15, 2000, we had reserved a total of 5,000,000 shares of common stock for issuance under the stock option plan. The stock option plan provides for the granting to our employees, including officers and directors, of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986 and for the granting to employees, consultants and non-employee directors of nonstatutory stock options. If an optionee would have the right in any calendar year to exercise for the first time incentive stock options for shares having an aggregate fair market value, determined for each share as of the date the option to purchase the shares was granted, in excess of $100,000, any such excess options shall be treated as nonstatutory stock options. Unless terminated earlier by our board of directors, the plan will terminate in June 2009. As of May 15, 2000, options to purchase 3,052,722 shares of common stock were outstanding under this plan and 669,905 shares had been issued upon exercise of options. The stock option plan may be administered by our board of directors or by a committee appointed by our board and is currently administered by our compensation committee. The plan administrator determines the terms of each option granted under the stock option plan, including the number of shares subject to an option, exercise price, vesting schedule and duration. The exercise price of all incentive stock options granted under the stock option plan cannot be less than the fair market value of the common stock on the date of grant and, in the case of incentive stock options granted to holders of more than 10% of our voting power, not less than 110% of the fair market value. Generally, options granted under the stock option plan have a term of ten years, vest over a four-year period and are nontransferable. Payment of the exercise price of options may be made in cash or other consideration as determined by the plan administrator. Our board of directors has the authority to amend or terminate the stock option plan as long as such action does not adversely affect any outstanding options and provided that stockholder approval for any amendments to the stock option plan shall be obtained to the extent required by applicable law. 401(k) PLAN In May 2000 our board of directors ratified the adoption of a tax-qualified employee savings and retirement plan for eligible U.S. employees, which is currently sponsored by The Canopy Group, one of our principal stockholders. Eligible employees may elect to defer a percentage of their eligible compensation in the 401(k) plan, subject to the statutorily prescribed annual limit. We make matching contributions on behalf of all participants in the 401(k) plan in the amount equal to one-half of the first 6% of an employee's contributions. Matching contributions are subject to a vesting schedule; all other contributions are at all times fully vested. We intend the 401(k) plan to qualify under Sections 401(k) and 501 of the Internal Revenue Code so that contributions by employees or us to the 47 401(k) plan, and income earned, if any, on plan contributions, are not taxable to employees until withdrawn from the 401(k) plan, and so that we will be able to deduct our contributions when made. The trustee of the 401(k) plan, at the direction of each participant, invests the assets of the 401(k) plan in any of a number of investment options. EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS In May 2000, we entered into an employment agreement with Mr. Sparks for a term of 24 months, subject to renewal thereafter. Under his employment agreement, Mr. Sparks is entitled to receive an annual salary of $150,000, as adjusted from time to time, and is eligible to receive bonuses as determined by us. If Mr. Sparks is terminated without cause, as defined in his employment agreement, he is entitled to receive his salary for a period of 12 months. Mr. Sparks has agreed not to compete, directly or indirectly, with us during his employment and for a period of 12 months thereafter. We currently do not have any employment agreements with any of our other executive officers. Our stock option plan provides that in the event a third party acquires us through the purchase of all or substantially all of our assets, a merger or other business combination, unless otherwise provided in applicable stock option agreements, the unexercised portion of outstanding options will vest and become immediately exercisable unless the options are assumed by the third party or are replaced with comparable options. DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY Our certificate of incorporation limits the liability of directors and officers to the fullest extent currently permitted by Delaware law or as it may be amended in the future. Consequently, subject to Delaware law, no director will be personally liable to us or our stockholders for monetary damages resulting from his conduct as our director, except liability for: - acts or omissions involving intentional misconduct or knowing violations of law; - unlawful distributions; or - transactions from which the director personally receives a benefit in money, property or services to which the director is not legally entitled. Our certificate of incorporation also provides that we shall indemnify any individual made a party to a proceeding because that individual is or was one of our directors or officers and shall advance or reimburse reasonable expenses incurred by such individual in advance of the final disposition of the proceeding to the fullest extent permitted by applicable law. Any repeal of or modification to our certificate of incorporation may not adversely affect any right of any of our directors who is or was a director at the time of such repeal or modification. We intend to enter into indemnification agreements with each of our officers and directors. In addition, our bylaws provide that we shall indemnify our directors and officers and may indemnify our employees and agents to the fullest extent permitted by law. Finally, we intend to purchase and maintain a liability insurance policy, pursuant to which our directors and officers will be indemnified against liability they may incur for serving in their capacities as our directors and officers. We believe that the indemnification and limitation of liability provisions in our certificate of incorporation, bylaws, indemnification agreements and the liability insurance policy will facilitate our ability to continue to attract and retain qualified individuals to serve as our directors and officers. To the extent the provisions of our certificate of incorporation, bylaws or indemnification agreements provide for indemnification of directors for liabilities arising under the Securities Act, those provisions are, in the opinion of the Securities and Exchange Commission, against public policy as expressed in the Securities Act and are therefore unenforceable. 48 RELATED-PARTY TRANSACTIONS TECHNOLOGY In September 1998, we entered into a DR DOS License Agreement with Caldera, Inc., a company founded by Mr. Sparks, our president, chief executive officer and chairman of the board. In December 1999, we entered into a Technology Assignment Agreement with The Canopy Group with respect to software technology. SALES OF COMMON STOCK In fiscal 1998 and 1999, we borrowed an aggregate of $2,290,000 from The Canopy Group, of which approximately $337,000 was repaid in January 2000 and the balance of approximately $1,953,000 was repaid in March 2000. Two of our directors, Messrs. Noorda and Yarro, are members of The Canopy Group, which holds approximately 44.4% of our outstanding common stock prior to completion of this offering. In December 1999, we sold 750,000 shares of common stock at a per share price of $0.80 to each of MRH Investments, LLC and Dry Canyon Holdings, LLC. One of our executive officers, Mr. Harris, is a member of MRH Investments, and Mr. Sparks is a member of Dry Canyon Holdings. In January 2000, we entered into a stock purchase and sale agreement with Caldera Systems to purchase 1,250,000 shares of Caldera Systems' common stock in exchange for 3,238,437 shares of our common stock. Three of our directors, Messrs. Egan, Noorda and Yarro, are also members of the board of directors of Caldera Systems. Caldera Systems holds approximately 13.1% of our outstanding common stock prior to completion of this offering. SALES OF PREFERRED STOCK In February 2000, we sold an aggregate of 7,500,000 shares of Series A preferred stock at a per share price of $1.50 to four investors. Three of the purchasers of Series A preferred stock included: - The Canopy Group, which exchanged 5,000,000 shares of our common stock for 5,000,000 shares of Series A Class 1 preferred stock pursuant to a recapitalization agreement between us and The Canopy Group. - Dry Canyon Holdings, which purchased 166,667 shares of Series A Class 2 preferred stock for total consideration of $250,000. - Egan-Managed Capital, L.P., which purchased 2,000,000 shares of Series A Class 2 preferred stock for total consideration of $3,000,000. One of our directors, Mr. Egan, is a managing partner of Egan-Managed Capital, which holds 6.1% of our outstanding common stock prior to this offering. In March 2000, we sold 326,667 shares, out of a total of 4,833,331 shares, of Series B preferred stock at a per share price of $3.00 to Egan-Managed Capital. In April 2000, we sold 83,333 shares, out of a total of 3,000,000 shares, of Series C preferred stock at a per share price of $6.00 to Angel Partners. One of our directors, Mr. Yarro, is president, chairman and a trustee of Angel Partners. In connection with the sale of the preferred stock, the investors, other than Dry Canyon Holdings, were granted registration rights, and we may therefore become obligated to effect a registration under the Securities Act of 1933 of shares of common stock held by these investors upon the conversion of the preferred stock. See "Description of Capital Stock" on page 53 for a more complete description of these registration rights. 49 STOCK OPTIONS We granted options to purchase shares of common stock to the following executive officers and directors on the date, for the number of shares and with an exercise price indicated opposite each person's name:
NUMBER OF SHARES NAME GRANT DATE UNDERLYING OPTION EXERCISE PRICE - ---- ---------- ----------------- -------------- Bryan W. Sparks...................................... 09/24/99 600,000 $0.80 04/25/00 160,000 $3.00 Gregory C. Hill...................................... 12/30/99 200,000 $0.80 Timothy R. Bird...................................... 09/24/99 55,000 $0.80 Matthew R. Harris.................................... 12/30/99 150,000 $0.80 Bradley J. Walters................................... 09/24/99 70,000 $0.80 Ralph J. Yarro III................................... 09/24/99 60,000 $0.80 02/29/00 20,000 $1.50 Egan-Managed Capital, L.P.*.......................... 02/29/00 80,000 $1.50 William P. Barnett................................... 02/29/00 80,000 $0.80
- ------------------------ * On behalf of one of our directors, Mr. Egan. OTHER MATTERS Our 401(k) plan is currently sponsored by The Canopy Group. The Canopy Group is a venture capital company that invests primarily in start-up technology companies that encourage the adoption, deployment and promotion of Linux. The Canopy Group currently holds equity interests in companies in fields including data storage and protection, Linux operating systems, data satellites, universal voice messaging and electronic commerce. We have entered into transactions with a number of these companies and the Canopy Group including with respect to product sales and purchases, joint insurance coverage and rent. See Note 9 of Notes to our Consolidated Financial Statements. 50 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of our common stock as of May 15, 2000, and as adjusted to reflect the sale of the common stock offered hereby, by: - each stockholder known by us to own beneficially more than 5% of our outstanding common stock; - each of our directors; - each of our named executive officers; and - all current executive officers and directors as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. For purposes of calculating the number of shares beneficially owned by a stockholder and the percentage ownership of that stockholder, shares of common stock subject to options that are currently exercisable or exercisable within 60 days of May 15, 2000 by that stockholder are deemed outstanding. These options are listed below under the heading "Number of Shares Underlying Options" and are not treated as outstanding for the purpose of computing the percentage ownership of any other stockholder. Percentage ownership is based 38,250,714 shares of common stock outstanding on May 15, 2000 and shares outstanding upon completion of this offering. Unless otherwise noted below, the address for each stockholder below is: c/o Lineo, Inc., 390 South 400 West Lindon, Utah 84042. Unless otherwise noted, we believe that each of the stockholders has sole investment and voting power with respect to the common stock indicated, except to the extent shared by spouses under applicable law.
PERCENTAGE OF NUMBER OF SHARES OUTSTANDING SHARES ------------------- NUMBER OF UNDERLYING BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OPTIONS OFFERING OFFERING - ------------------------------------ ---------- ---------- -------- -------- Ralph J. Yarro III(1)................................. 17,843,886 60,000 46.7% % Raymond J. Noorda(2).................................. 17,010,585 -- 44.4 The Canopy Group, Inc.(3) ............................ 17,010,585 -- 44.4 240 West Center Street Orem, UT 84057 Caldera Systems, Inc.(4) ............................. 5,000,000 -- 13.1 240 West Center Street Orem, UT 84057 Dry Canyon Holdings, LLC.............................. 3,147,441 -- 8.2 Bryan W. Sparks(5).................................... 3,147,441 -- 8.2 Egan-Managed Capital, L.P. ........................... 2,326,667 -- 6.1 c/o Michael H. Shanahan 30 Federal Street Boston, MA 02110 John R. Egan(6)....................................... 2,326,667 -- 6.1 Bradley J. Walters.................................... 23,532 8,750 * Timothy R. Bird....................................... 19,479 5,729 * William P. Barnett.................................... -- -- -- All executive officers and directors as a group (9 persons)(7)...................................... 23,361,005 74,479 61.1
- ------------------------ * Less than 1% 51 (1) Includes 12,010,585 shares of common stock held by The Canopy Group, of which Mr. Yarro is the president and chief executive officer, 5,000,000 shares of common stock held by Caldera Systems, of which Mr. Yarro is chairman of the board of directors, and 83,333 shares of common stock held by Angel Partners, of which Mr. Yarro is president, chairman and a trustee. Mr. Yarro disclaims beneficial ownership of the shares owned by The Canopy Group, Caldera Systems and Angel Partners. (2) Includes 12,010,585 shares of common stock held by The Canopy Group, of which Mr. Noorda is chairman and a member of the board of directors, and 5,000,000 shares of common stock held by Caldera Systems, of which Mr. Noorda is a member of the board of directors. Mr. Noorda disclaims beneficial ownership of the shares owned by The Canopy Group and Caldera Systems, except to the extent of his pecuniary interest therein. (3) Includes 5,000,000 shares of common stock held by Caldera Systems, of which The Canopy Group is a majority stockholder. (4) Includes 1,761,563 shares of common stock acquired from The Canopy Group in May 2000. (5) Includes 3,147,441 shares of common stock held by Dry Canyon Holdings, LLC, of which Mr. Sparks is a member. (6) Includes 2,326,667 shares of common stock held by Egan-Managed Capital, of which Mr. Egan is a managing partner. Mr. Egan disclaims beneficial ownership of the shares owned by Egan-Managed Capital, except to the extent of his pecuniary interest therein. (7) Includes 750,000 shares of common stock held by MRH Investments, LLC, of which Matthew R. Harris is a member. See also footnotes 1, 2, 5 and 6 above. 52 DESCRIPTION OF CAPITAL STOCK GENERAL Upon completion of this offering, we will be authorized to issue up to 100,000,000 shares of common stock, $0.001 par value, and 30,000,000 shares of preferred stock, $0.001 par value. The following summary of certain provisions of our common stock and preferred stock is not complete and may not contain all the information you should consider before investing in the common stock. This description is subject to and qualified in its entirety by provisions of our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus is a part, and by provisions of applicable Delaware law. COMMON STOCK As of May 15, 2000, assuming conversion of all outstanding shares of preferred stock, there were 38,250,714 shares of common stock outstanding that were held of record by 176 stockholders. After giving effect to the sale of common stock offered in this offering, there will be shares of common stock outstanding, assuming no exercise of outstanding stock options. As of May 15, 2000, there were outstanding options to purchase a total of 3,052,722 shares of common stock. The holders of common stock are entitled to one vote per share on all matters to be voted on by the stockholders. Subject to preferences that may be granted to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably only those dividends our board of directors declares out of funds legally available for the payment of dividends as well as any other distributions to the stockholders. If we are liquidated, dissolved or wound-up, the holders of common stock are entitled to share pro rata all of our assets remaining after payment of our liabilities and liquidation preferences of any then-outstanding shares of preferred stock. Holders of common stock have no preemptive rights or rights to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and non-assessable, and the shares of common stock to be issued in this offering will be fully paid and non-assessable. PREFERRED STOCK Upon completion of this offering, all outstanding shares of preferred stock will be converted into 16,763,813 shares of common stock. Thereafter, pursuant to our certificate of incorporation, our board of directors will have the authority, without further action by the stockholders, to issue up to 30,000,000 shares of preferred stock in one or more series and to fix the relative designations, powers, preferences and privileges of the preferred stock, any or all of which may be greater than the rights of the common stock. Our board of directors, without stockholder approval, can issue preferred stock with voting, conversion or other rights that could adversely affect the voting power and other rights of the holders of common stock. Preferred stock could thus be issued quickly with terms that could delay or prevent a change in control of us or make removal of our management more difficult. Additionally, the issuance of preferred stock may decrease the market price of the common stock and may adversely affect the voting and other rights of the holders of common stock. We have no present plans to issue any preferred stock. 53 REGISTRATION RIGHTS After this offering, the holders of 15,166,664 shares of common stock will be entitled to rights with respect to the registration of those shares under the Securities Act pursuant to an investor rights agreement among those holders and us dated February 17, 2000, as amended. Under the terms of this agreement, if we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, the holders of these shares are entitled to notice of the registration and to include their shares of common stock in the registration at our expense. Additionally, the holders of these shares are entitled to demand registration rights pursuant to which they may require us to file a registration statement under the Securities Act at our expense with respect to their shares of common stock. Further, the holders of these shares may require us to file additional registration statements on Form S-3 at our expense. All of these registration rights are subject to the right of the underwriters of an offering to limit the number of shares included in such registration. These registration rights terminate when the holder can transfer his or her registrable shares pursuant to Rule 144. Holders of these registration rights have entered into lock-up agreements and waived their registration rights until 180 days following the closing of this offering. ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW Our board of directors, without stockholder approval, has the authority under our certificate of incorporation to issue preferred stock with rights superior to the rights of the holders of common stock. As a result, preferred stock could be issued quickly and easily, could adversely affect the rights of holders of common stock and could be issued with terms calculated to delay or prevent a change in control of us or make removal of our management more difficult. In addition, as of the first annual meeting of stockholders following the closing of this offering, our board of directors will be divided into three classes. The directors in each class will serve for three-year terms, one class being elected each year by our stockholders, and directors can only be removed for cause. This system of electing and removing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of our company because it generally makes it more difficult for stockholders to replace a majority of the directors. Upon completion of this offering, our certificate of incorporation will also permit the stockholders to adopt, amend or repeal our bylaws only upon the affirmative vote of the holders of at least two-thirds of the outstanding shares of voting stock entitled to vote at an election of directors. In addition, directors will be removable for cause only by stockholders holding a majority of the then outstanding shares of stock entitled to vote. Vacancies on the board of directors resulting from death, resignation, removal or other reason shall be filled by a majority of the directors then in office, even if less than a quorum. Upon completion of this offering, our bylaws will require that all stockholder actions must be effected at a duly called annual or special meeting and not by a consent in writing. Our bylaws will not permit stockholders to call a special meeting. In addition, our bylaws will establish an advance notice procedure for matters to be brought before an annual or special meeting of our stockholders, including the election of directors. Business permitted to be conducted at any annual meeting or special meeting of stockholders will be limited to business properly brought before the meeting. Our bylaws will also provide that we will indemnify officers and directors against losses that they may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures. These provisions may have the effect of preventing changes in our management. In addition, section 203 of the Delaware General Corporation Law prohibits certain "business combination" transactions between a Delaware corporation and any "interested stockholder" owning 54 15% or more of the corporation's outstanding voting stock for a period of three years after the date on which such stockholder became an interested stockholder, unless: - the board of directors approves, prior to such date, either the proposed business combination or the proposed acquisition of stock which resulted in the stockholder becoming an interested stockholder; - upon consummation of the transaction in which the stockholder becomes an interested stockholder, the interested stockholder owned at least 85% of those shares of the voting stock of the corporation which are not held by the directors, officers or certain employee stock plans; or - on or subsequent to the date on which such stockholder became an interested stockholder, the business combination with the interested stockholder is approved by the board of directors and also approved at a stockholders' meeting by the affirmative vote of the holders of at least two-thirds of the outstanding shares of the corporation's voting stock other than shares held by the interested stockholder. Under Delaware law, a "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder. Section 203 does not apply, however, to those stockholders who own 15% or more of our voting stock prior to this offering. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services, L.L.C. The transfer agent's address is 520 Pike Street, Suite 1220, Seattle, Washington 98101, and its telephone number is (206) 292-3795. NATIONAL MARKET LISTING We have applied to list our common stock on The Nasdaq Stock Market's National Market under the symbol "LNEO." 55 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, we will have shares of common stock outstanding, assuming no exercise of options after May 15, 2000. Of these shares, the shares sold in this offering will be freely tradable in the public market without restriction under the Securities Act, unless such shares are held by our "affiliates," as that term is defined in Rule 144 under the Securities Act. The remaining 38,250,714 shares of common stock that will be outstanding after this offering will be restricted shares because they were sold in private transactions in reliance on exemptions from registration under the Securities Act. The following table shows the timing of when shares outstanding on May 15, 2000 first become eligible for resale in the public market:
NUMBER OF SHARES COMMENT --------------------- --------------------------------- - - upon effectiveness of this prospectus..................... - Freely tradable shares sold in this offering - - 90 days after the date of this prospectus..................... 669,905 - Shares eligible for sale under Rules 144 and 701 and not previously registered on Form S-8 or locked up - - 181 days after the date of this prospectus..................... 18,000,000 - Freely tradable upon expiration of lock-up agreements, subject to the provisions of Rule 144 - - at various times thereafter upon expiration of one-year holding periods................ 19,580,809 - Freely tradable, subject to the provisions of Rule 144
S-8 REGISTRATION STATEMENTS As of May 15, 2000, there were a total of 3,052,722 shares of common stock subject to outstanding options under our stock option plan. Following effectiveness of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register certain of the shares of common stock issued or reserved for future issuance under our stock option plan. After the effective date of the registration statement on Form S-8, shares purchased upon exercise of options granted pursuant to our stock option plan generally would be available for resale in the public market without restriction. RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned restricted shares for at least one year would be entitled to sell in any three-month period up to the greater of: - 1% of the then-outstanding shares of common stock, or approximately shares immediately after this offering; and - the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. 56 Sales under Rule 144 are also subject to certain manner of sale and notice requirements and to the availability of current public information about us. RULE 701 Any of our employees, directors, officers, consultants or advisors who purchased shares from us in connection with a written stock or option plan before the effective date of this offering is entitled to rely on the resale provisions of Rule 701, subject to the lock-up agreements described above. In general, Rule 701 permits non-affiliates to sell their Rule 701 shares 90 days after the effectiveness of a registration statement relating to a company's initial public offering without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with the holding period of Rule 144. RULE 144(k) Under Rule 144(k), a person who has not been one of our affiliates during the preceding 90 days and who has beneficially owned the restricted shares for at least two years is entitled to sell them without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. LOCK-UP AGREEMENTS Pursuant to certain "lock-up" agreements, our executive officers, directors and certain of our other stockholders have agreed not to offer, sell, contract to sell, announce an intention to sell, pledge or otherwise dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of common stock or securities convertible into or exchangeable or exercisable for any common stock without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus. 57 UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement dated , 2000, we have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, Lehman Brothers Inc., Dain Rauscher Incorporated and Wit SoundView Corporation are acting as representatives, the following respective numbers of shares of common stock:
NUMBER UNDERWRITER OF SHARES - ----------- --------- Credit Suisse First Boston Corporation...................... Lehman Brothers Inc......................................... Dain Rauscher Incorporated.................................. Wit SoundView Corporation................................... --------- Total................................................... =========
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering of common stock may be terminated. We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to additional shares from us at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the public offering price and concession and discount to broker/dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we will pay.
PER SHARE TOTAL ------------------------------- ------------------------------- WITHOUT WITH WITHOUT WITH OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT -------------- -------------- -------------- -------------- Underwriting discounts and commissions paid by us................ $ $ $ $ Expenses payable by us.................. $ $ $ $
The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares of common stock being offered. We have agreed not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of common stock, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus. 58 Our officers, directors and certain of our other stockholders have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction which would have the same effect, or enter into swap, hedge or other arrangement that transfers, in whole or part, any of the economic consequences of ownership of our common stock, whether any such aforementioned transaction is to be settled by delivery of our common stock or such other securities, in cash or otherwise, or publicly disclose the intention to make any such offer, sale, pledge or disposition, or to enter into any such transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus. The underwriters have reserved for sale, at the initial public offering price, up to shares of common stock for employees, directors and certain other person associated with us, who have expressed an interest in purchasing common stock in the offering. The number of shares available for sale to the general public in this offering will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares. We have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments which the underwriters may be required to make in that respect. We have applied to list our common stock on The Nasdaq Stock Market's National Market under the symbol "LNEO." Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiation between us and the underwriters and will not necessarily reflect the market price of the common stock following the offering. The principal factors that will be considered in determining the public offering price will include: - the information in this prospectus and otherwise available to the underwriters; - market conditions for initial public offerings; - the history and the prospects for the industry in which we will compete; - the ability of our management; - the prospects for our future earnings; - the present state of our development and our current financial condition; - the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies; and - the general condition of the securities markets at the time of this offering. We can offer no assurances that the initial public offering price will correspond to the price at which the common stock will trade in the public market subsequent to the offering or that an active trading market for the common stock will develop and continue after the offering. The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934. - Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. - Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. 59 - Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. - Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than it would otherwise be in the absence of these transactions. These transactions may be effected on The Nasdaq Stock Market's National Market or otherwise and, if commenced, may be discontinued at any time. A prospectus in electronic format will be made available on the Web sites maintained by one or more of the underwriters participating in this offering. The representatives may agree to allocate a number of shares to the underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters that will make Internet distributions on the same basis as other allocations. Wit Capital Corporation is an online broker/dealer that has received an allocation of shares of common stock through its affiliate Wit SoundView Corporation. In April 2000, DRW Venture Partners L.P., an affiliate of Dain Rauscher Wessels, one of the representatives, purchased 125,000 shares of our Series C preferred stock at a purchase price of $6.00 per share for a total purchase price of $750,000. NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are effected. Accordingly, any resale of the common stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. REPRESENTATIONS OF PURCHASERS Each purchaser of common stock in Canada who receives a purchase confirmation will be deemed to represent to us and the dealer from whom such purchase confirmation is received that (i) such purchaser is entitled under applicable provincial securities laws to purchase such common stock without the benefit of a prospectus qualified under such securities laws, (ii) where required by law, that such purchaser is purchasing as principal and not as agent, and (iii) such purchaser has reviewed the text above under "Resale Restrictions." RIGHTS OF ACTION (ONTARIO PURCHASERS) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. 60 ENFORCEMENT OF LEGAL RIGHTS All of the issuer's directors and officers as well as the experts named may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of common stock to whom the SECURITIES ACT (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by such purchaser pursuant to this offering. Such report must be in the form attached to British Columbia Securities Commission Blanket Order BOR # 95/17, a copy of which may be obtained from us. Only one such report must be filed in respect of common stock acquired on the same date and under the same prospectus exemption. TAXATION AND ELIGIBILITY FOR INVESTMENT Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and with respect to the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation. LEGAL MATTERS The validity of the common stock in this offering will be passed upon for the company by Summit Law Group, PLLC, Seattle, Washington. Certain legal matters will be passed upon for the underwriters by Stoel Rives LLP, Seattle, Washington. As of the date of this prospectus, Summit Law Group beneficially owns 80,000 shares of our common stock, and certain members of Summit Law Group are affiliated with both Rainier Investors, LLC, which beneficially holds 86,666 shares of our common stock, and MRH Investments, LLC, which beneficially holds 750,000 shares of our common stock. EXPERTS The financial statements and schedules included in this prospectus and elsewhere in the registration statement, to the extent and for the periods indicated in their reports, have been audited by Arthur Andersen and BEFEC - Price Waterhouse, independent public accountants, and are included herein in reliance upon the authority of said firms as experts in giving said reports. WHERE TO FIND ADDITIONAL DOCUMENTS We have filed with the SEC a registration statement on Form S-1. This prospectus, which forms a part of the registration statement, does not contain all the information included in the registration statement. Certain information is omitted and you should refer to the registration statement and its exhibits. With respect to references made in this prospectus to any of our contracts or other documents, such references are not necessarily complete and you should refer to the exhibits attached to the registration statement for copies of the actual contract or document. You may read and copy the registration statement, including exhibits and schedules filed with it, at the SEC's public reference facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the SEC's public reference facilities by calling the SEC at 61 1-800-SEC-0330. The SEC maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as us, that file electronically with the SEC. Upon completion of this offering, we will become subject to the information and periodic reporting requirements under the Exchange Act and, in accordance with this law, will file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information will be available for inspection and copying at the SEC's public reference facilities and the Web site of the SEC referred to above. 62 INDEX TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Unaudited Pro Forma Condensed Consolidated Balance Sheet as of April 30, 2000......................................... P-3 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended October 31, 1999............ P-4 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the six months ended April 30, 2000........ P-5 Notes to Pro Forma Condensed Consolidated Financial Statements................................................ P-6
P-1 LINEO, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma condensed consolidated financial statements are based on the historical consolidated financial statements of Lineo, Inc. included elsewhere in this prospectus adjusted to give effect to the acquisition of Zentropic Computing, LLC ("Zentropic") completed by the Company on April 3, 2000 and the acquisitions of United System Engineers ("USE"), Fireplug Computers Inc. ("Fireplug"), Inup S.A. ("Inup"), Moreton Bay Ventures Pty Ltd ("Moreton Bay") and RT-Control, Inc. ("RT-Control"), completed subsequent to April 30, 2000. The accompanying unaudited pro forma condensed consolidated financial statements should be read in conjunction with the audited financial statements, including the notes thereto, of these entities included elsewhere in this prospectus. The unaudited pro forma condensed consolidated financial statements have been prepared using the purchase method of accounting for the acquisitions. The unaudited pro forma condensed consolidated balance sheet as of April 30, 2000 reflects the effect of the Company's acquisition of USE, Fireplug, Inup, Moreton Bay and RT-Control as if they had occurred on April 30, 2000. The unaudited pro forma condensed consolidated statements of operations for the year ended October 31, 1999 and the six months ended April 30, 2000 reflect the effect of all of the acquisitions as if they had occurred on November 1, 1998. The pro forma adjustments are based on preliminary estimates, available information and certain assumptions that management believes are reasonable. The unaudited pro forma condensed consolidated financial statements included in this prospectus are for illustrative purposes only. Such information does not purport to represent what the Company's financial position or results of operations actually would have been had the acquisitions in fact occurred when assumed, nor is it indicative of actual or future operating results or financial position that may occur. P-2 LINEO, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 2000
HISTORICAL ------------------------------------------------------------------------------- LINEO USE FIREPLUG INUP MORETON BAY RT-CONTROL ------------ ----------- ---------- ---------- ----------- ---------- APRIL 30, MARCH 31, MARCH 31, MARCH 31, APRIL 30, MARCH 31, PRO FORMA 2000 2000 2000 2000 2000 2000 ADJUSTMENTS ------------ ----------- ---------- ---------- ----------- ---------- ----------- ASSETS Current assets: Cash....................... $ 30,464,362 $ 307,000 $ 537 $ 519,815 $214,848 $ 12,229 $(1,164,179)(a) Accounts receivable, net... 690,631 113,000 25,189 95,259 8,603 331 -- Marketable securities...... -- 499,000 -- -- 271,446 -- -- Other receivables.......... 1,531,236 -- -- -- 48,204 12,905 -- Prepaid expenses and other.................... 173,960 35,000 -- 5,176 58,613 54,609 -- ------------ ----------- --------- --------- -------- --------- ----------- Total current assets..... 32,860,189 954,000 25,726 620,250 601,714 80,074 (1,164,179) ------------ ----------- --------- --------- -------- --------- ----------- Property and equipment, net...................... 379,999 473,000 25,636 155,877 7,162 49,639 -- Goodwill and other intangibles, net......... 5,804,109 -- -- -- -- -- 19,071,626 (a) Other assets............... 2,157,885 19,000 -- -- -- -- (100,000)(b) ------------ ----------- --------- --------- -------- --------- ----------- Total assets............. $ 41,202,182 $ 1,446,000 $ 51,362 $ 776,127 $608,876 $ 129,713 $17,807,447 ============ =========== ========= ========= ======== ========= =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Notes payable and current maturities of long-term debt..................... $ -- $ 1,107,000 $ -- $ -- $ -- $ 1,821 $ -- Accounts payable........... 515,151 -- 27,051 103,681 80,787 21,237 -- Accrued liabilities........ 599,610 120,000 32,157 35,342 49,334 53,506 239,132 (a) Deferred revenue........... 303,953 18,000 -- -- 20,682 605 -- Related party payables..... 157,755 -- 62,476 -- -- 121,942 (100,000)(b) ------------ ----------- --------- --------- -------- --------- ----------- Total current liabilities............ 1,576,469 1,245,000 121,684 139,023 150,803 199,111 139,132 ------------ ----------- --------- --------- -------- --------- ----------- Deferred income tax liability.................. 115,059 -- -- -- -- -- -- ------------ ----------- --------- --------- -------- --------- ----------- Long-term debt, net of current maturities......... -- 814,000 -- -- -- 7,286 -- ------------ ----------- --------- --------- -------- --------- ----------- Stockholders' equity (deficit): Convertible preferred stock.................... 15,250 -- -- -- -- -- 1,514 (a) Common stock............... 20,149 781,000 134,074 188,363 -- 181,439 (1,283,543)(a) Additional paid-in capital.................. 52,611,663 -- -- 738,577 -- -- 19,322,892 (a) Retained earnings (accumulated deficit).... (10,225,164) (1,671,000) (199,394) (252,124) 458,073 (258,045) (138,340)(a) Accumulated other comprehensive income (loss)................... -- 277,000 (5,002) (37,712) -- (78) (234,208)(a) Deferred compensation...... (2,911,244) -- -- -- -- -- -- ------------ ----------- --------- --------- -------- --------- ----------- Total stockholders' equity (deficit)....... 39,510,654 (613,000) (70,322) 637,104 458,073 (76,684) 17,668,315 ------------ ----------- --------- --------- -------- --------- ----------- Total liabilities and stockholders' equity... $ 41,202,182 $ 1,446,000 $ 51,362 $ 776,127 $608,876 $ 129,713 $17,807,447 ============ =========== ========= ========= ======== ========= =========== PRO FORMA ------------ ASSETS Current assets: Cash....................... $ 30,354,612 Accounts receivable, net... 933,013 Marketable securities...... 770,446 Other receivables.......... 1,592,345 Prepaid expenses and other.................... 327,358 ------------ Total current assets..... 33,977,774 ------------ Property and equipment, net...................... 1,091,313 Goodwill and other intangibles, net......... 24,875,735 Other assets............... 2,076,885 ------------ Total assets............. $ 62,021,707 ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Notes payable and current maturities of long-term debt..................... $ 1,108,821 Accounts payable........... 747,907 Accrued liabilities........ 1,129,081 Deferred revenue........... 343,240 Related party payables..... 242,173 ------------ Total current liabilities............ 3,571,222 ------------ Deferred income tax liability.................. 115,059 ------------ Long-term debt, net of current maturities......... 821,286 ------------ Stockholders' equity (deficit): Convertible preferred stock.................... 16,764 Common stock............... 21,482 Additional paid-in capital.................. 72,673,132 Retained earnings (accumulated deficit).... (12,285,994) Accumulated other comprehensive income (loss)................... -- Deferred compensation...... (2,911,244) ------------ Total stockholders' equity (deficit)....... 57,514,140 ------------ Total liabilities and stockholders' equity... $ 62,021,707 ============
P-3 LINEO, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1999
HISTORICAL ----------------------------------------------------------------------------------------------- LINEO ZENTROPIC USE FIREPLUG INUP ---------------- ---------------- ----------------- ----------------- ----------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, 1999 OCTOBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999 ---------------- ---------------- ----------------- ----------------- ----------------- Revenue.......................... $ 2,800,584 $ 85,474 $1,534,000 $ 144,778 $ 8,355 Cost of revenue.................. 184,857 38,364 1,024,000 88,996 1,785 ----------- ---------- ---------- ---------- ---------- Gross margin................. 2,615,727 47,110 510,000 55,782 6,570 ----------- ---------- ---------- ---------- ---------- Operating expenses: Research and development....... 1,303,347 320,828 48,000 -- -- Sales and marketing............ 729,066 249,898 -- 32,382 -- General and administrative..... 1,223,578 150,132 971,000 56,787 131,556 Non-cash stock-related compensation(*).............. 250,265 78,708 -- -- -- Amortization of goodwill and other intangibles............ -- -- -- -- -- ----------- ---------- ---------- ---------- ---------- Total operating expenses..... 3,506,256 799,566 1,019,000 89,169 131,556 ----------- ---------- ---------- ---------- ---------- Loss from operations............. (890,529) (752,456) (509,000) (33,387) (124,986) Other expense, net............... (163,146) -- (69,000) -- (50) ----------- ---------- ---------- ---------- ---------- Loss before income taxes......... (1,053,675) (752,456) (578,000) (33,387) (125,036) Income tax (provision) benefit... -- 4,117 (2,000) -- 14,718 ----------- ---------- ---------- ---------- ---------- Net loss......................... $(1,053,675) $ (748,339) $ (580,000) $ (33,387) $ (110,318) =========== ========== ========== ========== ========== Basic and diluted net loss per common share................... $ (0.06) =========== Basic and diluted weighted average common shares outstanding.................... 18,000,000 1,745,226 (d) 1,333,333 (d) =========== ========== ========== Basic and diluted supplemental net loss per common share...... $ (0.06) =========== Basic and diluted supplemental weighted average common shares outstanding.................... 18,000,000 1,745,226 (e) 69,998 (e) 1,416,667 (e) =========== ========== ========== ========== - ------------------------------ * Non-cash stock-related compensation has been excluded from the following expenses: Research and development..... $ 15,935 $ 850 Sales and marketing.......... 26,376 58,393 General and administrative... 207,954 19,465 HISTORICAL -------------------------------------- MORETON BAY RT-CONTROL ---------------- ------------------- INCEPTION (JUNE 30, YEAR ENDED 1999) TO PRO FORMA OCTOBER 31, 1999 DECEMBER 31, 1999 ADJUSTMENTS PRO FORMA ---------------- ------------------- ----------- ------------ Revenue.......................... $ -- $ 66,951 $ -- $ 4,640,142 Cost of revenue.................. -- 42,392 -- 1,380,394 --------- -------- ----------- ------------ Gross margin................. -- 24,559 -- 3,259,748 --------- -------- ----------- ------------ Operating expenses: Research and development....... 37,839 74,468 -- 1,784,482 Sales and marketing............ 17,114 7,324 -- 1,035,784 General and administrative..... 92,038 38,446 -- 2,663,537 Non-cash stock-related compensation(*).............. 53,201 -- -- 382,174 Amortization of goodwill and other intangibles............ -- -- 7,125,248 (c) 7,125,248 --------- -------- ----------- ------------ Total operating expenses..... 200,192 120,238 7,125,248 12,991,225 --------- -------- ----------- ------------ Loss from operations............. (200,192) (95,679) (7,125,248) (9,731,477) Other expense, net............... -- (2,764) -- (234,960) --------- -------- ----------- ------------ Loss before income taxes......... (200,192) (98,443) (7,125,248) (9,966,437) Income tax (provision) benefit... -- -- -- 16,835 --------- -------- ----------- ------------ Net loss......................... $(200,192) $(98,443) $(7,125,248) $ (9,949,602) ========= ======== =========== ============ Basic and diluted net loss per common share................... $ (0.47) ============ Basic and diluted weighted average common shares outstanding.................... 21,078,559 ============ Basic and diluted supplemental net loss per common share...... $ (0.44) ============ Basic and diluted supplemental weighted average common shares outstanding.................... 956,315 (e) 404,169 (e) 22,592,375 ========= ======== ============ - ------------------------------ * Non-cash stock-related compensa has been excluded from the foll expenses: Research and development..... $ 43,097 $ 59,882 Sales and marketing.......... -- 84,769 General and administrative... 10,104 237,523
P-4 LINEO, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30, 2000
HISTORICAL ------------------------------------------------------------------------------------- LINEO ZENTROPIC USE FIREPLUG INUP -------------- ----------------- -------------- -------------- -------------- SIX MONTHS PERIOD FROM SIX MONTHS SIX MONTHS SIX MONTHS ENDED NOVEMBER 1, 1999 ENDED ENDED ENDED APRIL 30, 2000 TO APRIL 2, 2000 MARCH 31, 2000 MARCH 31, 2000 MARCH 31, 2000 -------------- ----------------- -------------- -------------- -------------- Revenue........................ $ 1,751,094 $ 256,491 $ 764,000 $ 128,238 $ 8,355 Cost of revenue................ 84,382 102,035 650,000 35,455 1,785 ----------- ---------- --------- --------- ---------- Gross margin............... 1,666,712 154,456 114,000 92,783 6,570 ----------- ---------- --------- --------- ---------- Operating expenses: Research and development..... 1,736,209 81,406 48,000 -- -- Sales and marketing.......... 1,098,284 223,870 -- 72,087 -- General and administrative... 1,108,174 72,108 623,000 16,652 313,025 Non-cash stock-related compensation(*)............ 1,045,621 167,354 -- 114,500 -- Amortization of goodwill and other intangibles.......... 165,829 -- -- -- -- Acquired in-process research and development............ 800,000 -- -- -- -- ----------- ---------- --------- --------- ---------- Total operating expenses... 5,954,117 544,738 671,000 203,239 313,025 ----------- ---------- --------- --------- ---------- Loss from operations........... (4,287,405) (390,282) (557,000) (110,456) (306,455) Other income (expense), net.... 45,105 -- (31,000) -- 443 ----------- ---------- --------- --------- ---------- Loss before income taxes....... (4,242,300) (390,282) (588,000) (110,456) (306,012) Income tax (provision) benefit...................... 139,715 (1,942) (1,000) -- 53,888 ----------- ---------- --------- --------- ---------- Net loss....................... $(4,102,585) $ (392,224) $(589,000) $(110,456) $ (252,124) =========== ========== ========= ========= ========== Basic and diluted net loss per common share................. $ (0.21) =========== Basic and diluted weighted average common shares outstanding.................. 19,659,910 1,484,888 (i) 1,333,333 (i) =========== ========== ========== Basic and diluted supplemental net loss per common share.... $ (0.17) =========== Basic and diluted supplemental weighted average common shares outstanding........... 23,945,361 (j) 1,484,888 (k) 69,998 (k) 1,416,667 (k) =========== ========== ========= ========== - ------------------------------ * Non-cash stock-related compensation has been excluded from the following expenses: Research and development... $ 66,931 $ 29,454 $ -- Sales and marketing........ 22,966 94,242 -- General and administrative........... 955,724 43,658 114,500 HISTORICAL -------------------------------- MORETON BAY RT-CONTROL --------------- -------------- SIX MONTHS SIX MONTHS ENDED ENDED PRO FORMA APRIL 30, 2000 MARCH 31, 2000 ADJUSTMENTS PRO FORMA --------------- -------------- ----------- ----------- Revenue........................ $ 26,558 $ 79,083 $ (200,000)(f) $ 2,813,819 Cost of revenue................ 13,691 32,330 (81,933)(f) 837,745 --------- --------- ----------- ----------- Gross margin............... 12,867 46,753 (118,067) 1,976,074 --------- --------- ----------- ----------- Operating expenses: Research and development..... 94,456 125,679 (118,067)(f) 1,967,683 Sales and marketing.......... 13,583 11,528 -- 1,419,352 General and administrative... 75,381 80,149 -- 2,288,489 Non-cash stock-related compensation(*)............ 59,365 75,000 -- 1,461,840 Amortization of goodwill and other intangibles.......... -- -- 3,396,793 (g) 3,562,622 Acquired in-process research and development............ -- -- (800,000)(h) -- --------- --------- ----------- ----------- Total operating expenses... 242,785 292,356 2,478,726 10,699,986 --------- --------- ----------- ----------- Loss from operations........... (229,918) (245,603) (2,596,793) (8,723,912) Other income (expense), net.... -- 4,123 -- 18,671 --------- --------- ----------- ----------- Loss before income taxes....... (229,918) (241,480) (2,596,793) (8,705,241) Income tax (provision) benefit...................... -- -- -- 190,661 --------- --------- ----------- ----------- Net loss....................... $(229,918) $(241,480) $(2,596,793) $(8,514,580) ========= ========= =========== =========== Basic and diluted net loss per common share................. $ (0.38) =========== Basic and diluted weighted average common shares outstanding.................. 22,478,131 =========== Basic and diluted supplemental net loss per common share.... $ (0.30) =========== Basic and diluted supplemental weighted average common shares outstanding........... 956,315 (k) 404,169 (k) 28,277,398 ========= ========= =========== - ------------------------------ * Non-cash stock-related compensation has been excluded from the following expenses: Research and development... $ 59,365 $ -- $ 155,750 Sales and marketing........ -- -- 117,208 General and administrative........... -- 75,000 1,188,882
P-5 LINEO, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The unaudited pro forma condensed consolidated financial statements are based on adjustments to the historical consolidated financial statements of Lineo, Inc. to give effect to the acquisitions described in Note 2 using the purchase method of accounting. The unaudited pro forma condensed consolidated balance sheet assumes the acquisitions of USE, Fireplug, Inup, Moreton Bay and RT-Control were consummated on April 30, 2000. The unaudited pro forma condensed consolidated statements of operations assume all acquisitions described in Note 2 were consummated as of November 1, 1998. The unaudited pro forma condensed consolidated statements of operations are not necessarily indicative of results that would have occurred had the acquisitions been consummated as of November 1, 1998 or that might be attained in the future. The pro forma condensed consolidated financial statements should be read in conjunction with the historical consolidated financial statements of the Company, the historical financial statements of the acquired companies and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. USE and Inup have not separately classified sales and marketing expenses from general and administrative expenses in their historical financial statements. As a result, for purposes of the accompanying unaudited pro forma condensed consolidated statements of operations the selling, general and administrative expense of USE and Inup have been classified as general and administrative expense. (2) ACQUISITIONS The following table sets forth the consideration paid in cash, including estimated direct expenses to be paid in connection with each acquisition, and through the issuance of shares of common stock, shares of Series C and Series D convertible preferred stock and options to acquire shares of common stock. For purposes of computing the estimated purchase price, the value of the common stock was determined using an estimated fair value of $3.80 per share for the Zentropic acquisition and a value of $6.00 per share for the shares of Series C and Series D convertible preferred shares and common shares issued for the acquisition of all other entities, which represents the estimated fair value based upon equity transactions with independent parties at or near the dates the acquisitions were consummated. The estimated fair values of the options to purchase common stock issued in connection with the acquisitions were determined using the Black-Scholes option pricing model with the following assumptions: expected exercise lives of five years, risk free interest rate of 5.65 percent, expected dividend yield of zero percent and volatility of 60.7 percent. The estimated purchase price for the acquisitions is based on preliminary estimates and is subject to certain purchase price adjustments following closing. However, management does not expect the final purchase price allocation to be P-6 LINEO, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) ACQUISITIONS (CONTINUED) materially different from the preliminary allocation nor does it expect there to be any material post closing adjustments.
OPTIONS TO SHARES OF SHARES OF PURCHASE SERIES C SERIES D SHARES OF SHARES OF CONVERTIBLE CONVERTIBLE COMMON COMMON PREFERRED PREFERRED CASH STOCK STOCK STOCK STOCK ---------- --------- ---------- ----------- ----------- Zentropic.............................. $ 111,867 1,745,226 -- -- -- USE.................................... 372,829 -- 507,335 -- -- Fireplug............................... 581,350 -- 62,220 -- 69,998 Inup................................... 60,000 1,333,333 -- 83,334 -- Moreton Bay............................ 60,000 -- 87,374 -- 956,315 RT-Control............................. 90,000 -- 16,667 -- 404,169 ---------- --------- ------- ------ --------- Total................................ $1,276,046 3,078,559 673,596 83,334 1,430,482 ========== ========= ======= ====== =========
Zentropic was acquired effective April 3, 2000. The acquisitions of USE, Fireplug, Inup, Moreton Bay and RT-Control are effective subsequent to April 30, 2000 through May 12, 2000. Management of the Company anticipates, based on its preliminary analysis, that the historical carrying value of the acquired companies' assets and liabilities will approximate fair value. The estimated purchase prices have been allocated to each of the acquired companies as follows based on preliminary independent appraisals:
ZENTROPIC USE FIREPLUG INUP MORETON BAY RT-CONTROL TOTAL ---------- ---------- ---------- ---------- ----------- ---------- ----------- Net assets (liabilities)...... $ 115,765 $ (613,000) $ (70,322) $ 637,104 $ 218,941 $ (76,684) $ 211,804 Deferred income tax liability.......... (141,977) -- -- -- -- -- (141,977) Acquired in-process research and development........ 800,000 -- -- 800,000 900,000 400,000 2,900,000 Assembled workforce.......... 610,000 475,000 130,000 210,000 320,000 -- 1,745,000 Core technology...... 1,301,000 466,000 600,000 -- 2,600,000 280,000 5,247,000 Non-competition agreements......... -- -- 400,000 -- -- -- 400,000 Goodwill............. 4,058,938 2,249,787 254,565 6,912,898 2,138,690 1,995,516 17,610,394 ---------- ---------- ---------- ---------- ---------- ---------- ----------- $6,743,726 $2,577,787 $1,314,243 $8,560,002 $6,177,631 $2,598,832 $27,972,221 ========== ========== ========== ========== ========== ========== ===========
The valuation of the in-process research and development included, but was not limited to, an analysis by independent appraisers of (1) the market for the acquired companies products and technologies; (2) the completion costs for the projects; (3) the expected cashflows attributed to the projects; and (4) the risks associated with achieving such cash flows. The assumptions used in valuing the in-process research and development were based upon assumptions the Company believed to be P-7 LINEO, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) ACQUISITIONS (CONTINUED) reasonable but which are inherently uncertain and unpredictable. For these reasons, actual results may vary from projected results. (3) PRO FORMA ADJUSTMENTS UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET ADJUSTMENTS (a) In each of the acquisitions, the Company purchased 100 percent of the outstanding equity of each entity. With respect to Moreton Bay, certain net assets and operations not acquired were split-out to a separate entity by Moreton Bay prior to the acquisition and accordingly were carved-out from Moreton Bay's historical financial statements. This pro forma adjustment as summarized in the table below reflects the following: (1) the consideration paid in connection with the acquisitions including the issuance of common stock, options to purchase common stock, Series C and Series D convertible preferred stock, and cash payments, (2) the elimination of the acquired companies historical equity accounts, (3) the impact of the write-off of acquired in-process research and development on the accumulated deficit, and (4) the potential repayment obligation of research and development grant reimbursements totaling $239,132 received by Moreton Bay.
TOTAL PRO FORMA USE FIREPLUG INUP MORETON BAY RT-CONTROL ADJUSTMENT ----------- ---------- ----------- ----------- ----------- ------------ Cash............... $ (372,829) $ (581,350) $ (60,000) $ (60,000) $ (90,000) $ (1,164,179) Goodwill and other intangibles...... 3,190,787 1,384,565 7,122,898 5,058,690 2,275,516 19,032,456 Accrued liabilities...... -- -- (239,132) -- (239,132) Convertible preferred stock............ -- (70) (84) (956) (404) (1,514) Common stock....... 781,000 134,074 187,030 -- 181,439 1,283,543 Additional paid-in capital.......... (2,204,958) (732,823) (7,760,008) (6,116,675) (2,508,428) (19,322,892) Retained earnings (accumulated deficit)......... (1,671,000) (199,394) 547,876 1,358,073 141,955 177,510 Accumulated other comprehensive income (loss).... 277,000 (5,002) (37,712) -- (78) 234,208 ----------- ---------- ----------- ----------- ----------- ------------ $ -- $ -- $ -- $ -- $ -- $ -- =========== ========== =========== =========== =========== ============
(b) To eliminate an intercompany advance from Lineo to RT-Control. P-8 LINEO, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) PRO FORMA ADJUSTMENTS (CONTINUED) UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ADJUSTMENTS YEAR ENDED OCTOBER 31, 1999 (c) To reflect the amortization of goodwill and other intangibles related to the acquisitions. The amortization periods for intangible assets are as follows:
PERIOD ----------- Goodwill.................................................... 3 - 5 years Core technology............................................. 3 - 5 years Assembled workforce......................................... 2 - 5 years Non-competition agreements.................................. 2 years
(d) Reflects the additional shares of common stock that would have been outstanding had the acquisition of Zentropic been effective as of November 1, 1998 and to reflect the shares of common stock issued in connection with the acquisition of Inup. All other acquisitions were completed through the issuance of options to purchase common stock and the issuance of Series C and Series D convertible preferred stock. The options and preferred stock are considered anti-dilutive and accordingly, have not been included in the calculation of pro forma weighted average common shares outstanding. (e) Reflects the additional shares of common stock to be issued upon conversion of the preferred shares issued as consideration in connection with the acquisitions, which will occur upon completion of this offering. SIX MONTHS ENDED APRIL 30, 2000 (f) To eliminate intercompany revenues and expenses between Lineo and Zentropic earned and incurred prior to April 3, 2000 (the effective date of the acquisition). (g) To reflect the amortization of goodwill and other intangibles related to the acquisitions. (h) To eliminate the impact of the acquired in-process research and development expensed as part of the acquisition of Zentropic. (i) Reflects the additional shares of common stock that would have been outstanding had the acquisition of Zentropic been effective as of November 1, 1998 and to reflect the shares of common stock issued in the acquisition of Inup. All other acquisitions were completed through the issuance of options to purchase common stock and the issuance of Series C and Series D convertible preferred stock. The options and preferred stock are considered anti-dilutive and accordingly, have not been included in the calculation of pro forma weighted average common shares outstanding. (j) Reflects the additional shares of common stock to be issued upon conversion of the preferred shares outstanding as of April 30, 2000 which will occur upon completion of this offering. (k) Reflects the additional shares of common stock to be issued upon conversion of the preferred shares issued as consideration in connection with the acquisitions, which will occur upon completion of this offering. P-9 INDEX TO FINANCIAL STATEMENTS LINEO, INC. Report of Independent Public Accountants.................. F-2 Consolidated Balance Sheets............................... F-3 Consolidated Statements of Operations and Comprehensive Loss.................................................... F-5 Consolidated Statements of Stockholders' Equity (Deficit)............................................... F-6 Consolidated Statements of Cash Flows..................... F-8 Notes to Consolidated Financial Statements................ F-10 ZENTROPIC COMPUTING, LLC Report of Independent Public Accountants.................. F-30 Consolidated Balance Sheets............................... F-31 Consolidated Statements of Operations and Comprehensive Loss.................................................... F-32 Consolidated Statements of Members' Capital............... F-33 Consolidated Statements of Cash Flows..................... F-34 Notes to Consolidated Financial Statements................ F-36 UNITED SYSTEM ENGINEERS, INC. Report of Independent Public Accountants.................. F-44 Balance Sheets............................................ F-45 Statements of Operations and Comprehensive Income (Loss).................................................. F-46 Statements of Stockholders' Deficit....................... F-47 Statements of Cash Flows.................................. F-48 Notes to Financial Statements............................. F-50 FIREPLUG COMPUTERS INC. Report of Independent Public Accountants.................. F-62 Balance Sheets............................................ F-63 Statements of Operations and Comprehensive Loss........... F-64 Statements of Stockholders' Deficit....................... F-65 Statements of Cash Flows.................................. F-66 Notes to Financial Statements............................. F-67 INUP Report of Independent Accountants......................... F-72 Balance Sheets............................................ F-73 Statements of Operations.................................. F-74 Statements of Stockholders' Equity........................ F-75 Statements of Cash Flows.................................. F-76 Notes to Financial Statements............................. F-77 MORETON BAY VENTURES PTY LTD Report of Independent Public Accountants.................. F-82 Statements of Assets, Liabilities, and Equity (Deficit) of the Acquired Operations................................. F-83 Statements of Revenue and Expenses and Comprehensive Loss.................................................... F-84 Statements of Changes in Equity (Deficit) of the Acquired Operations.............................................. F-85 Statements of Cash Flows.................................. F-86 Notes to Financial Statements............................. F-87 RT-CONTROL, INC. Report of Independent Public Accountants.................. F-93 Balance Sheets............................................ F-94 Statements of Operations and Comprehensive Loss........... F-95 Statements of Shareholders' Equity (Deficit).............. F-96 Statements of Cash Flows.................................. F-97 Notes to Financial Statements............................. F-98
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Lineo, Inc.: We have audited the accompanying consolidated balance sheets of Lineo, Inc. (a Delaware corporation), the carved-out portion of Caldera, Inc. (a Utah corporation) and their subsidiary as of October 31, 1998 and 1999, and the related consolidated statements of operations and comprehensive loss, stockholders' equity (deficit) and cash flows for each of the three years in the period ended October 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lineo, Inc., the carved-out portion of Caldera, Inc. and their subsidiary as of October 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1999 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Salt Lake City, Utah May 15, 2000 F-2 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS
OCTOBER 31, --------------------- APRIL 30, 1998 1999 2000 -------- ---------- ----------- (UNAUDITED) Current assets: Cash.................................................... $117,058 $ 67,794 $30,464,362 Accounts receivable, net of allowance for doubtful accounts of approximately $13,000, $68,000 and $68,000, respectively................................. 135,632 854,796 690,631 Stock subscription receivable........................... -- -- 1,500,000 Related party receivables............................... 29,884 32,116 31,236 Deferred income tax assets.............................. -- -- 107,319 Other current assets.................................... 11,941 5,623 66,641 -------- ---------- ----------- Total current assets.................................. 294,515 960,329 32,860,189 -------- ---------- ----------- Property and equipment: Computer equipment...................................... 124,934 115,920 382,980 Furniture and fixtures.................................. 55,881 117,897 89,483 Leasehold improvements.................................. -- 5,396 9,306 -------- ---------- ----------- 180,815 239,213 481,769 Less accumulated depreciation and amortization.......... (95,610) (65,420) (101,770) -------- ---------- ----------- Net property and equipment............................ 85,205 173,793 379,999 -------- ---------- ----------- Investment in affiliate................................... -- -- 531,402 -------- ---------- ----------- Intangibles, net of accumulated amortization of $165,829................................................ -- -- 5,804,109 -------- ---------- ----------- Advances to companies subsequently acquired............... -- -- 578,607 -------- ---------- ----------- Other assets.............................................. 85,000 -- 1,047,876 -------- ---------- ----------- $464,720 $1,134,122 $41,202,182 ======== ========== ===========
See accompanying notes to consolidated financial statements. F-3 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
OCTOBER 31, ------------------------- APRIL 30, 1998 1999 2000 ----------- ----------- ------------ (UNAUDITED) Current liabilities: Accounts payable......................................... $ 314,444 $ 65,084 $ 515,151 Accrued liabilities...................................... 142,780 290,579 599,610 Deferred revenue......................................... 782,075 293,155 303,953 Related party payables................................... 5,538 35,745 157,755 Convertible promissory note payable to majority stockholder and related accrued interest............... 403,542 2,432,387 -- ----------- ----------- ------------ Total current liabilities.............................. 1,648,379 3,116,950 1,576,469 ----------- ----------- ------------ Deferred income tax liability.............................. -- -- 115,059 ----------- ----------- ------------ Commitments and contingencies (Notes 1, 8 and 13) Stockholders' equity (deficit): Preferred stock, $0.001 par value; 30,000,000 shares authorized: Series A Class 1 convertible preferred stock, 5,000,000 shares designated and outstanding as of April 30, 2000................................................. -- -- 5,000 Series A Class 2 convertible preferred stock, 2,500,000 shares designated and outstanding as of April 30, 2000................................................. -- -- 2,500 Series B convertible preferred stock, 4,850,000 shares designated and 4,833,331 shares outstanding as of April 30, 2000....................................... -- -- 4,833 Series C convertible preferred stock, 3,000,000 shares designated and 2,916,666 shares outstanding as of April 30, 2000....................................... -- -- 2,917 Series D convertible preferred stock, 2,000,000 shares designated and no shares outstanding................. -- -- -- Common stock, $0.001 par value; 100,000,000 shares authorized, 18,000,000, 18,000,000 and 20,148,985 shares outstanding, respectively....................... 18,000 18,000 20,149 Additional paid-in capital............................... (719,002) (408,399) 52,611,663 Deferred compensation.................................... -- (60,338) (2,911,244) Cumulative translation adjustments....................... (4,241) -- -- Accumulated deficit...................................... (478,416) (1,532,091) (10,225,164) ----------- ----------- ------------ Total stockholders' equity (deficit)................... (1,183,659) (1,982,828) 39,510,654 ----------- ----------- ------------ $ 464,720 $ 1,134,122 $ 41,202,182 =========== =========== ============
See accompanying notes to consolidated financial statements. F-4 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED OCTOBER 31, SIX MONTHS ENDED APRIL 30, --------------------------------------- --------------------------- 1997 1998 1999 1999 2000 ----------- ----------- ----------- ------------ ------------ (UNAUDITED) (UNAUDITED) Revenue...................................... $ 945,414 $ 1,376,209 $ 2,800,584 $ 805,838 $ 1,751,094 Cost of revenue.............................. 247,694 360,727 184,857 36,722 84,382 ----------- ----------- ----------- ----------- ----------- Gross margin............................... 697,720 1,015,482 2,615,727 769,116 1,666,712 ----------- ----------- ----------- ----------- ----------- Operating expenses: Research and development (exclusive of non- cash stock-related compensation of $15,935 in fiscal year 1999 and $66,931 in the six months ended April 30, 2000).................................... 655,122 1,357,190 1,303,347 785,937 1,736,209 Sales and marketing (exclusive of non-cash stock-related compensation of $26,376 in fiscal year 1999 and $22,966 in the six months ended April 30, 2000)............. 662,811 1,023,759 729,066 320,582 1,098,284 General and administrative (exclusive of non-cash stock-related compensation of $207,954 in fiscal year 1999 and $955,724 in the six months ended April 30, 2000).................................... 207,084 639,667 1,223,578 695,124 1,108,174 Non-cash stock-related compensation........ -- -- 250,265 -- 1,045,621 Amortization of goodwill and other intangibles.............................. -- -- -- -- 165,829 Acquired in-process research and development.............................. -- -- -- -- 800,000 ----------- ----------- ----------- ----------- ----------- Total operating expenses................. 1,525,017 3,020,616 3,506,256 1,801,643 5,954,117 ----------- ----------- ----------- ----------- ----------- Loss from operations......................... (827,297) (2,005,134) (890,529) (1,032,527) (4,287,405) ----------- ----------- ----------- ----------- ----------- Other income (expense): Interest expense........................... (51,048) (186,904) (138,542) (49,166) (57,769) Interest income............................ -- 669 14,245 5,761 96,506 Other income (expense), net................ 1,439 5,098 (38,849) -- 6,368 ----------- ----------- ----------- ----------- ----------- Other income (expense), net.............. (49,609) (181,137) (163,146) (43,405) 45,105 ----------- ----------- ----------- ----------- ----------- Loss before income tax benefit............... (876,906) (2,186,271) (1,053,675) (1,075,932) (4,242,300) Income tax benefit........................... -- -- -- -- 139,715 ----------- ----------- ----------- ----------- ----------- Net loss..................................... $ (876,906) $(2,186,271) $(1,053,675) $(1,075,932) $(4,102,585) =========== =========== =========== =========== =========== Basic and diluted net loss per common share...................................... $ (0.05) $ (0.12) $ (0.06) $ (0.06) $ (0.21) =========== =========== =========== =========== =========== Weighted average common shares outstanding... 18,000,000 18,000,000 18,000,000 18,000,000 19,659,910 =========== =========== =========== =========== =========== Comprehensive loss: Net Loss................................... $ (876,906) $(2,186,271) $(1,053,675) $(1,075,932) $(4,102,585) Foreign currency translation adjustments... (11,463) 7,222 4,241 4,241 -- ----------- ----------- ----------- ----------- ----------- $ (888,369) $(2,179,049) $(1,049,434) $(1,071,691) $(4,102,585) =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-5 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED --------------------- --------------------- PAID-IN DEFERRED COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS) ---------- -------- ---------- -------- ----------- ------------- -------------- Balance, October 31, 1996.................... -- $ -- -- $ -- $ -- $ -- $ -- Debt funding and related accrued interest applicable to carved-out operations of Caldera, Inc..................... -- -- -- -- -- -- -- Foreign currency translation adjustment.............. -- -- -- -- -- -- (11,463) Net loss applicable to carved-out operations of Caldera, Inc............ -- -- -- -- -- -- -- ---------- ------- ---------- ------- ----------- ----------- -------- Balance, October 31, 1997.................... -- -- -- -- -- -- (11,463) Debt funding and related accrued interest applicable to carved-out operations of Caldera, Inc..................... -- -- -- -- -- -- -- Net loss applicable to carved-out operations of Caldera, Inc. through August 31, 1998......... -- -- -- -- -- -- -- Incorporation of Lineo, Inc. and issuance of common shares to Caldera, Inc. in exchange for certain net liabilities recorded at carryover basis......... -- -- 18,000,000 18,000 (719,002) -- -- Foreign currency translation adjustment.............. -- -- -- -- -- -- 7,222 Net loss for the period subsequent to incorporation........... -- -- -- -- -- -- -- ---------- ------- ---------- ------- ----------- ----------- -------- Balance, October 31, 1998.................... -- -- 18,000,000 18,000 (719,002) -- (4,241) Deferred compensation related to stock option grants.................. -- -- -- -- 310,603 (310,603) -- Amortization of deferred compensation............ -- -- -- -- -- 250,265 -- Foreign currency translation adjustment.............. -- -- -- -- -- -- 4,241 Net loss.................. -- -- -- -- -- -- -- ---------- ------- ---------- ------- ----------- ----------- -------- Balance, October 31, 1999.................... -- -- 18,000,000 18,000 (408,399) (60,338) -- CALDERA, INC.'S EQUITY (DEFICIT) IN ACCUMULATED CARVED-OUT DEFICIT OPERATIONS ------------ --------------- Balance, October 31, 1996.................... $ -- $ 364,189 Debt funding and related accrued interest applicable to carved-out operations of Caldera, Inc..................... -- 394,816 Foreign currency translation adjustment.............. -- -- Net loss applicable to carved-out operations of Caldera, Inc............ -- (876,906) ------------ ----------- Balance, October 31, 1997.................... -- (117,901) Debt funding and related accrued interest applicable to carved-out operations of Caldera, Inc..................... -- 1,124,754 Net loss applicable to carved-out operations of Caldera, Inc. through August 31, 1998......... -- (1,707,855) Incorporation of Lineo, Inc. and issuance of common shares to Caldera, Inc. in exchange for certain net liabilities recorded at carryover basis......... -- 701,002 Foreign currency translation adjustment.............. -- -- Net loss for the period subsequent to incorporation........... (478,416) -- ------------ ----------- Balance, October 31, 1998.................... (478,416) -- Deferred compensation related to stock option grants.................. -- -- Amortization of deferred compensation............ -- -- Foreign currency translation adjustment.............. -- -- Net loss.................. (1,053,675) -- ------------ ----------- Balance, October 31, 1999.................... (1,532,091) --
F-6 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(CONTINUED)
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED --------------------- --------------------- PAID-IN DEFERRED COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS) ---------- -------- ---------- -------- ----------- ------------- -------------- Conversion of common shares to Series A Class 1 convertible preferred shares and distribution to majority stockholder for fair value of preferred shares issued in excess of common shares converted (unaudited)............. 5,000,000 5,000 (5,000,000) (5,000) 750,000 -- -- Issuance of Series A Class 2 convertible preferred shares for cash, net of offering costs of $47,322 (unaudited)..... 2,500,000 2,500 -- -- 3,700,178 -- -- Issuance of Series B convertible preferred shares for cash and services, net of offering costs of $37,751 (unaudited)..... 4,833,331 4,833 -- -- 14,457,416 -- -- Issuance of Series C convertible preferred shares for cash and services, net of offering costs of $9,996 (unaudited)............. 2,916,666 2,917 -- -- 17,487,083 -- -- Issuance of common shares in exchange for investment in Caldera Systems, Inc. and distribution to majority stockholder for fair value of shares issued in excess of the carryover basis of investment (unaudited)............. -- -- 3,238,437 3,238 4,368,652 -- -- Issuance of common shares for cash and services (unaudited)............. -- -- 1,500,000 1,500 2,023,500 -- -- Issuance of common shares upon exercise of stock options (unaudited)..... -- -- 665,322 666 531,592 -- -- Grant of common stock option by majority stockholder for services (unaudited)............. -- -- -- -- 63,374 -- -- Deferred compensation related to stock option grants (unaudited)...... -- -- -- -- 3,008,153 (3,008,153) -- Amortization of deferred compensation (unaudited)............. -- -- -- -- -- 157,247 -- Issuance of common shares related to purchase of Zentropic Computing, LLC (unaudited)............. -- -- 1,745,226 1,745 6,630,114 -- -- Net loss (unaudited)...... -- -- -- -- -- -- -- ---------- ------- ---------- ------- ----------- ----------- -------- Balance, April 30, 2000 (unaudited)............. 15,249,997 $15,250 20,148,985 $20,149 $52,611,663 $(2,911,244) $ -- ========== ======= ========== ======= =========== =========== ======== CALDERA, INC.'S EQUITY (DEFICIT) IN ACCUMULATED CARVED-OUT DEFICIT OPERATIONS ------------ --------------- Conversion of common shares to Series A Class 1 convertible preferred shares and distribution to majority stockholder for fair value of preferred shares issued in excess of common shares converted (unaudited)............. (750,000) -- Issuance of Series A Class 2 convertible preferred shares for cash, net of offering costs of $47,322 (unaudited)..... -- -- Issuance of Series B convertible preferred shares for cash and services, net of offering costs of $37,751 (unaudited)..... -- -- Issuance of Series C convertible preferred shares for cash and services, net of offering costs of $9,996 (unaudited)............. -- -- Issuance of common shares in exchange for investment in Caldera Systems, Inc. and distribution to majority stockholder for fair value of shares issued in excess of the carryover basis of investment (unaudited)............. (3,840,488) -- Issuance of common shares for cash and services (unaudited)............. -- -- Issuance of common shares upon exercise of stock options (unaudited)..... -- -- Grant of common stock option by majority stockholder for services (unaudited)............. -- -- Deferred compensation related to stock option grants (unaudited)...... -- -- Amortization of deferred compensation (unaudited)............. -- -- Issuance of common shares related to purchase of Zentropic Computing, LLC (unaudited)............. -- -- Net loss (unaudited)...... (4,102,585) -- ------------ ----------- Balance, April 30, 2000 (unaudited)............. $(10,225,164) $ -- ============ ===========
See accompanying notes to consolidated financial statements. F-7 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH
YEAR ENDED SIX MONTHS ENDED OCTOBER 31, APRIL 30, ------------------------------------- ------------------------- 1997 1998 1999 1999 2000 --------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: $(1,075,932) Net loss................................................. $(876,906) $(2,186,271) $(1,053,675) $(4,1 Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................... 191,307 237,635 101,217 66,425 48,216 Amortization of intangibles............................ -- -- -- -- 165,829 Acquired in-process research and development........... -- -- -- -- 800,000 Non-cash stock related compensation.................... -- -- 250,265 -- 1,045,621 Gain on disposition of assets.......................... -- -- -- -- (6,368) Deferred income tax benefit............................ -- -- -- -- (134,237) Accrued interest applicable to funding of carved-out operations of Caldera, Inc........................... 51,048 183,362 -- -- -- Accrued interest on convertible note payable to majority stockholder................................. -- 3,542 138,845 49,137 57,769 Changes in operating assets and liabilities, net of effect of acquisition of Zentropic Computing, LLC: Accounts receivable, net............................. 150,764 (103,896) (719,164) (162,844) 270,216 Related party receivables............................ -- (29,884) (2,232) 13,270 880 Other current assets................................. (36,853) 24,912 6,318 6,286 (47,196) Other assets......................................... -- (85,000) 85,000 -- (504,061) Accounts payable..................................... 113,515 200,929 (249,360) (228,962) 403,455 Accrued liabilities.................................. 25,652 117,128 147,799 15,298 303,901 Deferred revenue..................................... 196,817 428,615 (488,920) (89,387) 4,756 Related party payables............................... -- 5,538 30,207 25,026 19,747 --------- ----------- ----------- ----------- ----------- Net cash used in operating activities.............. (184,656) (1,203,390) (1,753,700) (1,381,683) (1,674,057) --------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Purchase of property and equipment....................... (108,473) (72,342) (189,805) (155,479) (284,424) Proceeds from sale of property and equipment............. -- -- -- -- 75,000 Advances to companies subsequently acquired.............. -- -- -- -- (578,607) Net cash acquired in acquisition of Zentropic Computing, LLC.................................................... -- -- -- -- 1,627 --------- ----------- ----------- ----------- ----------- Net cash used in investing activities.............. (108,473) (72,342) (189,805) (155,479) (786,404) --------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Borrowings from majority stockholder under convertible promissory note........................................ -- 400,000 1,890,000 1,890,000 -- Repayment of borrowings from majority stockholder........ -- -- -- -- (2,490,156) Borrowings from majority stockholder prior to reorganization......................................... 343,768 941,392 -- -- -- Net proceeds from issuance of preferred stock............ -- -- -- -- 33,614,927 Proceeds from the sale of common stock................... -- -- -- -- 1,200,000 Proceeds from the exercise of common stock options....... -- -- -- -- 532,258 --------- ----------- ----------- ----------- ----------- Net cash provided by financing activities.......... 343,768 1,341,392 1,890,000 1,890,000 32,857,029 --------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash............................ 50,639 65,660 (53,505) 352,838 30,396,568 Foreign currency translation adjustments................... (11,463) 7,222 4,241 4,241 -- Cash, beginning of the period.............................. 5,000 44,176 117,058 117,058 67,794 --------- ----------- ----------- ----------- ----------- Cash, end of the period.................................... $ 44,176 $ 117,058 $ 67,794 $ 474,137 $30,464,362 ========= =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-8 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) INCREASE (DECREASE) IN CASH
YEAR ENDED SIX MONTHS ENDED OCTOBER 31, APRIL 30, ------------------------------------- ------------------------- 1997 1998 1999 1999 2000 --------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Supplemental disclosure of cash flow information: Cash paid for interest................................... $ -- $ -- $ -- $ -- $ 200,156 Supplemental schedule of noncash investing and financing activities: Acquisition of Zentropic Computing, LLC: Fair value of assets acquired.......................... $ -- $ -- $ -- $ -- $ 7,045,750 Liabilities assumed.................................... $ -- $ -- $ -- $ -- $ 302,024 Fair value of common stock issued...................... $ -- $ -- $ -- $ -- $ 6,631,859 Issuance of common stock in connection with the acquisition of certain net assets from Caldera, Inc. recorded at carryover basis............................ $ -- $ 701,002 $ -- $ -- $ -- Issuance of common stock in exchange for investment in Caldera Systems, Inc. recorded at carryover basis...... $ -- $ -- $ -- $ -- $ 531,402 Distribution to majority stockholder for fair value of shares issued in excess of the carryover basis of the investment in Caldera Systems, Inc..................... $ -- $ -- $ -- $ -- $ 3,840,488 Conversion of 5,000,000 shares of common stock to 5,000,000 shares of Series A Class 1 convertible preferred stock........................................ $ -- $ -- $ -- $ -- $ 5,000 Distribution to majority stockholder for fair value of preferred shares issued in excess of common shares converted.............................................. $ -- $ -- $ -- $ -- $ 750,000 Issuance of Series B and Series C convertible preferred stock for services..................................... $ -- $ -- $ -- $ -- $ 540,000
See accompanying notes to consolidated financial statements. F-9 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (1) ORGANIZATION AND DESCRIPTION OF BUSINESS Lineo, Inc. ("Lineo") was originally incorporated as a Utah corporation on August 26, 1998 as Caldera Thin Clients, Inc. and was reincorporated as a Delaware corporation on January 21, 2000. Lineo began operations in July 1996 as part of Caldera, Inc. ("Caldera"). Prior to July 1996, Caldera was developing and marketing Linux operating system software and related products for desktop personal computers and servers. On July 23, 1996, through an asset purchase, Caldera acquired certain rights related to a DOS-based operating system, which was marketed primarily as an embedded operating system in non-desktop microprocessors. Caldera continued the development of the DOS-based operating system for embedded applications. Caldera subsequently made the strategic determination to separate its two business lines into separate entities and, effective September 1, 1998, transferred certain of the assets relating to the DOS-based operating system to Lineo in exchange for 18,000,000 shares of common stock. Also effective September 1, 1998, Caldera sold certain assets not related to the DOS-based operating system to Caldera Systems, Inc. ("Caldera Systems"). Prior to the reorganization of Caldera, The Canopy Group ("Canopy") was the majority shareholder of Caldera and continued to be the majority shareholder of Lineo and was the sole shareholder of Caldera Systems. Since Caldera was the sole shareholder of Lineo, the transfer of the DOS-based operations from Caldera to Lineo has been treated as a reorganization of entities under common control with the assets and liabilities reflected at carry-over basis in a manner similar to a pooling of interests. The accompanying consolidated financial statements include the carved-out operations of Caldera related to the DOS-based operations through September 1, 1998. The revenue of the carved-out operations of Caldera reflect actual revenue derived from sales of DOS-based operating system products and the expenses of the carved-out operations reflect actual expenses associated with the DOS-based business and an allocated portion of common expenses. The allocated common expenses consist primarily of rent, depreciation, interest and personnel benefits. Rent, depreciation and personnel benefits were allocated based upon actual personnel expense. Interest was allocated based upon borrowings related to the carved-out operations of Caldera. Management believes that the allocation methods used are reasonable. Prior to the reorganization, the net losses of Caldera were funded through loans and equity contributions from Canopy. The funding applicable to the carved-out operations has been reflected as a component of Caldera Inc.'s Equity (Deficit) in Carved-out Operations included in the accompanying consolidated statements of stockholders' equity (deficit). This funding has been offset by the accumulated losses applicable to the carved-out operations. The resulting deficit balance as of the date of reorganization, September 1, 1998, of $701,002 has been reflected as a deemed distribution to Caldera and charged to equity. In connection with the reorganization, Lineo acquired a wholly owned subsidiary of Caldera, located in England, Caldera (UK) Limited ("Caldera Ltd"), which performed research and development activities. The operations of Caldera Ltd were terminated in February 1999. As discussed in Note 13, effective April 3, 2000, Lineo acquired Zentropic Computing, LLC ("Zentropic"), a Virginia limited liability company. Zentropic provides Linux solutions for time-sensitive processing functions, referred to as real-time technology. Zentropic's operations are included in the accompanying F-10 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (1) ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED) financial statements from the date of the acquisition, April 3, 2000. Lineo, the carved-out operations of Caldera, Caldera Ltd and Zentropic are collectively referred to as the "Company." Historically, the Company developed, marketed and supported DOS-based operating system products for the embedded systems market. Starting in January 1999, the Company focused its strategy on developing embedded operating systems based on Linux. In January 2000, the Company commercially released the first version of its embedded Linux operating system. The Company sells and distributes its software products through license agreements principally with original equipment manufacturers ("OEMs"). These sales occur throughout the United States and in certain international locations. The Company is subject to certain risks including the uncertainty of market acceptance and demand for Linux-based products and services, competition from larger, more established companies, short product life cycles, the Company's ability to develop and bring to market new products on a timely basis, dependence on key employees, the ability to attract and retain additional qualified personnel and the ability to obtain adequate financing to support growth. (2) SIGNIFICANT ACCOUNTING POLICIES UNAUDITED INTERIM FINANCIAL DATA The unaudited interim financial statements as of April 30, 2000 and for the six months ended April 30, 1999 and 2000 have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all normal recurring adjustments necessary to present fairly the financial information set forth therein, in accordance with accounting principles generally accepted in the United States. The results of operations for the six months ended April 30, 2000 are not necessarily indicative of the results to be expected for the entire fiscal year ending October 31, 2000. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the accompanying consolidated financial statements for cash, accounts receivable and accounts payable approximate fair values because of the immediate or short-term maturities of these financial instruments. The carrying amounts of the Company's debt obligations approximate fair value based on current interest rates. F-11 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the carved-out operations of Caldera prior to Lineo's incorporation, Lineo, Caldera Ltd and Zentropic, after elimination of intercompany accounts and transactions. FOREIGN CURRENCY TRANSLATION For purposes of consolidating the Caldera Ltd operations, the Company determined the functional currency for the Caldera Ltd operations to be the British Pound. Accordingly, translation gains and losses are included as a component of comprehensive loss. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less accumulated depreciation and amortization. Computer equipment and furniture and fixtures are depreciated using the straight-line method over the estimated useful life of the asset, typically three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the improvement or the remaining term of the lease agreement. Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments that extend the useful lives of existing equipment are capitalized and depreciated. On retirement or disposition of property and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is recognized in the statement of operations. CAPITALIZED SOFTWARE COSTS In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," development costs incurred in the research and development of new software products to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Internally generated capitalizable software development costs have not been material for the years ended October 31, 1997, 1998 and 1999 and the six months ended April 30, 2000. The Company has charged its software development costs to research and development expense in the accompanying consolidated statements of operations. OTHER ASSETS As of October 31, 1998, other assets consisted of prepaid software license fees of $85,000. During the year ended October 31, 1999, as a result of the Company focusing its strategy on Linux-based products for the embedded market, the determination was made that the remaining balance of prepaid software license fees was impaired and was therefore expensed as part of cost of revenue. As of April 30, 2000, other assets consisted primarily of legal and accounting fees capitalized in connection with the Company's anticipated initial public offering and deferred acquisition costs associated with the F-12 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) subsequent acquisitions discussed in Note 13. Capitalized offering costs will be netted against the actual offering proceeds and deferred acquisition costs will be included as part of the total purchase price. INTANGIBLE ASSETS Intangible assets include work force, core technology and goodwill associated with the acquisition of Zentropic (see Note 13). Work force is being amortized using the straight-line method over a period of two years. Other intangibles are amortized using the straight-line method over a period of three years. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews its long-lived assets, including intangibles, for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable. The Company evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. The Company uses an estimate of future undiscounted net cash flows of the related asset or group of assets over the remaining life in measuring whether the assets are recoverable. As of October 31, 1999 and April 30, 2000, the Company does not consider any of its long-lived assets to be impaired. REVENUE RECOGNITION The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue Recognition." Revenue from the sale of software is recognized upon delivery of the product when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is probable and no significant post-delivery obligations exist. Certain of the Company's software sales agreements include post-contract maintenance and support ("PCS") services. If these PCS services are to be provided for a period of one year or less, the estimated cost of providing the PCS is insignificant and there is no commitment to provide upgrades or enhancements, revenue is recognized upon delivery and the estimated costs of providing the PCS are accrued. If the PCS services are to be provided for a period greater than one year, or if the PCS includes upgrades or enhancements, software revenue is deferred and recognized over the PCS period or deferred until no significant obligations exist. As of October 31, 1998 and 1999 and April 30, 2000, the Company had deferred revenue of $782,075, $293,155 and $303,953, respectively. The Company has historically generated a majority of its revenue from software products sold directly to OEMs. Through April 30, 2000, some of the Company's license agreements have included bundled maintenance and support services. Because the Company had not established the necessary vendor specific objective evidence until the second quarter of fiscal year 2000, the Company could not recognize separately the service revenue. Accordingly, revenue for these licenses was deferred and recognized over the term of the maintenance and support services. F-13 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) During the six months ended April 30, 2000, the Company has begun to enter into multiple-element arrangements including software products, maintenance and support, engineering and training services. In these multiple-element arrangements, revenue is allocated to each element based on vendor-specific objective evidence of fair value for each element. Software license revenue under a multiple-element arrangement is recognized as described above. Service revenue is recognized as the services are performed. If any services to be provided are essential to the functionality of the software product, the software revenue is deferred and recognized over the period the services are provided. In December 1998, the AICPA issued Statement of Position No. 98-9 "Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amended SOP 97-2 to require recognition of revenue using a "residual method" in certain circumstances. SOP 98-9 is effective for transactions entered into by the Company beginning in its fiscal year 2000. The Company does not believe that the adoption of this statement will have a material effect on the Company's current revenue recognition policies. INCOME TAXES Prior to January 6, 2000, the Company was not directly subject to income taxes as the Company's operations were consolidated with those of Caldera for income tax reporting purposes. The Company was not an income tax reporting entity nor did it have a tax-sharing agreement with Caldera. As a result, Caldera allocated no income tax expense or related current or deferred income tax assets or liabilities to the Company and the liabilities or benefits attributable to the Company's operations were recorded by Caldera. Had Caldera allocated income taxes to the Company as if it were a separate taxable entity, no income tax expense or benefit would have been recorded due to the Company's net operating loss position and the uncertainty of future realization of any deferred income tax assets. A full valuation allowance would have been recorded against the Company's net deferred income tax assets. On January 6, 2000, as a result of the issuance of common stock by the Company to Caldera Systems (see Note 5), the Company could no longer be consolidated with Caldera for income tax reporting purposes and it became a separate taxable entity. Accordingly, the Company began to account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, the Company recognizes a liability or asset for the deferred income tax consequences of all temporary differences between the income tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. These deferred income tax assets or liabilities are measured using the enacted income tax rates that will be in effect when the differences are expected to reverse. Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided, as necessary. CONCENTRATION OF CREDIT RISK The Company offers credit terms on the sale of its software products to OEMs and other customers. The Company performs ongoing credit evaluations of its customers' financial condition and F-14 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) requires no collateral from its customers. The Company maintains an allowance for uncollectable accounts receivable based upon the expected collectibility of all accounts receivable. As of October 31, 1998 and 1999 and April 30, 2000, the allowance for bad debts was $13,000, $68,000 and $68,000, respectively. As of October 31, 1999, two customers accounted for approximately 73 percent of the gross accounts receivable balance. As of April 30, 2000, five customers accounted for approximately 78 percent of the gross accounts receivable balance. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 establishes new accounting and reporting standards for companies to report information about derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. This statement is effective for financial statements issued for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not expect this statement to have a material impact on the Company's results of operations, financial position or liquidity. In December 1999, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial Statements." This pronouncement summarizes certain of the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company is required to adopt SAB No. 101 during the first quarter of fiscal year 2001. Although management is currently evaluating the impact, if any, of SAB No. 101, management does not presently believe it will have a material impact on the Company's results of operations, financial position or liquidity. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 "Accounting for Certain Transactions involving Stock Compensation, an interpretation of Accounting Principles Board Opinion No. 25 ("APB No. 25")." This interpretation clarifies the definition of employee for purposes of applying APB No. 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. This interpretation is effective July 1, 2000, but certain conclusions in this interpretation cover specific events that occur after either December 15, 1998, or January 12, 2000. To the extent that this interpretation covers events occurring during the period after December 15, 1998, or January 12, 2000, but before the effective date of July 1, 2000, the effects of applying this interpretation are recognized on a prospective basis from July 1, 2000. Although management is currently evaluating the impact, if any, of this interpretation, management does not presently believe it will have a material impact on the Company's results of operations, financial position or liquidity. NET LOSS PER COMMON SHARE The Company computes net loss per share in accordance with SFAS No. 128, "Earnings Per Share", and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98, basic net loss per common share ("Basic EPS") is computed by dividing net loss available F-15 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share ("Diluted EPS") is computed by dividing net loss by the sum of the weighted average number of common shares and the dilutive common share equivalents then outstanding. Common share equivalents consist of shares issuable upon the exercise of stock options, shares issuable upon the conversion of the convertible note payable to majority stockholder and related accrued interest, and shares issuable upon conversion of convertible preferred stock. As of October 31, 1998 and 1999 and April 30, 1999 and 2000, there were 403,542, 3,388,087, 2,342,679 and 17,040,906 outstanding common share equivalents, respectively, that were not included in the computation of diluted net loss per common share as their effect would have been anti-dilutive, thereby decreasing the net loss per common share. There were no common share equivalents outstanding as of October 31, 1997. For the years ended October 31, 1997 and 1998, the 18,000,000 shares of common stock issued in the initial capitalization of the Company were treated as outstanding for the entire period. (3) CONVERTIBLE PROMISSORY NOTE PAYABLE TO MAJORITY STOCKHOLDER On September 11, 1998, Lineo and Canopy entered into a Secured Convertible Promissory Note Agreement (the "Note Agreement") pursuant to which the Company could borrow up to $2,290,000 to fund ongoing operations. Borrowings under the Note Agreement accrued interest at a rate of 7.25 percent per year, were due 30 days after demand and were secured by essentially all assets of the Company. At Canopy's option, borrowings under the Note Agreement, together with accrued interest thereon, were convertible into shares of the Company's common stock at $1.00 per share, which was deemed to be equal to or greater than the estimated fair market value of the Company's common stock on September 11, 1998. Under the Note Agreement, the Company borrowed $400,000, $1,890,000 during the years ended October 31, 1998 and 1999, respectively. Additionally, the Company accrued interest on borrowings under the Note Agreement of $3,542, $138,845 and $57,769 during the years ended October 31, 1998 and 1999 and the six months ended April 30, 2000, respectively. On January 12, 2000, the Company repaid $500,000 of principal and interest under the Note Agreement. Concurrently, the Note Agreement was amended to delete the conversion provision. No principal or interest was converted to common stock prior to the deletion of the conversion provision. The Company repaid all outstanding principal and interest due under the Note Agreement on March 22, 2000 and the Note Agreement was cancelled. (4) PREFERRED STOCK The Company's articles of incorporation provide for the issuance of up to 30,000,000 shares of $.001 par value preferred stock in one or more series. The Company's Board of Directors is authorized, without shareholder approval, to designate and determine the preferences, limitations and relative rights granted to or imposed upon any series of preferred stock or increase or decrease the number of shares constituting any series of preferred stock. The Company's Board of Directors designated 7,500,000 shares as Series A Convertible Preferred Stock ("Series A"), 5,000,000 of which were designated as Series A Class 1 Convertible Preferred Stock F-16 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (4) PREFERRED STOCK (CONTINUED) ("Series A Class 1") and 2,500,000 of which were designated as Series A Class 2 Convertible Preferred Stock ("Series A Class 2), 4,850,000 shares as Series B Convertible Preferred Stock ("Series B"), 3,000,000 shares as Series C Convertible Preferred Stock ("Series C") and 2,000,000 shares as Series D Convertible Preferred Stock ("Series D"). RIGHTS AND PREFERENCES The Series A, B and C shares have priority over any other class or series of outstanding capital stock of the Company with respect to dividend rights and liquidation, winding up or dissolution rights. The Series D shares rank junior to the Series A, B and C shares in all respects but have priority over the common stock of the Company with respect to liquidation, winding up or dissolution rights. The Series A, B, C and D shares are entitled to receive, when, as and if declared by the Board of Directors, dividends at the same rate as dividends are paid with respect to the Company's common stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, each holder of Series A, B and C shares then outstanding shall be entitled to receive, on a PARI PASSU basis, out of the assets available for distribution to stockholders an amount equal to the greater of (i) the sum of (1) the respective stated value per share plus (2) an amount equal to all unpaid accruing dividends (whether or not declared) plus (3) any other dividends declared but unpaid, and (ii) the amount that such holder of Series A, B or C shares would hold had all Series A, B and C shares been converted to common immediately prior to the liquidation, dissolution, or winding up after giving consideration to the amounts to be received by the holders of Series D shares. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, each holder of Series D shares then outstanding shall be entitled to receive out of the assets available for distribution to stockholders an amount equal to the sum of (1) the respective stated value per share plus (2) any dividends declared but unpaid. After payment of the full liquidation preference to the Series A, B, C and D shares and any other preferences payable to preferred stockholders, any remaining assets of the Company then available are to be distributed ratably among the holders of Series A, B, C and common shares. A share exchange, merger or sale of substantially all of the assets of the Company, as defined, is to be regarded as a liquidation, dissolution or winding up of the affairs of the Company and the Series A, B, C and D shares would be entitled to the preference payment described above. Each share of Series A, B, C and D is entitled to one vote for each share of common stock that would be issuable upon conversion of such share. All but one holder of Series A, B and C shares has certain rights with respect to registration of the common shares issued or issuable upon conversion of their shares. Additionally, the holders of Series A, B or C shares have demand rights that require the Company to use its best efforts to register the requested shares in accordance with the Securities Exchange Act of 1933. The Company has agreed to bear all expenses in connection with any registration. F-17 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (4) PREFERRED STOCK (CONTINUED) CONVERTIBILITY Any holder of Series A, B, C or D shares may convert all or any shares of Series A, B, C or D shares into common stock at any time. Each share of Series A, B and C automatically converts into common stock (i) immediately prior to the closing of a firm commitment underwritten public offering of common stock of the Company at a minimum price of $10 per share and gross proceeds of at least $15,000,000 (a "Qualified Offering"), (ii) upon approval of at least two-thirds of the then outstanding shares of the respective series or (iii) upon the cumulative conversion of at least two-thirds of the then outstanding shares of the respective series. Each share of Series D automatically converts into common stock (i) immediately prior to the closing of a firm commitment underwritten public offering of common stock of the Company at a minimum price of $7.50 per share and gross proceeds of at least $7,500,000 (a "Qualified Offering"), (ii) upon a share exchange or merger of the Company into or with another entity resulting in a change in control or (iii) upon the approval of at least two-thirds of the then outstanding shares of preferred stock. Each Series A, B, C and D share initially converts into one share of common stock. The conversion ratio is adjusted upon the happening of certain events, including the issuance of additional shares of common stock as a dividend or other distribution or changes resulting from a stock split. CONVERSION OF COMMON STOCK INTO SERIES A CLASS 1 On February 17, 2000, the Company entered into a recapitalization agreement with Canopy whereby 5,000,000 shares of common stock owned by Canopy were exchanged for 5,000,000 shares of Series A Class 1. In connection with the exchange, the Company recorded a deemed distribution to Canopy of $750,000 representing the difference between the estimated fair value of the shares of Series A Class 1 of $1.50 per share based on the offering price of Series A Class 2 shares and the estimated fair value of the shares of common stock of $1.35 per share on February 17, 2000. ISSUANCE OF SERIES A CLASS 2 On February 17, 2000, the Company sold 2,500,000 shares of Series A Class 2 at $1.50 per share for cash proceeds of $3,750,000. The Company incurred $47,322 of direct offering expenses in connection with the sale of the Series A Class 2 shares which have been netted against the total proceeds. ISSUANCE OF SERIES B On March 15, 2000, the Company issued 4,833,331 shares of Series B at $3.00 per share for cash proceeds of $14,260,000 and services of $240,000. The Company incurred $37,751 of direct offering expenses in connection with the sale of the Series B shares which have been netted against the proceeds. F-18 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (4) PREFERRED STOCK (CONTINUED) ISSUANCE OF SERIES C On April 28, 2000, the Company issued 2,916,666 shares of Series C at $6.00 per share for cash proceeds of $17,199,996 (of which $1,500,000 was received subsequent to April 30, 2000) and services of $300,000. On May 1, 2000, the Company issued 83,334 shares of Series C in conjunction with the acquisition of Inup S.A. (see Note 13). The Company incurred $9,996 of direct offering expenses in connection with the sale of the Series C shares which have been netted against the total proceeds. ISSUANCE OF SERIES D Subsequent to April 30, 2000, the Company has issued 1,430,482 shares of Series D in connection with the acquisitions discussed in Note 13. (5) COMMON STOCK STOCK SPLIT On September 24, 1999, the Company's Board of Directors approved a two-for-one stock split for holders of common stock. This stock split has been retroactively reflected in the accompanying consolidated financial statements for all periods presented. REINCORPORATION AS A DELAWARE CORPORATION On January 21, 2000, Lineo was reincorporated in Delaware. The reincorporation was effected by way of a merger with a newly-formed Delaware subsidiary, and the associated issuance of one share of common stock of the subsidiary for each share of common stock of the Company held by the stockholders of record. All share and per share amounts in the accompanying consolidated financial statements have been adjusted to retroactively reflect the reincorporation. COMMON STOCK TRANSACTIONS As discussed in Note 1, on September 1, 1998, in connection with the initial capitalization of Lineo, the Predecessor was issued 18,000,000 shares of common stock in exchange for certain net assets associated with the DOS-based operations of the Predecessor. The net assets acquired from the Predecessor were recorded at the Predecessor's carryover basis, which was a deficit of $701,002. F-19 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (5) COMMON STOCK (CONTINUED) On December 29, 1999, the Company's Board of Directors authorized the issuance of 1,500,000 shares of common stock to two officers of the Company at $0.80 per share. The estimated fair value of the common shares on December 29, 1999 for financial statement purposes was deemed to be $1.35 per share. The difference between the estimated fair value and the purchase price of $0.55 per share, or $825,000 in aggregate, has been recorded as non-cash stock-related compensation expense by the Company. STOCK EXCHANGE AGREEMENT WITH CALDERA SYSTEMS On January 6, 2000, the Company and Caldera Systems entered into a stock purchase and sale agreement. Pursuant to the stock purchase agreement, the Company agreed to purchase 1,250,000 shares of common stock of Caldera Systems (approximately 3.5 percent of Caldera Systems' then outstanding common stock) in exchange for 3,238,437 shares of the Company's common stock. Because Caldera Systems is also majority owned by Canopy, the investment in Caldera Systems has been accounted for as a transaction between entities under common control with the transfer being reflected in the accompanying financial statements at Caldera Systems' carry over basis. At the date of the agreement, Caldera Systems had stockholders' equity of approximately $15,113,000, of which approximately $530,000 relates to the 3.5 percent interest acquired by Lineo. Accordingly, the investment in Caldera Systems common stock was recorded at $531,402. Additionally, the Company recorded the estimated fair value of the shares of its common stock issued to Caldera Systems of $1.35 per share, or $4,371,890 in aggregate, with the difference between the $4,371,890 and the $531,402 investment recorded as a deemed distribution to Canopy. The Company currently intends to hold the shares of Caldera Systems indefinitely. Subsequent to April 30, 2000, Canopy transferred 1,761,563 shares of the Company's common stock which were held by Canopy to Caldera Systems. As a result of this transaction, Caldera Systems currently holds a total of 5,000,000 shares of the Company's common stock. In management's opinion, the transfer between Canopy and Caldera Systems was a transaction between stockholders from which the Company received no benefit. (6) STOCK OPTION PLAN THE 1999 STOCK OPTION PLAN During fiscal year 1999, the Company adopted the 1999 Stock Option Plan (the "1999 Plan") that provides for the granting of incentive or nonqualified stock options to purchase shares of common stock. The 1999 Plan is administered by the compensation committee (the "Committee") of Company's Board of Directors (the "Board"). Under the 1999 Plan, the Board can grant up to 5,000,000 options to employees, directors and to such other persons as the Board selects. Options granted under the 1999 Plan are subject to expiration and vesting terms as determined by the Board. No options can expire more than ten years from the date of grant. The exercise price for the options may be paid in cash or, as approved by the Board, in shares of the Company's common stock valued at fair market value on F-20 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (6) STOCK OPTION PLAN (CONTINUED) the exercise date. As of April 30, 2000, the Board had not authorized the exercise price of any of the options to be paid in shares of the Company's common stock. A summary of stock option activity under the 1999 Plan for the year ended October 31, 1999 and the six months ended April 30, 2000 is as follows:
WEIGHTED AVERAGE OPTIONS PRICE RANGE EXERCISE PRICE --------- ------------ ---------------- Balance, October 31, 1998............. -- $ -- $ -- Granted............................... 955,700 0.80 0.80 --------- Balance, October 31, 1999............. 955,700 0.80 0.80 Granted (unaudited)................... 1,500,531 0.80--3.00 1.88 Exercised (unaudited)................. (665,322) 0.80 0.80 --------- Balance, April 30, 2000 (unaudited)... 1,790,909 $ 0.80--3.00 $1.71 =========
As of October 31, 1999, the 955,700 outstanding options had a remaining contractual life of ten years and 677,469 of the options were exercisable. As of April 30, 2000, the 1,790,909 outstanding options had a remaining contractual life of 9.8 years and 95,171 of the options were exercisable. As discussed in Note 13, in connection with the acquisitions, subsequent to April 30, 2000, the Company has granted options to purchase an additional 673,596 shares of common stock at a weighted average exercise price of $2.82 per share. Additionally, the Company has subsequently granted additional options to employees as discussed below. STOCK-BASED COMPENSATION The Company accounts for its stock options issued to directors, officers and employees under APB No. 25 and related interpretations. Under APB No. 25, compensation expense is recognized if an option's exercise price on the measurement date is below the intrinsic fair value of the Company's common stock. During the year ended October 31, 1999 and the six months ended April 30, 2000, the Company granted 955,700 and 1,500,531 options, respectively, with exercises prices below the estimated fair market value on the measurement date as determined for financial reporting purposes resulting in $310,603 and $3,008,153, respectively, in deferred compensation. This deferred compensation has been recorded as a component of stockholders' equity and will be amortized as non-cash stock-related compensation over the vesting period of the underlying stock options. Amortization of deferred compensation amounted to $250,265 for the year ended October 31, 1999 and $157,247 for the six months ended April 30, 2000. Between April 30 and May 15, 2000, the Company has granted options to purchase an additional 652,800 shares of common stock to employees, officers and directors at a weighted average exercise price per share of $3.85, resulting in approximately $1,402,100 of additional deferred compensation. SFAS No. 123 "Accounting for Stock-Based Compensation", requires pro forma information regarding net loss as if the Company had accounted for its stock options granted under the fair value F-21 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (6) STOCK OPTION PLAN (CONTINUED) method. The fair market value of the stock options is estimated on the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions for grants during the year ended October 31, 1999: risk-free interest rate of 5.65 percent; expected dividend yield of 0 percent; volatility of 0 percent and an expected exercise life of five years. For purposes of the pro forma disclosures, the estimated fair market value of the stock options is amortized over the vesting periods of the respective stock options. The following is the pro forma disclosure and the related impact on net loss for the year ended October 31, 1999: Net loss as reported........................................ $(1,053,675) Pro forma net loss.......................................... (1,205,304)
(7) INCOME TAXES As described in Note 2, prior to January 6, 2000, the Company was not directly subject to income taxes as the Company's operations were consolidated with those of Caldera for income tax reporting purposes. On January 6, 2000, as a result of sales of common stock by the Company, the Company could no longer be consolidated with Caldera for income tax reporting purposes and became a separate taxable entity. The loss before income tax benefit consisted of the following components for the period from January 6, 2000 through April 30, 2000: Domestic U.S. operations.................................... $(2,553,885) Foreign operations.......................................... (19,849) ----------- $(2,573,734) ===========
F-22 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (7) INCOME TAXES (CONTINUED) The components of the benefit for income taxes for the period from January 6, 2000 through April 30, 2000 are as follows: Current: U.S. Federal.............................................. $ -- U.S. State................................................ -- Non-U.S................................................... (5,478) --------- (5,478) ========= Deferred: U.S. Federal.............................................. (608,695) U.S. State................................................ (100,189) Non-U.S................................................... -- Increase in valuation allowance........................... 574,647 --------- (134,237) --------- Total income tax benefit.................................... $(139,715) =========
In connection with the acquisition of Zentropic (see Note 13), the Company recorded a deferred income tax liability of $716,625 related to the acquired intangible assets other than goodwill that are not deductible for income tax purposes. As a result of the deferred income tax liability, the Company reduced the valuation allowance against its deferred income tax assets by $574,647 on the date of the acquisition. This reduction was included as a component of the purchase accounting in accordance with SFAS No. 109. The significant components of the Company's deferred income tax assets and liabilities as of April 30, 2000 are as follows: Deferred income tax assets: Net operating loss carryforward........................... $ 509,085 Reserves and accrued expenses............................. 107,319 Deferred revenue.......................................... 72,998 --------- Total deferred income tax assets.......................... 689,402 --------- Deferred income tax liabilities: Non-deductible intangibles................................ (696,719) Tax depreciation in excess of book........................ (423) --------- Total deferred income tax liabilities..................... (697,142) --------- Net deferred income tax liability....................... $ (7,740) =========
As of April 30, 2000, the Company had a net operating loss carryforward for federal income tax reporting purposes totaling approximately $1,358,000, which expires in 2020. F-23 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (7) INCOME TAXES (CONTINUED) The Internal Revenue Code contains provisions that likely could reduce or limit the availability and utilization of net operating loss carryforwards if certain changes in ownership have taken place or will take place. The Company has not performed an analysis to determine whether any such limitations have occurred. (8) COMMITMENTS AND CONTINGENCIES OPERATING AGREEMENTS The Company leases certain foreign and domestic facilities used in its operations under operating lease agreements. The aggregate commitments under non-cancelable operating leases in effect at October 31, 1999 were as follows:
YEAR ENDING OCTOBER 31, - ----------------------- 2000........................................................ $78,926 2001........................................................ 2,202 ------- $81,128 =======
The Company incurred expenses of approximately $12,796, $36,466 and $137,536 in connection with operating leases during the years ended October 31, 1997, 1998 and 1999, respectively. During the six months ended April 30, 2000, the Company has entered into additional operating lease arrangements for additional facilities. The future minimum rental payments on this premises for the years ending October 31, 2000, 2001 and 2002 total approximately $283,000, 267,000 and $50,000, respectively. LEGAL The Company may become party to certain legal proceedings arising in the ordinary course of business. Management believes, after consultation with legal counsel, that as of October 1, 1999 and April 30, 2000, no pending or threatened legal proceedings exist which would have a material adverse effect on the Company's financial position, liquidity or results of operations. (9) RELATED PARTY TRANSACTIONS CANOPY AND AFFILIATED COMPANIES A member of the Company's Board of Directors is the president and chief executive officer and a director of Canopy. Additionally, another director of the Company is the chairman of Canopy's Board of Directors. As discussed in Note 1, Canopy was the majority stockholder of Caldera. Canopy advanced $400,000 and $1,890,000 under a secured convertible promissory note agreement during the years ended October 31, 1998 and 1999, respectively (see Note 3). As discussed in Note 10, the Company participates in a 401(k) plan sponsored by Canopy. F-24 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (9) RELATED PARTY TRANSACTIONS (CONTINUED) The Company has entered into certain transactions with Canopy and other entities that are majority-owned by Canopy. These transactions consist mainly of participating in rent, joint insurance coverage and product sales and purchases. The Company believes that the terms of these related party transactions are no less favorable than the terms that could have been obtained from an unaffiliated third party in similar transactions. During the years ended October 31, 1997, 1998 and 1999 and the six months ended April 30, 2000, transactions with these related parties were as follows:
YEAR ENDED OCTOBER 31, SIX MONTHS -------------------------------- ENDED APRIL 30, 1997 1998 1999 2000 -------- -------- ---------- --------------- Transactions: Revenue....................................... $14,717 $ 42,302 $ 106,637 $ -- Purchases..................................... -- -- 1,700 26,246 Rent.......................................... 12,796 12,296 82,174 56,995 Insurance..................................... 2,076 2,321 14,955 5,796 Interest expense.............................. 51,048 186,904 138,542 57,769 Balances: Convertible note payable together with accrued interest.................................... -- 403,542 2,432,387 -- Accounts payable.............................. -- 5,538 35,745 51,019 Accounts receivable........................... -- 29,884 32,116 31,236
The Company's related-party receivables and payables are non-interest bearing and provide for settlement through cash payments in the normal course of business. As a result of an option agreement between Canopy and its chief executive officer, who is also a director of the Company, the Company has recorded a one-time compensation charge of $63,374 during the six months ended April 30, 2000. The option agreement, which granted options to purchase Lineo common shares directly from Canopy was subsequently rescinded. No shares were purchased under the agreement. CALDERA SYSTEMS As discussed in Note 5, in January 2000, the Company acquired an ownership interest in Caldera Systems. Three members of the Company's Board of Directors are also directors of Caldera Systems, one of which is also the chairman of the Board of Directors of Caldera Systems. ADVANCED SIMULATION TECHNOLOGY, INC. On April 3, 2000, the Company acquired Zentropic (see Note 13). The former principal members of Zentropic, who became stockholders of the Company as a result of the acquisition, are also majority stockholders of Advanced Simulation Technology, inc. ("ASTi"). Prior to the acquisition, Zentropic and ASTi entered into an informal agreement whereby ASTi paid substantially all operating expenses of Zentropic. As of April 3, 2000, Zentropic had a payable of $102,263 to ASTi. During the period from F-25 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (9) RELATED PARTY TRANSACTIONS (CONTINUED) acquisition (April 3, 2000) to April 30, 2000, the Company incurred $4,473 in expenses that were paid by ASTi on behalf of the Company. As of April 30, 2000, the Company had a related party payable of $106,736 to ASTi. (10) EMPLOYEE BENEFIT PLANS The Company has adopted a 401(k) plan sponsored by Canopy in which all eligible employees are entitled to make pre-tax contributions. All full-time employees become eligible for participation in the plan once they have reached the age of 21. Eligible participants are able to contribute up to 15 percent of annual compensation to the plan, subject to certain IRS limitations. As of October 31, 1999, the Company has not made any contributions to the plan, however, the Board of Directors of Canopy has approved a discretionary matching program allowing the Company to annually match up to 50 percent of each dollar contributed by employees up to six percent of the employee's salary. This matching program went in effect beginning January 1, 2000. During the four months ended April 30, 2000, the Company contributed $17,177 to the plan. (11) SIGNIFICANT CUSTOMERS During the years ended October 31, 1997, 1998 and 1999, the Company had sales to one, one and three customer(s), respectively, that accounted for 74 percent, 22 percent and 48 percent of revenue, respectively. During the six months ended April 30, 1999 and 2000, the Company has sales to two and one customer(s), respectively, that accounted for 28 percent and 34 percent of revenue, respectively. No other customers accounted for more than ten percent of revenue during the years ended October 31, 1997, 1998 and 1999 and the six months ended April 30, 1999 and 2000. (12) SEGMENT INFORMATION In June 1998, SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" was issued. SFAS No. 131 establishes disclosures related to components of a company for which separate financial information is available and evaluated regularly by the company's chief operating decision makers in deciding how to allocate resources and in assessing performance. It also requires segment disclosures about products and services as well as geographic areas. The Company has determined that it did not have any separately reportable operating segments as of October 31, 1997, 1998 and 1999 and April 30, 2000. However, the Company does generate revenue in geographic locations outside of the United States. Revenue attributable to individual countries based on the F-26 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (12) SEGMENT INFORMATION (CONTINUED) location of sales to unaffiliated customers for the years ended October 31, 1997, 1998 and 1999 and the six months ended April 30, 2000 is as follows:
YEAR ENDED OCTOBER 31, SIX MONTHS ---------------------------------- ENDED APRIL 30, 1997 1998 1999 2000 -------- ---------- ---------- --------------- United States................................ $895,341 $ 904,722 $2,100,599 $ 536,470 -------- ---------- ---------- ---------- Foreign: China...................................... 25,000 302,273 272,727 3,500 South Korea................................ -- -- -- 606,075 Taiwan..................................... -- 19,250 64,350 462,600 Other...................................... 25,073 149,964 362,908 124,654 -------- ---------- ---------- ---------- Total foreign............................ 50,073 471,487 699,985 1,196,829 -------- ---------- ---------- ---------- $945,414 $1,376,209 $2,800,584 $1,751,094 ======== ========== ========== ==========
No other individual countries accounted for more than ten percent of revenue during the years ended October 31, 1997, 1998 and 1999 and the six months ended April 30, 2000. (13) ACQUISITIONS ZENTROPIC Effective April 3, 2000, the Company, through a wholly owned subsidiary, acquired 100 percent of the membership interest of Zentropic in exchange for 1,745,226 shares of the Company's common stock. The value of the common shares was determined using an estimated fair value of $3.80 per share based on the Company's preferred stock offerings near the date of the acquisition (see Note 4). The acquisition was accounted for as a purchase and Zentropic's results of operations have been included in the accompanying April 30, 2000 unaudited consolidated financial statements from the acquisition date. The purchase price was allocated as follows, including legal and accounting fees associated with the acquisition: Current assets.............................................. $ 233,367 Property and equipment...................................... 38,630 Other assets................................................ 3,815 Goodwill.................................................... 4,058,938 Core technology and assembled workforce..................... 1,911,000 Acquired in-process research and development................ 800,000 Current liabilities......................................... (160,047) Net deferred income tax liability........................... (141,977) ---------- Purchase price.............................................. $6,743,726 ==========
F-27 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (13) ACQUISITIONS (CONTINUED) The value assigned to acquired in-process research and development was determined by an independent valuation which included, but was not limited to, an analysis of estimating the costs to develop the purchased in-process research and development into commercially viable products, the market for the developed products and technologies, and discounting the resulting net cash flows related to these projects and technologies. The valuation was based upon assumptions management believed to be reasonable at the time of the valuation. However, the underlying assumptions used to estimate expected revenue, development costs or profitability, or the events associated with such projects, may not transpire as estimated. At the date of the acquisition of Zentropic, management estimated that the acquired in-process research and development projects of Zentropic were approximately 60 percent complete and that an additional $150,000 would be required to develop these projects and technologies to commercial viability. At the date of the acquisition, the acquired in-process research and development had not yet reached technological feasibility and had no alternative future uses. UNITED SYSTEM ENGINEERS On April 13, 2000, the Company entered into an agreement with United System Engineers, Inc. ("USE"), a Japanese corporation. USE is a custom systems engineering company with experience in embedded operating systems. Pursuant to the agreement, the Company acquired, effective May 1, 2000, all of the outstanding stock of USE in exchange for $322,829 in cash and options to purchase 507,335 shares of the Company's common stock. The options have a vesting period of one year, an exercise price of $3.00 per share and expire ten years from the date of grant. The acquisition will be accounted for as a purchase. The excess of the purchase price over the estimated fair value of the acquired tangible assets will be allocated to goodwill and other intangible assets. FIREPLUG COMPUTERS INC. On May 1, 2000, the Company entered into an agreement with Fireplug Computers Inc. ("Fireplug"), a Canadian corporation. Fireplug is a developer of embedded Linux network application software solutions and embedded Linux tools. Pursuant to the agreement, the Company acquired all of the outstanding stock of Fireplug in exchange for $500,000 in cash, 69,998 shares of Series D and options to purchase 62,220 shares of common stock of the Company. The options have a vesting period of one year, an exercise price of $1.50 per share and expire ten years from the date of grant. The acquisition will be accounted for as a purchase. The excess of the purchase price over the estimated fair value of the acquired tangible assets will be allocated to goodwill and other intangible assets. INUP On May 1, 2000, the Company entered into an agreement with Inup S.A. ("Inup"), a French corporation. Inup develops Linux-based solutions for embedded devices that provide software backup in the event of hardware failures. Pursuant to the agreement, the Company acquired all of the outstanding stock of Inup in exchange for $10,000 in cash, 83,334 shares of Series C and 1,333,333 shares of common stock of the Company. The acquisition will be accounted for as a purchase. The F-28 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (13) ACQUISITIONS (CONTINUED) excess of the purchase price over the estimated fair value of the acquired tangible assets will be allocated to acquired in-process research and development, goodwill and other intangible assets. MORETON BAY VENTURES PTY LTD. On May 12, 2000, the Company entered into an agreement with Moreton Bay Ventures Pty Ltd. ("Moreton Bay"), an Australian corporation. Moreton Bay develops embedded virtual private network solutions for Internet appliances and provides engineering development for the Motorola ColdFire microprocessor platform. Moreton Bay's historical operations include two product lines, RAStel multimodem cards ("RAStel") and NETtel Internet routers ("NETtel"). Pursuant to the agreement, the Company acquired all of the outstanding stock of Moreton Bay in exchange for $10,000 in cash, 956,315 shares of Series D and options to purchase 87,374 shares of the Company's common stock. The options have a vesting period of one year, an exercise price of $3.00 per share and expire ten years from the date of grant. The acquisition will be accounted for as a purchase. The excess of the purchase price over the estimated fair value of the acquired tangible assets will be allocated to acquired in-process research and development, goodwill and other intangible assets. Prior to the acquisition, Moreton Bay transferred the RAStel assets, liabilities and operations, which the Company did not acquire, to a separate legal entity. F-29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Zentropic Computing, LLC: We have audited the accompanying consolidated balance sheets of Zentropic Computing, LLC (a Virginia limited liability company), the carved-out portion of Advanced Simulation Technology, inc. (a Virginia corporation) and their subsidiary as of October 31, 1998 and 1999, and the related consolidated statements of operations and comprehensive loss, members' capital and cash flows for each of the two years in the period ended October 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zentropic Computing, LLC, the carved-out portion of Advanced Simulation Technology, inc. and their subsidiary as of October 31, 1998 and 1999, and the results of their operations and their cash flows for each of the two years in the period ended October 31, 1999 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Salt Lake City, Utah April 3, 2000 F-30 ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF ADVANCED SIMULATION TECHNOLOGY, INC. AND THEIR SUBSIDIARY CONSOLIDATED BALANCE SHEETS
OCTOBER 31, --------------------- JANUARY 31, 1998 1999 2000 --------- --------- ----------- (UNAUDITED) ASSETS Current assets: Cash...................................................... $ 63,678 $ 120,037 $ 170,864 Accounts receivable, net of allowance for doubtful accounts of $0.......................................... -- 25,667 22,500 Value added tax and income tax receivables................ 7,053 4,280 4,945 Prepaid expenses.......................................... 2,426 11,534 16,141 --------- --------- --------- Total current assets.................................... 73,157 161,518 214,450 --------- --------- --------- Property and equipment: Computer equipment........................................ 3,385 10,764 12,752 Furniture and fixtures.................................... 3,059 9,368 9,352 --------- --------- --------- 6,444 20,132 22,104 Less accumulated depreciation............................. (1,084) (6,106) (6,779) --------- --------- --------- Net property and equipment.............................. 5,360 14,026 15,325 --------- --------- --------- Other assets, net........................................... 461 4,345 4,027 --------- --------- --------- $ 78,978 $ 179,889 $ 233,802 ========= ========= ========= LIABILITIES AND MEMBERS' CAPITAL Current liabilities: Accounts payable.......................................... $ 36,252 $ 6,810 $ 32,938 Accrued warranty.......................................... -- 5,000 5,000 Deferred revenue.......................................... -- 30,667 10,417 Related party payable..................................... -- 40,580 76,861 --------- --------- --------- Total current liabilities............................... 36,252 83,057 125,216 --------- --------- --------- Commitments and contingencies (Notes 1 and 4) Members' capital: Contributed capital....................................... 275,669 787,852 955,206 Member capital contributions receivable................... -- (137,900) -- Accumulated comprehensive income (loss)................... 446 96 (39) Accumulated deficit....................................... (23,910) (271,702) (566,071) Net deficit of carved-out operations...................... (209,479) (281,514) (280,510) --------- --------- --------- Total members' capital.................................. 42,726 96,832 108,586 --------- --------- --------- $ 78,978 $ 179,889 $ 233,802 ========= ========= =========
See accompanying notes to consolidated financial statements. F-31 ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF ADVANCED SIMULATION TECHNOLOGY, INC. AND THEIR SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
THREE MONTHS ENDED YEAR ENDED OCTOBER 31, JANUARY 31, ----------------------- ------------------------- 1998 1999 1999 2000 ---------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) Revenue: Software....................................... $ -- $ 26,141 $ -- $ 7,461 Services....................................... -- 59,333 -- 35,250 --------- --------- --------- --------- Total revenue................................ -- 85,474 -- 42,711 --------- --------- --------- --------- Cost of revenue: Software....................................... -- 20,725 -- 2,687 Services....................................... -- 17,639 -- 10,886 --------- --------- --------- --------- Total cost of revenue........................ -- 38,364 -- 13,573 --------- --------- --------- --------- Gross margin................................. -- 47,110 -- 29,138 --------- --------- --------- --------- Operating expenses: Research and development (exclusive of non-cash compensation of $0, $850, $0 and $29,454, respectively)................................ 208,539 320,828 70,300 76,826 Sales and marketing (exclusive of non-cash compensation of $0, $58,393, $0 and $94,242, respectively)................................ 130,314 249,898 57,849 79,700 General and administrative (exclusive of non-cash compensation of $0, $19,465, $0 and $43,658, respectively)....................... 90,674 150,132 36,123 71,733 Non-cash compensation.......................... -- 78,708 -- 167,354 --------- --------- --------- --------- Total operating expenses..................... 429,527 799,566 164,272 395,613 --------- --------- --------- --------- Loss before income taxes......................... (429,527) (752,456) (164,272) (366,475) Provision (benefit) for income taxes............. 2,482 (4,117) 4,907 3,479 --------- --------- --------- --------- Net loss......................................... $(432,009) $(748,339) $(169,179) $(369,954) ========= ========= ========= ========= Comprehensive loss: Net loss....................................... $(432,009) $(748,339) $(169,179) $(369,954) Foreign currency translation adjustments....... 446 (350) (454) (135) --------- --------- --------- --------- $(431,563) $(748,689) $(169,633) $(370,089) ========= ========= ========= =========
See accompanying notes to consolidated financial statements. F-32 ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF ADVANCED SIMULATION TECHNOLOGY, INC. AND THEIR SUBSIDIARY CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
MEMBER CAPITAL ACCUMULATED NET DEFICIT OF CONTRIBUTED CONTRIBUTIONS COMPREHENSIVE ACCUMULATED CARVED-OUT CAPITAL RECEIVABLE INCOME (LOSS) DEFICIT OPERATIONS ----------- -------------- ------------- ----------- -------------- Balance, October 31, 1997...... $ -- $ -- $ -- $ -- $ -- Member capital contributions... 58,295 -- -- -- -- ASTi funding of carved-out operations and contribution to members' capital.......... 217,374 -- -- -- 198,620 Net loss applicable to carved-out operations........ -- -- -- -- (408,099) Cumulative translation adjustment................... -- -- 446 -- -- Net loss....................... -- -- -- (23,910) -- -------- --------- ----- --------- --------- Balance, October 31, 1998...... 275,669 -- 446 (23,910) (209,479) Member capital contributions... 361,440 (137,900) -- -- -- ASTi funding of carved-out operations and contribution to members' capital.......... 72,035 -- -- -- 428,512 Net loss applicable to carved-out operations........ -- -- -- -- (500,547) Issuance of member interests for services................. 78,708 -- -- -- -- Cumulative translation adjustment................... -- -- (350) -- -- Net loss....................... -- -- -- (247,792) -- -------- --------- ----- --------- --------- Balance, October 31, 1999...... 787,852 (137,900) 96 (271,702) (281,514) ASTi funding of carved-out operations (unaudited)....... -- -- -- -- 76,589 Net loss applicable to carved-out operations (unaudited).................. -- -- -- -- (75,585) Cash received related to member capital contributions receivable (unaudited)....... -- 137,900 -- -- -- Issuance of member interests for services (unaudited)..... 167,354 -- -- -- -- Cumulative translation adjustment (unaudited)....... -- -- (135) -- -- Net loss (unaudited)........... -- -- -- (294,369) -- -------- --------- ----- --------- --------- Balance, January 31, 2000 (unaudited).................. $955,206 $ -- $ (39) $(566,071) $(280,510) ======== ========= ===== ========= =========
See accompanying notes to consolidated financial statements. F-33 ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF ADVANCED SIMULATION TECHNOLOGY, INC. AND THEIR SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH
THREE MONTHS ENDED YEAR ENDED OCTOBER 31, JANUARY 31, ----------------------- ------------------------- 1998 1999 1999 2000 ---------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss....................................... $(432,009) $(748,339) $(169,179) $(369,954) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................ 7,272 7,007 362 991 Non-cash compensation expense................ -- 78,708 -- 167,354 Changes in operating assets and liabilities, excluding effects of acquisition: Accounts receivable........................ 11,527 (25,667) -- 3,167 VAT and income tax receivables............. (6,021) 2,773 (3,932) (665) Prepaid expenses........................... (2,426) (9,108) (3,794) (4,607) Accounts payable........................... 24,465 (29,442) (20,512) 26,128 Deferred revenue........................... -- 30,667 -- (20,250) Accrued warranty........................... -- 5,000 -- -- Related party payable...................... -- 40,580 -- 36,281 --------- --------- --------- --------- Net cash used in operating activities.... (397,192) (647,821) (197,055) (161,555) --------- --------- --------- --------- Cash flows from investing activities: Purchase of property and equipment............. (3,683) (13,688) -- (1,972) Acquisition of Autospan Limited, net of cash acquired..................................... (9,692) -- -- -- Purchase of other long-term assets............. (490) (5,869) -- -- --------- --------- --------- --------- Net cash used in operating activities.... (13,865) (19,557) -- (1,972) --------- --------- --------- --------- Cash flows from financing activities: Members' capital contributions................. 275,669 295,575 72,025 137,900 ASTi funding of carved-out operations not contributed to members' capital.............. 198,620 428,512 127,288 76,589 --------- --------- --------- --------- Net cash provided by financing activities............................. 474,289 724,087 199,313 214,489 --------- --------- --------- --------- Net increase in cash............................. 63,232 56,709 2,258 50,962 Cumulative translation adjustment................ 446 (350) (454) (135) Cash, beginning of period........................ -- 63,678 63,678 120,037 --------- --------- --------- --------- Cash, end of period.............................. $ 63,678 $ 120,037 $ 65,482 $ 170,864 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. F-34 ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF ADVANCED SIMULATION TECHNOLOGY, INC. AND THEIR SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) INCREASE (DECREASE) IN CASH SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
THREE MONTHS YEAR ENDED ENDED OCTOBER 31, JANUARY 31, -------------------- -------------------- 1998 1999 1998 1999 --------- -------- --------- -------- Cash paid for income taxes....................... $ -- $2,482 $ -- $9,441
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES: During fiscal 1998, in connection with the acquisition of Autospan Limited, Advanced Simulation Technology, inc. received $15,308 of cash, $12,559 of receivables, $8,920 of equipment and other assets and assumed $11,787 of accounts payable and accrued liabilities in exchange for $25,000 in cash. See accompanying notes to consolidated financial statements. F-35 ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF ADVANCED SIMULATION TECHNOLOGY, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED JANUARY 31, 1999 AND 2000 IS UNAUDITED) (1) ORGANIZATION AND DESCRIPTION OF BUSINESS Zentropic Computing, LLC's subsidiary, Zentropic Computing Ltd ("Ltd"), began operations in the United Kingdom during November 1994 as Autospan Limited ("Autospan"). Autospan developed and marketed tools, related products and utilities for real time ("RT") Linux operating system software. Advanced Simulation Technology, inc. ("ASTi") acquired Autospan on February 1, 1998 for $25,000 in cash. Three individuals, together with ASTi, created a separate entity to market and sell Ltd's tools and products in the United States and certain other locations. These individuals, together with ASTi, organized Zentropic Computing, LLC, a Virginia limited liability company doing business as Zentropix ("Zentropix"), and became its founding members on January 5, 1998. Effective May 12, 1999, ASTi transferred its ownership interest in Ltd to Zentropix. As a result of the transfer, Ltd became a subsidiary of Zentropix (collectively referred to as the "Company"). ASTi's majority shareholder was one of the founding members of Zentropix. Since ASTi was the sole shareholder of Ltd and together with its majority shareholder was the majority owner of Zentropix, this transaction has been accounted for as a reorganization of entities under common control with the assets and liabilities reflected at carryover basis in a manner similar to a pooling of interests. Subsequent to the acquisition of Ltd and the reorganization of Zentropix, ASTi has paid substantially all operating expenses on behalf of the Company (see Note 5). These expenses were not recorded by the Company. Accordingly, the accompanying consolidated financial statements include the expenses paid by ASTi on behalf of the Company during the years ended October 31, 1998 and 1999 and the three months ended January 31, 2000 (referred to as the carved-out operations of ASTi). The expenses of the carved-out portion of ASTi reflect actual direct expenses associated with the Company's business and an allocated portion of common expenses. The allocated common expenses consist primarily of facilities rent and legal and accounting expenses and were allocated based on the percentage of ASTi payroll expense allocated to the Company. Management believes that the allocation methods used are reasonable and reflect their best estimate of the expenses that would have been incurred by the Company as a standalone entity. ASTi has funded the net losses of the Company by paying substantially all operating expenses of the Company. The funding applicable to the carved-out operations has been reflected as a component of equity entitled "Net Deficit of Carved-out Operations" in the accompanying consolidated balance sheets. This funding has been offset by the accumulated losses applicable to the carved-out operations of ASTi and the contributions to members' capital made by ASTi. The Company continues to develop, market and support operating system products primarily for the RT Linux and embedded Linux markets. The Company sells and distributes its software and related products through license agreements directly to end-users. These sales occur throughout the United States and in certain international locations. The Company is subject to certain risks including the uncertainty of market acceptance and demand for Linux-related products and services, competition from larger, more established companies, short product life cycles, the Company's ability to develop and bring to market new products on a F-36 ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF ADVANCED SIMULATION TECHNOLOGY, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED JANUARY 31, 1999 AND 2000 IS UNAUDITED) (1) ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED) timely basis, dependence on key employees, the ability to attract and retain additional qualified personnel and the ability to obtain adequate financing to support growth. During the years ended October 31, 1998 and 1999 and the three months ended March 31, 2000, the Company has suffered net losses of $432,009, $748,339 and $369,954, respectively. As discussed in Note 8, subsequent to March 31, 2000 the Company has been acquired by Lineo, Inc. ("Lineo") and Lineo has committed to provide funding to the Company as required. (2) SIGNIFICANT ACCOUNTING POLICIES UNAUDITED INTERIM FINANCIAL STATEMENTS The unaudited interim financial statements as of January 31, 2000 and for the three months ended January 31, 1999 and 2000 have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all normal recurring adjustments necessary to present fairly the financial information set forth therein in accordance with accounting principles generally accepted in the United States. The results of operations for the three months ended January 31, 2000 are not necessarily indicative of the results to be expected for the entire fiscal year ending October 31, 2000. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the accompanying consolidated financial statements for cash, accounts receivable, value added tax and income tax receivables and accounts payable approximate fair values because of the immediate or short-term maturities of these financial instruments. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Zentropix, the carved-out operations of ASTi and their wholly owned subsidiary, Ltd, after elimination of intercompany accounts and transactions. FOREIGN CURRENCY TRANSLATION For purposes of consolidating the operations of Ltd, the Company has determined the functional currency for Ltd's operations to be the British Pound. Accordingly, translation gains and losses are included as a component of comprehensive loss. F-37 ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF ADVANCED SIMULATION TECHNOLOGY, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED JANUARY 31, 1999 AND 2000 IS UNAUDITED) (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less accumulated depreciation. Computer equipment and furniture and fixtures are depreciated using the straight-line method over the estimated useful life of the asset, typically three years. Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments that extend the useful lives of existing equipment are capitalized and depreciated. On retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the statement of operations. CAPITALIZED SOFTWARE COSTS In accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," development costs incurred in the research and development of new software products to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Internally generated capitalizable software development costs have not been material for the years ended October 31, 1998 and 1999 and the three months ended January 31, 2000. The Company has charged its software development costs to research and development expense in the accompanying consolidated statements of operations. OTHER ASSETS Other assets consist of legal and other direct costs incurred to obtain the Company's trademarks. The trademarks are being amortized using the straight-line method over a period of five years. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews its long-lived assets, including intangibles, for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable. The Company evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. The Company uses an estimate of future undiscounted net cash flows of the related asset or group of assets over the remaining life in measuring whether the assets are recoverable. As of October 31, 1999 and January 31, 2000, the Company does not consider any of its long-lived assets to be impaired. REVENUE RECOGNITION The Company generates revenue from software sold directly to end-users. The Company also generates service revenue from training fees, consulting fees, and customer support fees. F-38 ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF ADVANCED SIMULATION TECHNOLOGY, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED JANUARY 31, 1999 AND 2000 IS UNAUDITED) (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue Recognition." Revenue from the sale of software products is recognized upon delivery when persuasive evidence of an arrangement exists, the price is fixed or determinable and collection is probable. Direct sales to end-users are evidenced by a binding purchase order for the product and are governed by a license agreement. Generally, the only multiple element arrangement of the Company's initial software sales are training and technical support services the Company provides at additional charge to the end-user. None of the post contract maintenance and support services extend for more than a year following the date of the sale. These services do not include product update or upgrade rights. After the initial support period, customers can elect to enter into separate support agreements. Revenue from the extended support agreements are deferred and recognized over the period of the contract or as the services are provided. If other significant post-delivery vendor obligations exist or if a product is subject to customer acceptance, revenues are deferred until no significant obligations remain or acceptance has occurred. To date, the Company has not shipped any software subject to acceptance terms or subject to other post-delivery vendor obligations. Additionally, the Company has not recognized revenue on any contract with customers that may include customer cancellation or termination clauses that indicate a demonstration period or otherwise incomplete transaction. The Company also offers it customers consulting, training and other services separate from the software sale. This service revenue is recognized as the services are performed. SALES AND MARKETING EXPENSES Sales and marketing expenses consist of the following: advertising, promotional activities, public relations, trade shows and the salaries, commissions and related expenses of all personnel in the sales process. The Company expenses the cost of advertising the first time the advertising takes place. Advertising expenses totaled $0 and $7,990 for the years ended October 31, 1998 and 1999, respectively, and $0 and $2,921 for the three-month periods ended January 31, 1999 and 2000, respectively. INCOME TAXES Historically, the Company has not recorded any income tax assets or liabilities related to its United States operations due to its treatment as a partnership for Federal income tax purposes. However, effective January 15, 2000, the Company elected to be taxed as a corporation rather than a partnership for Federal income tax purposes. The Company's subsidiary, Ltd, does recognize income tax assets and liabilities due to its classification as a Private Company Limited by Shares in the United Kingdom. The Company's policy was to make distributions to its members in amounts at least equal to the member's income taxes that were attributable to the net earnings of the Company. Due to its history of losses in the United States, the Company has not made any distributions to members for the payment of income taxes. F-39 ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF ADVANCED SIMULATION TECHNOLOGY, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED JANUARY 31, 1999 AND 2000 IS UNAUDITED) (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS The Company offers credit terms on the sale of its software products to its customers. The Company performs ongoing credit evaluations of its customers' financial condition and requires no collateral from its customers. The Company continually evaluates the need for an allowance for uncollectable accounts receivable based upon the expected collectibility of all accounts receivable. As of October 31, 1999, two customers accounted for 100 percent of the gross accounts receivable balance which the Company deemed to be entirely collectible. During the year ended October 31, 1999, the Company's sales to three customers accounted for 45, 23 and 19 percent of revenue. No other customer accounted for more than ten percent of net revenue during the year ended October 31, 1999. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes new accounting and reporting standards for companies to report information about derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. This statement is effective for financial statements issued for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not expect this statement to have a material impact on the Company's results of operations, financial position or liquidity. In December 1999, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial Statements." This pronouncement summarizes certain of the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company is required to adopt SAB No. 101 during the first quarter of fiscal year 2001. Although management is currently evaluating the impact, if any, of SAB No. 101, management does not presently believe it will have a material impact on the Company's results of operations, financial position or liquidity. (3) MEMBERS' CAPITAL CONTRIBUTED CAPITAL On January 5, 1998, Zentropix was organized with capital of $25,100 contributed by ASTi and three other founding members. During the period from January 5, 1998 through October 31, 1998, these members contributed an additional $33,195. On May 12, 1999, additional members were admitted to Zentropix. Together with the founding members, these members agreed to contribute additional capital of $336,440. As of October 31, 1999, the Company had member capital contributions receivable of $137,900. As of January 31, 2000, all amounts receivable from members had been collected. As discussed in Note 1, ASTi has funded the net losses of the Company by paying substantially all operating expenses of the Company. During fiscal 1999, ASTi and the other members agreed that a F-40 ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF ADVANCED SIMULATION TECHNOLOGY, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED JANUARY 31, 1999 AND 2000 IS UNAUDITED) (3) MEMBERS' CAPITAL (CONTINUED) portion of ASTi's funding would be deemed as contributed capital. During the years ended October 31, 1998 and 1999, the funding which was deemed to be contributed capital by the members totaled $217,374 and $72,035, respectively. TRANSFER OF MEMBER INTERESTS On May 12, 1999, the Company granted three founding members an additional 5.6 percent interest in the Company for services rendered. The Company valued this interest at $78,708 based upon the sale of member interests to third parties for cash at that same date. On December 7, 1999, three principal members of Zentropix transferred a portion of their membership interests in Zentropix to four key employees as compensation for services rendered by the employees. These three principal members transferred 7.1 percent of the total outstanding membership interest in the Company to these four employees. In accordance with Interpretation No. 1 to Accountings Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," the Company recorded the $167,354 estimated fair value related to the member interests transferred as non-cash compensation expense in the accompanying statement of operations for the quarter ended January 31, 2000. The fair value of the member interests transferred was based upon other equity transactions in fiscal 1999 and fiscal 2000 and in the opinion of management, is a reasonable estimate of fair value. (4) COMMITMENTS AND CONTINGENCIES OPERATING AGREEMENTS The Company shares its corporate office facilities with ASTi, which pays for all rent expense associated with corporate facilities. Historically no formal agreement between ASTi and the Company governed this arrangement. However, after the merger with Lineo (see Note 8), the Company expects to move its corporate offices and assume direct responsibility for its rent obligations. A portion of the rent expense paid by ASTi has been included in the carved-out operations of ASTi. The Company leases office space in Brighton, U.K. The current lease expires in March 2002. The Company is obligated to pay rent of approximately $5,100 per year plus annual VAT. Rent expense was approximately $800 for the year ended October 31, 1998 under a prior lease arrangement. Rent expense was approximately $5,000 (including VAT) for the year ended October 31, 1999 under the current and prior lease arrangements. Future minimum lease obligations related to this lease are $5,100 in fiscal 2000, $5,100 in fiscal 2001 and $1,200 in fiscal 2002. LIMITATION OF MEMBERS' LIABILITY None of the members are obligated to contribute capital to restore any negative capital account, nor is any member liable for any of the debts, losses, liabilities or obligations of the Company beyond such member's capital contributions as governed by the provisions of the Virginia Limited Liability Company Act and other applicable laws of the Commonwealth of Virginia. F-41 ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF ADVANCED SIMULATION TECHNOLOGY, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED JANUARY 31, 1999 AND 2000 IS UNAUDITED) (5) RELATED PARTY TRANSACTIONS The Company had an informal agreement whereby ASTi paid substantially all operating expenses of the Company. The expenses paid on behalf of the Company by ASTi consisted of the following:
THREE MONTHS ENDED YEAR ENDED OCTOBER 31, JANUARY 31, ----------------------- ------------------- 1998 1999 1999 2000 ---------- ---------- -------- -------- Payroll.............................. $332,551 $446,862 $106,886 $66,766 Contract research and development.... 37,500 -- -- -- Facilities rent...................... 17,795 33,693 8,423 7,500 Legal and accounting fees and other general operating expenses......... 8,083 17,971 4,493 2,323 Marketing expenses................... 20,065 2,021 505 -- -------- -------- -------- ------- Total expenses..................... $415,994 $500,547 $120,307 $76,589 ======== ======== ======== =======
The Company had a related party payable to ASTi of $40,580 as of October 31, 1999 and $76,861 at January 31, 2000 related to expenses paid by ASTi on behalf of the Company. The agreement between ASTi and the Company relating to these expenses is informal. Consequently, the Company has classified the related party payable as a current liability. (6) INCOME TAXES As described in Note 2, Zentropix was treated as a partnership for Federal income tax purposes prior to January 15, 2000 at which time it elected to be treated as a taxable entity. Ltd has been treated as a taxable entity under the laws of the United Kingdom since it's inception. The carved-out portion of ASTi was included in the U.S. tax return of ASTi for all periods presented. Had these carved-out expenses been paid by Zentropix, the tax benefit would have flowed through to the members and would not have been reflected in the accompanying financial statements for all periods prior to January 15, 2000. The net loss before income taxes consisted of the following components:
YEAR ENDED OCTOBER 31 THREE MONTHS --------------------- ENDED JANUARY 31, 1998 1999 2000 --------- --------- ------------------ Domestic U.S. operations............................... $(428,380) $(742,434) $(383,804) Operations of foreign subsidiary, Zentropic Computing Ltd.................................................. (1,147) (10,022) 17,329 --------- --------- --------- Net loss before income taxes......................... $(429,527) $(752,456) $(366,475) ========= ========= =========
The provision (benefit) for income taxes for the years ended October 31, 1998 and 1999 consisted entirely of taxes related to Ltd. F-42 ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF ADVANCED SIMULATION TECHNOLOGY, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED JANUARY 31, 1999 AND 2000 IS UNAUDITED) (6) INCOME TAXES (CONTINUED) The Company determines its deferred tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities. They are measured by applying the enacted tax rates and laws in effect for the years in which such differences are expected to reverse. As of January 15, 2000 (the date Zentropix became a taxable entity in the U.S.) the Company had approximately $6,000 of deferred income tax assets related to deferred revenue and accruals. As of January 31, 2000, the Company had approximately $29,000 of deferred income tax assets related to net operating losses, deferred revenue and accruals. The amount of and ultimate realization of the deferred income tax assets is dependent, in part, upon the tax laws in effect, the Company's future earnings, and other future events, the effects of which cannot be determined. The Company has established a valuation allowance against its deferred income tax assets because the available objective evidence creates sufficient uncertainty regarding their realizability. (7) SEGMENT INFORMATION In June 1998, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 establishes disclosures related to components of a company for which separate financial information is available and evaluated regularly by a company's chief operating decision makers in deciding how to allocate resources and in assessing performance. It also requires segment disclosures about products and services as well as geographic areas. The Company has determined that it did not have any separately reportable operating segments as of October 31, 1998 and 1999 and January 31, 2000. However, the Company does sell software and related services in geographic locations outside the United States. Revenues attributed to individual countries based on the location of sales to unaffiliated customers were as follows:
YEAR ENDED OCTOBER 31, THREE MONTHS -------------------- ENDED JANUARY 31, 1998 1999 2000 --------- -------- ------------------ Revenue: United States............................... $ -- $47,141 $36,461 France...................................... -- 38,333 6,250 --------- ------- ------- Total revenue................................. $ -- $85,474 $42,711 ========= ======= =======
(8) SUBSEQUENT EVENT On January 21, 2000, the Company signed a letter of intent to merge with Lineo. The Company agreed to exchange 100 percent of its members' capital for 1,745,226 shares of Lineo's common stock. On March 28, 2000, the Company and Lineo signed a definitive Agreement and Plan of Merger and on April 3, 2000, the Company finalized its merger with Lineo in accordance with the terms specified above. F-43 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To United System Engineers, Inc.: We have audited the accompanying balance sheets of United System Engineers, Inc. (a Japanese corporation) as of December 31, 1998 and 1999, and the related statements of operations and comprehensive income (loss), stockholders' deficit and cash flows for the years then ended, expressed in Japanese yen. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of United System Engineers, Inc. as of December 31, 1998 and 1999, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles in the United States of America (see Note 1). Also, in our opinion, the amounts translated into U.S. dollars in the accompanying financial statements have been computed on the basis set forth in Note 1. ARTHUR ANDERSEN Tokyo, Japan April 14, 2000 F-44 UNITED SYSTEM ENGINEERS, INC. BALANCE SHEETS
THOUSANDS OF YEN ------------------------------------------------------ THOUSANDS OF U.S. DOLLARS DECEMBER 31, -------------------------- ----------------------------------- MARCH 31, DECEMBER 31, MARCH 31, 1998 1999 2000 1999 2000 ---------------- ---------------- ---------------- ------------ ----------- (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................. Y 55,422 Y 40,091 Y 31,430 $ 391 $ 307 Time deposits............................. 9,104 9,124 9,130 89 89 Accounts receivable....................... 14,127 10,979 11,541 107 113 Unbilled revenue.......................... 5,979 13,790 -- 135 -- Prepaid expenses.......................... 12,732 13,857 1,357 135 13 Investment in marketable security......... -- -- 41,990 -- 410 Other current assets...................... 1,160 1,212 2,259 12 22 ---------------- ---------------- ---------------- ------- ------- Total current assets.................... 98,524 89,053 97,707 869 954 ---------------- ---------------- ---------------- ------- ------- Property and equipment, at cost: Buildings and improvements................ 99,039 99,039 99,039 967 967 Equipment................................. 17,294 17,793 17,945 174 175 Less accumulated depreciation............. (61,345) (67,275) (68,541) (657) (669) ---------------- ---------------- ---------------- ------- ------- 54,988 49,557 48,443 484 473 ---------------- ---------------- ---------------- ------- ------- Other assets................................ 2,375 1,994 1,942 20 19 ---------------- ---------------- ---------------- ------- ------- Y 155,887 Y 140,604 Y 148,092 $ 1,373 $ 1,446 ================ ================ ================ ======= ======= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable.......................... Y -- Y 8,500 Y -- $ 83 $ -- Customer advances and deferred revenue.... 193 182 1,839 1 18 Short-term debt........................... 69,735 78,284 81,846 764 799 Current maturities of long-term debt...... 19,920 31,094 31,484 304 308 Accrued vacation payable.................. 5,528 6,191 6,191 60 60 Other accrued liabilities................. 3,780 4,304 1,958 42 19 Income taxes payable...................... 206 206 51 2 -- Other current liabilities................. 2,044 7,903 4,153 78 41 ---------------- ---------------- ---------------- ------- ------- Total current liabilities............... 101,406 136,664 127,522 1,334 1,245 ---------------- ---------------- ---------------- ------- ------- Long-term debt, net of current maturities... 107,970 76,876 83,440 751 814 ---------------- ---------------- ---------------- ------- ------- Commitments and contingencies (Notes 1 and 5) Stockholders' deficit: Common stock, Y500 par value per share; Authorized--160,000 shares; Outstanding--80,000 shares as of December 31, 1998, 160,000 shares as of December 31, 1999 and March 31, 2000.... 40,000 80,000 80,000 781 781 Accumulated deficit......................... (93,489) (152,936) (171,185) (1,493) (1,671) Accumulated other comprehensive income...... -- -- 28,315 -- 277 ---------------- ---------------- ---------------- ------- ------- Total stockholders' deficit............. (53,489) (72,936) (62,870) (712) (613) ---------------- ---------------- ---------------- ------- ------- Y155,887 Y140,604 Y148,092 $ 1,373 $ 1,446 ================ ================ ================ ======= =======
See accompanying notes to financial statements. F-45 UNITED SYSTEM ENGINEERS, INC. STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
THOUSANDS OF U.S. DOLLARS THOUSANDS OF YEN -------------------------- --------------------------------------------------------------------- THREE YEAR ENDED THREE MONTHS ENDED MONTHS DECEMBER 31, MARCH 31, YEAR ENDED ENDED --------------------------------- --------------------------------- DECEMBER 31, MARCH 31, 1998 1999 1999 2000 1999 2000 --------------- --------------- --------------- --------------- ------------ ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Revenues: Services................... Y 202,408 Y 146,117 Y 34,050 Y 23,101 $1,427 $ 225 Software................... -- 10,990 -- 8,628 107 85 --------------- --------------- --------------- --------------- ------ ----- Total revenue............ Y202,408 Y157,107 Y 34,050 Y 31,729 $1,534 $ 310 Cost of revenue.............. 91,778 104,879 27,716 34,432 1,024 336 --------------- --------------- --------------- --------------- ------ ----- Gross profit (loss)...... 110,630 52,228 6,334 (2,703) 510 (26) --------------- --------------- --------------- --------------- ------ ----- Operating expenses: Research and development... 25,560 4,934 4,934 -- 48 -- Selling, general and administrative........... 82,495 99,506 14,296 13,890 971 136 --------------- --------------- --------------- --------------- ------ ----- Total operating expenses............... 108,055 104,440 19,230 13,890 1,019 136 --------------- --------------- --------------- --------------- ------ ----- Income (loss) from operations................. 2,575 (52,212) (12,896) (16,593) (509) (162) --------------- --------------- --------------- --------------- ------ ----- Other income (expense): Interest expense, net...... (6,134) (7,119) (1,639) (1,515) (69) (15) Other income (expense), net...................... 81 90 55 (90) -- (1) --------------- --------------- --------------- --------------- ------ ----- Other expense, net....... (6,053) (7,029) (1,584) (1,605) (69) (16) --------------- --------------- --------------- --------------- ------ ----- Loss before income taxes..... (3,478) (59,241) (14,480) (18,198) (578) (178) Provision for income taxes... 206 206 51 51 2 -- --------------- --------------- --------------- --------------- ------ ----- Net loss..................... Y (3,684) Y (59,447) Y (14,531) Y (18,249) $ (580) $(178) =============== =============== =============== =============== ====== ===== Comprehensive income (loss): Net loss................... Y (3,684) Y (59,447) Y (14,531) Y (18,249) $ (580) $(178) Unrealized gain on marketable security...... -- -- -- 28,315 -- 277 --------------- --------------- --------------- --------------- ------ ----- Y (3,684) Y (59,447) Y (14,531) Y 10,066 $ (580) $ 99 =============== =============== =============== =============== ====== =====
See accompanying notes to financial statements. F-46 UNITED SYSTEM ENGINEERS, INC. STATEMENTS OF STOCKHOLDERS' DEFICIT
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS ----------------------------------------------------- -------------------------- DECEMBER 31, ---------------------------------- MARCH 31, DECEMBER 31, MARCH 31, 1998 1999 2000 1999 2000 --------------- ---------------- ---------------- ------------ ----------- (UNAUDITED) (UNAUDITED) Common stock: Beginning balance.................... Y 30,000 Y 40,000 Y 80,000 $ 391 $ 781 Shares issued: 20,000 shares in December 1998..... 10,000 -- -- -- -- 80,000 shares in December 1999..... -- 40,000 -- 390 -- --------------- ---------------- ---------------- ------- ------- Ending balance....................... Y 40,000 Y 80,000 Y 80,000 $ 781 $ 781 =============== ================ ================ ======= ======= Accumulated deficit: Beginning balance.................... Y(89,805) Y (93,489) Y(152,936) $ (913) $(1,493) Net loss............................. (3,684) (59,447) (18,249) (580) (178) --------------- ---------------- ---------------- ------- ------- Ending balance....................... Y(93,489) Y(152,936) Y(171,185) $(1,493) $(1,671) =============== ================ ================ ======= ======= Accumulated other comprehensive income: Beginning balance.................... Y -- Y -- Y -- $ -- $ -- Unrealized gain on investment in marketable security................ -- -- 28,315 -- 277 --------------- ---------------- ---------------- ------- ------- Ending balance....................... Y -- Y -- Y 28,315 $ -- $ 277 =============== ================ ================ ======= =======
See accompanying notes to financial statements. F-47 UNITED SYSTEM ENGINEERS, INC. STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS --------------------------------------------------------------------- ---------------------------- YEAR ENDED THREE MONTHS ENDED THREE MONTHS DECEMBER 31, MARCH 31, YEAR ENDED ENDED --------------------------------- --------------------------------- DECEMBER 31, MARCH 31, 1998 1999 1999 2000 1999 2000 --------------- --------------- --------------- --------------- ------------ ------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss................. Y (3,684) Y(59,447) Y(14,531) Y(18,249) $(580) $(178) Adjustments to reconcile net loss to net cash provided by (used in) operating activities-- Depreciation and amortization......... 6,144 6,180 1,454 1,266 60 12 Changes in assets and liabilities-- Accounts receivable......... 11,420 3,148 (5,025) (562) 31 (6) Unbilled revenue..... (5,103) (7,811) 5,979 115 (76) 2 Prepaid expenses..... (11,192) (1,125) 11,498 12,500 (11) 122 Other current assets............. (799) (52) 1,058 (1,047) (1) (10) Other assets......... (1,319) 131 52 52 1 1 Accounts payable..... (5,882) 8,500 -- (8,500) 83 (83) Customer advances and deferred revenue... 54 (11) 14 1,657 -- 17 Accrued vacation payable............ 908 663 (1) -- 6 -- Other accrued liabilities........ (2,970) 524 (1,999) (2,346) 5 (23) Income tax payable... -- -- (155) (155) -- (2) Other current liabilities........ (2,813) 5,859 2,950 (3,750) 57 (37) --------------- --------------- --------------- --------------- ----- ----- Net cash provided by (used in) operating activities......... (15,236) (43,441) 1,294 (19,019) (425) (185) =============== =============== =============== =============== ===== ===== Cash flows from investing activities: Purchases of buildings and improvements, and equipment.............. (1,529) (499) -- (152) (4) (1) Increase in time deposits............... (3,635) (20) (11) (6) -- -- --------------- --------------- --------------- --------------- ----- ----- Net cash used in investing activities........... (5,164) (519) (11) (158) (4) (1) --------------- --------------- --------------- --------------- ----- ----- Cash flows from financing activities: Proceeds from long term debt................... 85,200 -- -- 15,000 -- 146 Repayments of long term debt................... (22,780) (19,920) (4,800) (8,046) (194) (79) Increase (decrease) in short term debt, net... (21,186) 8,549 (600) 3,562 83 35 Sale of common shares.... 10,000 40,000 -- -- 390 -- --------------- --------------- --------------- --------------- ----- ----- Net cash provided by (used in) financing activities........... 51,234 28,629 (5,400) 10,516 279 102 =============== =============== =============== =============== ===== ===== Net increase (decrease) in cash and cash equivalents.............. 30,834 (15,331) (4,117) (8,661) (150) (84) Cash and cash equivalents: Beginning of period...... 24,588 55,422 55,422 40,091 541 391 --------------- --------------- --------------- --------------- ----- ----- End of period............ Y 55,422 Y 40,091 Y 51,305 Y 31,430 $ 391 $ 307 =============== =============== =============== =============== ===== ===== See accompanying notes to financial statements.
F-48 UNITED SYSTEM ENGINEERS, INC. STATEMENTS OF CASH FLOWS (CONTINUED) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS --------------------------------------------------------------------- ---------------------------- YEAR ENDED THREE MONTHS ENDED THREE MONTHS DECEMBER 31, MARCH 31, YEAR ENDED ENDED --------------------------------- --------------------------------- DECEMBER 31, MARCH 31, 1998 1999 1999 2000 1999 2000 --------------- --------------- --------------- --------------- ------------ ------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Supplemental disclosure of cash flow information: Cash paid for interest... Y 7,219 Y 6,959 Y 1,658 Y 1,640 $ 67 $ 16 Cash paid for income taxes.................. Y 206 Y 206 Y 206 Y 206 $ 2 $ 2 Supplemental schedule of noncash investing and financing activities: Receipt of investment in marketable security as payment for services... Y -- Y -- Y -- Y 13,675 $ -- $ 134
See accompanying notes to financial statements. F-49 UNITED SYSTEM ENGINEERS, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) (1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND DESCRIPTION OF BUSINESS United System Engineers, Inc. (the "Company") was founded on October 24, 1984. Since its founding, the Company has specialized in providing engineering and software development services. A majority of the Company's services have been provided to computer system vendors and integrators in Japan. The Company's experience has been concentrated in embedded systems development. In November 1997, the Company began to develop its proprietary Linux-based server application software product named WebMart. In March 1999, the Company began to generate revenues from the sale of WebMart directly through the Company's Internet homepage and is negotiating with other vendors and system integrators for indirect sales. The Company's revenues are generated from two sources: contract engineering services and sales of WebMart, including technical support of WebMart. The commercial success of WebMart is subject to certain risks including the uncertainty of market acceptance and life cycles. The Company is yet to recover the research and development costs of WebMart, which was financed primarily by bank borrowings. During the years ended December 31, 1998 and 1999 and the three months ended March 31, 2000, the Company suffered net losses and as March 31, 2000, the Company had a working capital deficit of Y71,805,000 ($701,000) and a stockholders' deficit of Y62,870,000 ($613,000). As discussed in Note 11, subsequent to March 31, 2000 the Company's shares of common stock have been acquired by Lineo, Inc. and Lineo, Inc. has committed to provide funding to the Company as required. BASIS OF PRESENTING FINANCIAL STATEMENTS The Company maintains its accounts and prepares its financial statements in conformity with Japanese income tax laws and accounting practices. However, the accompanying financial statements differ from those issued for domestic purposes in Japan. They reflect certain adjustments necessary to present the financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The principal adjustments necessary to conform to U.S. GAAP relate to accounting for costs of computer software to be sold, leased or otherwise marketed, certain accrued liabilities, comprehensive income and differences related to accounting for income taxes. The Company's functional currency is the Japanese yen and the accompanying financial statements are presented in yen. Additionally, as a convenience, the balance sheets as of December 31, 1999 and March 31, 2000 and the related statements of operations and comprehensive income (loss), stockholders' deficit and cash flows for the year and three months then ended are also presented in U.S. dollars by arithmetically translating all Japanese yen amounts at Y102.40 to US$1, which was the exchange rate at December 31, 1999. UNAUDITED INTERIM FINANCIAL STATEMENTS The unaudited interim financial statements as of March 31, 2000 and for the three months ended March 31, 1999 and 2000 have been prepared on the same basis as the audited financial statements F-50 UNITED SYSTEM ENGINEERS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) (1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) and, in the opinion of management, reflect all normal recurring adjustments necessary to present fairly the financial information set forth therein in accordance with U.S. GAAP. All financial statement disclosures related to the interim financial statements are unaudited. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. TRANSLATION OF FOREIGN CURRENCIES In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation", certain transactions entered into by the Company which are denominated in foreign currencies are translated into Japanese yen using the prevailing exchange rates as of the transaction dates. Assets and liabilities denominated in the foreign currencies are translated using exchange rates in effect at the balance sheet date. Exchange gains and losses relating to these assets and liabilities are included in the determination of net income (loss). STATEMENTS OF CASH FLOWS For purposes of the statements of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist principally of amounts in time deposits. MARKETABLE SECURITY The Company's investment in a marketable security has been categorized as available for sale, as defined by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Unrealized holding gains and losses are reflected as a component of stockholders' deficit until realized. CONCENTRATION OF CREDIT RISK The Company offers credit terms on the sale of its software products to certain customers. The Company performs ongoing credit evaluations of its customers' financial condition and requires no collateral from its customers. The Company continually evaluates the need for an allowance for uncollectible accounts receivable based upon the expected collectibility of all accounts receivable. As of December 31, 1998 and 1999 and March 31, 2000, no allowance was recognized as the Company deemed its accounts receivable to be entirely collectible. DEPRECIATION Depreciation of buildings and equipment is computed by using the declining-balance method at rates based on the estimated useful lives of the assets, which range from 20 to 26 years for buildings (including improvements) and from two to ten years for equipment. Depreciation expense was F-51 UNITED SYSTEM ENGINEERS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) (1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Y5,668,000 ($55,000) and Y5,930,000 ($58,000) for the years ended December 31, 1998 and 1999, respectively. Amortization of intangible assets is computed by using the straight-line method based on a useful life of five years. Amortization expense was Y459,000 ($4,000) and Y250,000 ($2,000) for the years ended December 31,1998 and 1999, respectively. REVENUE Deferred revenue primarily relates to support agreements, which have been paid for by customers prior to the performance of the related services. REVENUE RECOGNITION In October 1997, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2"). Additionally, in December 1998, the AICPA issued Statement of Position No. 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition, With Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amends SOP 97-2 to require recognition of revenue using a "residual method" in certain circumstances. The Company has adopted SOP 97-2 and SOP 98-9 for all transactions entered into during the periods included in the accompanying financial statements. The Company generates revenue from software products sold directly to computer device manufacturers and end-users. The Company also generates services revenue from engineering, training and customer support fees. Revenue from contracted engineering services is recognized based upon the percentage completion method. The Company also provides training services to its customers and the related revenue is recognized as the services are performed. Revenue from the sale of software products is recognized upon delivery of the product when persuasive evidence of an arrangement exists, the price is fixed or determinable and collection is probable. All sales into the distribution channel require a binding purchase order. Direct sales to end-users are evidenced by concurrent payment for the product by transfer of funds and are governed by a license agreement. The sale of software products does not include product update or upgrade rights. If other significant post-delivery vendor obligations exist or if a product is subject to customer acceptance, revenue is deferred until no significant obligations remain or acceptance has occurred. To date, the Company has not shipped any software products subject to acceptance terms or subject to other post-delivery vendor obligations. Additionally, the Company has not recognized revenue on any contracts with customers that may include customer cancellation or termination clauses that indicate a demonstration period or otherwise incomplete transaction. The Company also offers its customers training and other services separate from the software sale. The services are not integral to the functionality of the software and are available from other vendors. This service revenue is generally recognized over the period during which the applicable service is to be performed or on a services-performed basis. F-52 UNITED SYSTEM ENGINEERS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) (1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CAPITALIZED SOFTWARE COSTS In accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," development costs incurred in the research and development of new software products to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Internally generated capitalizable software development costs have not been material for the years ended December 31, 1998 and 1999 and the three months ended January 31, 2000. The Company has charged its software development costs to research and development expense in the accompanying statements of operations. INCOME TAXES The Company recognizes a liability or asset for the deferred tax consequences of all temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. These deferred tax assets or liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. Deferred tax assets are reviewed periodically for recoverability and valuation allowances are provided, as necessary. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS No. 133 establishes new accounting and reporting standards for companies to report information regarding derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. This statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (or June 1, 2001 for the Company). The Company does not expect that SFAS No. 133 will have a material impact on the financial condition or results of the operations of the Company. In December 1999, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 101 ("SAB No. 1"), "Revenue Recognition in Financial Statements." This pronouncement summarizes certain of the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company is required to adopt SAB No. 101 during the second quarter of 2000. Although management is currently evaluating the impact, if any, of SAB No. 101, management does not presently believe it will have a material impact on the Company's results of operations, financial position or liquidity. (2) MARKETABLE SECURITY As discussed in Note 5, the Company received 16,833 shares of Caldera Systems, Inc.'s common stock in exchange for services. This investment has been classified as an available-for-sale security in F-53 UNITED SYSTEM ENGINEERS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) (2) MARKETABLE SECURITY (CONTINUED) the accompanying financial statements. The cost, gross unrealized holding gain, and estimated fair value of the marketable security as of March 31, 2000 is as follows:
THOUSANDS OF THOUSANDS OF YEN U.S. DOLLARS ---------------- ------------ Cost............................................. Y13,675 $134 Gross unrealized holding gain.................... 28,315 276 -------------- ---- Estimated fair value............................. Y41,990 $410 ============== ====
(3) SHORT-TERM AND LONG-TERM DEBT Short-term debt consisted primarily of short-term bank loans due to banks, shareholders and directors. The weighted-average annual interest rates applicable to short-term debt outstanding at December 31, 1998 and 1999, were 2.9 percent and 2.3 percent, respectively. The weighted-average borrowings during the years ended December 31, 1998 and 1999 were Y82,952,000 ($810,000) and Y69,055,000 ($674,000), respectively. F-54 UNITED SYSTEM ENGINEERS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) (3) SHORT-TERM AND LONG-TERM DEBT (CONTINUED) Long-term debt at December 31, 1998 and 1999, consisted of the following:
THOUSANDS OF YEN --------------------------------------------------- THOUSANDS OF U.S. DOLLARS DECEMBER 31, ------------------------- --------------------------------- MARCH 31, DECEMBER 31, MARCH 31, 1998 1999 2000 1999 2000 --------------- --------------- --------------- ------------ ---------- Long-term loan from 82 Bank: interest at 2.8 percent per annum payable monthly, principal due in monthly installments through 2003; secured by building; guaranteed by directors and stockholder........................... Y 47,216 Y 34,520 Y 31,346 $ 338 $ 306 --------------- --------------- --------------- ----- ----- Long-term loan from Ina Shinkin Bank: interest at 3.2 percent per annum payable monthly, principal due in monthly installments through 2003; secured by building and time deposit; guaranteed by directors and stockholder........................... 68,674 63,370 73,978 619 722 --------------- --------------- --------------- ----- ----- Long-term loan from People's Finance Corporation: interest at 2.3 percent per annum payable monthly, principal due in monthly installments through 2003; secured by building; guaranteed by directors and stockholder.......... 12,000 10,080 9,600 98 94 --------------- --------------- --------------- ----- ----- Less current maturities................. (19,920) (31,094) (31,484) (304) (308) --------------- --------------- --------------- ----- ----- Long-term debt.......................... Y107,970 Y 76,876 Y 83,440 $ 751 $ 814 =============== =============== =============== ===== =====
As is customary in Japan, substantially all bank loans are made under agreements which provide that the banks may require, under certain conditions, the borrower to provide collateral or guarantors for its loans. Lending banks have a right to offset cash deposited with them against any debt or obligation that becomes due and, in the case of default and certain other specified events, against all other debt payable to the banks. The Company paid guarantee fees and pledged a building with a book value of Y1,896,000 ($18,000) as of December 31, 1999 as security to the credit guarantee company. Additionally, another building with a book value of Y43,494,000 ($424,000) as of December 31, 1999 and a time deposit of Y20,024,000 ($195,000) are pledged as security to the banks. Furthermore all loans are guaranteed by the Company's directors and stockholders. F-55 UNITED SYSTEM ENGINEERS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) (3) SHORT-TERM AND LONG-TERM DEBT (CONTINUED) Annual maturities of long-term debt as of December 31, 1999 are as follows:
THOUSANDS OF YEAR ENDING DECEMBER 31 THOUSANDS OF YEN U.S. DOLLARS - ----------------------- ---------------- ------------ 2000......................................... Y 31,094 $ 304 2001......................................... 27,744 271 2002......................................... 27,744 271 2003......................................... 21,388 209 --------------- ------ Total........................................ Y107,970 $1,055 =============== ======
(4) RETIREMENT BENEFIT PLANS The Company has defined contribution benefit plans, which provide retirement benefits to qualified employees. The Company makes discretionary contributions principally based on individual technical skills and experience. The Company's contributions are expensed as incurred and totaled Y2,472,000 ($24,000) and Y2,252,000 ($22,000) for the years ended December 31, 1998 and 1999, respectively. (5) COMMITMENTS AND CONTINGENCIES SOFTWARE LOCALIZATION AGREEMENT On October 1, 1999, the Company entered into an agreement with Caldera Systems, Inc. ("Caldera") to localize certain of Caldera's software products for the Japanese market. As consideration, Caldera agreed to pay $250,000 in cash or issue to the Company shares of Caldera's common stock with a market value of $202,000, based on Caldera's initial public offering price per share. On January 4, 2000, the Company and Caldera amended the agreement pursuant to which Caldera agreed to issue 33,667 shares of common stock to the Company for the services, of which 16,833 were to be issued immediately for services previously rendered and the remaining 16,834 are to be issued upon completion of the localization services. In the event that the localized software is not accepted by Caldera under the agreement prior to December 31, 2001, then the Company shall pay $100,000 to Caldera. However, the Company shall have no obligation to pay such amount if the localized software is not accepted by Caldera prior to December 31, 2001 because Caldera unreasonably withheld or delayed such acceptance. Based on the performance commitment, the date of the amended contract has been determined to be the measurement date and the estimated fair value of Caldera's common stock on that date was $269,336, or $8 per share. As of December 31,1999, the Company recognized Y13,790,000 ($135,000) of revenue based upon the percentage completion method (see Note 1). OPERATING LEASE AGREEMENTS The Company leases land for operating facilities and equipment under cancelable and non-cancelable operating lease agreements. Rent expense under these lease agreements amounted to F-56 UNITED SYSTEM ENGINEERS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) (5) COMMITMENTS AND CONTINGENCIES (CONTINUED) Y2,432,000 ($23,000) and Y2,084,000 ($20,000) for the years ended December 31, 1998 and 1999, respectively. As of December 31, 1999, the future minimum lease payments under these operating leases were as follows:
YEAR ENDING DECEMBER 31, THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS - ------------------------ ---------------- ------------------------- 2000................................ Y 2,052 $ 20 2001................................ 2,052 20 2002................................ 2,052 20 2003................................ 2,052 20 2004................................ 2,052 20 Thereafter.......................... 12,312 120 -------------- ---- Total............................... Y22,572 $220 ============== ====
(6) STOCKHOLDERS' DEFICIT The Japanese Commercial Code (the "Code") provides that at least one-half of the issue price of new shares, with a minimum of the par value thereof, be included in common stock. The issue price is the price determined by the Board of Directors of a company. In December 1998 and 1999, the Company issued 20,000 and 40,000 shares of Common Stock at par value, Y 500 ($4.88) per share. As of December 31, 1999, the Company had received Y20,000,000 ($195,312) in exchange for 40,000 shares of common stock to be issued. The shares were not actually issued until February 2000; however, they have been reflected as issued and outstanding in the accompanying balance sheet as of December 31, 1999. At December 31, 1998 and 1999, the Company had an accumulated deficit and had no amounts legally available for distribution to stockholders. F-57 UNITED SYSTEM ENGINEERS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) (7) INCOME TAXES The significant components of the Company's net deferred income tax assets at December 31, 1998 and 1999 are as follows:
THOUSANDS OF THOUSANDS OF YEN U.S. DOLLARS --------------------------------- ------------ DECEMBER 31, --------------------------------- DECEMBER 31, 1998 1999 1999 --------------- --------------- ------------ Deferred income tax assets: Net operating loss carryforwards.......... Y 36,686 Y 62,882 $ 614 Research and development expenses......... 11,860 -- -- Deferred expenses......................... -- 8,982 87 Accrued vacation pay...................... 2,564 2,569 25 Other..................................... 980 977 9 Deferred revenue.......................... (2,775) (6,245) (60) Prepaid bonus............................. (5,096) (5,025) (49) --------------- --------------- ----- Net deferred income tax assets.......... 44,219 64,140 626 Valuation allowance......................... (44,219) (64,140) (626) --------------- --------------- ----- Net deferred income tax assets.......... Y -- Y -- $ -- =============== =============== =====
The amount of and ultimate realization of the net deferred income tax assets is dependent, in part, upon the tax laws in effect, the Company's future earnings, and other future events, the effects of which cannot be determined. The Company has established a valuation allowance against its deferred income tax assets because the available objective evidence creates sufficient uncertainty regarding their realizability. Under Japanese tax regulation, the Company can carry forward net operating losses for five years. The net operating loss carryforwards as of December 31, 1999 will expire as follows:
THOUSANDS OF YEAR OF EXPIRATION THOUSANDS OF YEN U.S. DOLLARS - ------------------ ---------------- ------------ 2000......................................... Y 21,455 $ 209 2001......................................... 57,610 563 2004......................................... 72,457 707 --------------- ------ Total........................................ Y151,522 $1,479 =============== ======
F-58 UNITED SYSTEM ENGINEERS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) (7) INCOME TAXES (CONTINUED) The differences between the statutory tax rates and the effective tax rates for the years ended December 31, 1998 and 1999 are summarized as follows:
DECEMBER 31, ------------------- 1998 1999 -------- -------- Statutory tax rate.......................................... (49.7)% (46.4)% Effect of tax rate change................................... 90.7 12.8 Change in valuation allowance............................... (40.8) 33.6 Minimum inhabitant tax...................................... (5.9) (0.3) Other....................................................... (0.2) -- ----- ----- Effective tax rate.......................................... (5.9)% (0.3)% ===== =====
Effective April 1, 1999, the statutory tax rate was reduced to approximately 41.5 percent and such rate has been used in calculating the future expected tax effects of temporary differences as of December 31, 1999. The provision for income taxes in the statements of operations reflects only the minimum inhabitant tax due to the Company's loss from operations. (8) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the accompanying financial statements for cash and cash equivalents, time deposits, accounts receivables, short-term debt, and accounts payable approximate fair values because of the immediate or short-term maturity of these financial instruments. The carrying amount of the Company's marketable security also approximates fair value because the investment has been classified as available for sale and recorded at the quoted market price. The estimated fair values of the Company's long-term debt obligations have been determined based on the present value of future cash flows associated with each instrument discounted using the current borrowing rate for similar debt of comparable maturity. As of December 31, 1999, the Company's long-term debt, which had a carrying amount of Y107,970,000 ($1,055,000), had an estimated fair value of Y110,525,000 ($1,079,000). (9) SEGMENT INFORMATION In June 1998, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" was issued. SFAS 131 establishes disclosures related to components of a company for which separate financial information is available and evaluated regularly by a company's chief operating decision makers in deciding how to allocate resources and in assessing performance. It also requires segment disclosures about products and services as well as geographic areas. The Company has determined that it did not have any separately reportable operating segments as of December 31, 1998 and 1999. F-59 UNITED SYSTEM ENGINEERS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) (9) SEGMENT INFORMATION (CONTINUED) However, the Company generates revenue in geographic locations outside of Japan. Revenue attributable to individual countries based on the location of sales is as follows:
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS ------------------------------------------------------------------- --------------------------- YEAR ENDED THREE MONTHS ENDED THREE MONTHS DECEMBER 31, MARCH 31, YEAR ENDED ENDED --------------------------------- ------------------------------- DECEMBER 31, MARCH 31, 1998 1999 1999 2000 1999 2000 --------------- --------------- -------------- -------------- ------------ ------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) Japan....................... Y202,408 Y143,317 Y34,050 Y31,729 $1,399 $ 310 Other countries............. -- 13,790 -- -- 135 -- --------------- --------------- -------------- -------------- ------ ----- Total revenue............. Y202,408 Y157,107 Y34,050 Y31,729 $1,534 $ 310 =============== =============== ============== ============== ====== =====
Sales to significant customers as a percentage of total revenue are as follows:
YEAR ENDED DECEMBER 31, ----------------------- CUSTOMER 1998 1999 - -------- -------- -------- Seiko Epson................................................. 40.0% 44.6% Mikuni Industry............................................. 9.0 20.3
(10) RELATED PARTY TRANSACTIONS The Company's stockholders and directors have made short-term loans to the Company from time to time. Certain of the loans are non-interest bearing. The Company has imputed interest on the loans, which has been reflected as additional capital contributions. The Company has also agreed to pay consulting fees to certain stockholders in connection with the Caldera transaction discussed in Note 5. The following table summarizes the amounts due from (due to) stockholders and the related interest expense and other transactions as of and for the years ended December 31, 1998 and 1999, and as of and for the three months ended March 31, 2000.
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS -------------------------------------------------- -------------------------- DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, 1998 1999 2000 1999 2000 -------------- --------------- --------------- ------------ ----------- (UNAUDITED) (UNAUDITED) Interest bearing short-term debt..... Y(8,600) Y(15,550) Y(15,550) $(151) $(151) Non-interest bearing short-term debt............................... (3,135) (734) (334) (7) (3) Consulting fees...................... -- 8,500 -- 83 -- Consulting fees payable.............. -- (8,500) -- (83) --
F-60 UNITED SYSTEM ENGINEERS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) (10) RELATED PARTY TRANSACTIONS (CONTINUED) The weighted average amount of non-interest short-term loans from stockholders and directors for the years ended December 31, 1998 and 1999 and for the three months ended March 31, 2000 were as follows:
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS - ----------------------------------------------------------- ------------------------------ DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, 1998 1999 2000 1999 2000 - --------------- --------------- --------------- ------------ ----------- (UNAUDITED) (UNAUDITED) Y(18,031) Y(14,392) Y(16,083) $(140) $(157)
(11) SUBSEQUENT STOCK PURCHASE AGREEMENT On April 13, 2000, the Company's stockholders and Lineo, Inc. ("Lineo") entered into a stock purchase agreement pursuant to which Lineo agreed to purchase all of the issued and outstanding capital stock of the Company for $322,829 of cash and 507,333 options to purchase shares of Lineo common stock at $3.00 per share. The stock purchase agreement is effective May 1, 2000. In addition, Lineo agreed to grant 175,000 additional options to purchase shares of Lineo's common stock to the employees of the Company who will become employees of Lineo for future services. F-61 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Fireplug Computers Inc: We have audited the accompanying balance sheets of Fireplug Computers Inc. (a British Columbia, Canada company) as of December 31, 1998 and 1999, and the related statements of operations and comprehensive loss, stockholders' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fireplug Computers Inc. as of December 31, 1998 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN Vancouver, British Columbia May 15, 2000 F-62 FIREPLUG COMPUTERS INC. BALANCE SHEETS (U.S. DOLLARS)
DECEMBER 31, ------------------- MARCH 31, 1998 1999 2000 -------- -------- ----------- (UNAUDITED) ASSETS Current assets: Cash...................................................... $ 2,462 $ 9,334 $ 537 Accounts receivable, net of allowance for doubtful accounts of $0, $0, and $9,803, respectively............ 304 1,008 25,189 -------- -------- --------- Total current assets.................................... 2,766 10,342 25,726 -------- -------- --------- Property and equipment: Computer equipment........................................ 43,485 50,406 61,924 Furniture and fixtures.................................... 5,394 5,394 8,063 -------- -------- --------- 48,879 55,800 69,987 Less accumulated depreciation............................. (19,944) (40,777) (44,351) -------- -------- --------- Net property and equipment.............................. 28,935 15,023 25,636 -------- -------- --------- $ 31,701 $ 25,365 $ 51,362 ======== ======== ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable.......................................... $ 6,714 $ 19,113 $ 27,051 Accrued liabilities....................................... -- 6,103 32,157 Deferred revenue.......................................... -- 3,465 -- Advances from stockholders................................ 72,951 82,015 62,476 -------- -------- --------- Total current liabilities............................... 79,665 110,696 121,684 -------- -------- --------- Commitments and contingencies (Note 6) Stockholders' deficit: Class C redeemable preferred stock, CDN$1.00 par value; 2,000,000 shares designated, none outstanding........... -- -- -- Class A voting shares, no par value; 2,000,000 shares designated, 412, 412 and 463 shares outstanding, respectively............................................ 288 288 134,074 Class B non-voting shares, no par value; 2,000,000 shares designated, none outstanding............................ -- -- -- Accumulated deficit....................................... (49,930) (83,317) (199,394) Cumulative translation adjustments........................ 1,678 (2,302) (5,002) -------- -------- --------- Total stockholders' deficit............................. (47,964) (85,331) (70,322) -------- -------- --------- $ 31,701 $ 25,365 $ 51,362 ======== ======== =========
See accompanying notes to financial statements. F-63 FIREPLUG COMPUTERS INC. STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (U.S. DOLLARS)
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, ------------------- ------------------------- 1998 1999 1999 2000 -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) Revenue............................................ $ 33,025 $144,778 $16,618 $ 69,186 Cost of revenue.................................... 34,128 88,996 10,008 24,733 -------- -------- ------- --------- Gross margin................................... (1,103) 55,782 6,610 44,453 -------- -------- ------- --------- Operating expenses: Sales and marketing.............................. 15,052 32,382 6,280 27,794 General and administrative (exclusive of non-cash stock-related compensation of $114,500 in the three months ended March 31, 2000)............. 32,003 56,787 5,184 18,236 Non-cash stock related compensation.............. -- -- -- 114,500 -------- -------- ------- --------- Total operating expenses....................... 47,055 89,169 11,464 160,530 -------- -------- ------- --------- Net loss........................................... $(48,158) $(33,387) $(4,854) $(116,077) ======== ======== ======= ========= Comprehensive loss: Net loss......................................... $(48,158) $(33,387) $(4,854) $(116,077) Foreign currency translation adjustments......... 1,629 (3,980) (788) (2,700) -------- -------- ------- --------- $(46,529) $(37,367) $(5,642) $(118,777) ======== ======== ======= =========
See accompanying notes to financial statements. F-64 FIREPLUG COMPUTERS, INC. STATEMENTS OF STOCKHOLDERS' DEFICIT (U.S. DOLLARS)
CLASS A VOTING CUMULATIVE TOTAL ------------------- ACCUMULATED TRANSLATION STOCKHOLDERS' SHARES AMOUNT DEFICIT ADJUSTMENTS DEFICIT -------- -------- ----------- ----------- ------------- Balance, December 31, 1997.............. 412 $ 288 $ (1,772) $ 49 $ (1,435) Foreign currency translation adjustments........................... -- -- -- 1,629 1,629 Net loss................................ -- -- (48,158) -- (48,158) --- -------- --------- ------- --------- Balance, December 31, 1998.............. 412 288 (49,930) 1,678 (47,964) Foreign currency translation adjustments........................... -- -- -- (3,980) (3,980) Net loss................................ -- -- (33,387) -- (33,387) --- -------- --------- ------- --------- Balance, December 31, 1999.............. 412 288 (83,317) (2,302) (85,331) Issuance of Class A voting shares for services (unaudited).................. 43 114,500 -- -- 114,500 Issuance of Class A voting shares upon conversion of advance from stockholder (unaudited)........................... 8 19,286 -- -- 19,286 Foreign currency translation adjustments (unaudited)........................... -- -- -- (2,700) (2,700) Net loss (unaudited).................... -- -- (116,077) -- (116,077) --- -------- --------- ------- --------- Balance, March 31, 2000 (unaudited)..... 463 $134,074 $(199,394) $(5,002) $ (70,322) === ======== ========= ======= =========
See accompanying notes to financial statements. F-65 FIREPLUG COMPUTERS INC. STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ------------------------ ----------------------------- 1998 1999 1999 2000 ---------- ----------- ------------- ------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss................................ $(48,158) $(33,387) $(4,854) $(116,077) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation.......................... 19,944 20,833 4,893 3,574 Non-cash stock related compensation... -- -- -- 114,500 Changes in operating assets and liabilities: Accounts receivable................. (304) (704) 260 (24,181) Accounts payable.................... 6,883 12,399 (5,393) 7,938 Accrued liabilities................. -- 6,103 6,737 26,054 Deferred revenue.................... -- 3,465 -- (3,465) -------- -------- ------- --------- Net cash provided by (used in) operating activities............ (21,635) 8,709 1,643 8,343 -------- -------- ------- --------- Cash flows from investing activities: Purchase of property and equipment...... -- (6,921) (462) (14,187) -------- -------- ------- --------- Cash flows from financing activities: Advances from stockholders.............. 22,468 9,064 1,558 (253) -------- -------- ------- --------- Net increase (decrease) in cash........... 833 10,852 2,739 (6,097) Foreign currency translation adjustments............................. 1,629 (3,980) (788) (2,700) Cash, beginning of period................. -- 2,462 2,462 9,334 -------- -------- ------- --------- Cash, end of period....................... $ 2,462 $ 9,334 $ 4,413 $ 537 ======== ======== ======= ========= Supplemental disclosure of non-cash investing and financing activities: Conversion of advance from stockholder to Class A voting shares.............. $ -- $ -- $ -- $ 19,286
See accompanying notes to financial statements. F-66 FIREPLUG COMPUTERS INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED) (U.S. DOLLARS) (1) ORGANIZATION AND DESCRIPTION OF BUSINESS Fireplug Computers Inc. (the "Company") was incorporated under the laws of British Columbia on April 11, 1997. The Company is a developer of embedded Linux network application software solutions and embedded Linux tools. On May 1, 2000, the Company's stockholders entered into an agreement with Lineo, Inc. ("Lineo"), a United States corporation. Pursuant to the agreement, Lineo acquired all of the outstanding stock of the Company in exchange for $500,000 in cash, 69,998 shares of Lineo's series D convertible preferred stock and options to purchase 62,220 shares of Lineo's common stock. The options have a vesting period of one year, an exercise price of $1.50 per share and expire ten years from the date of grant. Lineo has committed to provide funding to the Company as required. (2) SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States. UNAUDITED INTERIM FINANCIAL STATEMENTS The unaudited interim financial statements as of March 31, 2000 and for the three months ended March 31, 1999 and 2000 have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all normal recurring adjustments necessary to present fairly the financial information set forth therein in accordance with accounting principles generally accepted in the United States. The results of operations for the three months ended March 31, 2000 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2000. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the accompanying financial statements for cash, accounts receivable and accounts payable approximate fair values because of the immediate or short-term maturities of these financial instruments. FOREIGN CURRENCY TRANSLATION The Company prepares its statements in Canadian dollars since its functional currency is the Canadian dollar. As a result of the acquisition discussed in Note 1, the accompanying financial statements are denominated in U.S. dollars. The Company has translated its Canadian dollar financial F-67 FIREPLUG COMPUTERS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED) (U.S. DOLLARS) (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) statements into U.S. dollars using the current method. Under this method, monetary and non-monetary items are translated at the rate of exchange in effect at the balance sheet date and revenue and expenses are translated at the average exchange rate for the periods. Depreciation of assets is translated at the same exchange rate as the assets to which they relate. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less accumulated depreciation and amortization. Computer equipment and furniture and fixtures are depreciated using the straight-line method over the estimated useful life of the asset, typically three years. Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments that extend the useful lives of existing equipment are capitalized and depreciated. On retirement or disposition of property and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is recognized in the statement of operations. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets are comprised principally of equipment and fixtures. The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable. The Company evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. The Company uses an estimate of future undiscounted net cash flows of the related asset or group of assets over the remaining life in measuring whether the assets are recoverable. As of December 31, 1999 and March 31, 2000, the Company does not consider any of its long-lived assets to be impaired. REVENUE RECOGNITION The Company generates revenue from engineering services. Revenue is recognized as services are performed. Amounts received in advance of services being performed are recorded as deferred revenue. INCOME TAXES The Company recognizes a current tax liability or asset for current taxes payable or refundable and a deferred income tax liability or asset for the estimated future tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting and their tax basis and loss carry forwards to the extent they are realizable. A deferred income tax valuation allowance is required if it is "more likely than not" that all or a portion of recorded future tax assets will not be realized. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS The Company offers credit terms on the sale of its consulting services to its customers. The Company performs ongoing credit evaluations of its customers' financial condition and requires no F-68 FIREPLUG COMPUTERS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED) (U.S. DOLLARS) (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) collateral from its customers. The Company continually evaluates the need for an allowance for uncollectable accounts receivable based upon the expected collectability of all accounts receivable. As of March 31, 2000, one customer accounted for 97 percent of gross accounts receivable. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes new accounting and reporting standards for companies to report information about derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. This statement is effective for financial statements issued for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not expect this statement to have a material impact on the Company's results of operations, financial position or liquidity. In December 1999, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial Statements." This pronouncement summarizes certain of the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company is required to adopt SAB No. 101 during the second quarter of 2000. Although management is currently evaluating the impact, if any, of SAB No. 101, management does not presently believe it will have a material impact on the Company's results of operations, financial position or liquidity. (3) STOCKHOLDERS' DEFICIT AUTHORIZED SHARES The Company's articles of incorporation provide for the issuance of Class A, B and C shares and sets forth the preferences, limitations and relative rights granted or imposed upon each class of preferred stock. Dividends may be declared on the Class A, B and C shares at the discretion of the Board of Directors. The Class C shares are redeemable and have priority over Class A and B shares with respect to liquidation, winding up or dissolution. The Class B shares have no voting rights. CLASS A ISSUANCES During the three months ended March 31, 2000, the Company issued 43 shares of Class A stock to employees and consultants for services rendered. The estimated fair value of the Class A shares on the date of issuance was deemed to be $114,500, based on the consideration paid by Lineo to acquire the Company on May 1, 2000. The $114,500 has been reflected as non-cash stock-related compensation in the accompanying statement of operations for the three months ended March 31, 2000. During the three months ending March 31, 2000, the Company issued 8 shares of Class A stock in connection with a conversion of $19,826 of advances from stockholders (See Note 4). F-69 FIREPLUG COMPUTERS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED) (U.S. DOLLARS) (4) RELATED PARTY TRANSACTIONS During the year ended December 31, 1998, certain stockholders of the Company transferred $48,879 of property and equipment to the Company. The Company recorded the carry-over basis of these assets as advances from stockholders. Advances from stockholders represent amounts owed to stockholders for property and equipment transferred to the Company and for expenses incurred on behalf of the Company. The advances are non-interest bearing and have no fixed repayment terms. During the three months ended March 31, 2000, advances from stockholders of $19,826 were converted into 8 shares of Class A stock (see Note 3). (5) INCOME TAXES The components of the Company's income tax provision computed at the combined statutory Canadian federal and provincial income tax rate for the years ended December 31, 1998 and 1999 are as follows:
1998 1999 -------- -------- Income tax benefit at statutory rates...................... $9,632 $ 6,677 Change in valuation allowance.............................. (9,632) (6,677) ------ ------- $ -- $ -- ====== =======
The deferred income tax assets resulting from differences in the timing of the recognition of certain income and expense items for income tax and financial accounting purposes at December 31, 1998 and 1999 are as follows:
1998 1999 -------- -------- Net operating loss carryforwards......................... $ 8,575 $ 12,741 Depreciation............................................. 1,105 3,616 ------- -------- 9,680 16,357 Less: valuation allowance................................ (9,680) (16,357) ------- -------- Net deferred income taxes................................ $ -- $ -- ======= ========
The ultimate realization of the deferred income tax assets is dependent, in part, upon the tax laws in effect, the Company's future earnings, and other future events, the effects of which cannot be determined. The Company has established a valuation allowance against its deferred income tax assets because the available objective evidence creates sufficient uncertainty regarding their realizability. At December 31, 1999, the Company's net operating loss carryforwards totaled $64,000 and expire as follows: $43,000 in 2004 and $21,000 in 2005. F-70 FIREPLUG COMPUTERS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED) (U.S. DOLLARS) (6) COMMITMENTS AND CONTINGENCIES The Company may become party to certain legal proceedings arising in the ordinary course of business. Management believes, after consultation with legal counsel, that as of December 31, 1999 and March 31, 2000, no pending or threatened legal proceedings exist which would have a material adverse effect on the Company's financial position, liquidity or results of operations. F-71 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders of INUP S.A. In our opinion, the accompanying balance sheet and the related statement of operations, stockholders' equity, and cash flows present fairly, in all material respects, the financial position of INUP S.A. (a development stage company) (the "Company") at December 31, 1999, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. THE STATUTORY AUDITOR Befec -- Price Waterhouse Member of PricewaterhouseCoopers Paris, France April 28, 2000, except as to Notes 3 and 8 which are as of May 1, 2000 F-72 INUP S.A. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS (U.S. DOLLARS)
DECEMBER 31, MARCH 31, 1999 2000 ------------ ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 757,603 $ 519,815 Accounts receivable....................................... 62,992 95,259 Prepaid expenses.......................................... 9,666 3,146 Other current assets...................................... 1,623 2,030 --------- --------- Total current assets.................................... 831,884 620,250 --------- --------- Property and equipment, net................................. 148,243 155,877 --------- --------- Total assets............................................ $ 980,127 $ 776,127 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 152,487 $ 103,681 Accrued liabilities....................................... 10,021 35,342 --------- --------- Total liabilities....................................... 162,508 139,023 --------- --------- Commitments and contingencies (Note 6) Stockholders' Equity: Common stock, $0.25 par value, 750,000 shares authorized, issued and outstanding.................................. 188,363 188,363 Additional paid-in capital................................ 738,577 738,577 Accumulated other comprehensive (loss) income............. 997 (37,712) Deficit accumulated during the development stage.......... (110,318) (252,124) --------- --------- Total stockholders' equity.............................. 817,619 637,104 --------- --------- Total liabilities and stockholders' equity.............. $ 980,127 $ 776,127 ========= =========
The accompanying notes are an integral part of these financial statements. F-73 INUP S.A. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS (U.S. DOLLARS)
PERIOD FROM INCEPTION YEAR ENDED THREE MONTHS (JANUARY 1, 1999) DECEMBER 31, ENDED MARCH 31, THROUGH 1999 2000 MARCH 31, 2000 ------------ --------------- ----------------- (UNAUDITED) (UNAUDITED) Revenue.......................................... $ 8,355 $ -- $ 8,355 Cost of revenue.................................. 1,785 -- 1,785 --------- --------- --------- Gross profit................................... 6,570 6,570 Sales, general and administrative expenses....... 131,556 181,469 313,025 --------- --------- --------- Loss from operations............................. (124,986) (181,469) (306,455) --------- --------- --------- Other income (expense)........................... Interest income (expense)...................... (60) 494 434 Other non-operating income (expense)........... 10 (1) 9 --------- --------- --------- Other income (expense), net.................. (50) 493 443 --------- --------- --------- Loss before income taxes......................... (125,036) (180,976) (306,012) Income tax credit................................ 14,718 39,170 53,888 --------- --------- --------- Net loss......................................... $(110,318) $(141,806) $(252,124) ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-74 INUP S.A. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (U.S. DOLLARS)
DEFICIT ACCUMULATED ACCUMULATED COMMON STOCK ADDITIONAL DURING THE OTHER STOCKHOLDERS' ------------------- PAID-IN DEVELOPMENT COMPREHENSIVE EQUITY COMPREHENSIVE SHARES AMOUNT CAPITAL STAGE INCOME (LOSS) TOTAL LOSS -------- -------- ---------- ------------ -------------- ------------- -------------- Common stock issued for cash on January 1, 1999 at $0.25 per share................... 32,000 $ 8,037 $ -- -- $ -- $ 8,037 -- Common stock issued for cash on November 3, 1999 at $1.28 per share................... 718,000 180,326 738,577 -- -- 918,903 -- Comprehensive loss: Net loss.................... -- -- -- $(110,318) -- (110,318) $(110,318) Other comprehensive income: Foreign currency translation adjustment.............. -- -- -- -- 997 997 997 Comprehensive loss........ -- -- -- -- -- -- $(109,321) ------- -------- -------- --------- -------- --------- ========= Balances, December 31, 1999... 750,000 188,363 738,577 (110,318) 997 817,619 Comprehensive loss: Net loss (unaudited)........ -- -- -- (141,806) -- (141,806) $(141,806) Other comprehensive loss: Foreign currency translation adjustment (unaudited)............. -- -- -- -- (38,709) (38,709) (38,709) --------- Comprehensive loss (unaudited)........... -- -- -- -- -- -- $(180,515) ------- -------- -------- --------- -------- --------- --------- Balances, March 31, 2000 (unaudited)................. 750,000 $188,363 $738,577 $(252,124) $(37,712) $ 637,104 ======= ======== ======== ========= ======== =========
The accompanying notes are an integral part of these financial statements. F-75 INUP S.A. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (U.S. DOLLARS)
THREE PERIOD FROM MONTHS INCEPTION YEAR ENDED ENDED (JANUARY 1, 1999) DECEMBER 31, MARCH 31, THROUGH 1999 2000 MARCH 31, 2000 ------------- ----------- ------------------ (UNAUDITED) (UNAUDITED) Cash flows from operations: Net loss............................................ $(110,318) $(141,806) $(252,124) Adjustments to reconcile net loss to net cash used in operations: Depreciation...................................... 11,280 29,680 40,960 Changes in operating assets and liabilities: Accounts receivable............................. (62,992) (32,267) (95,259) Prepaid expenses................................ (9,666) 6,520 (3,146) Other current assets............................ (1,623) (407) (2,030) Accounts payable................................ 152,487 (48,806) 103,681 Accrued liabilities............................. 10,021 25,321 35,342 --------- --------- --------- Net cash used in operating activities............. (10,811) (161,765) (172,576) --------- --------- --------- Cash flows from investing activities: Purchase of property and equipment................ (159,523) (37,314) (196,837) --------- --------- --------- Net cash used in investing activities............. (159,523) (37,314) (196,837) --------- --------- --------- Cash flows from financing activities: Proceeds from issuance of common stock............ 926,940 -- 926,940 --------- --------- --------- Net cash provided by financing activities......... 926,940 -- 926,940 --------- --------- --------- Effect of exchange rate changes on cash and cash equivalents....................................... 997 (38,709) (37,712) --------- --------- --------- Net increase (decrease) in cash and cash equivalents....................................... 757,603 (237,788) 519,815 Cash and cash equivalents beginning of period....... -- 757,603 -- --------- --------- --------- Cash and cash equivalents end of period............. $ 757,603 $ 519,815 $ 519,815 ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-76 INUP S.A. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (U.S. DOLLARS) 1. ORGANIZATION OF THE COMPANY AND NATURE OF OPERATIONS INUP S.A. ("the Company") was formed on January 1, 1999 pursuant to French articles of incorporations as SOCIETE A RESPONSABILITE LIMITE (Limited Liability Company). The Company subsequently changed its corporate structure to that of a SOCIETE ANONYME (Corporation) on November 30, 1999. The Company seeks to produce and sell services and products associated with computer systems, electronics and telecommunications. Specifically, the Company currently aims to produce and sell suites for embedded and scalable Linux-based computer systems. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING AND PRESENTATION The Company maintains its accounting records and prepares its statutory financial statements in conformity with generally accepted accounting principles in France. The financial statements and notes are representations of the Company's management, who is responsible for their integrity and objectivity. These financial statements have been translated into US Dollars according to the guidance of Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS 52") and include certain adjustments, not recorded in the Company's accounting records, to present these financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and conform to the standards applicable to development stage companies. The Company's functional currency is the European Currency Unit ("Euro"). FOREIGN CURRENCY TRANSLATION Under the provisions of SFAS 52, the accompanying financial statements have been translated from Euros to US Dollars as follows: - All assets and liabilities have been translated into US Dollars using the current exchange rate at the balance sheet date. Equity accounts have been translated using historical exchange rates. - Income statement accounts have been translated into US Dollars using the average exchange rate over the period presented. - The adjustment from translation of the Company's financial statements into US Dollars is reported as a separate component of other comprehensive income. UNAUDITED INTERIM FINANCIAL STATEMENTS The unaudited interim financial statements as of March 31, 2000 and for the three months then ended have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all normal recurring adjustments necessary to present fairly the financial information set forth therein in accordance with U.S. GAAP. All financial statement disclosures related to the interim financial statements are unaudited. F-77 INUP S.A. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Although the Company was formed on January 1, 1999, the Company's operations did not begin until the fourth quarter of 1999. Accordingly, there is no comparative financial information for the three months ended March 31, 1999 to be included in the accompanying financial statements. DEVELOPMENT STAGE ENTERPRISE From the date of inception (January 1, 1999) through December 31, 1999, the Company was a development stage company, as planned principal operations had not yet begun to generate significant revenue. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from these estimates. CASH AND CASH EQUIVALENTS The Company considers investments purchased with a maturity period of three months or less at the date of purchase to be cash equivalents. REVENUE RECOGNITION Revenues in 1999 resulted from a one-time resale of acquired software and consulting services provided by the Company. Through December 31, 1999, and March 31, 2000 (unaudited), the Company has not recognized revenue from other product sales. CONCENTRATION OF CREDIT RISK The Company primarily places its temporary cash investments with high-credit quality financial institutions which invest primarily in French Government securities and commercial paper of prime quality. Cash deposits are held in financial institutions in France. FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts of certain of the Company's financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short maturities. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets, generally two to ten years. Leased assets are amortized on a straight-line basis over the lesser of the estimated useful life of the asset or the lease term. F-78 INUP S.A. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Expenditures for maintenance and repairs are charged to operations as incurred; major expenditures for renewals and betterments are capitalized and depreciated. When an asset is sold or otherwise disposed of, the cost of the asset and the related accumulated depreciation are removed from the accounts and the related gain or loss is recognized in the statement of operations. Depreciation periods used for property and equipment are as follows: Computer equipment.......................................... 2 years Furniture and fixtures...................................... 10 years Leasehold improvements...................................... 10 years
LONG-LIVED ASSETS The Company evaluates the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets to be Disposed of," ("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributed to such assets. INCOME TAXES The Company accounts for income taxes using the liability method which requires the recognition of deferred tax assets or liabilities for the temporary differences between the financial reporting and tax bases of the Company's assets and liabilities and for tax carryforwards at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, a valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. ADVERTISING The Company expenses advertising costs as incurred. For the three-month period ended March 31, 2000 (unaudited) and for the year ended December 31, 1999, the Company incurred $6,582 and $7,341 of advertising costs, respectively. INTERNAL USE SOFTWARE COSTS Effective January 1, 1999, the Company adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Through December 31, 1999, the only costs required to be capitalized under the provisions of this standard relate to purchased software. F-79 INUP S.A. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission staff released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB No. 101), which provides guidance on the recognition, presentation and disclosure of revenues in financial statements. The Company does not expect this guidance to materially impact the financial statements. 3. LIQUIDITY The Company incurred a net loss of $110,318 for the year ended December 31, 1999. The Company anticipates revenues generated from its continuing operations will not be sufficient to fund ongoing operations during the year ending December 31, 2000. As discussed in Note 8, the Company was acquired by Lineo, Inc. ("Lineo"). Lineo has represented its intent to fund the on-going operations of the Company. 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, MARCH 31, 1999 2000 ------------ ----------- (UNAUDITED) Purchased computer software and equipment................... $138,871 $171,236 Furniture and fixtures...................................... 9,833 11,350 Leasehold improvements...................................... 10,819 14,251 -------- -------- 159,523 196,837 Less accumulated depreciation............................... (11,280) (40,960) -------- -------- $148,243 $155,877 ======== ========
5. INCOME TAXES The Company is subject to income taxes levied by the governments of France. As of December 31, 1999, no income taxes have been generated or paid by the Company. Income tax credits of $14,718 and $39,170 have been earned by the Company for the year ended December 31, 1999 and for the three months ended March 31, 2000 (unaudited), respectively, and will be received by the Company in a future period. 6. COMMITMENTS AND CONTINGENCIES During the year ended December 31, 1999, the Company entered into a contract to purchase certain software. Included in the contract are terms that require the Company to pay royalties of 2% of gross income earned on the sale of licenses of this software. Furthermore, the Company must pay royalties of 30% upon the sale of licenses of this software which include the right to modify the source code. This royalty agreement will terminate on October 19, 2006. F-80 INUP S.A. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS) 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) Royalties that the Company is required to pay per the above contract will be expensed as cost of sales. Also, as of December 31, 1999, the Company leased office space under a cancelable operating lease. The contractual term of the lease is nine years, with a right to cancel at the third and sixth anniversary dates. The portion of future minimum lease payments required under this lease that are not cancelable at December 31, 1999, are as follows: 2000........................................................ $11,822 2001........................................................ 11,822 2002........................................................ 4,147 ------- Total minimum lease payments................................ $27,791 =======
7. STOCKHOLDERS' EQUITY Effective November 30, 1999, the par value of the common stock of the Company was changed from $25 per share to $0.25 per share. All references to number of shares and per share amounts have been restated to reflect the effect of this change. 8. SUBSEQUENT EVENTS On May 1, 2000, the Company's stockholders and Lineo entered into a stock purchase agreement pursuant to which Lineo agreed to purchase all of the issued and outstanding capital stock of the Company for 83,334 shares of the unregistered Series C convertible preferred stock and 1,333,333 shares of the unregistered common stock of Lineo and $10,000 of cash. F-81 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Moreton Bay Ventures Pty Ltd: We have audited the accompanying statements of assets, liabilities, and equity (deficit) of the acquired operations of Moreton Bay Ventures Pty Ltd as of October 31, 1998 and 1999 and the related statements of revenue and expenses and comprehensive loss, changes in equity (deficit) of the acquired operations and cash flows for each of the two years in the period ended October 31, 1999. These statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements were prepared for the purpose of complying with the rules and regulations of the United States Securities and Exchange Commission and, as described in Note 1, are not intended to be a complete presentation of Moreton Bay Ventures Pty Ltd's assets, liabilities, revenues, expenses and cash flows. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the acquired operations of Moreton Bay Ventures Pty Ltd as of October 31, 1998 and 1999, and the results of its operations and its cash flows for each of the two years in the period ended October 31, 1999 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the amounts translated into U.S. dollars in the accompanying financial statements have been computed on the basis set forth in Note 2. ARTHUR ANDERSEN Brisbane, Australia May 12, 2000 F-82 THE ACQUIRED OPERATIONS OF MORETON BAY VENTURES PTY LTD STATEMENTS OF ASSETS, LIABILITIES AND EQUITY (DEFICIT) OF THE ACQUIRED OPERATIONS
AUSTRALIAN DOLLARS U.S. DOLLARS --------------------------------- ------------------------- OCTOBER 31, ------------------- APRIL 30, OCTOBER 31, APRIL 30, 1998 1999 2000 1999 2000 -------- -------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash................................... $ -- $ -- $332,427 $ -- $214,848 Accounts receivable.................... -- -- 13,311 -- 8,603 Inventory.............................. -- -- 90,690 -- 58,613 Research grant receivable.............. 17,368 46,378 74,584 29,974 48,204 Marketable security, at fair value..... -- -- 420,000 -- 271,446 -------- -------- -------- -------- -------- Total current assets................. 17,368 46,378 931,012 29,974 601,714 ======== ======== ======== ======== ======== Property and equipment: Computer equipment..................... 17,684 34,930 38,437 22,575 24,842 Furniture and fixtures................. 2,178 6,291 6,291 4,066 4,066 -------- -------- -------- -------- -------- 19,862 41,221 44,728 26,641 28,908 Less accumulated depreciation.......... (12,520) (27,418) (33,647) (17,721) (21,746) -------- -------- -------- -------- -------- Net property and equipment........... 7,342 13,803 11,081 8,920 7,162 -------- -------- -------- -------- -------- $ 24,710 $ 60,181 $942,093 $ 38,894 $608,876 ======== ======== ======== ======== ======== LIABILITIES AND EQUITY (DEFICIT) OF THE ACQUIRED OPERATIONS Current liabilities: Accounts payable....................... $ -- $ 29,014 $124,999 $ 18,751 $ 80,787 Accrued liabilities.................... 7,078 36,947 76,333 23,879 49,334 Deferred revenue....................... -- -- 32,000 -- 20,682 -------- -------- -------- -------- -------- Total current liabilities............ 7,078 65,961 233,332 42,630 150,803 ======== ======== ======== ======== ======== Commitments and contingencies (Notes 1 and 6) Equity (deficit) of the acquired operations............................. 17,632 (5,780) 708,761 (3,736) 458,073 -------- -------- -------- -------- -------- $ 24,710 $ 60,181 $942,093 $ 38,894 $608,876 ======== ======== ======== ======== ========
See accompanying notes to financial statements. F-83 THE ACQUIRED OPERATIONS OF MORETON BAY VENTURES PTY LTD STATEMENTS OF REVENUE AND EXPENSES AND COMPREHENSIVE LOSS
AUSTRALIAN DOLLARS U.S. DOLLARS ------------------------------------------------- ------------------------------ YEAR ENDED SIX MONTHS ENDED OCTOBER 31, APRIL 30, YEAR ENDED SIX MONTHS ENDED --------------------- ------------------------- OCTOBER 31, APRIL 30, 1998 1999 1999 2000 1999 2000 --------- --------- ----------- ----------- ----------- ---------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Revenue....................... $ -- $ -- $ -- $ 41,093 $ -- $ 26,558 Cost of revenue............... -- -- -- 21,184 -- 13,691 --------- --------- -------- --------- --------- --------- Gross margin.............. -- -- -- 19,909 -- 12,867 --------- --------- -------- --------- --------- --------- Operating expenses: General and administrative (exclusive of non-cash compensation expense of AUS$0, AUS$15,633, AUS$0, AUS$0, US$10,104 and US$0, respectively)............. 81,964 142,408 76,794 116,634 92,038 75,381 Research and development (exclusive of non-cash compensation expense of AUS$0, AUS$66,683, AUS$0, AUS$91,854, US$43,097 and US$59,365, respectively)............. 81,595 58,547 8,554 146,148 37,839 94,456 Sales and marketing......... -- 26,481 6,972 21,017 17,114 13,583 Non-cash compensation expense................... -- 82,316 -- 91,854 53,201 59,365 --------- --------- -------- --------- --------- --------- Total operating expenses.... 163,559 309,752 92,320 375,653 200,192 242,785 --------- --------- -------- --------- --------- --------- Expenses in excess of revenue................... $(163,559) $(309,752) $(92,320) $(355,744) $(200,192) $(229,918) ========= ========= ======== ========= ========= ========= Comprehensive loss: Expenses in excess of revenue................... $(163,559) $(309,752) $(92,320) $(355,744) $(200,192) $(229,918) Unrealized loss on marketable security....... -- -- -- (380,000) -- (245,594) --------- --------- -------- --------- --------- --------- $(163,559) $(309,752) $(92,320) $(735,744) $(200,192) $(475,512) ========= ========= ======== ========= ========= =========
See accompanying notes to financial statements. F-84 THE ACQUIRED OPERATIONS OF MORETON BAY VENTURES PTY LTD CHANGES IN EQUITY (DEFICIT) OF THE ACQUIRED OPERATIONS
AUSTRALIAN DOLLARS U.S. DOLLARS ----------------------------------------- ----------------------------- YEAR ENDED OCTOBER 31, SIX MONTHS YEAR ENDED SIX MONTHS ----------------------- ENDED APRIL 30, OCTOBER 31, ENDED APRIL 30, 1998 1999 2000 1999 2000 ---------- ---------- --------------- ----------- --------------- (UNAUDITED) (UNAUDITED) Balance, beginning of period..... $ -- $ 17,632 $ (5,780) $ 11,396 $ (3,736) Expenses in excess of revenue.... (163,559) (309,752) (355,744) (200,192) (229,918) Unrealized loss on marketable security....................... -- -- (380,000) -- (245,594) Issuance of stock options by Moreton Bay Venture Pty Ltd.... -- 82,316 91,854 53,201 59,365 Funding provided by Moreton Bay Ventures Pty Ltd............... 181,191 204,024 1,358,431 131,859 877,956 --------- --------- ---------- --------- --------- Balance, end of period........... $ 17,632 $ (5,780) $ 708,761 $ (3,736) $ 458,073 ========= ========= ========== ========= =========
See accompanying notes to financial statements. F-85 THE ACQUIRED OPERATIONS OF MORETON BAY VENTURES PTY LTD STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH
AUSTRALIAN DOLLARS U.S. DOLLARS ------------------------------------------------- ----------------------------- YEAR ENDED SIX MONTHS ENDED OCTOBER 31, APRIL 30, YEAR ENDED SIX MONTHS --------------------- ------------------------- OCTOBER 31, ENDED APRIL 30, 1998 1999 1999 2000 1999 2000 --------- --------- ----------- ----------- ----------- --------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Expenses in excess of revenue............. $(163,559) $(309,752) $(92,320) $(355,744) $(200,192) $(229,918) Adjustments to reconcile expenses in excess of revenue to net cash used in operating activities: Depreciation............................ 8,000 14,898 5,085 6,229 9,629 4,025 Non-cash compensation................... -- 82,316 -- 91,854 53,201 59,365 Changes in operating assets and liabilities: Accounts receivable................... -- -- -- (13,311) -- (8,603) Inventory............................. -- -- -- (90,690) -- (58,613) Research grant receivable............. (17,368) (29,010) 17,368 (28,206) (18,749) (18,230) Accounts payable...................... -- 29,014 4,670 95,985 18,751 62,036 Accrued liabilities................... 7,078 29,869 16,906 39,386 19,305 25,455 Deferred revenue...................... -- -- -- 32,000 -- 20,682 --------- --------- -------- --------- --------- --------- Net cash used in operating activities........................ (165,849) (182,665) (48,291) (222,497) (118,055) (143,801) --------- --------- -------- --------- --------- --------- Cash flows from investing activities: Purchase of property and equipment........ (7,979) (21,359) (15,190) (3,507) (13,804) (2,267) --------- --------- -------- --------- --------- --------- Cash flows from financing activities: Funding provided by Moreton Bay Pty Ltd... 173,828 204,024 63,481 558,431 131,859 360,916 --------- --------- -------- --------- --------- --------- Net increase in cash........................ -- -- -- 332,427 -- 214,848 Cash, beginning of period................... -- -- -- -- -- -- --------- --------- -------- --------- --------- --------- Cash, end of period......................... $ -- $ -- $ -- $ 332,427 $ -- $ 214,848 ========= ========= ======== ========= ========= ========= Supplemental disclosure of non-cash investing and financing activities: Allocation of property and equipment by Moreton Bay Ventures Pty Ltd.......... $ 7,363 $ -- $ -- $ -- $ -- $ -- Issuance of common stock for marketable security.............................. $ -- $ -- $ -- $ 800,000 $ -- $ 517,040
See accompanying notes to financial statements. F-86 THE ACQUIRED OPERATIONS OF MORETON BAY VENTURES PTY LTD NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (1) ORGANIZATION AND DESCRIPTION OF BUSINESS Moreton Bay Pty Ltd ("Moreton Bay"), incorporated as an Australia corporation on April 24, 1995, develops embedded virtual private network solutions for Internet appliances and provides engineering development for the Motorola ColdFire microprocessor platform. Moreton Bay's historical operations include two product lines, RAStel multimodem cards ("RAStel") and NETtel Internet routers ("NETtel"). Moreton Bay LLC, a United States limited liability corporation, is a wholly owned subsidiary of Moreton Bay. On May 12, 2000, the Moreton Bay's stockholders entered into an agreement with Lineo, Inc. ("Lineo"), a United States corporation. Pursuant to the agreement, Lineo acquired all of the outstanding stock of Moreton Bay in exchange for US$10,000 in cash, 956,315 shares of series D convertible preferred stock and options to purchase 87,374 shares of Lineo's common stock. The options have a vesting period of one year, an exercise price of US$3.00 per share and expire ten years from the date of grant. Prior to the acquisition, Moreton Bay transferred the RAStel assets, liabilities and operations, which Lineo did not acquire, to a separate legal entity. The accompanying financial statements have been prepared for the purpose of complying with the rules and regulations of the United States Securities and Exchange Commission. The accompanying financial statements include Moreton Bay's NETtel operations (the "Company") acquired by Lineo. The statements of revenue and expenses reflect the revenue and direct expenses of the NETtel operations and allocations of common expenses. The common expenses consist primarily of the cost of shared facilities, employees and certain other costs. Such common expenses have been allocated to the acquired operations based upon actual usage or other methods that approximate actual usage. Management believes that the allocation methods used are reasonable. The accompanying financial information may not necessarily reflect the financial position, results of operations or cash flows of the acquired operations in the future, nor what the financial position, results of operations or cash flows would have been had it been a separate, stand-alone company throughout the periods presented. During the years ended October 31, 1998 and 1999 and the six months ended April 30, 2000, the expenses of the acquired operations exceeded revenue by AUS$163,559 (US$105,708), AUS$309,752 (US$200,192) and AUS$355,744 (US$229,918), respectively, and as of April 30, 2000, the acquired operations had equity of of AUS$708,761 (US$458,073). As discussed above, subsequent to April 30, 2000, Lineo acquired certain operations of Moreton Bay and Lineo has committed to provide funding to the Company as required. (2) SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Moreton Bay maintains its accounting records and prepares its financial statements in accordance with accounting principles generally accepted in Australia. However, the accompanying financial statements reflect all material adjustments necessary to present the financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The Company's functional currency is the Australian dollar and the accompanying financial statements are presented in Australian dollars. Additionally, as a convenience, the balance sheets as of F-87 THE ACQUIRED OPERATIONS OF MORETON BAY VENTURES PTY LTD NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) October 31, 1999 and April 30, 2000 and the related statements of revenue and expenses, changes in equity (deficit) of the acquired operations and cash flows for the respective year and six months then ended are also presented in U.S. dollars by arithmetically translating all Australian dollar amounts at AUS$1 to US$0.6463, which was the exchange rate at October 31, 1999. UNAUDITED INTERIM FINANCIAL STATEMENTS The unaudited interim financial statements as of April 30, 2000 and for the six months ended April 30, 1999 and 2000 have been prepared on the same basis as the audited financial statements, and, in the opinion of management, reflect all normal recurring adjustments necessary to present fairly the financial information set forth therein in accordance with U.S. GAAP. All financial statement disclosures related to the interim financial statements are unaudited. The results of the interim periods are not necessarily indicative of the results to be expected for the year ending October 31, 2000. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the accompanying financial statements for accounts receivable, research grant receivable and accounts payable approximate fair values because of the immediate or short-term maturities of these financial instruments. RESEARCH AND DEVELOPMENT GRANT The Company has a research and development grant related to the development of the NETtel products from AusIndustry, a division of the Australian government. The grant reimburses the Company for incurred costs. Grant reimbursements are not recognized until the costs have been incurred and there is reasonable assurance that the Company will comply with the grant's conditions and that the reimbursements will be received (see Note 6). The Company has elected to include reimbursements as a reduction of the related expenses. The Company recorded grant reimbursements of AUS$17,368 (US$11,225) and AUS$220,049 (US$142,218) during the years ended October 31, 1998 and 1999, respectively, and AUS$102,848 (US$66,471) and AUS$132,584 (US$85,689) during the six months ended April 30, 1999 and 2000, respectively. INVENTORY Inventories consist primarily of completed products. Inventories are stated at the lower of cost (using the first-in, first-out method) or market value. Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values. Due to competitive pressures F-88 THE ACQUIRED OPERATIONS OF MORETON BAY VENTURES PTY LTD NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) and technological innovation, it is possible that estimates of net realizable value could change in the near term. MARKETABLE SECURITY The Company's investment in a marketable security has been categorized as available for sale, as defined by Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Unrealized holding gains and losses are reflected as a component of equity (deficit) of the acquired operations until realized. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less accumulated depreciation. Computer equipment and furniture and fixtures are depreciated using the straight-line method over the estimated useful life of the asset, typically three to five years. Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments that extend the useful lives of existing equipment are capitalized and depreciated. On retirement or disposition of property and equipment, the cost and related accumulated depreciation is removed from the accounts and any resulting gain or loss is recognized. CAPITALIZED SOFTWARE COSTS In accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," development costs incurred in the research and development of new software products to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Internally generated capitalizable software development costs have not been material for the years ended October 31, 1998 and 1999 and the six months ended April 30, 2000. The Company has charged its software development costs to research and development expense in the accompanying statements of revenues and expenses. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable. The Company evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. The Company uses an estimate of future undiscounted net cash flows of the related asset or group of assets over the remaining life in measuring whether the assets are recoverable. As of October 31, 1999 and April 30, 2000, the Company does not consider any of its long-lived assets to be impaired. REVENUE RECOGNITION The accompanying statements of revenue and expenses reflect revenue in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position No. 97-2 F-89 THE ACQUIRED OPERATIONS OF MORETON BAY VENTURES PTY LTD NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ("SOP 97-2"), "Software Revenue Recognition." Revenue from the sale of software has been recognized upon delivery of the product when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is probable and no significant post-delivery obligations exist. In December 1998, the AICPA issued Statement of Position No. 98-9 "Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amended SOP 97-2 to require recognition of revenue using a "residual method" in certain circumstances. The Company does not believe that the adoption of this statement will have a material effect on the Company's current revenue recognition policies. INCOME TAXES For all periods presented, the Company was not directly subject to income taxes as the acquired operations were included with those of Moreton Bay for income tax reporting purposes. The Company was not an income tax reporting entity nor did it have a tax-sharing agreement with Moreton Bay. As a result, no income tax expense or related current or deferred income tax assets or liabilities have been allocated to the acquired operations and the liabilities or benefits attributable to the acquired operations were recorded by Moreton Bay. Had Moreton Bay allocated income taxes to the acquired operations as if it were a separate taxable entity, no income tax expense or benefit would have been recorded due to the net operating loss position of the acquired operations and the uncertainty of future realization of any deferred tax assets. The Company has recorded a valuation allowance against the net deferred tax assets of the acquired operations. EQUITY (DEFICIT) OF ACQUIRED OPERATIONS Cash remitted to or transferred from Moreton Bay has been reflected as a decrease or increase in the equity (deficit) of acquired operations. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION The acquired operations consist of one segment, NETtel operations. Substantially all of the acquired assets, liabilities and operations have been derived from and are located in Australia. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 establishes new accounting and reporting standards for companies to report information about derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. This statement is effective for financial statements issued for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not expect this statement to have a material impact on the Company's results of operations, financial position or liquidity. In December 1999, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial Statements." This F-90 THE ACQUIRED OPERATIONS OF MORETON BAY VENTURES PTY LTD NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) pronouncement summarizes certain of the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company is required to adopt SAB No. 101 during the first quarter of fiscal year 2001. Although management is currently evaluating the impact, if any, of SAB No. 101, management does not presently believe it will have a material impact on the Company's results of operations, financial position or liquidity. (3) MARKETABLE SECURITY On November 12, 1999, Moreton Bay entered into a stock exchange agreement with Netcomm Ltd ("Netcomm") whereby 206,868 shares of Moreton Bay's common stock were exchanged for 2,000,000 shares of common stock of Netcomm. The Company recorded the shares of Netcomm's common stock based upon the quoted market price on the date of exchange. The cost, gross unrealized loss and fair value of the marketable security as of April 30, 2000 is as follows:
AUSTRALIAN DOLLARS U.S. DOLLARS ---------- ------------ Cost.................................................. $ 800,000 $ 517,040 Gross unrealized loss................................. (380,000) (245,594) --------- --------- Fair value............................................ $ 420,000 $ 271,446 ========= =========
(4) STOCK OPTIONS During the year ended October 31, 1999 and the six months ended April 30, 2000, Moreton Bay agreed to grant options to purchase 26,250 and 20,000 shares of common stock, respectively, to consultants and an employee of the Company for services rendered. The committed exercise price is less than the estimated fair value of Moreton Bay's common stock on the commitment date. Accordingly, the Company recorded its allocated portion of the estimated expense related to these option commitments of AUS$82,316 (US$53,201) and AUS$91,854 (US$59,365) during the year ended October 31, 1999 and the six months ended April 30, 2000, respectively. As of April 30, 2000, the options had not yet been formally granted. (5) RELATED PARTY TRANSACTIONS As discussed in Note 3, Moreton Bay entered into a share exchange agreement with Netcomm. Pursuant to the share exchange, Netcomm acquired approximately 20 percent of Moreton Bay's then outstanding common stock and Moreton Bay acquired approximately 4 percent of Netcomm's then outstanding common stock. The managing director of Moreton Bay was appointed to Netcomm's Board of Directors on March 9, 2000. On November 12, 1999, Moreton Bay entered into a Technology Manufacturing and Marketing Agreement with Netcomm. This agreement granted Netcomm a non-exclusive license to use Moreton Bay's licensed intellectual property and the non-exclusive right to all general development products and software products developed by or available to Moreton Bay. In consideration for the rights granted, F-91 THE ACQUIRED OPERATIONS OF MORETON BAY VENTURES PTY LTD NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 2000 IS UNAUDITED) (5) RELATED PARTY TRANSACTIONS (CONTINUED) Netcomm agreed to pay a royalty on Netcomm product sales outside Australia and New Zealand which incorporate Moreton Bay's intellectual property or products. To date, no royalties have been received or are due. On November 12, 1999, Moreton Bay entered into a Contract Manufacturing agreement with Netcomm. The agreement specified that Netcomm would be the preferred supplier for Moreton Bay. Transactions under this agreement are conducted under terms that would be reasonable for entity's dealing at arm's length in similar circumstances. During the six months ended April 30, 2000, Moreton Bay purchased no products from Netcomm. As of April 30, 2000, the Company had no amounts due to Netcomm. (6) COMMITMENTS AND CONTINGENCIES OPERATING AGREEMENTS Rent expense included in the accompanying statements of revenues and expenses was AUS$8,610 (US$5,565) and AUS$14,225 (US$9,194) for the years ended October 31, 1998 and 1999, respectively, and AUS$5,675 (US$3,668) and AUS$8,550 (US$5,526) for the six months ended April 30, 1999 and 2000, respectively. Moreton Bay has entered into non-cancelable operating lease agreements for premises in the United States with terms of 6 months to 12 months. The future minimum rental payments under these leases for the years ending October 31, 2000 and 2001 total AUS$31,180 (US$20,152) and AUS$905 (US$585), respectively. Moreton Bay currently leases its Australian premises on a month-to-month basis. Current monthly rent is AUS$700 (US$452). RESEARCH AND DEVELOPMENT GRANT In October 1998, Moreton Bay was awarded a research and development grant related to the NETtel products from AusIndustry, a division of the Australian government. The grant criteria include certain restrictions, including ownership changes, as defined. If an ownership change is deemed to have occurred, the grant may be cancelled and proceeds previously received by Moreton Bay may be required to be repaid. The Company has not determined whether the acquisition by Lineo will constitute an ownership change. Through April 30, 2000, the Company has recorded approximately AUS$390,000 (US$239,132) in reimbursements from this grant. Total funding available under the grant is approximately AUS$614,000 (US$397,000). LITIGATION The Company is a party to certain legal proceedings from time to time arising in the ordinary course of business. Management believes, after consultation with legal counsel, that as of October 31, 1999 and April 30, 2000, no pending or threatened legal proceedings exist which would have a material adverse effect on the Company's financial position, liquidity or results of operations. F-92 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To RT-Control Inc.: We have audited the accompanying balance sheet of RT-Control Inc., a Canada Corporation, as of December 31, 1999 and the related statements of operations and comprehensive loss, shareholders' equity and cash flows for the period from inception (June 30, 1999) to December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of RT-Control Inc. as of December 31, 1999 and the results of its operations and its cash flows for the period from inception to December 31, 1999 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN Toronto, Canada May 15, 2000 F-93 RT-CONTROL INC. BALANCE SHEETS (U.S. DOLLARS)
DECEMBER 31, 1999 MARCH 31, 2000 ----------------- -------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 37,860 $ 12,229 Accounts receivable....................................... -- 331 Prepaid expenses.......................................... -- 5,769 Inventory................................................. 21,307 48,840 Goods and services tax recoverable........................ 7,037 12,905 --------- --------- Total current assets.................................... 66,204 80,074 --------- --------- Computer and office equipment, net of accumulated depreciation of $461.................................... -- 49,639 --------- --------- $ 66,204 $ 129,713 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.......................................... $ 36,451 $ 21,237 Accrued liabilities....................................... -- 53,506 Deferred revenue.......................................... -- 605 Advances from shareholders................................ 10,434 21,942 Notes payable to shareholders............................. 11,120 -- Note payable to Lineo, Inc................................ -- 100,000 Current portion of capital lease obligation............... -- 1,821 --------- --------- Total current liabilities............................... 58,005 199,111 --------- --------- Capital lease obligation, net of current portion............ -- 7,286 --------- --------- Shareholders' equity (deficit): Common shares, no par value, unlimited shares authorized, 291 and 300 shares outstanding, respectively............ 106,439 181,439 Accumulated deficit....................................... (98,443) (258,045) Cumulative translation adjustment......................... 203 (78) --------- --------- Total shareholders equity (deficit)..................... 8,199 (76,684) --------- --------- $ 66,204 $ 129,713 ========= =========
See accompanying notes to financial statements. F-94 RT-CONTROL INC. STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (U.S. DOLLARS)
PERIOD FROM INCEPTION THREE MONTHS (JUNE 30, 1999) TO ENDED DECEMBER 31, 1999 MARCH 31, 2000 ------------------ -------------- (UNAUDITED) Revenue..................................................... $ 66,951 $ 10,224 Cost of revenue............................................. 42,392 6,455 -------- --------- Gross margin.............................................. 24,559 3,769 -------- --------- Operating expenses: Research and development.................................. 74,468 52,870 General and administrative (exclusive of non-cash share-related compensation of $0 and $75,000, respectively)........................................... 38,446 27,690 Sales and marketing....................................... 7,324 6,475 Non-cash share-related compensation....................... -- 75,000 -------- --------- 120,238 162,035 -------- --------- Loss from operations........................................ (95,679) (158,266) Interest expense, net..................................... (2,764) (1,336) -------- --------- Net loss.................................................... $(98,443) $(159,602) ======== ========= Comprehensive loss: Net loss.................................................. $(98,443) $(159,602) Foreign currency translation adjustments.................. 203 (281) -------- --------- $(98,240) $(159,883) ======== =========
See accompanying notes to financial statements. F-95 RT-CONTROL INC. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (U.S. DOLLARS)
COMMON SHARES CUMULATIVE TOTAL ------------------- ACCUMULATED TRANSLATION SHAREHOLDERS' SHARES AMOUNT DEFICIT ADJUSTMENT EQUITY (DEFICIT) -------- -------- ----------- ----------- ---------------- Issuance of common shares for cash at inception............................. 291 $ 20 $ -- $ -- $ 20 Contribution of services................ -- 106,419 -- -- 106,419 Foreign currency translation adjustments........................... -- -- -- 203 203 Net loss................................ -- -- (98,443) -- (98,443) --- -------- --------- ----- --------- Balance, December 31, 1999.............. 291 106,439 (98,443) 203 8,199 Issuance of common shares for services (unaudited)........................... 9 75,000 -- -- 75,000 Foreign currency translation adjustments (unaudited)........................... -- -- -- (281) (281) Net loss (unaudited).................... -- -- (159,602) -- (159,602) --- -------- --------- ----- --------- Balance, March 31, 2000 (unaudited)..... 300 $181,439 $(258,045) $ (78) $ (76,684) === ======== ========= ===== =========
See accompanying notes to financial statements. F-96 RT-CONTROL INC. STATEMENTS OF CASH FLOWS (U.S. DOLLARS) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
PERIOD FROM INCORPORATION THREE (JUNE 30, 1999) TO MONTHS ENDED DECEMBER 31, 1999 MARCH 31, 2000 ------------------------- ------------------------- (UNAUDITED) Cash flows from operating activities: Net loss.................................................. $ (98,443) $ (159,602) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation.......................................... -- 461 Contribution of services.............................. 106,419 -- Non-cash share-related compensation................... -- 75,000 Changes in operating assets and liabilities: Accounts receivable................................. -- (331) Prepaid expenses.................................... -- (5,769) Inventory........................................... (21,307) (27,533) Goods and services tax recoverable.................. (7,037) (5,868) Accounts payable.................................... 36,451 (15,214) Accrued liabilities................................. -- 53,506 Deferred revenue.................................... -- 605 ------------------------- ------------------------- Net cash provided by (used in) operating activities........................................ 16,083 (84,745) ------------------------- ------------------------- Cash flows from investing activities: Purchase of property and equipment........................ -- (40,993) ------------------------- ------------------------- Cash flows from financing activities: Advances from shareholders................................ 10,434 11,508 Proceeds from (repayments of) notes payable to shareholders............................................ 11,120 (11,120) Proceeds from the sale of common shares upon incorporation........................................... 20 -- Proceeds from note payable to Lineo, Inc.................. -- 100,000 ------------------------- ------------------------- Net cash provided by financing activities........... 21,574 100,388 ------------------------- ------------------------- Net increase (decrease) in cash and cash equivalents........ 37,657 (25,350) Foreign currency translation adjustments.................... 203 (281) Cash and cash equivalents, beginning of period.............. -- 37,860 ------------------------- ------------------------- Cash and cash equivalents, end of period.................... $ 37,860 $ 12,229 ========================= ========================= Supplemental disclosure of cash flow information: Cash paid for interest.................................... $ 1,048 $ 907 Supplemental disclosure of noncash investing and financing activities: Acquisition of assets under capital lease arrangement..... $ -- $ 9,107
See accompanying notes to financial statements. F-97 RT-CONTROL INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED) (U.S. DOLLARS) 1. ORGANIZATION AND NATURE OF OPERATIONS RT-Control Inc. (the "Company") was incorporated under the Canada Business Corporations Act on June 30, 1999. The Company develops and markets the mcLinux version of Linux for microcontrollers. On May 12, 2000, the Company's shareholders entered into an agreement with Lineo, Inc. ("Lineo"), a United States corporation. Pursuant to the agreement, Lineo acquired all of the outstanding common shares of RT-Control in exchange for $15,000 in cash, 404,169 shares of Lineo's series D convertible preferred stock and options to purchase 16,667 shares of Lineo's common stock. The options have a vesting period of one year, an exercise price of $1.50 per share and expire ten years from the date of grant. During the three months ended March 31, 2000, the Company received $100,000 from Lineo through the issue of a promissory note. The Company received an additional $100,000 on April 3, 2000 from Lineo under similar terms (see Note 6). Lineo has committed to provide funding to the Company as required. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States. UNAUDITED INTERIM FINANCIAL STATEMENTS The unaudited interim financial statements as of March 31, 2000 and for the three months then ended have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all normal recurring adjustments necessary to present fairly the financial information set forth therein in accordance with accounting principles generally accepted in the United States. The results of operations for the three months ended March 31, 2000 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2000. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the accompanying financial statements for cash and cash equivalents, accounts receivable, goods and services tax recoverable, and accounts payable approximate fair values because of the immediate or short-term maturities of these financial instruments. The F-98 RT-CONTROL INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED) (U.S. DOLLARS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) carrying amounts of the Company's debt obligations approximate fair value based on current interest rates. FOREIGN CURRENCY TRANSLATION The Company prepares its statements in Canadian dollars since its functional currency is the Canadian dollar. As a result of the acquisition discussed in Note 1, the accompanying financial statements are denominated in U.S. dollars. As a result, the Company has translated its Canadian dollar financial statements into U.S. dollars using the current method. Under this method, monetary and non-monetary items are translated at the rate of exchange in effect at the balance sheet date and revenue and expenses are translated at the average exchange rate for the periods. Depreciation of assets is translated at the same exchange rate as the assets to which they relate. CASH AND CASH EQUIVALENTS For purposes of the balance sheet and statement of cash flows, the Company considers all short-term deposits with original maturities of 90 days or less to be cash equivalents. Cash equivalents consist of short-term low risk commercial paper and guaranteed investment certificates. INVENTORY Inventory consists primarily of raw materials. Inventory is stated at the lower of cost (using the first-in, first-out method) or market value. Provisions, when required, are made to reduce excess and obsolete inventory to its estimated net realizable value. Due to competitive pressures and technological innovation, it is possible that estimates of net realizable value could change in the near term. RESEARCH AND DEVELOPMENT EXPENSES In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", development costs incurred in the research and development of new software products to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Due to continuing technological changes and changing customer needs, the Company has concluded that it cannot determine technological feasibility of its various products until the development phase of the project is nearly complete. The time period during which costs could be capitalized from the point of reaching technological feasibility until the time of general product release is very short and, consequently, the amounts that could be capitalized are not material to the Company's financial position or results of operations. Therefore, the Company charges all research and development expenses to operations in the period incurred. F-99 RT-CONTROL INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED) (U.S. DOLLARS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION The Company generates revenue from the sale of its products, which primarily takes place through the Company's internet site. The Company has recognized software revenue in accordance with the provisions of Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2"). Under SOP 97-2, software revenue is recognized upon execution of a contract and delivery of software, provided that the license fee is fixed and determinable, no significant production, modification or customization of the software is required and collection is considered probable by management. Hardware sales are recognized when title passes, which coincides with shipment and customer acceptance. INCOME TAXES The Company recognizes a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting and their tax basis and loss carry forwards to the extent they are realizable. A deferred tax valuation allowance is required if it is "more likely than not" that all or a portion of recorded future tax assets will not be realized. GOODS AND SERVICES TAX RECOVERABLE Goods and services tax ("GST") is a Canadian value added tax. GST recoverable represents input tax credits received by the Company on GST paid or payable for certain goods and services purchased during the period. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 establishes new accounting and reporting standards for companies to report information about derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. This statement is effective for financial statements issued for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not expect this statement to have a material impact on the Company's results of operations, financial position or liquidity. In December 1999, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial Statements." This pronouncement summarizes certain of the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company is required to adopt SAB No. 101 during the second quarter of 2000. Although management is currently evaluating the impact, if any, of SAB No. 101, management does not presently believe it will have a material impact on the Company's results of operations, financial position or liquidity. F-100 RT-CONTROL INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED) (U.S. DOLLARS) 3. EQUITY AND RELATED PARTY TRANSACTIONS During the period ended December 31 1999, certain shareholders and employees of the Company rendered services without receiving any consideration amounting to approximately $90,400 and $16,000, respectively. The Company recorded the fair value of these services as a capital contribution. The fair value of these services was based on management's estimates. At December 31, 1999 and March 31, 2000, the Company had advances from shareholders of $10,434 and $21,942, respectively, representing amounts owed to shareholders for expenses incurred on behalf of the Company. The advances do not have any fixed repayment terms and bear interest charges only to the extent the shareholders incur interest charges. At December 31, 1999, the Company had $11,120 in notes due to shareholders representing cash advances made by the shareholders to the Company. The notes did not carry any fixed repayment terms and bore interest at prime (6.5 percent at December 31, 1999) plus 3.7 percent. Subsequent to December 31, 1999, the Company repaid these notes together with the related interest. On January 27, 2000, the Company issued 261 common shares to its existing shareholders on a pro-rata basis. This issuance has been accounted for as a stock split and retroactively reflected in the accompanying financial statements for all periods presented. During January 2000, the Company issued 9 common shares to an employee and a consultant for services rendered. The estimated fair value of the common shares on the date of issuance was deemed to be $75,000, based on the consideration paid by Lineo to acquire the Company on May 9, 2000. The $75,000 has been reflected as non-cash share-related compensation in the accompanying statement of operations for the three months ended March 31, 2000. 4. INCOME TAXES The components of the Company's income tax provision computed at the combined statutory Canadian federal and provincial income tax rate for the period from inception (June 30, 1999) to December 31, 1999 is as follows: Income tax benefit at statutory rates.............................. $22,267 Change in valuation allowance........ (22,267) ------- $ -- =======
The deferred income tax assets resulting from differences in the timing of the recognition of certain income and expense items for income tax and financial accounting purposes at December 31, 1999 are as follows: Net operating loss carryforward...... $ 22,267 Less: valuation allowance............ (22,267) -------- Net deferred income taxes.......... $ -- ========
F-101 RT-CONTROL INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED) (U.S. DOLLARS) 4. INCOME TAXES (CONTINUED) The ultimate realization of the net operating loss carryforward is dependent, in part, upon the tax laws in effect, the Company's future earnings, and other future events, the effects of which cannot be determined. The Company has established a valuation allowance against its net operating loss carryforward because the available objective evidence creates sufficient uncertainty regarding its realizability. At December 31, 1999, the Company's net operating loss carryforward totaled $98,443 and expires in 2006. 5. COMMITMENTS AND CONTINGENCIES LEGAL The Company may become party to certain legal proceedings arising in the ordinary course of business. Management believes, after consultation with legal counsel, that as of December 31, 1999 and March 31, 2000, no pending or threatened legal proceedings exist which would have a material adverse effect on the Company's financial position, liquidity or results of operations. LEASES The Company leases its operating facilities under an operating lease arrangement. The lease term is 29 months commencing on March 1, 2000. The future minimum rental payments under the arrangement are as follows:
YEAR ENDING DECEMBER 31, - ------------------------ 2000................................. $17,914 2001................................. 23,885 2002................................. 9,952 ------- $51,751 =======
F-102 RT-CONTROL INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED) (U.S. DOLLARS) 5. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company has acquired certain office equipment under a capital lease agreement. The lease term is for 60 months commencing on April 1, 2000. The future minimum lease payments on this lease are as follows:
YEAR ENDING DECEMBER 31, - ------------------------ 2000................................. $1,739 2001................................. 2,318 2002................................. 2,318 2003................................. 2,318 2004................................. 2,318 Thereafter........................... 580 ------ 11,591 Less: amounts representing interest........................... (2,484) ------ Capital lease obligation............. 9,107 Less: current portion................ (1,821) ------ $7,286 ======
6. NOTE PAYABLE TO LINEO On February 25, 2000, the Company received proceeds of $100,000 from Lineo in consideration for issuing an unsecured promissory note. On April 3, 2000, the Company received an additional $100,000 from Lineo in consideration for issuing an unsecured promissory note. The notes bear interest at a rate of 7.25 percent per annum and are due 30 days after demand. F-103 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE TO LINEO, INC.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Lineo, Inc., the carved-out portion of Caldera, Inc. and their subsidiary included in this registration statement and have issued our report thereon dated May 15, 2000. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II--Valuation and Qualifying Accounts is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Salt Lake City, Utah May 15, 2000 LINEO, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(A) PERIOD - -------------------------------------------------- ---------- ---------- ------------- ---------- Allowance of doubtful accounts: Year ended October 31, 1997..................... $ -- $ -- $ -- $ -- Year ended October 31, 1998..................... -- 13,500 -- 13,500 Year ended October 31, 1999..................... 13,500 163,500 (95,168) 68,332
- ------------------------ (a) Represents write-offs of uncollectable accounts receivable [LOGO] PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable by the registrant in connection with the sale of the securities being registered. All amounts are estimates except the Securities and Exchange Commission registration fee, the NASD filing fee and The Nasdaq National Market listing fee. Securities and Exchange Commission Registration Fee......... $ 15,840 NASD Filing Fee............................................. 6,500 Nasdaq National Market Filing Fee........................... 90,000 Printing Costs.............................................. 200,000 Legal Fees and Expenses..................................... 400,000 Accounting Fees and Expenses................................ 950,000 Directors' and Officers' Insurance Policy Premium........... 525,000 Blue Sky Fees and Expenses.................................. 5,000 Transfer Agent and Registrar Fees........................... 5,000 Miscellaneous............................................... 52,660 ---------- Total................................................... $2,250,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The registrant is a Delaware corporation. In its restated certificate of incorporation, the registrant has adopted the provisions of Section 102(b)(7) of the Delaware General Corporation Law (the "Delaware Law"), which enables a corporation in its original certificate of incorporation or an amendment thereto to eliminate or limit the personal liability of a director for monetary damages for breach of the director's fiduciary duty, except (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware Law (providing for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions) or (iv) for any transaction from which a director will personally receive a benefit in money, property or services to which the director is not legally entitled. The registrant has also adopted indemnification provisions in its restated certificate of incorporation and bylaws pursuant to Section 145 of the Delaware Law, which provides that a corporation may indemnify any persons, including officers and directors, who are, or are threatened to be made, parties to any threatened, pending or completed legal action, suit or proceedings, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that such person was an officer, director, employee or agent of the corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such officer, director, employee or agent acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, with respect to criminal proceedings, had no reasonable cause to believe that his conduct was unlawful. A Delaware corporation may indemnify officers or directors in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the II-1 defense of any action referred to above, the corporation must indemnify him against expenses (including attorneys' fees) that such officer or director actually and reasonably incurred. The registrant intends to enter into indemnification agreements with each of the registrant's officers and directors. The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification between the underwriters and the registrant from and against certain liabilities arising in connection with the offering which is the subject of this registration statement. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following is a description of all securities that the registrant has sold within the past three years without registering the securities under the Securities Act: On September 1, 1998, the registrant issued 18,000,000 shares of its common stock to Caldera, Inc. in exchange for a contribution of assets. This issuance was exempt from registration pursuant to 4(2) of the Securities Act. On December 29, 1999, the registrant sold 1,500,000 shares of its common stock at a price of $.80 per share to two accredited investors for an aggregate offering price of $1,200,000. This issuance was exempt from registration pursuant to 4(2) of the Securities Act. On February 17, 2000, the registrant sold 2,500,000 shares of its Series A Class 2 convertible preferred stock at a price of $1.50 per share to three accredited investors for an aggregate offering price of $3,750,000. This issuance was exempt from registration pursuant to Rule 506 of Regulation D under Section 4(2) of the Securities Act. On February 17, 2000, the registrant exchanged 5,000,000 shares of its Series A Class 1 convertible preferred stock to one accredited investor in exchange for 5,000,000 shares of our common stock. This exchange was exempt from registration pursuant to Rule 506 of Regulation D under Section 4(2) of the Securities Act. On March 15, 2000, the registrant sold 4,833,331 shares of its Series B convertible preferred stock at a price of $3.00 per share to 15 accredited investors for an aggregate offering price of $14,499,973. This issuance was exempt from registration pursuant to Rule 506 of Regulation D under Section 4(2) of the Securities Act. On April 3, 2000, the registrant issued 1,745,226 shares of its common stock to 23 individuals pursuant to a merger agreement between the registrant and Zentropic Computing, LLC, a Virginia limited liability company. This exchange was exempt from registration pursuant to Rule 506 of Regulation D under Section 4(2) of the Securities Act. On April 28, 2000, the registrant sold 3,000,000 shares of its Series C convertible preferred stock at a price of $6.00 per share to 21 accredited investors for an aggregate offering price of $18,000,000. This issuance was exempt from registration pursuant to Rule 506 of Regulation D under Section 4(2) of the Securities Act. On May 1, 2000, the registrant issued 69,998 shares of its Series D convertible preferred stock to five individuals pursuant to a share purchase agreement between the registrant and certain shareholders of Fireplug Computers Inc., a British Columbia, Canada company. This transaction was exempt from registration pursuant to Regulation S and/or Rule 506 of Regulation D under Section 4(2) of the Securities Act. On May 1, 2000, the registrant issued 1,333,333 shares of its common stock to 21 individuals and 83,334 shares of our Series C convertible preferred stock to one corporate entity pursuant to a stock purchase agreement between the registrant and certain shareholders of Inup S.A., a French II-2 corporation. This transaction was exempt from registration pursuant to Regulation S and/or Rule 506 of Regulation D under Section 4(2) of the Securities Act. On May 10, 2000, the registrant issued 956,315 shares of its Series D convertible preferred stock to 14 individuals pursuant to a stock purchase agreement between the registrant and certain shareholders of Moreton Bay Ventures Pty Ltd, an Australian corporation. This transaction was exempt from registration pursuant to Regulation S and/or Rule 506 of Regulation D under Section 4(2) of the Securities Act. On May 12, 2000, the registrant issued 404,169 shares of its Series D convertible preferred stock to three individuals pursuant to a stock purchase agreement between the registrant and certain shareholders of RT-Control, Inc., a Canadian corporation. This transaction was exempt from registration pursuant to Regulation S and/or Rule 506 of Regulation D under Section 4(2) of the Securities Act. From June 1999 to May 15, 2000, options to purchase 3,722,627 shares of the registrant's common stock were granted to 136 individuals at a weighted average exercise price of $2.05 per share. These grants were exempt from registration pursuant to Rule 701 under the Securities Act. From June 1999 to May 15, 2000, 669,905 shares of the registrant's common stock were issued to eight individuals upon the exercise of stock options granted pursuant to the registrant's stock option plan at a weighted average exercise price of $0.80 per share. These issuances were exempt from registration pursuant to Rule 701 under the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS.
NUMBER DESCRIPTION --------------------- ----------- 1.1* Form of Underwriting Agreement 3.1# Certificate of Incorporation and all amendments thereto 3.1(a)# Form of Restated Certificate of Incorporation 3.2# Bylaws and all amendments thereto 4.1 See Exhibits 3.1 and 3.2 for provisions defining the rights of the holders of common stock 5.1* Opinion of Summit Law Group, PLLC regarding legality of shares 10.1# 1999 Stock Option Plan 10.2# GNU General Public License 10.3#+ OEM License Agreement No. LNO201 (Amended and Restated 3/20/2000) by and between Lineo Inc. and DaiShin Information and Communications Company dated February 17, 2000 10.4# Stock Purchase and Sale Agreement dated as of January 6, 2000, by and between Lineo, Inc. and Caldera Systems, Inc. 10.5# DR DOS License Agreement dated as of September 1, 1998, by and between Caldera, Inc. and Caldera Thin Clients, Inc. 10.6# Technology Assignment Agreement dated as of December 29, 1999, by and between The Canopy Group and Lineo, Inc. 10.7# Recapitalization Agreement dated February 17, 2000, by and between Lineo, Inc. and The Canopy Group, Inc.
II-3
NUMBER DESCRIPTION --------------------- ----------- 10.8# Form of Lineo, Inc. Series A Stock Purchase Agreement 10.9# Form of Lineo, Inc. Series B Stock Purchase Agreement 10.10# Form of Lineo, Inc. Series C Stock Purchase Agreement 10.11# Stock Purchase Agreement dated as of April 13, 2000, by and among Lineo, Inc., United System Engineers, Inc., and the shareholders named therein 10.12# Share Purchase Agreement dated as of May 1, 2000, by and among Lineo, Inc., Fireplug Computers Inc. and the shareholders named therein 10.13# Stock Purchase Agreement dated as of May 10, 2000, by and among Moreton Bay Ventures Pty Ltd, Lineo, Inc. and the Sellers named therein 10.14# Stock Purchase Agreement dated as of May 1, 2000, by and among Lineo, Inc., Inup S.A. and the Sellers named therein 10.15# Share Purchase Agreement dated as of May 10, 2000, by and among Lineo, Inc., RT-Control, Inc. and the Shareholders named therein 10.16# Form of Lineo, Inc. Investor Rights Agreement 10.17# Form of Lineo, Inc. Amendment No. 1 to Investor Rights Agreement 10.18# Form of Lineo, Inc. Amendment No. 2 to Investor Rights Agreement 10.19# Form of Indemnification Agreement 10.20# Sublease dated January 31, 2000 by and between SwitchSoft Systems, Inc. and Lineo, Inc. 10.21# Sublease 380 South 400 West, Suite C dated February 21, 2000 by and between VPNX.com and Lineo, Inc. 10.22# Employment Agreement dated May 16, 2000 by and between Bryan W. Sparks and Lineo, Inc. 21.1# Subsidiaries of the registrant 23.1 Consent of Summit Law Group, PLLC (contained in the opinion filed as Exhibit 5.1 hereto) 23.2# Consent of Arthur Andersen LLP, Independent Public Accountants 23.3# Consent of Arthur Andersen, Independent Public Accountants 23.4# Consent of Arthur Andersen, Independent Public Accountants 23.5# Consent of Befec -- Price Waterhouse, Independent Accountants 23.6# Consent of Arthur Andersen, Independent Public Accountants 23.7# Consent of Arthur Andersen, Independent Public Accountants 24.1 Power of Attorney (See Page II-6) 27.1# Financial Data Schedule
- ------------------------ # Filed herewith + Confidential treatment requested * To be filed by amendment II-4 (B) FINANCIAL STATEMENT SCHEDULES. Schedule II -- Valuation and Qualifying Accounts for the Years Ended October 31, 1997, 1998 and 1999 Schedules not listed above have been omitted because they are inapplicable or the requested information is shown in the consolidated financial statements of the registrant or related notes thereto. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding), is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the questions whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lindon, State of Utah, on the 18(th) day of May, 2000. LINEO, INC. By: /s/ BRYAN W. SPARKS ----------------------------------------- Bryan W. Sparks PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
POWER OF ATTORNEY Each person whose individual signature appears below hereby authorizes and appoints Bryan W. Sparks and Matthew R. Harris, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to this registration statement, including any and all post-effective amendments thereto and any registration statement relating to the same offering as this registration statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated below on the 18(th) day of May, 2000.
SIGNATURE TITLE --------- ----- /s/ BRYAN W. SPARKS President, Chief Executive Officer and ------------------------------------------- Chairman of the Board (Principal Executive Bryan W. Sparks Officer) /s/ GREGORY C. HILL Senior Vice President, Chief Financial Officer ------------------------------------------- and Treasurer (Principal Financial and Gregory C. Hill Accounting Officer) /s/ RAYMOND J. NOORDA ------------------------------------------- Director Raymond J. Noorda /s/ RALPH J. YARRO ------------------------------------------- Director Ralph J. Yarro /s/ JOHN R. EGAN ------------------------------------------- Director John R. Egan /s/ WILLIAM P. BARNETT ------------------------------------------- Director William P. Barnett
II-6 EXHIBIT INDEX
NUMBER DESCRIPTION --------------------- ------------------------------------------------------------ 1.1* Form of Underwriting Agreement 3.1# Certificate of Incorporation and all amendments thereto 3.1(a)# Form of Restated Certificate of Incorporation 3.2# Bylaws and all amendments thereto 4.1 See Exhibits 3.1 and 3.2 for provisions defining the rights of the holders of common stock 5.1* Opinion of Summit Law Group, PLLC regarding legality of shares 10.1# 1999 Stock Option Plan 10.2# GNU General Public License 10.3#+ OEM License Agreement No. LNO201 (Amended and Restated 3/2/00) by and between Lineo Inc. and DaiShin Information and Communications Company dated February 17, 2000 10.4# Stock Purchase and Sale Agreement dated as of January 6, 2000, by and between Lineo, Inc. and Caldera Systems, Inc. 10.5# DR DOS License Agreement dated as of September 1, 1998, by and between Caldera, Inc. and Caldera Thin Clients, Inc. 10.6# Technology Assignment Agreement dated as of December 29, 1999, by and between The Canopy Group and Lineo, Inc. 10.7# Recapitalization Agreement dated February 17, 2000, by and between Lineo, Inc. and The Canopy Group, Inc. 10.8# Form of Lineo, Inc. Series A Stock Purchase Agreement 10.9# Form of Lineo, Inc. Series B Stock Purchase Agreement 10.10# Form of Lineo, Inc. Series C Stock Purchase Agreement 10.11# Stock Purchase Agreement dated as of April 13, 2000, by and among Lineo, Inc., United System Engineers, Inc., and the shareholders named therein 10.12# Share Purchase Agreement dated as of May 1, 2000, by and among Lineo, Inc., Fireplug Computers Inc. and the shareholders named therein 10.13# Stock Purchase Agreement dated as of May 10, 2000, by and among Moreton Bay Ventures Pty Ltd, Lineo, Inc. and the Sellers named therein 10.14# Stock Purchase Agreement dated as of May 1, 2000, by and among Lineo, Inc., Inup S.A. and the Sellers named therein 10.15# Share Purchase Agreement dated as of May 10, 2000, by and among Lineo, Inc., RT-Control, Inc. and the Shareholders named therein 10.16# Form of Lineo, Inc. Investor Rights Agreement 10.17# Form of Lineo, Inc. Amendment No. 1 to Investor Rights Agreement 10.18# Form of Lineo, Inc. Amendment No. 2 to Investor Rights Agreement 10.19# Form of indemnification agreement 10.20# Sublease dated January 31, 2000 by and between SwitchSoft Systems, Inc. and Lineo, Inc.
II-7
NUMBER DESCRIPTION --------------------- ------------------------------------------------------------ 10.21# Sublease 380 South 400 West, Suite C dated February 21, 2000 by and between VPNX.com and Lineo, Inc. 10.22# Employment Agreement dated May 16, 2000 by and between Bryan Sparks and Lineo, Inc. 21.1# Subsidiaries of the registrant 23.1 Consent of Summit Law Group, PLLC (contained in the opinion filed as Exhibit 5.1 hereto) 23.2# Consent of Arthur Andersen LLP, Independent Public Accountants 23.3# Consent of Arthur Andersen, Independent Public Accountants 23.4# Consent of Arthur Andersen, Independent Public Accountants 23.5# Consent of Befec -- Price Waterhouse, Independent Accountants 23.6# Consent of Arthur Andersen, Independent Public Accountants 23.7# Consent of Arthur Andersen, Independent Public Accountants 24.1 Power of Attorney (See Page II-6) 27.1# Financial Data Schedule
- ------------------------ # Filed herewith + Confidential treatment requested * To be filed by amendment II-8 EX-3.1 2 EXHIBIT 3.1 EXHIBIT 3.1 STATE OFFICE OF THE SECRETARY OF STATE OF DELAWARE Office of the Secretary of State ----------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF DESIGNATION OF "LINEO, INC.", FILED IN THIS OFFICE ON THE THIRD DAY OF MAY, A.D. 2000, AT 3 O'CLOCK P.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. /s/ EDWARD J. FREEL, SECRETARY OF STATE --------------------------------------- Edward J. Freel, Secretary of State AUTHENTICATION: 0417442 DATE: 05-03-00 CERTIFICATE OF DESIGNATION OF THE RELATIVE RIGHTS AND PREFERENCES OF THE SERIES D CONVERTIBLE PREFERRED STOCK OF LINEO, INC. The undersigned, the Secretary of Lineo, Inc., a Delaware corporation (the "Corporation"), does hereby certify that, pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Corporation, the following resolution creating a series of Series D Convertible Preferred Stock was duly adopted by the Board of Directors of the Corporation as of May 1, 2000: RESOLVED, that pursuant to the authority expressly granted to and vested in this Board of Directors by the provisions of the Certificate of Incorporation of the Corporation, this Board of Directors hereby creates a series of preferred stock (the "Preferred Stock"), $.001 par value per share, of the Corporation to be designated as Series D Convertible Preferred Stock, initially consisting of 2,000,000 shares. Except as provided herein or as required by law, the relative rights and preferences of the Series D Convertible Preferred Stock shall be as follows: SERIES D CONVERTIBLE PREFERRED STOCK The Corporation hereby designates 2,000,000 shares of the Preferred Stock as Series D Convertible Preferred Stock (the "Series D Preferred Stock"), which shall have the following rights, preferences and terms: SECTION 1. DIVIDENDS. The holders of Series D Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, at the same rate as dividends are paid (other than dividends paid in additional shares of Common Stock) with respect to the Common Stock (treating each share of Series D Preferred Stock as being equal to the number of shares of Common Stock into which each such share of Series D Preferred Stock could be converted pursuant to the provisions of Section 4 hereof with such number determined as of the record date for the determination of holders of Common Stock entitled to receive such dividend) (the "Participating Dividends"). Dividends shall be paid by forwarding a check, postage prepaid, to the address of each holder (or, in the case of joint holders, to the address of any such holder) of Series D Preferred Stock and/or Common Stock, as applicable, as shown on the books of the Corporation, or to such other address as such holder specifies for such purpose by written notice to the Corporation. SECTION 2. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, each holder of outstanding shares of Series D Preferred Stock and any other stock ranking on liquidation PARI PASSU therewith shall be entitled to be paid out of the assets of the Corporation available for distribution to stockholders, whether such assets are capital, surplus or earnings, after any amount shall be paid or distributed to the holders of outstanding shares of Series A Class 1 and Class 2 Convertible Preferred Stock (together, the "Series A Preferred Stock"), Series B Convertible Preferred Stock (the "Series B Preferred Stock"), Series C Convertible Preferred Stock (the "Series C Preferred Stock") and any other stock ranking on liquidation senior to the Series D Preferred Stock, but before any amount shall be paid or distributed to the holders of any class of Common Stock or of any other stock ranking on liquidation junior to the Series D Preferred Stock, an amount in cash equal to $6.00 per share (adjusted appropriately for stock splits, stock dividends and the like) together with declared but unpaid dividends to which the holders of outstanding shares of Series D Preferred Stock are entitled pursuant to Section 1 hereof; provided, however, that if, upon any liquidation, dissolution or winding up of the Corporation, the amounts payable with respect to the Series D Preferred Stock and any other stock ranking on liquidation PARI PASSU therewith are not paid in full, then each holder of Series D Preferred Stock and any other stock ranking on liquidation PARI PASSU therewith shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which such holder is entitled. (b) After payment of the full liquidation preferences of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock (collectively, the "Preferred Stock") as provided in Section 2(a) and any other applicable liquidation preferences payable to holders of outstanding Preferred Stock, any remaining assets of the Corporation then available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock (all on an as-if converted basis) and the Common Stock. (c) A share exchange or merger of the Corporation into or with another entity by means of any transaction or series of transactions (except (i) a merger into or with a wholly owned subsidiary of the Corporation with requisite stockholder approval or (ii) a merger in which the beneficial owners of the Corporation's outstanding capital stock immediately prior to such transaction hold no less than 51% of the voting power in the resulting entity), the effectuation by the Corporation of a transaction or series of related transactions in which 50% or more of the voting power of the Corporation is disposed of, or a sale of all or substantially all of the assets of the Corporation shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this Section 2; provided, however, that each holder of Series D Preferred Stock shall have the right to convert his, her or its shares of Series D Preferred Stock to Common Stock pursuant to Section 4(a) hereof in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section 2. Notice of such conversion shall be submitted in accordance with the provisions of Section 4(c) hereof no later than ten (10) days before the effective date of such event, provided that any such notice shall be effective if given not later than fifteen (15) days after the date of the Corporation's notice, pursuant to Section 6, with respect to such event. (d) If any of the assets of the Corporation are to be distributed other than in cash under this Section 2 or for any purpose, then the Board of Directors of the Corporation shall promptly engage independent competent appraisers to determine the value of the assets to be distributed. 3 (i) The Corporation shall, upon receipt of such appraiser's valuation, give prompt written notice thereof to each holder of shares of the Corporation's capital stock. Notwithstanding the above, any securities to be distributed shall be valued as follows: (A) if traded on a securities exchange or through the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the 30-day period ending three (3) business days prior to the distribution; (B) if actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the 30-day period ending three (3) business days prior to the distribution; and (C) if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Board of Directors and the holders of Preferred Stock. (ii) The method of valuation of securities subject to an investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (d)(i) to reflect the approximate fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of Preferred Stock. (iii) In the event the requirements of this subsection 2(d) are not complied with, the Corporation shall forthwith either: (A) cause such closing to be postponed until such time as the requirements of this Section 2 have been complied with; or (B) cancel such transaction, in which event the rights, preferences and privileges of the holders of the Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in subsection 2(d)(iv) hereof. (iv) The Corporation shall give each holder of record of Preferred Stock written notice of such impending transaction not later than 20 days prior to the stockholders' meeting called to approve such transaction, or 20 days prior to the closing of such transaction, whichever is earlier, and shall notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than 20 days after this Corporation has given the first notice provided for herein or sooner than 10 days after this Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of Preferred Stock. 4 (e) NOTICES. Any notice required by the provisions of this Section 2 to be given to the holders of shares of Series D Preferred Stock shall be in writing and shall be deemed given (i) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (ii) one (1) day (or five (5) days in the case of international deliveries) after the deposit with a nationally recognized overnight courier, having specified next day delivery, with written verification of receipt. All notices shall be addressed to each holder of record at the address of such holder appearing on the books of the Corporation. SECTION 3. VOTING POWER. Except as otherwise expressly provided herein or as required by law, the holder of each share of Series D Preferred Stock shall be entitled to vote on all matters submitted to a vote of the holders of outstanding voting securities. Each share of Series D Preferred Stock shall entitle the holder thereof to such number of votes per share as shall equal the number of shares of Common Stock into which each share of Series D Preferred Stock is convertible as of the record date for the determination of stockholders entitled to vote on or consent to such matters or, if no such record date is established, as of the date on which notice of such meeting is mailed or the date any written consent of stockholders is solicited. Except as otherwise expressly provided herein or as required by law, the holders of shares of the Preferred Stock and the Common Stock shall vote together as a single class on all matters. In all cases where class voting is required by law, Series D Preferred Stock shall be considered a separate class. SECTION 4. CONVERSION. The holders of Series D Preferred Stock shall have the following conversion rights: (a) VOLUNTARY CONVERSION. Holders of the outstanding shares of Series D Preferred Stock shall be entitled, at any time and from time to time after the date hereof, to cause any or all of such holder's shares to be converted into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $6.00 by the Conversion Price (as defined below) applicable to such shares, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. Initially the conversion price shall be $6.00 per share of Common Stock, which price shall be adjusted as hereinafter provided (and, as so adjusted, is hereinafter referred to as the "Conversion Price"). If a holder of Series D Preferred Stock elects to convert his, her or its Series D Preferred Stock at a time when there are any accrued and unpaid dividends or other amounts due on such shares (including any Participating Dividends), such dividends and other amounts shall, to the extent permitted by applicable law, be paid in full by the Corporation in connection with such conversion. (b) AUTOMATIC CONVERSION. Each share of Series D Preferred Stock outstanding shall automatically, and without the requirement of any consent of any holder, be converted into the number of shares of Common Stock into which such shares are convertible at the then effective Conversion Price: (i) upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock of the Corporation to the public at a minimum price of $7.50 per share (adjusted to reflect subsequent stock dividends, stock splits, contributions or recapitalizations) and pursuant to which the gross proceeds received by the Corporation equal or exceed $7,500,000 (a "Qualified Public Offering"); (ii) upon a share exchange or merger of the Corporation into or with another entity by means of any transaction or 5 series of transactions (except (x) a merger into or with a wholly owned subsidiary of the Corporation with requisite stockholder approval or (y) a merger in which the beneficial owners of the Corporation's outstanding capital stock immediately prior to such transaction hold no less than 51% of the voting power in the resulting entity), the effectuation by the Corporation of a transaction or series of related transactions in which 50% or more of the voting power of the Corporation is disposed of, or a sale of all or substantially all of the assets of the Corporation; or (iii) upon approval by the holders of at least two-thirds (2/3) of the then outstanding shares of Preferred Stock (on an as-if converted basis). In connection with any conversion under this Section 4(b), each holder of Series D Preferred Stock shall be entitled to receive, upon consummation of a Qualified Public Offering or other event giving rise to such conversion, payment in full of all accrued and unpaid dividends and other amounts due on such shares (including any Participating Dividends). (c) CONVERSION PROCEDURES. Any holder of Series D Preferred Stock converting such shares into shares of Common Stock pursuant to Section 4(a), or whose shares are automatically converted pursuant to Section 4(b), shall surrender the certificate or certificates representing Series D Preferred Stock being converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto), at the principal executive office of the Corporation or the offices of the transfer agent for Series D Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of Series D Preferred Stock by the Corporation, accompanied, in the case of conversion pursuant to Section 4(a), by written notice of conversion. Such notice of conversion shall (i) specify the number of shares of Series D Preferred Stock to be converted, (ii) specify the name or names in which such holder wishes the certificate or certificates for Common Stock and for any Series D Preferred Stock not to be so converted to be issued, (iii) include payment of any applicable transfer tax and (iv) specify the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion. Upon surrender of a certificate representing Series D Preferred Stock for conversion, the Corporation shall issue and send by hand delivery, by courier or by first class mail (postage prepaid) to the holder thereof or to such holder's designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion. In the event that there shall have been surrendered a certificate or certificates representing Series D Preferred Stock, only part of which are to be converted, the Corporation shall issue and send to such holder or such holder's designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of shares of Series D Preferred Stock which shall not have been converted. (d) EFFECTIVE DATE OF CONVERSION. The issuance by the Corporation of shares of Common Stock upon a conversion of Series D Preferred Stock into shares of Common Stock made at the option of the holder thereof pursuant to Section 4(a) hereof shall be effective as of the surrender of the certificate or certificates for Series D Preferred Stock to be converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto). The issuance by the Corporation of shares of Common Stock upon a conversion of Series D Preferred Stock into Common Stock pursuant to Section 4(b) hereof shall be deemed to be effective immediately prior to the closing of the Qualified Public Offering or upon the effective date of the event giving rise to such conversion. On and after the effective 6 date of conversion, the person or persons entitled to receive Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock. (e) FRACTIONAL SHARES. The Corporation shall not be obligated to deliver to holders of Series D Preferred Stock any fractional share of Common Stock issuable upon any conversion of such Series D Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series D Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (f) RESERVATION OF COMMON STOCK. The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of Series D Preferred Stock as herein provided, free from any preemptive rights or other obligations (except such rights and obligations created in connection with the issuance of the Series D Preferred Stock as are entered into by the holders thereof and the Corporation), such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the Series D Preferred Stock then outstanding; provided, that the shares of Common Stock so reserved shall not be reduced or affected in any manner whatsoever so long as any Series D Preferred Stock is outstanding, except in the case of a reverse stock split or stock combination. The Corporation shall prepare and shall use its reasonable business efforts to obtain and keep in force such governmental or regulatory permits or other authorizations as may be required by law, and shall comply with all requirements as to registration, qualification or listing of Common Stock, in order to enable the Corporation lawfully to issue and deliver to each holder of record of Series D Preferred Stock such number of shares of its Common Stock as shall from time to time be sufficient to effect the conversion of all shares of Series D Preferred Stock then outstanding and convertible into shares of Common Stock. (g) ADJUSTMENTS TO CONVERSION PRICE. Upon the issuance of additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock, the subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or the combination of outstanding shares of Common Stock into a smaller number of shares of Common Stock, the Conversion Price shall, simultaneously with the happening of such dividend, subdivision or combination, be adjusted by multiplying the then effective Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event. An adjustment made pursuant to this Section 4(g) shall be given effect, upon payment of such a dividend or distribution, as of the record date for the determination of stockholders entitled to receive such dividend or distribution (on a retroactive basis) and, in the case of a subdivision or combination, immediately as of the effective date thereof. (h) OTHER ADJUSTMENTS. In the event the Corporation shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event lawful and adequate provision shall be made so that 7 the holders of Series D Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities of the Corporation which they would have received had their Series D Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date (calculated in accordance with Section 4(d) hereof), retained such securities receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this Section 4 as applied to such distributed securities. If the Common Stock issuable upon the conversion of the Series D Preferred Stock shall be changed into the same or different number of shares of any class or classes of stock, whether by reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above), then and in each such event the holder of each share of Series D Preferred Stock shall have the right thereafter to convert each such share into the kind and amount of shares of stock and other securities and property receivable upon such reclassification or other change, by holders of the number of shares of Common Stock into which such shares of Series D Preferred Stock might have been converted immediately prior to such reclassification or change, all subject to further adjustment as provided herein. (i) OTHER DISTRIBUTIONS. In the event this Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this Corporation or other persons, or assets (excluding cash dividends), then, in each such case for the purpose of this Section 4(i), the holders of the Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (j) NO IMPAIRMENT. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Preferred Stock against dilution or other impairment. (k) NOTICES OF ADJUSTMENT. In each case of an adjustment or readjustment of the Conversion Price, the Corporation will furnish each holder of Series D Preferred Stock with a certificate, prepared by the chief financial officer of the Corporation, showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. (l) NOTICES. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Series D Preferred Stock shall be in writing and shall be deemed given (i) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (ii) one (1) day (or five (5) days in the case of international deliveries) after the deposit with a nationally recognized overnight courier, having specified next 8 day delivery, with written verification of receipt. All notices shall be addressed to each holder of record at the address of such holder appearing on the books of the Corporation. SECTION 5. NO REISSUANCE OF SERIES D PREFERRED STOCK. No share or shares of Series D Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired, and eliminated from the shares which the Corporation shall be authorized to issue. The Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the authorized number of shares of Series D Preferred Stock accordingly. SECTION 6. NOTICES OF RECORD DATE. In the event (i) the Corporation establishes a record date to determine the holders of any class of securities who are entitled to receive any dividend or other distribution, or (ii) there occurs any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, and any transfer of all or substantially all of the assets of the Corporation to any other corporation, or any other entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series D Preferred Stock at least 20 days prior to the record date or the expected effective date, as the case may be, specified therein, a notice specifying (a) the date of such record date for the purpose of such dividend or distribution and a description of such dividend or distribution, (b) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective and (c) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up. SECTION 7. OTHER RIGHTS. Except as otherwise provided in this Certificate of Designation, each share of Series D Preferred Stock and each share of Common Stock shall be identical in all respects, shall have the same powers, preferences and rights, without preference of any such class or share over any other such class or share. 9 IN WITNESS WHEREOF, the undersigned has executed and subscribed this Certificate and does affirm the foregoing as true as of the 2nd day of May, 2000. Lineo, Inc. a Delaware corporation By /s/ Matthew R. Harris, Secretary STATE OF DELAWARE ----------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF DESIGNATION OF "LINEO, INC.", FILED IN THIS OFFICE ON THE TWENTY-FIFTH DAY OF APRIL, A.D. 2000, AT 4:30 O'CLOCK P.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. /s/ EDWARD J. FREEL, SECRETARY OF STATE --------------------------------------- Edward J. Freel, Secretary of State AUTHENTICATION: 0401770 DATE: 04-26-00 CERTIFICATE OF DESIGNATION OF THE RELATIVE RIGHTS AND PREFERENCES OF THE SERIES C CONVERTIBLE PREFERRED STOCK OF LINEO, INC. The undersigned, the President and Chairman of Lineo, Inc., a Delaware corporation (the "Corporation"), does hereby certify that, pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Corporation, the following resolution creating a series of Series C Convertible Preferred Stock was duly adopted by the Board of Directors of the Corporation as of April 25, 2000: RESOLVED, that pursuant to the authority expressly granted to and vested in this Board of Directors by the provisions of the Certificate of Incorporation of the Corporation, this Board of Directors hereby creates a series of preferred stock (the "Preferred Stock"), $.001 par value per share, of the Corporation to be designated as Series C Convertible Preferred Stock, initially consisting of 3,000,000 shares. Except as provided herein or as required by law, the relative rights and preferences of the Series C Convertible Preferred Stock shall be as follows: SERIES C CONVERTIBLE PREFERRED STOCK The Corporation hereby designates 3,000,000 shares of the Preferred Stock as Series C Convertible Preferred Stock (the "Series C Preferred Stock"), which shall have the following rights, preferences and terms: SECTION 8. DIVIDENDS. The holders of Series C Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, at the same rate as dividends are paid with respect to Series A Class 1 and Class 2 Convertible Preferred Stock (together, the "Series A Preferred Stock"), Series B Convertible Preferred Stock (the "Series B Preferred Stock") and (other than dividends paid in additional shares of Common Stock) with respect to the Common Stock (treating each share of Series C Preferred Stock as being equal to the number of shares of Common Stock into which each such share of Series C Preferred Stock could be converted pursuant to the provisions of Section 4 hereof with such number determined as of the record date for the determination of holders of Common Stock entitled to receive such dividend) (the "Participating Dividends"). Dividends shall be paid by forwarding a check, postage prepaid, to the address of each holder (or, in the case of joint holders, to the address of any such holder) of Series C Preferred Stock and/or Common Stock, as applicable, as shown on the books of the Corporation, or to such other address as such holder specifies for such purpose by written notice to the Corporation. SECTION 9. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, each holder of outstanding shares of Series C Preferred Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to stockholders, whether such assets are capital, surplus or earnings, on a PARI PASSU basis with each holder of outstanding shares of Series A Preferred Stock, Series B Preferred Stock and any other stock ranking on liquidation PARI PASSU therewith, and before any amount shall be paid or distributed to the holders of any class of Common Stock or of any other stock ranking on liquidation junior to the Series C Preferred Stock, an amount in cash equal to $6.00 per share (adjusted appropriately for stock splits, stock dividends and the like) together with declared but unpaid dividends to which the holders of outstanding shares of Series C Preferred Stock are entitled pursuant to Section 1 hereof; provided, however, that if, upon any liquidation, dissolution or winding up of the Corporation, the amounts payable with respect to the Series C Preferred Stock, the Series A Preferred Stock, the Series B Preferred Stock and any other stock ranking on liquidation PARI PASSU therewith are not paid in full, then each holder of Series C Preferred Stock, Series A Preferred Stock, Series B Preferred Stock and any other stock ranking on liquidation PARI PASSU therewith shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which such holder is entitled. (b) After payment of the full liquidation preference of the Series C Preferred Stock, Series A Preferred Stock and Series B Preferred Stock (collectively, the "Preferred Stock") as provided in Section 2(a) and any other applicable liquidation preferences payable to holders of outstanding Preferred Stock, any remaining assets of the Corporation then available for distribution shall be distributed ratably among the holders of the Preferred Stock (on an as-if converted basis) and the Common Stock. (c) A share exchange or merger of the Corporation into or with another entity by means of any transaction or series of transactions (except (i) a merger into or with a wholly owned subsidiary of the Corporation with requisite stockholder approval or (ii) a merger in which the beneficial owners of the Corporation's outstanding capital stock immediately prior to such transaction hold no less than 51% of the voting power in the resulting entity), the effectuation by the Corporation of a transaction or series of related transactions in which 50% or more of the voting power of the Corporation is disposed of, or a sale of all or substantially all of the assets of the Corporation shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this Section 2; provided, however, that each holder of Series C Preferred Stock shall have the right to convert his, her or its shares of Series C Preferred Stock to Common Stock pursuant to Section 4(a) hereof in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section 2. Notice of such conversion shall be submitted in accordance with the provisions of Section 4(c) hereof no later than ten (10) days before the effective date of such event, provided that any such notice shall be effective if given not later than fifteen (15) days after the date of the Corporation's notice, pursuant to Section 6, with respect to such event. (d) If any of the assets of the Corporation are to be distributed other than in cash under this Section 2 or for any purpose, then the Board of Directors of the Corporation shall 13 promptly engage independent competent appraisers to determine the value of the assets to be distributed. (i) The Corporation shall, upon receipt of such appraiser's valuation, give prompt written notice thereof to each holder of shares of the Corporation's capital stock. Notwithstanding the above, any securities to be distributed shall be valued as follows: (A) if traded on a securities exchange or through the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the 30-day period ending three (3) business days prior to the distribution; (B) if actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the 30-day period ending three (3) business days prior to the distribution; and (C) if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Board of Directors and the holders of Preferred Stock. (ii) The method of valuation of securities subject to an investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (d)(i) to reflect the approximate fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of Preferred Stock. (iii) In the event the requirements of this subsection 2(d) are not complied with, the Corporation shall forthwith either: (A) cause such closing to be postponed until such time as the requirements of this Section 2 have been complied with; or (B) cancel such transaction, in which event the rights, preferences and privileges of the holders of the Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in subsection 2(d)(iv) hereof. (iv) The Corporation shall give each holder of record of Preferred Stock written notice of such impending transaction not later than 20 days prior to the stockholders' meeting called to approve such transaction, or 20 days prior to the closing of such transaction, whichever is earlier, and shall notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than 20 days after this Corporation has given the first notice provided for herein or sooner than 10 days after this Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the 14 holders of Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of Preferred Stock. (e) Notices. Any notice required by the provisions of this Section 2 to be given to the holders of shares of Series C Preferred Stock shall be in writing and shall be deemed given (i) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (ii) one (1) day (or five (5) days in the case of international deliveries) after the deposit with a nationally recognized overnight courier, having specified next day delivery, with written verification of receipt. All notices shall be addressed to each holder of record at the address of such holder appearing on the books of the Corporation. SECTION 10. VOTING POWER. Except as otherwise expressly provided herein or as required by law, the holder of each share of Series C Preferred Stock shall be entitled to vote on all matters submitted to a vote of the holders of outstanding voting securities. Each share of Series C Preferred Stock shall entitle the holder thereof to such number of votes per share as shall equal the number of shares of Common Stock into which each share of Series C Preferred Stock is convertible as of the record date for the determination of stockholders entitled to vote on or consent to such matters or, if no such record date is established, as of the date on which notice of such meeting is mailed or the date any written consent of stockholders is solicited. Except as otherwise expressly provided herein or as required by law, the holders of shares of the Preferred Stock and the Common Stock shall vote together as a single class on all matters. In all cases where class voting is required herein or is required by law, Series C Preferred Stock shall be considered a separate class. SECTION 11. CONVERSION. The holders of Series C Preferred Stock shall have the following conversion rights: (a) VOLUNTARY CONVERSION. Holders of the outstanding shares of Series C Preferred Stock shall be entitled, at any time and from time to time after the date hereof, to cause any or all of such holder's shares to be converted into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $6.00 by the Conversion Price (as defined below) applicable to such shares, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. Initially the conversion price shall be $6.00 per share of Common Stock, which price shall be adjusted as hereinafter provided (and, as so adjusted, is hereinafter referred to as the "Conversion Price"). If a holder of Series C Preferred Stock elects to convert his, her or its Series C Preferred Stock at a time when there are any accrued and unpaid dividends or other amounts due on such shares (including any Participating Dividends), such dividends and other amounts shall, to the extent permitted by applicable law, be paid in full by the Corporation in connection with such conversion. (b) AUTOMATIC CONVERSION. Each share of Series C Preferred Stock outstanding shall automatically, and without the requirement of any consent of any holder, be converted into the number of shares of Common Stock into which such shares are convertible at the then effective Conversion Price: (i) upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock of the Corporation to the public at a minimum price of $10.00 per share (adjusted to reflect subsequent stock dividends, stock splits, 15 contributions or recapitalizations) and pursuant to which the gross proceeds received by the Corporation equal or exceed $15,000,000 (a "Qualified Public Offering"); (ii) upon approval by the holders of at least two-thirds (2/3) of the then outstanding shares of Series C Preferred Stock; or (iii) upon the cumulative conversion of at least two-thirds (2/3) of the then outstanding shares of Series C Preferred Stock pursuant to Section 2(a) hereof. In connection with any conversion under this Section 4(b), each holder of Series C Preferred Stock shall be entitled to receive, upon consummation of a Qualified Public Offering or other event giving rise to such conversion, payment in full of all accrued and unpaid dividends and other amounts due on such shares (including any Participating Dividends). (c) CONVERSION PROCEDURES. Any holder of Series C Preferred Stock converting such shares into shares of Common Stock pursuant to Section 4(a), or whose shares are automatically converted pursuant to Section 4(b), shall surrender the certificate or certificates representing Series C Preferred Stock being converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto), at the principal executive office of the Corporation or the offices of the transfer agent for Series C Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of Series C Preferred Stock by the Corporation, accompanied, in the case of conversion pursuant to Section 4(a), by written notice of conversion. Such notice of conversion shall (i) specify the number of shares of Series C Preferred Stock to be converted, (ii) specify the name or names in which such holder wishes the certificate or certificates for Common Stock and for any Series C Preferred Stock not to be so converted to be issued, (iii) include payment of any applicable transfer tax and (iv) specify the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion. Upon surrender of a certificate representing Series C Preferred Stock for conversion, the Corporation shall issue and send by hand delivery, by courier or by first class mail (postage prepaid) to the holder thereof or to such holder's designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion. In the event that there shall have been surrendered a certificate or certificates representing Series C Preferred Stock, only part of which are to be converted, the Corporation shall issue and send to such holder or such holder's designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of shares of Series C Preferred Stock which shall not have been converted. (d) EFFECTIVE DATE OF CONVERSION. The issuance by the Corporation of shares of Common Stock upon a conversion of Series C Preferred Stock into shares of Common Stock made at the option of the holder thereof pursuant to Section 4(a) hereof shall be effective as of the surrender of the certificate or certificates for Series C Preferred Stock to be converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto). The issuance by the Corporation of shares of Common Stock upon a conversion of Series C Preferred Stock into Common Stock pursuant to Section 4(b) hereof shall be deemed to be effective immediately prior to the closing of the Qualified Public Offering or upon the effective date of the event giving rise to such conversion. On and after the effective date of conversion, the person or persons entitled to receive Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock. 16 (e) FRACTIONAL SHARES. The Corporation shall not be obligated to deliver to holders of Series C Preferred Stock any fractional share of Common Stock issuable upon any conversion of such Series C Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series C Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (f) RESERVATION OF COMMON STOCK. The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of Series C Preferred Stock as herein provided, free from any preemptive rights or other obligations (except such rights and obligations created in connection with the issuance of the Series C Preferred Stock as are entered into by the holders thereof and the Corporation), such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the Series C Preferred Stock then outstanding provided that the shares of Common Stock so reserved shall not be reduced or affected in any manner whatsoever so long as any Series C Preferred Stock is outstanding, except in the case of a reverse stock split or stock combination. The Corporation shall prepare and shall use its reasonable business efforts to obtain and keep in force such governmental or regulatory permits or other authorizations as may be required by law, and shall comply with all requirements as to registration, qualification or listing of Common Stock, in order to enable the Corporation lawfully to issue and deliver to each holder of record of Series C Preferred Stock such number of shares of its Common Stock as shall from time to time be sufficient to effect the conversion of all shares of Series C Preferred Stock then outstanding and convertible into shares of Common Stock. (g) ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price in effect from time to time shall be subject to adjustment as follows: (i) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. Upon the issuance of additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock, the subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or the combination of outstanding shares of Common Stock into a smaller number of shares of Common Stock, the Conversion Price shall, simultaneously with the happening of such dividend, subdivision or combination, be adjusted by multiplying the then effective Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event. An adjustment made pursuant to this Section 4(g)(i) shall be given effect, upon payment of such a dividend or distribution, as of the record date for the determination of stockholders entitled to receive such dividend or distribution (on a retroactive basis) and, in the case of a subdivision or combination, immediately as of the effective date thereof. (ii) SALE OF COMMON STOCK. In the event the Corporation shall at any time or from time to time while Series C Preferred Stock is outstanding, issue, sell or exchange any shares of Common Stock (including shares held in the Corporation's treasury, but excluding: (i) any Common Stock which may be issued upon conversion of the Preferred Stock, and (ii) up to 5,000,000 shares of Common Stock issued to officers, directors, employees, consultants or 17 agents of the Corporation pursuant to the Corporation's 1999 Stock Option Plan (the "Plan") or upon the exercise of options issued pursuant to such Plan, or such greater number of shares as may be issuable pursuant to the adjustment provisions of such Plan as in effect on the date hereof (collectively, the "Excluded Shares")), for a consideration per share less than the Conversion Price in effect immediately prior to the issuance, sale or exchange of such shares (any such issuance, sale or exchange hereinafter referred to as a "Dilutive Transaction"), then, and thereafter successively upon the consummation of any Dilutive Transaction, the Conversion Price in effect immediately prior to the Dilutive Transaction shall forthwith be reduced to an amount (calculated to the nearest cent) determined by multiplying such Conversion Price by a fraction: (A) the numerator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the Dilutive Transaction (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of shares of Common Stock which the net aggregate consideration received by the Corporation for the total number of such additional shares of Common Stock so issued in the Dilutive Transaction would purchase at the Conversion Price (prior to adjustment), and (B) the denominator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the Dilutive Transaction (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of such additional shares of Common Stock so issued in the Dilutive Transaction. (iii) SALE OF OPTIONS, RIGHTS OR CONVERTIBLE SECURITIES. In the event the Corporation shall at any time or from time to time while the Series C Preferred Stock is outstanding, issue options, warrants or rights to subscribe for shares of Common Stock (other than any options for Excluded Shares), or issue any securities convertible into or exercisable or exchangeable for shares of Common Stock, for a consideration per share (determined by dividing the Net Aggregate Consideration (as determined below) by the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted to the fullest extent permitted by their terms) less than the Conversion Price in effect immediately prior to the issuance of such options or rights or convertible or exchangeable securities, the Conversion Price in effect immediately prior to the issuance of such options, warrants or rights or securities shall be reduced to an amount determined by multiplying such Conversion Price by a fraction: (A) the numerator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such options, rights or convertible securities (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of shares of Common Stock which the total amount of consideration received by the Corporation for the issuance of such options, warrants, rights or convertible securities PLUS the minimum 18 amount set forth in the terms of such security as payable to the Corporation upon the exercise or conversion thereof (the "Net Aggregate Consideration") would purchase at the Conversion Price prior to adjustment, and (B) the denominator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such options, warrants, rights or convertible securities (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Preferred Stock, options, warrants, rights or convertible securities), plus (2) the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted. (iv) EXPIRATION OR CHANGE IN PRICE. If the consideration per share provided for in any options or rights to subscribe for shares of Common Stock or any securities exercisable or exchangeable for or convertible into shares of Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such options or convertible securities provided for such changed consideration per share (determined as provided in Section 4(g)(iii) hereof) at the time initially granted, issued or sold; PROVIDED, that such adjustment of the Conversion Price will be made only as and to the extent that the Conversion Price effective upon such adjustment remains less than or equal to the Conversion Price that would be in effect if such options, rights or securities had not been issued. No adjustment of the Conversion Price shall be made under this Section 4 upon the issuance of any additional shares of Common Stock which are issued pursuant to the exercise of any warrants, options or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any convertible securities if an adjustment shall previously have been made upon the issuance of such warrants, options or other rights. Any adjustment of the Conversion Price shall be disregarded if, as, and when the rights to acquire shares of Common Stock upon exercise or conversion of the warrants, options, rights or convertible securities which gave rise to such adjustment expire or are canceled without having been exercised, so that the Conversion Price effective immediately upon such cancellation or expiration shall be equal to the Conversion Price in effect at the time of the issuance of the expired or canceled warrants, options, rights or convertible securities, with such additional adjustments as would have been made to that Conversion Price had the expired or canceled warrants, options, rights or convertible securities not been issued. (h) OTHER ADJUSTMENTS. In the event the Corporation shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event lawful and adequate provision shall be made so that the holders of Series C Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities of the Corporation which they would have received had their Series C Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date (calculated in accordance with Section 4(d) hereof), retained such securities receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this Section 4 as applied to such distributed securities. 19 If the Common Stock issuable upon the conversion of the Series C Preferred Stock shall be changed into the same or different number of shares of any class or classes of stock, whether by reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above), then and in each such event the holder of each share of Series C Preferred Stock shall have the right thereafter to convert each such share into the kind and amount of shares of stock and other securities and property receivable upon such reclassification or other change, by holders of the number of shares of Common Stock into which such shares of Series C Preferred Stock might have been converted immediately prior to such reclassification or change, all subject to further adjustment as provided herein. (i) OTHER DISTRIBUTIONS. In the event this Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in Section 4(g)(iii), then, in each such case for the purpose of this Section 4(i), the holders of the Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (j) NO IMPAIRMENT. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Preferred Stock against dilution or other impairment. (k) NOTICES OF ADJUSTMENT. In each case of an adjustment or readjustment of the Conversion Price, the Corporation will furnish each holder of Series C Preferred Stock with a certificate, prepared by the chief financial officer of the Corporation, showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. (l) NOTICES. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Series C Preferred Stock shall be in writing and shall be deemed given (i) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (ii) one (1) day (or five (5) days in the case of international deliveries) after the deposit with a nationally recognized overnight courier, having specified next day delivery, with written verification of receipt. All notices shall be addressed to each holder of record at the address of such holder appearing on the books of the Corporation. SECTION 12. NO REISSUANCE OF SERIES C PREFERRED STOCK. No share or shares of Series C Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired, and eliminated from the shares which the Corporation shall be authorized to issue. The Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the authorized number of shares of Series C Preferred Stock accordingly. 20 SECTION 13. NOTICES OF RECORD DATE. In the event (i) the Corporation establishes a record date to determine the holders of any class of securities who are entitled to receive any dividend or other distribution, or (ii) there occurs any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, and any transfer of all or substantially all of the assets of the Corporation to any other corporation, or any other entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series C Preferred Stock at least 20 days prior to the record date or the expected effective date, as the case may be, specified therein, a notice specifying (a) the date of such record date for the purpose of such dividend or distribution and a description of such dividend or distribution, (b) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective and (c) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up. SECTION 14. PROTECTIVE PROVISION. So long as any shares of Series C Preferred Stock remain outstanding, the Corporation shall not without the affirmative vote or written consent of the holders of two-thirds in interest of the Series C Preferred Stock voting as a class: (a) sell, lease or otherwise dispose of (whether in one transaction or a series of related transactions) more than 50% of its assets or business, (b) merge with or into or consolidate with another entity or enter into or engage in any other transaction or series of related transactions, in any such case in connection with or as a result of which the Corporation is not the surviving entity or the owners of the Corporation's outstanding equity securities immediately prior to the transaction or series of related transactions do not own at least a majority of the outstanding equity securities of the surviving, resulting or consolidated entity, (c) dissolve, liquidate or wind up its operations, (d) adopt any amendment to this Certificate of Designation, or any amendment to its Certificate of Incorporation or Bylaws, that eliminates, amends, restricts or otherwise adversely affects the rights and preferences of the Series C Preferred Stock, or that increases the authorized shares of the Series C Preferred Stock, (e) declare or make dividend payments on any shares of its Common Stock or any other class of its capital stock, (f) create, or obligate itself to create, any class or series of shares or any other security that has a preference over or is on parity with the Series C Preferred Stock, (g) increase the size of the Board of Directors of the Corporation to more than five (5) members, 21 (h) redeem, purchase or otherwise acquire (or pay into or set aside funds for a sinking fund for such purpose) any share or shares of Preferred Stock or Common Stock; PROVIDED, HOWEVER, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Corporation or any subsidiary pursuant to agreements under which the Corporation has the right to repurchase such shares and such repurchase is approved by the Corporation's Board of Directors, (i) permit a subsidiary of the Corporation to sell or issue securities to a third party, except in connection with joint ventures or other strategic relationships approved by the Corporation's Board of Directors, (j) increase (other than by conversion) the authorized number of shares of Preferred Stock, or (k) make a fundamental change in the principal business of the Corporation as presently conducted or proposed to be conducted. SECTION 15. OTHER RIGHTS. Except as otherwise provided in this Certificate of Designation, each share of Series C Preferred Stock, each share of Series A Preferred Stock, each share of Series B Preferred Stock and each share of Common Stock shall be identical in all respects, shall have the same powers, preferences and rights, without preference of any such class or share over any other such class or share. IN WITNESS WHEREOF, the undersigned has executed and subscribed this Certificate and does affirm the foregoing as true as of the 25th day of April, 2000. Lineo, Inc. a Delaware corporation By /s/ Bryan Sparks, President and Chairman 22 STATE OF DELAWARE Office of the Secretary of State ----------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF DESIGNATION OF "LINEO, INC.", FILED IN THIS OFFICE ON THE FOURTEENTH DAY OF MARCH, A.D. 2000, AT 2:30 O'CLOCK P.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. /s/ EDWARD J. FREEL, SECRETARY OF STATE --------------------------------------- Edward J. Freel, Secretary of State AUTHENTICATION: 0345590 DATE: 03-28-00 CERTIFICATE OF DESIGNATION OF THE RELATIVE RIGHTS AND PREFERENCES OF THE SERIES B CONVERTIBLE PREFERRED STOCK OF LINEO, INC. The undersigned, the President and Chairman of Lineo, Inc., a Delaware corporation (the "Corporation"), does hereby certify that, pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Corporation, the following resolution creating a series of Series B Convertible Preferred Stock was duly adopted by the Board of Directors of the Corporation as of February 29, 2000: RESOLVED, that pursuant to the authority expressly granted to and vested in this Board of Directors by the provisions of the Certificate of Incorporation of the Corporation, this Board of Directors hereby creates a series of preferred stock (the "Preferred Stock"), $.001 par value per share, of the Corporation to be designated as Series B Convertible Preferred Stock, initially consisting of 4,850,000 shares. Except as provided herein or as required by law, the relative rights and preferences of the Series B Convertible Preferred Stock shall be as follows: SERIES B CONVERTIBLE PREFERRED STOCK The Corporation hereby designates 4,850,000 shares of the Preferred Stock as Series B Convertible Preferred Stock (the "Series B Preferred Stock"), which shall have the following rights, preferences and terms: SECTION 16. DIVIDENDS. The holders of Series B Preferred Stock shall be entitled to receive dividends at the same rate as dividends are paid with respect to Series A Class 1 and Class 2 Convertible Preferred Stock (together, the "Series A Preferred Stock") and (other than dividends paid in additional shares of Common Stock) with respect to the Common Stock (treating each share of Series B Preferred Stock as being equal to the number of shares of Common Stock into which each such share of Series B Preferred Stock could be converted pursuant to the provisions of Section 4 hereof with such number determined as of the record date for the determination of holders of Common Stock entitled to receive such dividend) (the "Participating Dividends"). Dividends shall be paid by forwarding a check, postage prepaid, to the address of each holder (or, in the case of joint holders, to the address of any such holder) of Series B Preferred Stock and/or Common Stock, as applicable, as shown on the books of the Corporation, or to such other address as such holder specifies for such purpose by written notice to the Corporation. SECTION 17. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, each holder of outstanding shares of Series B Preferred Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to stockholders, whether such assets are capital, surplus or earnings, on a PARI PASSU basis with each holder of outstanding shares of Series A Preferred Stock and any other stock ranking on liquidation PARI PASSU therewith, and before any amount shall be paid or distributed to the holders of any class of Common Stock or of any other stock ranking on liquidation junior to the Series B Preferred Stock, an amount in cash equal to $3.00 per share (adjusted appropriately for stock splits, stock dividends and the like) together with declared but unpaid dividends to which the holders of outstanding shares of Series B Preferred Stock are entitled pursuant to Section 1 hereof; provided, however, that if, upon any liquidation, dissolution or winding up of the Corporation, the amounts payable with respect to the Series B Preferred Stock, the Series A Preferred Stock and any other stock ranking on liquidation PARI PASSU therewith are not paid in full, then each holder of Series B Preferred Stock, Series A Preferred Stock and any other stock ranking on liquidation PARI PASSU therewith shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which such holder is entitled. (b) After payment of the full liquidation preference of the Series B Preferred Stock and Series A Preferred Stock as provided in Section 2(a) and any other applicable liquidation preferences payable to holders of outstanding Preferred Stock, any remaining assets of the Corporation then available for distribution shall be distributed ratably among the holders of the Preferred Stock (on an as-if converted basis) and the Common Stock. (c) A share exchange or merger of the Corporation (except (i) a merger into or with a wholly owned subsidiary of the Corporation with requisite stockholder approval or (ii) a merger in which the beneficial owners of the Corporation's outstanding capital stock immediately prior to such transaction hold no less than 51% of the voting power in the resulting entity) or a sale of all or substantially all of the assets of the Corporation shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this Section 2; provided, however, that each holder of Series B Preferred Stock shall have the right to convert his, her or its shares of Series B Preferred Stock to Common Stock pursuant to Section 4(a) hereof in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section 2. Notice of such conversion shall be submitted in accordance with the provisions of Section 4(c) hereof no later than ten (10) days before the effective date of such event, provided that any such notice shall be effective if given not later than fifteen (15) days after the date of the Corporation's notice, pursuant to Section 6, with respect to such event. (d) If any of the assets of the Corporation are to be distributed other than in cash under this Section 2 or for any purpose, then the Board of Directors of the Corporation shall promptly engage independent competent appraisers to determine the value of the assets to be distributed. The Corporation shall, upon receipt of such appraiser's valuation, give prompt written notice thereof to each holder of shares of the Corporation's capital stock. Notwithstanding the above, any securities to be distributed shall be valued as follows: (i) if traded on a securities exchange, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the 30-day period ending three (3) business days prior to the distribution; 25 (ii) if actively traded over-the-counter, the value shall be deemed to be the average of the closing bid prices over the 30-day period ending three (3) business days prior to the distribution; and (iii) if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Board of Directors and the holders of Preferred Stock. SECTION 18. VOTING POWER. Except as otherwise expressly provided herein or as required by law, the holder of each share of Series B Preferred Stock shall be entitled to vote on all matters submitted to a vote of the holders of outstanding voting securities. Each share of Series B Preferred Stock shall entitle the holder thereof to such number of votes per share as shall equal the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible as of the record date for the determination of stockholders entitled to vote on or consent to such matters or, if no such record date is established, as of the date on which notice of such meeting is mailed or the date any written consent of stockholders is solicited. Except as otherwise expressly provided herein or as required by law, the holders of shares of the Preferred Stock and the Common Stock shall vote together as a single class on all matters. In all cases where class voting is required herein or is required by law, Series B Preferred Stock shall be considered a separate class. SECTION 19. CONVERSION. The holders of Series B Preferred Stock shall have the following conversion rights: (a) VOLUNTARY CONVERSION. Holders of the outstanding shares of Series B Preferred Stock shall be entitled, at any time and from time to time after the date hereof, to cause any or all of such holder's shares to be converted into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $3.00 by the conversion price applicable to such shares, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. Initially the conversion price shall be $3.00 per share of Common Stock, which price shall be adjusted as hereinafter provided (and, as so adjusted, is hereinafter sometimes referred to as the "Conversion Price"). If a holder of Series B Preferred Stock elects to convert his, her or its Series B Preferred Stock at a time when there are any accrued and unpaid dividends or other amounts due on such shares (including any Participating Dividends), such dividends and other amounts shall, to the extent permitted by applicable law, be paid in full by the Corporation in connection with such conversion. (b) AUTOMATIC CONVERSION. Each share of Series B Preferred Stock outstanding shall automatically, and without the requirement of any consent of any holder, be converted into the number of shares of Common Stock into which such shares are convertible at the then effective Conversion Price: (i) upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock of the Corporation to the public at a minimum price of $10.00 per share and pursuant to which the gross proceeds received by the Corporation equal or exceed $15,000,000 (a "Qualified Public Offering"); (ii) upon approval by the holders of at least two-thirds (2/3) of the then outstanding shares of Series B Preferred Stock; or (iii) upon the cumulative conversion of at least two-thirds (2/3) of the then outstanding shares 26 of Series B Preferred Stock pursuant to Section 2(a) hereof. In connection with any conversion under this Section 4(b), each holder of Series B Preferred Stock shall be entitled to receive, upon consummation of a Qualified Public Offering or other event giving rise to such conversion, payment in full of all accrued and unpaid dividends and other amounts due on such shares (including any Participating Dividends). (c) CONVERSION PROCEDURES. Any holder of Series B Preferred Stock converting such shares into shares of Common Stock pursuant to Section 4(a), or whose shares are automatically converted pursuant to Section 4(b), shall surrender the certificate or certificates representing Series B Preferred Stock being converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto), at the principal executive office of the Corporation or the offices of the transfer agent for Series B Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of Series B Preferred Stock by the Corporation, accompanied, in the case of conversion pursuant to Section 4(a), by written notice of conversion. Such notice of conversion shall (i) specify the number of shares of Series B Preferred Stock to be converted, (ii) specify the name or names in which such holder wishes the certificate or certificates for Common Stock and for any Series B Preferred Stock not to be so converted to be issued, (iii) include payment of any applicable transfer tax and (iv) specify the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion. Upon surrender of a certificate representing Series B Preferred Stock for conversion, the Corporation shall issue and send by hand delivery, by courier or by first class mail (postage prepaid) to the holder thereof or to such holder's designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion. In the event that there shall have been surrendered a certificate or certificates representing Series B Preferred Stock, only part of which are to be converted, the Corporation shall issue and send to such holder or such holder's designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of shares of Series B Preferred Stock which shall not have been converted. (d) EFFECTIVE DATE OF CONVERSION. The issuance by the Corporation of shares of Common Stock upon a conversion of Series B Preferred Stock into shares of Common Stock made at the option of the holder thereof pursuant to Section 4(a) hereof shall be effective as of the surrender of the certificate or certificates for Series B Preferred Stock to be converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto). The issuance by the Corporation of shares of Common Stock upon a conversion of Series B Preferred Stock into Common Stock pursuant to Section 4(b) hereof shall be deemed to be effective immediately prior to the closing of the Qualified Public Offering or upon the effective date of the event giving rise to such conversion. On and after the effective date of conversion, the person or persons entitled to receive Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock. (e) FRACTIONAL SHARES. The Corporation shall not be obligated to deliver to holders of Series B Preferred Stock any fractional share of Common Stock issuable upon any conversion 27 of such Series B Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law. (f) RESERVATION OF COMMON STOCK. The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of Series B Preferred Stock as herein provided, free from any preemptive rights or other obligations (except such rights and obligations created in connection with the issuance of the Series B Preferred Stock as are entered into by the holders thereof and the Corporation), such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the Series B Preferred Stock then outstanding provided that the shares of Common Stock so reserved shall not be reduced or affected in any manner whatsoever so long as any Series B Preferred Stock is outstanding, except in the case of a reverse stock split or stock combination. The Corporation shall prepare and shall use its reasonable business efforts to obtain and keep in force such governmental or regulatory permits or other authorizations as may be required by law, and shall comply with all requirements as to registration, qualification or listing of Common Stock, in order to enable the Corporation lawfully to issue and deliver to each holder of record of Series B Preferred Stock such number of shares of its Common Stock as shall from time to time be sufficient to effect the conversion of all shares of Series B Preferred Stock then outstanding and convertible into shares of Common Stock. (g) ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price in effect from time to time shall be subject to adjustment as follows: (i) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. Upon the issuance of additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock, the subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or the combination of outstanding shares of Common Stock into a smaller number of shares of Common Stock, the Conversion Price shall, simultaneously with the happening of such dividend, subdivision or combination, be adjusted by multiplying the then effective Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event. An adjustment made pursuant to this Section 4(g)(i) shall be given effect, upon payment of such a dividend or distribution, as of the record date for the determination of stockholders entitled to receive such dividend or distribution (on a retroactive basis) and, in the case of a subdivision or combination, immediately as of the effective date thereof. (ii) SALE OF COMMON STOCK. In the event the Corporation shall at any time or from time to time while Series B Preferred Stock is outstanding, issue, sell or exchange any shares of Common Stock (including shares held in the Corporation's treasury, but excluding: (i) any Common Stock which may be issued upon conversion of the Preferred Stock, and (ii) up to 2,000,000 shares of Common Stock issued to officers, directors, employees, consultants or agents of the Corporation pursuant to the Corporation's 1999 Stock Option Plan (the "Plan") or upon the exercise of options issued pursuant to such Plan, or such greater number of shares as may be issuable pursuant to the adjustment provisions of such Plan as in effect on the date hereof (collectively, the "Excluded Shares")), for a consideration per share less than the Conversion Price in effect immediately prior to the issuance, sale or exchange of such shares (any such 28 issuance, sale or exchange hereinafter referred to as a "Dilutive Transaction"), then, and thereafter successively upon the consummation of any Dilutive Transaction, the Conversion Price in effect immediately prior to the Dilutive Transaction shall forthwith be reduced to an amount (calculated to the nearest cent) determined by multiplying such Conversion Price by a fraction: (A) the numerator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the Dilutive Transaction (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of shares of Common Stock which the net aggregate consideration received by the Corporation for the total number of such additional shares of Common Stock so issued in the Dilutive Transaction would purchase at the Conversion Price (prior to adjustment), and (B) the denominator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the Dilutive Transaction (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of such additional shares of Common Stock so issued in the Dilutive Transaction. (iii) SALE OF OPTIONS, RIGHTS OR CONVERTIBLE SECURITIES. In the event the Corporation shall at any time or from time to time while the Series B Preferred Stock is outstanding, issue options, warrants or rights to subscribe for shares of Common Stock (other than any options for Excluded Shares), or issue any securities convertible into or exercisable or exchangeable for shares of Common Stock, for a consideration per share (determined by dividing the Net Aggregate Consideration (as determined below) by the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted to the fullest extent permitted by their terms) less than the Conversion Price in effect immediately prior to the issuance of such options or rights or convertible or exchangeable securities, the Conversion Price in effect immediately prior to the issuance of such options, warrants or rights or securities shall be reduced to an amount determined by multiplying such Conversion Price by a fraction: (A) the numerator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such options, rights or convertible securities (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of shares of Common Stock which the total amount of consideration received by the Corporation for the issuance of such options, warrants, rights or convertible securities PLUS the minimum amount set forth in the terms of such security as payable to the Corporation upon the exercise or conversion thereof (the "Net Aggregate Consideration") would purchase at the Conversion Price prior to adjustment, and 29 (B) the denominator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such options, warrants, rights or convertible securities (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Preferred Stock, options, warrants, rights or convertible securities), plus (2) the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted. (iv) EXPIRATION OR CHANGE IN PRICE. If the consideration per share provided for in any options or rights to subscribe for shares of Common Stock or any securities exercisable or exchangeable for or convertible into shares of Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such options or convertible securities provided for such changed consideration per share (determined as provided in Section 4(g)(iii) hereof) at the time initially granted, issued or sold; PROVIDED, that such adjustment of the Conversion Price will be made only as and to the extent that the Conversion Price effective upon such adjustment remains less than or equal to the Conversion Price that would be in effect if such options, rights or securities had not been issued. No adjustment of the Conversion Price shall be made under this Section 4 upon the issuance of any additional shares of Common Stock which are issued pursuant to the exercise of any warrants, options or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any convertible securities if an adjustment shall previously have been made upon the issuance of such warrants, options or other rights. Any adjustment of the Conversion Price shall be disregarded if, as, and when the rights to acquire shares of Common Stock upon exercise or conversion of the warrants, options, rights or convertible securities which gave rise to such adjustment expire or are canceled without having been exercised, so that the Conversion Price effective immediately upon such cancellation or expiration shall be equal to the Conversion Price in effect at the time of the issuance of the expired or canceled warrants, options, rights or convertible securities, with such additional adjustments as would have been made to that Conversion Price had the expired or canceled warrants, options, rights or convertible securities not been issued. (h) OTHER ADJUSTMENTS. In the event the Corporation shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event lawful and adequate provision shall be made so that the holders of Series B Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities of the Corporation which they would have received had their Series B Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date (calculated in accordance with Section 4(d) hereof), retained such securities receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this Section 4 as applied to such distributed securities. If the Common Stock issuable upon the conversion of the Series B Preferred Stock shall be changed into the same or different number of shares of any class or classes of stock, whether by reclassification or otherwise (other than a subdivision or combination of shares or stock 30 dividend provided for above), then and in each such event the holder of each share of Series B Preferred Stock shall have the right thereafter to convert each such share into the kind and amount of shares of stock and other securities and property receivable upon such reclassification or other change, by holders of the number of shares of Common Stock into which such shares of Series B Preferred Stock might have been converted immediately prior to such reclassification or change, all subject to further adjustment as provided herein. (i) NOTICES. In each case of an adjustment or readjustment of the Conversion Price, the Corporation will furnish each holder of Series B Preferred Stock with a certificate, prepared by the chief financial officer of the Corporation, showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. SECTION 20. NO REISSUANCE OF SERIES B PREFERRED STOCK. No share or shares of Series B Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired, and eliminated from the shares which the Corporation shall be authorized to issue. The Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the authorized number of shares of Series B Preferred Stock accordingly. SECTION 21. NOTICES OF RECORD DATE. In the event (i) the Corporation establishes a record date to determine the holders of any class of securities who are entitled to receive any dividend or other distribution, or (ii) there occurs any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, and any transfer of all or substantially all of the assets of the Corporation to any other corporation, or any other entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series B Preferred Stock at least 20 days prior to the record date or the expected effective date, as the case may be, specified therein, a notice specifying (a) the date of such record date for the purpose of such dividend or distribution and a description of such dividend or distribution, (b) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective and (c) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up. SECTION 22. PROTECTIVE PROVISION. So long as any shares of Series B Preferred Stock remain outstanding, the Corporation shall not without the affirmative vote or written consent of the holders of two-thirds in interest of the Series B Preferred Stock voting as a class: (a) sell, lease or otherwise dispose of (whether in one transaction or a series of related transactions) more than 50% of its assets or business, (b) merge with or into or consolidate with another entity or enter into or engage in any other transaction or series of related transactions, in any such case in connection with or as a result of which the Corporation is not the surviving entity or the owners of the Corporation's outstanding equity securities immediately prior to the transaction or series of related transactions 31 do not own at least a majority of the outstanding equity securities of the surviving, resulting or consolidated entity, (c) dissolve, liquidate or wind up its operations, (d) directly or indirectly redeem, purchase, or otherwise acquire for consideration any shares of its Common Stock or any other class of its capital stock except in connection with contractual obligations with employees or ex-employees, (e) adopt any amendment to this Certificate of Designation, or any amendment to its Certificate of Incorporation or Bylaws, that eliminates, amends, restricts or otherwise adversely affects the rights and preferences of the Series B Preferred Stock, or that increases the authorized shares of the Series B Preferred Stock, (f) declare or make dividend payments on any shares of its Common Stock or any other class of its capital stock, or (g) create, or obligate itself to create, any class or series of shares or any other security that has a preference over the Series B Preferred Stock. (h) increase the size of the Board of Directors of the Corporation to more than five (5) members. SECTION 23. OTHER RIGHTS. Except as otherwise provided in this Certificate of Designation, each share of Series B Preferred Stock, each share of Series A Preferred Stock and each share of Common Stock shall be identical in all respects, shall have the same powers, preferences and rights, without preference of any such class or share over any other such class or share. IN WITNESS WHEREOF, the undersigned has executed and subscribed this Certificate and does affirm the foregoing as true as of the 14th day of March, 2000. Lineo, Inc. a Delaware corporation By /s/ Sparks, President and Chairman 32 STATE OF DELAWARE Office of the Secretary of State ----------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF DESIGNATION OF "LINEO, INC.", FILED IN THIS OFFICE ON THE SIXTEENTH DAY OF FEBRUARY, A.D. 2000, AT 5 O'CLOCK P.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. /s/ EDWARD J. FREEL, SECRETARY OF STATE --------------------------------------- Edward J. Freel, Secretary of State AUTHENTICATION: 0262418 DATE: 02-16-00 CERTIFICATE OF DESIGNATION OF THE RELATIVE RIGHTS AND PREFERENCES OF THE SERIES A CONVERTIBLE PREFERRED STOCK OF LINEO, INC. The undersigned, the President of Lineo, Inc., a Delaware corporation (the "Corporation"), does hereby certify that, pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Corporation, the following resolution creating a series of Series A Convertible Preferred Stock was duly adopted by the Board of Directors of the Corporation as of February 14, 2000: RESOLVED, that pursuant to the authority expressly granted to and vested in this Board of Directors by the provisions of the Certificate of Incorporation of the Corporation, this Board of Directors hereby creates a series of the preferred stock (the "Preferred Stock"), $.001 par value per share, of the Company, 5,000,000 of which shall be designated Series A Class 1 Convertible Preferred Stock, and 2,500,000 of which shall be designated Series A Class 2 Convertible Preferred Stock. Except as provided herein or as required by law, the relative rights and the preferences of the Series A Class 1 Convertible Preferred Stock and the Series A Class 2 Convertible Preferred Stock shall be identical, and shall be as follows: SERIES A CONVERTIBLE PREFERRED STOCK The Corporation hereby designates as Series A Convertible Preferred Stock 5,000,000 shares of Series A Class 1 Convertible Preferred Stock (the "Series A Class 1 Preferred Stock"), and 2,500,000 shares of Series A Class 2 Convertible Preferred Stock (the "Series A Class 2 Preferred Stock") (the Series A Class 1 Preferred Stock and the Series A Class 2 Preferred Stock are collectively referred to as the "Series A Preferred Stock"). The Series A Preferred Stock shall have the following rights, preferences and terms: SECTION 24. DIVIDENDS. The holders of the Series A Preferred Stock shall be entitled to receive dividends at the same rate as dividends (other than dividends paid in additional shares of Common Stock) are paid with respect to the Common Stock (treating each share of Series A Preferred Stock as being equal to the number of shares of Common Stock into which each such share of Series A Preferred Stock could be converted pursuant to the provisions of Section 4 hereof with such number determined as of the record date for the determination of holders of Common Stock entitled to receive such dividend) (the "Participating Dividends"). Dividends shall be paid by forwarding a check, postage prepaid, to the address of each holder (or, in the case of joint holders, to the address of any such holder), of Series A Preferred Stock and/or Common Stock, as applicable, as shown on the books of the Corporation, or to such other address as such holder specifies for such purpose by written notice to the Corporation. SECTION 25. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, each holder of outstanding shares of Series A Preferred Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to stockholders, whether such assets are capital, surplus or earnings, on a PARI PASSU basis with any other stock ranking on liquidation PARI PASSU therewith, and before any amount shall be paid or distributed to the holders of any class of Common Stock or of any other stock ranking on liquidation junior to the Series A Preferred Stock, an amount in cash equal to $1.50 per share (adjusted appropriately for stock splits, stock dividends and the like) together with declared but unpaid dividends to which the holders of outstanding shares of Series A Preferred Stock are entitled pursuant to Section 1 hereof; provided, however, that if, upon any liquidation, dissolution or winding up of the Corporation, the amounts payable with respect to the Series A Preferred Stock and any other stock ranking on liquidation PARI PASSU therewith are not paid in full, the holders of the Series A Preferred Stock and any other stock ranking on liquidation PARI PASSU therewith shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which they are entitled. (b) After payment of the full liquidation preference of the Series A Preferred Stock as provided in Section 2(a) and any other applicable liquidation preferences payable to holders of outstanding Preferred Stock, any remaining assets of the Corporation then available for distribution shall be distributed ratably among the holders of the Preferred Stock (on an as-if converted basis) and the Common Stock. (c) A share exchange or merger of the Corporation (except (i) a merger into or with a wholly owned subsidiary of the Corporation with requisite stockholder approval or (ii) a merger in which the beneficial owners of the Corporation's outstanding capital stock immediately prior to such transaction hold no less than 51% of the voting power in the resulting entity) or a sale of all or substantially all of the assets of the Corporation shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this Section 2; provided, however, that each holder of the Series A Preferred Stock shall have the right to convert his, her or its shares of Series A Preferred Stock to Common Stock pursuant to Section 4(a) hereof in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section 2. Notice of such conversion shall be submitted in accordance with the provisions of Section 4(c) hereof no later than ten (10) days before the effective date of such event, provided that any such notice shall be effective if given not later than fifteen (15) days after the date of the Corporation's notice, pursuant to Section 6, with respect to such event. (d) If any of the assets of the Corporation are to be distributed other than in cash under this Section 2 or for any purpose, then the Board of Directors of the Corporation shall promptly engage independent competent appraisers to determine the value of the assets to be distributed. The Corporation shall, upon receipt of such appraiser's valuation, give prompt 35 written notice thereof to each holder of shares of the Corporation's capital stock. Notwithstanding the above, any securities to be distributed shall be valued as follows: (i) if traded on a securities exchange, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the 30-day period ending three (3) business days prior to the distribution; (ii) if actively traded over-the-counter, the value shall be deemed to be the average of the closing bid prices over the 30-day period ending three (3) business days prior to the distribution; and (iii) if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Board of Directors and the holders of Preferred Stock. SECTION 26. VOTING POWER. Except as otherwise expressly provided herein or as required by law, the holder of each share of Series A Preferred Stock shall be entitled to vote on all matters submitted to a vote of the holders of outstanding voting securities. Each share of Series A Preferred Stock shall entitle the holder thereof to such number of votes per share as shall equal the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible as of the record date for the determination of stockholders entitled to vote on or consent to such matters or, if no such record date is established, as of the date on which notice of such meeting is mailed or the date any written consent of stockholders is solicited. Except as otherwise expressly provided herein or as required by law, the holders of shares of the Preferred Stock and the Common Stock shall vote together as a single class on all matters. In all cases where class voting is required herein or is required by law, the Series A Class 1 Preferred Stock and the Series A Class 2 Preferred Stock shall each be considered a separate class. SECTION 27. CONVERSION. The holders of the Series A Preferred Stock shall have the following conversion rights: (a) VOLUNTARY CONVERSION. Holders of the outstanding shares of Series A Preferred Stock shall be entitled, at any time and from time to time after the date hereof, to cause any or all of such holder's shares to be converted into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $1.50 by the conversion price applicable to such shares, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. Initially the conversion price shall be $1.50 per share of Common Stock, which price shall be adjusted as hereinafter provided (and, as so adjusted, is hereinafter sometimes referred to as the "Conversion Price"). If a holder of Series A Preferred Stock elects to convert his, her or its Series A Preferred Stock at a time when there are any accrued and unpaid dividends or other amounts due on such shares (including any Participating Dividends), such dividends and other amounts shall, to the extent permitted by applicable law, be paid in full by the Corporation in connection with such conversion. (b) AUTOMATIC CONVERSION. Each share of Series A Preferred Stock outstanding shall automatically, and without the requirement of any consent of any holder, be converted into the number of shares of Common Stock into which such shares are convertible at the then 36 effective Conversion Price: (i) upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock of the Corporation to the public at a minimum price of $10.00 per share and pursuant to which the gross proceeds received by the Corporation equal or exceed $15,000,000 (a "Qualified Public Offering"); (ii) upon approval by the holders of at least two-thirds (2/3) of the then outstanding shares of Series A Preferred Stock; or (iii) upon the cumulative conversion of at least two-thirds (2/3) of the then outstanding shares of Series A Preferred Stock pursuant to Section 2(a) hereof. In connection with any conversion under this Section 4(b), each holder of Series A Preferred Stock shall be entitled to receive, upon consummation of a Qualified Public Offering or other event giving rise to such conversion, payment in full of all accrued and unpaid dividends and other amounts due on such shares (including any Participating Dividends). (c) CONVERSION PROCEDURES. Any holder of Series A Preferred Stock converting such shares into shares of Common Stock pursuant to Section 4(a), or whose shares are automatically converted pursuant to Section 4(b), shall surrender the certificate or certificates representing the Series A Preferred Stock being converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto), at the principal executive office of the Corporation or the offices of the transfer agent for the Series A Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the Series A Preferred Stock by the Corporation, accompanied, in the case of conversion pursuant to Section 4(a), by written notice of conversion. Such notice of conversion shall (i) specify the number of shares of Series A Preferred Stock to be converted, (ii) specify the name or names in which such holder wishes the certificate or certificates for Common Stock and for any Series A Preferred Stock not to be so converted to be issued, (iii) include payment of any applicable transfer tax and (iv) specify the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion. Upon surrender of a certificate representing Series A Preferred Stock for conversion, the Corporation shall issue and send by hand delivery, by courier or by first class mail (postage prepaid) to the holder thereof or to such holder's designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion. In the event that there shall have been surrendered a certificate or certificates representing Series A Preferred Stock, only part of which are to be converted, the Corporation shall issue and send to such holder or such holder's designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of shares of Series A Preferred Stock which shall not have been converted. (d) EFFECTIVE DATE OF CONVERSION. The issuance by the Corporation of shares of Common Stock upon a conversion of Series A Preferred Stock into shares of Common Stock made at the option of the holder thereof pursuant to Section 4(a) hereof shall be effective as of the surrender of the certificate or certificates for the Series A Preferred Stock to be converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto). The issuance by the Corporation of shares of Common Stock upon a conversion of Series A Preferred Stock into Common Stock pursuant to Section 4(b) hereof shall be deemed to be effective immediately prior to the closing of the Qualified Public Offering or upon the effective date of the event giving rise to such conversion. On and after the 37 effective date of conversion, the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock. (e) FRACTIONAL SHARES. The Corporation shall not be obligated to deliver to holders of Series A Preferred Stock any fractional share of Common Stock issuable upon any conversion of such Series A Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law. (f) RESERVATION OF COMMON STOCK. The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of Series A Preferred Stock as herein provided, free from any preemptive rights or other obligations (except such rights and obligations created in connection with the issuance of the Series A Preferred Stock as are entered into by the holders thereof and the Corporation), such number of shares of the Common Stock as shall from time to time be issuable upon the conversion of all the Series A Preferred Stock then outstanding provided that the shares of Common Stock so reserved shall not be reduced or affected in any manner whatsoever so long as any Series A Preferred Stock is outstanding, except in the case of a reverse stock split or stock combination. The Corporation shall prepare and shall use its reasonable business efforts to obtain and keep in force such governmental or regulatory permits or other authorizations as may be required by law, and shall comply with all requirements as to registration, qualification or listing of the Common Stock, in order to enable the Corporation lawfully to issue and deliver to each holder of record of Series A Preferred Stock such number of shares of its Common Stock as shall from time to time be sufficient to effect the conversion of all shares of Series A Preferred Stock then outstanding and convertible into shares of Common Stock. (g) ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price in effect from time to time shall be subject to adjustment as follows: (i) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. Upon the issuance of additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock, the subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or the combination of outstanding shares of Common Stock into a smaller number of shares of Common Stock, the Conversion Price shall, simultaneously with the happening of such dividend, subdivision or combination, be adjusted by multiplying the then effective Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event. An adjustment made pursuant to this Section 4(g)(i) shall be given effect, upon payment of such a dividend or distribution, as of the record date for the determination of stockholders entitled to receive such dividend or distribution (on a retroactive basis) and, in the case of a subdivision or combination, immediately as of the effective date thereof. (ii) SALE OF COMMON STOCK. In the event the Corporation shall at any time or from time to time while the Series A Preferred Stock is outstanding, issue, sell or exchange any shares of Common Stock (including shares held in the Corporation's treasury, but excluding: (i) any Common Stock which may be issued upon conversion of the Preferred Stock, 38 and (ii) up to 2,000,000 shares of Common Stock issued to officers, directors, employees, consultants or agents of the Corporation pursuant to the Corporation's 1999 Stock Option Plan (the "Plan") or upon the exercise of options issued pursuant to such Plan, or such greater number of shares as may be issuable pursuant to the adjustment provisions of such Plan as in effect on the date hereof (collectively, the "Excluded Shares")), for a consideration per share less than the Conversion Price in effect immediately prior to the issuance, sale or exchange of such shares (any such issuance, sale or exchange hereinafter referred to as a "Dilutive Transaction"), then, and thereafter successively upon the consummation of any Dilutive Transaction, the Conversion Price in effect immediately prior to the Dilutive Transaction shall forthwith be reduced to an amount (calculated to the nearest cent) determined by multiplying such Conversion Price by a fraction: (A) the numerator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the Dilutive Transaction (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of shares of Common Stock which the net aggregate consideration received by the Corporation for the total number of such additional shares of Common Stock so issued in the Dilutive Transaction would purchase at the Conversion Price (prior to adjustment), and (B) the denominator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the Dilutive Transaction (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of such additional shares of Common Stock so issued in the Dilutive Transaction. (iii) SALE OF OPTIONS, RIGHTS OR CONVERTIBLE SECURITIES. In the event the Corporation shall at any time or from time to time while the Series A Preferred Stock is outstanding, issue options, warrants or rights to subscribe for shares of Common Stock (other than any options for Excluded Shares), or issue any securities convertible into or exercisable or exchangeable for shares of Common Stock, for a consideration per share (determined by dividing the Net Aggregate Consideration (as determined below) by the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted to the fullest extent permitted by their terms) less than the Conversion Price in effect immediately prior to the issuance of such options or rights or convertible or exchangeable securities, the Conversion Price in effect immediately prior to the issuance of such options, warrants or rights or securities shall be reduced to an amount determined by multiplying such Conversion Price by a fraction: (A) the numerator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such options, rights or convertible securities (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of shares of Common Stock which the total amount of consideration received by the Corporation for the 39 issuance of such options, warrants, rights or convertible securities PLUS the minimum amount set forth in the terms of such security as payable to the Corporation upon the exercise or conversion thereof (the "Net Aggregate Consideration") would purchase at the Conversion Price prior to adjustment, and (B) the denominator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such options, warrants, rights or convertible securities (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Preferred Stock, options, warrants, rights or convertible securities), plus (2) the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted. (iv) EXPIRATION OR CHANGE IN PRICE. If the consideration per share provided for in any options or rights to subscribe for shares of Common Stock or any securities exercisable or exchangeable for or convertible into shares of Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such options or convertible securities provided for such changed consideration per share (determined as provided in Section 4(g)(iii) hereof) at the time initially granted, issued or sold; PROVIDED, that such adjustment of the Conversion Price will be made only as and to the extent that the Conversion Price effective upon such adjustment remains less than or equal to the Conversion Price that would be in effect if such options, rights or securities had not been issued. No adjustment of the Conversion Price shall be made under this Section 4 upon the issuance of any additional shares of Common Stock which are issued pursuant to the exercise of any warrants, options or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any convertible securities if an adjustment shall previously have been made upon the issuance of such warrants, options or other rights. Any adjustment of the Conversion Price shall be disregarded if, as, and when the rights to acquire shares of Common Stock upon exercise or conversion of the warrants, options, rights or convertible securities which gave rise to such adjustment expire or are canceled without having been exercised, so that the Conversion Price effective immediately upon such cancellation or expiration shall be equal to the Conversion Price in effect at the time of the issuance of the expired or canceled warrants, options, rights or convertible securities, with such additional adjustments as would have been made to that Conversion Price had the expired or canceled warrants, options, rights or convertible securities not been issued. (h) OTHER ADJUSTMENTS. In the event the Corporation shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event lawful and adequate provision shall be made so that the holders of Series A Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities of the Corporation which they would have received had their Series A Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date (calculated in accordance with Section 4(d) hereof), retained such securities receivable by them as aforesaid during such period, giving application to 40 all adjustments called for during such period under this Section 4 as applied to such distributed securities. If the Common Stock issuable upon the conversion of the Series A Preferred Stock shall be changed into the same or different number of shares of any class or classes of stock, whether by reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above), then and in each such event the holder of each share of Series A Preferred Stock shall have the right thereafter to convert each such share into the kind and amount of shares of stock and other securities and property receivable upon such reclassification or other change, by holders of the number of shares of Common Stock into which such shares of Series A Preferred Stock might have been converted immediately prior to such reclassification or change, all subject to further adjustment as provided herein. (i) NOTICES. In each case of an adjustment or readjustment of the Conversion Price, the Corporation will furnish each holder of Series A Preferred Stock with a certificate, prepared by the chief financial officer of the Corporation, showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. SECTION 28. NO REISSUANCE OF SERIES A PREFERRED STOCK. No share or shares of the Series A Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired, and eliminated from the shares which the Corporation shall be authorized to issue. The Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the authorized number of shares of the Series A Preferred Stock accordingly. SECTION 29. NOTICES OF RECORD DATE. In the event (i) the Corporation establishes a record date to determine the holders of any class of securities who are entitled to receive any dividend or other distribution, or (ii) there occurs any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, and any transfer of all or substantially all of the assets of the Corporation to any other corporation, or any other entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series A Preferred Stock at least 20 days prior to the record date or the expected effective date, as the case may be, specified therein, a notice specifying (a) the date of such record date for the purpose of such dividend or distribution and a description of such dividend or distribution, (b) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective and (c) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up. SECTION 30. PROTECTIVE PROVISION. So long as any shares of the Series A Preferred Stock remain outstanding, the Corporation shall not without the affirmative vote or written consent of the holders of two-thirds in interest of each of the Series A Class 1 Preferred Stock, voting separately as a class, and the Series A Class 2 Preferred Stock, voting separately as a class: 41 (a) sell, lease or otherwise dispose of (whether in one transaction or a series of related transactions) more than 50% all of its assets or business, (b) merge with or into or consolidate with another entity or enter into or engage in any other transaction or series of related transactions, in any such case in connection with or as a result of which the Corporation is not the surviving entity or the owners of the Corporation's outstanding equity securities immediately prior to the transaction or series of related transactions do not own at least a majority of the outstanding equity securities of the surviving, resulting or consolidated entity, (c) dissolve, liquidate or wind up its operations, (d) directly or indirectly redeem, purchase, or otherwise acquire for consideration any shares of its Common Stock or any other class of its capital stock except in connection with contractual obligations with employees or ex-employees, (e) adopt any amendment to this Certificate of Designation, or any amendment to its Certificate of Incorporation or Bylaws, that eliminates, amends, restricts or otherwise adversely affects the rights and preferences of the Series A Preferred Stock, or that increases the authorized shares of the Series A Preferred Stock, (f) declare or make dividend payments on any shares of its Common Stock or any other class of its capital stock, or (g) create, or obligate itself to create, any class or series of shares, or any other security, that has a preference over the Series A Preferred Stock. (h) increase the size of the Board of Directors of the Corporation to more than five (5) members. SECTION 31. OTHER RIGHTS. Except as otherwise provided in this Certificate of Designation, each share of Series A Preferred Stock and each share of Common Stock shall be identical in all respects, shall have the same powers, preferences and rights, without preference of any such class or share over any other such class or share. IN WITNESS WHEREOF, the undersigned has executed and subscribed this Certificate and does affirm the foregoing as true as of the 14th day of February, 2000. Lineo, Inc. a Delaware corporation By /s/ Sparks, Chairman and President STATE OF DELAWARE Office of the Secretary of State ----------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF THE MERGER, WHICH MERGES: "LINEO, INC.", A UTAH CORPORATION, WITH AND INTO "LINEO MERGER CORPORATION" UNDER THE NAME OF "LINEO, INC.", A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE TWENTY-FIRST DAY OF JANUARY, A.D. 2000, AT 9 O'CLOCK A.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. /s/ EDWARD J. FREEL, SECRETARY OF STATE --------------------------------------- Edward J. Freel, Secretary of State AUTHENTICATION: 0210734 DATE: 01-21-00 CERTIFICATE OF MERGER LINEO, INC. A UTAH CORPORATION WITH AND INTO LINEO MERGER CORPORATION A DELAWARE CORPORATION In accordance with Section 252 of the General Corporation Law of Delaware, the undersigned, Bryan Sparks, being the President of Lineo, Inc., a Utah corporation and the President of Lineo Merger Corporation, a Delaware corporation, DOES HEREBY CERTIFY as follows: (1) the constituent corporations in the merger (the "Merger") are Lineo, Inc., a Utah corporation ("Lineo Utah"), and Lineo Merger Corporation, a Delaware corporation ("Lineo Delaware"); (2) an Agreement and Plan of Merger dated as of January 5, 2000 (the "Merger Agreement") has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations in accordance with Section 252 of the General Corporation Law of Delaware; (3) the name of the surviving corporation shall be Lineo Merger Corporation, a Delaware corporation, which shall hereinwith be changed to Lineo, Inc., a Delaware corporation; (4) the Certificate of Incorporation and Bylaws of Lineo Delaware shall be the Certificate of Incorporation and Bylaws of the surviving corporation without change or amendment until thereafter amended in accordance with the provisions thereof and applicable law; (5) the executed Merger Agreement is on file at the principal place of business of the surviving corporation at 383 S. 520 W. Lindon, Utah 84042; (6) a copy of the Merger Agreement will be furnished by the surviving corporation, on request and without cost, to any stockholder of the constituent corporations; (7) the authorized capital of each foreign corporation which is a party to the merger is as follows:
Corporation Class Number of Shares Par Value Per Share --------------------------------------------------------------------------------- Lineo, Inc., a Utah Common 100,000,000 no par value Coporation Preferred 30,000,000 no par value
(8) this certificate shall become effective upon filing and acceptance by the Office of the Secretary of State of Delaware. 45 IN WITNESS WHEREOF, the undersigned have affirmed the statements herein as true, under penalties of perjury, as of this 5th day of January, 2000. LINEO, INC. a Utah corporation By: /s/ Bryan Sparks, President Attest: /s/ Lisa Richards, Secretary LINEO MERGER CORPORATION a Delaware corporation By: /s/ Bryan Sparks, President Attest: /s/ Lisa Richards, Secretary 46 STATE OF DELAWARE Office of the Secretary of State ----------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF INCORPORATION OF "LINEO MERGER CORPORATION", FILED IN THIS OFFICE ON THE FOURTEENTH DAY OF JANUARY, A.D. 2000, AT 1 O'CLOCK P.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. /s/ EDWARD J. FREEL, SECRETARY OF STATE --------------------------------------- Edward J. Freel, Secretary of State AUTHENTICATION: 0200954 DATE: 01-14-00 CERTIFICATE OF INCORPORATION OF LINEO MERGER CORPORATION ARTICLE I The name of this corporation is Lineo Merger Corporation (the "Corporation"). ARTICLE II The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. ARTICLE IV AUTHORIZED SHARES 4.1 AUTHORIZED CAPITAL. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is 130,000,000 shares, consisting of 100,000,000 shares of Common Stock, $.001 par value (the "Common Stock") and 30,000,000 shares of Preferred Stock, $.001 par value (the "Preferred Stock"). 4.2 ISSUANCE OF PREFERRED STOCK IN SERIES. The Preferred Stock may be issued from time to time in one or more series in any manner permitted by law and the provisions of these Articles of Incorporation, as determined from time to time by the Board of Directors and stated in the resolution or resolutions providing for the issuance thereof, prior to the issuance of any shares thereof. The Board of Directors shall have the authority to fix and determine and to amend, subject to the provisions hereof, the designations, powers, preferences and relative, participating, optional or other rights, if any, and qualifications, limitations or other restrictions of the shares of any series that is wholly unissued or to be established and the number of shares constituting any such series. Unless otherwise specifically provided in the resolution establishing any series, the Board of Directors shall further have the authority, after the issuance of shares of a series whose number it has designated, to amend the resolution establishing such series to decrease the number of shares of that series, but not below the number of shares of such series then outstanding. 48 (a) DIVIDENDS. The holders of shares of the Preferred Stock shall be entitled to receive dividends, out of the funds of the corporation legally available therefor, at the rate and at the time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. The holders of the Preferred Stock shall not be entitled to receive any dividends thereon, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (b) LIQUIDATION. In the event of any liquidation, dissolution or winding up of the affairs of the corporation, whether voluntary or involuntary, then, before any distribution shall be made to the holders of the Common Stock, the holders of the Preferred Stock at the time outstanding shall be entitled to be paid the preferential amount or amounts per share as may be provided by the Board of Directors in designating a particular series of Preferred Stock, plus dividends accrued thereon to the date of such payment. In designating a particular series of Preferred Stock, the Board of Directors may also provide that such series is senior, on a par with or subordinate in order of priority to any other existing or later issued series of Preferred Stock in respect of distribution of amounts upon the liquidation, dissolution or winding up of the affairs of the corporation. The holders of the Preferred Stock shall not be entitled to receive any distributive amounts upon the liquidation, dissolution or winding up of the affairs of the corporation, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (c) CONVERSION. Shares of Preferred Stock may be convertible to shares of Common Stock at such rate and subject to such adjustments as may be provided by the Board of Directors in designating a particular series of Preferred Stock. (d) REDEMPTION. The Preferred Stock may be redeemable in such amounts, and at such time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. In any event, such Preferred Stock may be repurchased by the corporation only to the extent legally permissible. (e) VOTING RIGHTS. Holders of Preferred Stock shall have such voting rights as may be provided by the Board of Directors in designating a particular series of Preferred Stock. ARTICLE V The Corporation reserves the right to amend, alter, change, or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon the stockholders herein are granted subject to this right. ARTICLE VI The Corporation is to have perpetual existence. ARTICLE VII 49 1. LIMITATION OF LIABILITY. To the fullest extent permitted by the Delaware General Corporation Law as it now exists or as it may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. 2. INDEMNIFICATION. To the full extent permitted by the Delaware General Corporation Law as it now exists or as it may hereafter be amended, the Corporation is authorized to provide indemnification of, and advancement of expenses to, such directors, officers and agents (and any other person to which Delaware law permits the Corporation to provide indemnification) through bylaw provisions, agreements with such directors, officers, agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification provisions and advancement of expenses permitted by Section 145 of the General Corporation Law of Delaware, subject only to limits created by applicable Delaware law (statutory and non-statutory) with respect to actions for breach of duty to a corporation, its stockholders and others. 3. AMENDMENTS. Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of the Corporation's Certificate of Incorporation inconsistent with this Article VII, shall eliminate or reduce the effect of this Article VII, in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article VII, would accrue or arise, prior to such amendment, repeal, or adoption of an inconsistent provision. ARTICLE VIII The right to cumulate votes in the election of directors shall not exist with respect to shares of stock of this Corporation. 1. NUMBER OF DIRECTORS. The number of directors which constitutes the whole Board of Directors of the Corporation shall be designated in the Bylaws of the Corporation. The names and addresses of the initial Board of Directors are: Raymond J. Noorda 383 S. 520 W. Lindon, Utah 84042 Ralph J. Yarro 383 S. 520 W. Lindon, Utah 84042 Bryan W. Sparks 383 S. 520 W. Lindon, Utah 84042 2. ELECTION OF DIRECTORS. Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide. ARTICLE IX 50 In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation. ARTICLE X Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. ARTICLE XI The name and mailing address of the incorporator is: Michael J. Erickson, Esq. c/o Summit Law Group, PLLC 1505 Westlake Avenue North, Suite 300 Seattle, WA 98109 I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make this certificate, hereby declaring and certifying, under penalties of perjury, that this is my act and deed and the facts herein stated are true, and accordingly have hereunto set my hand this 13th day of January, 2000. /S/ Michael J. Erickson, Esq. 51 EX-3.1(A) 3 EXHIBIT 3.1(A) RESTATED CERTIFICATE OF INCORPORATION OF LINEO, INC. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Restated Certificate of Incorporation was adopted by the Corporation's Board of Directors and its stockholders in accordance with Section 228 thereof. This Restated Certificate of Incorporation restates, integrates and amends the provisions of the Certificate of Incorporation of the Corporation. ARTICLE I The name of this corporation is Lineo, Inc. (the "Corporation"). ARTICLE II The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. ARTICLE IV AUTHORIZED SHARES 4.1 AUTHORIZED CAPITAL. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is 130,000,000 shares, consisting of 100,000,000 shares of Common Stock, $.001 par value (the "Common Stock") and 30,000,000 shares of Preferred Stock, $.001 par value (the "Preferred Stock"). 4.2 ISSUANCE OF PREFERRED STOCK IN SERIES. The Preferred Stock may be issued from time to time in one or more series in any manner permitted by law and the provisions of these Articles of Incorporation, as determined from time to time by the Board of Directors and stated in the resolution or resolutions providing for the issuance thereof, prior to the issuance of any shares thereof. The Board of Directors shall have the authority to fix and determine and to amend, subject to the provisions hereof, the designations, powers, preferences and relative, participating, optional or other rights, if any, and qualifications, limitations or other restrictions of the shares of any series that is wholly unissued or to be established and the number of shares constituting any such series. Unless otherwise specifically provided in the resolution establishing any series, the Board of Directors shall further have the authority, after the issuance of shares of a series whose number it has designated, to amend the resolution establishing such series to decrease the number of shares of that series, but not below the number of shares of such series then outstanding. (a) DIVIDENDS. The holders of shares of the Preferred Stock shall be entitled to receive dividends, out of the funds of the corporation legally available therefor, at the rate and at the time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. The holders of the Preferred Stock shall not be entitled to receive any dividends thereon, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (b) LIQUIDATION. In the event of any liquidation, dissolution or winding up of the affairs of the corporation, whether voluntary or involuntary, then, before any distribution shall be made to the holders of the Common Stock, the holders of the Preferred Stock at the time outstanding shall be entitled to be paid the preferential amount or amounts per share as may be provided by the Board of Directors in designating a particular series of Preferred Stock, plus dividends accrued thereon to the date of such payment. In designating a particular series of Preferred Stock, the Board of Directors may also provide that such series is senior, on a par with or subordinate in order of priority to any other existing or later issued series of Preferred Stock in respect of distribution of amounts upon the liquidation, dissolution or winding up of the affairs of the corporation. The holders of the Preferred Stock shall not be entitled to receive any distributive amounts upon the liquidation, dissolution or winding up of the affairs of the corporation, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (c) CONVERSION. Shares of Preferred Stock may be convertible to shares of Common Stock at such rate and subject to such adjustments as may be provided by the Board of Directors in designating a particular series of Preferred Stock. (d) REDEMPTION. The Preferred Stock may be redeemable in such amounts, and at such time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. In any event, such Preferred Stock may be repurchased by the corporation only to the extent legally permissible. (e) VOTING RIGHTS. Holders of Preferred Stock shall have such voting rights as may be provided by the Board of Directors in designating a particular series of Preferred Stock. ARTICLE V The Corporation reserves the right to amend, alter, change, or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon the stockholders herein are granted subject to this right. ARTICLE VI The Corporation is to have perpetual existence. ARTICLE VII 1. LIMITATION OF LIABILITY. To the fullest extent permitted by the Delaware General Corporation Law as it now exists or as it may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. 2. INDEMNIFICATION. To the full extent permitted by the Delaware General Corporation Law as it now exists or as it may hereafter be amended, the Corporation is authorized to provide indemnification of, and advancement of expenses to, such directors, officers and agents (and any other person to which Delaware law permits the Corporation to provide indemnification) through bylaw provisions, agreements with such directors, officers, agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification provisions and advancement of expenses permitted by Section 145 of the General Corporation Law of Delaware, subject only to limits created by applicable Delaware law (statutory and non-statutory) with respect to actions for breach of duty to a corporation, its stockholders and others. 3. AMENDMENTS. Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of the Corporation's Certificate of Incorporation inconsistent with this Article VII, shall eliminate or reduce the effect of this Article VII, in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article VII, would accrue or arise, prior to such amendment, repeal, or adoption of an inconsistent provision. ARTICLE VIII The right to cumulate votes in the election of directors shall not exist with respect to shares of stock of this Corporation. The Board of Directors shall be set at five (5). Effective upon the date that the Corporation becomes a Public Company, as defined below, the Board of Directors shall be divided into three (3) classes, as determined by the Board of Directors, with said classes to be as equal in number as may be possible, which classes shall be elected for the terms set forth below: Class Term ----- ---- Class 1 1 Year Class 2 2 Years Class 3 3 Years Thereafter, each Director's term shall be three (3) years, and each Director shall serve for the term he or she was elected and thereafter until his or her successor is elected and qualified (or the number of directors is reduced), or until his or her death, resignation or removal from office. Directors need not be stockholders of the Corporation or residents of the State of Delaware. Written ballots are not required in the election of Directors. For purposes of this Restated Certificate of Incorporation, the Corporation shall be a "Public Company" at such time and for so long as it has a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or any successor statute (the "Exchange Act"), or is otherwise subject to the reporting requirements of Section 15(d) of the Exchange Act. Newly created directorships resulting from any increase in the number of Directors or any vacancies on the Board of Directors resulting from death, resignation, removal or other cause shall be filled by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board of Directors. Any Director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of Directors in which the new directorship was created or in which the vacancy occurred and thereafter until such Director's successor shall have been elected and qualified (or the number of directors is reduced). No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. ARTICLE IX In furtherance of and not in limitation of powers conferred by statute, the Board of Directors of the Corporation is expressly authorized to adopt, repeal, alter, amend and rescind the bylaws of the Corporation by vote of a majority of the Board of Directors. In addition, the bylaws may be amended by the affirmative vote of the holders of at least two-thirds of the outstanding shares of voting stock of the Corporation entitled to vote at an election of directors. ARTICLE X Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. ARTICLE XI Any Director or the entire Board of Directors may be removed with or without cause by the holders of not less than a majority of the shares then entitled to vote at an election of Directors; PROVIDED, HOWEVER, beginning at such time and for so long as the Corporation is a Public Company (as defined in Article VIII), no Director may be removed without "Cause," as defined below. Such action may be taken at any regular or special meeting of the stockholders of the Corporation, or by unanimous written consent in lieu of a meeting, provided that notice of the proposed removal, which shall include a statement of the charges alleged against the Director(s) in the event of removal for Cause, shall have been duly given to the stockholders together with or as a part of the notice of the meeting. Where a question of the removal of a Director for Cause is to be presented for stockholder consideration while the Corporation is a Public Company, an opportunity must be provided to such Director to present his or her defense to the stockholders by a statement which must accompany or precede the notice of the meeting at which removal of such Director for Cause shall be considered. Under such circumstances the Director involved shall be served with notice of the meeting at which such action is proposed to be taken together with a statement of the specific charges and shall be given an opportunity to be present and to be heard at the meeting at which his or her removal is considered. For purposes of this Article XI, "Cause" for removal shall be limited to (a) action by a Director involving willful malfeasance having a material adverse effect on the Corporation or (b) a Director being convicted of a felony; provided that any action by a Director shall not constitute "Cause" if, in good faith, such Director believed such action to be in or not opposed to the best interests of the Corporation, or if a Director shall be entitled, under applicable law or the Restated Certificate of Incorporation or Bylaws of the Corporation, to be indemnified with respect to such action. ARTICLE XII Special meetings of the stockholders, for any purpose or purposes, may only be called by the Chairman of the Board or a majority of the Board. * * * This Restated Certificate of Incorporation shall become effective at 8:59 a.m. EST on _________, 2000. * * * IN WITNESS WHEREOF, the undersigned officer of the Corporation has executed this Restated Certificate of Incorporation this ___ day of __________, 2000. ------------------------------- Name: Matthew R. Harris Title: Secretary EX-3.2 4 EXHIBIT 3.2 EXHIBIT 3.2 AMENDMENTS TO LINEO, INC. BYLAWS SEPTEMBER 24, 1999 BOARD OF DIRECTORS MEETING: Number of Directors was increased to seven (7) members FEBRUARY 14, 2000 CONSENT OF DIRECTORS IN LIEU OF SPECIAL MEETING: Number of Directors was decreased to five (5) members MAY 17, 2000 BOARD OF DIRECTORS MEETING: Section 2.2 Special Meetings. Special meetings of the stockholders, for any purpose or purposes, may only be called by the Chairman of the Board or a majority of the Board. RESOLVED FURTHER, that Article II of the Bylaws shall also be amended to add the following three sections: Section 2.16. Action by Consent - Post IPO. Effective upon the Effective upon the closing of the corporation's initial public offering of securities pursuant to a registration statement filed under the Securities Act of 1933, as amended, the stockholders of the Corporation may not take action by written consent without a meeting but must take any such actions at a duly called annual or special meeting in accordance with these Bylaws and the Certificate of Incorporation. Section 2.17. Notice of Stockholder Nominees. Nominations of persons for election to the Board of Directors shall be made only at a meeting of stockholders and only (i) by the Board of Directors or a committee appointed by the Board of Directors or (ii) by any stockholder entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.17. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation (i) with respect to an election to be held at an annual meeting of stockholders, ninety days prior to the date one year from the date of the immediately preceding annual meeting of stockholders, and (ii) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to stockholders. For purposes of this Section 2.17, any adjournment(s) or postponement(s) of the original meeting whereby the meeting will reconvene within thirty days from the original date shall be deemed for purposes of notice to be a continuation of the original meeting, and no nominations by a stockholder of persons to be elected directors of the corporation may be made at any such reconvened meeting unless pursuant to a notice which was timely for the meeting on the date originally scheduled. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to the Securities Exchange Act of 1934, as amended; and (e) the consent of each nominee to serve as a director of the corporation if so elected. Notwithstanding the foregoing, nothing in this Section 2.17 shall be interpreted or construed to require the inclusion of information about any such nominee in any proxy statement distributed by, at the direction of, or on behalf of the Board of Directors. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedures, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Section 2.18 Stockholder Proposals at Annual Meeting. Business may be properly brought before an annual meeting by a stockholder only upon the stockholder's timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not later than ninety days prior to the date one year from the date of the immediately preceding annual meeting of stockholders. For purposes of this Section 2.18, any adjournment(s) or postponement(s) of the original meeting whereby the meeting will reconvene within thirty days from the original date shall be deemed for purposes of notice to be a continuation of the original meeting, and no business may be brought before any reconvened meeting unless pursuant to a notice which was timely for the meeting on the date as originally scheduled. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the proposal; (b) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to vote for the proposal; (c) any material interest of such stockholder in such proposal; and (d) such other information regarding such proposal as would be required to be disclosed in solicitations of proxies pursuant to the Securities Exchange Act of 1934, as amended. Notwithstanding the foregoing, nothing in this Section 2.18 shall be interpreted or construed to require the inclusion of information about any such proposal in any proxy statement distributed by, at the discretion of, or on behalf of the Board of Directors. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a proposal was not made in accordance with the foregoing procedures, and if he should so determine, he shall so declare to the meeting, and any such business not properly brought before the meeting shall be disregarded. RESOLVED FURTHER, that Article X of the Bylaws shall be amended to read in its entirety as follows: These bylaws may be altered, amended or repealed or new bylaws may be adopted by the affirmative vote of holders of at least 66-2/3% vote of the outstanding voting stock of the corporation. These bylaws may also be altered, amended or repealed or new bylaws may be adopted by the Board of Directors, when such power is conferred upon the Board of Directors by the certificate of incorporation. The foregoing may occur at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new bylaws be contained in the notice of such special meeting. If the power to adopt, amend or repeal bylaws is conferred upon the Board of Directors by the certificate of incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal bylaws. BYLAWS OF LINEO, INC. A DELAWARE CORPORATION TABLE OF CONTENTS
PAGE ---- ARTICLE 1 OFFICES......................................................................1 1.1 Business Offices.....................................................1 1.2 Registered Office....................................................1 ARTICLE 2 STOCKHOLDERS.................................................................1 2.1 Annual Stockholder Meeting...........................................1 2.2 Special Stockholder Meetings.........................................1 2.3 Place of Stockholder Meeting.........................................2 2.4 Notice of Stockholder Meeting........................................2 2.5 Fixing of Record Date................................................3 2.6 Stockholder List.....................................................4 2.7 Stockholder Quorum and Voting Requirements...........................4 2.8 Proxies..............................................................5 2.9 Voting of Shares.....................................................5 2.10 Corporation's Acceptance of Votes....................................5 2.11 Informal Action by Stockholders......................................7 2.12 Voting for Directors.................................................8 2.13 Stockholder's Rights to Inspect Corprorate Records...................8 2.14 Furnishing Financial Statements to a Stockholder....................10 2.15 Information Respecting Shares.......................................10 ARTICLE 3 BOARD OF DIRECTORS..........................................................10 3.1 General Powers......................................................10 3.2 Number, Tenure, and Qualifications of Directors.....................10 3.3 Regular Meetings of the Board of Directors..........................11 3.4 Special Meetings of the Board of Directors..........................11 3.5 Notice and Waiver of Notice of Special Director Meetings............11 3.6 Director Quorum.....................................................12 3.7 Manner of Acting....................................................12 3.8 Director Action Without a Meeting...................................12 3.9 Removal of Directors................................................13 3.10 Board of Director Vacancies.........................................13 3.11 Director Compensation...............................................14 3.12 Director Committees.................................................14 3.13 Director's Rights to Inspect Corporate Records......................14 3.14 General Standard of Conduct for Directors...........................16 ARTICLE 4 OFFICERS....................................................................17 i 4.1 Number of Officers..................................................17 4.2 Appointment and Term of Office......................................17 4.3 Removal of Officers.................................................17 4.4 Chairman of the Board...............................................17 4.5 Chief Executive Officer.............................................17 4.6 President...........................................................18 4.7 Vice Presidents.....................................................18 4.8 Secretary...........................................................18 4.9 Treasurer...........................................................19 4.10 Assistant Secretaries and Assistant Treasurers......................19 4.11 Salaries............................................................19 4.12 General Standards of Conduct for Officers...........................19 ARTICLE 5 LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, FIDUCIARIES, AND AGENTS .........................................20 5.1 Limitation of Liability of Directors and Officers...................20 5.2 Indemnification of Directors and Officers...........................20 5.3 Effect of Repeal or Modification of Article V.......................21 5.4 Insurance...........................................................21 ARTICLE 6 CERTIFICATES FOR SHARES AND THEIR TRANSFER..................................21 6.1 Certificates for Shares.............................................21 6.2 Shares Without Certificates.........................................22 6.3 Registration of Transfer of Shares..................................22 6.4 Restrictions on Transfer of Shares Permitted........................22 6.5 Acquisition of Shares...............................................23 ARTICLE 7 DISTRIBUTIONS...............................................................24 7.1 Distributions.......................................................24 ARTICLE 8 CORPORATE SEAL..............................................................24 8.1 Corporate Seal......................................................24 ARTICLE 9 FISCAL YEAR.................................................................24 9.1 Fiscal Year.........................................................24 ARTICLE 10 AMENDMENTS.................................................................25 10.1 Amendments..........................................................25
ii BYLAWS OF LINEO, INC. ARTICLE 1 OFFICES 1.1 BUSINESS OFFICES. The principal office of Lineo, Inc., a Delaware corporation (the "Corporation"), shall be located at any place either within or outside the State of Delaware, as designated in the Corporation's Certificate of Incorporation or the Corporation's most recent annual report on file with the Office of the Secretary of State of Delaware providing such information. The Corporation may have such other offices, either within or outside the State of Delaware as the Board of Directors may designate or as the business of the Corporation may require from time to time. The Corporation shall maintain at its principal office a copy of those records specified in Section 2.13 of Article II of these Bylaws. 1.2 REGISTERED OFFICE. The registered office of the Corporation required by the Delaware General Corporation Code shall be located within the State of Delaware. The address of the registered office may be changed from time to time. ARTICLE 2 STOCKHOLDERS 2.1 ANNUAL STOCKHOLDER MEETING. An annual meeting of the stockholders shall be held each year on the date, at the time, and at the place, fixed by the Board of Directors, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. 2.2 SPECIAL STOCKHOLDER MEETINGS. Special meetings of the stockholders may be called, for any purposes described in the notice of the meeting, by the president, or by the Board of Directors, and shall be called by the president at the request of the holders of not less than one-tenth of all outstanding votes of the Corporation entitled to be cast on any issue at the meeting. 1 2.3 PLACE OF STOCKHOLDER MEETING. The Board of Directors may designate any place, either within or outside the State of Delaware, as the place for any annual meeting of the stockholders and for any special meeting of the stockholders called by the Board of Directors. The president of the Corporation or any stockholder or any group, of stockholders of the Corporation holding at least ten percent (10%) of ad of the voting shares of the Corporation may designate any place, within or outside the State of Delaware, as the place for any special meeting of the stockholders called by the president or the group of stockholders. If no designation is made by the Board of Directors, the president, or the stockholders, as the case may be, the place of the meeting shall be the principal ounce of the Corporation. 2.4 NOTICE OF STOCKHOLDER MEETING. (a) REQUIRED NOTICE. Written notice stating the place, day, and hour of any annual or special stockholder meeting shall be delivered not less than ten nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the Board of Directors, the president, or other persons calling the meeting, to each stockholder of record entitled to vote at such meeting, and to any other stockholder entitled by the Delaware General Corporation Code or the Corporation's Certificate of Incorporation to receive notice of the meeting. Notice shall be deemed to be effective when mailed. Notice shall not be required to be given to any stockholder to whom: (i) A notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting during the period between the two consecutive annual meetings, have been mailed, addressed to the stockholder at the stockholder's address as shown on the records of the Corporation, and have been returned undeliverable; or (ii) At least two payments, if sent by first class mail, of dividends or interest on securities during a twelve month period, have been mailed, addressed to the stockholder at the stockholder's address as shown on the records of the Corporation, and have been resumed undeliverable. If a stockholder to whom notice is not required delivers to the Corporation a written notice setting forth the stockholder's current address, or if another address for the stockholder is otherwise made known to the Corporation, the requirement that notice be given to the stockholder is reinstated. (b) ADJOURNED MEETING. If any stockholder meeting is adjourned to a different date, time, or place, notice need not be given of the new date, time, or place, if the new date, time, or place is announced at the meeting before adjournment. However, if the adjournment is for more than 30 days, or if after the adjournment a new record date for the adjourned meeting is or must be fixed (SEE Section 2.5 of these Bylaws), then notice must be given pursuant to the requirements of paragraph (a) of this Section 2.4 to stockholders of record who are entitled to vote at the meeting. 2 (c) WAIVER OF NOTICE. Any stockholder may waive notice of a meeting (or any notice required by the Delaware General Corporation Code, the Corporation's Certificate of Incorporation, or these Bylaws), by a writing signed by the stockholder, which is delivered to the Corporation (either before or after the date and time stated in the notice as the date or time when any action will occur or has occurred) for inclusion in the minutes or filing with the Corporation's records. A stockholder's attendance at a meeting: (i) Waives objection to lack of notice or defective notice of the meeting, unless the stockholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting; and (ii) Waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the stockholder objects to considering the matter when it is presented. (d) CONTENTS OF NOTICE. Notice of any special meeting of the stockholders shall include a description of the purpose or purposes for which the meeting is called. Except as provided in this Section 2.4(d), in the Certificate of Incorporation, or in the Delaware General Corporation Code, notice of an annual meeting of the stockholders need not include a description of the purpose or purposes for which the meeting is called. 2.5 FIXING OF RECORD DATE. For the purpose of determining stockholders of any voting group entitled to notice of or to vote at any meeting of stockholders, or stockholders entitled to take action without a meeting or to demand a special meeting, or stockholders entitled to receive payment of any distribution or dividend, or in order to make a determination of stockholders for any other proper purpose, the Board of Directors may fix in advance a date as the record date. Such record date shall not be more than seventy days prior to the date on which the particular action, requiring such determination of stockholders, is to be taken. If no record date is so fixed by the Board of Directors, the record date shall be at the close of business: (a) with respect to an annual meeting of the stockholders or any special meeting of the stockholders called by the Board of Directors or any person or group specifically authorized by these Bylaws to call a meeting of the stockholders, as of the close of business on the day before the first notice is delivered to stockholders; (b) with respect to a special stockholder meeting demanded by the stockholders, on the earliest date of any of the demands pursuant to which the meeting is called, or 60 days prior to the date the first of the written demands is received by the Corporation, whichever is later; (c) with respect to actions taken in writing without a meeting (pursuant to Section 2.11 of these Bylaws), on the date the first stockholder delivers to the Corporation a signed written consent upon which the action is taken; 3 (d) with respect to a distribution to stockholders (other than one involving a repurchase or reacquisition of shares), on the date the Board of Directors authorizes the distribution; and (e) with respect to the payment of a share dividend, on the date the Board of Directors authorizes the share dividend. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this Section, such determination shall apply to any adjournment thereof unless the Board of Directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. 2.6 STOCKHOLDER LIST. The secretary shall make a complete record of the stockholders entitled to vote at each meeting of stockholders, arranged in alphabetical order within each class or series, with the address of and the number of shares held by each. The list must be arranged by voting group (if such exists; SEE Section 2.7 of these Bylaws) and within each voting group by class or series of shares. The stockholder list must be available for inspection by any stockholder, beginning on the earlier of ten days before the meeting for which the list was prepared or two business days after notice of the meeting is given and continuing through the meeting and any adjournments. The list shall be available at the Corporation's principal office or at a place identified in the notice of the meeting in the city where the meeting is to be held. A stockholder, his agent, or attorney is entitled on written demand to inspect and, subject to the requirements of Section 2.13 of these Bylaws, to inspect and copy the list during regular business hours and during the period it is available for inspection. The Corporation shall maintain the stockholder list in written form or in another form capable of conversion into written form within a reasonable time. 2.7 STOCKHOLDER QUORUM AND VOTING REQUIREMENTS. If the Certificate of Incorporation or the Delaware General Corporation Code provide for voting by a single voting group on a matter, action on that matter is taken when voted upon by that voting group. Shares entitled to vote as a separate voting group may take action on a maker at a meeting only if a quorum of those shares exists with respect to that matter. Unless the Certificate of Incorporation, a Bylaw adopted by the stockholders pursuant to the Delaware General Corporation Code provide otherwise, at least two-thirds (2/3) of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter. If the Certificate of Incorporation or the Delaware General Corporation Code provide for voting by two or more voting groups on a matter, action on that matter is taken only when voted upon by each of those voting groups counted separately. One voting group may vote on a matter even though another voting group entitled to vote on the matter has not voted. Once a share is represented for any purpose at a meeting, including the purpose of determining that a quorum exists, it is deemed present for quorum purposes for the remainder of 4 the meeting and for any adjournment of that meeting, unless a new record date is or must be set for that adjourned meeting. If a quorum exists, action on a matter (other than the election of directors) by a voting group is approved if at least two-thirds (2/3) of the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the Certificate of Incorporation, a Bylaw adopted by the stockholders pursuant to the Delaware General Corporation Code, require a greater number of affirmative votes. 2.8 PROXIES. At all meetings of stockholders, a stockholder may vote in person or by a proxy executed in any lawful manner. Such proxy shall be filed with the Corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution unless otherwise provided in the proxy. 2.9 VOTING OF SHARES. Unless otherwise provided in the Certificate of Incorporation, each outstanding share entitled to vote shall be entitled to one vote, and each fractional share shall be entitled to a corresponding fractional vote, upon each matter submitted to a vote at a meeting of stockholders. Except as provided by specific court order, no shares of the Corporation held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Corporation, shall be voted at any meeting of the Corporation or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. However, the power of the Corporation to vote any shares, including its own shares, held by it in a fiduciary capacity is not hereby limited. Redeemable shares are not entitled to be voted after notice of redemption is mailed to the holders thereof and a sum sufficient to redeem the shares has been deposited with a bank,- trust company, or other financial institution under an irrevocable obligation to pay the holders the redemption price on surrender of the shares. 2.10 CORPORATION'S ACCEPTANCE OF VOTES. (a) If the name signed on a vote, consent, waiver, proxy appointment, or proxy appointment revocation corresponds to the name of a stockholder, the Corporation, if acting in good faith, is entitled to accept the vote, consent, waiver, proxy appointment, or proxy appointment revocation and give it effect as the act of the stockholder. (b) If the name signed on a vote, consent, waiver, proxy appointment, or proxy appointment revocation does not correspond to the name of a stockholder, the Corporation, if acting in good faith, is nevertheless entitled to accept the vote, consent, waiver, proxy appointment, or proxy appointment revocation and give it effect as the act of the stockholder if: 5 (i) The stockholder is an entity as defined in the Delaware General Corporation Code and the name signed purports to be that of an officer or agent of the entity; (ii) the name signed purports to be that of an administrator, executor, guardian, or conservator representing the stockholder and, if the Corporation requests, evidence of fiduciary status acceptable to the Corporation has been presented with respect to the vote, consent, waiver, proxy appointment, or proxy appointment revocation; (iii) the name signed purports to be that of a receiver or trustee in bankruptcy of the stockholder and, if the Corporation requests, evidence of this status acceptable to the Corporation has been presented with respect to the vote, consent, waiver, proxy appointment, or proxy appointment revocation; (iv) the name signed purports to be that of a pledges, beneficial owner, or attorney-in-fact of the stockholder and, if the Corporation requests, evidence acceptable to the Corporation of the signatory's authority to sign for the stockholder has been presented with respect to the vote, consent, waiver, proxy appointment, or proxy appointment revocation; (v) two or more persons are the stockholder as cotenants or fiduciaries and the name signed purports to be the name of at least one of the cotenants or fiduciaries and the person signing appears to be acting on behalf of all the cotenants or fiduciaries; or (vi) the acceptance of the vote, consent, waiver, proxy appointment, or proxy appointment revocation is otherwise proper under rules established by the Corporation that are not inconsistent with the provisions of this Section 2.10. (c) If shares of the Corporation are registered in the names of two or more persons, or if two or more persons have the same fiduciary relationship respecting the same shares, unless the secretary is given written notice to the contrary and furnished with a copy of the instrument creating the relationship, their acts with respect to voting shall have the following effect: (i) if only one votes, the act binds all; (ii) if more than one vote, the act of the majority so voting binds all; (iii) if more than one vote, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionately; and (iv) if the instrument so filed or the registration of the shares shows that any tenancy is held in unequal interests, a majority or even split for the purpose of this Section 2.10 shall be a majority or even split in interest. (d) The Corporation is entitled to reject a vote, consent, waiver, proxy appointment, or proxy appointment revocation if the secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for the stockholder. 6 (e) The Corporation and its officer or agent who accepts or rejects a vote, consent, waiver, proxy appointment, or proxy appointment revocation in good faith and in accordance with the standards of this Section 2.10 are not liable in damages to the stockholder for the consequences of the acceptance or rejection. (f) Corporate action based on the acceptance or rejection of a vote, consent, waiver, proxy appointment, or proxy appointment revocation under this Section 2.10 is valid unless a court of competent jurisdiction determines otherwise. 2.11 INFORMAL ACTION BY STOCKHOLDERS. (a) Unless otherwise provided in the Certificate of Incorporation, any action which may be taken at any annual or special meeting of stockholders may be taken without a meeting and without prior notice if one or more consents in writing, setting forth the action so taken, are signed by the holders of outstanding shares having not less than the minimum number of votes necessary to authorize or take the action at a meeting at which all shares entitled to vote thereon were present and voted. (b) Unless written consents of all stockholders entitled to vote have been obtained, the Corporation shall give notice of any stockholder approval without a meeting at least ten days before the consummation of the action authorized by the approval to: (i) those stockholders entitled to vote who have not consented in writing; and (ii) those stockholders not entitled to vote and to whom the Delaware General Corporation Code requires notice be given. Such notice shall contain or be accompanied by the same material that would have been required if a formal meeting had been called to consider the action. (c) Any stockholder giving a written consent, or the stockholders' proxyholder, or a transferee of the shares or a personal representative of the stockholder or their respective proxyholder, may revoke the consent by a signed writing describing the action and stating-that the stockholder's prior consent is revoked, if the writing is received by the Corporation prior to the effectiveness of the action. (d) Action taken pursuant to this Section 2.11 is not effective unless all written consents on which the Corporation relies for the taking of action are received by the Corporation within a sixty day period and are not revoked. Action thus taken is effective as of the date the last written consent necessary to effect the action is received by the Corporation, unless all the written consents necessary to effect the action specify a later date as the effective date of action. If the Corporation has received written consents signed by all stockholders entitled to vote with respect to the action, the effective date of the action may be any date that is specified in all the written consents as the effective date of the action. The writing may be received by the Corporation by electronically transmitted facsimile or other form of communication providing the Corporation with a complete copy thereof, including a copy of the signature. 7 (e) Notwithstanding Subsection (a) of this Section 2.11, directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors. (f) Action taken under this Section 2.11 has the same effect as action taken at a meeting of stockholders and may be so described in any document. 2.12 VOTING FOR DIRECTORS. At each election of directors, unless otherwise provided in the Certificate of Incorporation or the Delaware General Corporation Code, every stockholder entitled to vote at the election has the right to vote, in person or by proxy, all of the votes to which the stockholder's shares are entitled for as many persons as there are directors to be elected and for whose election the stockholder has the right to vote. Unless otherwise provided in the Certificate of Incorporation or the Delaware General Corporation Code, directors are elected by at least two-thirds (2/3) of the votes cast by the shares entitled to be voted in the election, at a meeting at which a quorum is present. 2.13 STOCKHOLDER'S RIGHTS TO INSPECT CORPRORATE RECORDS. (a) MINUTES AND ACCOUNTING RECORDS. The Corporation shall keep as permanent records minutes of all meetings of its stockholders and Board of Directors, a record of all actions taken by its stockholders or Board of Directors without a meeting, a record of all actions taken on behalf of the Corporation by a committee of the Board of Directors in place of the Board of Directors, and a record of all waivers of notices of meetings of its stockholders, meetings of the Board of Directors, or any meetings of committees of the Board of Directors. The Corporation shall maintain appropriate accounting records. (b) ABSOLUTE INSPECTION RIGHTS OF RECORDS REQUIRED AT PRINCIPAL OFFICE. If a stockholder gives the Corporation written notice of the stockholder's demand at least five business days before the date on which the stockholder wishes to inspect and copy, a stockholder (or the stockholder's agent or attorney) has the right to inspect and copy, during regular business hours, any of the following records, all of which the Corporation is required to keep at its principal office: (i) The Corporation's Certificate of Incorporation currently in effect; (ii) the Corporation's Bylaws currently in effect; (iii) the minutes of all stockholders' meetings, and records of all action taken by stockholders without a meeting, for the past three years; (iv) all written communications within the past three years to stockholders as a group or to the holders of any class or series of shares as a group; (v) a list of the names and business addresses of the Corporation's current officers and directors; 8 (vi) the Corporation's most recent annual report delivered to the Office of the Secretary of State of Delaware; and (vii) all financial statements prepared for periods ending during the last three years that a stockholder could request pursuant to the Delaware General Corporation Code. (c) CONDITIONAL INSPECTION RIGHT. If a stockholder gives the Corporation a written demand made in good faith and for a proper purpose at least five business days before the date on which the stockholder wishes to inspect and copy, the stockholder describes with reasonable particularity the stockholder's purpose and the records the stockholder desires to inspect, and the records are directly connected with the stockholder's purpose, the stockholder (or the stockholder's agent or attorney) is entitled to inspect and copy, during regular business hours at a reasonable location specified by the Corporation, any of the following records of the Corporation: (i) Excerpts from: (A) Minutes of any meeting of the Board of Directors, records of any action of a committee of the Board of Directors while acting on behalf of the Corporation in place of the Board of Directors; (B) minutes of any meeting of the stockholders; (C) records of action taken by the stockholders without a meeting; and (D) waivers of notices of any meeting of the stockholders, of any meeting of the Board of Directors, or of any meeting of a committee of the Board of Directors; (ii) accounting records of the Corporation; and (iii) the record of the Corporation's stockholders. (d) COPY COSTS. The right to copy records includes, if reasonable, the right to receive copies made by photographic, xerographic, or other means. The Corporation may impose a reasonable charge, payable in advance, covering the costs of labor and material, for copies of any documents provided to a stockholder. The charge may not exceed the estimated cost of production or reproduction of the records. (e) STOCKHOLDER INCLUDES BENEFICIAL OWNER. For purposes of this Section 2.14, the term "stockholder" shall include a beneficial owner whose shares are held in a voting trust and any other beneficial owner who establishes beneficial ownership. 9 2.14 FURNISHING FINANCIAL STATEMENTS TO A STOCKHOLDER. Upon the written request of any stockholder, the Corporation shall mail to the stockholder its most recent annual or quarterly financial statements showing in reasonable detail its assets and liabilities and the results of its operations. 2.15 INFORMATION RESPECTING SHARES. Upon the written request of any stockholder, the Corporation, at its own expense, shall mail to the stockholder information respecting the designations, preferences, limitations, and relative rights applicable to each class of shares, the variations determined for each series, and the authority of the Board of Directors to determine variations for any existing or future class or series. The Corporation may comply by mailing the stockholder a copy of its Certificate of Incorporation containing such information. ARTICLE 3 BOARD OF DIRECTORS 3.1 GENERAL POWERS. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation managed under, the direction of the Board of Directors, subject to any limitation set forth in the Certificate of Incorporation or in any agreement authorized the Delaware General Corporation Code. 3.2 NUMBER, TENURE, AND QUALIFICATIONS OF DIRECTORS. (a) NUMBER. The number of directors of the Corporation shall be not less than three (3) nor more than fifteen (15) except in the event that there are less than three (3) stockholders of the Corporation entitled to vote for the election of directors in which case the number of directors may equal the number of such voting stockholders of the Corporation. Within this range, the stockholders or the Board of Directors initially shall fix the number of directors of the Corporation. Thereafter, again within this range, the number of directors of the Corporation may be changed and re-established, from time to time, by the stockholders or the Board of Directors of the Corporation. Alternatively, if the stockholders of the Corporation elect a new Board of Directors of the Corporation and the total number of directors elected are within the range set by this Section 3.2 but are more or less than the number of directors of the Corporation previously fixed by the stockholders or the Board of Directors of the Corporation, then such number of directors shall be deemed to be the fixed number of directors of the Corporation (until such time as the stockholders or the Board of Directors of the Corporation change said number of directors by the methods described herein) even though such number has not been expressly fixed by resolution of the stockholders or the Board of Directors of the Corporation. Notwithstanding a change in the number of directors of the Corporation implemented by any of the methods described in this Section 3.2, no decrease in the number of directors of the Corporation may shorten the term of any incumbent director. 10 (b) TENURE. Each director shall hold office until the next annual meeting of stockholders or until removed. However, if a director's term expires, the director shall continue to serve until the directors successor shall have been elected and qualified, or until there is a decrease in the number of directors. (c) QUALIFICATIONS. Directors need not be residents of the State of Delaware or stockholders of the Corporation unless the Certificate of Incorporation so prescribes. 3.3 REGULAR MEETINGS OF THE BOARD OF DIRECTORS. The Board of Directors may provide, by resolution, the time and place, either within or outside the State of Delaware, for the holding of regular meetings, which shall be held without other notice than such resolution. 3.4 SPECIAL MEETINGS OF THE BOARD OF DIRECTORS. Special meetings of the Board of Directors may be called by or at the request of one (1) of the directors, who may fix any place, either within or outside the State of Delaware, as the place for holding the meeting. 3.5 NOTICE AND WAIVER OF NOTICE OF SPECIAL DIRECTOR MEETINGS. Unless the Certificate of Incorporation provides for a longer or shorter period, special meetings of the Board of Directors must be preceded by at least two days notice, either orally or in writing, of the date, time, and place of the meeting. Notice of any meeting of the Board of Directors shall be deemed to be effective at the earliest of: (1) when received; (2) five days after it is mailed; or (3) the date shown on the return receipt if sent by registered or certified mail, return receipt requested, and the receipt is signed by or on behalf of the director. A director may waive notice of any meeting. Except as in this Section 3.5 provided, the waiver must be in writing and signed by the director entitled to the notice. The waiver shall be delivered to the Corporation for filing with the corporate records, but delivery and filing are not conditions to its effectiveness. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except when a director attends a meeting for the express purpose of objecting to the transaction of any business and at the beginning of the meeting, or promptly upon arrival the director objects to holding the meeting or transacting business at the meeting because of lack of notice or defective notice, and does not thereafter vote for or assent to action taken at the meeting. A director who attends a special meeting to object to lack of notice shall not be deemed to be present for quorum purposes. 11 3.6 DIRECTOR QUORUM. A majority of the number of directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, unless the Certificate of Incorporation require a greater number. A majority of the number of directors prescribed by resolution (or if no number is prescribed, the number in office immediately before the meeting begins) shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, unless the Certificate of Incorporation require a greater number. 3.7 MANNER OF ACTING. The act of the majority of the directors present at a meeting at which a quorum is present when the vote is taken shall be the act of the Board of Directors, unless the Certificate of Incorporation require a greater percentage. Unless the Certificate of Incorporation provides otherwise, any or all directors may participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting. A director who is present at a meeting of the Board of Directors when corporate action is taken is considered to have assented to the action taken, unless: (a) the director objects at the beginning of the meeting, or promptly upon arrival, to holding it or transacting business at the meeting; (b) the director contemporaneously requests his dissent or abstention as to any specific action to be entered into the minutes of the meeting; or (c) the director causes written notice of a dissent or abstention as to any specific action to be received by the presiding officer of the meeting before its adjournment or by the Corporation promptly after adjournment of the meeting. The right of dissent or abstention as to a specific action is not available to a director who votes in favor of the action taken. 3.8 DIRECTOR ACTION WITHOUT A MEETING. Unless the Certificate of Incorporation or the Delaware General Corporation Code provide otherwise, any action required or permitted to be taken by the Board of Directors at a meeting may be taken without a meeting if all the directors consent to the action in writing. Action is taken by consents at the time the last director signs a writing describing the action taken, unless, prior to that time, any director has revoked a consent by a writing signed by the director and received by the secretary. Action taken by consents is effective when the last director signs the consent, unless the Board of Directors establishes a different effective date. 12 Action taken by consents has the same effect as action taken at a meeting of directors and may be described as such in any document. 3.9 REMOVAL OF DIRECTORS. The stockholders may remove one or more directors at a meeting called for that purpose if notice has been given that a purpose of the meeting is such removal. The removal may be with or without cause, unless the Certificate of Incorporation provides that directors may only be removed with cause. If a director is elected by a voting group of stockholders, only the stockholders of that voting group may participate in the vote to remove the director. If cumulative voting is in effect, a director may not be removed if the number of votes sufficient to elect the director under cumulative voting is voted against the director's removal. If cumulative voting is not in effect, a director may be removed only if the number of votes cast to remove the director exceeds the number of votes cast not to remove the director. 3.10 BOARD OF DIRECTOR VACANCIES. (a) Unless the Certificate of Incorporation provides otherwise, if a vacancy occurs on the Board of Directors, including a vacancy resulting from an increase in the number of directors: (i) the stockholders may fill the vacancy; (ii) the Board of Directors may fill the vacancy; or (iii) if the directors remaining in office constitute fewer than a quorum of the board, they may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office. (b) Unless the Certificate of Incorporation provides otherwise, if the vacant office was held by a director elected by a voting group of stockholders: (i) If one or more directors were elected by the same voting group, only they are entitled to vote to fill the vacancy if it is filled by the directors; and (ii) only the holders of shares of that voting group are entitled to vote to fill the vacancy if it is filled by the stockholders. A vacancy that will occur at a specific later date, because of a resignation effective at a later date, may be filled before the vacancy occurs, but the new director may not take office until the vacancy occurs. If a director's term expires, the director shall continue to serve until the director's successor is elected and qualified or until there is a decrease in the number of directors. The term of a director elected to fill a vacancy expires at the next stockholders' meeting at which directors are elected. 13 3.11 DIRECTOR COMPENSATION. Unless otherwise provided in the Certificate of Incorporation, by resolution of the Board of Directors, each director may be paid his expenses, if any, of attendance at each meeting of the Board of Directors, and may be paid a stated salary as a director or a fixed sum for attendance at each meeting of the Board of Directors or both. No such payment shall preclude any director from serving the Corporation in any capacity and receiving compensation therefor. 3.12 DIRECTOR COMMITTEES. (a) CREATION OF COMMITTEES. Unless the Certificate of Incorporation provides otherwise, the Board of Directors may create an Executive Committee and such other committees as the Board of Directors deems appropriate and appoint members of the Board of Directors to serve on them. Mach committee must have two or more members, who serve at the pleasure of the Board of Directors. (b) SELECTION OF MEMBERS. The creation of a committee and appointment of members to it must be approved by the greater of: (i) a majority of all the directors in office when the action is taken; or (ii) the number of directors required by the Certificate of Incorporation take such action, or if not specified in the Certificate of Incorporation the number required by Section 3.7 of these Bylaws to take action. (c) REQUIRED PROCEDURES. Sections 3.4 through 3.9 of these Bylaws, which govern meetings, action without a meeting, notice, waiver of notice, and quorum and voting requirements of the Board of Directors, apply to committees and their members as well. (d) AUTHORITY. Unless limited by the Certificate of Incorporation, each committee may exercise those aspects of the authority of the Board of Directors which the Board of Directors confers upon such committee in the resolution creating the committee. (e) AUTHORITY OF EXECUTIVE COMMITTEE. The Executive Committee shall have, and may exercise all powers of the Board of Directors with respect to the management of the business and affairs of the Corporation during the intervals between the meetings of the Board of Directors, unless otherwise limited by the Board of Directors. Provided, however, the Executive Committee shall not have the power to fill vacancies on the Board of Directors or to amend these Bylaws. 3.13 DIRECTOR'S RIGHTS TO INSPECT CORPORATE RECORDS. (a) ABSOLUTE INSPECTION RIGHTS OF RECORDS REQUIRED AT PRINCIPAL OFFICE. If a director gives the Corporation written notice of the director's demand at least five business days before the date on which the director wishes to inspect and copy, the director (or the directors agent or attorney) has the right to inspect and copy, during regular business hours, any of the following records, all of which the Corporation Is required to keep at its principal office: 14 (i) the Corporation's Certificate of Incorporation currently in effect; (ii) the Corporation's Bylaws currently in effect; (iii) the minutes of all stockholders' meetings, and records of all action taken by stockholders without a meeting, for the past three years; (iv) all written communications within the past three years to stockholders as a group or to the holders of any class or series of shares as a group; (v) a list of the names and loudness addresses of the Corporation's current officers and directors; (vi) the Corporation's most recent annual report delivered to the Office of the Secretary of State of Delaware; and (vii) all financial statements prepared for periods ending during the last three years that a stockholder could request. (b) CONDITIONAL INSPECTION RIGHT. In addition, if a director gives the Corporation a written demand made in good faith and for a proper purpose at least five business days before the date on which the director wishes to inspect and copy, the director describes with reasonable particularity the director's purpose and the records the director desires to inspect, and the records the director desires to inspect, and the records are directly connected with the director's purpose, the director (or the director's agent or attorney) is entitled to inspect and copy, during regular business hours at a reasonable location specified by the Corporation, any of the following records of the Corporation: (i) Excerpts from: (A) Minutes of any meeting of the Board of Directors, records of any action of a committee of Board of Directors whim acting on behalf of the Corporation in place of the Board of Directors; (B) minutes of any meeting of the stockholders; (C) records of action taken by the stockholders without a meeting; and (D) waivers of notices of any meeting of the stockholders, of any meeting of the Board of Directors, or of any meeting of a committee of the Board of Directors; (ii) accounting records of the Corporation; and (iii) the record of the Corporation's stockholders. 15 (c) COPY COSTS. The right to copy records includes, if reasonable, the right to receive copes made by photographic, xerographic, or other means. The Corporation may impose a reasonable charge, payable in advance, covering the costs of labor and material, for copies of any documents provided to the director. The charge may not exceed the estimated cost of production or reproduction of the records. 3.14 GENERAL STANDARD OF CONDUCT FOR DIRECTORS. The standards of conduct for the Directors of the Corporation shall be as follows: (a) Each director shall discharge his or her duties as a director, including duties as a member of a committee, (i) in good faith, (ii) with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and (iii) in a manner if - director reasonably believes to be in the best interests of the Corporation. The Board of Directors and stockholders of the Corporation understand that the members of the Board of Directors may have other business interests, activities and responsibilities that take a substantial portion of their time and attention. Accordingly, the members of the Board of Directors are required to devote to the business of the Corporation in fulfillment of their respective responsibilities as a director of the Corporation only the time and attention that they shall unilaterally deem necessary in order to fill their responsibilities as a director. (b) In discharging his or her duties, a director is entitled to rely on information' opinions, reports, or statements including financial statements and other financial data, if prepared or predator by; (i) one or more officers or employees of the Corporation whom the director reasonably believes to reliable and competent in the matters presented; (ii) legal counsel, public accountants, or other persons as to matters the director reasonably believes are within the person's professional or expert competence; or (iii) a committee of the board of directors of which the director is not a member, if the director reasonably believes the committee merits confidence. (c) A director is not acting in good faith if he or she has knowledge concerning the matter in question that makes reliance otherwise permitted by paragraph (b) of this Section 3.15 unwarranted. (d) A director is not liable for any action taken, or any failure to take any action as a director, if the duties of the director have been performed in compliance with this Section 3.15. (e) The standards of conduct set forth In this Section 3.14, or any breach of such standards, shall not affect the right or power of the Corporation to indemnify any Individual pursuant to Article 5 of these Bylaws. 16 ARTICLE 4 OFFICERS 4.1 NUMBER OF OFFICERS. The officers of the Corporation shall be a president, a secretary, and a treasurer, each of whom shall be appointed by the Board of Directors. Such other officers and assistant officers as may be deemed necessary, including any chairman of the board, chief executive officer and any vice presidents, may be appointed by the Board of Directors. If specifically authorized by the Board of Directors, an officer may appoint one or more officers or assistant officers. The same individual may simultaneously hold more than one office in the Corporation. 4.2 APPOINTMENT AND TERM OF OFFICE. The officers of the Corporation shall be appointed by the Board of Directors for such term as is determined by the Board of Directors. The designation of a specified term does not grant to the officer any contract rights, and the Board of Directors can remove the officer at any time prior to the end of such term. If no term is specified, the officer shall hold office until the officer resigns, dies, or until removed in the manner provided in Section 4.3 of these Bylaws. 4.3 REMOVAL OF OFFICERS. Any officer or agent may be removed by the Board of Directors at any time, with or without cause. Such removal shall be without prejudice to the contract rights, if any, of the person so removed. Appointment of an officer or agent shall not of itself create contract rights. 4.4 CHAIRMAN OF THE BOARD. The chairman of the board, if any, shall have the following powers and duties: (a) To be the senior officer of the Corporation and, in addition to the duties specified in this Section 4.4, to perform such duties as may be assigned to him by the Board of Directors; (b) to preside at all meetings of the stockholders of the Corporation: (c) to preside at all meetings of the Board of Directors; (d) to be a member of the Executive Committee, if any. 4.5 CHIEF EXECUTIVE OFFICER. The chief executive officer, if there is such an officer, shall possess all of the powers that the Board of Directors may see fit to delegate to the chief executive officer and he or she shall perform all of the duties that may be prescribed by the Board of Directors from time to time. 17 4.6 PRESIDENT. The president shall be the principal executive officer of the Corporation and, subject to the control of the Board of Directors, shall, in general, supervise and control all of the business and affairs of the Corporation. The president shall when present and in the absence of the chairman of the board of the Corporation preside at all meetings of the stockholders and of the Board of Directors. The president may sign, with, the secretary or any other proper officer of the Corporation authorized by the Board of Directors, certificates for shares of the Corporation, the issuance of which shall have been authorized by a resolution of the Board of Directors, and deeds, mortgages, bonds, contracts, or other instruments which the Board of Directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation, or shall be required by law to be otherwise signed or executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the Board of Directors from time to time. The president shall be a member of the Executive Committee, if any, of the Corporation. 4.7 VICE PRESIDENTS. If appointed, in the absence of the president or in the event of his death, inability, or refusal to act, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated at the time of their election, or in to absence of any designation, then in the order of their appointment) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. If there is no vice president, then the treasurer shall perform such duties of the president. Any vice president may sign, with the secretary or an assistant secretary, certificates for shares of the Corporation the issuance of which have been authorized by resolution of the Board of Directors; and shall perform such other duties as from time to time may be assigned to him or her by the president or by the Board of Directors. 4.8 SECRETARY. The secretary shall: (a) keep the minutes of the proceedings of the stockholders and of the Board of Directors and the other records and information of the Corporation required to be kept, in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of any seal of the Corporation; (d) when requested or required, authenticate any records of the Corporation; (e) keep a register of the post office address of each stockholder which shall be furnished to the secretary by such stockholder, 18 (f) sign with the chairman of the board, president, or a vice president, certificates for shares of the Corporation, the issuance of which shall have been authorized by resolution of the Board of Directors: (g) have general charge of the stock transfer books of the Corporation; and (h) In general perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him or her by the president or by the Board of Directors. 4.9 TREASURER. The Treasurer shall: (a) have charge and custody of and be responsible for all funds and securities of the Corporation; (b) receive and give receipts for moneys due and payable to the Corporation from any source whatsoever, and deposit all such moneys in the name of the Corporation in such banks, trust companies, or other depositories as shall be selected by the Board of Directors; and (c) in general perform all of the duties incident to the office of treasurer and such other duties as from time to time may be assigned to him or her by the president or by the Board of Directors. If required by the Board of Directors, the treasurer shall give a bond for the faithful discharge of his or her duties in such sum and with such surety or sureties as the Board of Directors shall determine. 4.10 ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant secretaries, when authorized by the Board of Directors, may sign, with the chairman of the board, president or a vice president, certificates for shares of the Corporation, the issuance of which shall have been authorized by a resolution of the Board of Directors. The assistant treasurers shall, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. The assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the secretary or the treasurer, respectively, or by the president or the Board of Directors. 4.11 SALARIES. The salaries of the offsets shall be fixed from tinge to time by the Board of Directors. 4.12 GENERAL STANDARDS OF CONDUCT FOR OFFICERS. The standards of conduct for the officers of the Corporation shall be as follows: 19 (a) Each officer with discretionary authority shall discharge his or her duties under that authority (i) in good faith, (ii) with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and (iii) in a manner the officer reasonably believes to be In the best interests of the Corporation. (b) In discharging his or her duties, an officer Is entitled to rely on information, opinions, reports, or statements Including financial statements and other financial data, if prepared or presented by: (i) one or more officers or employees of the Corporation whom the officer reasonably believes to be reliable and competent in the matters presented; or (ii) legal counsel, public accountants, or other persons as to matters the officer reasonably believes are within the person's professional or expert competence. (c) An officer is not acting in good faith if he or she has knowledge concerning the matter in question that makes reliance otherwise permitted by paragraph (b) of this Section 5.12 unwarranted. (d) An officer is not liable for any action taken, or any failure to take any action as an officer if the duties of the office have been performed in compliance with this Section 5.12. (e) The standards of conduct set forth in this Section 5.12, or any breach of such standards, shall not affect the right or power of the Corporation to indemnify any individual pursuant to Article 6 of these Bylaws. ARTICLE 5 LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, FIDUCIARIES, AND AGENTS 5.1 LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS. The personal liability of the directors and officers of the Corporation to the Corporation or its stockholders, or to any third person; shall be eliminated or limited to the fullest extent as from time to time permitted by Delaware law. 5.2 INDEMNIFICATION OF DIRECTORS AND OFFICERS. Unless otherwise provided in the Certificate of Incorporation, the Corporation shall indemnify any individual made a party to a proceeding because the individual is or was a director or officer of the Corporation against liability incurred in such proceeding to the fullest extent as from time to time permitted by Delaware law. 20 5.3 EFFECT OF REPEAL OR MODIFICATION OF ARTICLE V. Any repeal or modification of this Article V by the stockholders of the Corporation shall not adversely affect any right or protection of any person existing at the time of such repeal or modification. 5.4 INSURANCE. The Corporation may purchase and maintain liability insurance on behalf of a person who is or was a director, officer, employee, fiduciary, or agent of the Corporation, or who, while serving as a director, officer, employee, fiduciary, or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, fiduciary, or agent of another foreign or domestic corporation or other person, or of an employee benefit plan, against liability asserted against or incurred by him or her in that capacity or arising from his or her status as a director, officer, employee, fiduciary, or agent, whether or not the Corporation would have power to indemnify him or her against the same liability under the Delaware General Corporation Code. Insurance may be procured from any insurance company designated by the Board of Directors, whether the insurance company is formed under the laws of the State of Delaware or any other jurisdiction of the United States or elsewhere, including any insurance company in which the Corporation has an equity or any other interest through stock ownership or otherwise. ARTICLE 6 CERTIFICATES FOR SHARES AND THEIR TRANSFER 6.1 CERTIFICATES FOR SHARES. (a) CONTENT. Certificates representing shares of the Corporation shall, at a minimum, state on their face the name of the Corporation and that the Corporation is organized under the lauds of the State of Delaware; the name of the person to whom issued; and the number and class of shares and the designation of the series, if any, the certificate represents; and be in such form as is determined by the Board of Directors. Such certificates shall be signed by the chairman of board, president or a vice president and by the secretary or an assistant secretary and may be sealed with the corporate seal or a facsimile thereof. The signatures of the officers may be facsimiles if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. Each certificate for shares shall be consecutively numbered or otherwise identified. The certificates may contain any other information the Corporation considers necessary or appropriate. (b) LEGEND AS TO CLASS OR SERIES. If the Corporation is authorized to issue different classes of shares or different series within a class, the designations, preferences, limitations, and relative rights applicable to each class, the variations in preferences, limitations, and relative rights determined for each series, and the authority of the Board of Directors to determine variations for any existing or future class or series must be summarized on the front or back of each certificate. Alternatively, each certificate may state conspicuously on its front or 21 back that the Corporation will furnish the stockholder this information on request in writing and without charge. (c) STOCKHOLDER LIST. The name and address of the person to whom the shares represented are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. (d) TRANSFERRING SHARES. All certificates surrendered to the Corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in case of a lost, destroyed, or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the Corporation as the Board of Directors may prescribe. 6.2 SHARES WITHOUT CERTIFICATES. (a) ISSUING SHARES WITHOUT CERTIFICATES. Unless the Certificate of Incorporation provides otherwise, the Board of Directors may authorize the issuance of some or all of the shares of any or all classes or series without certificates. The authorization does not affect shares already represented by certificates until they are surrendered to the Corporation. (b) INFORMATION STATEMENT REQUIRED. Within a reasonable time after the issuance or transfer of shares without certificates, the Corporation shall send the stockholder a written statement containing, at a minimum, the name of the Corporation and that it is organized under the laws of the State of Delaware; the name of the person to whorls issued; and the number and class of shares and the designation of the series, if any, of the issued shares. If the Corporation is authorized to issue different classes of shares or different series within a class, the written statement shall describe the designations, preferences, limitations, and relative rights applicable to each class, the variations in preferences, limitations, and relative rights determined for each series, and the authority of the Board of Directors to determine variations for any existing or future class or series. 6.3 REGISTRATION OF TRANSFER OF SHARES. Registration of the transfer of shares of the Corporation shall be made only on the stock transfer books of the Corporation. In order to register a transfer, the record owner shall surrender the shares to the Corporation for cancellation, properly endorsed by the appropriate person or persons with reasonable assurances that the endorsements are genuine and effective. Unless the Corporation has established a procedure by which a beneficial owner of shares held by a nominee is to be recognized by the Corporation as the owner, the person in whose name shares stand on the books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes. 6.4 RESTRICTIONS ON TRANSFER OF SHARES PERMITTED. The Board of Directors or the stockholders may impose restrictions on the transfer or registration of transfer of shares (including any security convertible into, or carrying a right to subscribe for or acquire shares). A restriction does not affect shares issued before the restriction 22 was adopted unless the holders of the shares are parties to the restriction agreement or voted in favor of the registration or otherwise consented to the restriction. (a) A restriction on the transfer or registration of transfer of shares may be authorized: (i) To maintain the Corporation's status when it is dependent on the number or identity of its stockholders; (ii) to preserve entitlements, benefits, or exemptions under federal, state, or local laws; and (iii) for any other reasonable purpose. (b) A restriction on the transfer or registration of transfer of shares may: (i) Obligate the stockholder first to offer the Corporation or other persons, separately, consecutively, or simultaneously, an opportunity to acquire the restricted shares; (ii) obligate the Corporation or other persons, separately, consecutively, or simultaneously, to acquire the restricted shares; (iii) require, as a condition to a transfer or registration, that any one or more persons, including the Corporation or any of its stockholders, approve the transfer or registration, if the requirement is not manifestly unreasonable; or (iv) prohibit the transfer or the registration of a transfer of the restricted shares to designated persons or classes of persons, if the prohibition is not manifestly unreasonable. A restriction on the transfer or registration of transfer of shares is valid and enforceable against the holder or a transferee of the holder if the restriction is authorized by this Section 6.4 and its existence is noted conspicuously on the front or back of the certificate, or if the restriction is contained in the information statement required by Section 6.2 of these Bylaws with regard to shares issued without certificates. Unless so noted, a restriction is not enforceable against a person without knowledge of the restriction. 6.5 ACQUISITION OF SHARES. The Corporation may acquire its own shares, and, unless otherwise provided in the Certificate of Incorporation, the shares so acquired constitute authorized but unissued shares. If the Certificate of Incorporation prohibits the reissuance of acquired shares, the number of authorized shares shall be reduced by the number of shares acquired, effective upon amendment of the Certificate of Incorporation, which amendment shall be adopted by the stockholders or the Board of Directors without stockholder action. Appropriate Certificate of 23 Amendment must be delivered to the Office of the Secretary of State of Delaware and must set forth: (a) the name of the Corporation; (b) the reduction in the number of authorized shares, itemized by class and series; (c) the total number of authorized shares, itemized by class and series, remaining after reduction of the shares; and (d) a statement that the amendment was adopted by the Board of Directors without stockholder action and that stockholder action was not required if such be the case. ARTICLE 7 DISTRIBUTIONS 7.1 DISTRIBUTIONS. The Board of Directors may authorize, and the Corporation may make, distributions (including dividends on its outstanding shares) in the manner and upon the terms and conditions provided by law and in the Certificate of Incorporation. ARTICLE 8 CORPORATE SEAL 8.1 CORPORATE SEAL. The Board of Directors may provide a corporate seal which may be circular in form and have inscribed thereon any designation including the name of the Corporation, Delaware as the state of incorporation, and the words "Corporate Seal." ARTICLE 9 FISCAL YEAR 9.1 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. 24 ARTICLE 10 AMENDMENTS 10.1 AMENDMENTS. The Corporation's Board of Directors may amend these Bylaws, except to the extent that the Certificate of Incorporation, these Bylaws, or the Delaware General Corporation Code reserve this power exclusively to the stockholders in whole or in part. However, the Board of Directors may not adopt, amend, or repeal a Bylaw that fixes a stockholder quorum or voting requirement that is greater than required by the Delaware General Corporation Code. If authorized by the Certificate of Incorporation, the stockholders may adopt, amend, or repeal a Bylaw that fixes a greater quorum or voting requirement for stockholders, or voting groups of stockholders, than is required by the Delaware General Corporation Code. Any such action shall comply with the provisions of the Delaware General Corporation Code. The Corporation's stockholders may amend or repeal the Corporation's Bylaws even though the Bylaws may also be amended or repealed by the Corporation's Board of Directors. 25 EX-10.1 5 EXHIBIT 10.1 EXHIBIT 10.1 LINEO, INC. 1999 STOCK OPTION PLAN 1. DEFINITIONS.................................................................................................1 2. PURPOSES....................................................................................................4 3. ADMINISTRATION..............................................................................................4 (A) COMMITTEE................................................................................................4 (B) APPOINTMENT OF COMMITTEE.................................................................................4 (C) POWERS; REGULATIONS......................................................................................4 (D) DELEGATION TO EXECUTIVE OFFICER..........................................................................5 4. ELIGIBILITY.................................................................................................5 5. STOCK.......................................................................................................5 6. TERMS AND CONDITIONS OF OPTIONS.............................................................................5 (A) NUMBER OF SHARES AND TYPE OF OPTION......................................................................5 (B) DATE OF GRANT............................................................................................6 (C) OPTION PRICE.............................................................................................6 (D) DURATION OF OPTIONS......................................................................................6 (E) VESTING SCHEDULE OF OPTIONS..............................................................................7 (F) ACCELERATION OF VESTING..................................................................................7 (G) TERM OF OPTION...........................................................................................7 (H) EXERCISE OF OPTIONS......................................................................................8 (I) PAYMENT UPON EXERCISE OF OPTION..........................................................................9 (J) RIGHTS AS A SHAREHOLDER..................................................................................9 (K) TRANSFER OF OPTION......................................................................................10 (L) SECURITIES REGULATION AND TAX WITHHOLDING...............................................................11 (M) STOCK SPLIT, REORGANIZATION OR LIQUIDATION..............................................................12 (N) APPROVED TRANSACTIONS; CONTROL PURCHASE.................................................................12 (O) FURTHER ADJUSTMENTS OF AWARDS...........................................................................13 7. EFFECTIVE DATE; TERM.......................................................................................13 8. MARKET STANDOFF............................................................................................14 9. NO OBLIGATIONS TO EXERCISE OPTION..........................................................................14 10. NO RIGHT TO OPTIONS OR TO EMPLOYMENT.......................................................................14 11. APPLICATION OF FUNDS.......................................................................................14 12. INDEMNIFICATION OF COMMITTEE...............................................................................15 13. SHAREHOLDERS AGREEMENT.....................................................................................15 14. SEPARABILITY...............................................................................................15 15. NON-EXCLUSIVITY OF THE PLAN................................................................................15 16. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION......................................................15 17. AMENDMENT OF PLAN..........................................................................................16
LINEO, INC. 1999 STOCK OPTION PLAN 1. DEFINITIONS. Capitalized terms not defined elsewhere in the Plan shall have the following meanings (whether used in the singular or plural). (a) "AGREEMENT" means a written agreement approved by the Committee evidencing Options granted under the Plan. (b) "APPROVED TRANSACTION" means (i) the acquisition of the Company by another entity by means of merger, consolidation or other transaction or series of related transactions resulting in the exchange of the outstanding shares of the Company for securities of, or consideration issued, or caused to be issued by, the acquiring entity or any of its affiliates, provided, that after such event the shareholders of the Company immediately prior to the event own less than a majority of the outstanding voting equity securities of the surviving entity immediately following the event; (ii) any liquidation or dissolution of the Company; and (iii) any sale, lease, exchange or other transfer not in the ordinary course of business (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company. (c) "BOARD" means the Board of Directors of the Company. (d) "CODE" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific section of the Code shall include any successor section. (e) "COMMITTEE" shall mean the Board, or the committee appointed by the Board pursuant to Section 3(b) of the Plan, if it is administering the Plan. (f) "COMMON STOCK" means the Common Stock, no par value, of the Company. (g) "COMPANY" means Lineo, Inc., a Utah corporation. (h) "CONTROL PURCHASE" means any transaction (or series of related transactions) in which any person, corporation or other entity (including any "person" as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act, but excluding the Company and any employee benefit plan sponsored by the Company): (i) purchases any Common Stock (or securities convertible into Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer unless by the terms of such offer the offeror, upon consummation thereof, would be the "beneficial owner" (as that term is defined in Rule 13d-3 under the 1 Exchange Act) of less than 30% of the shares of Common Stock then outstanding; or (ii) becomes the "beneficial owner", directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) under the Exchange Act in the case of rights to acquire the Company's securities); PROVIDED, HOWEVER, that the foregoing shall not constitute a Control Purchase if the transactions or related transactions received the prior approval of a majority of all of the directors of the Company, excluding for such purpose the votes of directors who are directors or officers of, or have a material financial interest in any Person (other than the Company) who is a party to the event specified in either clauses (i) or (ii). (i) "COVERED EMPLOYEE" has the meaning given to it by Section 162(m)(3) of the Code. (j) "DATE OF GRANT" means that date the Committee has deemed to be the effective date of the Option for purposes of the Plan. (k) "DISABILITY" means any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months that renders the Optionee unable to engage in any substantial gainful activity. (l) "EFFECTIVE DATE" means at the time specified in the resolutions of the Board adopting the Plan. (m) "EMPLOYEES" means individuals employed by the Company or a Related Corporation. (n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific section of the Exchange Act shall include any successor section. (o) "EXECUTIVE OFFICER" shall be defined in Section 3(d). (p) "FAIR MARKET VALUE" means, if the Common Stock is publicly traded, the last sales price (or, if no last sales price is reported, the average of the high bid and low asked prices) for a share of Common Stock on that day (or, if that day is not a trading day, on the next preceding trading day), as reported by the principal exchange on which the Common Stock is listed, or, if the Common Stock is publicly traded but not listed on an exchange, as reported by The Nasdaq Stock Market, or if such prices or quotations are not reported by The Nasdaq Stock Market, as reported by any other available source of prices or quotations selected by the Committee. If the Common Stock is not publicly traded or if the Fair Market Value is not determinable by any of the foregoing means, the Fair Market Value on any day shall be determined in good faith by the Committee on the basis of such considerations as the Committee deems important. 2 (q) "IMMEDIATE FAMILY MEMBER" means a spouse, children or grandchildren of the Optionee. (r) "INCENTIVE STOCK OPTION" means an Option that is an incentive stock option within the meaning of Section 422 of the Code. (s) "NON-EMPLOYEE DIRECTOR" has the meaning given to it by Rule 16b-3 promulgated under the Exchange Act of 1934. (t) "NON-INSIDERS" has the meaning given to it by Section 162(m)(3) of the Code. (u) "NON-QUALIFIED STOCK OPTION" means an Option that is not an Incentive Stock Option. (v) "OPTION" means an option with respect to shares of Common Stock awarded pursuant to Section 6. (w) "OPTIONEE" means any person to whom an Option is granted under the Plan (as well as any permitted transferee of an Option). (x) "OUTSIDE DIRECTOR" has the meaning given to by the regulations promulgated under Section 162(m) of the Code. (y) "PLAN" means the Lineo, Inc. 1999 Stock Option Plan. (z) "QUALIFIED PERFORMANCE-BASED COMPENSATION" has the meaning given to it by the regulations promulgated under Section 162(m) of the Code. (aa) "RELATED CORPORATION" means any corporation (other than the Company) that is a "parent corporation" of the Company or "subsidiary corporation" of the Company, as defined in Sections 424(e) and 424(f) respectively, of the Code. (bb) "SECTION 16 INSIDERS" means individuals who are subject to Section 16(b) of the Exchange Act with respect to the Common Stock. (cc) "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time, or any successor statute or statutes thereto. References to any specific section of the Securities Act shall include any successor section. (dd) "TEN PERCENT SHAREHOLDER" means a person who owns more than ten percent of the total combined voting power of the Company or any related corporation as determined with reference to Section 424(d) of the Code. 3 2. PURPOSES. The purposes of the Plan are to retain the services of directors, valued key employees and consultants of the Company and such other persons as the Committee shall select in accordance with Section 4, to encourage such persons to acquire a greater proprietary interest in the Company, thereby strengthening their incentive to achieve the objectives of the shareholders of the Company, and to serve as an aid and inducement in hiring new employees and to provide an equity incentive to directors, consultants and other persons selected by the Committee. 3. ADMINISTRATION. (a) COMMITTEE. The Plan shall be administered by the Board unless the Board appoints a separate committee of the board to administer the Plan pursuant to Section 3(b) below. A majority of the members of the Committee shall constitute a quorum, and all actions of the Committee shall be taken by a majority of the members present. Any action may be taken by a written instrument signed by all of the members of the Committee and any action so taken shall be fully effective as if it had been taken at a meeting. (b) APPOINTMENT OF COMMITTEE. The Board may appoint a committee consisting of two or more of its members to administer the Plan. The Board shall consider whether a director is (i) an Outside Director and (ii) a Non-Employee Director when appointing any such Committee and shall appoint solely two or more individuals who qualify as Outside Directors if the Board intends for compensation attributable to Options to be Qualified Performance-Based Compensation. The Committee shall have the powers and authority vested in the Board hereunder (including the power and authority to interpret any provision of the Plan or of any Option). The members of any such Committee shall serve at the pleasure of the Board. (c) POWERS; REGULATIONS. Subject to the provisions of the Plan, and with a view to effecting its purpose, the Committee shall have sole authority, in its absolute discretion, to: (i) construe and interpret the Plan; (ii) define the terms used in the Plan; (iii) prescribe, amend and rescind rules and regulations relating to the Plan; (iv) correct any defect, supply any omission or reconcile any inconsistency in the Plan; (v) grant Options under the Plan; (vi) determine the individuals to whom Options shall be granted under the Plan and whether the Option is an Incentive Stock Option or a Non-Qualified Stock Option; (vii) determine the time or times at which Options shall be granted under the Plan; (viii) determine the number of shares of Common Stock subject to each Option, the exercise price of each Option, the duration of each Option and the times at which each Option shall become exercisable; (ix) determine all other terms and conditions of Options; and (x) make all other determinations necessary or advisable for the administration of the Plan. 4 All decisions, determinations and interpretations made by the Committee shall be binding and conclusive on all participants in the Plan and on their legal representatives, heirs and beneficiaries. (d) DELEGATION TO EXECUTIVE OFFICER. The Committee may by resolution delegate to one or more executive officers (the "Executive Officer") of the Company the authority to grant Options under the Plan to employees of the Company who, at the time of grant, are not Section 16 Insiders nor Covered Employees; PROVIDED, HOWEVER, that the authority delegated to the Executive Officer under this Section 3 shall not exceed that of the Committee under the provisions of the Plan and shall be subject to such limitations, in addition to those specified in this Section 3, as may be specified by the Committee at the time of delegation. 4. ELIGIBILITY. Incentive Stock Options may be granted to any individual who, at the time such Options are granted, is an Employee, including Employees who are also directors of the Company. Non-Qualified Stock Options may be granted to Employees and to such other persons as the Committee shall select. Options may be granted in substitution for outstanding options of another corporation in connection with the merger, consolidation, acquisition of property or stock or other reorganization between such other corporation and the Company or any subsidiary of the Company. At such point as the Company first becomes subject to the periodic reporting requirements of Section 12 of the Exchange Act, no person shall be eligible to receive in any fiscal year Options to purchase more than 100,000 shares of Common Stock (subject to adjustment as set forth in Section 6(m) hereof). 5. STOCK. The Company is authorized to grant Options to acquire up to a total of 2,000,000 shares of the Company's authorized but unissued, or reacquired, Common Stock. The number of shares with respect to which Options may be granted hereunder is subject to adjustment as set forth in Section 6(m). In the event that any outstanding Option expires or is terminated for any reason, the shares of Common Stock allocable to the unexercised portion of such Option may again be subject to an Option granted to the same Optionee or to a different person eligible under Section 4; PROVIDED, HOWEVER, that any canceled Options will be counted against the maximum number of shares with respect to which Options may be granted to any particular person as set forth in Section 4. 6. TERMS AND CONDITIONS OF OPTIONS. Each Option granted under the Plan shall be evidenced by an Agreement. Agreements may contain such provisions, not inconsistent with the Plan, as the Committee or Executive Officer, in its discretion, may deem advisable. All Options also shall comply with the following requirements: (a) NUMBER OF SHARES AND TYPE OF OPTION. Each Agreement shall state the number of shares of Common Stock to which it pertains and whether the Option is intended to be an Incentive Stock Option or a Non-Qualified Stock Option. In the absence of action to the contrary by the Committee or Executive Officer in connection with the grant of an Option, all Options shall be Non-Qualified Stock Options. The aggregate Fair Market Value (determined at the Date of Grant) of the Common Stock with respect to which the Incentive Stock Options granted to the Optionee and any incentive stock options granted to the Optionee under any other stock option plan of the Company, any 5 Related Corporation or any predecessor corporation are exercisable for the first time by the Optionee during any calendar year shall not exceed $100,000, or such other limit as may be prescribed by the Code. If (i) an Optionee holds one or more Incentive Stock Options under the Plan (and/or any incentive stock options under any other stock option plan of the Company, any Related Corporation or any predecessor corporation), and (ii) the aggregate Fair Market Value of the shares of Common Stock with respect to which, during any calendar year, such Options become exercisable for the first time exceeds $100,000 (said value to be determined as provided above), then such Option or Options are intended to qualify under Section 422 of the Code with respect to the maximum number of such shares as can, in light of the foregoing limitation, be so qualified, with the shares so qualified to be the shares subject to the Option or Options earliest granted to the Optionee. If an Option that would otherwise qualify as an Incentive Stock Option becomes exercisable for the first time in any calendar year for shares of Common Stock that would cause such aggregate Fair Market Value to exceed $100,000, then the portion of the Option in respect of such shares shall be deemed to be a Non-Qualified Stock Option. (b) DATE OF GRANT. Each Agreement shall state the Date of Grant. (c) OPTION PRICE. Each Agreement shall state the price per share of Common Stock at which it is exercisable. The exercise price shall be fixed by the Committee or Executive Officer at whatever price the Committee or Executive Officer may determine in the exercise of its sole discretion; PROVIDED, HOWEVER, that the per share exercise price for an Incentive Stock Option shall not be less than the Fair Market Value at the Date of Grant; PROVIDED FURTHER, that with respect to Incentive Stock Options granted to Ten Percent Shareholders of the Company, the per share exercise price shall not be less than 110 percent (110%) of the Fair Market Value at the Date of Grant; and, PROVIDED FURTHER, that Options granted in substitution for outstanding options of another corporation in connection with the merger, consolidation, acquisition of property or stock or other reorganization involving such other corporation and the Company or any subsidiary of the Company may be granted with an exercise price equal to the exercise price for the substituted option of the other corporation, subject to any adjustment consistent with the terms of the transaction pursuant to which the substitution is to occur. (d) DURATION OF OPTIONS. On the Date of Grant, the Committee or Executive Officer shall designate, subject to Section 6(g), the expiration date of the Option, which date shall not be later than ten (10) years from the Date of Grant in the case of Incentive Stock Options; PROVIDED, HOWEVER, that the expiration date of any Incentive Stock Option granted to a Ten Percent Shareholder shall not be later than five (5) years from the Date of Grant. In the absence of action to the contrary by the Committee in connection with the grant of an Option, and except in the case of Incentive Stock Options granted to Ten Percent Shareholders, all Options granted under this Section 6 shall expire ten (10) years from the Date of Grant. 6 (e) VESTING SCHEDULE OF OPTIONS No Option shall be exercisable until it has vested. The vesting schedule for each Option shall be specified by the Committee or Executive Officer at the time of grant of the Option; PROVIDED, HOWEVER, that if no vesting schedule is specified at the time of grant, the Option shall be vested according to the following schedule:
Number of Years of Continuous Employment Portion of Total With the Company Following Option Which Will Become Vesting Commencement Date Vested - --------------------------------------------------- ------------------------- 1 1/4th Monthly thereafter 1/48th
The Committee or Executive Officer may specify a vesting schedule for all or any portion of an Option based on the achievement of performance objectives established in advance of the commencement by the Optionee of services related to the achievement of the performance objectives. Performance objectives shall be expressed in terms of one or more of the following: return on equity, return on assets, share price, market share, sales, earnings per share, costs, net earnings, net worth, inventories, cash and cash equivalents, gross margin or the Company's performance relative to its internal business plan. Performance objectives may be in respect of the performance of the Company as a whole (whether on a consolidated or unconsolidated basis), a Related Corporation, or a subdivision, operating unit, product or product line of the foregoing. Performance objectives may be absolute or relative and may be expressed in terms of a progression or a range. An Option which is exercisable (in whole or in part) upon the achievement of one or more performance objectives may be exercised only upon completion of the following process: (a) the Optionee must deliver written notice to the Company that the performance objective has been achieved and demonstrating, if necessary, how the objective has been satisfied, (b) within 45 days after receipt of such notice, the Committee will make a good faith determination whether such performance objective has been achieved and deliver written notice to the Optionee detailing the results of such determination; if the Company fails to respond with such 45-day period, then the performance objective shall be presumed to have been achieved and (c) upon receipt of written notice from the Company that the performance objective has been achieved (or upon expiration of such 45-day period without a determination by the Company), the Optionee may exercise the Option; upon receipt of written notice from the Company that the performance objective has not been achieved, the Optionee shall have 15 days to appeal the Company's determination and the Company shall have 15 days after the receipt of such appeal to consider the issues presented by the Optionee and make a determination on the appeal, which determination shall be conclusive and binding on the Optionee. (f) ACCELERATION OF VESTING. The vesting of one or more outstanding Options may be accelerated by the Board at such times and in such amounts as it shall determine in its sole discretion. (g) TERM OF OPTION. Any vested Option granted to an Optionee shall terminate, to the extent not previously exercised, upon the occurrence of the first of the following events: 7 (i) as designated by the Committee or the Executive Officer in accordance with Section 6(d) hereof; (ii) the date of the Optionee's termination of employment or contractual relationship with the Company or any Related Corporation for cause (as determined in the sole discretion of the Committee); (iii) the expiration of ninety (90) days from the date of the Optionee's termination of employment or contractual relationship with the Company or any Related Corporation for any reason whatsoever other than cause, death or Disability unless the exercise period is extended by the Committee until a date not later than the expiration date of the Option; (iv) the expiration of one year from (A) the date of death of the Optionee or (B) cessation of the Optionee's employment or contractual relationship by reason of Disability unless the exercise period is extended by the Committee until a date not later than the expiration date of the Option; or (v) any other event specified by the Committee at the time of grant of the Option. If an Optionee's employment or contractual relationship is terminated by death, any Option granted to the Optionee shall be exercisable only by the person or persons to whom such Optionee's rights under such Option shall pass by the Optionee's will or by the laws of descent and distribution of the state or county of the Optionee's domicile at the time of death. The Committee shall determine whether an Optionee has incurred a Disability on the basis of medical evidence reasonably acceptable to the Committee. Upon making a determination of Disability, the Committee shall, for purposes of the Plan, determine the date of an Optionee's termination of employment or contractual relationship. Unless accelerated in accordance with Section 6(f), any unvested Option granted to an Optionee shall terminate immediately upon termination of employment of the Optionee by the Company for any reason whatsoever, including death or Disability. For purposes of the Plan, transfer of employment between or among the Company and/or any Related Corporation shall not be deemed to constitute a termination of employment with the Company or any Related Corporation. For purposes of this subsection with respect to Incentive Stock Options, employment shall be deemed to continue while the Optionee is on military leave, sick leave or other bona fide leave of absence (as determined by the Committee). The foregoing notwithstanding, employment shall not be deemed to continue beyond the first ninety (90) days of such leave, unless the Optionee's re-employment rights are guaranteed by statute or by contract. (h) EXERCISE OF OPTIONS. An Option shall be exercisable, either all or in part, at any time after vesting and prior to the expiration date with respect to, or the termination of, the Option. If less than all of the shares included in an exercisable Option are purchased, the remainder may be purchased at any subsequent time prior to the expiration date with respect to, or the termination of, the Option. No portion of any vested Option may be exercised for less than one hundred (100) shares (as adjusted pursuant to Section 6(m)); PROVIDED, HOWEVER, that if the vested Option is less than one hundred (100) shares, it may be exercised with respect to all shares for which it is vested. Only whole shares may be issued upon exercise of an vested Option, and to the extent that a vested Option covers less than one (1) share, it is unexercisable. 8 A vested Option or any portion thereof may be exercised by giving written notice to the Company upon such terms and conditions as the Agreement evidencing the vested Option may provide and in accordance with such other procedures for the exercise of a vested Option as the Committee may establish from time to time. Such notice shall be accompanied by payment in the amount of the aggregate exercise price for such shares, which payment shall be in the form specified in Section 6(i). The Company shall not be obligated to issue, transfer or deliver a certificate of Common Stock to the holder of any vested Option until provision has been made by the holder, to the satisfaction of the Company, for the payment of the aggregate exercise price for all shares for which the vested Option shall have been exercised and for satisfaction of any tax withholding obligations associated with such exercise. Options granted to an Optionee are, during the Optionee's lifetime, exercisable only by the Optionee or a transferee who takes title to the Option in the manner permitted by Section 6(k). (i) PAYMENT UPON EXERCISE OF OPTION. The exercise price for shares purchased under an Option shall be paid in full to the Company by delivery of consideration equal to the product of the Option exercise price and the number of shares purchased. Such consideration must be paid in cash or by check or, unless the Committee in its sole discretion determines otherwise, either at the time the Option is granted or at any time before it is exercised, a combination of cash and/or check (if any) and one or both of the following alternative forms: (a) tendering (either actually or, if and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, by attestation) Common Stock already owned by the Optionee for at least six months (or any shorter period necessary to avoid a charge to the Company's earnings for financial reporting purposes) having a Fair Market Value on the day prior to the exercise date equal to the aggregate Option exercise price; or (b) if and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, delivery of a properly executed exercise notice, together with irrevocable instructions, to (i) a brokerage firm designated by the Company to deliver promptly to the Company the aggregate amount of sale or loan proceeds to pay the Option exercise price and any withholding tax obligations that may arise in connection with the exercise and (ii) the Company to deliver the certificates for such purchased shares directly to such brokerage firm, all in accordance with the regulations of the Federal Reserve Board. In addition, to the extent permitted by the Committee in its sole discretion, the price for shares purchased under an Option may be paid, either singly or in combination with one or more of the alternative forms of payment authorized by this Section 6(i), by (y) a full-recourse promissory note; or (z) such other consideration as the Committee may permit. (j) RIGHTS AS A SHAREHOLDER. An Optionee shall have no rights as a shareholder with respect to any shares of Common Stock issuable upon exercise of the Option until such holder becomes a record holder of such shares. Subject to the provisions of Sections 6(m), no rights shall accrue to an Optionee and no adjustments shall be made on account of dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights declared on, or created in, the Common Stock for which the record date is prior to the date such Optionee becomes a record holder of the shares of Common Stock issuable upon exercise of such Option. 9 (k) TRANSFER OF OPTION. Options granted under the Plan and the rights and privileges conferred by the Plan may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will, by applicable laws of descent and distribution or pursuant to a domestic relations order (as defined in the Code or Title I of the Employment Retirement Income Security Act of 1974 or the rules or regulations thereunder), and shall not be subject to execution, attachment or similar process; PROVIDED, HOWEVER, that solely with respect to Non-Qualified Stock Options, the Committee may, in its discretion, authorize all or a portion of the Options to be granted to an Optionee to be on terms which permit transfer by such Optionee to: (i) Immediate Family Members, (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership in which such Immediate Family Members are the only partners, provided that : (x) there may be no consideration for any such transfer, (y) the Agreement evidencing such Options must be approved by Committee, and must expressly provide for transferability in a manner consistent with this Section, and (z) subsequent transfers of transferred Options shall be prohibited other than by will, by applicable laws of descent and distribution or pursuant to a domestic relations order (as defined in the Code or Title I of the Employment Retirement Income Security Act of 1974 or the rules or regulations thereunder). Following transfer, any such Options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of Section 6(l)(2), the term "Optionee" shall be deemed to refer to the initial transferor. The events of termination of employment of Section 6(g) shall continue to be applied with respect to the original Optionee, following which the options shall be exercisable by the transferee only to the extent, and for the periods specified at Section 6(g). Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any Option or of any right or privilege conferred by the Plan contrary to the provisions hereof, or upon the sale, levy or any attachment or similar process upon the rights and privileges conferred by the Plan, such Option shall thereupon terminate and become null and void. 10 (l) SECURITIES REGULATION AND TAX WITHHOLDING. (1) No shares of Common Stock shall be issued upon exercise of an Option unless the exercise of such Option and the issuance and delivery of such shares shall comply with all relevant provisions of law, including, without limitation, any applicable state securities laws, the Securities Act, the Exchange Act, the rules and regulations thereunder and the requirements of any stock exchange upon which such shares may then be listed, and such issuance shall be further subject to the approval of counsel for the Company with respect to such compliance, including the availability of an exemption from registration for the issuance and sale of such shares. The inability of the Company to obtain from any regulatory body the authority deemed by the Company to be necessary for the lawful issuance and sale of any shares under the Plan, or the unavailability of an exemption from registration for the issuance and sale of any shares under the Plan, shall relieve the Company of any liability with respect to the non-issuance or sale of such shares. As long as the Common Stock is not registered under the Exchange Act, the Company intends that all offers and sales of Options and shares of Common Stock issuable upon exercise of Options shall be exempt from registration under the provisions of Section 5 of the Securities Act, and the Plan shall be administered in a manner so as to preserve such exemption. The Company also intends that the Plan shall constitute a written compensatory benefit plan, within the meaning of Rule 701(b) promulgated under the Securities Act, and that each Option granted pursuant to the Plan at a time when the Common Stock is not registered under the Exchange Act shall, unless otherwise specified by the Committee at the time the Option is granted or at any time thereafter, be granted in reliance on the exemption from the registration requirements of Section 5 of the Securities Act provided by Rule 701. As a condition to the exercise of an Option, the Committee may require the Optionee to represent and warrant in writing at the time of such exercise that the shares of Common Stock issuable upon exercise of the Option are being purchased only for investment and without any then-present intention to sell or distribute such shares. At the option of the Committee, a stop-transfer order against such shares may be placed on the stock books and records of the Company, and a legend indicating that such shares may not be pledged, sold or otherwise transferred unless an opinion of counsel is provided stating that such transfer is not in violation of any applicable law or regulation, may be stamped on the certificates representing such shares in order to assure an exemption from registration. The Committee also may require such other documentation as it shall, in its discretion, deem necessary from time to time to comply with federal and state securities laws. THE COMPANY HAS NO OBLIGATION TO UNDERTAKE REGISTRATION OF ANY OPTION OR ANY SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF ANY OPTION. (2) The Company may require the Optionee to pay to the Company the amount of any withholding taxes that the Company is required to withhold with respect to the grant, vesting or exercise of any Option. Subject to the Plan and applicable law, the Committee may, in its sole discretion, permit the Optionee to satisfy withholding obligations, in whole or in part, by paying cash, by electing to have the Company withhold shares of Common Stock or by transferring shares of Common Stock to the Company, in such amounts as are equivalent to the Fair Market Value of the withholding obligation. The Company shall have the right to withhold from any shares of Common Stock issuable pursuant to an Option or from any cash amounts otherwise due or to become due from the Company to the Optionee an amount equal to such taxes. The Company may also deduct from any Option any other amounts due from the Optionee to the Company or a Related Corporation. 11 (3) The issuance, transfer or delivery of certificates of Common Stock pursuant to the exercise of an Option may be delayed, at the discretion of the Committee, until the Committee is satisfied that the applicable requirements of the federal and state securities laws and the withholding provisions of the Code have been met. (m) STOCK SPLIT, REORGANIZATION OR LIQUIDATION. (1) In the event that, at any time or from time to time, a stock dividend, stock split, spin-off, combination or exchange of shares, recapitalization, merger, consolidation, distribution to shareholders other than a normal cash dividend, or other change in the Company's corporate or capital structure results in (a) the outstanding shares, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of securities of the Company or of any other corporation or (b) new, different or additional securities of the Company or of any other corporation being received by the holders of shares of Common Stock of the Company, then the Board shall make proportional adjustments in (i) the maximum number and kind of securities subject to the Plan as set forth in Section 5 and (ii) the number and kind of securities that are subject to any outstanding Option and the per share price of such securities, without any change in the aggregate price to be paid therefor. The determination by the Board as to the terms of any of the foregoing adjustments shall be conclusive and binding. Notwithstanding the foregoing, an Approved Transaction or Control Purchase shall not be governed by this Section 6(m) but shall be governed by Section 6(n). (2) The foregoing adjustments shall be made by the Committee or by the applicable terms of any assumption or substitution document. (3) With respect to the foregoing adjustments, the number of shares subject to an Option shall always be a whole number. The Committee may, if deemed appropriate, provide for a cash payment to any Optionee in connection with any adjustment made pursuant to this Section 6(m). (4) The grant of an Option shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge, consolidate or dissolve, to liquidate or to sell or transfer all or any part of its business or assets. (k) APPROVED TRANSACTIONS; CONTROL PURCHASE. (1) Except as otherwise provided in this instrument that evidences an Option, in the event of any Approved Transaction or Control Purchase, each Option that is at the time outstanding shall automatically accelerate so that each such Option shall, immediately prior to the specified effective date for the Approved Transaction or Control Purchase, become 100% vested and exercisable. (2) Such Option shall not so accelerate, however, if and to the extend that such Option is, in connection with the Approved Transaction or Control Purchase, either to be assumed by the successor corporation or parent thereof (the "Successor Corporation") or to be replaced with a comparable option for the purchase of shares of capital stock of the Successor Corporation. The determination of option comparability shall be made by the Board, and its determination shall be conclusive and binding. (3) All such Options shall terminate and cease to remain outstanding immediately following the consummation of the Approved Transaction or Control Purchase, except to the extent assumed by the Successor Corporation. 12 (4) The acceleration will not occur if, in the opinion of the Company's outside accountants, it would render unavailable "pooling of interest" accounting for an Approved Transaction or Control Purchase that would otherwise qualify for such accounting treatment. (o) FURTHER ADJUSTMENTS OF AWARDS. Subject to the other provisions of Section 6, the Board shall have the discretion, exercisable at any time before a sale, merger, consolidation, reorganization, liquidation or change in control of the Company, as defined by the Board, to take such further action as it determines to be necessary or advisable, and fair and equitable to the Optionees, with respect to Options. Such authorized action may include (but shall not be limited to) establishing, amending or waiving the type, terms, conditions or duration of, or restrictions on, Options so as to provide for earlier, later, extended or additional time for exercise, lifting restrictions and other modifications, and the Board may take such actions with respect to all Optionees, to certain categories of Optionees or only to individual Optionees. The Board may take such action before or after granting Options to which the action relates and before or after any public announcement with respect to such sale, merger, consolidation, reorganization, liquidation or change in control that is the reason for such action. 7. EFFECTIVE DATE; TERM. The Plan shall be effective at the time specified in the resolutions of the Board adopting the Plan (the "Effective Date"). Options may be granted by the Committee or Executive Officer from time to time thereafter until the tenth anniversary of the Effective Date. Termination of the Plan shall not terminate any Option granted prior to such termination. Issuance of Non-Qualified Stock Options under the Plan shall be subject to the requirement of RCW 21.20.310(10) that the Administrator of Securities of the Department of Financial Institutions of the State of Washington be provided with notification of the adoption of the Plan. No Non-Qualified Stock Option shall be granted hereunder until this notification requirement has been satisfied. Issuance of Incentive Stock Options under the Plan within twelve (12) months after the Effective Date shall be subject to the approval of the Plan by the shareholders of the Company at a duly held meeting of shareholders at which a majority of all outstanding voting stock of the Company is represented in person or by proxy. The approval required shall be a majority of the votes cast on the proposal to approve the Plan. Such approval may also be provided pursuant to a written consent in lieu of such meeting. No Incentive Stock Option granted hereunder shall be exercisable until this approval requirement has been satisfied. If this requirement is not satisfied within twelve (12) months after the Effective Date, then, notwithstanding any contrary provision in the Plan (a) no Incentive Stock Options may thereafter be granted under the Plan, and (b) each Incentive Stock Option granted under the Plan prior thereto shall automatically be deemed to be a Non-Qualified Stock Option (except to the extent the Agreement evidencing the Option expressly provides otherwise). 13 8. MARKET STANDOFF. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, a person shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any shares issued pursuant to an Option granted under the Plan without the prior written consent of the Company or its underwriters. Such limitations shall be in effect for such period of time as may be requested by the Company or such underwriters and agreed to by the Company's officers and directors with respect to their shares; provided, however, that in no event shall such period exceed 180 days. The limitations of this paragraph shall in all events terminate two years after the effective date of the Company's initial public offering. Holders of shares issued pursuant to an Option granted under the Plan shall be subject to the market standoff provisions of this paragraph only if the officers and directors of the Company are also subject to similar arrangements. In the event of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the Company's outstanding Common Stock effected as a class without the Company's receipt of consideration, then an new, substituted or additional securities distributed with respect to the purchased shares shall immediately subject to the provisions of this Section 8, to the same extent the purchased shares are at such time covered by such provisions. In order to enforce the limitations of this Section 8, the Company may impose stop-transfer instructions with respect to the purchased shares until the end of the applicable standoff period. 9. NO OBLIGATIONS TO EXERCISE OPTION. The grant of an Option shall impose no obligation upon the Optionee to exercise such Option. 10. NO RIGHT TO OPTIONS OR TO EMPLOYMENT. Whether or not any Options are to be granted under the Plan shall be exclusively within the discretion of the Committee, and nothing contained in the Plan shall be construed as giving any person any right to participate under the Plan. The grant of an Option to any Optionee shall in no way constitute any form of agreement or understanding binding on the Company or any Related Corporation, express or implied, that the Company or such Related Corporation will employ or contract with such Optionee for any length of time, nor shall it interfere in any way with the Company's or, where applicable, a Related Corporation's right to terminate such Optionee's employment at any time, which right is hereby reserved. 11. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of Common Stock issued upon the exercise of Options shall be used for general corporate purposes, unless otherwise directed by the Board. 14 12. INDEMNIFICATION OF COMMITTEE. In addition to all other rights of indemnification they may have by virtue of being a member of the Board or an executive officer of the Company, members of the Committee and the Executive Officer shall be indemnified by the Company for all reasonable expenses and liabilities of any type or nature, including attorneys' fees, incurred in connection with any action, suit or proceeding to which they or any of them are a party by reason of, or in connection with, the Plan or any Option granted under the Plan, and against all amounts paid by them in settlement thereof (provided that such settlement is approved by independent legal counsel selected by the Company), except to the extent that such expenses relate to matters for which it is adjudged that such Committee member or Executive Officer is liable for willful misconduct; PROVIDED, HOWEVER, that within fifteen (15) days after the institution of any such action, suit or proceeding, the Committee member or Executive Officer involved therein shall, in writing, notify the Company of such action, suit or proceeding, so that the Company may have the opportunity to make appropriate arrangements to prosecute or defend the same. 13. SHAREHOLDERS AGREEMENT. Unless the Agreement evidencing an Option expressly provides otherwise, each Optionee may be required, as a condition to the issuance of any shares of Common Stock that such Optionee acquires upon the exercise of the Option, to execute and deliver to the Company a shareholders agreement in such form as may be required by the Company at the time of such exercise, or a counterpart thereof, together with, unless the Optionee is unmarried, a spousal consent in the form required thereby, unless the Optionee has previously executed and delivered such documents and they are in effect at the time of exercise and apply by their terms to the shares to be issued. 14. SEPARABILITY. With respect to Incentive Stock Options, if the Plan does not contain any provision required to be included herein under Section 422 of the Code, such provision shall be deemed to be incorporated herein with the same force and effect as if such provision had been set out in full herein; PROVIDED, HOWEVER, that to the extent any Option that is intended to qualify as an Incentive Stock Option cannot so qualify, the Option, to that extent, shall be deemed to be a Non-Qualified Stock Option for all purposes of the Plan. 15. NON-EXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board nor the submission of the Plan to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options and the awarding of stock and cash otherwise than pursuant to the Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 16. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION. By acceptance of an Option, unless otherwise provided in the Agreement evidencing the Option, the Optionee with respect to such Option shall be deemed to have agreed that the Option is special incentive compensation that will not be taken into account, in any manner, as salary, compensation or bonus in determining the amount of any payment or other benefit under any pension, retirement or other employee benefit plan, program or policy of the Company or any of its affiliates. 15 17. AMENDMENT OF PLAN. The Board may, at any time, modify, amend or terminate the Plan or modify or amend any Option granted pursuant to the Plan, including, without limitation, such modifications or amendments as are necessary to maintain compliance with applicable statutes, rules or regulations; PROVIDED, HOWEVER, that no amendment with respect to an outstanding Option which has the effect of reducing the benefits afforded to the Optionee shall be made over the objection of such Optionee; FURTHER PROVIDED, that the events triggering acceleration of vesting of an outstanding Option may be modified, expanded or eliminated without the consent of the Optionee. The Board may condition the effectiveness of any such amendment on the receipt of shareholder approval at such time and in such manner as the Committee may consider necessary for the Company to comply with or to avail the Company, the Optionees or both of the benefits of any securities, tax, market listing or other administrative or regulatory requirement which the Board determines to be desirable. Without limiting the generality of the foregoing, the Board may modify grants to persons who are eligible to receive Options under the Plan who are foreign nationals or employed outside the United States to recognize differences in local law, tax policy or custom. Date Approved by the Board of Directors of Company: June 28, 1999 Date Approved by the Shareholders of Company: ____________________, 1999 16 EX-10.2 6 EXHIBIT 10.2 EXHIBIT 10.2 GNU GENERAL PUBLIC LICENSE Version 2, June 1991 Copyright (C) 1989, 1991 Free Software Foundation, Inc. Temple Place, Suite 330, Boston, MA 02111-1307 USA Everyone is permitted to copy and distribute verbatim copies of this license document, but changing it is not allowed. Preamble The licenses for most software are designed to take away your freedom to share and change it. By contrast, the GNU General Public License is intended to guarantee your freedom to share and change free software--to make sure the software is free for all its users. This General Public License applies to most of the Free Software Foundation's software and to any other program whose authors commit to using it. (Some other Free Software Foundation software is covered by the GNU Library General Public License instead.) You can apply it to your programs, too. When we speak of free software, we are referring to freedom, not price. Our General Public Licenses are designed to make sure that you have the freedom to distribute copies of free software (and charge for this service if you wish), that you receive source code or can get it if you want it, that you can change the Software or use pieces of it in new free programs; and that you know you can do these things. To protect your rights, we need to make restrictions that forbid anyone to deny you these rights or to ask you to surrender the rights. These restrictions translate to certain responsibilities for you if you distribute copies of the software, or if you modify it. For example, if you distribute copies of such a program, whether gratis or for a fee, you must give the recipients all the rights that you have. You must make sure that they, too, receive or can get the source code. And you must show them these terms so they know their rights. We protect your rights with two steps: (1) copyright the software, and (2) offer you this license which gives you legal permission to copy, distribute and/or modify the software. Also, for each author's protection and ours, we want to make certain that everyone understands that there is no warranty for this free software. If the software is modified by someone else and passed on, we want its recipients to know that what they have is not the original, so that any problems introduced by others will not reflect on the original authors' reputations. Finally, any free program is threatened constantly by software patents. We wish to avoid the danger that redistributors of a free program will individually obtain patent licenses, in effect making the program proprietary. To prevent this, we have made it clear that any patent must be licensed for everyone's free use or not licensed at all. The precise terms and conditions for copying, distribution and modification follow. GNU GENERAL PUBLIC LICENSE TERMS AND CONDITIONS FOR COPYING, DISTRIBUTION AND MODIFICATION This License applies to any program or other work which contains a notice placed by the copyright holder saying it may be distributed under the terms of this General Public License. The "Program", below, refers to any such program or work, and a "work based on the Program" means either the Program or any derivative work under copyright law: that is to say, a work containing the Program or a portion of it, either verbatim or with modifications and/or translated into another language. (Hereinafter, translation is included without limitation in the term "modification".) Each licensee is addressed as "you". Activities other than copying, distribution and modification are not covered by this License; they are outside its scope. The act of running the Program is not restricted, and the output from the Program is covered only if its contents constitute a work based on the Program (independent of having been made by running the Program). Whether that is true depends on what the Program does. 1. You may copy and distribute verbatim copies of the Program's source code as you receive it, in any medium, provided that you conspicuously and appropriately publish on each copy an appropriate copyright notice and disclaimer of warranty; keep intact all the notices that refer to this License and to the absence of any warranty; and give any other recipients of the Program a copy of this License along with the Program. You may charge a fee for the physical act of transferring a copy, and you may at your option offer warranty protection in exchange for a fee. 2. You may modify your copy or copies of the Program or any portion of it, thus forming a work based on the Program, and copy and distribute such modifications or work under the terms of Section 1 above, provided that you also meet all of these conditions: a) You must cause the modified files to carry prominent notices stating that you changed the files and the date of any change. b) You must cause any work that you distribute or publish, that in whole or in part contains or is derived from the Program or any part thereof, to be licensed as a whole at no charge to all third parties under the terms of this License. c) If the modified program normally reads commands interactively when run, you must cause it, when started running for such interactive use in the most ordinary way, to print or display an announcement including an appropriate copyright notice and a notice that there is no warranty (or else, saying that you provide a warranty) and that users may redistribute the program under these conditions, and telling the user how to view a copy of this License. (Exception: if the Program itself is interactive but does not normally print such an announcement, your work based on the Program is not required to print an announcement.) These requirements apply to the modified work as a whole. If identifiable sections of that work are not derived from the Program,and can be reasonably considered independent and separate works in themselves, then this License, and its terms, do not apply to those sections when you distribute them as separate works. But when you distribute the same sections as part of a whole which is a work based on the Program, the distribution of the whole must be on the terms of this License, whose permissions for other licensees extend to the entire whole, and thus to each and every part regardless of who wrote it. Thus, it is not the intent of this section to claim rights or contest your rights to work written entirely by you; rather, the intent is to exercise the right to control the distribution of derivative or collective works based on the Program. In addition, mere aggregation of another work not based on the Program with the Program (or with a work based on the Program) on a volume of a storage or distribution medium does not bring the other work under the scope of this License. 3. You may copy and distribute the Program (or a work based on it, under Section 2) in object code or executable form under the terms of Sections 1 and 2 above provided that you also do one of the following: a) Accompany it with the complete corresponding machine-readable source code, which must be distributed under the terms of Sections 1 and 2 above on a medium customarily used for software interchange; or, b) Accompany it with a written offer, valid for at least three years, to give any third party, for a charge no more than your cost of physically performing source distribution, a complete machine-readable copy of the corresponding source code, to be distributed under the terms of Sections 1 and 2 above on a medium customarily used for software interchange; or, c) Accompany it with the information you received as to the offer to distribute corresponding source code. (This alternative is allowed only for noncommercial distribution and only if you received the program in object code or executable form with such an offer, in accord with Subsection b above.) The source code for a work means the preferred form of the work for making modifications to it. For an executable work, complete source code means all the source code for all modules it contains, plus any associated interface definition files, plus the scripts used to control compilation and installation of the executable. However, as a special exception, the source code distributed need not include anything that is normally distributed (in either source or binary form) with the major components (compiler, kernel, and so on) of the operating system on which the executable runs, unless that component itself accompanies the executable. If distribution of executable or object code is made by offering access to copy from a designated place, then offering equivalent access to copy the source code from the same place counts as distribution of the source code, even though third parties are not compelled to copy the source along with the object code. 4. You may not copy, modify, sublicense, or distribute the Program except as expressly provided under this License. Any attempt otherwise to copy, modify, sublicense or distribute the Program is void, and will automatically terminate your rights under this License. However, parties who have received copies, or rights, from you under this License will not have their licenses terminated so long as such parties remain in full compliance. 5. You are not required to accept this License, since you have not signed it. However, nothing else grants you permission to modify or distribute the Program or its derivative works. These actions are prohibited by law if you do not accept this License. Therefore, by modifying or distributing the Program (or any work based on the Program), you indicate your acceptance of this License to do so, and all its terms and conditions for copying, distributing or modifying the Program or works based on it. 6. Each time you redistribute the Program (or any work based on the Program), the recipient automatically receives a license from the original licensor to copy, distribute or modify the Program subject to these terms and conditions. You may not impose any further restrictions on the recipients' exercise of the rights granted herein. You are not responsible for enforcing compliance by third parties tothis License. 7. If, as a consequence of a court judgment or allegation of patent infringement or for any other reason (not limited to patent issues), conditions are imposed on you (whether by court order, agreement or otherwise) that contradict the conditions of this License, they do not excuse you from the conditions of this License. If you cannot distribute so as to satisfy simultaneously your obligations under this License and any other pertinent obligations, then as a consequence you may not distribute the Program at all. For example, if a patent license would not permit royalty-free redistribution of the Program by all those who receive copies directly or indirectly through you, then the only way you could satisfy both it and this License would be to refrain entirely from distribution of the Program. If any portion of this section is held invalid or unenforceable under any particular circumstance, the balance of the section is intended to apply and the section as a whole is intended to apply in othercircumstances. It is not the purpose of this section to induce you to infringe any patents or other property right claims or to contest validity of any such claims; this section has the sole purpose of protecting the integrity of the free software distribution system, which is implemented by public license practices. Many people have made generous contributions to the wide range of software distributed through that system in reliance on consistent application of that system; it is up to the author/donor to decide if he or she is willing to distribute software through any other system and a licensee cannot impose that choice. This section is intended to make thoroughly clear what is believed to be a consequence of the rest of this License. 8. If the distribution and/or use of the Program is restricted in certain countries either by patents or by copyrighted interfaces, the original copyright holder who places the Program under this License may add an explicit geographical distribution limitation excluding those countries, so that distribution is permitted only in or among countries not thus excluded. In such case, this License incorporates the limitation as if written in the body of this License. 9. The Free Software Foundation may publish revised and/or new versions of the General Public License from time to time. Such new versions will be similar in spirit to the present version, but may differ in detail to address new problems or concerns. Each version is given a distinguishing version number. If the Program specifies a version number of this License which applies to it and "any later version", you have the option of following the terms and conditions either of that version or of any later version published by the Free Software Foundation. If the Program does not specify a version number of this License, you may choose any version ever published by the Free Software Foundation. 10. If you wish to incorporate parts of the Program into other free programs whose distribution conditions are different, write to the author to ask for permission. For software which is copyrighted by the Free Software Foundation, write to the Free Software Foundation; we sometimes make exceptions for this. Our decision will be guided by the two goals of preserving the free status of all derivatives of our free software and of promoting the sharing and reuse of software generally. NO WARRANTY 11. Because the program is licensed free of charge, there is no warranty for the program, to the extent permitted by applicable law. except when otherwise stated in writing the copyright holders and/or other parties provide the program "as is" without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranties of merchantability and fitness for a particular purpose. the entire risk as to the quality and performance of the program is with you. Should the program prove defective, you assume the cost of all necessary servicing, repair or correction. 12. In no event unless required by applicable law or agreed to in writing will any copyright holder, or any other party who may modify and/or redistribute the program as permitted above, be liable to you for damages, including any general, special, incidental or consequential damages arising out of the use or inability to use the program (including but not limited to loss of data or data being rendered inaccurate or losses sustained by you or third parties or a failure of the program to operate with any other programs), even if such holder or other party has been advised of the possibility of such damages. END OF TERMS AND CONDITIONS How to Apply These Terms to Your New Programs If you develop a new program, and you want it to be of the greatest possible use to the public, the best way to achieve this is to make it free software which everyone can redistribute and change under these terms. To do so, attach the following notices to the program. It is safest to attach them to the start of each source file to most effectively convey the exclusion of warranty; and each file should have at least the "copyright" line and a pointer to where the full notice is found. < one line to give the program's name and a brief idea of what it does. > Copyright (C) 19yy < name of author > This program is free software; you can redistribute it and/or modify it under the terms of the GNU General Public License as published by the Free Software Foundation; either version 2 of the License, or (at your option) any later version. This program is distributed in the hope that it will be useful, but WITHOUT ANY WARRANTY; without even the implied warranty of MERCHANTABILITY or FITNESS FOR A PARTICULAR PURPOSE. See the GNU General Public License for more details. You should have received a copy of the GNU General Public License along with this program; if not, write to the Free Software Foundation, Inc., 59 Temple Place, Suite 330, Boston, MA 02111-1307 USA Also add information on how to contact you by electronic and paper mail. If the program is interactive, make it output a short notice like this when it starts in an interactive mode: Gnomovision version 69, Copyright (C) 19yy name of author Gnomovision comes with ABSOLUTELY NO WARRANTY; for details type `show w'. This is free software, and you are welcome to redistribute it under certain conditions; type `show c' for details. The hypothetical commands `show w' and `show c' should show the appropriate parts of the General Public License. Of course, the commands you use may be called something other than `show w' and `show c'; they could even be mouse-clicks or menu items--whatever suits your program. You should also get your employer (if you work as a programmer) or your school, if any, to sign a "copyright disclaimer" for the program, if necessary. Here is a sample; alter the names: Yoyodyne, Inc., hereby disclaims all copyright interest in the program `Gnomovision' (which makes passes at compilers) written by James Hacker. < signature of Ty Coon >, 1 April 1989 Ty Coon, President of Vice This General Public License does not permit incorporating your program into proprietary programs. If your program is a subroutine library, you may consider it more useful to permit linking proprietary applications with the library. If this is what you want to do, use the GNU Library General Public License instead of this License. EX-10.3 7 EXHIBIT 10.3 LINEO, INC. OEM LICENSE AGREEMENT NO. LN 0201 (AMENDED AND RESTATED 3/20/2000) This OEM License Agreement (this "Agreement") is entered as of the Effective Date listed on Schedule A between Lineo, Inc. ("Lineo") and the Original Equipment Manufacturer identified below ("OEM" or "Licensee"), governing OEM's licensed rights to use and reproduce software, related products and documentation proprietary to Lineo, and consists of and incorporates the following: THIS SIGNATURE PAGE SCHEDULE A - SCOPE, GENERAL TERMS AND LICENSE FEES SCHEDULE B - ADDITIONAL TERMS AND EXCEPTIONS SCHEDULE C - STANDARD TERMS AND CONDITIONS APPENDIX I TO SCHEDULE C - END USER LICENSE AGREEMENT SCHEDULE D - MAINTENANCE, SUPPORT AND TRAINING AGREEMENT This Agreement amends, restates and supersedes that certain OEM License Agreement first executed between the parties on February 17, 2000. 1. LINEO ADDRESS AND CONTACT: Lineo, Inc. Attn: Legal 390 South 400 West Lindon, UT 84042 Voice: 801-426-5001 Fax: 801-426-6166 2. OEM ADDRESS AND CONTACT: DaiShin Information & Communications CO. Attn: Oneil Chung 395-68, Shindaebang-Dong Dongjak-ku, Seoul, Korea 156-710 Voice: 82-2-3284-5008 Fax: 82-2-3284-5015 By signing below, the parties acknowledge their agreement with the terms and conditions of this Agreement, and each signatory represents and certifies that he or she is authorized to sign on behalf of and to bind each to the respective signatories to all of the terms and conditions of this Agreement: LINEO, INC. DAISHIN INFORMATION & COMMUNICATIONS CO. By: /s/ Brad Walters By: /s/ Jae-Won Lee -------------------------------- ----------------------------------- Printed Name: Brad Walters Printed Name: Jae-Won Lee ----------------------- -------------------------- Title: Vice President Title: CEO & President ------------------------------ --------------------------------- Date: 2/17/00 Date: 2/17/00 ------------------------------- ---------------------------------- OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 1 of 17 - ---------------------------------- * Confidential Treatment Requested LINEO, INC. OEM LICENSE AGREEMENT SCHEDULE A SCOPE, GENERAL TERMS AND LICENSE FEES 1. EFFECTIVE DATE: 15 MARCH 2000 ----------------- 2. LICENSED PRODUCT: Lineo's Embedix(TM) binary software solution to be bundled with OEM's banking/stock trading devices and electronic transaction system products (sometimes referred to as "OEM Products" or "OEM Hardware Platforms"), together with associated Documentation. 3. TERRITORY: Worldwide. 4. LICENSE TERM: The License Term is perpetual for the total number of units (* total) specified in this Agreement, subject to terms governing termination as set forth in Schedule C, Standard Terms and Conditions. 5. FEES AND PAYMENT: OEM shall pay to Lineo a nonrefundable license fee of $*, against which it shall be entitled to up to * licenses (or units) of Embedix(TM) binary software solution, at preferred pricing of $* USD per license. $ * USD will be due and payable on the Effective Date of this Agreement $ * USD will be due and payable within 30 days of the Effective Date of this Agreement. 6. MAINTENANCE/SERVICE AND TRAINING FEE: In addition to the license fee payable as set forth above, OEM shall pay to Lineo such fees for maintenance, service and training as are set forth in Schedule D hereto, provided that such Schedule D is separately signed by the parties. These fees will be due and payable 30 days from the Effective Date of this Agreement unless otherwise stated in this Agreement. - ---------------------------------- * Confidential Treatment Requested OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 2 of 17 LINEO, INC. OEM LICENSE AGREEMENT SCHEDULE B ADDITIONAL TERMS AND EXCEPTIONS A. The Standard Terms and Conditions set forth in Schedule C shall apply, except that Sections 4(b) and 9(a) of Schedule C shall be superseded and replaced as follows: 4(b) License Fees under this Agreement are due and payable pursuant to Section 5 of Schedule A, which supersedes the Standard Terms and Conditions set forth in Section 4(b) of Schedule C. OEM is granted no rights hereunder to licensed copies of the Licensed Products beyond * units. 9(a) License Term under this Agreement is as described under Section 4 of Schedule A, which supersedes the Standard Terms and Conditions set forth in Section 9(a) of Schedule C. B. Further development or adaptation of the Licensed Product for OEM's products, and product maintenance, service and training are covered, if at all, by separate agreements between the parties. - ---------------------------------- * Confidential Treatment Requested OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 3 of 17 LINEO, INC. OEM LICENSE AGREEMENT SCHEDULE C STANDARD TERMS AND CONDITIONS The following standard terms and conditions apply: 1. DEFINITION. For purposes of this Agreement, the following definitions apply to the respective capitalized terms: a. AGREEMENT means this Agreement, consisting of the Signature Page, Schedules A, B, C and D, and Appendix I to Schedule C, and any additional documents attached and initialed by the parties. b. CONFIDENTIAL INFORMATION means all business, marketing and technical information of each party considered by each to be trade secrets or otherwise valuable proprietary information, designated or marked as such by either. Confidential Information shall not include information that (i) is now or later becomes generally known to the computer industry (other than as a result of a breach of this Agreement); (ii) is independently developed by the receiving party; or (iii) the receiving party lawfully obtains from any third party without restrictions on use or disclosure. c. DERIVATIVE WORKS means a revision, modification, translation, abridgment, condensation or expansion of Lineo Products or Documentation or any form in which Lineo Products or Documentation may be recast, transferred, or adapted, which, if prepared without the consent of Lineo, would be a copyright infringement. d. DOCUMENTATION means those software user manuals, reference manuals and installation guides, or portions thereof (if any), which are distributed in conjunction with the Licensed Product set forth in Schedule A. e. END USER means an entity that acquires the Licensed Product for Internal Use and is not an affiliate of OEM's enterprise. "End User" does not include a Reseller. f. INTERNAL USE means use for purposes that do not directly produce revenue for the user. g. LICENSED PRODUCT means the binary code version of the Lineo's Licensed Product identified in Schedule A, including updates thereof (if any). Lineo reserves the right at any time to make changes to any Licensed Product, including without limitation changes required (i) for security, or (ii) to facilitate performance in accordance with specifications. h. MARKS means Lineo's trademarks, service marks, logos, designations and insignias. i. OEM PRODUCTS refers to the specific hardware manufactured or produced by OEM with which the Licensed Product is to be bundled or on which the Licensed Product is to be embedded to create a single product offering. j. RESELLER refers broadly to any third party VAD, VAR, distributor or other reseller to or through which OEM is licensed under this Agreement to distribute copies of the Licensed Product for marketing and distribution to End-Users, directly or through other third parties. 2. CONTRACT RESPONSIBILITIES: Subject to the terms and conditions of this Agreement, the parties have the following respective contractual responsibilities: a. LINEO'S RESPONSIBILITIES: Lineo shall: 1) Grant OEM the rights and licenses to the Licensed Product as set forth in Section 3; 2) Provide such technical support as may be agreed and set forth in Schedule A; 3) Warrant the Licensed Product as detailed in Section 7 below; and 4) Indemnify OEM as set forth in Section 8(a) below. b. OEM'S RESPONSIBILITIES: OEM shall: OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 4 of 17 1) Market, sell and deliver units of the Licensed Product embedded or incorporated with OEM's Products as permitted under this Agreement within the Territory, as identified in Schedule A; 2) Include with all sales and distributions of OEM Hardware Platforms incorporating or bundled with the Licensed Product an acceptable End-User License Agreement governing End-User use of the Licensed Product; 3) Protect Lineo's proprietary rights in the Licensed Product as set forth in Section 5 hereof; and 4) Make all payments to Lineo as required by Section 4 and Schedule A hereof; and 5) Indemnify Lineo as set forth in Section 8(b) below. 6) Perform all other obligations required of OEM under this Agreement. 3. GRANT OF LICENSES. Subject to the terms and conditions of this Agreement and for the term hereof, Lineo hereby grants to OEM the following rights and licenses: a. LICENSED PRODUCT AND DOCUMENTATION. Lineo hereby grants to OEM a nonexclusive and nontransferable right and license (i) to use and reproduce the Licensed Product and the Documentation on any tangible media and (ii) to market and distribute copies of the Licensed Product (in binary code only), with copies of the Documentation, to End Users, directly or through Resellers. Unless otherwise specifically provided in Schedules A or B, OEM's rights to reproduce the Licensed Product are limited to binary code. Unless otherwise specifically provided in Schedules A or B, OEM's rights of distribution and sale are limited to Licensed Product bundled with or embedded in OEM's Product(s), and OEM shall have no rights to market or distribute copies of the Licensed Product or Documentation independent of OEM's Products. OEM shall not contract reproduction of the Licensed Product and Documentation to third parties without Lineo's express written consent, which consent shall not unreasonably be withheld. OEM may grant Resellers the sublicensed right to distribute copies of OEM Hardware Platforms incorporating or bundled with the Licensed Product through other Resellers, regardless of tier, provided that such sublicenses are consistent with the terms hereof and are no less restrictive than the license granted herein. b. TRADEMARKS. Lineo hereby grants to OEM the nonexclusive, nontransferable right and license to use and display Lineo's Marks solely in connection with and only to the extent reasonably necessary for the marketing, distribution and support of OEM's Product during the term of this Agreement, provided that any such use and display shall comply with Lineo's then current trademark usage policies. Upon expiration or termination of this Agreement, OEM agrees to cease all display, advertising and use of any and all Lineo Marks. In the case of bundled products, OEM agrees not to alter, erase or overprint any notice provided by Lineo and not to attach any additional trademarks without the prior written consent of Lineo or affix any Lineo Marks to any non-Lineo product. OEM recognizes Lineo's ownership and title to the Marks and the goodwill attaching to said Marks. OEM agrees not to use, employ or attempt to register any trademarks or Trade Names that are confusingly similar to Lineo's Marks or Trade Names. c. THIRD PARTY LICENSE. If all or any part of the Licensed Product or Updates delivered to OEM has been licensed to Lineo by a third party software supplier then, notwithstanding anything to the contrary contained in this Agreement, OEM is granted a sublicense to the third party software subject to the same terms and conditions as those contained in the Agreement between Lineo and such third party software supplier. Lineo reserves the right to substitute any third party software in the Licensed Product as long as the new third party software does not materially affect the functionality of the Licensed Product. Lineo hereby represents the current release of the Licensed Product contains no third party software which would require OEM to agree to any terms and conditions in addition to those set forth in this Agreement. Certain components of the Licensed Product are components licensed under the GNU General Public License (version 2), which Lineo supports. OEM may obtain a copy of the GNU General Public License at www.gnudocs.com/GNU/COPYING. Lineo will provide source code for any of the components of the Licensed Product licensed under the GNU General Public License. To obtain such source code, send email request to embedix-support@lineo.com. OEM's rights to obtain source code to those elements or components of the Licensed Product that are subject to the GNU General Public License shall not be construed to create or imply a right to any element or component of the Licensed Product that is proprietary to Lineo, except as and to the extent that such rights are expressly granted under this License Agreement. d. PRODUCT TAMPERING. Unless and to the specific extent that source code rights are specifically granted in Schedules A or B, OEM shall have no rights directly or indirectly to de-compile, reverse engineer, reverse compile, modify or perform any similar type of operation on the Licensed Product, or any portion thereof, or to prepare any other form of Derivative Works. All Derivative Works, whether or not authorized by Lineo, shall remain the sole property of Lineo. 4. PRICING AND PAYMENT a. PRICING AND LICENSE FEES. OEM shall pay to Lineo the Fees set out in Schedule A as required therein. Prices are exclusive of all applicable taxes. OEM agrees to pay all taxes associated with the marketing, sublicensing, distribution and transfer of all Licensed Products, whether bundled with or embedded with OEM Products, including but not limited to sales, use, excise, added value and similar OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 5 of 17 taxes and all customs, duties or governmental impositions, but excluding taxes on Lineo's net income. Any tax or duty Lineo may be required to collect or pay upon the marketing or transfer of the Licensed Product shall be paid by OEM, and such sums shall be due and payable to Lineo upon delivery. If OEM claims a tax exemption, OEM must provide Lineo with valid tax exemption certificates. b. PAYMENT AND REPORTING. License fees will accrue in the applicable corresponding quantity upon: (a) the initial date of OEM's Internal Use of a Licensed Product; (b) distribution by OEM of a copy of a Licensed Product in any form (including demonstration versions or prototypes of OEM's Product) to a Reseller or End User; or (c)(if rights to do so are specifically granted in Schedule A) OEM's authorization to a Reseller to increase the authorized number of copies. OEM shall pay Lineo License Fees accrued during each calendar month, together with any other fees accruing over the same period, within 30 days following the date of invoice for such month. Payment shall be accompanied by a written report detailing the quantity of bundled or embedded Licensed Product shipped by OEM in the prior month and showing calculation of all fees payable thereon. All payments shall be made in U.S. dollars, (i) at Lineo's address as indicated in this Agreement or at such other address as Lineo may from time to time indicate by proper notice hereunder or (ii) by wire transfer to a bank and account number to be designated by Lineo. Royalty reporting requirements shall not apply when licenses are pre-paid. c. INTEREST shall accrue on any unpaid payment or payment balance at an annual rate of 18% per annum, or, if lower, at the highest lawful rate, calculated from the date the payment is due to the date it is received by Lineo. Arrearage in excess of $5,000 not paid within 10 days of written demand following the date payment is due shall be grounds for Lineo's termination of this Agreement at Lineo's option. d. RECORDS EXAMINATIONS. OEM agrees to allow Lineo to examine OEM's records to test OEM's compliance with this Agreement. Any examination will be conducted only by an authorized representative of Lineo, and will occur during regular business hours at OEM's offices and will not interfere unreasonably with OEM's business activities. Examinations will be made no more frequently than quarterly, and Lineo will give OEM 15 business days or more prior written notice of the date of the examination and the name of Lineo's authorized representative who will be conducting the examination. The audit will be conducted at Lineo's expense unless the results of such audit establish that inaccuracies in the quarterly reports have resulted in underpayment to Lineo of more than 5% of the amount due in any quarter, in which case OEM shall pay all amounts determined to be due and shall bear the expenses of the audit. All information obtained by Lineo's authorized representative conducting the audit will be maintained confidential by the representative. The examiner will give OEM and Lineo an examination report containing only the information necessary to indicate compliance or non-compliance with this Agreement. 5. LINEO'S INTELLECTUAL PROPERTY RIGHTS a. ACKNOWLEDGMENT OF LINEO'S RIGHTS. For purposes of this Agreement, and with the exception only of those elements (if any) of the Licensed Product specifically identified and designated by Lineo as third-party software, OEM acknowledges and confirms Lineo's exclusive worldwide rights, including copyright in, and the validity of the Licensed Products (including, without limitation, all input/output and report formats, screen displays, menu features and overall structure, sequence and organization) and in the Marks. OEM agrees not to challenge or otherwise to interfere with the use and ownership by Lineo of the Licensed Product or any of the intellectual property rights associated with the Licensed Product or the Marks (hereinafter referred to collectively as "Lineo Intellectual Property"). OEM also shall not permit any personnel to remove any proprietary or other legends or restrictive notices contained or included in any materials supplied or approved by Lineo, and OEM shall not permit any personnel to copy or modify or reverse-engineer any materials, including the Licensed Product provided by Lineo, except as and to the extent specifically permitted under this Agreement. Title to every copy of the Licensed Product is vested and shall remain in Lineo, or, as applicable, in such third party from whom Lineo holds rights of license and distribution, and title does not pass with any license under this Agreement. b. END USER LICENSE AGREEMENTS. OEM agrees to exercise commercially reasonable efforts to ensure that each End User receiving the Licensed Product through OEM or Resellers understands, and agrees to be bound by, an appropriate End User License Agreement that is no less restrictive in its application to the Licensed Product than the then-current form of Lineo's End User License Agreement, the most current version of which is attached as Appendix I hereto. c. OEM'S WAIVER OF RIGHTS. OEM further acknowledges that it has no rights of any kind anywhere in the world in any of Lineo's Intellectual Property other than those limited rights granted by this Agreement. Accordingly, OEM waives (a) all claims of any right by OEM in any of the Lineo's Intellectual Property and (b) the right, if any, to file or own in its own name or in that of any designee, any application for registration of any trademark, copyright, patent, industrial design, trade secret or other intellectual property which forms part of Lineo's Intellectual Property, or to own any registration or patent resulting therefrom. In the event OEM, in any jurisdiction of the world, files such an application or obtains such a patent or registration in violation of this section, such application, registration or patent shall be deemed held in trust by OEM for Lineo and shall be assigned by OEM to Lineo without conditions and upon demand by Lineo. d. PRESERVATION AND SECURITY OF PROPRIETARY INFORMATION. OEM shall not sell, assign, lease, license, transfer or otherwise disclose the Licensed Product except as expressly authorized by this Agreement. OEM shall safeguard any and all copies of the Licensed Product against unauthorized disclosure, reproduction or tampering, and shall assist Lineo in the enforcement of Lineo's rights in the event of unauthorized disclosure by any person under OEM's control or service. OEM shall also ensure that Licensor's Lineo's copyright, trademark and patent notices, which may from time to time be updated, are prominently displayed on all copies of OEM's Products and documentation containing the Licensed Product. OEM shall not remove or obscure any copyright, trademark, patent or other proprietary OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 6 of 17 rights notice already present on any of the Licensed Products or Documentation. The notice of Lineo's intellectual property rights in the Licensed Product shall read as follows: "Licensed Software (C)Lineo, Inc.1999-2000, all rights reserved." e. GOODWILL. To protect and preserve the reputation and goodwill of Lineo and of the Licensed Product, OEM shall (1) avoid deceptive, misleading or unethical practices that are or might be detrimental to Lineo, the Licensed Product or the public, including any disparagement of Lineo or the Licensed Product; (2) make no false or misleading representations with regard to Lineo or the Licensed Product; (3) refrain from publishing or employing any misleading or deceptive advertising material reflecting upon Lineo or the Licensed Product; (4) refrain from making any representations, warranties or guarantees to Resellers or End Users or to the trade with respect to the specifications, features or capabilities of the Licensed Program that are inconsistent with the Documentation and marketing literature distributed by Lineo, including all warranties and disclaimers contained in such literature; (5) not distribute for any purpose any marketing materials, packaging or other material bearing Lineo Marks which have not been first approved by Lineo; and (6) enter into agreements for marketing and distribution of OEM's Product bearing or bundled with the Licensed Products only with such Resellers who have agreed to be bound by the foregoing terms as part of the applicable Reseller agreement. f. THIRD-PARTY REQUIREMENTS. In the event that Lineo is required by a third party software supplier to cease and to cause its OEM's to cease reproduction and distribution of a particular revision of the Licensed Products, OEM agrees to comply herewith provided Lineo provides OEM with 30 days prior written notice and further provided that Lineo replaces such affected Lineo Product with a functionally equivalent Lineo Product as soon as commercially practicable. 6. CONFIDENTIAL INFORMATION. OEM shall not use or disclose any Confidential Information supplied by Lineo relating to the Licensed Product except as authorized in writing by Lineo in advance of such disclosure and shall safeguard all Confidential Information provided by Lineo to OEM under this Agreement in the same or more restrictive manner as OEM safeguards its own Confidential Information. 7. LIMITED WARRANTIES a. Lineo's sole warranty to OEM, for its benefit and for the benefit of its Reseller customers and any End User regarding the Licensed Product is that the Licensed Product will conform in material respects to Lineo's most current published specifications pertaining to the Licensed Product. b. The exclusive remedy of OEM, for itself or on behalf of any Reseller or End User customers, against Lineo for breach of the foregoing warranty shall be to seek repair or replacement of the defective Licensed Product element or unit at no charge to OEM. c. EXCEPT AS SET FORTH IN THIS SECTION 7, LINEO DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES AS TO THE SUITABILITY OR MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF THE LICENSED PRODUCT. IN NO EVENT SHALL LINEO BE LIABLE FOR ANY LOST OR ANTICIPATED PROFITS, OR ANY INCIDENTAL, EXEMPLARY, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), REGARDLESS OF WHETHER LINEO WAS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THE WARRANTY SET OUT IN THIS SECTION 7 SHALL BE NULL AND VOID IF THE LICENSED PRODUCT IS NOT USED IN A MANNER CONSISTENT WITH ITS INTENDED PURPOSES OR IS MODIFIED OR REPAIRED BY OEM IN A MANNER NOT AUTHORIZED BY THIS AGREEMENT OR IS MODIFIED OR REPAIRED BY AN END-USER. FURTHER, THE WARRANTY IN THIS SECTION 7 DOES NOT APPLY IF THE ERROR(S) ARE CAUSED BY ANY PROGRAMMING NOT CREATED BY LINEO, OR BY ANY REPAIRS, MODIFICATIONS OR ENHANCEMENT NOT MADE BY LINEO. d. OEM is not authorized to make any warranty commitment on Lineo's behalf, whether written or oral, other than those contained above. 8. INDEMNIFICATION a. BY LINEO. Lineo agrees to defend OEM and, to the extent of payments made by OEM under this Agreement, to indemnify and hold OEM harmless from any and all third-party claims, actions, demands, and related damages, liabilities, costs and expenses resulting from charges or allegations that the Licensed Product or Lineo Mark appropriately used by OEM infringes any U.S. trademark, U.S. copyright or other intellectual property right of any third party. OEM shall permit Lineo to replace or modify the Licensed Product affected so as to avoid infringement or to procure the right for OEM to continue use and marketing of such items. If neither alternative is possible or commercially reasonable, the infringing items shall be returned to Lineo, whose sole liability shall be to refund amounts paid by OEM for the affected copies of the Licensed Product. Lineo shall have no liability for infringement based on (a) use of other than the current release of the Licensed Products, or (b) modification of the Licensed Products by any party other than Lineo, or the combination or use of the Licensed Products with any other computer program, equipment, product, device, item or process not furnished by Lineo, if such infringement would have been avoided by the use of the Licensed Products alone and in their current unmodified form, or (c) other acts of OEM. OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 7 of 17 THE ABOVE STATES THE ENTIRE LIABILITY OF LINEO WITH RESPECT TO INFRINGEMENT OF PATENTS, COPYRIGHTS, TRADEMARKS OR ANY OTHER FORM OF INTELLECTUAL PROPERTY RIGHT BY ANY PRODUCT SUPPLIED BY LINEO. b. BY OEM. OEM agrees to indemnify, defend and hold Lineo harmless from and against any and all third-party claims, actions, demands, and related damages, liabilities, costs and expenses arising or resulting from, or related to, marketing, distribution or other activities by OEM or its Resellers under this Agreement or otherwise respecting the Licensed Product. c. GENERAL CONDITIONS TO INDEMNITY RIGHTS. The forgoing rights and obligations of indemnity are conditioned on (i) prompt written notification from the indemnified party to the indemnifying party of the claim for which indemnity is sought; (ii) sole control in the indemnifying party of the defense of any action and all negotiations for settlement and compromise; and (iii) cooperation and assistance from the party seeking indemnification, including disclosure of information and authority necessary to perform the above. The indemnified party shall be responsible for the costs and fees of its own counsel if it desires to have separate legal representation in any such action. 9. TERM AND TERMINATION. a. TERM AND EXTENSIONS. The initial term hereof shall be as provided in Schedule A. Unless earlier terminated for breach as provided herein, or unless either party notifies the other in writing, not later than 30 days prior to expiration of the initial term, of its intention to terminate the agreement upon said expiration, this Agreement shall automatically renew at the end of the initial term for successive one year terms. b. TERMINATION FOR CAUSE. Either party may terminate this Agreement for the substantial breach by the other party of a material term. The terminating party will first give the other party written notice of the breach and a reasonable period of at least 30 days in which to cure the alleged breach. If a cure is not achieved during the cure period, then the non-breaching party may terminate this Agreement upon written notice. c. TERMINATION BY LINEO. Lineo may terminate this Agreement if OEM fails to meet its payment obligations under this Agreement and this failure continues for 10 days following receipt of written notice and demand from Lineo. d. INSOLVENCY, ASSIGNMENT, OR BANKRUPTCY. Either party may, at its option, immediately terminate this Agreement upon written notice to the other party if the other party (i) admits in writing its inability to pay its debts generally as they become due; (ii) makes a general assignment for the benefit of creditors; (iii) institutes proceedings to be adjudicated a voluntary bankrupt, or consents to the filing of a petition of bankruptcy against it; (iv) is adjudicated by a court of competent jurisdiction as being bankrupt or insolvent; (v) seeks reorganization under any bankruptcy act or consents to the filing of a petition seeking such reorganization; or (vi) is the subject of a decree by a court of competent jurisdiction appointing a receiver, liquidator, trustee or assignee in bankruptcy or in insolvency covering all or substantially all of such party's property or providing for the liquidation of such party's property or business affairs. e. ACCELERATION OF PAYMENT. Upon termination of this Agreement by Lineo under Section 9.a, 9.b or 9.c, the due dates of all outstanding invoices to OEM for Licensed Products will automatically be accelerated so that they become due and payable on the effective date of termination, even if longer terms had been previously granted or allowed. f. EFFECT OF TERMINATION ON OBLIGATIONS. Upon termination of this Agreement for any reason, OEM shall (1) immediately cease all reproduction of the Licensed Product and shall cease distribution of all copies previously made; (2) within 30 calendar days after termination of this Agreement, either deliver to Lineo or destroy all copies of Licensed Products and Documentation in OEM's possession or under its control, and shall furnish to Lineo an affidavit signed by an officer of Licensee certifying that, to the best of its knowledge, such delivery or destruction has been fully effected. Notwithstanding the foregoing, and provided OEM fulfills its obligations specified in this Agreement with respect to such items, OEM may continue to use and retain copies of the Licensed Products and Documentation to the extent, but only to the extent, necessary to support and maintain Licensed Products rightfully distributed to Resellers and End Users by OEM prior to termination of this Agreement. Termination of this Agreement shall not affect rights of Resellers or End Users receiving Product incorporating or bundled with Licensed Product prior to the date of termination, provided, however, that Lineo shall have received payment of License Fees and other fees owing from OEM therefor. g. SURVIVAL OF TERMS. Termination of this Agreement shall not relieve either party of any obligations arising under this Agreement prior to the date of termination. Any provisions of this Agreement that by their nature extend beyond the Expiration Date or other termination of this Agreement, including specifically obligations owing under Sections 4, 5 and 7 hereof, will survive and remain in effect until all obligations are satisfied. Confidentiality provisions shall remain in effect until the Confidential Information is no longer confidential. OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 8 of 17 10. GENERAL PROVISIONS. a. PUBLIC ANNOUNCEMENTS AND PROMOTIONAL MATERIALS. Lineo and OEM shall cooperate with each other either to issue a joint press release and/or to enable each party to issue and post to its web site an announcement concerning this Agreement, provided that each party must approve any such press announcement prior to its release. Any separate release shall be subject to must approve such press release prior to its release. Lineo shall have the right to use OEM's name as a customer reference. Lineo shall cooperate with OEM as OEM may reasonably desire and request in its development of the initial marketing and sales materials used to promote the distribution of OEM Products incorporating or bundled with the Licensed Products. b. FORCE MAJEURE. If either party is prevented from performing any portion of this Agreement (except the payment of money) by causes beyond its control, including labor disputes, civil commotion, war, governmental regulations or controls, casualty, inability to obtain materials or services or acts of God, such defaulting party will be excused from performance for the period of the delay and for a reasonable time thereafter. c. DISPUTE RESOLUTION. The parties agree to attempt in good faith to resolve all disputes arising between them first through expedited mediation (not to exceed 48 hours from the receipt by a party of the notice described below) and, if mediation is not successful, through negotiated settlement or court action. Neither party shall file a lawsuit until the mediation has been completed, except that in the event that the actions of one party will cause or are causing the other immediate irreparable injury requiring temporary injunctive relief and the other party is unwilling to suspend its planned or existing activity to allow for expedited mediation, the aggrieved party may file suit and seek such temporary injunctive relief in a court with jurisdiction over the subject matter of the dispute. Dispute resolution under this section shall be triggered by one party's service upon the other of a written notice and request to mediate, identifying the subject matter of the dispute and the nature of the relief sought. Unless otherwise agreed in writing at the time of mediation, mediation shall be conducted through and under the mediation rules of the American Arbitration Association. d. LIMITATION OF ACTIONS. No action arising or resulting from this Agreement, regardless of its form, may be brought by either party more than two years after termination of this Agreement. e. THIRD PARTY CLAIMS. Neither party shall be liable for any claim by the other based on any third party claim, except as stated in Section 7 of this Agreement. f. JURISDICTION. This Agreement will in all respects be governed by and construed in accordance with the laws of the State of Utah of the United States of America, and will not be construed in accordance with or governed by the United Nations Convention for International Sales of Goods. g. ATTORNEYS' FEES. If either Lineo or OEM employs attorneys to enforce any rights arising out of or relating to this Agreement, the prevailing party shall be entitled to recover reasonable costs and attorney's fees. h. WAIVER. No waiver of any right or remedy on one occasion by either party will be deemed a waiver of that right or remedy on any other occasion. i. SUPERIOR AGREEMENT. This Agreement will not be supplemented or modified by any course of dealing or usage of trade. Variance from or addition to the terms and conditions of this Agreement in any written notification from OEM will be of no effect, unless otherwise expressly provided for in this Agreement. This Agreement may be amended or modified only by a writing signed by each party. j. ASSIGNMENT. This Agreement is not assignable by OEM, in whole or in part, without Lineo's prior written consent. Lineo will not unreasonably withhold consent to an assignment of this Agreement or any part of this Agreement to a parent, subsidiary or affiliate of OEM, provided that such entity is at least as capable as OEM of satisfying OEM's responsibilities hereunder. Any attempted assignment without Lineo's written consent will be null and void. k. NOTICE. Unless otherwise agreed to by the parties, all notices required under this Agreement (except those relating to product pricing, changes and upgrades) will be deemed effective when received and made in writing by either (i) registered mail, (ii) certified mail, return receipt requested, (iii) overnight mail, addressed and sent to the address indicated on the Signature Page, to the attention of the person designated as the responsible representative or to that person's successor, or (iv) by telephone facsimile transfer appropriately directed to the attention of the person designated as the responsible representative or to that person's successor. l. SEVERABILITY. If any term, provision, covenant or condition of this Agreement is held invalid or unenforceable for any reason, the remainder of the provisions will continue in full force and effect as if this Agreement had been executed with the invalid portion eliminated. The parties further agree to substitute for the invalid provision a valid provision that most closely approximates the intent and economic effect of the invalid provision. OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 9 of 17 m. INDEPENDENT CONTRACTORS. Each party acknowledges that the parties to this Agreement are independent contractors and that it will not, except in accordance with this Agreement, represent itself as an agent or legal representative of the other. n. COMPLIANCE WITH LAWS. OEM represents and warrants that it shall comply at its own expense with all applicable laws, rules and regulations of governmental bodies and agencies, including all laws, rules and regulations affecting or governing exports, in its performance under this Agreement. o. GOVERNMENT RIGHTS. OEM agrees (i) to identify the Licensed Products in all proposals and agreements with the United States Government or any contractor for the United States Government; and (ii) to identify or to mark the software products provided pursuant to any agreement with the United States Government or any contractor for the United States Government as necessary to obtain protection substantially equivalent to that afforded commercial computer software and related documentation developed at private expense and provided with Restricted Rights as defined in DOD FAR Supplement 48 C.F.R. 252.227-7013(c)(1)(ii) in effect as of May 18, 1987 or any successor regulation. p. HEADINGS. The headings provided in this Agreement are for convenience only and will not be used in interpreting or construing this Agreement. q. SCOPE OF AGREEMENT. Each of the parties hereto acknowledges that it has read this Agreement, understands it and agrees to be bound by its terms. The parties further agree that this Agreement is the complete and exclusive statement of agreement regarding the subject matter and supersedes all proposals (oral or written), understandings, representations, conditions, warranties, covenants and all other communications between the parties relating thereto. This Agreement may be amended only by a writing that refers specifically to this Agreement and is signed by both parties. * * * END OF STANDARD TERMS AND CONDITIONS * * * OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 10 of 17 APPENDIX I TO SCHEDULE C, STANDARD TERMS AND CONDITIONS LINEO END USER LICENSE AGREEMENT IMPORTANT-READ CAREFULLY This Lineo End User License Agreement ("EULA") is a legal agreement between you (either an individual or a single entity) and Lineo, Inc. ("Lineo") for the enclosed or attached Lineo software product, which includes computer software and associated documentation ("Software"). The Software also includes any updates and supplements to the original Software provided to you by Lineo. Any product provided along with the Software that is associated with a separate end-user license agreement is licensed to you under the terms of that license agreement. By installing, copying, downloading, accessing or otherwise using the software, you agree to be bound by the terms of this EULA. If you do not agree to the terms of this EULA, you may not use or install the Software. If you have purchased the Software, promptly return the Software and all accompanying materials with proof of purchase for a refund. SOFTWARE LICENSE The Software is protected by copyright laws and international copyright treaties, as well as other intellectual property laws and treaties. The Software is licensed, not sold. 1. GRANT OF LICENSE This EULA grants you the rights to install, use, access, display, run, or otherwise interact with ("Run") one copy of the Software on no more than one computer or device ("Computer"). 2. OTHER RIGHTS AND LIMITATIONS - LIMITATIONS ON REVERSE ENGINEERING, DECOMPILATION, AND DISASSEMBLY. You may not reverse engineer, decompile, or disassemble the Software, except and only to the extent that such activity is permitted by applicable law. - RENTAL. You may not rent, lease, sell, sublicense, or lend the Software. - LANGUAGE VERSIONS. If the media provided to you includes more than one language version of the same Software, you may Run any of the language versions of the Software, provided the total number of copies Run does not exceed the number of licenses you have acquired. - TRANSFER. You may not transfer or assign your rights or obligations under this EULA to any person or entity without the prior written consent of Lineo. - SUPPORT SERVICES. Lineo may provide you with technical support services related to the Software ("Support Services") as described in other Lineo-provided materials. Any supplemental software code provided to you as part of the Support Services shall be considered part of the Software and subject to the terms and conditions of this EULA. With respect to technical information you provide to Lineo as part of the Support Services, Lineo may use such information for its business purposes, including for product support and development. Lineo will not utilize such technical information in a form that personally identifies you. - RESERVATION OF RIGHTS. Lineo reserves all rights not expressly granted under this EULA. OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 11 of 17 3. SAFEGUARDS/AUDIT RIGHTS You agree to: (i) implement internal safeguards to prevent any unauthorized copying, distribution, or use of the Software; (ii) provide Lineo with written certification of the number of copies or concurrent usage of the Software on request, and (iii) allow Lineo to audit for compliance with this EULA during regular business hours. Lineo will pay for the cost of the audit unless the audit shows a discrepancy which is five percent (5%) or more of the number of copies of the Software Run over the licenses you have acquired; in which event, you shall pay for the cost of the audit. 4. COPYRIGHTS Lineo and its suppliers retain all ownership of the Software and all copies thereof, provided, however, that certain components of the Software are components licensed under the GNU General Public License (version 2), which Lineo supports. You may obtain a copy of the GNU General Public License at www.gnudocs.com/GNU/COPYING. Lineo will provide source code for any of the components of the Software licensed under the GNU General Public License. To obtain such source code, send email to embedix-support@lineo.com. You may make up to two copies of electronic documentation accompanying the Software for each license you have acquired for the Software. If you make copies, you must include all applicable copyright notices and other proprietary rights legends that come with the Software. 5. EXPORTS You agree that you will not export or re-export the Software, any part thereof, or any process or service that is the direct product of the Software (the foregoing collectively referred to as the "Restricted Components"), to any country, person or entity subject to U.S. export restrictions. You specifically agree not to export or re-export any of the Restricted Components (i) to any country to which the U.S. has embargoed or restricted the export of goods or services, which currently include, but are not necessarily limited to Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria, or to any national of any such country, wherever located, who intends to transmit or transport the Restricted Components back to any such restricted country; (ii) to any person or entity who you know or have reason to know will utilize the Restricted Components in the design, development or production of nuclear, chemical or biological weapons; or (iii) to any person or entity who has been prohibited from participating in U.S. export transactions by any federal agency of the U.S. Government. You warrant and represent that neither the Bureau of Export Administration of the U.S. Commerce Department nor any other U.S. federal agency has suspended, revoked or denied your export privileges. 6. LIMITED WARRANTY - LIMITED WARRANTY. For a period of 90 days from the date you receive the Software or from the date of performance of Support Services by Lineo, Lineo warrants that: (a) the unmodified Software will perform substantially in accordance with the accompanying written materials when used as directed, (b) Lineo media will be free of defects, and (c) such Support Services will be performed in a manner consistent with generally accepted industry standards. Any implied warranties are limited to the 90 day period. This Limited Warranty is void if failure of the Software has resulted from modification, accident, abuse, or misapplication. Some jurisdictions do not allow limitations on duration of an implied warranty, so the above limitation may not apply to you. - YOUR EXCLUSIVE REMEDY. Lineo's and its suppliers' entire liability and your exclusive remedy arising from a breach of the Limited Warranty is, at Lineo's option, either repair or replacement of OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 12 of 17 the non-conforming Software, or reperformance of the nonconforming Support Services, or return of the price you paid for the non-conforming Software or Support Services. You must return all non-conforming Software to Lineo with your proof of purchase to be entitled to any of these remedies. Any replacement Software or Support Services will be warranted for the remainder of the original warranty period or 30 days, whichever is longer. Outside the United States, neither these remedies nor any product support services offered by Lineo are available without proof of your purchase from an authorized international source. - NO OTHER WARRANTIES. TO THE FULL EXTENT PERMITTED BY LAW, LINEO AND ITS SUPPLIERS DISCLAIM ALL OTHER WARRANTIES, WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, AND NON-INFRINGEMENT, WITH REGARD TO THE SOFTWARE AND THE PROVISION OF OR FAILURE TO PROVIDE SUPPORT SERVICES. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS. YOU MAY HAVE OTHERS, WHICH VARY FROM JURISDICTION TO JURISDICTION. - LIMITATION OF LIABILITY. LINEO AND ITS SUPPLIERS WILL NOT BE LIABLE FOR ANY SPECIAL, INCIDENTAL, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, DAMAGES FOR PERSONAL INJURY, LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS OR CONFIDENTIAL INFORMATION, LOSS OF PRIVACY, OR ANY OTHER PECUNIARY LOSS) ARISING OUT OF THE USE OF OR INABILITY TO USE THE SOFTWARE OR THE PROVISION OF OR FAILURE TO PROVIDE SUPPORT SERVICES, EVEN IF LINEO OR ITS SUPPLIERS HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN ANY CASE, THE ENTIRE LIABILITY OF LINEO AND ITS SUPPLIERS UNDER THIS AGREEMENT AND LIMITED WARRANTY SHALL BE LIMITED TO THE AMOUNT ACTUALLY PAID BY YOU FOR THE SOFTWARE OR SUPPORT SERVICES THAT CAUSE THE DAMAGE. BECAUSE SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF LIABILITY, THE ABOVE LIMITATION MAY NOT APPLY TO YOU. 7. U.S. GOVERNMENT RESTRICTED RIGHTS Software and documentation delivered to civilian agencies of the U.S. Government pursuant to solicitations dated prior to December 1, 1995, and Software and documentation delivered to the Department of Defense of the U.S. Government pursuant to solicitations dated prior to September 29, 1995, are provided with RESTRICTED RIGHTS. Use, duplication, or disclosure by the Government is subject to restrictions as set forth in subparagraph FAR 52.227-14(g)(Jun. 1987) or subparagraph DFAR 252.227-7013 (c)(1)(ii)(Oct. 1988). All Software and documentation delivered to civilian agencies or the Department of the Defense of the U.S. Government pursuant to solicitations issued after the dates specified above, are delivered with commercial licensing rights as set forth in this EULA only. 8. GOVERNING LAWS AND ATTORNEYS' FEES This EULA is governed by the laws of the State of Utah, USA, without regard to principles of conflict of laws, and specifically excludes the United Nations Convention on Contracts for the International Sale of Goods. If you acquired this Software in a country outside of the United States, that country's laws may apply. In any action or suit OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 13 of 17 to enforce any right or remedy under this EULA or to interpret any provision of this EULA, the prevailing party will be entitled to recover its costs, including reasonable attorneys' fees. 9. ENTIRE AGREEMENT This EULA constitutes the entire agreement between you and Lineo with respect to the Software, and replaces all other understandings, communications, agreements or representations, whether written or oral. The terms of this EULA cannot be modified by any terms in any printed forms used by the parties in performing the EULA, and can only be modified by express written consent of both parties. If any part of this EULA is held to be unenforceable as written, it will be enforced to the maximum extent allowed by applicable law, and will not affect the enforceability of any other part. Should you have any questions concerning this EULA, or if you desire to contact Lineo for any reason, please contact the Lineo representative serving your company, or send email to: embedix-support@lineo.com. OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 14 of 17 LINEO, INC. OEM LICENSE AGREEMENT SCHEDULE D ANNUAL OEM MAINTENANCE, SUPPORT AND TRAINING AGREEMENT NO. LN0201 ------ This OEM Maintenance, Support and Training Agreement is an element of an OEM License Agreement ("OEM Agreement") between Lineo and Licensee, and is subject to all the general terms and conditions thereof, except as and to the extent such terms are specifically and directly superseded hereby. Lineo will provide maintenance and support only in connection with OEM's pre-purchase of * licenses (or units) as specified in the OEM License Agreement of which this is a part, for a term expiring 12 months from the Effective Date. Lineo and OEM may, at any time, negotiate and mutually agree to amend and extend the coverage of the maintenance and support beyond such 12-month period, provided that any such amendment is in writing. A. MAINTENANCE AND PRODUCT SUPPORT: 1. MAINTENANCE/MINOR UPDATES. In consideration of the maintenance and support Service Fee set forth in Section 3 below, Lineo will provide to OEM any minor updates to the current version of the Licensed Product, Embedix(TM), made generally available during the term of this Maintenance and Support Agreement. In addition, Lineo will provide ongoing telephone and e-mail support. The expenses of any distribution of such updates through the distribution channels for OEM's products will be paid by OEM. OEM and Lineo will favorably consider electronic or alternative dissemination methods of such minor updates to the extent consistent with policies of both companies. OEM and Lineo agree to reasonably cooperate on a monthly basis regarding support issues and processes. 2. TECHNICAL SUPPORT. In further consideration of the maintenance and support Service Fee set forth in Section 3, Lineo will provide OEM with Lineo's backend technical support services, as further described herein. a. BACK-END SUPPORT. Lineo will provide back-end support to OEM for program errors not resolved by OEM pursuant to OEM support policies and in accordance with subsection (b) below. This support includes efforts to identify defective source code and to provide corrections, workarounds and/or patches to correct program errors. Lineo will provide OEM with a telephone number and an e-mail address which OEM may use to report program errors during Lineo's Support local Utah business hours (8am-5pm Mountain Standard Time). For Priority 1 or 2 failures, OEM agrees to notify Lineo via both telephone and E-mail. OEM will identify one member of its customer support staff and an alternate to act as the primary technical liaisons responsible for all communications with Lineo's technical support representatives. Such liaisons will have sufficient technical expertise, training and/or experience for OEM to perform its obligations hereunder. Within one week after the Effective Date, OEM will designate its liaisons(s). Such designation will be in writing and/or E-mail to Lineo. OEM may substitute contacts at any time by providing to Lineo one week prior written and/or electronic notice thereof. Lineo will make reasonable efforts to correct significant program errors that OEM identifies, classifies and reports to Lineo and that Lineo substantiates. Lineo may reclassify program errors if it reasonably believes that OEM's classification is incorrect. OEM will provide sufficient information to enable Lineo to duplicate the program error before Lineo's response obligations - ---------------------------------- * Confidential Treatment Requested OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 15 of 17 will commence. Lineo will not be required to correct any program error caused by: (a) OEM's incorporation or attachment of a feature, program, or device to the Lineo Products, or any part thereof; (b) any nonconformance caused by accident, transportation, neglect, misuse, alteration, modification, or enhancement of the Lineo Products; (c) the failure to provide a suitable installation environment; (d) use of the Lineo Products for other than the specific purpose for which the Lineo Products are designed; (e) use of the Lineo Products on any systems other than the specified hardware platform for such Lineo Products; (f) OEM's use of defective media or defective duplication of the Lineo Products; or (g) OEM's failure to incorporate any minor update previously released by Lineo which corrects such program error. Provided program error reports are received by Lineo during Lineo's local Utah business hours (8am-5pm Mountain Standard Time, Monday through Friday), Lineo will use reasonable commercial efforts to communicate with OEM about the program error via telephone or e-mail within the following targeted response times:
- ------------ ------------------------------------------------------------------ ----------------------------- Priority Failure Description Response Time - ------------ ------------------------------------------------------------------ ----------------------------- 1 Fatal (no useful work can be done) 10 working hours - ------------ ------------------------------------------------------------------ ----------------------------- 2 Severe Impact (functionality disabled): errors which result in a 1 working day lack of application functionality or cause intermittent system failure - ------------ ------------------------------------------------------------------ ----------------------------- 3 Degraded Operations: errors causing malfunction of non critical 3 working days functions - ------------ ------------------------------------------------------------------ ----------------------------- 4 Minimal Impact: attributes and/or options to utility programs do Future release, on business not operate as stated justifiable basis - ------------ ------------------------------------------------------------------ ----------------------------- 5 Enhancements Request When applicable - ------------ ------------------------------------------------------------------ -----------------------------
Lineo will use reasonable commercial efforts to resolve each significant program error by providing either a reasonable work around, an object code patch, or a specific action plan for how Lineo will address the problem and an estimate of how long it will take to rectify the defect. OEM may be required to pay to Lineo additional fees at Lineo's then-standard rates for services performed in connection with reported program errors which are later determined by Lineo to have been due to hardware of software not supplied by Lineo. Notwithstanding the foregoing, Lineo has no obligation to perform services in connection with (i) program errors resolution from hardware or software not supplied by Lineo: or (ii) which occur in the Lineo Product release which is not the then-current release. b. FRONT-LINE SUPPORT. OEM, and not Lineo, will provide front-line, or first and second level, technical support to its Distributors, Resellers and End Users. Such support includes call receipt, call screening, installation assistance, problem identification and diagnosis, efforts to create a repeatable demonstration of the program error, maintenance of a website that provides technical and warranty support to End Users and, if applicable, the distribution of any defective media or minor updates. OEM agrees that any documentation distributed by OEM will clearly and conspicuously state that End Users should call OEM, and not Lineo, for technical support for the Lineo Products. Lineo will have no obligation to furnish any assistance, information or documentation with respect to the Lineo Products to any Distributor, Reseller or End User. If Lineo believes its customer support representatives are being contacted by a significant number of OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 16 of 17 OEM's Distributors, Reseller or End Users, then, upon Lineo's request, OEM will undertake every reasonable effort to minimize such contact. 3. SERVICE FEE: For maintenance and support rendered in connection with the Licensed Product, as set forth in Sections 1 and 2 above, and for the period of this maintenance agreement only, OEM shall pay to Lineo maintenance and support Fees in the amount of US $*, representing *% of the aggregate total of nonrefundable license fees payable under the OEM License Agreement. Said maintenance and support fees shall be payable on or before the Effective Date. B. PRODUCT TRAINING 1. STANDARD TRAINING. Lineo will provide its standard product training to OEM, as described below, at any time during the period of this maintenance agreement, upon payment of the training fees prescribed below. All training can be conducted on site at OEM in Korea. OEM may designate one or more of the following training programs by initialing below: _____ LINUX SYSTEM ADMINISTRATION: 3-5 DAYS This training program is optimal if OEM desires training designed for those who are taking first steps into using Linux and want to learn how to administer their Linux system, gain experience with basic Linux administration tasks, better understand the Linux phenomenon, explore command line and GUI utilities, learn system processes, and configure printing and networking. If OEM selects this training program, OEM shall pay to Lineo Training Fees consisting of U.S. $* per each OEM participant per class. _____ EMBEDIX SDK: 3-5 DAYS This training program is designed for those desiring an in-depth understanding of the Embedix SDK toolkit, Linux kernel, base programs, compilers, and customization tools. If OEM selects this training program, OEM shall pay to Lineo Training Fees consisting of U.S. $* per each OEM participant per class. _____ LINUX SYSTEM ADMINSTRATION AND EMBEDIX SDK A combination of the two training programs above with special emphasis on Embedix SDK. If OEM selects this combined training program, OEM shall pay to Lineo Training Fees consisting of U.S. $* per each OEM participant per class. 2. CUSTOMIZED TRAINING. Any of the selected training programs may be customized, at OEM's request and upon mutual agreement, specifically to meet OEM's needs. For any customization of the selected training program requested by OEM, the parties shall negotiate the terms and conditions of such customization, including, but not limited to, additional fees and the nature of the customization. 3. TRAINING FEES. All Training Fees are payable not later than fifteen (15) days prior to the first day of the selected training program. - ---------------------------------- * Confidential Treatment Requested OEM License Agreement (Embedded) Lineo, Inc., 390 South 400 West, Lindon, Utah 84042 Page 17 of 17 EX-10.4 8 EXHIBIT 10.4 EXHIBIT 10.4 STOCK PURCHASE AND SALE AGREEMENT THIS STOCK PURCHASE AND SALE AGREEMENT (this "Agreement") is made and entered into as of this 6th day of January, 2000 by and between Lineo, Inc., a Utah corporation ("Lineo"), and Caldera Systems, Inc., a Utah corporation ("Caldera Systems"). WHEREAS, Lineo and Caldera Systems have agreed in principle to provide each other with certain marketing and other services pursuant to a strategic alliance agreement, and Lineo and Caldera Systems each wishes to purchase from the other shares of common stock; NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: SECTION 1. PURCHASE AND SALE OF SHARES 1.1 PURCHASE OF LINEO STOCK. Upon the terms and subject to the conditions herein, in reliance on the representations and warranties set forth in Sections 2 and 4 hereof, Caldera Systems hereby purchases from Lineo, and Lineo hereby issues and sells to Caldera Systems 3,238,437 shares of the Common Stock of Lineo, representing 16.75% of the issued and outstanding shares of capital stock of Lineo on a fully-diluted basis as of the date hereof (the "Lineo Shares"). 1.2 PURCHASE OF CALDERA SYSTEMS STOCK. Upon the terms and subject to the conditions herein, in reliance on the representations and warranties set forth in Sections 3 and 4 hereof, Lineo hereby purchases from Caldera Systems, and Caldera Systems hereby issues and sells to Lineo, 1,250,000 shares of the Common Stock of Caldera Systems, representing 3.35% of the issued and outstanding shares of capital stock of Caldera Systems on a fully-diluted basis as of the date hereof (the "Caldera Systems Shares"). 1.3 CLOSING. The closing of the purchases and sales of the Lineo Shares and the Caldera Systems Shares contemplated by Sections 1.1 and 1.2 above (the "Closing") shall take place at 10:00 a.m. on the date hereof, or at such other time and date as the parties hereto mutually agree (the "Closing Date"). SECTION 2. REPRESENTATIONS AND WARRANTIES OF LINEO In order to induce Caldera Systems to enter into this Agreement, Lineo represents and warrants to Caldera Systems the following, except as set forth on a Schedule of Exceptions furnished by Lineo to Caldera Systems (the "Lineo Schedule of Exceptions"), specifically identifying the relevant subparagraph(s) hereof, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 ORGANIZATION AND CORPORATE POWER. Lineo is a corporation duly organized and validly existing under the laws of the State of Utah, and is qualified to do business as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a material adverse effect on its assets, liabilities, financial condition, business, or results of operations (a "Material Adverse Effect"). Lineo has all required corporate power and corporate authority to carry on its business as presently conducted, to enter into and perform this Agreement and the agreements contemplated hereby to which it is a party and to carry out the transactions contemplated hereby and thereby, including the issuance of the Lineo Shares. Lineo is not in material violation of any term of its Articles of Incorporation (the "Lineo Articles of Incorporation"), or Bylaws (the "Lineo Bylaws"). 2.2 AUTHORIZATION AND NON-CONTRAVENTION. The execution, delivery and performance by Lineo of this Agreement and each other agreement, document and instrument to be executed and delivered by Lineo pursuant to or as contemplated by this Agreement, including, without limitation, the issuance and delivery of the Lineo Shares, have been duly authorized, by all necessary corporate action on behalf of Lineo. This Agreement and each such other agreement, document, and instrument, when executed and delivered, will constitute valid and binding obligations of Lineo, enforceable in accordance with their respective terms, except as may be limited by applicable law and public policy and subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) general principles of equity and/or laws relating to the availability of specific performance, injunctive relief or other equitable remedies, whether such enforceability is considered in a proceeding in equity or at law. The execution and delivery by Lineo of this Agreement and each other agreement, document and instrument to be executed and delivered by Lineo pursuant hereto or as contemplated hereby and the performance by Lineo of the transactions contemplated hereby and thereby, including, without limitation, the offer, sale, issuance and delivery of the Lineo Shares, do not and will not: (A) violate, conflict with or result in a default (whether after the giving of notice, lapse of time or both) under any material contract, mortgage, indenture, contract, instrument or obligation to which Lineo is a party or by which it or its assets are bound, or any provision of the Lineo Articles of Incorporation or Lineo Bylaws, or cause the creation of any material lien, charge or encumbrance upon any of the assets of Lineo; (B) to Lineo's knowledge, violate or result in a violation of, or constitute a default under, any provision of any material law, regulation or rule, or any judgment, order, writ, decree or statute of, or any restriction imposed by, any court or governmental agency applicable to Lineo; (C) require from Lineo any notice to, declaration or filing with, or consent or approval of any governmental authority or third party other than such filings as have been made prior to the Closing and/or as may be required to secure an exemption from qualification of the offer and sale of the Lineo Shares under the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities and blue sky laws; or (D) accelerate any obligation under, or give rise to a right of termination, suspension, revocation or impairment of, any material agreement, permit, license or authorization applicable to any of Lineo's, operations, assets or properties, or by which Lineo is bound. 2.3 CAPITALIZATION. As of the Closing, the authorized capital stock of Lineo will consist of 100,000,000 shares of Common Stock, of which 18,000,000 shares will be issued and outstanding. As of the Closing, other than the shares described in the preceding sentence and options to purchase 1,333,950 shares of the common stock of Lineo granted to employees and members of the Board of Directors of Lineo pursuant to Lineo's Stock Option Plan, Lineo has not issued any warrants, options, rights (including, without limitation, conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements or agreements of any kind for the purchase or acquisition from Lineo of any shares of capital stock or other securities, including, without limitation, any securities convertible into or exercisable or exchangeable for such shares or any warrants, options or other rights to acquire any such convertible securities. As of the Closing, and after giving effect to the transactions contemplated hereby, all of the outstanding shares of capital stock of Lineo and each of its Subsidiaries will have been duly and validly authorized and issued, fully paid and nonassessable and not subject to any preemptive rights and will have been offered, issued, sold and delivered in compliance with applicable federal and state securities laws. There are no preemptive rights, rights of first refusal, put or call rights or obligations or anti-dilution rights with respect to the issuance, sale or redemption of Lineo's capital stock or other securities. Lineo is not a party or subject to any agreement or understanding, and, to the best of Lineo's knowledge, there is no agreement or understanding between any persons that affects or relates to the voting or giving of written consents with respect to any security or the voting by a director of Lineo. 2.4 VALID ISSUANCE OF LINEO SHARES. The Lineo Shares, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid and non-assessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and under applicable state and federal securities laws. 2.5 SUBSIDIARIES. Lineo does not own or control, directly or indirectly, any interest in any other corporation, partnership, limited liability company, association or other business entity. Lineo is not a participant in any joint venture, partnership or similar arrangement. 2.6 CONTRACTS AND OTHER COMMITMENTS. Lineo has not and/or is not bound by any contract, agreement, lease, commitment, or proposed transaction, judgment, order, writ or decree, written or oral, absolute or contingent, other than contracts entered into in the ordinary course of business. For the purpose of this paragraph, employment and consulting contracts and license agreements and any other agreements relating to Lineo's acquisition or disposition of Intellectual Property (other than standard end-user license agreements) shall not be considered to be contracts entered into in the ordinary course of business. 2.7 RELATED-PARTY TRANSACTIONS. No employee, officer, stockholder or director of Lineo or member of his or her immediate family is indebted to Lineo, nor is Lineo indebted (or committed to make loans or extend or guarantee credit) to any of them, other than (i) for payment of salary for services rendered, (ii) reimbursement for reasonable expenses incurred on behalf of Lineo, and (iii) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of Lineo or such Subsidiary). To the best of Lineo's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which Lineo is affiliated or with which Lineo has a business relationship, or any firm or corporation that competes with Lineo, except that employees, stockholders, officers or directors of Lineo and members of their immediate families may own stock in publicly-traded companies that may compete with Lineo. To the best of Lineo's, no officer, director or stockholder or any member of their immediate families is, directly or indirectly, interested in any material contract with Lineo (other than such contracts as relate to any such person's ownership of capital stock or other securities of Lineo). 2.8 REGISTRATION RIGHTS. Lineo is presently not under any obligation and has not granted any rights to register under the Securities Act any of its presently outstanding securities or any of its securities that may subsequently be issued. 2.9 PERMITS. Lineo has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects or financial condition of Lineo, and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as presently planned to be conducted. Lineo is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.10 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the best of Lineo's knowledge, currently threatened against Lineo that questions the validity of this Agreement, or the right of Lineo to enter into this Agreement, or to consummate the transactions contemplated hereby, or that might result, either individually or in the aggregate, in any material adverse change in the assets, business, properties, prospects, or financial condition of Lineo, or in any material change in the current equity ownership of Lineo. 2.11 RETURNS AND COMPLAINTS. Lineo has not received any customer complaints concerning alleged defects in its products (or the design thereof) that, if true, would materially adversely affect the operations or financial condition of Lineo. 2.12 DISCLOSURE. Lineo has provided Caldera Systems with all the information reasonably available to it without undue expense that Caldera Systems has requested for deciding whether to purchase the Lineo Shares and all information that Lineo believes is reasonably necessary to enable Caldera Systems to make such decision. 2.13 OFFERING. Subject, in part, to the truth and accuracy of Caldera Systems's representations set forth in this Agreement, the offer, sale and issuance of the Lineo Shares as contemplated by this Agreement are exempt from the registration requirements of the Securities Act, and neither Lineo, nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 2.14 TITLE TO PROPERTY AND ASSETS; LEASES. Except (i) as reflected in the Lineo Financial Statements (defined in paragraph 2.15), (ii) for liens for current taxes not yet delinquent, (iii) for liens imposed by law and incurred in the ordinary course of business for obligations not past due to carriers, warehousemen, laborers, materialmen and the like, (iv) for liens in respect of pledges or deposits under workers' compensation laws or similar legislation or (v) for minor defects in title, none of which, individually or in the aggregate, materially interferes with the use of such property, Lineo has good and marketable title to its property and assets free and clear of all mortgages, liens, claims and encumbrances. With respect to the property and assets it leases, Lineo is in compliance with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances, subject to clauses (i)-(v) above. 2.15 FINANCIAL STATEMENTS. Lineo has made available to Caldera Systems its unaudited trial balance sheet (which includes assets and liabilities, ending balances, revenues and expenses, and the balance of stockholders' equity) at October 31, 1999 for the fiscal year then ended (the "Lineo Financial Statements"). The Lineo Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated. The Lineo Financial Statements fairly present the financial condition and operating results of Lineo as of the dates, and for the periods, indicated therein. Except as set forth in the Lineo Financial Statements, Lineo has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to October 31, 1999 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Lineo Financial Statements, which in both cases, individually or in the aggregate, are not material to the financial condition or operating results of Lineo. Except as disclosed in the Lineo Financial Statements, Lineo is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. Lineo maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 2.16 CHANGES. Since October 31, 1999, there has not been any event or condition of any type that has materially and adversely affected the business, properties or financial condition of Lineo or any of its Subsidiaries. 2.17 INTELLECTUAL PROPERTY. To the best of Lineo's knowledge, Lineo, and its products have not infringed and do not infringe the copyrights of any third party. To the best of Lineo's knowledge, Lineo has not misappropriated and is not misappropriating any trade secrets or proprietary confidential information of any third party, and the products of Lineo do not include or embody any trade secret or proprietary confidential information misappropriated by Lineo from any third party. To the best of Lineo's knowledge, Lineo and its products have not infringed and do not infringe any patents, trademarks, service marks, or trade names of any third party. Each item of Intellectual Property owned by or licensed to Lineo immediately prior to the Closing hereunder will be owned by or licensed to Lineo on identical terms and conditions immediately subsequent to the Closing hereunder (i.e., identical to any applicable terms and conditions immediately prior to the Closing). (i) To the best of Lineo's knowledge, none of Lineo and its directors and officers (and employees with responsibility for Intellectual Property matters) has ever received any charge, complaint, claim, demand, or notice alleging any such infringement, misappropriation, or violation by Lineo of Intellectual Property (including any claim that Lineo must license or refrain from using any Intellectual Property rights of any third party). To the best of Lineo's knowledge and the knowledge of directors and officers (and employees with responsibility for Intellectual Property matters) of Lineo, no third party has infringed, misappropriated, or otherwise violated any Intellectual Property rights of Lineo. (ii) Within thirty days of the date of Closing, Lineo will provide to Caldera Systems a schedule (the "IP Schedule") identifying (a) each patent which has been issued or assigned to Lineo, (b) each pending patent application which has been filed by or for Lineo, (c) each trademark or service mark registration issued or assigned to Lineo, (d) each pending trademark or service mark application which has been filed by or for Lineo, (e) each copyright registration issued or assigned to Lineo, (f) each pending copyright application which has been filed by or for Lineo, and (g) each license which Lineo has granted to any third party with respect to any of Lineo's Intellectual Property excluding licenses to end users of Company products granted in the ordinary course of business. Lineo will deliver to Caldera Systems correct and complete copies of all such patents, registrations, applications, and licenses (as amended to date). The Lineo IP Schedule will also identify each trade name and each unregistered trademark or service mark owned or claimed by Lineo in connection with its business. With respect to each patent, application, and registration (each an "IP item") identified in the Lineo IP Schedule: (A) Lineo possess all right, title, and interest in and to the IP item, free and clear of any mortgage, lien, claim, license, or other encumbrance; (B) to the best of Lineo's knowledge, the IP item is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; (C) to the best of Lineo's knowledge, no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or, to the best of Lineo's or its Subsidiaries' knowledge, and the knowledge of the directors and officers (and employees with responsibility for Intellectual Property matters) of Lineo and its Subsidiaries, is threatened which challenges the legality, validity, enforceability, use, or ownership of the IP item; and (D) Lineo has never agreed to indemnify any Person for or against any interference, infringement, misappropriation, or other conflict with respect to the IP item. (iii) The Lineo IP Schedule will identify each item of Intellectual Property that any third party owns and licenses to Lineo, excluding licenses to commercially available software products (e.g., Windows, Microsoft Office, etc.) used by Lineo as an end user. Lineo will deliver with the IP Schedule to Caldera Systems correct and complete copies of all agreements applicable to such licenses (as amended to date). The term "license" is intended to include "sublicense." With respect to each such license and agreement required to be identified in the Lineo IP Schedule, to the best of Lineo's knowledge; the license and agreement are legal, valid, binding, enforceable, and in full force and effect; the license and agreement will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms on the day immediately following the Closing; no party to the agreement is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default or permit termination, modification, or acceleration thereunder; no party to the agreement has repudiated any provision thereof; the license is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or is threatened which challenges the legality, validity, or enforceability of the license or agreement. (iv) To the best of Lineo's knowledge and to the knowledge of the directors and officers (and employees with responsibility for Intellectual Property matters) of Lineo, Lineo will not infringe, misappropriate, or otherwise violate any Intellectual Property rights of third parties as a result of the continued operation of its businesses as presently conducted and as presently proposed to be conducted. 2.18 MANUFACTURING AND MARKETING RIGHTS. Except as set forth on the Lineo Schedule of Exceptions, Lineo has not granted rights to manufacture, produce, assemble, license, market or sell its products to any other person and is not bound by any agreement that affects Lineo's exclusive right to develop, manufacture, assemble, distribute, market or sell its products. 2.19 EMPLOYEES; EMPLOYEE COMPENSATION. To the best of Lineo's knowledge, the relationships between Lineo and its employees are good and no labor dispute or claims are pending or threatened. None of Lineo's employees belongs to any union or collective bargaining unit. To the best of Lineo's knowledge, Lineo has complied in all material respects with all applicable state and federal laws related to employment. To the best of Lineo's knowledge, no employee of Lineo is or will be in violation of any judgment, decree or order, or any term of any employment contract, patent disclosure agreement, or other contract or agreement relating to the relationship of any such employee with Lineo, or any other party because of the nature of the business conducted or presently proposed to be conducted by Lineo or to the use by the employee of his or her best efforts with respect to such business. Lineo is not a party to or bound by any currently effective employment contract, deferred compensation agreement, incentive plan, profit sharing plan, retirement agreement or other employee compensation agreement. Lineo is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with Lineo, nor does Lineo have a present intention to terminate the employment of any of the foregoing. Subject to general principles related to wrongful termination of employees, the employment of each officer and employee of Lineo is terminable at the will of Lineo. 2.20 TAX RETURNS, PAYMENTS, AND ELECTIONS. Lineo has timely filed all tax returns and reports (federal, state and local) as required by law. These returns and reports are true and correct in all material respects. Lineo has paid all taxes and other assessments due, except those contested by it in good faith. Lineo has not elected, pursuant to the Internal Revenue Code of 1986, as amended ("Code"), to be treated as an S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a material effect on the business, properties, prospects or financial condition of Lineo. Lineo has never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. None of Lineo's income tax returns (federal or otherwise) and none of its state income or franchise tax or sales or use tax returns has ever been audited by governmental authorities. Lineo has made adequate provisions on its books of account for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. Lineo has withheld or collected from each payment made to each of its employees, the amount of all taxes, including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositaries. 2.21 ENVIRONMENTAL AND SAFETY LAWS. Lineo is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. SECTION 3. REPRESENTATIONS AND WARRANTIES OF CALDERA SYSTEMS In order to induce Lineo to enter into this Agreement, Caldera Systems represents and warrants to Lineo the following, except as set forth on a Schedule of Exceptions furnished by Caldera Systems to Lineo (the "Caldera Systems Schedule of Exceptions"), specifically identifying the relevant subparagraph(s) hereof, which exceptions shall be deemed to be representations and warranties as if made hereunder: 3.1 ORGANIZATION AND CORPORATE POWER. Each of Caldera Systems and its Subsidiaries is a corporation duly organized and validly existing under the laws of the State of Utah, and is qualified to own and operate its properties and assets, to do business as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a Material Adverse Effect. Each of Caldera Systems and its Subsidiaries has all required corporate power and corporate authority to carry on its business as presently conducted, to enter into and perform this Agreement and the agreements contemplated hereby to which it is a party and to carry out the transactions contemplated hereby and thereby, including the issuance of the Caldera Systems Shares. Caldera Systems is not in material violation of any term of its Articles of Incorporation, as amended as of the date hereof (the "Caldera Systems Articles of Incorporation"), or Bylaws, as amended as of the date hereof (the "Caldera Systems Bylaws"). 3.2 AUTHORIZATION AND NON-CONTRAVENTION. The execution, delivery and performance by Caldera Systems of this Agreement and each other agreement, document and instrument to be executed and delivered by Caldera Systems pursuant to or as contemplated by this Agreement, including, without limitation, the issuance and delivery of the Caldera Systems Shares, have been duly authorized, or will be duly authorized prior to the Closing, by all necessary corporate action on behalf of Caldera Systems. This Agreement and each such other agreement, document, and instrument, when executed and delivered, will constitute valid and binding obligations of Caldera Systems, enforceable in accordance with their respective terms, except as may be limited by applicable law and public policy and subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) general principles of equity and/or laws relating to the availability of specific performance, injunctive relief or other equitable remedies, whether such enforceability is considered in a proceeding in equity or at law. The execution and delivery by Caldera Systems of this Agreement and each other agreement, document and instrument to be executed and delivered by Caldera Systems pursuant hereto or as contemplated hereby and the performance by Caldera Systems of the transactions contemplated hereby and thereby, including, without limitation, the offer, sale, issuance and delivery of the Caldera Systems Shares, do not and will not: (A) violate, conflict with or result in a default (whether after the giving of notice, lapse of time or both) under any material contract, mortgage, indenture, contract, instrument or obligation to which Caldera Systems or any of its Subsidiaries is a party or by which it or its assets are bound, or any provision of the Caldera Systems Articles of Incorporation or Caldera Systems Bylaws, or cause the creation of any material lien, charge or encumbrance upon any of the assets of Caldera Systems or any of its Subsidiaries; (B) to Caldera Systems's knowledge, violate or result in a violation of, or constitute a default under, any provision of any material law, regulation or rule, or any judgment, order, writ, decree or statute of, or any restriction imposed by, any court or governmental agency applicable to Caldera Systems or any of its Subsidiaries; (C) require from Caldera Systems any notice to, declaration or filing with, or consent or approval of any governmental authority or third party other than such filings as have been made prior to the Closing and/or as may be required to secure an exemption from qualification of the offer and sale of the Caldera Systems Shares under the Securities Act, and applicable state securities and blue sky laws; or (D) accelerate any obligation under, or give rise to a right of termination, suspension, revocation or impairment of, any material agreement, permit, license or authorization applicable to any of Caldera Systems's, or any of its Subsidiaries', business, operations, assets or properties, to which Caldera Systems, or any of its Subsidiaries, is a party or by which Caldera Systems is bound. 3.3 CAPITALIZATION. As of the Closing, without giving effect to the transactions contemplated hereby, the authorized capital stock of Caldera Systems will consist of 75,000,000 shares of common stock, of which 20,144,904 shares will be issued and outstanding and 25,000,000 shares of preferred stock of which 6,596,146 shares have been designated Series A Preferred Stock, all of which are issued and outstanding, and 5,000,000 shares have been designated Series B Preferred Stock, all of which are isssued and outstanding. As of the Closing, other than the shares described in the preceding sentence, (ii) the conversion privileges of the Series A Preferred Stock and the Series B Preferred Stock of Caldera, and (iii) currently outstanding options to purchase 5,288,882 shares of the common stock of Caldera granted to employees and members of the Board of Directors of Caldera pursuant to Caldera's 1998 Stock Option Plan and 1999 Omnibus Stock Incentive Plan, Caldera Systems has not issued any warrants, options, rights (including, without limitation, conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements or agreements of any kind for the purchase or acquisition from Caldera Systems, or any of its Subsidiaries, of any shares of its, or any of its Subsidiaries', capital stock or other securities, including, without limitation, any securities convertible into or exercisable or exchangeable for such shares or any warrants, options or other rights to acquire any such convertible securities. As of the Closing, and after giving effect to the transactions contemplated hereby, all of the outstanding shares of capital stock of Caldera Systems and each of its Subsidiaries will have been duly and validly authorized and issued, fully paid and nonassessable and not subject to any preemptive rights and will have been offered, issued, sold and delivered in compliance with applicable federal and state securities laws. Except as set forth in the Caldera Systems Articles of Incorporation and in that certain Amended and Restated Investor Rights Agreement, dated as of December 30, 1999, among Caldera Systems and the shareholders of Caldera Systems who are party thereto (the "Caldera Systems Investor Rights Agreement"), there are no preemptive rights, rights of first refusal, put or call rights or obligations or anti-dilution rights with respect to the issuance, sale or redemption of Caldera Systems's capital stock or other securities. Caldera Systems is not a party or subject to any agreement or understanding, and, to the best of Caldera Systems's knowledge, there is no agreement or understanding between any persons that affects or relates to the voting or giving of written consents with respect to any security or the voting by a director of Caldera Systems. 3.4 VALID ISSUANCE OF CALDERA SYSTEMS SHARES. The Caldera Systems Shares, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid and non-assessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and under applicable state and federal securities laws. 3.5 SUBSIDIARIES. Caldera Systems does not own or control, directly or indirectly, any interest in any other corporation, partnership, limited liability company, association or other business entity. Caldera Systems is not a participant in any joint venture, partnership or similar arrangement. 3.6 CONTRACTS AND OTHER COMMITMENTS. Neither Caldera Systems nor any of its Subsidiaries has and/or is bound by any contract, agreement, lease, commitment, or proposed transaction, judgment, order, writ or decree, written or oral, absolute or contingent, other than contracts entered into in the ordinary course of business. For the purpose of this paragraph, employment and consulting contracts and license agreements and any other agreements relating to Caldera Systems's or any of its Subsidiary's acquisition or disposition of Intellectual Property (other than standard end-user license agreements) shall not be considered to be contracts entered into in the ordinary course of business. 3.7 RELATED-PARTY TRANSACTIONS. No employee, officer, stockholder or director of Caldera Systems or any of its Subsidiaries or member of his or her immediate family is indebted to Caldera Systems, nor is Caldera Systems or any Subsidiary indebted (or committed to make loans or extend or guarantee credit) to any of them, other than (i) for payment of salary for services rendered, (ii) reimbursement for reasonable expenses incurred on behalf of Caldera Systems or such Subsidiary, and (iii) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of Caldera Systems or such Subsidiary). To the best of Caldera Systems's or such Subsidiary's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which Caldera Systems or such Subsidiary is affiliated or with which Caldera Systems or such Subsidiary has a business relationship, or any firm or corporation that competes with Caldera Systems or such Subsidiary, except that employees, stockholders, officers or directors of Caldera Systems or such Subsidiary and members of their immediate families may own stock in publicly-traded companies that may compete with Caldera Systems or such Subsidiary. To the best of Caldera Systems's or such Subsidiary's knowledge, no officer, director or stockholder or any member of their immediate families is, directly or indirectly, interested in any material contract with Caldera Systems or such Subsidiary (other than such contracts as relate to any such person's ownership of capital stock or other securities of Caldera Systems or such Subsidiary). 3.8 REGISTRATION RIGHTS. Except as set forth in the Caldera Systems Investor Rights Agreement, Caldera Systems is presently not under any obligation and has not granted any rights to register under the Securities Act any of its presently outstanding securities or any of its securities that may subsequently be issued. 3.9 PERMITS. Each of Caldera Systems and its Subsidiaries has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects or financial condition of Caldera Systems or any such Subsidiary, and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as presently planned to be conducted. Neither Caldera Systems nor any Subsidiary is in default in any material respect under any of such franchises, permits, licenses or other similar authority. 3.10 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the best of Caldera Systems's or any of its Subsidiary's knowledge, currently threatened against Caldera Systems or any of its Subsidiary's that questions the validity of this Agreement, or the right of Caldera Systems to enter into this Agreement, or to consummate the transactions contemplated hereby, or that might result, either individually or in the aggregate, in any material adverse change in the assets, business, properties, prospects, or financial condition of Caldera Systems or any of its Subsidiaries, or in any material change in the current equity ownership of Caldera Systems or any of its Subsidiaries. 3.11 RETURNS AND COMPLAINTS. Neither Caldera Systems nor any of its Subsidiaries has received any customer complaints concerning alleged defects in its products (or the design thereof) that, if true, would materially adversely affect the operations or financial condition of Caldera Systems or any of its Subsidiaries. 3.12 DISCLOSURE. Caldera Systems has provided Lineo with all the information reasonably available to it without undue expense that Lineo has requested for deciding whether to purchase the Caldera Systems Shares and all information that Caldera Systems believes is reasonably necessary to enable Lineo to make such decision. 3.13 OFFERING. Subject, in part, to the truth and accuracy of Lineo's representations set forth in this Agreement, the offer, sale and issuance of the Caldera Systems Shares as contemplated by this Agreement are exempt from the registration requirements of the Securities Act, and neither Caldera Systems, any of its Subsidiaries, nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 3.14 TITLE TO PROPERTY AND ASSETS; LEASES. Except (i) as reflected in the Caldera Systems Financial Statements (defined in paragraph 3.15), (ii) for liens for current taxes not yet delinquent, (iii) for liens imposed by law and incurred in the ordinary course of business for obligations not past due to carriers, warehousemen, laborers, materialmen and the like, (iv) for liens in respect of pledges or deposits under workers' compensation laws or similar legislation or (v) for minor defects in title, none of which, individually or in the aggregate, materially interferes with the use of such property, each of Caldera Systems and its Subsidiaries has good and marketable title to its property and assets free and clear of all mortgages, liens, claims and encumbrances. With respect to the property and assets it leases, each of Caldera Systems and its Subsidiaries is in compliance with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances, subject to clauses (i)-(v) above. 3.15 FINANCIAL STATEMENTS. Caldera Systems has delivered to Lineo its audited financial statements (balance sheet and profit and loss statement, statement of stockholders' equity and statement of cash flows, including notes thereto) at October 31, 1999 and for the fiscal year then ended (the "Caldera Systems Financial Statements"). The Caldera Systems Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated. The Caldera Systems Financial Statements fairly present the financial condition and operating results of Caldera Systems as of the dates, and for the periods, indicated therein. Except as set forth in the Caldera Systems Financial Statements, neither Caldera Systems nor any of its Subsidiaries has any material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to October 31, 1999 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Caldera Systems Financial Statements, which in both cases, individually or in the aggregate, are not material to the financial condition or operating results of Caldera Systems or any of its Subsidiaries. Except as disclosed in the Caldera Systems Financial Statements, neither Caldera Systems nor any of its Subsidiaries is a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. Caldera Systems and each of its Subsidiaries maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 3.16 CHANGES. Since October, 1999, there has not been any event or condition of any type that has materially and adversely affected the business, properties or financial condition of Caldera Systems or any of its Subsidiaries. 3.17 INTELLECTUAL PROPERTY. To the best of Caldera Systems's and its Subsidiaries' knowledge, Caldera Systems, its Subsidiaries and their products have not infringed and do not infringe the copyrights of any third party. To the best of Caldera Systems's and its Subsidiaries' knowledge, neither Caldera Systems nor its Subsidiaries has misappropriated or is misappropriating any trade secrets or proprietary confidential information of any third party, and the products of Caldera Systems and its Subsidiaries do not include or embody any trade secret or proprietary confidential information misappropriated by Caldera Systems or its Subsidiaries from any third party. To the best of Caldera Systems's and its Subsidiaries' knowledge, each of Caldera Systems and its Subsidiaries and their respective products have not infringed and do not infringe any patents, trademarks, service marks, or trade names of any third party. Each item of Intellectual Property owned by or licensed to Caldera Systems and its Subsidiaries immediately prior to the Closing hereunder will be owned by or licensed to Caldera Systems and the Subsidiary on identical terms and conditions immediately subsequent to the Closing hereunder (i.e., identical to any applicable terms and conditions immediately prior to the Closing). (i) To the best of Caldera Systems's and its Subsidiaries' knowledge, none of Caldera Systems or its Subsidiaries or their directors and officers (and employees with responsibility for Intellectual Property matters) has ever received any charge, complaint, claim, demand, or notice alleging any such infringement, misappropriation, or violation by Caldera Systems or its Subsidiaries of Intellectual Property (including any claim that Caldera Systems and its Subsidiaries must license or refrain from using any Intellectual Property rights of any third party). To the best of Caldera Systems's and its Subsidiaries' knowledge and the knowledge of directors and officers (and employees with responsibility for Intellectual Property matters) of Caldera Systems and its Subsidiaries, no third party has infringed, misappropriated, or otherwise violated any Intellectual Property rights of Caldera Systems and its Subsidiaries. (ii) The Caldera Systems Schedule of Exceptions identifies (a) each patent which has been issued or assigned to Caldera Systems or any of its Subsidiaries, (b) each pending patent application which has been filed by or for Caldera Systems or any of its Subsidiaries, (c) each trademark or service mark registration issued or assigned to Caldera Systems or any of its Subsidiaries, (d) each pending trademark or service mark application which has been filed by or for Caldera Systems or any its Subsidiaries, (e) each copyright registration issued or assigned to Caldera Systems or any of its Subsidiaries, (f) each pending copyright application which has been filed by or for Caldera Systems or any of its Subsidiaries, and (g) each license which Caldera Systems and its Subsidiaries has granted to any third party with respect to any of Caldera Systems's Intellectual Property excluding licenses to end users of Company products granted in the ordinary course of business. Caldera Systems has delivered to Lineo correct and complete copies of all such patents, registrations, applications, and licenses (as amended to date). The Caldera Systems Schedule of Exceptions also identifies each trade name and each unregistered trademark or service mark owned or claimed by any of Caldera Systems and its Subsidiaries in connection with any of their businesses. With respect to each IP item identified in the Caldera Systems Schedule of Exceptions: (A) Caldera Systems and its Subsidiaries possess all right, title, and interest in and to the IP item, free and clear of any mortgage, lien, claim, license, or other encumbrance; (B) to the best of Caldera Systems's and its Subsidiaries' knowledge, the IP item is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; (C) to the best of Caldera Systems's or its Subsidiaries' knowledge, no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or, to the best of Caldera Systems's or its Subsidiaries' knowledge, and the knowledge of the directors and officers (and employees with responsibility for Intellectual Property matters) of Caldera Systems and its Subsidiaries, is threatened which challenges the legality, validity, enforceability, use, or ownership of the IP item; and (D) none of Caldera Systems and its Subsidiaries has ever agreed to indemnify any Person for or against any interference, infringement, misappropriation, or other conflict with respect to the IP item. (iii) The Caldera Systems Schedule of Exceptions identifies each item of Intellectual Property that any third party owns and licenses to any of Caldera Systems and its Subsidiaries, excluding licenses to commercially available software products (e.g., Windows, Microsoft Office, etc.) used by any of Caldera Systems and its Subsidiaries as an end user. Caldera Systems has delivered to Lineo correct and complete copies of all agreements applicable to such licenses (as amended to date). The term "license" is intended to include "sublicense." With respect to each such license and agreement required to be identified in the Caldera Systems Schedule of Exceptions, to the best of Caldera Systems's or its Subsidiaries' knowledge; the license and agreement are legal, valid, binding, enforceable, and in full force and effect; the license and agreement will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms on the day immediately following the Closing; no party to the agreement is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default or permit termination, modification, or acceleration thereunder; no party to the agreement has repudiated any provision thereof; the license is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or is threatened which challenges the legality, validity, or enforceability of the license or agreement. (iv) To the best of Caldera Systems's and its Subsidiaries' knowledge and to the knowledge of the directors and officers (and employees with responsibility for Intellectual Property matters) of Caldera Systems and its Subsidiaries, neither Caldera Systems nor any of its Subsidiaries will infringe, misappropriate, or otherwise violate any Intellectual Property rights of third parties as a result of the continued operation of its businesses as presently conducted and as presently proposed to be conducted. 3.18 MANUFACTURING AND MARKETING RIGHTS. Except as set forth on the Caldera Systems Schedule of Exceptions, neither Caldera Systems nor any of its Subsidiaries has granted rights to manufacture, produce, assemble, license, market or sell its products to any other person and is not bound by any agreement that affects Caldera Systems's or such Subsidiary's exclusive right to develop, manufacture, assemble, distribute, market or sell its products. 3.19 EMPLOYEES; EMPLOYEE COMPENSATION. To the best of Caldera Systems's and its Subsidiary's knowledge, the relationships between Caldera Systems and its Subsidiaries and their respective employees are good and no labor dispute or claims are pending or threatened. None of Caldera Systems's or any of its Subsidiary's employees belongs to any union or collective bargaining unit. To the best of Caldera Systems's and its Subsidiaries' knowledge, Caldera Systems and each of its Subsidiaries has complied in all material respects with all applicable state and federal laws related to employment. To the best of Caldera Systems's and it Subsidiary's knowledge, no employee of Caldera Systems or any such Subsidiary is or will be in violation of any judgment, decree or order, or any term of any employment contract, patent disclosure agreement, or other contract or agreement relating to the relationship of any such employee with Caldera Systems, any of its Subsidiaries, or any other party because of the nature of the business conducted or presently proposed to be conducted by Caldera Systems or any of its Subsidiaries or to the use by the employee of his or her best efforts with respect to such business. Caldera Systems is not a party to or bound by any currently effective employment contract, deferred compensation agreement, incentive plan, profit sharing plan, retirement agreement or other employee compensation agreement. Neither Caldera Systems nor any of its Subsidiaries is aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with Caldera Systems or any of its Subsidiaries, nor does Caldera Systems or any of its Subsidiaries have a present intention to terminate the employment of any of the foregoing. Subject to general principles related to wrongful termination of employees, the employment of each officer and employee of Caldera Systems and each of its Subsidiaries is terminable at the will of Caldera Systems or such Subsidiary, as applicable. 3.20 TAX RETURNS, PAYMENTS, AND ELECTIONS. Caldera Systems and each of its Subsidiaries has timely filed all tax returns and reports (federal, state and local) as required by law. These returns and reports are true and correct in all material respects. Caldera Systems and each of its Subsidiaries has paid all taxes and other assessments due, except those contested by it in good faith. Neither Caldera Systems nor any of its Subsidiaries has elected pursuant to the Code, to be treated as an S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a material effect on the business, properties, prospects or financial condition of Caldera Systems or any of its Subsidiaries. Neither Caldera Systems nor any of its Subsidiaries has ever had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. None of Caldera Systems's or any Subsidiary's income tax returns (federal or otherwise) and none of its state income or franchise tax or sales or use tax returns has ever been audited by governmental authorities. Caldera Systems and each of its Subsidiaries has made adequate provisions on its books of account for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. Caldera Systems and each of its Subsidiaries has withheld or collected from each payment made to each of its employees, the amount of all taxes, including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositaries. 3.21 ENVIRONMENTAL AND SAFETY LAWS. Neither Caldera Systems nor any of its Subsidiaries is in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. SECTION 4. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE PARTIES (a) Each party purchasing securities hereunder represents to the other that (i) it has such knowledge and experience in financial and business matters and in private placement transactions of securities of companies in a similar stage of development as the other party that it is capable of evaluating the merits and risks of the investment contemplated by such purchasing party under this Agreement and making an informed investment decision with respect thereto, (ii) it is able to bear the economic risk of such investment and can afford to sustain a substantial loss on such investment, (iii) it is an "accredited investor" as such term is defined in Rule 501 under the Securities Act, (iv) it is purchasing the securities purchased by it hereunder for its own account, for investment only and not with a view to, or any present intention of, effecting a resale ordistribution of or selling or granting any participation in such securities or any part thereof, (v) it realizes that the basis for any exemption pursuant to which the securities such party is purchasing hereunder have been issued may not be present if, notwithstanding the representations made by such party hereunder, such party has in mind merely acquiring the securities is is purchasing hereunder for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise and (vi) it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to such securities. Each party acknowledges that the securities purchased by it hereunder have not been registered under the Securities Act or the securities laws of any state or other jurisdiction in reliance on an exemption from registration thereunder and reliance on such exemption by the issuer of such securities is predicated on the representations and warranties set forth in this Agreement. Furthermore, each party purchasing securities hereunder acknowledges that such securities cannot be disposed of unless they are subsequently registered under the Securities Act and any applicable state laws or an exemption from such registration is available. (b) Each party understands that the securities have not been registered under the Securities Act, that there is no public market for the securities, and that it must bear the economic risk of investment for an indefinite period of time. In particular, such party is aware that the securities purchased by it hereunder may not be sold pursuant to Rule 144 promulgated under the Securities Act unless all of the conditions of that Rule are met. Among the conditions for use of Rule 144 may be the availability of current information to the public about the issuer of such securities. Such information is not now available and such issuer has no present plans to make such information available. (c) Each party represents that there are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of such party. Such party (the "Indemnifying Party") agrees to indemnify and to hold harmless the other from any liability for any commission or compensation in the nature of a finder's fee (and the cost and expenses of defending against such liability or asserted liability) for which such Indemnifying Party or any of its officers, partners, employees or representatives is responsible. (d) Each party believes it has received all the information it considers necessary or appropriate for deciding whether to purchase the securities purchased by it hereunder. Such party further represents that it has had an opportunity to ask questions and receive answers from the party issuing such securities regarding the terms and conditions of the offering of such securities and the business, properties, prospects and financial condition of such issuer and to obtain additional information (to the extent such issuer possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to such party or to which such party had access. The foregoing, however, does not limit or modify the representations and warranties of such issuer in Section 2 or 3, as applicable, of this Agreement or the right of such party to rely thereon. SECTION 5. CONDITIONS TO CLOSING 5.1 CONDITIONS OF CALDERA SYSTEMS'S OBLIGATIONS AT CLOSING. The obligations of Caldera Systems under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions, the waiver of which shall not be effective against Caldera Systems unless it consents in writing thereto: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Lineo and its Subsidiaries contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. (b) PERFORMANCE. Lineo shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. (c) QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the L:ineo Shares pursuant to this Agreement shall be duly obtained and effective as of the Closing. (d) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Caldera Systems's counsel, which shall have received all such counterpart original and certified or other copies of such documents as it may reasonably request. 5.2 CONDITIONS OF LINEO'S OBLIGATIONS AT CLOSING. The obligations of Lineo under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions, the waiver of which shall not be effective against Lineo unless it consents in writing thereto: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Caldera Systems and its Subsidiaries contained in Section 3 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. (b) PERFORMANCE. Caldera Systems and its Subsidiaries shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. (c) QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Caldera Systems Shares pursuant to this Agreement shall be duly obtained and effective as of the Closing. (d) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Lineo's counsel, which shall have received all such counterpart original and certified or other copies of such documents as it may reasonably request. SECTION 6. POST-CLOSING COVENANTS OF CALDERA SYSTEMS 6.1 FINANCIAL STATEMENTS. Caldera Systems shall deliver to Lineo: (a) as soon as available, but in any event within 45 days after the end of each quarterly accounting period in each fiscal year, unaudited statements of income and cash flows of Caldera Systems for such quarterly period and for the period from the beginning of the fiscal year to the end of such quarter, and unaudited balance sheets of Caldera Systems as of the end of such quarterly period, setting forth in each case comparisons to the corresponding period in the preceding fiscal year, and all such statements shall be prepared in accordance with generally accepted accounting principles, consistently applied, subject to the absence of footnote disclosures and to normal year-end adjustments for recurring accruals, and shall be certified by Caldera Systems's chief financial officer; (b) within 90 days after the end of each fiscal year, audited statements of income and cash flows of Caldera Systems for such fiscal year, and audited balance sheets of Caldera Systems as of the end of such fiscal year, setting forth in each case comparisons to the preceding fiscal year, all prepared in accordance with generally accepted accounting principles, consistently applied, and accompanied by, with respect to the consolidated portions of such statements, an opinion containing no exceptions or qualifications (except for qualifications regarding specified contingent liabilities) of an independent accounting firm of recognized national standing; and (c) prompt notification of any matter or matters which would reasonably be expected to, individually or in the aggregate, have a material adverse effect on the financial condition, operating results, business, assets, operations, employee relations or customer or supplier relations of Caldera Systems. Each of the financial statements referred to in subparagraphs (a) and (b) shall be true and correct in all material respects as of the dates and for the periods stated therein, subject in the case of the unaudited financial statements to changes resulting from normal year-end adjustments for recurring accruals (none of which would, alone or in the aggregate, be materially adverse to the financial condition, operating results, business, assets, operations, business prospects, employee relations or customer or supplier relations of Caldera Systems). 6.2 CURRENT PUBLIC INFORMATION. At all times after Caldera Systems has filed a registration statement with the Securities and Exchange Commission pursuant to the requirements of either the Securities Act or the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), Caldera Systems shall file all reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the Securities and Exchange Commission thereunder and shall take such further action with respect to the provision of information as any holder or holders of Caldera Systems Shares may reasonably request, all to the extent required to enable such holders to sell Securities pursuant to Rule 144 adopted by the Securities and Exchange Commission under the Securities Act (as such rule may be amended from time to time) or any similar rule or regulation hereafter adopted by the Securities and Exchange Commission. Upon request, Caldera Systems shall deliver to any holder of Caldera Systems Shares a written statement as to whether it has complied with such requirements. SECTION 7. POST-CLOSING COVENANTS OF LINEO 7.1 FINANCIAL STATEMENTS. Lineo shall deliver to Caldera Systems: (a) audited financial statements for Lineo for the fiscal year ended October 31, 1999 including balance sheet, profit and loss statement, statement of stockholders' equity and statement of cash flows (including notes thereto) which Lineo expects to be completed by January 31, 2000; (b) as soon as available, but in any event within 45 days after the end of each quarterly accounting period in each fiscal year, unaudited statements of income and cash flows of Lineo for such quarterly period and for the period from the beginning of the fiscal year to the end of such quarter, and unaudited balance sheets of Lineo as of the end of such quarterly period, setting forth in each case comparisons to the corresponding period in the preceding fiscal year, and all such statements shall be prepared in accordance with generally accepted accounting principles, consistently applied, subject to the absence of footnote disclosures and to normal year-end adjustments for recurring accruals, and shall be certified by Lineo's chief financial officer; (c) within 90 days after the end of each fiscal year, audited statements of income and cash flows of Lineo for such fiscal year, and audited balance sheets of Lineo as of the end of such fiscal year, setting forth in each case comparisons to the preceding fiscal year, all prepared in accordance with generally accepted accounting principles, consistently applied, and accompanied by, with respect to the consolidated portions of such statements, an opinion containing no exceptions or qualifications (except for qualifications regarding specified contingent liabilities) of an independent accounting firm of recognized national standing; and (d) prompt notification of any matter or matters which would reasonably be expected to, individually or in the aggregate, have a material adverse effect on the financial condition, operating results, business, assets, operations, employee relations or customer or supplier relations of Lineo. Each of the financial statements referred to in subparagraphs (a), (b) and (c) shall be true and correct in all material respects as of the dates and for the periods stated therein, subject in the case of the unaudited financial statements to changes resulting from normal year-end adjustments for recurring accruals (none of which would, alone or in the aggregate, be materially adverse to the financial condition, operating results, business, assets, operations, business prospects, employee relations or customer or supplier relations of Lineo). 7.2 CURRENT PUBLIC INFORMATION. At all times after Lineo has filed a registration statement with the Securities and Exchange Commission pursuant to the requirements of either the Securities Act or the Exchange Act, Lineo shall file all reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the Securities and Exchange Commission thereunder and shall take such further action with respect to the provision of information as any holder or holders of Lineo Shares may reasonably request, all to the extent required to enable such holders to sell Securities pursuant to Rule 144 adopted by the Securities and Exchange Commission under the Securities Act (as such rule may be amended from time to time) or any similar rule or regulation hereafter adopted by the Securities and Exchange Commission. Upon request, Lineo shall deliver to any holder of Lineo Shares a written statement as to whether it has complied with such requirements. 7.3 LINEO IP SCHEDULE. Lineo shall deliver the IP Schedule to Caldera Systems within thirty days of the date of this Agreement. SECTION 8. GENERAL 8.1 AMENDMENTS, WAIVERS AND CONSENTS. For the purposes of this Agreement and all agreements executed pursuant hereto, no course of dealing between or among any of the parties hereto and no delay on the part of any party hereto in exercising any rights hereunder or thereunder shall operate as a waiver of the rights hereof and thereof. No covenant or other provision hereof may be waived otherwise than by a written instrument signed by the party or parties so waiving such covenant or other provision. No amendment to this Agreement may be made without the written consent of all of the parties hereto. 8.2 LEGEND ON SECURITIES. The parties acknowledge and agree that the following legend shall be typed on each certificate evidencing any of the securities issued hereunder held at any time by a party: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES AND BLUE SKY LAWS RELATING TO THE DISPOSITION OF SECURITIES, PROVIDED THAT AN OPINION OF COUNSEL TO SUCH EFFECT IS PROVIDED TO THE ISSUER OF SUCH SECURITIES, IN FORM SATISFACTORY TO SUCH ISSUER, IN CONNECTION THEREWITH. 8.3 GOVERNING LAW. This Agreement shall be deemed to be a contract made under, and shall be construed in accordance with, the laws of the State of Utah, as applied to agreements among Utah residents entered into and to be performed entirely within Utah, without giving effect to conflict of laws principles thereof. 8.4 SECTION HEADINGS. The descriptive headings in this Agreement have been inserted for convenience only and shall not be deemed to limit or otherwise affect the construction or interpretation of any provision thereof or hereof. 8.5 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute but one and the same document. 8.6 ENTIRE AGREEMENT. This Agreement, including the exhibits, documents and instruments referred to herein or therein, constitutes the entire agreement, and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. 8.7 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS The warranties, representations and covenants of Lineo and Caldera Systems contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing. 8.8 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including permitted transferees of any securities issued hereunder). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 8.9 NOTICES. Unless otherwise provided, all notices and other communications required or permitted under this Agreement shall be in writing and shall be mailed by United States first-class mail, postage prepaid, sent by facsimile or delivered personally by hand or by a nationally recognized courier addressed to the party to be notified at the address or facsimile number indicated for such person at the address set forth below, or at such other address or facsimile number as such party may designate by ten (10) days' advance written notice to the other parties hereto: If to Caldera Systems: Caldera Systems, Inc. 240 West Center Street Orem, Utah 84057 Attention: President If to Lineo: Lineo, Inc. 383 South 520 West Lindon, Utah 84042 Attention: Chief Financial Officer All such notices and other written communications shall be effective on the date of mailing, confirmed facsimile transfer or delivery. 8.10 ATTORNEYS' FEES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to be reimbursed by the non-prevailing party for reasonable attorneys' fees, costs and disbursements, in addition to any other relief to which such party may be entitled. 8.11 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. SECTION 9 DEFINITIONS For the purposes of this Agreement, each of the following terms shall have the meaning set forth opposite such term below: "knowledge" of a person shall mean actual knowledge of such person after (i) with respect to representations, warranties and statements made by or with respect to Caldera Systems, inquiry of the officers and directors of Caldera Systems and those management-level employees of Caldera Systems who have responsibility for the area of inquiry and (ii) with respect to representations, warranties and statements made by or with respect to Lineo, inquiry of the officers and directors of Lineo and those management-level employees of Lineo who have responsibility for the area of inquiry. "Intellectual Property" shall mean (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, trade names, and corporate names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all mask works and all applications, registrations, and renewals in connection therewith, (e) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (f) all computer software (including data and related documentation), (g) all other proprietary rights, and (h) all copies and tangible embodiments thereof (in whatever form or medium). "Subsidiary" shall mean any corporation with respect to which a specified party (or a Subsidiary thereof) owns a majority of the common stock or has the power to vote or direct the voting of sufficient securities to elect a majority of the directors. "Subsidiaries" shall mean, for purposes of this Agreement, each Subsidiary of a party, collectively and individually. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. Lineo, Inc., a Utah corporation By: /s/ Bryan Sparks, President and CEO Caldera Systems, Inc., a Utah corporation By: /s/ Ransom Love, President and CEO SCHEDULE OF EXCEPTIONS SECTION 2.6 Lineo is a party to the following licensing agreements:
- ------------------ ----------------------------------- ------------------------------------ COMPANY Technology Lineo Product Affected - ------------------ ----------------------------------- ------------------------------------ Viosoft Graphical IDE Embedix SDK - ------------------ ----------------------------------- ------------------------------------ Nombas Java Script Browser - ------------------ ----------------------------------- ------------------------------------ Voxware ROIP Browser - ------------------ ----------------------------------- ------------------------------------ Caldera, Inc. DR DOS, lanwork place, personal Browser (lanwork place only), DR netware DOS - ------------------ ----------------------------------- ------------------------------------
Lineo is also party to various and numerous end user license agreements. SECTION 2.7 Lineo's auditors are, in the course of completing an audit, calculating amounts owed by Lineo to Caldera, Inc., Lineo's single largest shareholder. Current estimates place the amount of the debt at $1.5 - $2.0 million. SECTIONS 2.14, 2.15, 2.16 Lineo is in the process of completing its first independent audit. The only financial information available at this time is an unaudited trial balance, which has been made available to Caldera Systems. Lineo is thus unable to make any of the representations contained in Sections 2.14, 2,15 and 2.16 regarding its financial condition. Lineo expects its audit to be completed by February 15, 2000. Upon completion of the audit, Lineo will provide a copy of its audited financial statements to Caldera Systems. In the meantime, Lineo will make its Chief Financial Officer, Greg Hill, available to answer questions from Caldera Systems regarding Lineo's financial condition. SECTION 2.17 Lineo does not have a list of intellectual property as contemplated by Section 2.17. Lineo will provide Caldera Systems such a list within 30 days of the date of this Agreement. SECTION 2.20 Lineo has not timely filed all tax returns and reports. As part of its audit process, Lineo is currently completely all due and overdue tax returns and reports. These returns and reports will be filed as soon as they are complete. EX-10.5 9 EXHIBIT 10.5 EXHIBIT 10.5 DR DOS LICENSE AGREEMENT THIS LICENSE AGREEMENT (this "Agreement") is made and entered into this 1st day of September, 1998 by and between Caldera, Inc., a Utah corporation ("Licensor"), and Caldera Thin Clients, Inc., a Utah corporation ("Licensee"). RECITALS WHEREAS, Licensor owns all right, title and interest in and to that certain technology described on EXHIBIT A hereto (the "Technology"); and WHEREAS, Licensor is willing to grant to Licensee a broad license to use the Technology in accordance with the terms and conditions of this Agreement revocable only upon the occurrence of certain specific events described herein, in exchange for which Licensor shall be entitled to receive shares of Licensee's capital stock. AGREEMENT NOW, THEREFORE, in consideration of the promises and the mutual covenants contained herein, the parties agree as follows: 1. LICENSE GRANT. 1.1. LICENSE TO THE TECHNOLOGY. Subject to the terms and conditions of this Agreement, Licensor hereby grants to Licensee a perpetual, non-exclusive, royalty-free, worldwide license to make, use, sell, reproduce, distribute and sublicense the Technology and to prepare derivative works from the Technology. 1.2. TITLE. All right, title, and interest in and to the Technology shall remain exclusively with Licensor. All right, title, and interest in and to any and all modifications, improvements or derivative works of or to the Technology (the "Derivatives") shall vest exclusively with Licensee. Licensee shall do nothing to divest, challenge or disturb Licensor's title to the Technology. Licensee shall take all reasonable steps to protect any of Licensor's proprietary rights in connection with the Technology. The provisions of this Section 1.2 shall survive termination of this Agreement. 1.3. SUBLICENSES. As a manufacturer and supplier of products of the Technology, Licensee shall have the right to sublicense users and distributors to use the Technology in the ordinary course of exploiting the Technology. 1 1.4. LICENSEE STOCK. In consideration of the license granted hereunder, Licensor shall be entitled to receive shares of Licensee's Common Stock, no par value. 2. REPRESENTATIONS AND WARRANTIES. 2.1. TITLE. Licensor represents and warrants that (i) it has good title to the Technology and (ii) it is authorized to grant the license provided for herein. 2.2. NO INFRINGEMENT. Licensor warrants that, to the best of its knowledge, the Technology does not violate or infringe any patent, copyright, trademark, trade secret or other proprietary right of any third party and that Licensor is not aware of any facts upon which such a claim for infringement could be based. Licensor will promptly notify Licensee if it becomes aware of any claim or any facts upon which such a claim could reasonably or legitimately be based. 3. TERM AND TERMINATION. 3.1. TERM. The license granted hereunder shall have a perpetual term unless terminated as provided below. 3.2. TERMINATION. The license granted hereunder may be terminated as follows: 3.2.1. By written agreement of the parties; 3.2.2. By either party in the event of a material breach of this Agreement by the other party and such breach is not cured within 30 days of written notice thereof; 3.2.3. By Licensor in the event that Licensee ceases doing business as a going concern, is adjudged insolvent or bankrupt, or upon the institution of any proceeding by or against it seeking relief, reorganization or arrangement under any laws relating to insolvency (except for a proceeding that is commenced involuntarily and dismissed within 60 days), or upon the appointment of any of a receiver, liquidator or trustee of any of its property or assets, or upon the liquidation, dissolution or winding up of its business or otherwise seeks protection against creditors' demands for payment; or 3.2.4. By Licensor in the event Licensee allows usage of the Technology in violation of this Agreement. 2 3.3. EFFECT OF TERMINATION. Upon the termination of this Agreement, Licensee shall immediately discontinue use of the Technology. The license shall terminate upon termination of this Agreement. 3.4. DISPOSITION OF TECHNOLOGY. Upon termination of this Agreement, Licensee shall, pursuant to Licensor's instructions, return or destroy the Technology and all copies thereof (in all forms, electronic or otherwise) that are in the possession, custody, or control of Licensee, except that Licensee may retain one copy of the Technology (and any documentation provided therewith by Licensor) solely for purposes of post-termination customer support. 3.5. SURVIVAL. The termination of this Agreement shall not relieve either party of any liability that accrued prior thereto nor shall affect the continued operation or enforcement of any provision of this Agreement which, by its express terms, shall survive termination. 4. ENFORCEMENT OF IP RIGHTS. 4.1. Licensee shall have the right to, and shall at the direction of Licensor, enforce all of the licensed intellectual property rights against infringement by third parties. Licensor agrees to cooperate with such enforcement efforts. In the event that Licensee chooses not to enforce the licensed rights against an infringer, Licensor may do so and may retain all advantages obtained thereby. 5. GENERAL. 5.1. WAIVER OF PERFORMANCE. A failure of either party hereto at any time to require performance by the other party of any provision of this Agreement will in no way affect the right of the first party to require such performance at any time thereafter. The waiver by either party of a breach by the other party of any provision of this Agreement will in no way be construed as a waiver of any succeeding breach of such provision or a waiver of the provision itself. 5.2. LAW AND VENUE. This Agreement shall be construed and enforced in accordance with the laws of the State of Utah. 5.3. EQUITABLE RELIEF. The parties acknowledge and agree that remedies at law may be inadequate to protect against breaches of this Agreement and expressly consent to the granting of equitable relief, whether temporary, preliminary or final, without proof of actual damages, to prevent any actual or threatened breach. 3 5.4. ASSIGNMENT. Except as expressly permitted herein, neither this Agreement nor any right hereunder may be assigned by either party in whole or in part without the express prior written consent of the other party, which may be withheld for any or no reason. 5.5. ENTIRE AGREEMENT. This Agreement and the documents referenced herein constitute the entire understanding and agreement of the parties with respect to the subject matter of this Agreement and supersede all prior agreements or understandings, written or oral, between the parties with respect to the subject matter of this Agreement. 5.6. AMENDMENTS. No change in, addition to, or waiver of any of the terms and provisions of this Agreement shall be binding unless approved by the parties hereto in a writing signed by both parties. 5.7. SEVERABILITY. If any provision of this Agreement is held to be invalid, void or unenforceable, the remaining provisions of this Agreement nevertheless will continue in full force and effect without being impaired or invalidated in any way. 5.8. ATTORNEYS' FEES. Except as otherwise provided herein, in the event of any claim or controversy between the parties relating to this Agreement or to the breach hereof, the prevailing party in such action shall be entitled to recover from the other party the costs and expenses, including reasonable fees of attorneys, experts and other technical advisors, incurred in taking or defending such action, including on appeal. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. LICENSOR: LICENSEE: Caldera, Inc., Caldera Thin Clients, Inc., a Utah corporation a Utah corporation By____________________________ By____________________________ Bryan Sparks, President Its____________________________ 4 EXHIBIT A DESCRIPTION OF TECHNOLOGY The technology is the "Transferred Assets," as that term is defined in Section 2.14 of the Asset Purchase Agreement by and between Caldera, Inc. and Novell, Inc., dated July 23, 1996, and attached hereto as Exhibit B, together with any derivative works based thereon created by Caldera, Inc. 5 EXHIBIT B JULY 23, 1996, ASSET PURCHASE AGREEMENT 6 EX-10.6 10 EXHIBIT 10.6 EXHIBIT 10.6 TECHNOLOGY ASSIGNMENT AGREEMENT THIS TECHNOLOGY ASSIGNMENT AGREEMENT (this "Agreement") is made and entered into this 29th day of December, 1999 by and between The Canopy Group ("Assignor") and Lineo, Inc., a Utah corporation ("Assignee"). RECITALS WHEREAS, Assignor owns the right, title and interest in and to that certain technology described on EXHIBIT A, including the source code and all affiliated technology (the "Technology"); and WHEREAS, Assignor wishes to transfer and assign all right, title and interest in and to the Technology to Assignee. AGREEMENT NOW, THEREFORE, for good and valuable consideration of Ten Dollars ($10.00), which the parties hereby acknowledge to be sufficient consideration, the parties agree as follows: 1. ASSIGNMENT. Assignor hereby transfers and assigns all right, title and interest in and to the Technology to Assignee effective as of the date hereof, and hereby waives any and all claims of ownership thereto and releases Assignee from all such claims. 2. REPRESENTATIONS AND WARRANTIES. 2.1 TITLE. Assignor hereby represents and warrants that (i) it has good title to the Technology and (ii) it is authorized to make the assignment provided for herein. 2.2 NO INFRINGEMENT. Assignor warrants that, to the best of its knowledge, the Technology does not violate or infringe any patent, copyright, trademark, trade secret or other proprietary right of any third party and that Assignor is not aware of any facts upon which such a claim for infringement could be based. Assignor will promptly notify Assignee if it becomes aware of any claim or any facts upon which such a claim could reasonably or legitimately be based. 3. GENERAL. 1 3.1 LAW AND VENUE. This Agreement shall be construed and enforced in accordance with the laws of the State of Utah. 3.2 EQUITABLE RELIEF. The parties acknowledge and agree that remedies at law may be inadequate to protect against breaches of this Agreement and expressly consent to the granting of equitable relief, whether temporary, preliminary or final, without proof of actual damages, to prevent any actual or threatened breach. 3.3 ENTIRE AGREEMENT. This Agreement and the documents referenced herein constitute the entire understanding and agreement of the parties with respect to the subject matter of this Agreement and supersede all prior agreements or understandings, written or oral, between the parties with respect to the subject matter of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. ASSIGNOR: ASSIGNEE: The Canopy Group Lineo, Inc., a Utah corporation By /s/ Ralph Yarro By /s/ Ralph Yarro 2 EXHIBIT A DESCRIPTION OF TECHNOLOGY The technology being transferred is commonly referred to as the "Willows" technology. It is a set of software libraries that emulate the Microsoft Win16 and Win32 Application Programming Interfact ("API"). A developer ma make use of the libraries, by compiling against them, to create software that emulates the functionality of the Win16 and Win32 API. The Willows technology includes Win16/Win32 binary loader and executor, and related applications, a software Intel instruction set emulator, demonstration programs, tools and utilities. The Willows technology also includes all derivative works available from Award to Canopy. 3 EX-10.7 11 EXHIBIT 10.7 EXHIBIT 10.7 LINEO, INC. - -------------------------------------------------------------------------------- RECAPITALIZATION AGREEMENT Series A Class 1 Preferred Stock - -------------------------------------------------------------------------------- February __, 2000 LINEO, INC. RECAPITALIZATION AGREEMENT THIS RECAPITALIZATION AGREEMENT (this "Agreement") is made as of this __ day of February, 2000, by and between Lineo, Inc., a Delaware corporation (together with any predecessors or successors thereto; the "Company"), and The Canopy Group, Inc., a Utah corporation (together with its successors and assigns; "Canopy"). RECITALS A. Canopy currently owns 14,496,617 shares of the Common Stock of the Company. B. Canopy wishes to exchange 5,000,000 shares of such Common Stock (the "Canopy Common Stock") for 5,000,000 shares of the Company's Series A Class 1 Convertible Preferred Stock, $.001 par value per share. C. The Company has authorized the issuance to Canopy of 5,000,000 shares of Series A Class 1 Convertible Preferred Stock having the rights and preferences set forth in the Certificate of Designation attached as EXHIBIT A hereto (the "Certificate"), in exchange for the Canopy Common Stock. D The parties hereto desire to set forth the terms of the issuance of the Series A Class 1 Preferred Stock. AGREEMENT NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. RECAPITALIZATION. 1.1 Description of Securities. The Company's authorized capital stock consists of 100,000,000 shares of Common Stock, par value $.001 per share, and 30,000,000 shares of Preferred Stock, par value $.001 per share, of which 5,000,000 shares have been designated as Series A Class 1 Convertible Preferred Stock and 2,500,000 shares have been designated as Series A Class 2 Convertible Preferred Stock. The Company has authorized and has reserved, and covenants to continue to reserve, a sufficient number of shares of its Common Stock to satisfy the rights of conversion of the holders of the Series A Class 1 Convertible Preferred Stock. For purposes of this Agreement, (a) the shares of Series A Class 1 Convertible Preferred Stock to be acquired by Canopy from the Company hereunder are referred to as the "Series A Class 1 Preferred Shares," (b) the shares of Common Stock issuable upon conversion of the Series A Class 1 Preferred Shares are referred to 1 as the "Conversion Shares" and (c) the Series A Class 1 Preferred Shares and the Conversion Shares are sometimes referred to collectively as the "Securities." 1.2 EXCHANGE. Upon the terms and subject to the conditions herein, and in reliance on the representations and warranties set forth in Section 2, the Company agrees to issue to Canopy, at the Closing (as defined below in Section 1.3), 5,000,000 Series A Class 1 Preferred Shares in exchange for the surrender and cancellation of the Canopy Common Stock, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and the Company hereby grants Canopy the rights set forth herein. 1.3 CLOSING. The closing of the issuance of the Series A Class 1 Preferred Shares (the "Closing") shall take place at the offices of the Company at 10:00 a.m. on February __, 2000, or at such other time and place as the parties hereto may agree (the "Closing Date"). SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants the following, except as set forth in the schedule of exceptions attached hereto as EXHIBIT B (the "Disclosure Schedule"): 2.1 ORGANIZATION AND CORPORATE POWER. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is qualified to do business as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a material adverse effect on its assets, liabilities, condition (financial or other), business, results of operations or prospects (a "Material Adverse Effect"). The Company has all required corporate power and authority to carry on its business as presently conducted, to enter into and perform this Agreement and the agreements contemplated hereby to which it is a party and to carry out the transactions contemplated hereby and thereby, including the issuance and exchange of the Securities and the issuance of the Conversion Shares. The Company is not in violation of any term of the Certificate of Incorporation and Bylaws of the Company, as amended to date (the "Certificate of Incorporation" and the "Bylaws," respectively). 2.2 AUTHORIZATION AND NON-CONTRAVENTION. The execution, delivery and performance by the Company of this Agreement and all other agreements, documents and instruments to be executed and delivered by the Company as contemplated hereby (including, without limitation, the Certificate) and the issuance and delivery of (i) the Series A Class 1 Preferred Shares and (ii) upon the conversion of the Series A Class 1 Preferred Shares, the Conversion Shares, have been duly authorized by all necessary corporate and other action of the Company. This Agreement and each such other agreement, document and instrument (including, without limitation, the Certificate) constitute valid and binding obligations of the Company, enforceable in accordance with their respective terms. The execution and delivery by the Company of this Agreement and each other agreement, document 2 and instrument to be executed and delivered by the Company pursuant hereto or as contemplated hereby (including, without limitation, the Certificate) and the performance by the Company of the transactions contemplated hereby and thereby, including, without limitation, the issuance and delivery of (i) the Series A Class 1 Preferred Shares and (ii) upon the conversion of the Series A Class 1 Preferred Shares, the Conversion Shares, do not and will not: (A) violate, conflict with or result in a default (whether after the giving of notice, lapse of time or both) under any material contract or obligation to which the Company is a party or by which it or its assets are bound, or any provision of the Certificate of Incorporation or Bylaws of the Company, or cause the creation of any material encumbrance upon any of the assets of the Company; (B) violate or result in a violation of, or constitute a default under, any provision of any material law, regulation or rule, or any order of, or any restriction imposed by, any court or governmental agency applicable to the Company; (C) require from the Company any notice to, declaration or filing with, or consent or approval of any governmental authority or third party other than as may be required to secure an exemption from qualification of the offer and sale of the Series A Class 1 Preferred Shares under the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities and blue sky laws; or (D) accelerate any obligation under, or give rise to a right of termination of, any material agreement, permit, license or authorization to which the Company or any of its assets is a party or by which the Company or any of its assets is bound. 2.3 CAPITALIZATION. As of the Closing and after giving effect to the transactions contemplated hereby, the authorized capital stock of the Company will consist of 100,000,000 shares of Common Stock, $.001 par value per share, of which 17,738,437 shares will be issued and outstanding, and 30,000,000 shares of Preferred Stock, $.001 par value per share, of which (a) 5,000,000 shares shall be designated as Series A Class 1 Preferred Stock, of which 5,000,000 will be issued and outstanding and (b) 2,500,000 shares shall be designated as Series A Class 2 Preferred Stock of which 2,500,000 shares will be issued and outstanding.. The shares of Common Stock are held by the stockholders listed in Section 2.3 of the Disclosure Schedule in the amounts listed therein. In addition, the Company has authorized and reserved for issuance upon conversion of the Series A Class 1 Preferred Shares up to 5,000,000 Conversion Shares (subject to adjustment for stock splits, stock dividends and the like) and has reserved for issuance upon exercise of options under the Company's stock option plan (the "Plan") 2,000,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like). Other than as described above, the Company has not issued or agreed to issue and is not obligated to issue any warrants, options or other rights to purchase or acquire any shares of its capital stock, or any securities convertible into or exercisable or exchangeable for such shares or any warrants, options or other rights to acquire any such convertible securities. As of the Closing, and after giving effect to the transactions contemplated hereby, all of the outstanding shares of capital stock of the Company (including, without limitation, the Series A Class 1 Preferred Shares) will have been duly and validly authorized and issued, fully paid and nonassessable and, except as set forth herein, not subject to any preemptive rights and will have been offered, issued, sold and delivered in compliance with applicable federal and state securities and blue sky laws. The Conversion Shares will, upon issuance, be duly and validly authorized and issued, fully paid and nonassessable, and not subject to any preemptive rights, and will be offered, issued, sold and delivered in compliance with applicable federal and state securities and blue sky laws. The 3 relative rights, preferences and other provisions relating to the Series A Class 1 Preferred Shares are as set forth in EXHIBIT A hereto. 2.4 SUBSIDIARIES; INVESTMENTS. Other than 1,250,000 shares of Common Stock of Caldera Systems, Inc., a representative office located in Taiwan and a subsidiary located in the United Kingdom, the Company has no subsidiaries and no interests in any corporation, joint venture, partnership or other entity. 2.5 FINANCIAL STATEMENTS. The Company has previously furnished to Canopy copies of its draft audited financial statements (balance sheet, statement of operations; statement of cash flows and statement of stockholders equity) for the fiscal year at and ended October 31, 1999. Such financial statements were prepared in conformity with generally accepted accounting principles applied on a consistent basis; are complete, correct and consistent in all material respects with the books and records of the Company; and fairly and accurately present the financial position of the Company as of the dates thereof and the results of operations and cash flows of the Company for the periods shown therein. 2.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the extent reflected or reserved against in the financial statements referred to in Section 2.5 above, the Company does not have and is not subject to any material liability or obligation of any nature, whether accrued, absolute, contingent or otherwise. 2.7 CERTAIN CONTRACTS AND ARRANGEMENTS. Except as set forth in Section 2.7 of the Disclosure Schedule (with true and correct copies delivered to Canopy), the Company is not a party or subject to or bound by: (a) any plan or contract providing for collective bargaining or the like, or any contract or agreement with any labor union; (b) any contract, lease or agreement creating any obligation of the Company to pay to any third party $100,000 or more with respect to any single such contract or agreement; (c) any contract or agreement for the sale, license, lease or disposition of products or services in excess of $100,000; (d) any contract containing covenants directly or explicitly limiting the freedom of the Company to compete in any line of business or with any person or entity; (e) any license agreement (as licensor or licensee); (f) any contract or agreement for the purchase of any leasehold improvements, equipment or fixed assets for a price in excess of $100,000; 4 (g) any indenture, mortgage, promissory note, loan agreement, guaranty or other agreement or commitment for borrowing in excess of $100,000 or any pledge or security arrangement; (h) any material joint venture, partnership, or manufacturing agreement; (i) any endorsement or any other advertising, promotional or marketing agreement; (j) any employment contracts, or agreements with officers, directors, employees or stockholders of the Company or persons or organizations related to or affiliated with any such persons; (k) any pension, profit sharing, retirement (other than the Company's 401(k) plan), stock option, phantom stock or other equity incentive plans; (l) any arrangement relating to any royalty payments to employees, customers or independent contractors based on the sales volume of the Company; (m) any acquisition, merger or similar agreement; or (n) any contract with a governmental body under which the Company may have an obligation for renegotiation. All of the Company's contracts and commitments are in full force and effect and neither the Company nor, to the knowledge of the Company, any other party is in default thereunder (nor, to the knowledge of the Company, has any event occurred which with notice, lapse of time or both would constitute a default thereunder), except to the extent that any such default would not have a Material Adverse Effect, and the Company has not received notice of any alleged default under any such contract, agreement, understanding or commitment. 2.8 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS. Except as set forth in Section 2.8 of the Disclosure Schedule: (a) The Company has the right to use, sell, and license the Intellectual Property Rights (as defined below) material to the conduct of its business as presently conducted, including without limitation all rights to the Company name "Lineo" and to the trademarks and the product name "Embedix" (the "Company Rights"). (b) The business of the Company as presently conducted and the provision of services by the Company do not violate any agreements that the Company has with any third party or infringe any patent, trademark, service mark, copyright or trade secret or any other Intellectual Property Rights of any third party. (c) No claim is pending or threatened against the Company nor has the Company received any notice or claim from any person asserting that any of the Company's present or contemplated activities infringe or may infringe any Intellectual Property Rights of 5 such person, and the Company is not aware of any infringement by any other person of any of the Company Rights. (d) Each current and former employee of the Company, and each of the Company's consultants and independent contractors involved in development of any of the Company Rights, has executed an agreement regarding confidentiality, proprietary information and assignment of inventions and copyrights to the Company, and none of such employees, consultants or independent contractors is in violation of any agreement or in breach of any agreement or arrangement with former or present employers relating to proprietary information or assignment of inventions. As used herein, the term "Intellectual Property Rights" shall mean the intellectual property rights, including, without limitation, all patents, patent applications, patent rights, trademarks, trademark applications, trade names, service marks, service mark applications, copyrights, copyright applications, computer programs and other computer software, inventions, designs, samples, specifications, schematics, know-how, trade secrets, proprietary processes and formulae, including production technology and processes, all source and object code, algorithms, promotional materials, customer lists, supplier and dealer lists and marketing research, and all documentation and media constituting, describing or relating to the foregoing, including without limitation, manuals, memoranda and records. 2.9 LITIGATION. There is no litigation or governmental proceeding or investigation pending or threatened against the Company or affecting any of its properties or assets or against any officer, director or key employee of the Company in his or her capacity as an officer, director or employee of the Company, which litigation, proceeding or investigation is reasonably likely to have a Material Adverse Effect, or which may call into question the validity or hinder the enforceability of this Agreement or any other agreements or transactions contemplated hereby; nor has there occurred any event nor does there exist any condition on the basis of which any such litigation, proceeding or investigation might be properly instituted or commenced. 2.10 TAX MATTERS. The Company has filed all federal, state, local and foreign income, excise and franchise tax returns, real estate and personal property tax returns, sales and use tax returns and other tax returns required to be filed by it where the failure to file such returns would have a Material Adverse Effect, and has paid all taxes owing by it, except taxes which have not yet accrued or otherwise become due, for which adequate provision has been made in the pertinent financial statements referred to in Section 2.5 above or which will not have a Material Adverse Effect. All taxes and other assessments and levies which the Company is required to withhold or collect have been withheld and collected and have been paid over to the proper governmental authorities except where the failure to withhold or collect and pay over would not have a Material Adverse Effect. With regard to the federal income tax returns of the Company, the Company has never received notice of any audit or of any proposed deficiencies from the Internal Revenue Service. There are in effect no waivers of applicable statutes of limitations with respect to any taxing owed by the Company for any year. Neither the Internal Revenue Service nor any other taxing 6 authority is now asserting or, to the knowledge of the Company, threatening to assert against the Company any deficiency or claim for additional taxes or interest thereon or penalties in connection therewith. 2.11 EMPLOYEE BENEFIT PLANS. The Company does not maintain or contribute to any employee benefit plan, stock option, bonus or incentive plan, severance pay policy or agreement, deferred compensation agreement or any similar plan or agreement (an "Employee Benefit Plan") other than the Plan and the Employee Benefit Plans identified and described in Section 2.11 of the Disclosure Schedule. The terms and operation of each Employee Benefit Plan comply in all material respects with all applicable laws and regulations relating to such Employee Benefit Plan. There are no unfunded obligations of the Company under any retirement, pension, profit-sharing, deferred compensation plan or similar program. The Company is not required to make any payments or contributions to any Employee Benefit Plan pursuant to any collective bargaining agreement, and all Employee Benefit Plans are terminable at the discretion of the Company without material liability to the Company upon or following such termination. The Company has never maintained or contributed to any Employee Benefit Plan providing or promising any health or other welfare benefits (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) to terminated employees, except for benefits mandated by applicable law, including, but not limited to, Section 4980B of the Internal Revenue Code of 1986, as amended, and Part 6 of Subtitle B of Title I of ERISA. 2.12 LABOR LAWS. The Company employs approximately 50 employees and generally enjoys good employer-employee relationships. The Company is not delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed for it as of the date hereof or amounts required to be reimbursed to such employees. The Company is in compliance in all material respects with all applicable laws and regulations respecting labor, employment, fair employment practices, terms and conditions of employment, and wages and hours. There are no charges of employment discrimination or unfair labor practices or strikes, slowdowns, stoppages of work or any other concerted interference with normal operations existing, pending or, to the knowledge of the Company, threatened against or involving the Company. 2.13 EMPLOYEES. Section 2.13 of the Disclosure Schedule contains a list of all managers, employees and consultants of the Company who, individually, have received compensation from the Company for the fiscal year of the Company ended October 31, 1999, in excess of $100,000. In each case, Section 2.13 of the Disclosure Schedule includes the current job title, years of service with the Company and aggregate annual compensation and benefits of each such individual. To the knowledge of the Company and the Stockholders, no key employee of the Company has any plan or intention to terminate his or her employment with the Company. The Company has complied in all material respects with the immigration laws of the United States with respect to the hiring, employment and engagement of all of its employees and consultants who are not United States 7 citizens, and, to the knowledge of the Company, the immigration or residency status of each of such employees and consultants is sufficient to allow such employees and consultants to remain lawfully employed or engaged by the Company. 2.14 HAZARDOUS WASTE, ETC. No hazardous wastes, substances or materials or oil or petroleum products have been generated, transported, used, disposed, stored or treated by the Company, and no hazardous wastes, substances or materials or oil or petroleum products have been released, discharged, disposed, transported, placed or otherwise caused to enter the soil or water in, under or upon any real property owned, leased or operated by the Company. 2.15 BUSINESS; COMPLIANCE WITH LAWS. The Company has all necessary franchises, permits, licenses and other rights and privileges necessary to permit it to own its property and to conduct its business as it is presently or contemplated to be conducted. The Company is currently and has heretofore been in compliance in all material respects with all federal, state, local and foreign laws and regulations. 2.16 INVESTMENT BANKING; BROKERAGE. There are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transaction contemplated by this Agreement payable by the Company or based on any arrangement or agreement made by or on behalf of the Company or any of the Stockholders. 2.17 INSURANCE. The Company has fire, casualty, product liability, workers' compensation and business interruption and other insurance policies, with extended coverage, sufficient in amount to allow it to replace any of its material properties which might be damaged or destroyed or sufficient to cover liabilities to which the Company may reasonably become subject, and such types and amounts of other insurance with respect to its business and properties, on both a per occurrence and an aggregate basis, as are customarily carried by persons engaged in the same or similar business as the Company. There is no default or event which could give rise to a default under any such policy. 2.18 TRANSACTIONS WITH AFFILIATES. There are no loans, leases, contracts or other transactions between the Company and any officer, director or five percent (5%) stockholder of the Company or any family member or affiliate of the foregoing persons, and there have been no such transactions within the past twelve (12) months except as set forth in Section 2.18 of the Disclosure Schedule. 2.19 SUPPLIERS. Section 2.19 of the Disclosure Schedule sets forth each supplier of the Company who supplied more than five percent (5%) of the Company's supplies or materials for the fiscal year 8 ended December 31, 1999 and each supplier who the Company believes may supply for more than five percent (5%) of the Company's supplies or materials for the fiscal year ending December 31, 2000 (each a "Supplier" and collectively the "Suppliers"). The relationships of the Company with its Suppliers are good commercial working relationships. No Supplier of the Company has canceled or otherwise terminated its relationship with the Company, or has during the last 12 months decreased materially its services, supplies or materials to the Company. No Supplier has, to the knowledge of the Company, any plan or intention to terminate, cancel or otherwise materially and adversely modify its relationship with the Company or to decrease materially or limit its services, supplies or materials to the Company. 2.20 CERTAIN EVENTS. (a) During the past ten (10) years, neither the Company nor any of the officers or directors of the Company has had a petition under the Bankruptcy Reform Act of 1978, as amended, or any state insolvency law, filed by or against any of them. (b) During the past ten (10) years, neither the Company nor the officers or directors of the Company has been convicted in a criminal proceeding or is a named subject of a criminal proceeding which is presently pending (excluding traffic violations and other minor offenses). (c) During the past ten (10) years, neither the Company nor the stockholders, officers or directors of the Company has been, or is, the subject of any order, judgment or decree, whether or not subsequently reversed, suspended or vacated, of any court or any administrative agency, requiring the payment of money damages in excess of $100,000 or permanently or temporarily enjoining any of them from, or otherwise limiting any of their abilities to engage in, any type of business practice. 2.21 REGISTRATION RIGHTS. Other than as set forth in Schedule 2.21 to the Disclosure Schedule, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. 2.22 DISCLOSURE. The representations and warranties made or contained in this Agreement, the exhibits hereto and the certificates and statements executed or delivered in connection herewith, and the information concerning the business of the Company delivered to Canopy in connection with or pursuant to this Agreement, when taken together, do not and shall not contain any untrue statement of a material fact and do not and shall not omit to state a material fact required to be stated therein or necessary in order to make such representations, warranties or other material not misleading in light of the circumstances in which they were made or delivered. There have been no events or transactions or information which has come to the attention of the management of the Company having a direct impact on the Company or its assets, liabilities, financial condition, business, results of operations or prospects which, in the reasonable judgment of such management, could be expected to have a Material Adverse Effect. 9 SECTION 3. REPRESENTATIONS AND WARRANTIES OF CANOPY. Canopy represents and warrants to the Company the following: 3.1 INVESTMENT EXPERIENCE AND INTENT. Canopy represents to the Company that it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment contemplated by this Agreement and making an informed investment decision with respect thereto. Canopy represents that it is an "accredited investor" as such term is defined in Rule 501 under the Securities Act. Canopy represents and understands that it is responsible for its own due diligence investigation and satisfying its own due diligence requirements and shall not be entitled to rely on the due diligence investigation of any other person or entity. Canopy represents to the Company that it is purchasing the Series A Class 1 Preferred Shares for its own account, for investment only and not with a view to, or any present intention of, effecting a distribution of such securities or any part thereof except pursuant to a registration or an available exemption under applicable law. Canopy acknowledges that the Series A Class 1 Preferred Shares have not been registered under the Securities Act or the securities laws of any state or other jurisdiction and cannot be disposed of unless they are subsequently registered under the Securities Act and any applicable state laws or exemption from such registration is available. 3.2 AUTHORIZATION AND NON-CONTRAVENTION. Canopy represents that it has full right, authority and power to enter into this Agreement and each agreement, document and instrument to be executed and delivered by or on behalf of such Investor pursuant to or as contemplated by this Agreement and to carry out the transactions contemplated hereby and thereby, and the execution, delivery and performance by such Investor of this Agreement and each such other agreement, document and instrument have been duly authorized by all necessary action. Canopy represents and warrants that this Agreement and each agreement, document and instrument executed and delivered by such Investor pursuant to or as contemplated by this Agreement constitute, or when executed and delivered will constitute, valid and binding obligations of such Investor enforceable in accordance with their respective terms and that the execution, delivery and performance by such Investor of this Agreement and each such other agreement, document and instrument, and the performance of the transactions contemplated hereby and thereby do not and will not: (a) violate, conflict with or result in a default (whether after the giving of notice, lapse of time or both) under any contract or obligation to which such Investor is a party or by which it or its assets are bound, or cause the creation of any encumbrance upon any of the assets of Canopy; (b) violate or result in a violation of, or constitute a default under, any provision of any law, regulation or rule, or any order of, or any restriction imposed by, any court or other governmental agency applicable to Canopy; (c) require from Canopy any notice to, declaration or filing with, or consent or approval of any governmental authority or other third party; or (d) accelerate any obligation under, or give rise to a right of termination of, any agreement, permit, license or authorization to which Canopy is a party or by which Canopy is bound. 10 3.3 COMMISSIONS AND FEES. Canopy represents that there are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of such Investor. SECTION 4. CONDITIONS OF EXCHANGE. Canopy's obligation to exchange the Series A Class 1 Preferred Shares for the Canopy Common Stock shall be subject to compliance by the Company with its agreements herein contained and to the fulfillment to Canopy's satisfaction, or the waiver by Canopy, on or before and at the Closing Date, of the following conditions: 4.1 SATISFACTION OF CONDITIONS. The representations and warranties of the Company contained in this Agreement shall be true and correct on and as of the Closing Date; each of the conditions specified in this Section 4 shall have been satisfied or waived in writing by Canopy; and, on the Closing Date, certificates to such effect executed by the President and Chief Financial Officer of the Company shall have been delivered to Canopy. 4.2 AUTHORIZATION. The Board of Directors of the Company shall have duly adopted resolutions in form and substance reasonably satisfactory to Canopy and shall have taken all action necessary for the purpose of authorizing the Company to consummate the transactions contemplated hereby in accordance with the terms hereof and to cause the Certificate to become effective; and Canopy shall have received a certificate of the Secretary of the Company setting forth a copy of the relevant Board of Directors and/or stockholder resolutions and the Certificate of Incorporation, the Certificate and Bylaws of the Company and such other matters as may be reasonably requested by Canopy. 4.3 OPINION OF COUNSEL. Canopy shall have received from Summit Law Group an opinion dated as of the Closing Date substantially in the form attached hereto as EXHIBIT C. 4.4 ALL PROCEEDINGS SATISFACTORY. All corporate and other proceedings taken prior to or at the Closing in connection with the transactions contemplated by this Agreement, and all documents and evidences incident thereto, shall be reasonably satisfactory in form and substance to Canopy. 11 4.5 NO VIOLATION OR INJUNCTION. The consummation of the transactions contemplated by this Agreement shall not be in violation of any law or regulation and shall not be subject to any injunction, stay or restraining order. 4.6 CONSENTS AND WAIVERS. The Company shall have obtained all consents or waivers necessary to execute this Agreement and the other agreements and documents contemplated herein, to issue and sell the Securities to be sold to Canopy hereunder and to carry out the transactions contemplated hereby and thereby and shall have delivered evidence thereof to Canopy. All corporate and other action and governmental filings necessary to effectuate the terms of this Agreement and other agreements and instruments executed and delivered by the Company in connection herewith shall have been made or taken. SECTION 5. GENERAL. 5.1 AMENDMENTS, WAIVERS AND CONSENTS. For the purpose of this Agreement and all agreements executed pursuant hereto, no course of dealing between or among any of the parties hereto and no delay on the part of any party hereto in exercising any rights hereunder or thereunder shall operate as a waiver of the rights hereof and thereof. No covenant or other provision hereof may be waived otherwise than by a written instrument signed by the party or parties so waiving such covenant or other provision. No amendment to this Agreement may be made without the written consent of the Company and Canopy. 5.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS; ASSIGNABILITY OF RIGHTS. All covenants, agreements, representations and warranties of the Company and Canopy made herein, in the Disclosure Schedule and the Certificate and in the certificates, lists, exhibits, schedules or other written information delivered or furnished to any Investor in connection herewith (a) are material, shall be deemed to have been relied upon by the party or parties to whom they are made and shall survive the Closing regardless of any investigation or knowledge on the part of such party or its representatives and (b) shall bind the parties' successors and assigns (including without limitation any successor to the Company by way of acquisition, merger or otherwise), whether so expressed or not, and, except as otherwise provided in this Agreement, all such covenants, agreements, representations and warranties shall inure to the benefit of Canopy's successors and assigns and to their transferees of Securities, whether so expressed or not, and any such transferee shall be deemed the "Investor" for purposes hereof. 5.3 MARKET STAND-OFF. In connection with any underwritten public offering by the Company, Canopy, if requested in good faith by the Company and the managing underwriter of the Company's securities, shall agree not to sell or otherwise transfer or dispose of any securities of the Company held by it (except for any securities sold pursuant to such registration statement) for a 12 period following the effective date of the applicable registration statement that in no event shall exceed 180 days. In order to enforce the foregoing, the Company may impose stop-transfer instructions with respect to the securities held by Canopy until the end of such period. 5.4 LEGEND ON SECURITIES. The Company and Canopy acknowledge and agree that the following legend shall be typed on each certificate evidencing any of the securities issued hereunder held at any time by Canopy: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY LAWS. 5.5 GOVERNING LAW. This Agreement shall be deemed to be a contract made under, and shall be construed in accordance with, the laws of Delaware, without giving effect to conflict of laws principles thereof. 5.6 SECTION HEADINGS AND GENDER. The descriptive headings in this Agreement have been inserted for convenience only and shall not be deemed to limit or otherwise affect the construction of any provision thereof or hereof. The use in this Agreement of the masculine pronoun in reference to a party hereto shall be deemed to include the feminine or neuter, and vice versa, as the context may require. 5.7 COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute but one and the same document. 5.8 NOTICES AND DEMANDS. Any notice or demand which is required or provided to be given under this Agreement or the Certificate shall be deemed to have been sufficiently given and received for all purposes when delivered by hand, telecopy, telex or other method of facsimile, or five days after being 13 sent by certified or registered mail, postage and charges prepaid, return receipt requested, or two days after being sent by overnight delivery providing receipt of delivery, to the following addresses: if to the Company: Lineo, Inc. 383 S. 520 W. Lindon, Utah 84042 Attn: President Fax: (801) 426-6166 copy to: Summit Law Group 1505 Westlake Avenue N., Suite 300 Seattle, Washington 98109 Attn: Mark F. Worthington, Esq. Fax: (206) 281-9882 if to Canopy: The Canopy Group, Inc. 240 West Center Street Orem, Utah Attn: ___________ Fax: ___________ copy to: _______________ _______________ _______________ _______________ 5.9 REMEDIES; SEVERABILITY. It is specifically understood and agreed that any breach of the provisions of this Agreement by any person subject hereto will result in irreparable injury to the other parties hereto, that the remedy at law alone will be an inadequate remedy for such breach, and that, in addition to any other remedies which they may have, such other parties may enforce their respective rights by actions for specific performance (to the extent permitted by law). The Company may refuse to recognize any unauthorized transferee as one of its stockholders for any purpose, including, without limitation, for purposes of dividend and voting rights, until the relevant party or parties have complied with all applicable of this Agreement. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be deemed prohibited or invalid under such applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, and such prohibition or invalidity shall not invalidate the remainder of such provision or the other provisions of this Agreement. 5.10 INTEGRATION. This Agreement, including the exhibits, documents and instruments referred to herein or therein, constitutes the entire agreement, and supersedes all other prior agreements and 14 understandings, both written and oral, among the parties with respect to the subject matter hereof. 15 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. Lineo, Inc. Canopy Group, Inc. By: By: ------------------------------- -------------------------- Bryan Sparks, President 16 EX-10.8 12 EXHIBIT 10.8 EXHIBIT 10.8 LINEO, INC. STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of this __ day of February, 2000, by and between Lineo, Inc., a Delaware corporation (together with any predecessors or successors thereto; the "Company"), and ___________________, (together with its successors and assigns; the "Investor"). RECITALS A. The Investor wishes to invest in the Company's Series A Class 2 Convertible Preferred Stock, $.001 par value per share (the "Series A Class 2 Preferred Stock"). B. The Company has authorized the issuance and sale to the Investor of ___________ shares of Series A Class 2 Preferred Stock having the rights and preferences set forth in the Certificate of Designation attached as EXHIBIT A hereto (the "Certificate"), for an aggregate purchase price of $____________. C. The parties hereto desire to set forth the terms of the purchase and sale of the Series A Class 2 Preferred Stock. AGREEMENT NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: SECTION 1. PURCHASE AND SALE OF SHARES. 1.1 Description of Securities. The Company's authorized capital stock consists of 100,000,000 shares of Common Stock, par value $.001 per share, and 30,000,000 shares of Preferred Stock, par value $.001 per share, of which 5,000,000 shares have been designated as Series A Class 1 Convertible Preferred Stock and 2,500,000 shares have been designated as Series A Class 2 Convertible Preferred Stock. The Company has authorized and has reserved, and covenants to continue to reserve, free and clear of preemptive and other similar rights, a sufficient number of shares of its Common Stock to satisfy the rights of conversion of the holders of the Series A Class 2 Preferred Stock. For purposes of this Agreement, (a) the shares of Series A Class 2 Preferred Stock to be acquired by the Investor from the Company hereunder are referred to as the "Series A Class 2 Preferred Shares," (b) the shares of Common Stock issuable upon conversion of the Series A Class 2 Preferred Shares are referred to as the "Conversion Shares" and (c) the Series A Class 2 Preferred Shares and the Conversion Shares are sometimes referred to collectively as the "Securities." 1 1.2. SALE AND PURCHASE; CONVERSION. Upon the terms and subject to the conditions herein, and in reliance on the representations and warranties set forth in Section 2, the Investor hereby purchases from the Company, and the Company hereby issues and sells to the Investor, at the Closing (as defined below in Section 1.3), ___________ Series A Class 2 Preferred Shares for the purchase price of $1.50 per share for an aggregate of $____________, and the Company hereby grants the Investor the rights set forth herein. The proceeds of this sale are intended to be used for the expansion of the Company's business, working capital and other general corporate purposes. 1.3 CLOSING. The closing of the purchase and sale of the Series A Class 2 Preferred Shares (the "Closing") shall take place at the offices of the Company at 10:00 a.m. on February __, 2000, or at such other time and place as the parties hereto may agree (the "Closing Date"). At the Closing, the Company shall deliver to the Investor a stock certificate, registered in the name of the Investor, representing the number of Series A Class 2 Preferred Shares purchased by Investor hereunder. SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants the following, except as set forth in the schedule of exceptions attached hereto as EXHIBIT B (the "Disclosure Schedule"): 2.1 ORGANIZATION AND CORPORATE POWER. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is qualified to do business as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a material adverse effect on its assets, liabilities, condition (financial or other), business, results of operations or prospects (a "Material Adverse Effect"). The Company has all required corporate power and authority to carry on its business as presently conducted, to enter into and perform this Agreement and the agreements contemplated hereby to which it is a party and to carry out the transactions contemplated hereby and thereby, including the issuance and conversion of the Securities and the issuance of the Conversion Shares. The Company is not in violation of any term of the Certificate of Incorporation and Bylaws of the Company, as amended to date (the "Certificate of Incorporation" and the "Bylaws," respectively). 2.2 AUTHORIZATION AND NON-CONTRAVENTION. The execution, delivery and performance by the Company of this Agreement and all other agreements, documents and instruments to be executed and delivered by the Company as contemplated hereby (including, without limitation, the Certificate) and the issuance and delivery of (i) the Series A Class 2 Preferred Shares and (ii) upon the conversion of the Series A Class 2 Preferred Shares, the Conversion Shares, have been duly authorized by all necessary corporate and other action of the Company. This Agreement and each such other agreement, document and instrument (including, without limitation, the Certificate) constitute valid and binding obligations of the Company, enforceable in accordance with their respective terms. The execution and delivery by the Company of this Agreement and each other agreement, document 2 and instrument to be executed and delivered by the Company pursuant hereto or as contemplated hereby (including, without limitation, the Certificate) and the performance by the Company of the transactions contemplated hereby and thereby, including, without limitation, the issuance and delivery of (i) the Series A Class 2 Preferred Shares and (ii) upon the conversion of the Series A Class 2 Preferred Shares, the Conversion Shares, do not and will not: (A) violate, conflict with or result in a default (whether after the giving of notice, lapse of time or both) under any material contract or obligation to which the Company is a party or by which it or its assets are bound, or any provision of the Certificate of Incorporation or Bylaws of the Company, or cause the creation of any material encumbrance upon any of the assets of the Company; (B) violate or result in a violation of, or constitute a default under, any provision of any material law, regulation or rule, or any order of, or any restriction imposed by, any court or governmental agency applicable to the Company; (C) require from the Company any notice to, declaration or filing with, or consent or approval of any governmental authority or third party other than as may be required to secure an exemption from qualification of the offer and sale of the Series A Class 2 Preferred Shares under the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities and blue sky laws; or (D) accelerate any obligation under, or give rise to a right of termination of, any material agreement, permit, license or authorization to which the Company or any of its assets is a party or by which the Company or any of its assets is bound. 2.3 CAPITALIZATION. As of the Closing and after giving effect to the transactions contemplated hereby, the authorized capital stock of the Company will consist of 100,000,000 shares of Common Stock, par value $.001 per share, of which 22,738,437 shares will be issued and outstanding, and 30,000,000 shares of Preferred Stock, par value $.001 per share, of which (a) 5,000,000 shares shall be designated as Series A Class 1 Preferred Stock, none of which will be issued and outstanding and (b) 2,500,000 shares shall be designated as Series A Class 2 Preferred Stock and of which not more than 2,500,000 shares will be issued and outstanding. The shares of Common Stock are held by the stockholders listed in Section 2.3 of the Disclosure Schedule in the amounts listed therein. In addition, the Company has authorized and reserved for issuance upon conversion of the Series A Preferred Shares up to 7,500,000 Conversion Shares (subject to adjustment for stock splits, stock dividends and the like) and has reserved for issuance upon exercise of options under the Company's stock option plan (the "Plan") 2,000,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like). The Company has also authorized the Canopy Group, Inc. to convert up to 5,000,000 shares of Common Stock into Series A Class 1 Preferred Stock. Other than as described above, the Company has not issued or agreed to issue and is not obligated to issue any warrants, options or other rights (contingent or otherwise) to purchase or acquire any shares of its capital stock, or any securities convertible into or exercisable or exchangeable for such shares or any warrants, options or other rights to acquire any such convertible securities. The Company has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any shares of its capital stock or any interest therein or to pay any dividend or make any other distribution in respect thereof. There are no agreements, written or oral, between the Company and any holder of its capital stock or, among any holders of its capital tock, relating to the acquisition, disposition or voting of the capital stock of the Company. As of the Closing, and after giving effect to the transactions contemplated hereby, all of the outstanding shares of capital stock of the Company (including, without limitation, the Series A Class 2 Preferred Shares) will have been duly and validly authorized and issued, fully paid and nonassessable and, except as set forth herein, not subject to 3 any preemptive or similar rights to purchase or otherwise acquire shares of capital stock of the Company and will have been offered, issued, sold and delivered in compliance with applicable federal and state securities and blue sky laws. No person or entity is entitled to (a) any preemptive right, right of first refusal or similar right with respect to the issuance of any capital stock of the Company, or (b) any rights with respect to the registration of any capital stock of the Company under the Securities Act of 1933, as amended. The Conversion Shares will, upon issuance, be duly and validly authorized and issued, fully paid and nonassessable, and not subject to any preemptive rights, and will be offered, issued, sold and delivered in compliance with applicable federal and state securities and blue sky laws. The relative rights, preferences and other provisions relating to the Series A Class 2 Preferred Shares are as set forth in EXHIBIT A hereto. 2.4 SUBSIDIARIES; INVESTMENTS. Other than 1,250,000 shares of Common Stock of Caldera Systems, Inc., a representative office located in Taiwan and a wholly owned subsidiary located in the United Kingdom, the Company has no subsidiaries and no capital stock or other interest in any corporation, joint venture, partnership, trust, limited liability company or other entity. 2.5 FINANCIAL STATEMENTS. The Company has previously furnished to the Investor copies of its draft audited financial statements (balance sheet, statement of operations; statement of cash flows and statement of stockholders equity) for the fiscal year at and ended October 31, 1999. Such financial statements were prepared in conformity with generally accepted accounting principles applied on a consistent basis; are complete, correct and consistent in all material respects with the books and records of the Company; and fairly and accurately present the financial position of the Company as of the dates thereof and the results of operations and cash flows of the Company for the periods shown therein. 2.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the extent reflected or reserved against in the financial statements referred to in Section 2.5 above, the Company does not have and is not subject to any material liability or obligation of any nature, whether accrued, absolute, contingent or otherwise. 2.7 ABSENCE OF CHANGES. Except as set forth in Section 2.7 of the Disclosure Schedule, since October 31, 1999 there has not been (a) any material adverse change in the financial condition, results of operations, assets, liabilities, or business of the Company, (b) any material asset or property of the Company made subject to a lien of any kind, (c) any waiver of any material right of the Company, or the cancellation of any material debt or claim held by the Company, (d) any payment of dividends on, or other distribution with respect to, or any direct or indirect redemption or acquisition of, any shares of the capital stock of the Company, or any agreement or commitment therefore, (e) any mortgage, pledge or hypothecation of any tangible or intangible asset of the Company, except in the ordinary course of business, (f) any sale or assignment of any tangible asset of the Company having a book value in excess of $5,000, except in the ordinary course of business, or of any Intellectual Property Rights (as hereafter 4 defined) or other intangible assets, (g) any loan by the Company to, or any loan to the Company from, any officer, director, employee or stockholder of the Company, or any agreement or commitment therefore (other than travel and other advances in the ordinary course of business), (h) any damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the assets, property or business of the Company, (i) any repayment of any loan owed by the Company (including, without limitation, any loan owed to any stockholder of the Company), (j) any single capital expenditure in excess of $50,000 or any capital expenditures aggregating more than $250,000, or (k) any material change in the accounting methods or practices followed by the Company. 2.8 TITLE; CONDITION OF PROPERTY. (a) Except as set forth in Section 2.8 of the Disclosure Schedule, the Company has good title to all of its property and assets, real, personal or mixed, tangible or intangible, free and clear of all liens, security interests, charges and other encumbrances of any kind. (b) Without material exception, all assets used in the Company business are in good operating condition and repair and suitable for use in the operation of such business, and none of such assets that (singly or when aggregated with other assets) is material to the business of the Company is obsolete. 2.9 CERTAIN CONTRACTS AND ARRANGEMENTS. Except as set forth in Section 2.9 of the Disclosure Schedule (with true and correct copies delivered to the Investor), the Company is not a party or subject to or bound by: (a) any plan or contract providing for collective bargaining or the like, or any contract or agreement with any labor union; (b) any contract, lease or agreement creating any obligation of the Company to pay to any third party $100,000 or more with respect to any single such contract or agreement; (c) any contract or agreement for the sale, license, lease or disposition of products or services in excess of $100,000; (d) any contract containing covenants directly or explicitly limiting the freedom of the Company to compete in any line of business or with any person or entity; (e) any license agreement (as licensor or licensee); (f) any contract or agreement for the purchase of any leasehold improvements, equipment or fixed assets for a price in excess of $100,000; (g) any indenture, mortgage, promissory note, loan agreement, guaranty or other agreement or commitment for borrowing in excess of $100,000 or any pledge or security arrangement; (h) any material joint venture, partnership, or manufacturing agreement; 5 (i) any endorsement or any other advertising, promotional or marketing agreement; (j) any employment contracts, or agreements with officers, directors, employees or stockholders of the Company or persons or organizations related to or affiliated with any such persons; (k) any pension, profit sharing, retirement (other than the Company's 401(k) plan), stock option, phantom stock or other equity incentive plans; (l) any arrangement relating to any royalty payments to employees, customers or independent contractors based on the sales volume of the Company; (m) any acquisition, merger or similar agreement; or (n) any contract with a governmental body under which the Company may have an obligation for renegotiation. All of the Company's contracts and commitments are in full force and effect and neither the Company nor, to the knowledge of the Company, any other party is in default thereunder (nor, to the knowledge of the Company, has any event occurred which with notice, lapse of time or both would constitute a default thereunder), except to the extent that any such default would not have a Material Adverse Effect, and the Company has not received notice of any alleged default under any such contract, agreement, understanding or commitment. 2.10 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS. Except as set forth in Section 2.10 of the Disclosure Schedule: (a) The Company has the right to use, sell, and license the Intellectual Property Rights (as defined below) material to the conduct of its business as presently conducted, including without limitation all rights to the Company name "Lineo" and to the trademarks and the product name "Embedix," free and clear of the rights of all others (the "Company Rights"). (b) The business of the Company as presently conducted, the products marketed or sold, and the provision of services by the Company do not violate and will not violate any agreements that the Company has with any third party or infringe any patent, trademark, service mark, copyright or trade secret or any other Intellectual Property Rights of any third party. (c) No claim is pending or threatened against the Company nor has the Company received any notice or claim from any person asserting that any of the Company's present or contemplated activities infringe or may infringe any Intellectual Property Rights of such person, and the Company is not aware of any infringement by any other person of any of the Company Rights. (d) Each current and former employee of the Company, and each of the Company's consultants and independent contractors involved in development of any of the Company Rights, has executed an agreement regarding confidentiality, proprietary information and assignment of inventions and copyrights to the Company, and none of such employees, 6 consultants or independent contractors is in violation of any agreement or in breach of any agreement or arrangement with former or present employers relating to proprietary information or assignment of inventions. The Company has taken all reasonable steps to protect all data, information, ideas, concepts, know-how and materials that the Company treats as trade secrets, and all other confidential information and Intellectual Property Rights of the Company, which are not part of the public domain or knowledge, nor, to the best knowledge of the Company, have they been used, divulged or appropriated for the benefit of any person other than the Company or otherwise to the detriment of the Company. (e) No royalties or other amounts are payable by the Company to persons by reason of the ownership or use of the Intellectual Property Rights of the Company. (f) No third party has claimed or, to the best of the Company's knowledge, has reason to claim that any person employed by or affiliated with the Company has (a) violated or may be violating any of the terms or conditions of his or her employment, non-competition, non-disclosure, non-solicitation or inventions agreement with such third party, (b) disclosed or may be disclosing or utilized or may be utilizing any Intellectual Property Rights, trade secret or proprietary information or documentation of such third party, or (c) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees. As used herein, the term "Intellectual Property Rights" shall mean the intellectual property rights, including, without limitation, all patents, patent applications, patent rights, trademarks, trademark applications, trade names, service marks, service mark applications, copyrights, copyright applications, computer programs and other computer software, inventions, designs, samples, specifications, schematics, know-how, trade secrets, proprietary processes and formulae, including production technology and processes, all source and object code, algorithms, promotional materials, customer lists, supplier and dealer lists and marketing research, and all documentation and media constituting, describing or relating to the foregoing, including without limitation, manuals, memoranda and records. 2.11 LITIGATION. There is no litigation or governmental proceeding or investigation pending or threatened against the Company or affecting any of its properties or assets or against any officer, director or key employee of the Company in his or her capacity as an officer, director or employee of the Company, which litigation, proceeding or investigation is reasonably likely to have a Material Adverse Effect, or which may call into question the validity or hinder the enforceability of this Agreement or any other agreements or transactions contemplated hereby; nor has there occurred any event nor does there exist any condition on the basis of which any such litigation, proceeding or investigation might be properly instituted or commenced. 2.12 TAX MATTERS. The Company has filed all federal, state, local and foreign income, excise and franchise tax returns, real estate and personal property tax returns, sales and use tax returns and other tax returns required to be filed by it where the failure to file such returns would have a Material Adverse Effect, and has paid all taxes owing by it, except taxes which have not yet accrued or 7 otherwise become due, for which adequate provision has been made in the pertinent financial statements referred to in Section 2.5 above or which will not have a Material Adverse Effect. All taxes and other assessments and levies which the Company is required to withhold or collect have been withheld and collected and have been paid over to the proper governmental authorities except where the failure to withhold or collect and pay over would not have a Material Adverse Effect. With regard to the federal income tax returns of the Company, the Company has never received notice of any audit or of any proposed deficiencies from the Internal Revenue Service. There are in effect no waivers of applicable statutes of limitations with respect to any taxing owed by the Company for any year. Neither the Internal Revenue Service nor any other taxing authority is now asserting or, to the knowledge of the Company, threatening to assert against the Company any deficiency or claim for additional taxes or interest thereon or penalties in connection therewith. 2.13 EMPLOYEE BENEFIT PLANS. The Company does not maintain or contribute to any employee benefit plan, stock option, bonus or incentive plan, severance pay policy or agreement, deferred compensation agreement or any similar plan or agreement (an "Employee Benefit Plan") other than the Plan and the Employee Benefit Plans identified and described in Section 2.13 of the Disclosure Schedule. The terms and operation of each Employee Benefit Plan comply in all material respects with all applicable laws and regulations relating to such Employee Benefit Plan. There are no unfunded obligations of the Company under any retirement, pension, profit-sharing, deferred compensation plan or similar program. The Company is not required to make any payments or contributions to any Employee Benefit Plan pursuant to any collective bargaining agreement, and all Employee Benefit Plans are terminable at the discretion of the Company without material liability to the Company upon or following such termination. The Company has never maintained or contributed to any Employee Benefit Plan providing or promising any health or other welfare benefits (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) to terminated employees, except for benefits mandated by applicable law, including, but not limited to, Section 4980B of the Internal Revenue Code of 1986, as amended, and Part 6 of Subtitle B of Title I of ERISA. 2.14 LABOR LAWS. The Company employs approximately 50 employees and generally enjoys good employer-employee relationships. The Company is not delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed for it as of the date hereof or amounts required to be reimbursed to such employees. The Company is in compliance in all material respects with all applicable laws and regulations respecting labor, employment, fair employment practices, terms and conditions of employment, and wages and hours. There are no charges of employment discrimination or unfair labor practices or strikes, slowdowns, stoppages of work or any other concerted interference with normal operations existing, pending or, to the knowledge of the Company, threatened against or involving the Company. 2.15 EMPLOYEES. Section 2.15 of the Disclosure Schedule contains a list of all managers, employees and consultants of the Company who, individually, have received compensation from the Company 8 for the fiscal year of the Company ended October 31, 1999, in excess of $100,000. In each case, Section 2.15 of the Disclosure Schedule includes the current job title, years of service with the Company and aggregate annual compensation and benefits of each such individual. To the knowledge of the Company and the Stockholders, no key employee of the Company has any plan or intention to terminate his or her employment with the Company. The Company has complied in all material respects with the immigration laws of the United States with respect to the hiring, employment and engagement of all of its employees and consultants who are not United States citizens, and, to the knowledge of the Company, the immigration or residency status of each of such employees and consultants is sufficient to allow such employees and consultants to remain lawfully employed or engaged by the Company. 2.16 HAZARDOUS WASTE, ETC. No hazardous wastes, substances or materials or oil or petroleum products have been generated, transported, used, disposed, stored or treated by the Company, and no hazardous wastes, substances or materials or oil or petroleum products have been released, discharged, disposed, transported, placed or otherwise caused to enter the soil or water in, under or upon any real property owned, leased or operated by the Company. 2.17 BUSINESS; COMPLIANCE WITH LAWS. The Company has all necessary franchises, permits, licenses and other rights and privileges necessary to permit it to own its property and to conduct its business as it is presently or contemplated to be conducted. The Company is currently and has heretofore been in compliance in all material respects with all federal, state, local and foreign laws and regulations. 2.18 INVESTMENT BANKING; BROKERAGE. There are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transaction contemplated by this Agreement payable by the Company or based on any arrangement or agreement made by or on behalf of the Company or any of the Stockholders. 2.19 INSURANCE. The Company has fire, casualty, product liability, workers' compensation and business interruption and other insurance policies, with extended coverage, sufficient in amount to allow it to replace any of its material properties which might be damaged or destroyed or sufficient to cover liabilities to which the Company may reasonably become subject, and such types and amounts of other insurance with respect to its business and properties, on both a per occurrence and an aggregate basis, as are customarily carried by persons engaged in the same or similar business as the Company. There is no default or event which could give rise to a default under any such policy. 2.20 TRANSACTIONS WITH AFFILIATES. There are no loans, leases, contracts or other transactions between the Company and any officer, director or five percent (5%) stockholder of the Company or any family member or 9 affiliate of the foregoing persons, and there have been no such transactions within the past twelve (12) months except as set forth in Section 2.20 of the Disclosure Schedule. 2.21 SUPPLIERS. Section 2.21 of the Disclosure Schedule sets forth each supplier of the Company who supplied more than five percent (5%) of the Company's supplies or materials for the fiscal year ended October 31, 1999 and each supplier who the Company believes may supply for more than five percent (5%) of the Company's supplies or materials for the fiscal year ended October 31, 2000 (each a "Supplier" and collectively the "Suppliers"). The relationships of the Company with its Suppliers are good commercial working relationships. No Supplier of the Company has canceled or otherwise terminated its relationship with the Company, or has during the last 12 months decreased materially its services, supplies or materials to the Company. No Supplier has, to the knowledge of the Company, any plan or intention to terminate, cancel or otherwise materially and adversely modify its relationship with the Company or to decrease materially or limit its services, supplies or materials to the Company. 2.22 CERTAIN EVENTS. (a) During the past ten (10) years, neither the Company nor any of the officers or directors of the Company has had a petition under the Bankruptcy Reform Act of 1978, as amended, or any state insolvency law, filed by or against any of them which has not as of the date of this Agreement been dismissed. (b) During the past ten (10) years, neither the Company nor the officers or directors of the Company has been convicted in a criminal proceeding or is a named subject of a criminal proceeding which is presently pending (excluding traffic violations and other minor offenses). (c) During the past ten (10) years, neither the Company nor the officers or directors of the Company has been, or is, the subject of any order, judgment or decree, whether or not subsequently reversed, suspended or vacated, of any court or any administrative agency, requiring the payment of money damages in excess of $100,000 or permanently or temporarily enjoining any of them from, or otherwise limiting any of their abilities to engage in, any type of business practice. 2.23 REGISTRATION RIGHTS. Except as disclosed is Section 2.23 of the Disclosure Schedule, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. 2.24 DISCLOSURE. The representations and warranties made or contained in this Agreement, the exhibits hereto and the certificates and statements executed or delivered in connection herewith, and the information concerning the business of the Company delivered to the Investor in connection with or pursuant to this Agreement, when taken together, do not and shall not contain any untrue statement of a material fact and do not and shall not omit to state a material fact required to be 10 stated therein or necessary in order to make such representations, warranties or other material not misleading in light of the circumstances in which they were made or delivered. There have been no events or transactions or information which has come to the attention of the management of the Company having a direct impact on the Company or its assets, liabilities, financial condition, business, results of operations or prospects which, in the reasonable judgment of such management, could be expected to have a Material Adverse Effect. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor represents and warrants to the Company the following: 3.1 INVESTMENT EXPERIENCE AND INTENT. The Investor represents to the Company that it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment contemplated by this Agreement and making an informed investment decision with respect thereto. The investor represents that it is an "accredited investor" as such term is defined in Rule 501 under the Securities Act. The Investor represents and understands that it is responsible for its own due diligence investigation and satisfying its own due diligence requirements and shall not be entitled to rely on the due diligence investigation of any other person or entity. The Investor represents to the Company that it is purchasing the Series A Class 2 Preferred Shares for its own account, for investment only and not with a view to, or any present intention of, effecting a distribution of such securities or any part thereof except pursuant to a registration or an available exemption under applicable law. The Investor acknowledges that its respective Series A Class 2 Preferred Shares have not been registered under the Securities Act or the securities laws of any state or other jurisdiction and cannot be disposed of unless they are subsequently registered under the Securities Act and any applicable state laws or exemption from such registration is available. 3.2 AUTHORIZATION AND NON-CONTRAVENTION. The Investor represents that it has full right, authority and power to enter into this Agreement and each agreement, document and instrument to be executed and delivered by or on behalf of such Investor pursuant to or as contemplated by this Agreement and to carry out the transactions contemplated hereby and thereby, and the execution, delivery and performance by such Investor of this Agreement and each such other agreement, document and instrument have been duly authorized by all necessary action. The Investor represents and warrants that this Agreement and each agreement, document and instrument executed and delivered by such Investor pursuant to or as contemplated by this Agreement constitute, or when executed and delivered will constitute, valid and binding obligations of such Investor enforceable in accordance with their respective terms and that the execution, delivery and performance by such Investor of this Agreement and each such other agreement, document and instrument, and the performance of the transactions contemplated hereby and thereby do not and will not: (a) violate, conflict with or result in a default (whether after the giving of notice, lapse of time or both) under any contract or obligation to which such Investor is a party or by which it or its assets are bound, or cause the creation of any encumbrance upon any of the assets of the Investor; (b) violate or result in a violation of, or constitute a default under, any provision of any law, regulation or rule, or any order of, or any restriction imposed by, any court or other governmental agency applicable to the Investor; (c) require from the Investor any notice to, declaration or filing with, 11 or consent or approval of any governmental authority or other third party; or (d) accelerate any obligation under, or give rise to a right of termination of, any agreement, permit, license or authorization to which the Investor is a party or by which the Investor is bound. 3.3 COMMISSIONS AND FEES. The Investor represents that there are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of such Investor. SECTION 4. CONDITIONS OF PURCHASE. The Investor's obligation to purchase and pay for the Series A Class 2 Preferred Shares to be purchased by it shall be subject to compliance by the Company with its agreements herein contained and to the fulfillment to the Investor's satisfaction, or the waiver by the Investor, on or before and at the Closing Date, of the following conditions: 4.1 SATISFACTION OF CONDITIONS. The representations and warranties of the Company contained in this Agreement shall be true and correct on and as of the Closing Date; each of the conditions specified in this Section 4 shall have been satisfied or waived in writing by the Investor; and, on the Closing Date, certificates to such effect executed by the President and Chief Financial Officer of the Company shall have been delivered to the Investor. 4.2 AUTHORIZATION. The Board of Directors of the Company shall have duly adopted resolutions in form and substance reasonably satisfactory to the Investor and shall have taken all action necessary for the purpose of authorizing the Company to consummate the transactions contemplated hereby in accordance with the terms hereof and to cause the Certificate to become effective; and the Investor shall have received a certificate of the Secretary of the Company setting forth a copy of the relevant Board of Directors and/or stockholder resolutions and the Certificate of Incorporation, the Certificate and Bylaws of the Company and such other matters as may be reasonably requested by the Investor. 4.3 OPINION OF COUNSEL. The Investor shall have received from Summit Law Group an opinion dated as of the Closing Date substantially in the form attached hereto as EXHIBIT C. 4.4 ALL PROCEEDINGS SATISFACTORY. All corporate and other proceedings taken prior to or at the Closing in connection with the transactions contemplated by this Agreement, and all documents and evidences incident thereto, shall be reasonably satisfactory in form and substance to the Investor. 12 4.5 NO VIOLATION OR INJUNCTION. The consummation of the transactions contemplated by this Agreement shall not be in violation of any law or regulation and shall not be subject to any injunction, stay or restraining order. 4.6 CONSENTS AND WAIVERS. The Company shall have obtained all consents or waivers necessary to execute this Agreement and the other agreements and documents contemplated herein, to issue and sell the Securities to be sold to the Investor hereunder and to carry out the transactions contemplated hereby and thereby and shall have delivered evidence thereof to the Investor. All corporate and other action and governmental filings necessary to effectuate the terms of this Agreement and other agreements and instruments executed and delivered by the Company in connection herewith shall have been made or taken. 4.7 ATTORNEYS' FEES. The Company shall have reimbursed Investor for its reasonable fees and expenses of a single legal counsel, up to $10,000. 4.8 OTHER AGREEMENTS. The Company, Investor and all other relevant parties shall have entered into the Voting Agreement and the Investor Rights Agreement. SECTION 5. GENERAL. 5.1 AMENDMENTS, WAIVERS AND CONSENTS. For the purpose of this Agreement and all agreements executed pursuant hereto, no course of dealing between or among any of the parties hereto and no delay on the part of any party hereto in exercising any rights hereunder or thereunder shall operate as a waiver of the rights hereof and thereof. No covenant or other provision hereof may be waived otherwise than by a written instrument signed by the party or parties so waiving such covenant or other provision. No amendment to this Agreement may be made without the written consent of the Company and the Investor. 5.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS; ASSIGNABILITY OF RIGHTS. All covenants, agreements, representations and warranties of the Company and the Investor made herein, in the Disclosure Schedule and the Certificate and in the certificates, lists, exhibits, schedules or other written information delivered or furnished to any Investor in connection herewith (a) are material, shall be deemed to have been relied upon by the party or parties to whom they are made and shall survive the Closing regardless of any investigation or knowledge on the part of such party or its representatives and (b) shall bind the parties' successors and assigns (including without limitation any successor to the Company by way of acquisition, merger or otherwise), whether so expressed or not, and, except as otherwise provided in this Agreement, all such covenants, agreements, representations and warranties shall inure to the benefit of the Investor's successors and assigns and to their transferees of Securities, 13 whether so expressed or not, and any such transferee shall be deemed the "Investor" for purposes hereof. 5.3 LEGEND ON SECURITIES. The Company and the Investor acknowledge and agree that the following legend shall be typed on each certificate evidencing any of the securities issued hereunder held at any time by an Investor: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY LAWS. 5.4 GOVERNING LAW. This Agreement shall be deemed to be a contract made under, and shall be construed in accordance with, the laws of Delaware, without giving effect to conflict of laws principles thereof. 5.5 SECTION HEADINGS AND GENDER. The descriptive headings in this Agreement have been inserted for convenience only and shall not be deemed to limit or otherwise affect the construction of any provision thereof or hereof. The use in this Agreement of the masculine pronoun in reference to a party hereto shall be deemed to include the feminine or neuter, and vice versa, as the context may require. 5.6 COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute but one and the same document. 5.7 NOTICES AND DEMANDS. Any notice or demand which is required or provided to be given under this Agreement or the Certificate shall be deemed to have been sufficiently given and received for all purposes when delivered by hand, telecopy, telex or other method of facsimile, or five days after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, or two 14 days after being sent by overnight delivery providing receipt of delivery, to the following addresses: if to the Company: Lineo, Inc. 383 S. 520 W. Lindon, Utah 84042 Attn: President Fax: (801) 426-6166 copy to: Summit Law Group 1505 Westlake Avenue N., Suite 300 Seattle, Washington 98109 Attn: Mark F. Worthington, Esq. Fax: (206) 281-9882 if to the Investor: __________________ __________________ __________________ 5.8 REMEDIES; SEVERABILITY. It is specifically understood and agreed that any breach of the provisions of this Agreement by any person subject hereto will result in irreparable injury to the other parties hereto, that the remedy at law alone will be an inadequate remedy for such breach, and that, in addition to any other remedies which they may have, such other parties may enforce their respective rights by actions for specific performance (to the extent permitted by law). The Company may refuse to recognize any unauthorized transferee as one of its stockholders for any purpose, including, without limitation, for purposes of dividend and voting rights, until the relevant party or parties have complied with all applicable of this Agreement. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be deemed prohibited or invalid under such applicable law, such provision shall be ineffective to the extent 15 of such prohibition or invalidity, and such prohibition or invalidity shall not invalidate the remainder of such provision or the other provisions of this Agreement. 5.9 INTEGRATION. This Agreement, including the exhibits, documents and instruments referred to herein or therein, constitutes the entire agreement, and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. Lineo, Inc. Investor By: ____________________________________ By:__________________________________ Bryan Sparks, President and Chairman 16 EX-10.9 13 EXHIBIT 10.9 EXHIBIT 10.9 LINEO, INC. STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of this __ day of March, 2000, by and between Lineo, Inc., a Delaware corporation (together with any predecessors or successors thereto, the "Company"), and _________________ (together with its successors and assigns, the "Investor"). RECITALS A. The Company has authorized the issuance and sale to the Investor of ___________ shares of Series B Convertible Preferred Stock, $.001 par value per share (the "Series B Preferred Stock"), having the rights and preferences set forth in the Certificate of Designation attached as EXHIBIT A hereto (the "Certificate of Designation"), for an aggregate purchase price of $________. AGREEMENT NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: SECTION 1. PURCHASE AND SALE OF SHARES. 1.1 DESCRIPTION OF SECURITIES. The Company's authorized capital stock consists of 100,000,000 shares of Common Stock and 30,000,000 shares of Preferred Stock, par value $.001 per share. Of such shares of Preferred Stock, 4,850,000 shares are designated as Series B Preferred Stock. The Company has authorized and has reserved, and covenants to continue to reserve, free and clear of preemptive and other preferential rights, a sufficient number of shares of its Common Stock to satisfy the rights of conversion of the holders of the Series B Preferred Stock. For purposes of this Agreement, (a) the shares of Series B Preferred Stock to be acquired by the Investor from the Company hereunder are referred to as the "Series B Preferred Shares," (b) the shares of Common Stock issuable upon conversion of the Series B Preferred Shares are referred to as the "Conversion Shares" and (c) the Series B Preferred Shares and the Conversion Shares are sometimes referred to collectively as the "Securities." 1.2 SALE AND PURCHASE. Upon the terms and subject to the conditions herein, and in reliance on the representations and warranties set forth in Section 2, the Investor hereby purchases from the Company, and the Company hereby issues and sells to the Investor, at the Closing (as defined below in Section 1.3), __________ Series B Preferred Shares for the purchase price of $3.00 per share for an aggregate of $___________, and the Company hereby grants the Investor the rights set forth herein. The proceeds of this sale are intended to be used for the expansion of the Company's business, working capital, debt repayment and other general corporate purposes. 1 1.3 CLOSING. The closing of the purchase and sale of the Series B Preferred Shares (the "Closing") shall take place at the offices of the Company at 10:00 a.m. on March __, 2000, or at such other time and place as the parties hereto may agree (the "Closing Date"). At the Closing, the Company shall deliver to the Investor a stock certificate, registered in the name of the Investor, representing the number of shares of Series B Preferred Stock purchased by such Investor hereunder. SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants the following, except as set forth in the schedule of exceptions attached hereto as EXHIBIT B (the "Disclosure Schedule"): 2.1 ORGANIZATION AND CORPORATE POWER. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is qualified to do business as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a material adverse effect on its assets, liabilities, condition (financial or other), business, results of operations or prospects (a "Material Adverse Effect"). The Company has all required corporate power and authority to carry on its business as presently conducted, to enter into and perform this Agreement and the agreements contemplated hereby to which it is a party and to carry out the transactions contemplated hereby and thereby, including the issuance and conversion of Series B Preferred Shares and the issuance of the Conversion Shares. The Company is not in violation of any term of the Certificate of Incorporation and Bylaws of the Company, as amended to date (the "Certificate of Incorporation" and the "Bylaws," respectively.) 2.2 AUTHORIZATION AND NON-CONTRAVENTION. The execution, delivery and performance by the Company of this Agreement and all other agreements, documents and instruments to be executed and delivered by the Company as contemplated hereby (including, without limitation, the Certificate of Designation) and the issuance and delivery of (i) the Series B Preferred Shares and (ii) upon the conversion of the Series B Preferred Shares, the Conversion Shares, have been duly authorized by all necessary corporate and other action of the Company. This Agreement and each such other agreement, document and instrument (including, without limitation, the Certificate of Designation) constitute valid and binding obligations of the Company, enforceable in accordance with their respective terms. The execution and delivery by the Company of this Agreement and each other agreement, document and instrument to be executed and delivered by the Company pursuant hereto or as contemplated hereby (including, without limitation, the Certificate of Designation) and the performance by the Company of the transactions contemplated hereby and thereby, including, without limitation, the issuance and delivery of (i) the Series B Preferred Shares and (ii) upon the conversion of the Series B Preferred Shares, the Conversion Shares, do not and will not: (A) violate, conflict with or result in a default (whether after the giving of notice, lapse of time or both) under any material contract or obligation to which the Company is a party or by which it or its assets are bound, or any provision of the Certificate of Incorporation or Bylaws of the Company, or cause the creation of any material encumbrance upon any of the assets of the Company; (B) violate or result in a violation of, or constitute a default under, any provision of any material law, regulation or rule, or any order of, or any restriction imposed by, any court or governmental agency applicable to the Company; (C) require from the Company any notice to, declaration or filing with, or consent or approval of any governmental authority or third party other than as may be required to secure an exemption from qualification of the 2 offer and sale of the Series B Preferred Shares under the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities and blue sky laws; or (D) accelerate any obligation under, or give rise to a right of termination of, any material agreement, permit, license or authorization to which the Company or any of its assets is a party or by which the Company or any of its assets is bound. 2.3 CAPITALIZATION. As of the Closing and after giving effect to the transactions contemplated hereby, the authorized capital stock of the Company will consist of 100,000,000 shares of Common Stock, par value $.001 per share, of which 17,738,437 shares will be issued and outstanding, and 30,000,000 shares of Preferred Stock, par value $.001 per share, of which (a) 7,500,000 shares will be designated as Series A Preferred Stock, of which (i) 5,000,000 shares shall be designated as Series A Class 1 Preferred Stock all of which are issued and outstanding and (ii) 2,500,000 shares shall be designated as Series A Class 2 Preferred Stock and of which not more than 2,500,000 shares will be issued and outstanding and (b) 4,850,000 shares will be designated as Series B Preferred Stock. In addition, the Company has authorized and reserved for issuance upon conversion of the Series A Preferred Stock up to 7,500,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like), has authorized and reserved for issuance upon conversion of the Series B Preferred Stock up to 4,850,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like) and has reserved for issuance upon exercise of options under the Company's stock option plan (the "Plan") 2,000,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like). Other than as described above, the Company has not issued or agreed to issue and is not obligated to issue any warrants, options or other rights to purchase or acquire any shares of its capital stock, or any securities convertible into or exercisable or exchangeable for such shares or any warrants, options or other rights to acquire any such convertible securities. As of the Closing, and after giving effect to the transactions contemplated hereby, all of the outstanding shares of capital stock of the Company (including, without limitation, the Series B Preferred Shares) will have been duly and validly authorized and issued, fully paid and nonassessable and, except as set forth herein, not subject to any preemptive rights to purchase or otherwise acquire shares of capital stock of the Company and will have been offered, issued, sold and delivered in compliance with applicable federal and state securities and blue sky laws. The Conversion Shares will, upon issuance, be duly and validly authorized and issued, fully paid and nonassessable, and not subject to any preemptive rights, and will be offered, issued, sold and delivered in compliance with applicable federal and state securities and blue sky laws. The relative rights, preferences and other provisions relating to the Series B Preferred Shares are as set forth in EXHIBIT A hereto. 2.4 SUBSIDIARIES; INVESTMENTS. Other than 1,250,000 shares of Common Stock of Caldera Systems, Inc., a representative office located in Taiwan and a wholly owned subsidiary located in the United Kingdom, the Company does not currently own any capital stock or interest in any corporation, joint venture, partnership, trust, limited liability company or other entity. 2.5 FINANCIAL STATEMENTS. The Company has previously furnished to the Investor copies of its draft audited financial statements (balance sheet, statement of operations, statement of cash flows and statement of stockholders equity) for the fiscal year at and ended October 31, 1999. Such financial statements were prepared in conformity with generally accepted accounting principles applied on a consistent basis; are complete, correct and consistent in all material respects with the books and records of the Company; and fairly and 3 accurately present the financial position of the Company as of the dates thereof and the results of operations and cash flows of the Company for the periods shown therein. 2.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the extent reflected or reserved against in the financial statements referred to in Section 2.5 above, the Company does not have and is not subject to any material liability or obligation of any nature, whether accrued, absolute, contingent or otherwise. 2.7 ABSENCE OF CHANGES. Except as set forth in Section 2.7 of the Disclosure Schedule, since October 31, 1999 there has not been (a) any material adverse change in the financial condition, results of operations, assets, liabilities, or business of the Company, (b) any material asset or property of the Company made subject to a lien of any kind, (c) any waiver of any material right of the Company, or the cancellation of any material debt or claim held by the Company, (d) any payment of dividends on, or other distribution with respect to, or any direct or indirect redemption or acquisition of, any shares of the capital stock of the Company, or any agreement or commitment therefore, (e) any mortgage, pledge or hypothecation of any tangible or intangible asset of the Company, except in the ordinary course of business, (f) any sale or assignment of any tangible asset of the Company having a book value in excess of $5,000, except in the ordinary course of business, or of any Intellectual Property Rights (as hereafter defined) or other intangible assets, (g) any loan by the Company to, or any loan to the Company from, any officer, director, employee or stockholder of the Company, or any agreement or commitment therefore (other than travel and other advances in the ordinary course of business), (h) any damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the assets, property or business of the Company, (i) any repayment of any loan owed by the Company (including, without limitation, any loan owed to any stockholder of the Company), (j) any single capital expenditure in excess of $50,000 or any capital expenditures aggregating more than $250,000, or (k) any material change in the accounting methods or practices followed by the Company. 2.8 TITLE; CONDITION OF PROPERTY. (a) Except as set forth in Section 2.8 of the Disclosure Schedule, the Company has good title to all of its property and assets, real, personal or mixed, tangible or intangible, free and clear of all liens, security interests, charges and other encumbrances of any kind. (b) Without material exception, all assets used in the Company business are in good operating condition and repair and suitable for use in the operation of such business, and none of such assets that (singly or when aggregated with other assets) is material to the business of the Company is obsolete. 2.9 CERTAIN CONTRACTS AND ARRANGEMENTS. Except as set forth in Section 2.9 of the Disclosure Schedule (with true and correct copies delivered to the Investor), the Company is not a party or subject to or bound by: (a) any plan or contract providing for collective bargaining or the like, or any contract or agreement with any labor union; 4 (b) any contract, lease or agreement creating any obligation of the Company to pay to any third party $100,000 or more with respect to any single such contract or agreement; (c) any contract or agreement for the sale, license, lease or disposition of products or services in excess of $100,000; (d) any contract containing covenants directly or explicitly limiting the freedom of the Company to compete in any line of business or with any person or entity; (e) any license agreement (as licensor or licensee); (f) any contract or agreement for the purchase of any leasehold improvements, equipment or fixed assets for a price in excess of $100,000; (g) any indenture, mortgage, promissory note, loan agreement, guaranty or other agreement or commitment for borrowing in excess of $100,000 or any pledge or security arrangement; (h) any material joint venture, partnership, or manufacturing agreement; (i) any endorsement or any other advertising, promotional or marketing agreement; (j) any employment contracts, or agreements with officers, directors, employees or stockholders of the Company or persons or organizations related to or affiliated with any such persons; (k) any pension, profit sharing, retirement (other than the Company's 401(k) plan), stock option, phantom stock or other equity incentive plans; (l) any arrangement relating to any royalty payments to employees, customers or independent contractors based on the sales volume of the Company; (m) any acquisition, merger or similar agreement; or (n) any contract with a governmental body under which the Company may have an obligation for renegotiation. All of the Company's contracts and commitments are in full force and effect and neither the Company nor, to the knowledge of the Company, any other party is in default thereunder (nor, to the knowledge of the Company, has any event occurred which with notice, lapse of time or both would constitute a default thereunder), except to the extent that any such default would not have a Material Adverse Effect, and the Company has not received notice of any alleged default under any such contract, agreement, understanding or commitment. 2.10 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS. Except as set forth in Section 2.10 of the Disclosure Schedule: (a) The Company has the right to use, sell, and license the Intellectual Property Rights (as defined below) material to the conduct of its business as presently conducted, including without 5 limitation all rights to the Company name "Lineo" and to the trademarks and the product name "Embedix" (the "Company Rights"), free and clear of the rights of all others. (b) The business of the Company as presently conducted, the products as marketed or sold and the provision of services by the Company do not violate and will not violate any agreements that the Company has with any third party or infringe any patent, trademark, service mark, copyright or trade secret or any other Intellectual Property Rights of any third party. (c) No claim is pending or threatened against the Company nor has the Company received any notice or claim from any person asserting that any of the Company's present or contemplated activities infringe or may infringe any Intellectual Property Rights of such person, and the Company is not aware of any infringement by any other person of any of the Company Rights. (d) Each current and former employee of the Company, and each of the Company's consultants and independent contractors involved in development of any of the Company Rights, has executed an agreement regarding confidentiality, proprietary information and assignment of inventions and copyrights to the Company, and none of such employees, consultants or independent contractors is in violation of any agreement or in breach of any agreement or arrangement with former or present employers relating to proprietary information or assignment of inventions. The Company has taken all reasonable steps to protect all data, information, ideas, concepts, know-how and materials that the Company treats as trade secrets, and all other confidential information and Intellectual Property Rights of the Company, which are not part of the public domain or knowledge, nor, to the best knowledge of the Company, have they been used, divulged or appropriated for the benefit of any person other than the Company or otherwise to the detriment of the Company. (e) No royalties or other amounts are payable by the Company to persons by reason of the ownership or use of the Intellectual Property Rights of the Company. (f) No third party has claimed or, to the best of the Company's knowledge, has reason to claim that any person employed by or affiliated with the Company has (a) violated or may be violating any of the terms or conditions of his or her employment, non-competition, non-disclosure, non-solicitation or inventions agreement with such third party, (b) disclosed or may be disclosing or utilized or may be utilizing any Intellectual Property Rights, trade secret or proprietary information or documentation of such third party, or (c) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees. As used herein, the term "Intellectual Property Rights" shall mean the intellectual property rights, including, without limitation, all patents, patent applications, patent rights, trademarks, trademark applications, trade names, service marks, service mark applications, copyrights, copyright applications, computer programs and other computer software, inventions, designs, samples, specifications, schematics, know-how, trade secrets, proprietary processes and formulae, including production technology and processes, all source and object code, algorithms, promotional materials, customer lists, supplier and dealer lists and marketing research, and all documentation and media constituting, describing or relating to the foregoing, including without limitation, manuals, memoranda and records. 2.11 LITIGATION. There is no litigation or governmental proceeding or investigation pending or threatened against the Company or affecting any of its properties or assets or against any officer, director or key employee 6 of the Company in his or her capacity as an officer, director or employee of the Company, which litigation, proceeding or investigation is reasonably likely to have a Material Adverse Effect, or which may call into question the validity or hinder the enforceability of this Agreement or any other agreements or transactions contemplated hereby; nor has there occurred any event nor does there exist any condition on the basis of which any such litigation, proceeding or investigation might be properly instituted or commenced. 2.12 TAX MATTERS. The Company has filed all federal, state, local and foreign income, excise and franchise tax returns, real estate and personal property tax returns, sales and use tax returns and other tax returns required to be filed by it where the failure to file such returns would have a Material Adverse Effect, and has paid all taxes owing by it, except taxes which have not yet accrued or otherwise become due, for which adequate provision has been made in the pertinent financial statements referred to in Section 2.5 above or which will not have a Material Adverse Effect. All taxes and other assessments and levies which the Company is required to withhold or collect have been withheld and collected and have been paid over to the proper governmental authorities except where the failure to withhold or collect and pay over would not have a Material Adverse Effect. With regard to the federal income tax returns of the Company, the Company has never received notice of any audit or of any proposed deficiencies from the Internal Revenue Service. There are in effect no waivers of applicable statutes of limitations with respect to any taxing owed by the Company for any year. Neither the Internal Revenue Service nor any other taxing authority is now asserting or, to the knowledge of the Company, threatening to assert against the Company any deficiency or claim for additional taxes or interest thereon or penalties in connection therewith. 2.13 EMPLOYEE BENEFIT PLANS. The Company does not maintain or contribute to any employee benefit plan, stock option, bonus or incentive plan, severance pay policy or agreement, deferred compensation agreement or any similar plan or agreement (an "Employee Benefit Plan") other than the Plan and the Employee Benefit Plans identified and described in Section 2.13 of the Disclosure Schedule. The terms and operation of each Employee Benefit Plan comply in all material respects with all applicable laws and regulations relating to such Employee Benefit Plan. There are no unfunded obligations of the Company under any retirement, pension, profit-sharing, deferred compensation plan or similar program. The Company is not required to make any payments or contributions to any Employee Benefit Plan pursuant to any collective bargaining agreement, and all Employee Benefit Plans are terminable at the discretion of the Company without material liability to the Company upon or following such termination. The Company has never maintained or contributed to any Employee Benefit Plan providing or promising any health or other welfare benefits (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) to terminated employees, except for benefits mandated by applicable law, including, but not limited to, Section 4980B of the Internal Revenue Code of 1986, as amended, and Part 6 of Subtitle B of Title I of ERISA. 2.14 LABOR LAWS. The Company employs approximately 50 employees and generally enjoys good employer-employee relationships. The Company is not delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed for it as of the date hereof or amounts required to be reimbursed to such employees. The Company is in 7 compliance in all material respects with all applicable laws and regulations respecting labor, employment, fair employment practices, terms and conditions of employment, and wages and hours. There are no charges of employment discrimination or unfair labor practices or strikes, slowdowns, stoppages of work or any other concerted interference with normal operations existing, pending or, to the knowledge of the Company, threatened against or involving the Company. 2.15 EMPLOYEES. Section 2.15 of the Disclosure Schedule contains a list of all managers, employees and consultants of the Company who, individually, have received compensation from the Company for the fiscal year of the Company ended October 31, 1999, in excess of $100,000. In each case, Section 2.15 of the Disclosure Schedule includes the current job title, years of service with the Company and aggregate annual compensation and benefits of each such individual. To the knowledge of the Company, no key employee of the Company has any plan or intention to terminate his or her employment with the Company. The Company has complied in all material respects with the immigration laws of the United States with respect to the hiring, employment and engagement of all of its employees and consultants who are not United States citizens, and, to the knowledge of the Company, the immigration or residency status of each of such employees and consultants is sufficient to allow such employees and consultants to remain lawfully employed or engaged by the Company. 2.16 HAZARDOUS WASTE, ETC. No hazardous wastes, substances or materials or oil or petroleum products have been generated, transported, used, disposed, stored or treated by the Company, and no hazardous wastes, substances or materials or oil or petroleum products have been released, discharged, disposed, transported, placed or otherwise caused to enter the soil or water in, under or upon any real property owned, leased or operated by the Company. 2.17 BUSINESS; COMPLIANCE WITH LAWS. The Company has all necessary franchises, permits, licenses and other rights and privileges necessary to permit it to own its property and to conduct its business as it is presently or contemplated to be conducted. The Company is currently and has heretofore been in compliance in all material respects with all federal, state, local and foreign laws and regulations. 2.18 INVESTMENT BANKING; BROKERAGE. There are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transaction contemplated by this Agreement payable by the Company or based on any arrangement or agreement made by or on behalf of the Company or any of the stockholders. 8 2.19 INSURANCE. The Company has fire, casualty, product liability, workers' compensation and business interruption and other insurance policies, with extended coverage, sufficient in amount to allow it to replace any of its material properties which might be damaged or destroyed or sufficient to cover liabilities to which the Company may reasonably become subject, and such types and amounts of other insurance with respect to its business and properties, on both a per occurrence and an aggregate basis, as are customarily carried by persons engaged in the same or similar business as the Company. There is no default or event which could give rise to a default under any such policy. 2.20 TRANSACTIONS WITH AFFILIATES. There are no loans, leases, contracts or other transactions between the Company and any officer, director or five percent (5%) stockholder of the Company or any family member or affiliate of the foregoing persons, and there have been no such transactions within the past twelve (12) months except as set forth in Section 2.20 of the Disclosure Schedule. 2.21 SUPPLIERS. Section 2.21 of the Disclosure Schedule sets forth each supplier of the Company who supplied more than five percent (5%) of the Company's supplies or materials for the fiscal year ended December 31, 1999 and each supplier who the Company believes may supply for more than five percent (5%) of the Company's supplies or materials for the fiscal year ended December 31, 2000 (each a "Supplier" and collectively the "Suppliers"). The relationships of the Company with its Suppliers are good commercial working relationships. No Supplier of the Company has canceled or otherwise terminated its relationship with the Company, or has during the last 12 months decreased materially its services, supplies or materials to the Company. No Supplier has, to the knowledge of the Company, any plan or intention to terminate, cancel or otherwise materially and adversely modify its relationship with the Company or to decrease materially or limit its services, supplies or materials to the Company. 2.22 CERTAIN EVENTS. (a) During the past ten (10) years, neither the Company nor any of the officers or directors of the Company has had a petition under the Bankruptcy Reform Act of 1978, as amended, or any state insolvency law, filed by or against any of them which has not as of the date of this Agreement been dismissed. (b) During the past ten (10) years, neither the Company nor the officers or directors of the Company has been convicted in a criminal proceeding or is a named subject of a criminal proceeding which is presently pending (excluding traffic violations and other minor offenses). (c) During the past ten (10) years, neither the Company nor the officers or directors of the Company has been, or is, the subject of any order, judgment or decree, whether or not subsequently reversed, suspended or vacated, of any court or any administrative agency, requiring the payment of money damages in excess of $100,000 or permanently or temporarily enjoining any of them from, or otherwise limiting any of their abilities to engage in, any type of business practice. 9 2.23 REGISTRATION RIGHTS. Except as disclosed in Section 2.23 of the Disclosure Schedule, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. 2.24 DISCLOSURE. The representations and warranties made or contained in this Agreement, the exhibits hereto and the certificates and statements executed or delivered in connection herewith, and the information concerning the business of the Company delivered to the Investor in connection with or pursuant to this Agreement, when taken together, do not and shall not contain any untrue statement of a material fact and do not and shall not omit to state a material fact required to be stated therein or necessary in order to make such representations, warranties or other material not misleading in light of the circumstances in which they were made or delivered. There have been no events or transactions or information which has come to the attention of the management of the Company having a direct impact on the Company or its assets, liabilities, financial condition, business, results of operations or prospects which, in the reasonable judgment of such management, could be expected to have a Material Adverse Effect. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor represents and warrants to the Company the following: 3.1 INVESTMENT EXPERIENCE AND INTENT. The Investor represents to the Company that it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment contemplated by this Agreement and making an informed investment decision with respect thereto. The Investor represents that it is an "accredited investor" as such term is defined in Rule 501 under the Securities Act. The Investor represents and understands that it is responsible for its own due diligence investigation and satisfying its own due diligence requirements and shall not be entitled to rely on the due diligence investigation of any other person or entity. The Investor represents to the Company that it is purchasing the Series B Preferred Shares for its own account, for investment only and not with a view to, or any present intention of, effecting a distribution of such securities or any part thereof except pursuant to a registration or an available exemption under applicable law. The Investor acknowledges that its Series B Preferred Shares have not been registered under the Securities Act or the securities laws of any state or other jurisdiction and cannot be disposed of unless they are subsequently registered under the Securities Act and any applicable state laws or exemption from such registration is available. 3.2 AUTHORIZATION AND NON-CONTRAVENTION. The Investor represents that it has full right, authority and power to enter into this Agreement and each agreement, document and instrument to be executed and delivered by or on behalf of such Investor pursuant to or as contemplated by this Agreement and to carry out the transactions contemplated hereby and thereby, and the execution, delivery and performance by such Investor of this Agreement and each such other agreement, document and instrument have been duly authorized by all necessary action. The Investor represents and warrants that this Agreement and each agreement, document and instrument executed and delivered by such Investor pursuant to or as contemplated by this Agreement constitute, or when executed and delivered will constitute, valid and binding obligations of such Investor enforceable in accordance with their respective terms and that the execution, delivery and performance by such Investor 10 of this Agreement and each such other agreement, document and instrument, and the performance of the transactions contemplated hereby and thereby do not and will not: (a) violate, conflict with or result in a default (whether after the giving of notice, lapse of time or both) under any contract or obligation to which such Investor is a party or by which it or its assets are bound, or cause the creation of any encumbrance upon any of the assets of the Investor; (b) violate or result in a violation of, or constitute a default under, any provision of any law, regulation or rule, or any order of, or any restriction imposed by, any court or other governmental agency applicable to the Investor; (c) require from the Investor any notice to, declaration or filing with, or consent or approval of any governmental authority or other third party; or (d) accelerate any obligation under, or give rise to a right of termination of, any agreement, permit, license or authorization to which the Investor is a party or by which the Investor is bound. 3.3 COMMISSIONS AND FEES. The Investor represents that there are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of such Investor. SECTION 4. CONDITIONS OF PURCHASE. The Investor's obligation to purchase and pay for the Series B Preferred Shares to be purchased by it shall be subject to compliance by the Company with its agreements herein contained and to the fulfillment to the Investor's satisfaction, or the waiver by the Investor, on or before and at the Closing Date, of the following conditions: 4.1 SATISFACTION OF CONDITIONS. The representations and warranties of the Company contained in this Agreement shall be true and correct on and as of the Closing Date; each of the conditions specified in this Section 4 shall have been satisfied or waived in writing by the Investor; and, on the Closing Date, a certificate to such effect executed by the President and Chief Financial Officer of the Company shall have been delivered to the Investor. 4.2 AUTHORIZATION. The Board of Directors of the Company shall have duly adopted resolutions in form and substance reasonably satisfactory to the Investor and shall have taken all action necessary for the purpose of authorizing the Company to consummate the transactions contemplated hereby in accordance with the terms hereof and to cause the Certificate of Designation to become effective; and the Investor shall have received a certificate of the Secretary of the Company setting forth a copy of the relevant Board of Directors and/or stockholder resolutions and the Certificate of Incorporation, the Certificate of Designation and Bylaws of the Company and such other matters as may be reasonably requested by the Investor. 4.3 OPINION OF COUNSEL. The Investor shall have received from Summit Law Group an opinion dated as of the Closing Date substantially in the form attached hereto as EXHIBIT C. 11 4.4 ALL PROCEEDINGS SATISFACTORY. All corporate and other proceedings taken prior to or at the Closing in connection with the transactions contemplated by this Agreement, and all documents and evidences incident thereto, shall be reasonably satisfactory in form and substance to the Investor. 4.5 NO VIOLATION OR INJUNCTION. The consummation of the transactions contemplated by this Agreement shall not be in violation of any law or regulation and shall not be subject to any injunction, stay or restraining order. 4.6 CONSENTS AND WAIVERS. The Company shall have obtained all consents or waivers necessary to execute this Agreement and the other agreements and documents contemplated herein, to issue and sell the Securities to be sold to the Investor hereunder and to carry out the transactions contemplated hereby and thereby and shall have delivered evidence thereof to the Investor. All corporate and other action and governmental filings necessary to effectuate the terms of this Agreement and other agreements and instruments executed and delivered by the Company in connection herewith shall have been made or taken. SECTION 5. GENERAL. 5.1 AMENDMENTS, WAIVERS AND CONSENTS. For the purpose of this Agreement and all agreements executed pursuant hereto, no course of dealing between or among any of the parties hereto and no delay on the part of any party hereto in exercising any rights hereunder or thereunder shall operate as a waiver of the rights hereof and thereof. No covenant or other provision hereof may be waived otherwise than by a written instrument signed by the party or parties so waiving such covenant or other provision. No amendment to this Agreement may be made without the written consent of the Company and the Investor. 5.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS; ASSIGNABILITY OF RIGHTS. All covenants, agreements, representations and warranties of the Company and the Investor made herein, in the Disclosure Schedule and the Certificate of Designation and in the certificates, lists, exhibits, schedules or other written information delivered or furnished to the Investor in connection herewith (a) are material, shall be deemed to have been relied upon by the party or parties to whom they are made and shall survive the Closing regardless of any investigation or knowledge on the part of such party or its representatives and (b) shall bind the parties' successors and assigns (including without limitation any successor to the Company by way of acquisition, merger or otherwise), whether so expressed or not, and, except as otherwise provided in this Agreement, all such covenants, agreements, representations and warranties shall inure to the benefit of the Investor's successors and assigns and to their transferees of Securities, whether so expressed or not, and any such transferee shall be deemed the "Investor" for purposes hereof. 5.3 LEGEND ON SECURITIES. The Company and the Investor acknowledge and agree that the following legend shall be typed on each certificate evidencing any of the securities issued hereunder held at any time by the Investor: 12 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY LAWS. 5.4 MARKET STAND-OFF. In connection with any underwritten public offering by the Company, the Investor, if requested in good faith by the Company and the managing underwriter of the Company's securities, shall agree not to sell or otherwise transfer or dispose of any securities of the Company held by it (except for any securities sold pursuant to such registration statement) for a period following the effective date of the applicable registration statement that in no event shall exceed 180 days. In order to enforce the foregoing, the Company may impose stop-transfer instructions with respect to the securities held by the Investor until the end of such period. 5.5 GOVERNING LAW. This Agreement shall be deemed to be a contract made under, and shall be construed in accordance with, the laws of Delaware, without giving effect to conflict of laws principles thereof. 5.6 SECTION HEADINGS AND GENDER. The descriptive headings in this Agreement have been inserted for convenience only and shall not be deemed to limit or otherwise affect the construction of any provision thereof or hereof. The use in this Agreement of the masculine pronoun in reference to a party hereto shall be deemed to include the feminine or neuter, and vice versa, as the context may require. 5.7 COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute but one and the same document. 5.8 NOTICES AND DEMANDS. Any notice or demand which is required or provided to be given under this Agreement or the Certificate of Designation shall be deemed to have been sufficiently given and received for all purposes when delivered by hand, telecopy, telex or other method of facsimile, or five days after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, or two days after being sent by overnight delivery providing receipt of delivery, to the following addresses: if to the Company: 13 Lineo, Inc. 383 S. 520 W. Lindon, Utah 84042 Attn: President Fax: (801) 426-6166 copy to: Summit Law Group 1505 Westlake Avenue N., Suite 300 Seattle, Washington 98109 Attn: Mark F. Worthington, Esq. Fax: (206) 281-9882 if to the Investor: - ------------------- - ------------------- - ------------------- - ------------------- 5.9 REMEDIES; SEVERABILITY. It is specifically understood and agreed that any breach of the provisions of this Agreement by any person subject hereto will result in irreparable injury to the other parties hereto, that the remedy at law alone will be an inadequate remedy for such breach, and that, in addition to any other remedies which they may have, such other parties may enforce their respective rights by actions for specific performance (to the extent permitted by law). The Company may refuse to recognize any unauthorized transferee as one of its stockholders for any purpose, including, without limitation, for purposes of dividend and voting rights, until the relevant party or parties have complied with all applicable of this Agreement. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be deemed prohibited or invalid under such applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, and such prohibition or invalidity shall not invalidate the remainder of such provision or the other provisions of this Agreement. 5.10 INTEGRATION. This Agreement, including the exhibits, documents and instruments referred to herein or therein, constitutes the entire agreement, and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. [Signature Page Follows] 14 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. COMPANY: INVESTOR: LINEO, INC., a Delaware corporation By By ------------------------------------ ---------------------------- Bryan Sparks, President and Chairman Its -------------------------- 15 EX-10.10 14 EXHIBIT 10.10 EXHIBIT 10.10 LINEO, INC. STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of this __ day of April, 2000, by and between Lineo, Inc., a Delaware corporation (together with any predecessors or successors thereto, the "Company"), and _____________________ (together with its successors and assigns, the "Investor"). RECITALS A. The Company has authorized the issuance and sale to the Investor of _______ shares of Series C Convertible Preferred Stock, $.001 par value per share (the "Series C Preferred Stock"), having the rights and preferences set forth in the Certificate of Designation in the form attached as EXHIBIT A hereto (the "Certificate of Designation"), which the Company shall adopt and file with the Secretary of State of the State of Delaware on or before the Closing (as defined below in Section 1.3), for an aggregate purchase price of $__________. AGREEMENT NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: SECTION 1. PURCHASE AND SALE OF SHARES. 1.1 DESCRIPTION OF SECURITIES. The Company's authorized capital stock consists of 100,000,000 shares of Common Stock and 30,000,000 shares of Preferred Stock, par value $.001 per share. Of such shares of Preferred Stock, 3,000,000 shares are designated as Series C Preferred Stock. The Company has authorized and has reserved, and covenants to continue to reserve, free and clear of preemptive and other preferential rights, a sufficient number of shares of its Common Stock to satisfy the rights of conversion of the holders of the Series C Preferred Stock. For purposes of this Agreement, (a) the shares of Series C Preferred Stock to be acquired by the Investor from the Company hereunder are referred to as the "Series C Preferred Shares," (b) the shares of Common Stock issuable upon conversion of the Series C Preferred Shares are referred to as the "Conversion Shares" and (c) the Series C Preferred Shares and the Conversion Shares are sometimes referred to collectively as the "Securities." 1.2 SALE AND PURCHASE. Upon the terms and subject to the conditions herein, and in reliance on the representations and warranties set forth in Section 2, the Investor hereby agrees to purchase from the Company, and the Company hereby agrees to issue and sell to the Investor, at the Closing, ______ Series C Preferred Shares for the purchase price of $6.00 per share for an aggregate of $_________, and the Company hereby grants the Investor the rights set forth herein. The proceeds of this sale are intended to be used for the expansion of the Company's business, working capital and other general corporate purposes. 1 1.3 CLOSING. The closing of the purchase and sale of the Series C Preferred Shares (the "Closing") shall take place at the offices of the Company at 10:00 a.m. on April __, 2000, or at such other time and place as the parties hereto may agree (the "Closing Date"). At the Closing, the Company shall deliver to the Investor a stock certificate, registered in the name of the Investor, representing the number of shares of Series C Preferred Stock purchased by such Investor hereunder. SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants the following, except as set forth in the schedule of exceptions attached hereto as EXHIBIT B (the "Disclosure Schedule"), which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 ORGANIZATION AND CORPORATE POWER. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is qualified to do business as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a material adverse effect on its assets, liabilities, condition (financial or other), business, results of operations or prospects (a "Material Adverse Effect"). The Company has all required corporate power and authority to carry on its business as presently conducted, to enter into and perform this Agreement and all other agreements contemplated hereby to which it is a party and to carry out the transactions contemplated hereby and thereby, including the issuance (or reservation for issuance), sale, delivery and conversion of Series C Preferred Shares and the issuance of the Conversion Shares. The Company is not in violation of any term of the Certificate of Incorporation and Bylaws of the Company, as amended to date (the "Certificate of Incorporation" and the "Bylaws," respectively.) 2.2 AUTHORIZATION AND NON-CONTRAVENTION. The execution, delivery and performance by the Company of this Agreement and all other agreements, documents and instruments to be executed and delivered by the Company as contemplated hereby (including, without limitation, the Certificate of Designation) and the issuance and delivery of (i) the Series C Preferred Shares and (ii) upon the conversion of the Series C Preferred Shares, the Conversion Shares, have been duly authorized by all necessary corporate and other action of the Company. This Agreement and each such other agreement, document and instrument (including, without limitation, the Certificate of Designation) constitute valid and binding obligations of the Company, enforceable in accordance with their respective terms. The execution and delivery by the Company of this Agreement and each other agreement, document and instrument to be executed and delivered by the Company pursuant hereto or as contemplated hereby (including, without limitation, the Certificate of Designation) and the performance by the Company of the transactions contemplated hereby and thereby, including, without limitation, the issuance and delivery of (i) the Series C Preferred Shares and (ii) upon the conversion of the Series C Preferred Shares, the Conversion Shares, do not and will not (whether after the giving of notice, lapse of time or both): (a) violate, conflict with or result in a default under any instrument, judgment, order, writ, decree, contract, statute, rule, regulation or obligation to which the Company is subject to or by which it or its assets are bound, or any provision of the Certificate of Incorporation or Bylaws of the Company, and a violation of which would have a material adverse effect on the business, condition, financial or otherwise, or operations of the Company, or (b) result in any such 2 violation, or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event that results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any material permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. 2.3 CAPITALIZATION. As of the Closing and after giving effect to the transactions contemplated hereby, the authorized capital stock of the Company will consist of 100,000,000 shares of Common Stock, par value $.001 per share, of which 20,148,724 shares are issued and outstanding, and 30,000,000 shares of Preferred Stock, par value $.001 per share, of which (a) 7,500,000 shares are designated as Series A Preferred Stock, of which (i) 5,000,000 shares are designated as Series A Class 1 Preferred Stock, all of which are issued and outstanding, and (ii) 2,500,000 shares are designated as Series A Class 2 Preferred Stock, all of which are issued and outstanding, (b) 4,850,000 shares are designated as Series B Preferred Stock, of which 4,833,331 shares are issued and outstanding, and (c) 3,000,000 shares are designated as Series C Preferred Stock. In addition, the Company has authorized and reserved for issuance upon conversion of the Series A Preferred Stock up to 7,500,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like), has authorized and reserved for issuance upon conversion of the Series B Preferred Stock up to 4,850,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like), has authorized and reserved for issuance upon conversion of the Series C Preferred Stock up to 3,000,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like) and has reserved for issuance upon exercise of options under the Company's stock option plan (the "Plan") 5,000,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like). Other than as described above, the Company has not issued or agreed to issue and is not obligated to issue any warrants, options or other rights to purchase or acquire any shares of its capital stock, or any securities convertible into or exercisable or exchangeable for such shares or any warrants, options or other rights to acquire any such convertible securities. As of the Closing, and after giving effect to the transactions contemplated hereby, all of the outstanding shares of capital stock of the Company (including, without limitation, the Series C Preferred Shares) are duly and validly authorized and issued, fully paid and nonassessable and, except as set forth herein, not subject to any preemptive rights to purchase or otherwise acquire shares of capital stock of the Company, are free of restrictions on transfer, other than restrictions on transfer under this Agreement and the Investor Rights Agreement and under applicable state and federal securities laws, and will have been offered, issued, sold and delivered in compliance with applicable federal and state securities laws. The Conversion Shares will, upon issuance, be duly and validly authorized and issued, fully paid and nonassessable, will be free of restrictions on transfer, other than restrictions on transfer under this Agreement and the Investor Rights Agreement and under applicable state and federal securities laws, and will not be subject to any preemptive rights, and will be offered, issued, sold and delivered in compliance with applicable federal and state securities laws. The relative rights, preferences and other provisions relating to the Series C Preferred Shares are as set forth in the Certificate of Designation. 2.4 SUBSIDIARIES; INVESTMENTS. Except as set forth in Section 2.4 of the Disclosure Schedule and other than 1,250,000 shares of Common Stock of Caldera Systems, Inc., a representative office located in Taiwan and a wholly owned subsidiary located in the United Kingdom, the Company does not currently own any capital stock or 3 interest or participate in any corporation, joint venture, partnership, trust, limited liability company or other entity. 2.5 FINANCIAL STATEMENTS. The Company has previously furnished to the Investor copies of its draft audited financial statements (balance sheet, statement of operations, statement of cash flows and statement of stockholders equity, including notes thereto) for the fiscal year at and ended October 31, 1999 (the "Financial Statements"). Such financial statements were prepared in conformity with generally accepted United States accounting principles applied on a consistent basis; are complete, correct and consistent in all material respects with the books and records of the Company; and fairly and accurately present the financial position of the Company as of the dates thereof and the results of operations and cash flows of the Company for the periods shown therein. The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted United States accounting principles. 2.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the extent reflected or reserved against in the financial statements referred to in Section 2.5 above, the Company does not have and is not subject to any material liability or obligation of any nature, whether accrued, absolute, contingent or otherwise. 2.7 ABSENCE OF CHANGES. Except as set forth in Section 2.7 of the Disclosure Schedule, since October 31, 1999 there has not been (a) any material adverse change in the financial condition, results of operations, assets, liabilities, or business of the Company, (b) any material asset or property of the Company made subject to a lien of any kind, (c) any waiver of any material right of the Company, or the cancellation of any material debt or claim held by the Company, (d) any payment of dividends on, or other distribution with respect to, or any direct or indirect redemption or acquisition of, any shares of the capital stock of the Company, or any agreement or commitment therefore, (e) any mortgage, pledge or hypothecation of any tangible or intangible asset of the Company, except in the ordinary course of business, (f) any sale or assignment of any tangible asset of the Company having a book value in excess of $5,000, except in the ordinary course of business, or of any Intellectual Property Rights (as hereafter defined) or other intangible assets, (g) any loan by the Company to, or any loan to the Company from, any officer, director, employee or stockholder of the Company, or any agreement or commitment therefore (other than travel and other advances in the ordinary course of business), (h) any damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the assets, property or business of the Company, (i) any repayment of any loan owed by the Company (including, without limitation, any loan owed to any stockholder of the Company), (j) any single capital expenditure in excess of $50,000 or any capital expenditures aggregating more than $250,000, (k) any material change in the accounting methods or practices followed by the Company, (l) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and that is not material to the business, properties, prospects or financial condition of the Company, (m) any material change to a material contract or agreement by which the Company or any of its assets is bound or subject, (n) any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder of the Company, (o) to the Company's knowledge, any other event or condition of any character that might materially and adversely affect the business, properties, prospects or financial condition of the Company , (p) any resignation or termination of employment of any officer or key 4 employee of the Company, or (q) any arrangement or commitment by the Company to do any of the things described in this Section 2.7. 2.8 TITLE; CONDITION OF PROPERTY. (a) Except as set forth in Section 2.8 of the Disclosure Schedule, the Company has good title to all of its property and assets, real, personal or mixed, tangible or intangible, free and clear of all liens, security interests, charges and other encumbrances of any kind. (b) Without material exception, all assets used in the Company business are in good operating condition and repair and suitable for use in the operation of such business, and none of such assets that (singly or when aggregated with other assets) is material to the business of the Company is obsolete. 2.9 CERTAIN CONTRACTS AND ARRANGEMENTS. Except as set forth in Section 2.9 of the Disclosure Schedule (with true and correct copies delivered to the Investor), the Company is not a party or subject to or bound by: (a) any plan or contract providing for collective bargaining or the like, or any contract or agreement with any labor union; (b) any contract, lease or agreement creating any obligation of the Company (contingent or otherwise) to pay to any third party $100,000 or more with respect to any single such contract or agreement; (c) any contract or agreement for the sale, license, lease or disposition of products or services in excess of $100,000; (d) any contract containing covenants directly or explicitly limiting the freedom of the Company to compete in any line of business or with any person or entity; (e) any license agreement (as licensor or licensee); (f) any contract or agreement for the purchase of any leasehold improvements, equipment or fixed assets for a price in excess of $100,000; (g) any indenture, mortgage, promissory note, loan agreement, guaranty or other agreement or commitment for borrowing in excess of $100,000 or any pledge or security arrangement; (h) any material joint venture, partnership, or manufacturing agreement; (i) any endorsement or any other advertising, promotional or marketing agreement; (j) any employment contracts, or agreements with officers, directors, employees or stockholders of the Company or persons or organizations related to or affiliated with any such persons; (k) any pension, profit sharing, retirement (other than the Company's 401(k) plan), stock option, phantom stock or other equity incentive plans; 5 (l) any arrangement relating to any royalty payments to employees, customers or independent contractors based on the sales volume of the Company; (m) any acquisition, merger or similar agreement; or (n) any contract with a governmental body under which the Company may have an obligation for renegotiation. Except as set forth in Section 2.9 of the Disclosure Schedule, (i) each of the Company's contracts and commitments is in full force and effect and is valid, binding and enforceable in accordance with its terms as to the Company and, to the knowledge of the Company, as to each other party thereto; (ii) there exists no material breach or material default (or event that with notice or lapse of time would constitute a material breach or material default) on the part of the Company or, to the knowledge of the Company, on the part of any other party under any of the Company's contracts or commitments, except to the extent that any such breach or default would not have a Material Adverse Effect; (iii) the Company has not received a written notice of termination or default under any of the Company's contracts or commitments; and (iv) as of the date of this Agreement, no party to an agreement under which the Company acquired a substantial portion of its assets has asserted any claim for indemnification under such agreement. The Company has not engaged in the past three (3) months in any discussion (i) with any representative of any corporation or corporations regarding the merger of the Company with or into any such corporation or corporations, (ii) with any representative of any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company or a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company would be disposed of, or (iii) regarding any other form of liquidation, dissolution or winding up of the Company. 2.10 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS. Except as set forth in Section 2.10 of the Disclosure Schedule: (a) The Company has the right to use, sell, and license the Intellectual Property Rights (as defined below) material to the conduct of its business as presently conducted, including without limitation all rights to the Company name "Lineo" and to the trademarks and the product name "Embedix" (the "Company Rights"), free and clear of the rights of all others. (b) The business of the Company as presently conducted, the products as marketed or sold and the provision of services by the Company do not violate and will not violate any agreements that the Company has with any third party or infringe any patent, trademark, service mark, copyright or trade secret or any other Intellectual Property Rights of any third party. (c) No claim is pending or threatened against the Company nor has the Company received any notice or claim from any person asserting that any of the Company's present or contemplated activities infringe or may infringe any Intellectual Property Rights of such person, and the Company is not aware of any infringement by any other person of any of the Company Rights. 6 (d) Each current and former employee of the Company, and each of the Company's consultants and independent contractors involved in development of any of the Company Rights, has executed an agreement regarding confidentiality, proprietary information and assignment of inventions and copyrights to the Company, and none of such employees, consultants or independent contractors is in violation of any agreement or in breach of any agreement or arrangement with former or present employers relating to proprietary information or assignment of inventions. The Company has taken all reasonable steps to protect all data, information, ideas, concepts, know-how and materials that the Company treats as trade secrets, and all other confidential information and Intellectual Property Rights of the Company, which are not part of the public domain or knowledge, nor, to the best knowledge of the Company, have they been used, divulged or appropriated for the benefit of any person other than the Company or otherwise to the detriment of the Company. (e) No royalties or other amounts are payable by the Company to persons by reason of the ownership or use of the Intellectual Property Rights of the Company. (f) No third party has claimed or, to the best of the Company's knowledge, has reason to claim that any person employed by or affiliated with the Company has (a) violated or may be violating any of the terms or conditions of his or her employment, non-competition, non-disclosure, non-solicitation or inventions agreement with such third party, (b) disclosed or may be disclosing or utilized or may be utilizing any Intellectual Property Rights, trade secret or proprietary information or documentation of such third party, or (c) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees. As used herein, the term "Intellectual Property Rights" shall mean the intellectual property rights, including, without limitation, all patents, patent applications, patent rights, trademarks, trademark applications, trade names, service marks, service mark applications, copyrights, copyright applications, computer programs and other computer software, inventions, designs, samples, specifications, schematics, know-how, trade secrets, proprietary processes and formulae, including production technology and processes, all source and object code, algorithms, promotional materials, customer lists, supplier and dealer lists and marketing research, and all documentation and media constituting, describing or relating to the foregoing, including without limitation, manuals, memoranda and records. 2.11 LITIGATION. There is no litigation or governmental proceeding or investigation pending or threatened against the Company or affecting any of its properties or assets or against any officer, director or key employee of the Company in his or her capacity as an officer, director or employee of the Company, which litigation, proceeding or investigation is reasonably likely to have a Material Adverse Effect, or which may call into question the validity or hinder the enforceability of this Agreement or any other agreements or transactions contemplated hereby; nor has there occurred any event nor does there exist any condition on the basis of which any such litigation, proceeding or investigation might be properly instituted or commenced. Neither the Company nor any of its subsidiaries is a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company or any of its subsidiaries currently pending or which the Company or any of its subsidiaries intends to initiate. 2.12 TAX MATTERS. 7 The Company has filed all federal, state, local and foreign income, excise and franchise tax returns, real estate and personal property tax returns, sales and use tax returns and other tax returns required to be filed by it where the failure to file such returns would have a Material Adverse Effect, and has paid all taxes owing by it, except taxes which have not yet accrued or otherwise become due, for which adequate provision has been made in the pertinent financial statements referred to in Section 2.5 above or which will not have a Material Adverse Effect. The filed tax returns and reports are true and correct in all material respects. All taxes and other assessments and levies which the Company is required to withhold or collect have been withheld and collected and have been paid over to the proper governmental authorities except where the failure to withhold or collect and pay over would not have a Material Adverse Effect With regard to the federal income tax returns of the Company, the Company has never received notice of any audit or of any proposed deficiencies from the Internal Revenue Service. There are in effect no waivers of applicable statutes of limitations with respect to any taxing owed by the Company for any year. Neither the Internal Revenue Service nor any other taxing authority is now asserting or, to the knowledge of the Company, threatening to assert against the Company any deficiency or claim for additional taxes or interest thereon or penalties in connection therewith. 2.13 EMPLOYEE BENEFIT PLANS. The Company does not maintain or contribute to any employee benefit plan, stock option, bonus or incentive plan, severance pay policy or agreement, deferred compensation agreement or any similar plan or agreement (an "Employee Benefit Plan") other than the Plan and the Employee Benefit Plans identified and described in Section 2.13 of the Disclosure Schedule. The terms and operation of each Employee Benefit Plan comply in all material respects with all applicable laws and regulations relating to such Employee Benefit Plan. There are no unfunded obligations of the Company under any retirement, pension, profit-sharing, deferred compensation plan or similar program. The Company is not required to make any payments or contributions to any Employee Benefit Plan pursuant to any collective bargaining agreement, and all Employee Benefit Plans are terminable at the discretion of the Company without material liability to the Company upon or following such termination. The Company has never maintained or contributed to any Employee Benefit Plan providing or promising any health or other welfare benefits (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) to terminated employees, except for benefits mandated by applicable law, including, but not limited to, Section 4980B of the Internal Revenue Code of 1986, as amended, and Part 6 of Subtitle B of Title I of ERISA. 2.14 LABOR LAWS. The Company employs approximately 105 employees and generally enjoys good employer-employee relationships. The Company is not delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed for it as of the date hereof or amounts required to be reimbursed to such employees. The Company is in compliance in all material respects with all applicable laws and regulations respecting labor, employment, fair employment practices, terms and conditions of employment, and wages and hours. There are no charges of employment discrimination or unfair labor practices or strikes, slowdowns, stoppages of work or any other concerted interference with normal operations existing, pending or, to the knowledge of the Company, threatened against or involving the Company. 8 2.15 EMPLOYEES. Section 2.15 of the Disclosure Schedule contains a list of all managers, employees and consultants of the Company who, individually, have received compensation from the Company for the fiscal year of the Company ended October 31, 1999, in excess of $100,000. In each case, Section 2.15 of the Disclosure Schedule includes the current job title, years of service with the Company and aggregate annual compensation and benefits of each such individual. To the knowledge of the Company, no key employee of the Company has any plan or intention to terminate his or her employment with the Company. The Company has complied in all material respects with the immigration laws of the United States with respect to the hiring, employment and engagement of all of its employees and consultants who are not United States citizens, and, to the knowledge of the Company, the immigration or residency status of each of such employees and consultants is sufficient to allow such employees and consultants to remain lawfully employed or engaged by the Company. The employment of each officer and employee of the Company is teminable at the will of the Company. The Company is not a party to or bound by any currently effective employment contract. 2.16 HAZARDOUS WASTE, ETC. No hazardous wastes, substances or materials or oil or petroleum products have been generated, transported, used, disposed, stored or treated by the Company, and no hazardous wastes, substances or materials or oil or petroleum products have been released, discharged, disposed, transported, placed or otherwise caused to enter the soil or water in, under or upon any real property owned, leased or operated by the Company. 2.17 BUSINESS; COMPLIANCE WITH LAWS. The Company has all necessary franchises, permits, licenses and other rights and privileges necessary to permit it to own its property and to conduct its business as it is presently or contemplated to be conducted and is not in default in any material respect under any of such franchises, permits, licenses and other similar rights and privileges. The Company is currently and has heretofore been in compliance in all material respects with all federal, state, local and foreign laws and regulations. 2.18 INVESTMENT BANKING; BROKERAGE. There are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transaction contemplated by this Agreement payable by the Company or based on any arrangement or agreement made by or on behalf of the Company or any of the stockholders. 2.19 INSURANCE. The Company has fire, casualty, product liability, workers' compensation and business interruption and other insurance policies, with extended coverage, sufficient in amount to allow it to replace any of its material properties which might be damaged or destroyed or sufficient to cover liabilities to which the Company may reasonably become subject, and such types and amounts of other insurance with respect to its business and properties, on both a per occurrence and an aggregate basis, as are customarily carried by persons engaged in the same or similar business as the Company. There is no default or event which could give rise to a default under any such policy. 9 2.20 TRANSACTIONS WITH AFFILIATES. There are no loans, leases, contracts or other transactions (directly or indirectly) between the Company and any officer, director or one percent (1%) stockholder of the Company or any family member or affiliate of the foregoing persons, and there have been no such transactions within the past twelve (12) months except as set forth in Section 2.20 of the Disclosure Schedule. To the best of the Company's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officers or directors of the Company and members of their families may own stock in publicly traded companies that may compete with the Company. 2.21 SUPPLIERS. Section 2.21 of the Disclosure Schedule sets forth each supplier of the Company who supplied more than five percent (5%) of the Company's supplies or materials for the fiscal year ended October 31, 1999 and each supplier who the Company believes may supply for more than five percent (5%) of the Company's supplies or materials for the fiscal year ended October 31, 2000 (each a "Supplier" and collectively the "Suppliers"). The relationships of the Company with its Suppliers are good commercial working relationships. No Supplier of the Company has canceled or otherwise terminated its relationship with the Company, or has during the last 12 months decreased materially its services, supplies or materials to the Company. No Supplier has, to the knowledge of the Company, any plan or intention to terminate, cancel or otherwise materially and adversely modify its relationship with the Company or to decrease materially or limit its services, supplies or materials to the Company. 2.22 CERTAIN EVENTS. (a) During the past ten (10) years, neither the Company nor any of the officers or directors of the Company has had a petition under the Bankruptcy Reform Act of 1978, as amended, or any state insolvency law, filed by or against any of them which has not as of the date of this Agreement been dismissed. (b) During the past ten (10) years, neither the Company nor the officers or directors of the Company has been convicted in a criminal proceeding or is a named subject of a criminal proceeding which is presently pending (excluding traffic violations and other minor offenses). (c) During the past ten (10) years, neither the Company nor the officers or directors of the Company has been, or is, the subject of any order, judgment or decree, whether or not subsequently reversed, suspended or vacated, of any court or any administrative agency, requiring the payment of money damages in excess of $100,000 or permanently or temporarily enjoining any of them from, or otherwise limiting any of their abilities to engage in, any type of business practice. 2.23 REGISTRATION RIGHTS. Except as disclosed in Section 2.23 of the Disclosure Schedule, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. 10 2.24 DISCLOSURE. The representations and warranties made or contained in this Agreement, the exhibits hereto and the certificates and statements executed or delivered in connection herewith, and the information concerning the business of the Company delivered to the Investor in connection with or pursuant to this Agreement, when taken together, do not and shall not contain any untrue statement of a material fact and do not and shall not omit to state a material fact required to be stated therein or necessary in order to make such representations, warranties or other material not misleading in light of the circumstances in which they were made or delivered. There have been no events or transactions or information which has come to the attention of the management of the Company having a direct impact on the Company or its assets, liabilities, financial condition, business, results of operations or prospects which, in the reasonable judgment of such management, could be expected to have a Material Adverse Effect. The Company has fully provided the Investor with all the information that the Investor has requested for deciding whether to acquire the Series C Preferred Shares. 2.25 CORPORATE DOCUMENTS. The Certificate of Incorporation and Bylaws of the Company have been made available to the Investor. The minute books of the Company containing minutes of all meetings of directors and stockholders and all actions by written consent without a meeting by the directors and stockholders since the date of incorporation have been made available to the Investor and reflect accurately in all material respects all actions by the directors (and any committee of directors) and stockholders with respect to all transactions referred to in such minutes. The stock transfer ledgers and other similar records of the Company as made available to the Investor prior to the execution of this Agreement accurately reflect all record transfers prior to the execution of this Agreement in the capital stock of the Company. 2.26 OFFERING. Subject in part to the truth and accuracy of the Investor's representations and warranties set forth in this Agreement, the offer, sale and issuance of the Securities as contemplated by this Agreement are exempt from the registration requirements of the Securities Act and any applicable state securities laws, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 2.27 INVESTMENT COMPANY. The Company is not and shall not become an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"). In the event the Company breaches the foregoing, the Company shall forthwith notify the Investor and shall take immediate corrective action to remedy such breach. 2.28 SUPPLEMENTAL REMUNERATION. The Company has not and shall not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise to any investor or other stockholder of the Company as consideration for or as an inducement to entering into by any investor or other stockholder of the Company of any waiver or amendment of any of the terms and provisions of the agreements or the Certificate of Incorporation which affects any such party's rights as an investor or stockholder, unless such remuneration is concurrently paid, on the same terms, ratably to 11 all investors or stockholders whether or not such investors or stockholders grant such waiver or agree to such amendment. 2.29 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement other than as may be required to secure an exemption from qualification of the offer and sale of the Series C Preferred Shares under the Securities Act and applicable state securities laws. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor represents and warrants to the Company the following: 3.1 INVESTMENT EXPERIENCE AND INTENT. The Investor represents to the Company that it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment contemplated by this Agreement and making an informed investment decision with respect thereto. The Investor represents that it is an "accredited investor" as such term is defined in Rule 501 under the Securities Act. The Investor represents and understands that it is responsible for its own due diligence investigation and satisfying its own due diligence requirements and shall not be entitled to rely on the due diligence investigation of any other person or entity. The Investor represents to the Company that it is purchasing the Series C Preferred Shares for its own account, for investment only and not with a view to, or any present intention of, effecting a distribution of such securities or any part thereof except pursuant to a registration or an available exemption under applicable law. The Investor acknowledges that its Series C Preferred Shares have not been registered under the Securities Act or the securities laws of any state or other jurisdiction and cannot be disposed of unless they are subsequently registered under the Securities Act and any applicable state laws or exemption from such registration is available. 3.2 AUTHORIZATION AND NON-CONTRAVENTION. The Investor represents that it has full right, authority and power to enter into this Agreement and each agreement, document and instrument to be executed and delivered by or on behalf of such Investor pursuant to or as contemplated by this Agreement and to carry out the transactions contemplated hereby and thereby, and the execution, delivery and performance by such Investor of this Agreement and each such other agreement, document and instrument have been duly authorized by all necessary action. The Investor represents and warrants that this Agreement and each agreement, document and instrument executed and delivered by such Investor pursuant to or as contemplated by this Agreement constitute, or when executed and delivered will constitute, valid and binding obligations of such Investor enforceable in accordance with their respective terms (except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investor Rights Agreement may be limited by applicable federal or state securities laws) and that the execution, delivery and performance by such Investor of this Agreement and each such other agreement, document and instrument, and the performance of the transactions contemplated hereby and thereby do not and will not: (a) violate, conflict with or result in a default (whether after the giving of notice, lapse of 12 time or both) under any contract or obligation to which such Investor is a party or by which it or its assets are bound, or cause the creation of any encumbrance upon any of the assets of the Investor; (b) violate or result in a violation of, or constitute a default under, any provision of any law, regulation or rule, or any order of, or any restriction imposed by, any court or other governmental agency applicable to the Investor; (c) require from the Investor any notice to, declaration or filing with, or consent or approval of any governmental authority or other third party; or (d) accelerate any obligation under, or give rise to a right of termination of, any agreement, permit, license or authorization to which the Investor is a party or by which the Investor is bound. 3.3 COMMISSIONS AND FEES. The Investor represents that there are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of such Investor. SECTION 4. CONDITIONS OF PURCHASE. The Investor's obligation to purchase and pay for the Series C Preferred Shares to be purchased by it shall be subject to compliance by the Company with its agreements herein contained and to the fulfillment to the Investor's satisfaction, or the waiver by the Investor, on or before and at the Closing Date, of the following conditions: 4.1 SATISFACTION OF CONDITIONS. The representations and warranties of the Company contained in this Agreement shall be true and correct on and as of the Closing Date; the Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing; and, on the Closing Date, a certificate to such effect executed by the President and Chief Financial Officer of the Company shall have been delivered to the Investor. 4.2 AUTHORIZATION. The Board of Directors of the Company shall have duly adopted resolutions in form and substance reasonably satisfactory to the Investor and shall have taken all action necessary for the purpose of authorizing the Company to consummate the transactions contemplated hereby in accordance with the terms hereof and to cause the Certificate of Designation to become effective; and the Investor shall have received a certificate of the Secretary of the Company setting forth a copy of the relevant Board of Directors and/or stockholder resolutions and the Certificate of Incorporation, the Certificate of Designation and Bylaws of the Company and such other matters as may be reasonably requested by the Investor. 4.3 OPINION OF COUNSEL. The Investor shall have received from Summit Law Group an opinion dated as of the Closing Date substantially in the form attached hereto as EXHIBIT C. 13 4.4 ALL PROCEEDINGS SATISFACTORY. All corporate and other proceedings taken prior to or at the Closing in connection with the transactions contemplated by this Agreement, and all documents and evidences incident thereto, shall be reasonably satisfactory in form and substance to the Investor. 4.5 NO VIOLATION OR INJUNCTION. The consummation of the transactions contemplated by this Agreement shall not be in violation of any law or regulation and shall not be subject to any injunction, stay or restraining order. 4.6 CONSENTS AND WAIVERS. The Company shall have obtained all consents or waivers necessary to execute this Agreement and the other agreements and documents contemplated herein, to issue and sell the Securities to be sold to the Investor hereunder and to carry out the transactions contemplated hereby and thereby and shall have delivered evidence thereof to the Investor. All corporate and other action and governmental filings necessary to effectuate the terms of this Agreement and other agreements and instruments executed and delivered by the Company in connection herewith shall have been made or taken. 4.7 AMENDMENT NO. 2 TO INVESTOR RIGHTS AGREEMENT. The Company, each other Investor and the holders of all of the Series A and Series B Preferred Stock shall have entered into the Amendment No. 2 to Investor Rights Agreement. 4.8 FILING OF CERTIFICATE OF DESIGNATION. The Certificate of Designation shall have been filed with the Secretary of State of the State of Delaware. SECTION 5. GENERAL. 5.1 AMENDMENTS, WAIVERS AND CONSENTS. For the purpose of this Agreement and all agreements executed pursuant hereto, no course of dealing between or among any of the parties hereto and no delay on the part of any party hereto in exercising any rights hereunder or thereunder shall operate as a waiver of the rights hereof and thereof. No covenant or other provision hereof may be waived otherwise than by a written instrument signed by the party or parties so waiving such covenant or other provision. No amendment to this Agreement may be made without the written consent of the Company and the Investor. 14 5.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS; ASSIGNABILITY OF RIGHTS. All covenants, agreements, representations and warranties of the Company and the Investor made herein, in the Disclosure Schedule and the Certificate of Designation and in the certificates, lists, exhibits, schedules or other written information delivered or furnished to the Investor in connection herewith (a) are material, shall be deemed to have been relied upon by the party or parties to whom they are made and shall survive the Closing regardless of any investigation or knowledge on the part of such party or its representatives and (b) shall bind the parties' successors and assigns (including without limitation any successor to the Company by way of acquisition, merger or otherwise), whether so expressed or not, and, except as otherwise provided in this Agreement, all such covenants, agreements, representations and warranties shall inure to the benefit of the Investor's successors and assigns and to their transferees of Securities, whether so expressed or not, and any such transferee shall be deemed the "Investor" for purposes hereof. 5.3 LEGEND ON SECURITIES. The Company and the Investor acknowledge and agree that the following legend shall be typed on each certificate evidencing any of the securities issued hereunder held at any time by the Investor: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY LAWS. 5.4 GOVERNING LAW. This Agreement shall be deemed to be a contract made under, and shall be construed in accordance with, the laws of Delaware, without giving effect to conflict of laws principles thereof. 5.5 SECTION HEADINGS AND GENDER. The descriptive headings in this Agreement have been inserted for convenience only and shall not be deemed to limit or otherwise affect the construction of any provision thereof or hereof. The use in this Agreement of the masculine pronoun in reference to a party hereto shall be deemed to include the feminine or neuter, and vice versa, as the context may require. 5.6 COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute but one and the same document. 15 5.7 NOTICES AND DEMANDS. Any notice or demand which is required or provided to be given under this Agreement or the Certificate of Designation shall be deemed to have been sufficiently given and received for all purposes when delivered by hand, telecopy, telex or other method of facsimile, or five days after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, or two days after being sent by overnight delivery providing receipt of delivery, to the following addresses: if to the Company: Lineo, Inc. 383 S. 520 W. Lindon, Utah 84042 Attn: President Fax: (801) 426-6166 copy to: Summit Law Group 1505 Westlake Avenue N., Suite 300 Seattle, Washington 98109 Attn: Mark F. Worthington, Esq. Fax: (206) 281-9882 if to the Investor: - ------------------------------- - ------------------------------- - ------------------------------- - ------------------------------- - ------------------------------- - ------------------------------- 5.8 REMEDIES; SEVERABILITY. It is specifically understood and agreed that any breach of the provisions of this Agreement by any person subject hereto will result in irreparable injury to the other parties hereto, that the remedy at law alone will be an inadequate remedy for such breach, and that, in addition to any other remedies which they may have, such other parties may enforce their respective rights by actions for specific performance (to the extent permitted by law). The Company may refuse to recognize any unauthorized transferee as one of its stockholders for any purpose, including, without limitation, for purposes of dividend and voting rights, until the relevant party or parties have complied with all applicable of this Agreement. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be deemed prohibited or invalid under such applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, and such prohibition or invalidity shall not invalidate the remainder of such provision or the other provisions of this Agreement. 16 5.9 INTEGRATION. This Agreement, including the exhibits, documents and instruments referred to herein or therein, constitutes the entire agreement, and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. 5.10 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by another party under this Agreement, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or in any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on any Investor's part of any breach, default or noncompliance under this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. 5.11 AGGREGATION OF STOCK. All shares of the Series C Preferred Stock or Common Stock issued upon conversion thereof held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. [Signature Page Follows] 17 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. COMPANY: INVESTOR: LINEO, INC., a Delaware corporation ------------------------------ By By ----------------------------------------- ---------------------------- Bryan Sparks, President and Chairman Its ------------------------- 18 EX-10.11 15 EXHIBIT 10.11 EXHIBIT 10.11 STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT (this "Agreement") is made as of April 13, 2000 by and among Lineo, Inc., a Delaware corporation ("Buyer"), Yoshinobu Ushiyama, an individual residing in Japan ("Mr. Ushiyama"), Tatsuya Takeuchi, an individual residing in Japan ("Mr. Takeuchi", and together with Mr. Ushiyama, collectively, "Principal Shareholders", and each a "Principal Shareholder") and such other minority shareholders of United System Engineers, Inc., a Japanese corporation (the "Company"), listed in the List of Shareholders attached hereto as Schedule 1 (collectively, "Minority Shareholders", and together with Principal Shareholders, collectively, "Sellers" and each "Seller"), acting through Mr. Ushiyama as their representative ("Shareholder Representative"). RECITALS A. Sellers collectively own 160,000 shares of common stock of the Company, with par value of Yen 500 per share, representing all of the issued and outstanding capital stock of the Company (the "Company Shares"). B. The Company is engaged in the business of development, design, manufacture and sale of computer systems (the "Business"). C. Buyer desires to purchase from Sellers, and Sellers desire to sell to Buyer, the Company Shares on the terms and conditions hereinafter set forth. AGREEMENT In consideration of the premises and the mutual agreements herein contained, Sellers and Buyer agree as follows: 1. PURCHASE AND SALE OF COMPANY SHARES. (a) TRANSACTION. On and subject to the terms and conditions set forth herein, Buyer agrees to purchase from Sellers, and Sellers agree to sell to Buyer, at the Closing, 160,000 Company Shares. (b) CONSIDERATION. The total consideration to be paid by Buyer to Sellers for all of the Company Shares hereunder shall be Three Hundred Twenty Two Thousand Eight Hundred Twenty Nine and 13/100 Dollars ($322,829.13). Each Seller shall be entitled to such amount as appearing opposite his or her name in Schedule 1 (the "Consideration"). (c) THE CLOSING. Subject to satisfaction or waiver of the conditions set forth in Section 3 hereof, the closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Summit Law Group, PLLC on April 30, 2000 or on such other date as Sellers and Buyer may mutually agree (the "Closing Date"). (d) DELIVERIES AT THE CLOSING. At the Closing, (i) each Seller shall deliver to Buyer certificates for the Company Shares representing such number of the Company Shares as set forth opposite his or her name in Schedule 1, and (ii) Buyer shall deliver to each Seller the Consideration appearing opposite his or her name in Schedule 1. 2. REPRESENTATIONS AND WARRANTIES. (a) REPRESENTATIONS AND WARRANTIES BY PRINCIPAL SHAREHOLDERS. Principal Shareholders hereby jointly and severally represent and warrant to Buyer as follows: (i) The Company has been duly incorporated and is validly existing and in good standing as a joint stock corporation (KABUSHIKI KAISHA) under the laws of Japan. It has full corporate power to carry on its business as it is now conducted and to own, lease or operate the properties and assets it now owns, leases or operates. It is qualified to do business, is in good standing and has all required and appropriate licenses in each jurisdiction in which its failure to obtain or maintain such qualification, good standing or licensing would have a material adverse effect on the condition (financial or otherwise), assets, properties, results of operations or business of the Company (a "Material Adverse Effect"). The Company does not have a subsidiary (defined to mean any entity or organization in which it has a direct or indirect equity or ownership interest in excess of 50%). (ii) The authorized capital stock of the Company consists solely of one class of stock and the total number of the Company Shares authorized to be issued by the Company is 160,000 shares, of which 160,000 Company Shares are issued and outstanding as of the date hereof. (iii) All of the Company Shares have been legally and validly issued and are fully paid and nonassessable; and the Company has no outstanding obligations, understandings, or commitments regarding the issuance of any additional shares of capital stock, or any options, rights, or warrants concerning the issuance of any additional shares of capital stock or securities convertible into shares of capital stock, of the Company. (iv) The List of Shareholders in Schedule 1 lists the names and the number of the Company Shares held of record by each Seller as of the date hereof. (v) There are no permits, approvals or consents of any governmental bodies or agencies which are necessary or appropriate to be obtained by Sellers in order for the consummation of the transactions contemplated by this Agreement to be in compliance with applicable laws, other than permits, approvals and consents already obtained. (vi) The Company has delivered to Buyer the Company's unaudited balance sheet as of December 31, 1999 and unaudited income statement and statement of 2 disposition of loss (SONSHITSUKIN SHORI KEISANSHO) for the period then ended, which have been approved by the shareholders of the Company at the general meeting of the shareholders. The financial statements so delivered have been prepared in conformity with generally accepted accounting principles in Japan ("Japanese GAAP") applied on a consistent basis (except for changes, if any, required by Japanese GAAP and disclosed therein). Such financial statements present fairly the financial condition and the results of operations of the Company as of the date and for the period stated therein. Except as and to the extent reflected or reserved against in the balance sheet mentioned above, the Company did not have and was not subject to any material liability or obligation of any nature, whether accrued, absolute, contingent or otherwise, as of December 31, 1999 (the "Balance Sheet Date"), required by Japanese GAAP to be stated therein. (vii) Since the Balance Sheet Date, there has not been, occurred or arisen (i) any declaration or payment of dividends by the Company or any distribution of assets of any kind whatsoever by the Company to its shareholders with respect to any shares of its capital stock; (ii) any transaction, sale or transfer of any of its assets, or cancellation of any debts or claims not in the ordinary course of business; (iii) any material adverse change in the results of operations, financial condition, assets or liabilities of the Company; (iv) any increase in, or commitment to increase, the compensation payable or to become payable to any officer, director, employee or agent of the Company, or any bonus payment or similar arrangement made to or with any such officers, directors, employees or agents, except for bonus payment or similar arrangement made consistent with the past practice; (v) any incurring of, assumption of, or taking any property subject to, any liability, except for liabilities incurred or assumed or property taken subsequent to the Balance Sheet Date in the ordinary course of business and consistent with past practice; (vi) any adoption of a plan or agreement or amendment to any plan or agreement providing any new or additional "fringe benefits" (including, but not limited to, vacation plans or programs, sick leave plans or programs, dental or medical plans or programs, and related or similar benefits); or (vii) any material alteration in the manner of keeping the books, accounts or record of the Company, or in the accounting practices therein reflected. (viii) Except in each case as set forth in the Disclosure Schedule, attached hereto as SCHEDULE 2: (A) The Company owns and has good and marketable title to, or is licensed or otherwise possesses legally enforceable rights to use, all patents, patent applications, disclosures, copyrights (whether registered or unregistered), and any applications therefor, software or applications (in both source code and object code), websites, domain names, technology, trademarks, trade names, service marks, trade secrets, know-how or mask work right (the "Intellectual Property") material to the conduct of its business as presently conducted; (B) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not breach, violate or conflict in any material respect with any instrument or agreement governing any of the Intellectual Property, or impair the right of the Company to use, sell, 3 license or dispose of the Intellectual Property, or to bring any action for the infringement of the Intellectual Property; (C) To the actual knowledge of Principal Shareholders, no third party is infringing any of the Intellectual Property; (D) The Company has taken reasonable steps necessary or appropriate (including, without limitation, entering into agreements concerning nondisclosure and assignment of inventions and copyrights with all employees of the Company and setting forth in the employment rules (SHUGYOKISOKU) the prohibition against employees' work for another employer without the consent of the Company) to safeguard and maintain the secrecy and confidentiality of, and establish the Company's proprietary rights in, all of the Intellectual Property; (E) All embodiments of those trade secrets which are related to the Company's Business are presently and as of the Closing Date will be located at the Company's headquarters; and (F) The Company has in all material respects performed, or is now performing the obligations of the Company in all material respects pursuant to each and every license or agreement concerning the Intellectual Property. All such licenses and agreements are in full force and effect and are a valid and enforceable obligation against the other party or parties thereto in accordance with their terms (subject to the enforcement of remedies). (ix) Within the times and in the manner prescribed by law, the Company has filed all applicable tax returns and has paid or caused to be paid all taxes which have been due pursuant to such tax returns. All tax returns filed by the Company through the Closing Date, including any amendments to date, have been prepared in good faith without negligence or willful misrepresentation and are complete and accurate in all material respects and accurately set forth all items (to the extent required to be included or reflected in such returns) relevant to their future tax liabilities, including the tax bases of their properties and assets. (x) No examination of the tax returns of the Company is currently in progress nor, to the knowledge of Principal Shareholders, is any such examination threatened. To the knowledge of Principal Shareholders, no governmental entity has proposed (tentatively or definitively), asserted or assessed, or threatened to propose or assert, any deficiency, assessment or claim for national, local or foreign taxes against the Company. (xi) There is no action, suit or proceeding to which the Company is a party (either as a plaintiff or defendant) pending before any court or governmental agency, authority or body or arbitrator that would have a Material Adverse Effect; and to the knowledge of Principal Shareholders, there is no such action, suit or proceeding threatened against the Company. Neither the Company, nor, to the knowledge of Principal Shareholders, any officer, director or employee of any of the foregoing, has been permanently or temporarily enjoined by any order, judgment or decree of any court 4 or any governmental agency, authority or body from engaging in or continuing any conduct or practice in connection with the Business, assets, or properties of the Company. (xii) The conduct of business by the Company on the date hereof does not violate any laws, statutes, ordinances, rules, regulations, decrees, orders, permits or other similar items in force on the date hereof, the enforcement of which would have a Material Adverse Effect, nor has the Company received any notice of any such violation. The Company holds all permits and licenses that are required to permit it to conduct its Business as now conducted; all such permits and licenses are valid and in full force and effect and will remain so upon consummation of the transactions contemplated by this Agreement; and, to the knowledge of Principal Shareholders, no suspension, cancellation or termination of any of such permits or licenses is threatened or imminent. (xiii) Mr. Ushiyama is duly authorized to act as Shareholder Representative on behalf of Minority Shareholders in connection with this Agreement, including without limitation the execution, delivery and performance of this Agreement on their behalf. (b) REPRESENTATIONS AND WARRANTIES OF SELLER. Each Seller, with respect to himself or herself, hereby represents and warrants to Buyer as follows: (i) Seller has good, marketable and indefeasible title to, is the sole record and beneficial owner of, has full power of disposition over and has full capacity to sell and transfer to Buyer such number of the Company Shares as set forth opposite his or her name in Schedule 1, and, at Closing, Buyer will have good, marketable and indefeasible title to such Company Shares. Such Company Shares are free and clear of all liens, claims, debts, or other encumbrances; provided, that a transfer of such Company Shares is subject to the approval of the Board of Directors as set forth in the Articles of Incorporation of the Company. To the best knowledge of each Seller, no shareholder of the Company is entitled to any preemptive or similar rights to subscribe for shares of capital stock of the Company. (ii) Seller has full power and capacity to enter into this Agreement and all other agreements contemplated hereby to which Seller is or will be a party (collectively the "Seller Related Agreements") and to consummate the transactions contemplated hereby and thereby (including sale and delivery of the Company Shares). This Agreement and the Seller Related Agreements constitute (or upon execution will constitute) legal, valid and binding obligations of Seller, enforceable against Seller in accordance with their respective terms and conditions, except as the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws relating to the enforcement of creditors' rights generally and by general principles of equity. (iii) The execution and delivery of this Agreement and the Seller Related Agreements, the consummation of the transactions contemplated hereby and thereby and the fulfillment of the terms hereof and thereof will not result in a breach of any of the terms or provisions of, or constitute a default under, or conflict with, any agreement, indenture or other instrument to which either Seller is a party or by which Seller is bound, 5 any judgment, decree, order or award of any court, governmental body or arbitrator by which Seller is bound, or any law, rule or regulation applicable to Seller. (c) REPRESENTATIONS AND WARRANTIES OF BUYER. Except as set forth in the Disclosure Schedule attached hereto as SCHEDULE 2, Buyer hereby represents and warrants to Sellers as follows: (i) Buyer has been duly organized and is validly existing and in good standing as a corporation under the laws of the State of Delaware and is qualified to do business as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a Material Adverse Effect. Buyer has all requisite corporate power and authority to carry on its business as presently conducted, enter into this Agreement and all other agreements herein contemplated to be executed in connection herewith by Buyer (collectively, the "Buyer Related Agreements") and to consummate the transactions contemplated hereby and thereby. This Agreement and the Buyer Related Agreements have been duly authorized by all necessary action, corporate or otherwise, and constitute (or upon execution will constitute) legal, valid and binding obligations of Buyer, enforceable against Buyer in accordance with their respective terms and conditions, except as the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws relating to the enforcement of creditors' rights generally and by general principles of equity. (ii) The execution and delivery of this Agreement and the Buyer Related Agreements, the consummation of the transactions contemplated hereby and thereby and the fulfillment of the terms hereof and thereof will not result in a breach of any of the terms or provisions of, or constitute a default under, or conflict with, any agreement, indenture or other instrument to which Buyer is a party or by which it is bound, the charter documents of Buyer, any judgment, decree, order or award of any court, governmental body or arbitrator by which Buyer is bound, or any law, rule or regulation applicable to Buyer. (iii) Immediately prior to the Closing, the authorized share capital of the Buyer consists, or will consist of 100,000,000 shares of common stock, of which 20,148,724 are issued and outstanding, and 30,000,000 shares of preferred stock, of which 7,500,000, 4,850,000 and 3,000,000 shares of preferred stock are designated Series A Preferred, Series B Preferred and Series C Preferred, respectively, and of which 7,500,000, 4,833,331 and none, respectively, are issued and outstanding. 5,000,000 additional shares of common stock of Buyer are reserved for issuance to employees, officers and directors of Buyer pursuant to such employee stock option plans as may be approved by the Buyer's board of directors, of which options for 1,808,381 shares are currently outstanding. (iv) Buyer has previously furnished to Sellers copies of its draft audited financial statements (balance sheet, statement of operations, statement of cash flows and statement of stockholders equity) for the fiscal year at and ended October 31, 1999. Such financial statements were prepared in conformity with generally accepted accounting principles in the United States ("US GAAP") applied on a consistent basis; are complete, 6 correct and consistent in all material respects with the books and records of Buyer; and fairly and accurately present the financial position of Buyer as of the dates thereof and the results of operations and cash flows of Buyer for the periods shown therein. Except as and to the extent reflected or reserved against in the balance sheet so furnished to Sellers, Buyer did not have and was not subject to any material liability or obligation of any nature, whether accrued, absolute, contingent or otherwise, as of October 31, 1999 (the "Buyer Balance Sheet Date"), required by US GAAP to be stated therein. (v) Since the Buyer Balance Sheet Date, there has not been (a) any material adverse change in the financial condition, results of operations, assets, liabilities, or business of Buyer, (b) any material asset or property of Buyer made subject to a lien of any kind, (c) any waiver of any material right of Buyer, or the cancellation of any material debt or claim held by Buyer, (d) any payment of dividends on, or other distribution with respect to, or any direct or indirect redemption or acquisition of, any shares of the capital stock of Buyer, or any agreement or commitment therefore, (e) any mortgage, pledge or hypothecation of any tangible or intangible asset of Buyer, except in the ordinary course of business, (f) any sale or assignment of any tangible asset of Buyer having a book value in excess of $25,000, except in the ordinary course of business, or of any Buyer Intellectual Property Rights (as hereafter defined) or other intangible assets, (g) any loan by Buyer to, or any loan to Buyer from, any officer, director, employee or stockholder of Buyer, or any agreement or commitment therefore (other than travel and other advances in the ordinary course of business), (h) any damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the assets, property or business of Buyer, (i) any repayment of any loan owed by Buyer (including, without limitation, any loan owed to any stockholder of Buyer), (j) any single capital expenditure in excess of $50,000 or any capital expenditures aggregating more than $250,000, or (k) any material change in the accounting methods or practices followed by Buyer. (vi) Buyer is not a party or subject to or bound by any acquisition, merger or similar agreement that may have a Material Adverse Effect. (vii) With respect to Buyer Intellectual Property Rights (as defined below): (A) Buyer has the right to use, sell, and license the Buyer Intellectual Property Rights (as defined below) material to the conduct of its business as presently conducted, including without limitation all rights to Buyer name "Lineo" and to the trademarks and the product name "Embedix" (the "Buyer Rights"), free and clear of the rights of all others. (B) The business of Buyer as presently conducted, the products as marketed or sold and the provision of services by Buyer do not violate and will not violate any agreements that Buyer has with any third party or infringe any patent, trademark, service mark, copyright or trade secret or any other Intellectual Property Rights of any third party (C) No claim is pending or threatened against Buyer nor has Buyer 7 received any notice or claim from any person asserting that any of Buyer's present or contemplated activities infringe or may infringe any Buyer Intellectual Property Rights of such person, and Buyer is not aware of any infringement by any other person of any of Buyer Rights. (D) Each current and former employee of Buyer, and each of Buyer's consultants and independent contractors involved in development of any of Buyer Rights, has executed an agreement regarding confidentiality, proprietary information and assignment of inventions and copyrights to Buyer, and none of such employees, consultants or independent contractors is in violation of any agreement or in breach of any agreement or arrangement with former or present employers relating to proprietary information or assignment of inventions. Buyer has taken all reasonable steps to protect all data, information, ideas, concepts, know-how and materials that Buyer treats as trade secrets, and all other confidential information and Buyer Intellectual Property Rights of Buyer, which are not part of the public domain or knowledge, nor, to the best knowledge of Buyer, have they been used, divulged or appropriated for the benefit of any person other than Buyer or otherwise to the detriment of Buyer. (E) No royalties or other amounts are payable by Buyer to persons by reason of the ownership or use of the Buyer Intellectual Property Rights of Buyer. (F) No third party has claimed or, to the best of Buyer's knowledge, has reason to claim that any person employed by or affiliated with Buyer has (i) violated or may be violating any of the terms or conditions of his or her employment, non-competition, non-disclosure, non-solicitation or inventions agreement with such third party, (ii) disclosed or may be disclosing or utilized or may be utilizing any Buyer Intellectual Property Rights, trade secret or proprietary information or documentation of such third party, or (iii) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees. As used herein, the term "Buyer Intellectual Property Rights" shall mean the intellectual property rights, including, without limitation, all patents, patent applications, patent rights, trademarks, trademark applications, trade names, service marks, service mark applications, copyrights, copyright applications, computer programs and other computer software, inventions, designs, samples, specifications, schematics, know-how, trade secrets, proprietary processes and formulae, including production technology and processes, all source and object code, algorithms, promotional materials, customer lists, supplier and dealer lists and marketing research, and all documentation and media constituting, describing or relating to the foregoing, including without limitation, manuals, memoranda and records. (viii) There is no litigation or governmental proceeding or investigation pending or threatened against Buyer or affecting any of its properties or assets or against any officer, director or key employee of Buyer in his or her capacity as an officer, director or employee of Buyer, which litigation, proceeding or investigation is reasonably likely to have a Material Adverse Effect, or which may call into question the validity or hinder the enforceability of this Agreement or any other agreements or transactions contemplated 8 hereby; nor has there occurred any event nor does there exist any condition on the basis of which any such litigation, proceeding or investigation might be properly instituted or commenced. (ix) Buyer has filed all federal, state, local and foreign income, excise and franchise tax returns, real estate and personal property tax returns, sales and use tax returns and other tax returns required to be filed by it where the failure to file such returns would have a Material Adverse Effect, and has paid all taxes owing by it, except taxes which have not yet accrued or otherwise become due, for which adequate provision has been made in the pertinent financial statements referred to above or which will not have a Material Adverse Effect. All taxes and other assessments and levies which Buyer is required to withhold or collect have been withheld and collected and have been paid over to the proper governmental authorities except where the failure to withhold or collect and pay over would not have a Material Adverse Effect. With regard to the federal income tax returns of Buyer, Buyer has never received notice of any audit or of any proposed deficiencies from the Internal Revenue Service. There are in effect no waivers of applicable statutes of limitations with respect to any taxing owed by Buyer for any year. Neither the Internal Revenue Service nor any other taxing authority is now asserting or, to the knowledge of Buyer, threatening to assert against Buyer any deficiency or claim for additional taxes or interest thereon or penalties in connection therewith. (x) There are no permits, approvals or consents of any governmental bodies or agencies which are necessary or appropriate to be obtained by Buyer in order for the consummation of the transactions contemplated by this Agreement to be in compliance with applicable laws, other than a securities notice filed with the Minister of Finance of Japan pursuant to the ministerial ordinances issued under the Securities and Exchange Law of Japan, and such other permits, approvals and consents already obtained. 3. CONDITIONS TO CLOSING. (a) CONDITIONS PRECEDENT TO EACH PARTY'S OBLIGATIONS TO CLOSE. The obligations of the parties to effect the Closing shall be subject to the following conditions unless waived in writing by Buyer and Sellers: (i) No law or order shall have been enacted, entered, issued, promulgated or enforced by any governmental entity, nor shall any legal action have been instituted and remain pending or, to the knowledge of Principal Shareholders and Buyer, have been threatened and remain so at what would otherwise be the Closing Date, which prohibits or restricts or would (if successful) prohibit or restrict the transactions contemplated by this Agreement or which would not permit the Company's Business as presently conducted to continue unimpaired following the Closing Date. No governmental entity shall have notified any party to this Agreement that consummation of the transactions contemplated by this Agreement would constitute a violation of any laws of any jurisdiction and/or that it intends to commence proceedings to restrain or prohibit such transactions or force divestiture or rescission, unless such governmental entity shall have withdrawn such notice and abandoned any such proceedings prior to the time which otherwise would have been the Closing Date; and 9 (ii) To the extent required by applicable law, all governmental permits and approvals required to be obtained from any governmental entity or agency shall have been received or obtained on or prior to the Closing Date. (b) CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS TO CLOSE. The obligations of Buyer to effect the Closing shall be subject to the following conditions except to the extent waived in writing by Buyer: (i) The respective representations and warranties of Principal Shareholders and each Seller herein contained shall be true and correct in all material respects as of the Closing Date with the same effect as though made as of such date; Principal Shareholders and Sellers shall have in all material respects performed all obligations and complied with all covenants and conditions required under this Agreement to be performed or complied with by them on or prior to the Closing Date; and Principal Shareholders and Sellers shall have executed and delivered to Buyer certificates, dated as of the Closing Date, to that effect in form and substance satisfactory to Buyer; (ii) The Board of Directors of the Company shall have approved the transfer by Sellers of the Company Shares to Buyer, and Buyer shall have been furnished with satisfactory evidence of all other consents, approvals or notifications of other persons whose consent, approval or notification is required in order to permit the transactions contemplated hereunder; and (iii) Buyer shall have received an opinion from counsel to the Company in form and substance mutually agreeable to Buyer and the Company. (c) CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS TO CLOSE. The obligations of Sellers to effect the Closing shall be subject to the following conditions, except to the extent waived in writing by Sellers: (i) The representations and warranties of Buyer herein contained shall be true and correct in all material respects as of the Closing Date with the same effect as though made as of such date; Buyer shall have in all material respects performed all obligations and complied with all covenants and conditions required under this Agreement to be performed or complied with by it at or prior to the Closing Date; and Buyer shall have delivered to Sellers a certificate in form and substance satisfactory to Sellers, dated the Closing Date and signed by its duly authorized officer, to such effect; (ii) Sellers shall have been furnished with satisfactory evidence of all consents, approvals or notifications of other persons whose consent, approval or notification is required in order to permit the transactions contemplated hereunder; (iii) Buyer shall have executed employment agreements with Mr. Ushiyama, Mr. Takeuchi and Mr. Koichi Narasaki on such terms and conditions mutually agreeable to the parties thereto and shall have granted, effective on the Closing Date, stock options to those Sellers who shall become employees of Buyer upon the Closing. 10 (iv) Buyer shall have executed an indemnity agreement for the benefits of Principal Shareholders, Satoru Miura, Masatoshi Suzuki and Yoshito Iguchi (collectively "Financial Support Providers"), in which Buyer agrees to: (i) use or caused to be used commercially reasonable best efforts to arrange for the release of Financial Support Providers from the guarantee they have made on behalf of the Company ("Guarantees"); (ii) pay or cause to be paid when due any and all the Company's borrowings in respect of which Guarantees have been provided with respect to which such release has not been effected; (iii) pay or cause to be paid when due any and all loans made to the Company by Financial Support Providers ("Loans"); and (iv) indemnity and hold Financial Support Providers harmless from and against all liability, damage, deficiency, loss, cost or expense, including attorneys' fees and costs of investigation ("Losses"), incurred by Financial Support Providers in connection with any execution of Guarantees by the creditors thereof and/or any breach by the Company of Loans. 4. Termination. (a) TERMINATION. Anything contained herein to the contrary notwithstanding, this Agreement may not be terminated or canceled prior to the Closing Date, except: (i) By written consent of Buyer and Sellers; or (ii) Upon the failure to satisfy one or more conditions to Close set forth herein; or (iii) By either party by written notice to the other if the Closing has not occurred by April 30, 2000. (b) EFFECT OF TERMINATION. If this Agreement is terminated pursuant to Section 4(a) above, all rights and obligations of the parties hereunder shall terminate without any liability of any party to the other (except for any liability of the party then in breach). 5. INDEMNIFICATION. (a) INDEMNIFICATION BY PRINCIPAL SHAREHOLDERS. Principal Shareholders shall jointly and severally indemnify and hold harmless Buyer from and against all Losses, incurred by Buyer in good faith and which arise from or are attributable to any breach of any representation or warranty made by Principal Shareholders in Section 2(a) above even though any such representation or warranty may have been made by Principal Shareholders in good faith and to the best of their knowledge (unless such representation or warranty is expressly limited in this Agreement to the knowledge of Principal Shareholders). (b) INDEMNIFICATION BY SELLER. Each Seller (including Principal Shareholders) shall indemnify and hold harmless Buyer from and against all Losses which Buyer shall incur in good faith and which arise from or are attributable to any breach of any representation or warranty made by such Seller in Section 2(b) above even though any such representation or warranty may have been made by such Seller in 11 good faith and to the best of his or her knowledge (unless such representation or warranty is expressly limited in this Agreement to the knowledge of such Seller), provided, however, that the indemnity obligation of each Seller (other than Principal Shareholders) hereunder shall be limited to the consideration he or she has received pursuant to this Agreement. (c) INDEMNIFICATION BY BUYER. Buyer shall indemnify and hold harmless Sellers (including Principal Shareholders) from and against all Losses which Sellers shall incur in good faith and which arise from or are attributable to any breach of any representation or warranty made by Buyer in Section 2(c) above even though any such representation or warranty may have been made by Buyer in good faith and to the best of its knowledge (unless such representation or warranty is expressly limited in this Agreement to the knowledge of Buyer). (d) INDEMNIFICATION PROCEDURES. If any party claiming the right to be indemnified hereunder (the "Indemnitee") is threatened with any claim, or any claim is presented to or made by the Indemnitee, or any action is commenced against the Indemnitee, which may give rise to a right of indemnification hereunder, the Indemnitee shall, with reasonable promptness, give to the party or parties claiming to be liable hereunder (the "Indemnitor") a written notice of the claim and request the Indemnitor to defend the Indemnitee, and, without prejudice to the Indemnitee's right of indemnification hereunder, shall, prior to taking any action with respect to the subject claim, make itself available to meet with the Indemnitor and in good faith attempt to resolve and settle the claim without further recourse to the Indemnitee's rights and remedies under this Section 5. The Indemnitor may elect, within thirty (30) days after receipt of such notice, or no later than five (5) days before the return date required by any citation, claim or other statute, whichever occurs earlier, to contest or defend against such claim at the expense of the Indemnitor (with counsel selected by the Indemnitor and reasonably acceptable to the Indemnitee), and shall give a written notice to the Indemnitee of the commencement of such defense with reasonable promptness after the giving of the written notice of the claim by the Indemnitee. The Indemnitee, its subsidiaries, successors and assigns shall be entitled to participate with the Indemnitor in such event, but shall not be entitled in any way to release, waive, settle, modify or pay such claim without the consent of the Indemnitor if the Indemnitor has assumed such defense. In the event the Indemnitor has assumed said defense and has employed counsel with respect thereto, the Indemnitee shall also be entitled to employ separate counsel at the Indemnitee's expense. In the event that the Indemnitor does not elect to contest or defend the claim as provided above, the Indemnitee, its subsidiaries, successors or assigns shall have the exclusive right (but not the obligation) to prosecute, defend, compromise, settle or pay the claim in its sole discretion and pursue its rights under this Agreement, including the remedies set forth in Section 7 hereof. (e) INDEMNITEE'S COOPERATION. In the event that a claim or benefit, other than an insurance claim against an insurer of the Indemnitee under a policy obtained on or after the Closing Date, is created in connection with the occurrence of any Losses 12 which have not been collected by the Indemnitee at the time payment with respect to such Losses is made by the Indemnitor, the Indemnitee shall assign such benefit or claim to the Indemnitor as a condition to the payment by the Indemnitor and shall cooperate with the Indemnitor in its efforts to collect any such benefit or claim. If such claim or benefit is not assignable under applicable laws, the Indemnitee shall cooperate in good faith with the Indemnitor's efforts to collect such claim or benefit. 6. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties contained in or made pursuant to this Agreement shall survive the Closing and expire on the first anniversary of the Closing except that if a claim or notice is given under Section 5 with respect to any representation or warranty prior to the applicable expiration date, such representation or warranty shall continue until such claim is finally resolved. No claim or action for breach of any representation or warranty shall be asserted or maintained by any party hereto after the expiration of such representation or warranty pursuant to the preceding sentence except for claims made in writing prior to such expiration or actions (whether instituted before or after such expiration) based on any claim made in writing prior to such expiration. 7. NONCOMPETITION COVENANT. (a) NONCOMPETITION. Principal Shareholders and Mr. Koichi Narasaki acknowledge and agree that, after the Closing, Buyer shall be beneficially entitled, jointly with the Company, to the goodwill and going concern value of the Business of the Company and that such goodwill and going concern value shall be protected and preserved to the maximum extent permitted by law. Principal Shareholders and Mr. Koichi Narasaki also acknowledge that their management contributions to the Company have been uniquely valuable and involve proprietary information that would be competitively unfair to make available to any competitor of the Company, and after the Closing, Buyer. For these and other reasons and as an inducement to Buyer to enter into this Agreement, each Principal Shareholder and Mr. Koichi Narasaki agrees that for a period of two (2) years from the Closing Date, he will not, directly or indirectly, for his own benefit or as agent for another, carry on or participate in the ownership, management or control of, or be employed by, or consult for or otherwise render services to, or allow his name or reputation to be used in or by any other present or future business enterprise that engages in the Business competitive with the Company in the geographic areas that the Company currently conducts its Business. (b) RESTRICTIONS ON SOLICITING EMPLOYEES. In addition, to protect the Company and, after the Closing, Buyer against any efforts by Principal Shareholders and Mr. Koichi Narasaki to cause employees of the Company to terminate their employment with the Company, each Principal Shareholder and Mr. Koichi Narasaki agrees that, until the later of (i) the expiry of a period of two (2) years following the Closing Date and (ii) the expiry of a period of six (6) months following the date that his service to or employment with the Company terminates 13 (for whatever reason), he shall not directly or indirectly (i) induce any such employee to leave the Company or any of its affiliates or to accept any other employment or position with any other business enterprise engaging in the Business or (ii) assist such enterprise in hiring any such employee. (c) EXCEPTIONS. Nothing contained in this Section 7 shall limit the right of a Principal Shareholder and Mr. Koichi Narasaki as an investor to hold and make investments in securities of any corporation or limited partnership that is registered on a national securities exchange or admitted to trading privileges thereon or traded in a generally recognized over-the-counter market, provided that Principal Shareholder's and Mr. Koichi Narasaki's equity interest therein does not exceed 5% of the outstanding shares or interests in such corporation or partnership. For avoidance of doubt, nothing contained in this Section 7 is intended to prohibit or restrict the activities of a Principal Shareholder and Mr. Koichi Narasaki in performing his duties as a director, officer or employee of the Company, Buyer or any of their affiliates. Further, for avoidance of doubt, it is agreed among the parties hereto that no Sellers (other than Principal Shareholders and Mr. Koichi Narasaki) shall be subject to the restrictions set forth in this Section 7. (d) SPECIAL REMEDIES AND ENFORCEMENT. Each Principal Shareholder and Mr. Koichi Narasaki recognizes and agrees that a breach by a Principal Shareholder or Mr. Koichi Narasaki of any of the covenants set forth in this Section 7 could cause irreparable harm to the Company and, after the Closing, Buyer, that the Company's and Buyer's remedies at law in the event of such breach would be inadequate, and that, accordingly, in the event of such breach a restraining order or injunction or both may be issued against a breaching Principal Shareholder and Mr. Koichi Narasaki, in addition to any other rights and remedies which are available to the Company or Buyer. If this Section 7 is more restrictive than permitted by the laws of the jurisdiction in which the Company or Buyer seeks enforcement hereof, this Section 7 shall be limited to the extent permitted by such laws. 8. COVENANTS. (a) GENERAL. The parties hereto agree to execute, acknowledge and deliver, at or after the Closing Date, such other and further instruments and documents as may be reasonably necessary to implement, consummate and effectuate the terms of this Agreement. Sellers agree that at any time and from time to time, at the Company's expense, Sellers shall execute such documents and take any and all necessary actions as reasonably requested by Buyer or the Company to promptly transfer to the Company any assets held in the names of Sellers, which are related to or used in connection with the Business of the Company. (b) CONFIDENTIALITY. After the Closing, no Seller (including Principal Shareholders) shall, at any time, make use of, divulge or otherwise disclose, directly or indirectly, any trade secret or other proprietary data (including, but not limited to, any customer list, record or financial information) of or concerning the Business, 14 except in furtherance of his or her duties and responsibilities as a director, officer or employee of the Company (or Buyer) (c) CONTINUED EMPLOYMENT. Buyer hereby confirms its agreement and acknowledgement to continue the employment of all directors, officers and employees of the Company with the Company after the Closing on terms consistent with those of other employees of Buyer of comparable status. 9. ASSIGNMENT. Except with respect to an assignment by Buyer to a successor of all of the Company Shares, no party hereto may assign this Agreement or any Buyer Related Agreement or Seller Related Agreement, nor any of its rights or obligations hereunder may be assignable or transferable, in any manner to a third party, without the prior written consent of (in case of an assignment by a Seller) Buyer or (in case of an assignment by Buyer) Sellers. Subject to the foregoing, this Agreement, the Buyer Related Agreements and Seller Related Agreements shall be binding upon, inure to the benefit of, and be enforceable by the heirs, administrators, executors and proper assigns of Sellers and of Buyer to which they are or will be parties. 10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of Delaware to the rights and duties of the parties. 11. EXPENSES. Sellers and Buyer shall each pay and bear its or his own costs and expenses incident to the negotiation, preparation and performance of this Agreement and the transaction contemplated hereby, including but not limited to the fees, expenses and disbursements of their respective accountants and legal counsel; provided, that Buyer shall bear the costs and expenses of the audit of the Company, to the extent that Buyer determines such audit is necessary or desirable and expenses to be borne or paid by Sellers shall be charged to the Company. 12. PUBLICITY. No party shall issue any press release, publicity statement or other public notice relating to this Agreement or the transactions contemplated by this Agreement, without obtaining the prior written consent of the other party or unless a particular action is required by applicable law; provided, that the parties acknowledge that Buyer and its affiliates may issue a press release at or following the Closing to announce the acquisition of the Company and that the Company may send a notice of the acquisition to its customers, supplies and such other business contacts of the Company in a manner customary in Japan. 13. ENTIRE AGREEMENT. This Agreement, together with the Exhibits and Schedules attached hereto, contains the entire agreement of the parties hereto (including the Minority Shareholders represented by the Shareholder Representative), and supersedes any prior written or oral agreements between them concerning the subject matter contained herein. There are no representations, agreements, arrangements or understanding, oral or written, between and among the parties hereto, relating to the subject matter contained in this Agreement, which are not fully expressed herein. 15 14. COUNTERPARTS. This Agreement and any amendments hereto may be executed in any number of counterparts, and each such counterpart shall for all purposes be deemed to be an original. 15. TAX MATTERS. Sellers and Buyer acknowledge and agree that each is responsible for obtaining his, her or its own tax advice with respect to the transactions contemplated hereby and the tax impact thereof on his, her or its own tax obligations. 16. AGREEMENT TO ARBITRATE. (a) The parties agree that any dispute, controversy or claim concerning or relating to this Agreement (a "Dispute"), shall be resolved pursuant to this Section 16. (b) The parties shall use all reasonable efforts to resolve the Dispute through direct discussions. Within 20 days of written notice that there is a Dispute, the parties shall meet in King County, Washington or confer by telephone in an effort to reach an amicable settlement and to explore alternative means to resolve the dispute expeditiously (E.G., mediation). (c) If the Dispute has not been resolved as a result of the procedure in paragraph (b) hereof or otherwise within sixty (60) days of the initial written notice that there is a Dispute (or such additional time to which the parties may agree), the matter shall be resolved by final and binding arbitration in King County, Washington under the then current Rules promulgated by the CPR Institute for Dispute Resolution. The arbitration shall be governed by the United States Arbitration Act, 9 USCss.1-16. There shall be three arbitrators, each of whom shall be neutral, independent and impartial. Any arbitrator may be of any nationality. The award shall be final, binding and conclusive upon the parties. Judgment on an arbitral award may be entered by any court of competent jurisdiction, or application may be made to such a court for judicial acceptance of the award and any appropriate order including enforcement. (d) The dispute resolution proceedings contemplated by this provision shall be as confidential and private as permitted by law. To that end, the parties shall not disclose the existence, content or results of any proceedings conducted in accordance with this provision, and materials prepared or submitted in connection with such proceedings shall not be admissible in any other proceeding, provided, however, that this confidentiality provision shall not prevent a petition to vacate or enforce an arbitral award, and shall not bar disclosures required by law. The parties agree that any decision or award resulting from proceedings in accordance with this dispute resolution provision shall have no preclusive effect in any other matter involving third parties. 16 (e) The arbitral award shall be rendered in writing and shall state the reasons for the award. The arbitral tribunal shall not be empowered to award any form of punitive damages or any other remedy not measured by the prevailing party's actual damages, nor to act as amiable compositeur and shall not make an award solely out of fairness and equity. The arbitration award may award reasonable attorneys' fees to the prevailing party. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 17 IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto or their duly authorized representatives as of the date first above written. LINEO, INC., AS BUYER By: -------------------------------------- Name: Title: YOSHINOBU USHIYAMA, AS PRINCIPAL SHAREHOLDER AND SELLER ------------------------------------------ TATSUYA TAKEUCHI, AS PRINCIPAL SHAREHOLDER AND SELLER ------------------------------------------ YOSHINOBU USHIYAMA, AS SHAREHOLDER REPRESENTATIVE ON BEHALF OF MINORITY SHAREHOLDERS 18 INDEX OF SCHEDULES AND EXHIBIT SCHEDULE 1. List of Shareholders 2. Disclosure Schedule 19 SCHEDULE 1 LIST OF SHAREHOLDERS 20 EX-10.12 16 EXHIBIT 10.12 EXHIBIT 10.12 SHARE PURCHASE AGREEMENT THIS AGREEMENT made as of the 1st day of May, 2000. BETWEEN: SHIRLEY PITT ("Pitt"), of 19344 - 119B Avenue Pitt Meadows, British Columbia OF THE FIRST PART STUART LYNNE ("Lynne"), of 35 Wilkes Creek Drive Port Moody, British Columbia OF THE SECOND PART BRUCE BALDEN ("Balden"), of 331 Oxford Drive Port Moody, British Columbia OF THE THIRD PART DONNA ALARIE ("Alarie"), of 35 Wilkes Creek Drive Port Moody, British Columbia and OF THE FOURTH PART RICHARD PITT ("Richard"), of 19344 - 119B Avenue Pitt Meadows, British Columbia OF THE FIFTH PART KENNETH CILLIS ("Ken"), of 2658 Burnside Place Coquitlam, British Columbia OF THE SIXTH PART JACK VANDENAKKER ("Jack"), of 3085 Anmore Creek Way Anmore, British Columbia -2- OF THE SEVENTH PART TED POWELL ("Ted"), of 3331 West 8th Avenue Vancouver, British Columbia OF THE EIGHTH PART REGULAR EXPRESSIONS INC. ("Regular"), of Suite 1104 - 100 Park Royal West Vancouver BC V7T 1A2 OF THE NINTH PART FIREPLUG COMPUTERS INC. (the "Company"), Suite 1104 - 100 Park Royal South West Vancouver BC V7T 1A2 OF THE TENTH PART (herein collectively called the "Vendors") AND: LINEO, INC. 390 South 400 West Lindon, Utah 84047 U.S.A. (herein called the "Purchaser") OF THE ELEVENTH PART WHEREAS: A. Pitt, Balden, Alarie, Lynne, Cillis, Van den Akker, Powell, Regular Expressions and Richard are hereinafter referred to as the "Vendors"; -3- B. The Vendors are the beneficial owners of all the issued and outstanding shares in the capital of Fireplug Computers Inc. (herein called the "Company"), being the following quantities and types: Shirley Pit t 100 Class "A" Voting with no par value; Stuart Lynne 100 Class "A" Voting with no par value; Bruce Balden 100 Class "A" Voting with no par value; Donna Alarie 56 Class "A" Voting with no par value; Richard Pitt 56 Class "A" Voting with no par value; Kenneth Cillis 19 Class "A" Voting with no par value; Jack VanDenAkker 17 Class "A" Voting with no par value; Ted Powell 7 Class "A" Voting with no par value; and Regular Expressions Inc. 8 Class "A" Voting with no par value. C. The Vendors have provided to the Purchaser and the Purchaser has relied upon the following financial information: (i) unaudited financial statements of the Company as at December 31, 1999, attached hereto as Schedule "A". D. The Vendors have agreed to sell and the Purchaser has agreed to purchase 100% of the issued and outstanding shares in the capital of the Company being 463 shares with no par value (herein called the "Shares"); -4- NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises, the covenants, agreements and warranties hereinafter set forth, it is hereby agreed as follows 1. DEFINITIONS As used in this Agreement, the following terms shall have the following meanings: 1.1 "Agreement" shall mean this Share Purchase Agreement, together with the Schedules, as the same may be updated or amended from time to time as provided herein. 1.2 "Unaudited Financial Statements" shall mean the unaudited balance sheet of the Company at December 31, 1999, and the related unaudited statements of operations, changes in shareholders' equity and cash flows for the years then ended, including related footnotes, in each case which Unaudited Financial Statements are annexed as Schedule "A" to this Agreement. 1.3 "Business" shall mean the Linux design and programming business of Fireplug Computers Inc. 1.4 "Business Day" shall mean any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by law to be closed in the State of Delaware, USA. -5- 1.5 "Buyer" shall have the same meaning as that set forth for "Purchaser" 1.6 "Closing" shall have the meaning set forth in Section 8.1. 1.7 "Closing Date" shall mean the date and effective time at which the Closing occurs. 1.8 "Code" shall mean the United States of America Internal Revenue Code of 1986, as amended, together with the regulations promulgated thereunder. 1.9 "Company Affiliate" shall mean any affiliate of the Company other than the Vendors. 1.10 "Company Shares" means all of the issued and outstanding shares of Fireplug Computers Inc. 1.11 "Contract" shall mean any contract, agreement, indenture, note, bond, loan agreement, letter of credit agreement, line of credit agreement, instrument, lien, conditional sales contract, mortgage, franchise, commitment, obligation or other arrangement or agreement, but shall exclude leases of real or personal property and insurance policies. -6- 1.12 "Encumbrances" shall mean any security interest, pledge, mortgage, lien, charge, adverse claim of ownership or other encumbrance of any kind. 1.13 "Environmental Laws" shall mean all applicable provincial, national and local statutes, regulations, rules, ordinances, codes, licenses, permits, orders, approvals, plans, authorizations, concessions, franchises, and similar items of all authorities, and all applicable judicial, administrative and regulatory decrees, judgments and orders, any of which relate to the protection of human health or the environment from the effects of hazardous substances, including but not limited to those pertaining to reporting, licensing, permitting, investigating, and remediating emissions, discharges, releases or threatened releases of Hazardous Substances into the air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of Hazardous Substances. 1.14 "Family Member" shall mean with respect to a particular individual, such individual's spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, and brothers- and sisters-in-law. 1.15 "Financial Statements" shall mean the Unaudited Financial Statements and the Interim Financial Statements of the Company. -7- 1.16 "GAAP" shall mean generally accepted accounting principles (as such term is used in the applicable country's professional accounting standards) from time to time in effect. 1.17 "Hazardous Substance" shall mean any substance or waste which is listed as hazardous, regulated or toxic, or is a contaminant, pollutant or hazardous or toxic substance or waste under any Environmental Laws, or any substance or waste which has been determined at any time by regulation, ruling or otherwise by any Authority to be a contaminant, pollutant or hazardous or toxic substance and which shall include, without limitation, hazardous waste, any medical waste, biohazardous waste, industrial waste and special waste. 1.18 "Intellectual Property" means each and every and any and all patents and patent rights, trademarks and trademark rights, trade names and trade name rights, service marks and service mark rights, service names and service name rights, brand names, inventions, procedures, formulae, copyrights and copyright rights, trade dress, business and product names, logos, slogans, trade secrets, processes, designs, methodologies, computer programs (including all source codes) and related documentation, Linux embedded platforms and related documentation, technical information, know-how and all pending applications for and registrations of patents, trademarks, service marks and copyrights. -8- 1.19 "Knowledge" shall mean (i) in the case of any Vendor, knowledge of such Vendor, and if such Vendor is an entity, knowledge of any officer or director of such entity, (ii) in the case of the Buyer, knowledge of any officer or director of the Buyer, and (iii) in the case of the Company or any Subsidiary, knowledge of any officer or director of the Company. An individual will be deemed to have "Knowledge" of a particular fact or other matter if (a) such individual is actually aware of such fact or other matter; or (b) with respect to Sections 3.26 and 6.11 only, such individual would likely discover or otherwise become aware of such fact or other matter by exercising the care an ordinarily prudent person in a like position would exercise under similar circumstances. 1.20 "Lineo Shares and Options" shall have the meaning set forth in Sections 3.1.2 and 3.1.3. 1.21 "Material Adverse Effect" shall mean a material adverse effect on the business, operations, properties, assets (including intangible assets), liabilities (contingent or otherwise), financial condition or results of operations of the Company, taken as a whole. -9- 1.22 "Permits" shall mean all permits, licenses and other approvals, certificates of need, accreditations, participation agreements, consents, authorizations, certificates of authority and orders. 1.23 "Person" shall mean an individual, firm, trust, association, corporation, limited liability company, partnership, limited partnership, limited liability partnership, Authority or other entity. 1.24 "Purchase Price" shall have the meaning set forth in Section 3. 1.25 "Subsidiary" shall mean a corporation, partnership or other entity of which the Company (i) has the power to elect more than fifty percent (50%) of the board of directors or other governing authority either directly or indirectly or (ii) owns or controls more than fifty percent (50%) of the outstanding equity securities or equity interests either directly or through an unbroken chain of entities as to each of which fifty percent (50%) or more of the outstanding equity securities or equity interests is owned directly or indirectly by its parent. 1.26 "Tax" or "Taxes" shall mean all taxes, levies, imposts, duties, excises, licenses and resignation fees, and charges of any kind or nature whatsoever including, without limitation, income tax withholding, unemployment and social welfare taxes, sales and use taxes and property taxes, and interest, penalties and additions to tax with respect to any of the above. -10- 1.27 "Tax Return" shall mean any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment to such documents and any amendment of such documents. 1.28 "U.S. Person" shall mean: (i) any natural person resident in the United States; (ii) any partnership or corporation organized or incorporated under the laws of the United States; (iii) any estate of which any executor or administrator is a U.S. person; (iv) any trust of which any trustee is a U.S. person; (v) any agency or branch of a foreign entity located in the United States; (vi) any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person; (vii) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the United States; and (viii) any partnership or corporation if: (a) organized or incorporated under the laws of any foreign jurisdiction; and (b) formed by a U.S. person principally for the purpose of investing in securities not registered under the Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a)) who are not natural persons, estates or trusts. 1.29 "Undisclosed Liability" shall mean an obligation, indebtedness or liability of any nature (each of which, for purposes of this definition, is assumed to be -11- material), which is not reserved against or disclosed on the Balance Sheet, or in the notes to the Balance Sheet or to the Interim Financial Statements, and which is not so reflected, reserved against or otherwise disclosed in this Agreement. 1.30 "Vendor" and "Vendors" are identified in Section of the Preamble to this Agreement. 1.31 "1934 Act" shall mean the U.S. Securities Exchange Act of 1934, as amended. 1.32 Other Defined Terms. The terms defined in the first paragraph and in the whereas clauses shall have the meanings given to such terms in such paragraph and whereas clauses. 2 SALE AND PURCHASE 2.1 The Vendor hereby agrees to sell and the Purchaser hereby agrees to buy the Shares on the terms and conditions herein contained. PURCHASE PRICE 2.2 The total consideration, being the Purchase Price shall be the sum of $1,200,000.00 (One Million Two Hundred Thousand Dollars) in the currency of the United States of America, which Purchase Price shall be paid as follows: -12- 2.2.1 on the date of closing the sum of $500,000.00 (Five Hundred Thousand Dollars) in lawful currency of the United States of America by delivery of a bank draft payable to the designated solicitor for the Vendors, David H. Stoller, "In Trust"; 2.2.2 allotment and issuance of 70, 000 Series D Preference Shares of the Purchaser with a current value of $420,000.00 (Four Hundred Twenty Thousand Dollars) in the currency of the United States of America, such shares to be convertible to the common shares of the Purchaser, at closing, to be issued in accordance with Schedule "E"; 2.2.3 Options to acquire 62,220 (Sixty-Two Thousand Two Hundred Twenty) common shares of the Purchaser currently valued at $6.00 (Six Dollars) per share in the currency of the United States of America with a strike price of $1.50 (One Dollar and Fifty Cents) in the currency of the United States of America, to be distributed pursuant to Schedule "E". 3 REPRESENTATIONS AND WARRANTIES OF THE DIRECTORS OF FIREPLUG COMPUTERS INC. -13- In order to induce the Purchaser to enter into and consummate this Agreement, the following representations and warranties are made to the Purchaser by the Directors of Fireplug Computers Inc.: 3.1 The authorized capital of the Company is 6,000,000 (Six Million) shares as follows: 2,000,000 Class "A" Voting Shares with no par value; 3.1.1 2,000,000 Class "B" Non-Voting Shares with no par value; and 3.1.2 2,000,000 Class "C" Non-Voting Redeemable Preferred Shares with a par value of $1.00 each. 3.2 The issued and outstanding shares in the capital of the Company are set forth in paragraph B of the preamble to this Agreement. 3.3 The only Directors of the Company are Stuart Lynne and Richard Pitt. 3.4 The Company carries on business in the Province of British Columbia and does not carry on business in any other Province or Territory of Canada nor in any other country. 3.5 There will be no restriction by the Company on the Vendors transferring of the legal and beneficial title and ownership of the Shares to the Purchaser at the time of closing. -14- 3.6 The Company has the corporate power to own the property owned by it and to carry on the business carried on by it and is duly qualified to carry on business in the Provinces of British Columbia. 3.7 The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate or other power and authority: 3.7.1 to conduct its business as it is now conducted and to own or lease all of the properties owned or leased by it, and 3.7.2 in the case of the Company, to enter into and perform its obligations under this Agreement and to undertake the transactions contemplated hereby. 3.8 True, correct and complete copies of the Memorandum of Association and Articles of Incorporation and Bylaws of the Company (or other constituting documents) as of the date of this Agreement have been previously delivered or made available to the Buyer. 3.9 The corporate records and minute books of the Company contain complete, comprehensive and accurate minutes of all meetings and other corporate actions of the incorporators, directors, committees of directors and shareholders of the Company held, in the case of the Company, since its date of incorporation and the share certificate books and register of shareholders of the Company are -15- complete and accurate, reflecting all transactions in the equity securities of the Company . 3.10 The Company's share transfer records reflect fully all issuances, transfers and redemptions of the Company Shares since the date of incorporation. 3.11 The Company is duly qualified to do business as a foreign corporation, and is in good standing, in all jurisdictions in which the ownership or lease of property by it or the conduct of its business makes such qualification necessary., 3.12 The execution, delivery and performance of this Agreement and the consummation of the transactions provided for herein have been duly authorized by all requisite corporate action on the part of the Company, and this Agreement has been duly executed and delivered by the Company. 3.13 Assuming due execution and delivery by the other parties, this Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, or other laws affecting creditors' rights and remedies generally. -16- 3.14 All outstanding capital shares of the Company have been duly authorized and validly issued, are fully paid and non-assessable, and have in no case been issued in violation of any preemptive rights granted by the Company. 3.15 All outstanding capital shares of the Company were authorized, offered, issued and sold in accordance with applicable law. The Company has capital shares in its treasury, but none have been repurchased pursuant to a promissory note that is not yet fully paid. 3.16 There is no existing subscription, option, warrant, call, right, commitment or other agreement (whether statutory or contractual) to which the Company is a party requiring, and there are no convertible securities of the Company outstanding which upon conversion would require, directly or indirectly, the issuance of any additional capital shares of the Company or other securities convertible into or exercisable or exchangeable for capital shares of the Company or any other equity security of the Company, and there are no obligations (contingent or otherwise) of the Company 3.16.1 to repurchase, redeem or otherwise acquire any outstanding capital shares of the Company or -17- 3.16.2 except for guarantees of obligations of, or loans and advances to, the Company provide funds to, or make investments in, or provide any guarantee with respect to the obligations of, any other Person. 3.17 There are no bonds, debentures, notes, lines of credit, letters of credit, or other indebtedness issued and outstanding having the right to vote on any matters on which the Company's shareholders may vote. 3.18 The Company Shares to be sold pursuant to this Agreement constitute all of the issued and outstanding capital shares of the Company. 3.19 The Company has granted no Person any registration rights in respect of capital shares of the corporation or securities convertible into or exercisable or exchangeable for capital shares of the Company. 3.20 Each Vendor is the sole record owner of the shares of the Company listed beside such Vendor's name in Section B of the preamble to this Agreement. 3.21 Except as provided herein, the execution and delivery of this Agreement, the compliance with and performance of the terms and provisions of this Agreement, and the consummation of the transactions contemplated herein by the Company will not -18- 3.21.1 conflict with or result in the contravention or breach of the terms, conditions or provisions of, 3.21.2 constitute a default (or an event which, with notice, lapse of time, or both, would constitute a default) under, 3.21.3 result in any violation of, 3.21.4 require the obtaining of any consent or approval of, the taking of any action of, the making of any filing with, or the giving of any notice to, any Person (except such consents, approvals, actions, filings and notices that will have been obtained, taken, made, given or effectively waived prior to the Closing, as a result of or under the terms of, 3.21.5 result in or give to any Person any right of termination, cancellation, acceleration, modification, or increased or accelerated rights, entitlements or payments under, or 3.21.6 result in the creation or imposition of any Encumbrance upon the Company or any of their respective assets or the Company Shares under: -19- the Charter of the Company or any resolutions adopted by the shareholders or the Board of Directors or any committee of the Board of Directors of the Company; any order, judgment, decree, license, permit, statute, law, rule, or regulation to which the Company or any of its respective assets is subject; or any provision of any Contract to which the Company is party or by which the Company or any of their respective assets is bound except, in the case of clauses 4.19.6B and Schedule "C", for any such violations, breaches, defaults, terminations, cancellations or accelerations which in the aggregate would not be reasonably likely to have a Material Adverse Effect or a material adverse effect on the ability of the Company to consummate the transactions contemplated by this Agreement. 3.22 No Permit by or from, or declaration, filing or registration with, or notification to, any Authority is required to be made or obtained by the Company in connection with the execution, delivery and performance of this Agreement, or the consummation of the transactions contemplated hereby except where the failure to obtain the Permit, or make the declaration, filing, registration, or notification would not have a Material Adverse Effect or a material adverse -20- effect on the parties' ability to consummate the transactions contemplated by this Agreement. 3.23 Except as set forth in this Agreement there is no action, suit, proceeding or investigation in progress or pending or, to the Knowledge of the Company, threatened or contemplated, at law or in equity, in any court or before or by any Authority against or relating to the Company or any of their respective properties, or the conduct of the Company's business as currently operated or contemplated to be operated, which in any case would be reasonably likely to have a Material Adverse Effect or a material adverse effect on the parties' ability to consummate the transactions contemplated by this Agreement. 3.24 There is not currently outstanding against the Company any judgment, decree, injunction, ruling or order of any Authority which, insofar as it can be reasonably foreseen, individually or in the aggregate, would have a Material Adverse Effect. 3.25 Schedule "A" identifies the Financial Statements that have been furnished to the Buyer. The Financial Statements: 3.25.1 have been prepared based upon, and are consistent with, the books and records of the Company (which books and records are correct and complete in all material respects), and -21- 3.25.2 fairly present the financial position, results of operations, changes in shareholders' equity and cash flows of the Company as of the dates and for the periods set forth in such Financial Statements, in accordance with applicable country GAAP applied consistently throughout the periods involved, except normal year-end audit adjustments with respect to the Interim Financial Statements. 3.26 The balance sheets included in the Financial Statements accurately reflect all properties and assets of the Company, whether real, personal or mixed, which are required to be reflected on such balance sheets in accordance with applicable country GAAP, consistently applied. 3.27 The Company has no Undisclosed Liabilities outstanding on the date of this Agreement, whether due or to become due, which individually or in the aggregate would be reasonably likely to have a Material Adverse Effect. 3.28 The Company has complied with, and are not in violation of, and have not received any notices of violation with respect to, any national, provincial or local statute, law, regulation or ordinance with respect to the conduct of their business, or the ownership or operation of their business, except for failures to comply or violations that would not be reasonably likely to have a Material Adverse Effect. -22- 3.29 Since the date of the Financial Statements, except as contemplated by this Agreement, there has not been, occurred or arisen: 3.29.1 any change, destruction or loss not covered by insurance with respect to the Company having a Material Adverse Effect; 3.29.2 any material change by the Company in its accounting methods, principles or practices; 3.29.3 any material revaluation of any of the assets of the Company, including, without limitation, writing down the value of inventory; or 3.29.4 any other event that resulted in a Material Adverse Effect. 3.30 Except as set forth in Schedule "F", to the Knowledge of the Company, 3.30.1 No Vendor, and no Family Member, Affiliate or Associate of any Vendor (other than the Company), 3.30.2 No Officer, director or other Affiliate of the Company ("Company Affiliate"), and -23- 3.30.3 No Associate or Family Member of any Company Affiliate ("Related Party") directly or indirectly 3.31 sells to or purchases from the Company any products or services in any material amount, 3.32 has any interest in any corporation, partnership, limited liability company, proprietorship or other entity which sells to or purchases from the Company any products or services in any material amount, 3.33 has any cause of action or claim against the Company in any material amount; or 3.34 has a beneficial interest in any Contract to which the Company is a party or which binds it or its assets. 3.35 The Company is not indebted, either directly or indirectly, to any Related Party in any amount other than current obligations for payments of salaries, bonuses and other fringe benefits for past services rendered and recorded on the books of the Company; except as set forth in Schedule "A" and as follows: 3.35.1 Loan from Regular Expressions Ltd. $27,100.00; and 3.35.2 Loan from Stuart Lynne $35,623.85. 3.36 The Company is not indebted to any Vendor in any amount for any management or other fees. 3.37 The liabilities, contingent or otherwise, of the Company which are not disclosed or reflected in Schedule "A" do not exceed $50,000.00 in Canadian funds. -24- 3.38 The Company has not guaranteed, or agreed to guarantee, any debt, liability or other obligation of any person, firm, or corporation. 3.39 There are monies owing to Richard which will be offset against his indebtedness to the Company. 3.40 No dividends or other distribution on any shares in the capital of the Company have been made, declared or authorized since December 1, 1999. 3.41 Other than as provided on Schedule "A", no payments of any kind have been made or authorized since December 31, 1999 to or on behalf of the Vendors or to or on behalf of officers, directors, shareholders or employees of the Company or under any management agreements with the Company save and except in the ordinary course of business and at the regular rates of salary or management fees payable to them. 3.42 The Company has no leases of equipment or property. 3.43 The Company is not a citizen or resident of the United States of America nor has a permanent establishment therein in the last five years. -25- 3.44 The Company does not maintain and has never maintained a Permanent Establishment, as defined in the Code, in the United States of America and the Company has never filed or is required to file a tax return with the IRS. 3.45 The Company is not a party to any oral or written: 3.45.1 union or collective bargaining agreement, 3.45.2 agreement with any officer or other key employee of the Company, the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a change in control of the Company or other transaction involving the Company of the nature contemplated by this Agreement, 3.45.3 agreement with any officer of the Company providing any term of employment or compensation guarantee, 3.45.4 agreement or plan, including any stock option plan, stock appreciation right plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be -26- calculated on the basis of any of the transactions contemplated by this Agreement; or 3.45.5 agreement or commitment to provide health care, life insurance or other benefits after termination of employment. 3.46 The Company has: 3.46.1 filed when due (after taking into account applicable extensions) with the appropriate agencies all Tax Returns, with the exception of Income Tax Returns required to be filed by them, and 3.46.2 paid when due and payable all Taxes owed by them or, to the extent of Taxes not yet due and payable, have accrued or otherwise adequately reserved on the Financial Statements in material compliance with applicable country GAAP for the payment of such Taxes not yet due and payable. 3.47 All such Tax Returns are correct and complete in all material respects. 3.48 Complete and, subject to the filing of the Income Tax Returns, accurate copies of such Tax Returns due or filed for the past three years have been furnished or made available to the Buyer. -27- 3.49 3.50 Under the provisions of the INCOME TAX ACTS of Canada and British Columbia the Company has always been a Canadian-controlled private corporation. 3.51 The Company has not prior to the date hereto: 3.51.1 made any election under Section 85 of the INCOME TAX ACT (Canada) with respect to the acquisition or disposition of any property; 3.51.2 made any election under Sections 83 of the INCOME TAX ACT (Canada); 3.51.3 acquired any property from a person with whom it was not dealing at arm's length; or 3.51.4 disposed of anything to a person with whom the Company was not dealing at arm's length for proceeds less than the fair market value thereof. 3.52 The Company has made all elections required to be made under the INCOME TAX ACT of Canada in connection with any distributions by the Company and all such elections were true and correct. 3.53 Subject to the filing of the Income Tax Returns, there are no Taxes assessed or, to the Knowledge of the Company, asserted in respect of any Tax Returns filed -28- by the Company or claimed to be due by any taxing authority or otherwise that are not accrued or adequately reserved for on the Financial Statements in accordance with GAAP. 3.54 The Company is not a party to any action or proceeding, and to the Company's Knowledge, no action or proceeding is threatened or contemplated, for the assessment or collection of any Taxes, and the Company has received no deficiency notices or reports in respect of any Tax. 3.55 To the Knowledge of the Company, no Tax Return of the Company is currently being audited or is scheduled for future audit by any Authority. 3.56 Schedule "C" to this Agreement sets forth each of the following Contracts to which the Company is a party: 3.56.1 any Contract for borrowed money or deferred portion of purchase price; 3.56.2 any loan agreement, credit agreement, promissory note, guarantee, indenture, 3.56.3 subordination agreement, letter of credit, use of credit, interest rate or foreign -29- 3.56.4 currency protection agreement or any other similar type of Contract; 3.56.5 any consulting or other Contract with attorneys, accountants, actuaries, appraisers, investment bankers, lobbyists, government relations' persons or other professional advisers providing for total payments equal to or in excess of Twenty Five Thousand Dollars (USD $25,000) and that cannot be terminated by the Company without penalty on 30 days or less notice; 3.56.6 any Contract (except for Contracts with customers) which, in whole or in part, 3.56.7 presently restricts or precludes the Company or any present or future Subsidiary or Affiliate of the Company from conducting any business anywhere in the world, or 3.56.8 upon the occurrence of any event, the giving of notice or the passage of time, by its terms would have such an effect; 3.56.9 any Contract that involves aggregate payments by or to the Company in excess of Twenty Five Thousand Dollars (USD $25,000) and that cannot be terminated by the Company without penalty on 30 days or less notice; and -30- 3.56.10 any indemnification agreement (except those entered into in the ordinary course of business), guaranty or power of attorney granted to any Person (other than the Company). 3.57 The Company has delivered or otherwise made available to the Buyer true, correct and complete copies of the Contracts set forth in Schedule "C" of this Agreement, and all other contracts, together with all amendments, waivers, modifications, supplements or side letters affecting the obligations of any party under such Contracts. 3.58 Except as set forth opposite or otherwise as part of the description of such Contract: 3.58.1 No party to any Contract listed in Schedule "C" has given to the Company notice of any breach or default under any such Contract by the Company, which has not been cured or waived; 3.58.2 The Company is not in violation or breach of or default of any material term under any Contract listed in Schedule "C" in any respect or, with notice or lapse of time or both, would be in violation or breach of or default under any such Contract; -31- 3.58.3 To the Knowledge of the Company no other party to any such Contract is in violation or breach of or default under any such Contract or, with notice or lapse of time or both, would be in violation or breach of or default under any such Contract; and 3.58.4 No consent by or of any party to any Contract listed in Schedule "C" is required in order to consummate the transactions contemplated by this Agreement without causing a breach or violation of or a default under such Contract. 3.59 The Company either has all right, title and interest in (free and clear of all Encumbrances), or a valid and binding license to use, all of the Intellectual Property used by the Company in the conduct of their respective businesses, except to the extent that the failure to have such rights have not had and would not be reasonably likely to have a Material Adverse Effect. 3.60 Except as disclosed herein, 3.60.1 all registrations with and applications to Authorities in respect of such Intellectual Property are valid and in full force and effect, 3.60.2 the Company has and the Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of their -32- respective trade secrets which Company or the Subsidiary considers to be material, and 3.60.3 the Company is not, and the Company has not received any notice that it is in violation or breach of or default under (or with the giving of notice or lapse of time or both, would be in violation or breach of or default under) any license to use such Intellectual Property, except to the extent that the failure to have such rights has not had and would not be reasonably likely to have a Material Adverse Effect. 3.61 The Company has not, and no Subsidiary has, received notice that the Company is infringing any Intellectual Property of any other Person. 3.62 No claim is pending or, to the Knowledge of the Company, has been made to such effect that has not been resolved. 3.63 To the Knowledge of the Company , the Company is not infringing any Intellectual Property rights of any other Person, which infringement would be reasonably likely to have a Material Adverse Effect. -33- 3.64 The Company has received letters of breach of intellectual property rights from several sources regarding their operation of an ISP, and all offending material has been removed from the ISP. 3.65 Except where any such matters or violations would, individually or in the aggregate, not be reasonably expected to have a Material Adverse Effect: 3.65.1 the Company has not generated, used, manufactured, processed, distributed, handled, transported, treated, stored, released or disposed of, and has not suffered or permitted anyone else to generate, use, manufacture, process, distribute, handle, transport, treat, store, release or dispose of, any Hazardous Substance in violation of any Environmental Laws; 3.65.2 there has not been any generation, use, manufacture, processing, distribution, handling, transportation, treatment, storage, release or disposal of any Hazardous Substance in connection with the conduct of the Business or the use of any property or facility leased or owned by the Company , or to the Knowledge of the Company , any nearby or adjacent properties or facilities, which has created or might reasonably be expected to create any liability under any Environmental Laws or which would require reporting to or notification of any Authority; -34- 3.65.3 to the Knowledge of the Company, no friable asbestos or polychlorinated biphenyl, and no underground storage tank, is contained in or located at any property or facility of the Company ; 3.65.4 any Hazardous Substance handled or dealt with in any way in connection with the Business has been and is being handled or dealt with in compliance with any Environmental Laws; 3.65.5 there are no investigations, proceedings, actions, orders, claims or notices that are pending, anticipated or, to the Knowledge of the Company threatened or contemplated against the Company or involving the Business and relating to Environmental Laws; and 3.65.6 the Company has not received, and no Subsidiary has received, any notice of, and the Company does not have Knowledge of, and no Subsidiary has Knowledge of, any facts which relate to the ownership or operation of the Business or any of the properties or facilities of the Company and that might constitute a violation of any Environmental Laws. 3.66 No broker, agent, finder, consultant or other Person has been retained by, or has acted on behalf of the Company (other than legal and accounting advisors) or is entitled to be paid based upon any agreements or understandings made by such parties in connection with the transactions contemplated by this -35- Agreement, and neither the Buyer nor the Company shall have any liability for any broker's fee, finder's fee, consultant's fee or similar third party remuneration payable by reason of any action of the Company. 3.67 The accounting books, minute books, share transfer records, and other records of the Company, all of which have been made available to the Buyer, are complete and correct in all material respects and to the Knowledge of the Company, have been maintained in accordance with sound business practices and the requirements of Section 13(b)(2) of the 1934 Act (regardless of whether or not the Company is subject to that Section), including the maintenance of an adequate system of internal controls. 3.68 At the Closing, all such books and records will be in the possession of the Company. 3.69 There is no real property owned by the Company . 3.70 The Company owns all the properties and assets (whether tangible or intangible) that it purports to own located in the facilities operated by the Company or reflected as owned in the books and records of the Company or such Subsidiary, including all of the properties and assets reflected in the Balance Sheet and the Interim Financial Statements (except for assets held under capitalized leases disclosed or not required to be disclosed and personal -36- property sold since the date of the Balance Sheet and the Financial Statements, as the case may be, in the ordinary course of business), and all of the properties and assets purchased or otherwise acquired by the Company since the date of the Balance Sheet (except for personal property acquired and sold since the date of the Balance Sheet in the ordinary course of business and consistent with past practice). 3.71 All of the assets related to the business of the Company shall remain the property of the Company, with the exception of those set forth in schedule "D".. 3.72 To the Knowledge of the Company, the equipment of the Company is in good operating condition and repair, and are adequate for the uses to which they are being put. 3.73 All accounts receivable of the Company that are reflected on the Balance Sheet (collectively, the "Accounts Receivable") represent or will represent valid obligations arising from sales actually made or services actually performed in the ordinary course of business. 3.74 Unless paid before the Closing Date, the Accounts Receivable are or will be as of the Closing Date collectible net of the respective reserves shown on the -37- Balance Sheet or the Interim Financial Statements, except as disclosed in Schedule "C" to this Agreement. 3.75 The Company does not maintain inventory in the odinary course of its business and has no inventory at the Closing Date. 3.76 The Company does not maintain insurance. 3.77 Except as disclosed in this Agreement, the Company has not, and no director, officer, agent or employee of the Company, or any other Person associated with or acting for or on behalf of the Company has, directly or indirectly: 3.77.1 made any bribe, rebate, payoff, influence payment, kickback, or other payment to any Person, private or public, regardless of form, whether in money, property, or services 3.77.2 to obtain favourable treatment in securing business, 3.77.3 to pay for favourable treatment for business secured, 3.77.4 to obtain special concessions or for special concessions already obtained, for or in respect of the Company or any Affiliate, or -38- 3.77.5 in violation of any legal requirement, or 3.77.6 established or maintained any fund or asset that has not been recorded in the books and records of the Company. 3.78 No representation or warranties of the Company fail to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading. 3.79 There is no fact known to the Company that has specific application to the Company (other than general economic or industry conditions) and that materially adversely affects the assets, business, prospects, financial condition, or results of operations of the Company (on a consolidated basis) that has not been set forth in this Agreement. 4 REPRESENTATIONS AND WARRANTIES OF THE INDIVIDUAL VENDORS 4.1 Each individual Vendor represents and warrants for himself that he has the full power and capacity necessary to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated herein. 4.2 This Agreement has been duly executed and delivered by each individual Vendor and, assuming due execution and delivery by the other parties, constitutes the legal, valid and binding obligation of such Vendor, enforceable -39- against such Vendor in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, or other laws affecting creditors' rights and remedies generally. 4.3 Each individual Vendor warrants, for himself, that there is no existing subscription, option, warrant, call, right, commitment or other agreement (whether preemptive or contractual) to which such Vendor is a party requiring, and there are no convertible securities of the Company owned or held by such Vendor which upon conversion would require, directly or indirectly, the issuance of any additional capital shares of the Company or other securities convertible into or exercisable or exchangeable for capital shares of the Company or any other equity security of the Company, and there are no obligations (contingent or otherwise) of such Vendor to purchase or otherwise acquire any outstanding capital shares of the Company. 4.4 The Company Shares to be sold by such Vendor pursuant to this Agreement will be delivered to the Buyer free and clear of all Encumbrances (except Encumbrances arising out of, under or in connection with this Agreement), and such delivery will not be in violation of any preemptive rights. 4.5 Each individual Vendor is the sole beneficial owner of the Company Shares listed beside such Vendor's name on Exhibit A, and has the full legal right and -40- power to sell, convey, transfer, and assign such Company Shares to the Buyer pursuant to this Agreement. 4.6 Each individual Vendor is not a party to any shareholder agreement, voting agreement, voting trust, proxy or other agreement with respect to the voting or transfer of the Company Shares. 4.7 Each individual Vendor warrants for himself that no Person (other than the Buyer as provided in this Agreement) has any agreement or option or any right or privilege (whether preemptive or contractual) capable of becoming an agreement or option for the purchase from such Vendor of any of the Company Shares being transferred by such Vendor to the Buyer pursuant to this Agreement. 4.8 Each individual Vendor warrants for himself that he has no knowledge of any action, suit, proceeding or investigation in progress or pending to the Knowledge of such Vendor which affects the Vendor's ability to transfer to the Buyer the Corporate Shares to be sold by such Vendor, free and clear of all claims or encumbrances whatsoever. 4.9 Each individual Vendor warrants for himself that no broker, agent, finder, consultant or other Person has been retained by, or has acted on behalf of such -41- Vendor (other than legal and accounting advisors) or is entitled to be paid based upon any agreements or understandings made by such parties in connection with the transactions contemplated by this Agreement. Neither the Buyer nor the individual Vendor or the Company shall have any liability for any broker's fee, finder's fee, consultant's fee or similar third party remuneration payable by reason of any action of such Vendor. 4.10 Each individual Vendor warrants that he is not a U.S. Person. 5 INDIVIDUAL VENDOR'S REPRESENTATIONS AND WARRANTIES 5.1 Each individual Vendor purports and warrants that neither he, nor his spouse, nor any Company controlled by him or his spouse, owns any property or assets which are used by the Company or are necessary or useful in the conduct of its business. 5.2 The representations, warranties, covenants and agreements by the individual Vendors contained in this Agreement or any certificates or documents delivered pursuant to the provisions hereof or in connection with the transaction contemplated hereby shall be true at and as of the time of closing as though such representations and warranties were made at and as of such time. -42- Notwithstanding any investigations or enquiries made by the Purchaser prior to closing or the waiver of any condition by the Purchaser, the representations, warranties, covenants and agreements of the individual Vendors shall survive the closing date and notwithstanding the closing of the purchase and sale herein provided for, shall continue in full force and effect. In the event that any of the said representations and warranties are found to be incorrect or there is a breach of any covenants or agreement of the individual Vendors, which incorrectness or breach shall result in any loss or damage sustained directly or indirectly by the Purchaser then the individual Vendor concerned in such incorrectness or breach shall pay the amount of such loss or damage to the Purchaser within 30 days of receiving notice thereof provided that the Purchaser shall not be entitled to make any claim unless the loss or damage suffered shall exceed the amount of $1,000.00 (One Thousand Dollars) in Canadian funds. 5.3 Each individual Vendor warrants for himself that he is a resident of Canada within the meaning of the Income Tax Act. 6 PURCHASER'S REPRESENTATIONS AND WARRANTIES In order to induce the Vendors to enter into and consummate this Agreement, the Purchaser represents and warrants to and covenants with the Vendors as follows: -43- 6.1 The Purchaser is a company duly incorporated under the laws of the State of Delaware, is not a reporting company, is a valid and subsisting company, and will be in good standing in the Office of the Registrar of Companies of the State of Delaware; 6.2 The Company carries on business in the State of Utah and the United States of America and does not carry on business in any Province or Territory of Canada; 6.3 The Purchaser has due and sufficient right and authority to enter into this Agreement on the terms and conditions herein set forth and to transfer the legal and beneficial title and ownership of the Shares and Options to the Vendors as set forth in Paragraph 2 of this agreement; 6.4 No person, firm or corporation has any agreement or option or a right capable of becoming an agreement for the purchase of the Lineo Shares and Options; 6.5 The Purchaser shall transfer the Lineo Shares and Options to the Vendors in accordance with Schedule "E" and such Shares and Options shall be registered on the books of the Purchaser in the names of the Vendors at the time of closing; -44- 6.6 The representations and warranties of the Purchaser set forth in this Agreement shall be true and correct as of the date of the Agreement and shall be true and correct as of the date of closing as if made by the Purchaser on the closing date; 6.7 The Purchaser or its nominees shall issue at the time of closing the Lineo Shares and Options forming part of the Purchase Price as set forth in PARAGRAPHS 2 .1.2, 2.1.3 and Schedule "E" herein. of this agreement; 6.8 The representations, warranties, covenants and agreements by the Purchaser contained in this Agreement or any certificates or documents delivered pursuant to the provisions hereof or in connection with the transaction contemplated hereby shall be true at and as of the time of closing as though such representations and warranties were made at and as of such time. Notwithstanding any investigations or enquiries made by the Vendors prior to closing or the waiver of any condition by the Vendors, the representations, warranties, covenant and agreement of the Purchasers shall survive the closing date and notwithstanding the closing of the purchase and sale herein provided for, shall continue in full force and effect. In the event that any of the said representations and warranties are found to be incorrect or there is a breach of any covenants or agreement of the Purchaser, which incorrectness or breach shall result in any loss or damage sustained directly or indirectly by the Vendors then the Purchaser shall pay the amount of such loss or damage to the Vendors within 30 days of receiving notice thereof, provided that the Vendors shall not -45- be entitled to make any claim unless the loss or damage suffered shall exceed the amount of $1,000.00 (One Thousand Dollars) in Canadian funds. 7 CONDITIONS PRECEDENT FOR PURCHASER All obligations of the Purchaser under this Agreement are subject to the fulfilment, prior to closing, of each of the following conditions: 7.1 Richard Pitt, Stuart Lynne and Bruce Balden shall have been offered employment contracts with the Purchaser. 7.2 The Vendors shall transfer the Shares to the Purchaser and such Shares shall be registered on the books of the Company in the name of the Purchaser at the time of closing. 7.3 The representations and warranties of the Vendors set forth in this Agreement shall be true and correct as of the date of the Agreement and shall be true and correct as of the date of closing as if made by the Vendors on the closing date. 7.4 The foregoing conditions in this section are inserted for the exclusive benefit of the Purchaser and may be waived by it in whole or in part at any time. -46- 8 CONDITIONS PRECEDENT FOR VENDORS 8.1 The representations and warranties of the Purchaser set forth in this Agreement shall be true and correct as of the date of closing as if made by the Purchaser on the date of closing. 8.2 The following persons shall have been offered and shall have accepted Contracts of Employment with the Purchaser: Stuart Lynne; Richard Pitt; and Bruce Balden. 8.3 The Vendors shall acquire at the time of closing that portion of the Purchase Price consisting of the Lineo Shares and Options in the capital of the Purchaser pursuant to PARAGRAPH 2.1, such Shares and Options to be allotted and issued from treasury and allocated as set forth on Schedule "E". 8.4 The cash portion of the Purchase Price shall be paid in accordance with Section 2 of this Agreement. 8.5 The Purchaser shall pay the Vendor's closing costs, including legal costs. -47- 8.6 The foregoing conditions in this section are inserted for the exclusive benefit of the Vendors and may be waived by them in whole or in part at any time. 9 CLOSING 9.1 The sale and purchase of the Shares and the other transactions contemplated by this Agreement shall be closed at the offices of David H. Stoller. Barrister and Solicitor, Suite 1104 - 100 Park Royal South, West Vancouver, British Columbia V7T 1A2, Canada at 11:00 a.m. (Pacific Daylight Time) on May 1, 2000 or on such other date or at such other place as may be agreed upon, which date is referred to herein as the "date of closing" and "closing date" and which time is referred to herein as "closing" and "time of closing". 9.2 The Vendors shall have caused to be delivered to the Purchaser an opinion of the solicitors for the Company in form and substance satisfactory to the Purchaser's solicitors, dated the closing date to the effect that: 9.2.1 the Company is duly organized and validly existing under the laws of the Province of British Columbia, is in good standing in the Office of the Registrar of Companies of British Columbia; -48- 9.2.2 all necessary steps and corporate proceedings have been taken to permit the Shares to be duly and validly transferred to and registered in the name of the Purchaser; 9.2.3 the number of authorized and issued shares in the capital of the Company are as warranted by the Vendor and all issued shares are duly authorized, validly issued and outstanding as fully paid and non-assessable; and 9.2.4 based on knowledge and belief, such solicitors know of no claims, judgment, actions, suits, litigation, proceedings or investigations, actual, pending or threatened against the Company which might materially affect any business, properties, assets, prospects of conditions, financial or otherwise of the Company or which could result in any material liability to the Company. 9.3 The Purchaser shall transfer or provide the share certificates and options as required to the Vendors in accordance with Schedule "E", and such compensation shall be registered on the books of the Purchaser in the names of the Vendors as set forth on Schedule "E". 9.4 At the Closing, the Vendors shall deliver or cause to be delivered to the Purchaser: -49- 9.4.1 all deeds of conveyance, transfer of the Shares, and Share Certificates properly endorsed on the reverse, in form and content satisfactory to the Purchaser's counsel, appropriate to effectively vest a good and marketable title to the Shares in the Purchaser to the extent contemplated by this Agreement; 9.4.2 all consents or approvals required to be obtained by the Vendors for the purpose of validly transferring the Shares and the Company; 9.4.3 new share certificates in the name of the Purchaser representing the Shares transferred; 9.4.4 the opinion of the solicitor for the Company; 9.4.5 duly executed releases of, or evidence to the reasonable satisfaction of the Purchaser as to the discharge of any and all liabilities to Shareholders which the Purchaser has not agreed to assume; and 9.4.6 certified copies of such resolutions of the Shareholders and directors of the Company as are required to be passed to authorize the execution, delivery and implementation of this Agreement and of all documents to be delivered by the Vendors hereto. -50- 9.5 At the time of Closing, the Purchaser shall deliver or cause to be delivered to the Vendors: 9.5.1 a Banker's Draft payable to David H. Stoller In Trust for that portion of the Purchase Price payable in cash; 9.5.2 all documents required to convey the Lineo Shares and Options to the Vendors; and 9.5.3 the legal opinion as required. 9.6 The parties will sign and deliver such further documentation as may be required to fulfil their obligations pursuant to the terms of this Agreement. 10 NOTICES 10.1 All notices, requested, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand, faxed or mailed postage prepaid addressed as follows: -51- To the Vendors: At the addresses set forth on page 1 of this Agreement; To the Purchaser: At 390 South 400 West, Lindon, Utah 84042, U.S.A. Facsimile number (801) 426-6166 or to such other address as may be given in writing by the Vendors or the Purchaser, and shall be deemed to have been received, if delivered, on the date of delivery and if mailed as aforesaid at Vancouver, British Columbia then on the next business day following the posting thereof. 11 PARTIES IN INTEREST 11.1 This Agreement shall enure to the benefit of and shall be binding upon the Vendors, their heirs, executors, administrators and assigns and the Purchaser and its successors and assigns. 12 GENERAL 12.1 Time shall be of the essence of this Agreement. 12.2 The waiver by any party of any breach of any term of this Agreement shall not prevent the subsequent enforcement of that term and shall not be deemed a waiver of any subsequent breach unless in writing and signed by and on behalf of the parties hereto. -52- 12.3 This Agreement embodies the entire understanding between the parties hereto and there are no promises, terms, conditions or obligations, oral or written, express or implied, other than those contained herein. 12.4 Any dispute between the parties to this Agreement may be referred to a single arbitrator in accordance with the provisions of the Commercial Arbitration Act, R.S.B.C. 1996, as amended. 12.5 In this Agreement, wherever the masculine is used, such use shall include the feminine. 12.6 Any part of this Agreement that is found to be invalid or unenforceable for any reason shall, wherever possible, be severable from the Agreement and shall not in any way prejudice the validity or enforceability of the remainder. 12.7 This Agreement shall be construed and governed in all respects by the laws of the State of Delaware, and the forum of conveyance shall be British Columbia. 13 SCHEDULES The following schedules are annexed to, and form part of, this Agreement: Schedule "A" Financial Statements of Fireplug Computers Inc. dated December 31, 1999; -53- Schedule "B" Liens, Mortgages and Other Encumbrances to the Assets of Fireplug Computers Inc. Schedule "C" Particulars of Accounts Receivable from DVD Technologies, Inc. and Sierra; Schedule "D" Assets presently owned by Fireplug Computers Inc. which do not form part of the Assets subject to this sale; Schedule "E" Distribution of Shares and Options Among Vendors. Schedule "F" List of Current Suppliers IN WITNESS WHEREOF the Vendors and the Purchaser have duly executed this Agreement this 1st day of May, 2000. SIGNED, SEALED AND DELIVERED ) by SHIRLEY PITT in the ) presence of: ) _________________________ ) SHIRLEY PITT ______________________________ ) ) SIGNED, SEALED AND DELIVERED ) by STUART LYNNE in the ) presence of: ) _________________________ ) STUART LYNNE ______________________________ ) SIGNED, SEALED AND DELIVERED ) by BRUCE BALDEN in the ) presence of: ) _________________________ ) BRUCE BALDEN ______________________________ ) -54- SIGNED, SEALED AND DELIVERED ) by DONNA ALARIE in the ) presence of: ) _________________________ ) DONNA ALARIE ______________________________ ) SIGNED, SEALED AND DELIVERED ) by RICHARD PITT in the ) presence of: ) _________________________ ) RICHARD PITT ______________________________ ) SIGNED, SEALED AND DELIVERED ) by KENNETH CILLIS in the ) presence of: ) _________________________ ) KENNETH CILLIS ______________________________ ) SIGNED, SEALED AND DELIVERED ) by JACK VANDENAKKER in the ) presence of: ) _________________________ ) JACK VANDENAKKER ______________________________ ) SIGNED, SEALED AND DELIVERED ) by TED POWELL in the ) presence of: ) _________________________ ) TED POWELL ______________________________ ) SIGNED, SEALED AND DELIVERED ) REGULAR EXPRESSIONS INC. -55- On behalf of REGULAR EXPRESSIONS INC. ) per: In the presence of: ) ) ) ______________________________ ) _________________________ Authorized Signatory SIGNED, SEALED AND DELIVERED ) FIREPLUG COMPUTERS INC. On behalf of FIREPLUG COMPUTERS INC. ) per: In the presence of: ) ) ) ______________________________ ) _________________________ Authorized Signatory SIGNED, SEALED AND DELIVERED ) LINEO, INC. On behalf of LINEO, INC. ) per: In the presence of: ) ) ) ______________________________ ) _________________________ Authorized Signatory EX-10.13 17 EXHIBIT 10.13 STOCK PURCHASE AGREEMENT BY AND AMONG MORETON BAY VENTURES PTY LTD, an Australian corporation, LINEO, INC. a Delaware, USA corporation AND THE SELLERS NAMED HEREIN DATED AS OF MAY 10, 2000 TABLE OF CONTENTS
Page ---- ARTICLE 1. DEFINITIONS......................................................................................5 ARTICLE 2. SALE OF SHARES; CLOSING.........................................................................10 2.1 PURCHASE AND SALE...............................................................................10 2.2 PURCHASE PRICE..................................................................................10 2.3 DELIVERY OF CORPORATION SHARES; PAYMENT.........................................................11 2.4 TIME AND PLACE OF CLOSING.......................................................................11 ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF CORPORATION...................................................11 3.1 ORGANIZATION, ETC...............................................................................11 3.2 AUTHORIZATION; EXECUTION; BINDING EFFECT........................................................12 3.3 CAPITALIZATION; SHARE OWNERSHIP.................................................................12 3.4 SUBSIDIARIES....................................................................................13 3.5 NO CONFLICTING AGREEMENTS OR CHARTER PROVISIONS.................................................13 3.6 CONSENTS, APPROVALS, LICENSES, ETC..............................................................13 3.7 LITIGATION......................................................................................14 3.8 FINANCIAL STATEMENTS............................................................................14 3.9 NO UNDISCLOSED LIABILITIES......................................................................14 3.10 COMPLIANCE WITH LAWS; PERMITS...................................................................14 3.11 NO ADVERSE CHANGES..............................................................................14 3.12 CERTAIN TRANSACTIONS............................................................................15 3.13 BENEFIT PLANS...................................................................................15 3.14 TAX MATTERS.....................................................................................16 3.15 CONTRACTS.......................................................................................17 3.16 LEASED PROPERTY.................................................................................17 3.17 INTELLECTUAL PROPERTY...........................................................................18 3.18 COMPLIANCE WITH ENVIRONMENTAL LAWS..............................................................18 3.19 NO BROKERS......................................................................................19 3.20 BOOKS AND RECORDS...............................................................................19 3.21 TITLE TO PROPERTIES; ENCUMBRANCES...............................................................19 3.22 CONDITION AND SUFFICIENCY OF ASSETS.............................................................19 3.23 ACCOUNTS RECEIVABLE.............................................................................19 3.24 INVENTORY.......................................................................................19 3.25 INSURANCE.......................................................................................19 3.26 LABOR RELATIONS; COMPLIANCE.....................................................................20 3.27 CERTAIN PAYMENTS................................................................................20 3.28 DISCLOSURE......................................................................................20 3.29 EQUITY..........................................................................................20 ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF THE SELLERS...................................................20 4.1 CAPACITY; EXECUTION; VALIDITY; BINDING EFFECT...................................................20 4.2 SHARE OWNERSHIP.................................................................................20 4.3 NO OTHER RIGHTS.................................................................................21 4.4 NO CONFLICTING AGREEMENTS.......................................................................21 4.5 CONSENTS, APPROVALS, LICENSES, ETC..............................................................21 4.6 LITIGATION......................................................................................21 4.7 NO BROKERS......................................................................................21 4.8 NO U.S. PERSONS.................................................................................22 4.9 INVESTMENT EXPERIENCE AND INTENT................................................................22 ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF BUYER.........................................................22 5.1 ORGANIZATION AND CORPORATE POWER................................................................22 5.2 AUTHORIZATION AND NON-CONTRAVENTION.............................................................22 5.3 CAPITALIZATION..................................................................................23 5.4 SUBSIDIARIES; INVESTMENTS.......................................................................23 5.5 FINANCIAL STATEMENTS............................................................................23 5.6 ABSENCE OF UNDISCLOSED LIABILITIES..............................................................23 5.7 ABSENCE OF CHANGES..............................................................................24 5.8 TITLE; CONDITION OF PROPERTY....................................................................24 5.9 CERTAIN CONTRACTS AND ARRANGEMENTS..............................................................24 5.10 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS.............................................26 5.11 LITIGATION......................................................................................26 5.12 TAX MATTERS.....................................................................................27 5.13 EMPLOYEE BENEFIT PLANS..........................................................................27 5.14 LABOR LAWS......................................................................................27 5.15 EMPLOYEES.......................................................................................27 5.16 HAZARDOUS WASTE, ETC............................................................................28 5.17 BUSINESS; COMPLIANCE WITH LAWS..................................................................28 5.18 INVESTMENT BANKING; BROKERAGE...................................................................28 5.19 INSURANCE.......................................................................................28 5.20 TRANSACTIONS WITH AFFILIATES....................................................................28 5.21 SUPPLIERS.......................................................................................28 5.22 CERTAIN EVENTS..................................................................................29 5.23 REGISTRATION RIGHTS.............................................................................29 5.24 DISCLOSURE......................................................................................29 5.25 CORPORATE DOCUMENTS.............................................................................29 5.26 OFFERING........................................................................................29 5.27 INVESTMENT COMPANY..............................................................................30 5.28 SUPPLEMENTAL REMUNERATION.......................................................................30 5.29 GOVERNMENTAL CONSENTS...........................................................................30 ARTICLE 6. COVENANTS OF SELLERS, BUYER AND CORPORATION.....................................................30 6.1 INVESTIGATION OF BUSINESS; ACCESS TO PROPERTIES AND RECORDS.....................................30 6.2 REGULATORY AND OTHER AUTHORIZATIONS.............................................................30 6.3 REASONABLE EFFORTS; CONSENTS AND NOTIFICATIONS..................................................31 6.4 FURTHER ASSURANCES..............................................................................31 6.5 CONDUCT OF BUSINESS OF THE CORPORATION AND SUBSIDIARIES.........................................32 6.6 PRESERVATION OF BUSINESS........................................................................33 6.7 ANNOUNCEMENTS...................................................................................33 6.8 NO SOLICITATION.................................................................................33 6.9 RIGHT TO UPDATE AND CURE........................................................................34 6.10 MARKET STAND-OFF AGREEMENT......................................................................34 6.11 SECURITIES LAW COMPLIANCE.......................................................................34 ARTICLE 7. CONDITIONS TO BUYER'S OBLIGATION TO CLOSE.......................................................35 7.1 REPRESENTATIONS; WARRANTIES AND COVENANTS OF THE CORPORATION AND THE SELLERS....................35 3 7.2 FILINGS; CONSENTS; WAITING PERIODS..............................................................35 7.3 NO INJUNCTION...................................................................................35 7.4 CLOSING DELIVERIES..............................................................................35 7.5 ABSENCE OF LITIGATION...........................................................................37 7.6 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS.............................................37 7.7 NO MATERIAL ADVERSE EFFECT......................................................................37 7.8 GENERAL RELEASE.................................................................................37 7.9 TAX FILING CODE SECTION 338(g) ELECTION.........................................................38 ARTICLE 8. CONDITIONS TO SELLERS'OBLIGATIONS TO CLOSE......................................................38 8.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BUYER..........................................38 8.2 FILINGS; CONSENTS; WAITING PERIODS..............................................................38 8.3 NO INJUNCTION...................................................................................38 8.4 CLOSING DELIVERIES..............................................................................38 8.5 ABSENCE OF LITIGATION...........................................................................39 8.6 ABSENCE OF LITIGATION...........................................................................39 ARTICLE 9. SURVIVAL; INDEMNIFICATION.......................................................................39 9.1 INDEMNIFICATION.................................................................................39 9.2 LIMITATIONS ON INDEMNIFICATION..................................................................41 ARTICLE 10. TERMINATION.....................................................................................42 10.1 TERMINATION.....................................................................................42 10.2 PROCEDURE AND EFFECT OF TERMINATION.............................................................43 ARTICLE 11. MISCELLANEOUS...................................................................................43 11.1 COUNTERPARTS....................................................................................43 11.2 GOVERNING LAW...................................................................................43 11.3 NO THIRD PARTY BENEFICIARIES....................................................................43 11.4 ENTIRE AGREEMENT................................................................................44 11.5 EXPENSES........................................................................................44 11.6 NOTICES.........................................................................................44 11.7 SUCCESSORS AND ASSIGNS..........................................................................44 11.8 HEADINGS; DEFINITIONS...........................................................................45 11.9 AMENDMENTS AND WAIVERS..........................................................................45 11.10 VENUE; SERVICE OF PROCESS.......................................................................45 11.11 ARBITRATION.....................................................................................45 11.12 ATTORNEYS'FEES..................................................................................46 11.13 SEVERABILITY OF PROVISIONS; JEOPARDY............................................................47 11.14 SELLER APPROVAL.................................................................................47
Exhibits - -------- Exhibit A List of Sellers Exhibit B Option Holders Exhibit C Deed of Release Schedules - --------- Corporation Disclosure Schedule Buyer Disclosure Schedule Seller Disclosure Schedule 4 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT dated as of May 10, 2000 is made and entered into by and among all of the Sellers listed on EXHIBIT A hereto (each a "Seller" and collectively the "Sellers"), Moreton Bay Ventures Pty Ltd, ACN 069 159 539, an Australian corporation (the "Corporation"), and Lineo, Inc., a Delaware, USA, corporation (the "Buyer"). WHEREAS, the Sellers own all of the shares of the Corporation issued and outstanding as of the date of this Agreement, with each Seller owning that number of shares of the Corporation set forth opposite such Seller's name in EXHIBIT A hereto; and WHEREAS, the Buyer desires to purchase from the Sellers, and the Sellers desire to sell to the Buyer, all of the shares of the Corporation issued and outstanding as of the date of this Agreement upon the terms and subject to the conditions set forth in this Agreement (the sale and purchase of such shares are referred to in this Agreement as the "Share Purchase"); NOW, THEREFORE, in consideration of the mutual agreements, covenants, representations and warranties contained herein, and subject to the terms and conditions hereinafter set forth, the parties to this Agreement hereby agree as follows: ARTICLE 1. DEFINITIONS As used in this Agreement, the following terms shall have the following meanings: 1.1 "ACCOUNTANTS" shall have the meaning set forth in Section 2.2(b). 1.2 "ACCOUNTS RECEIVABLE" shall have the meaning set forth in Section 3.23. 1.3 "AFFILIATE" shall mean, with respect to any Person, a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person. 1.4 "AGREEMENT" shall mean this Stock Purchase Agreement, together with the Buyer Disclosure Schedule, the Corporation Disclosure Schedule and the Seller Disclosure Schedule, as the same may be updated or amended from time to time as provided herein. 1.5 "ASSOCIATE" shall mean, with respect to any Person, any corporation or other business organization of which such Person is an executive officer (as such term is defined in Rule 3b-7 under the 1934 Act), or the Corporations Law of Queensland, Australia, (as the context requires), or partner or is the beneficial owner, directly or indirectly, of ten percent or more of any class of equity securities, any trust or estate in which such Person has a substantial beneficial interest or as to which such Person serves as a trustee or in a similar capacity and any relative or spouse of such Person. 1.6 "AUDITED FINANCIAL STATEMENTS" shall mean the audited balance sheet of the Corporation at March 31, 2000, and the related audited consolidated statements of operations, changes in shareholders' equity and cash flows for the years then ended, including related footnotes, in each case as examined by and accompanied by the report of an independent certified public accountant, which Audited Financial Statements are included in the Corporation Disclosure Schedule. 5 1.7 "AUTHORITY" shall mean any Australian, foreign, federal, provincial state or local entity or municipality or subdivision thereof or any authority, department, commission, board, bureau, agency, court or instrumentality thereof. 1.8 "BALANCE SHEET" shall mean the unaudited consolidated balance sheet of the Corporation as of March 31, 2000, included in the Interim Financial Statements. 1.9 "BENEFIT PLANS" shall mean any and all private or Government plans, programs, Welfare Plans, Pension Plans and other arrangements under which or through which the Corporation, any Subsidiary or any Affiliate provides, or has an obligation to provide, or makes, or has an obligation to make, contributions, compensation or benefits of any kind or description whatsoever (whether current or deferred and whether paid in cash or in kind) to, or on behalf of, one, or more than one, employee or director or former employee or former director, other than any plans, programs or other arrangements which only provide for the payment of cash compensation currently from the general assets of the Corporation, any Subsidiary or any Affiliate on a payday by payday basis as base salary or hourly wages for current services. 1.10 "BUSINESS" shall mean the internet software and appliance development business of Moreton Bay Ventures Pty Ltd. 1.11 "BUSINESS DAY" shall mean any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by law to be closed in Salt Lake City, Utah, USA. 1.12 "BUYER" shall have the meaning set forth in the first paragraph of the Agreement. 1.13 "BUYER DISCLOSURE SCHEDULE" shall mean the disclosure schedule, dated as of the date of this Agreement, delivered to the Sellers by the Buyer. 1.14 "BUYER FINANCIAL STATEMENTS" shall have the same meaning as set forth in Section 5.5. 1.15 "BUYER RIGHTS" shall have the meaning set forth in Section 5.10. 1.16 "BYLAWS" shall mean the Bylaws, as amended, of Buyer. 1.17 "CERTIFICATE OF INCORPORATION" shall mean Certificate of Incorporation and all amendments thereto of Buyer. 1.18 "CLOSING" shall have the meaning set forth in Section 2.4. 1.19 "CLOSING BALANCE SHEET" shall have the meaning set forth in Section 2.2(b). 1.20 "CLOSING DATE" shall mean the date and effective time at which the Closing occurs. 1.21 "CODE" shall mean the United States of America Internal Revenue Code of 1986, as amended, together with the regulations promulgated thereunder. 1.22 "CORPORATION AFFILIATE" shall have the meaning set forth in Section 3.12. 1.23 "CONTRACT" shall mean any contract, agreement, indenture, note, bond, loan agreement, letter of credit agreement, line of credit agreement, instrument, lien, conditional sales contract, mortgage, franchise, commitment, obligation or other arrangement or agreement, but shall exclude leases of real or personal property and insurance policies. 6 1.24 "CORPORATION" shall mean Moreton Bay Ventures Pty Ltd. ACN 069 159 539, an Australian corporation. 1.25 "CORPORATION DISCLOSURE SCHEDULE" shall mean the disclosure schedule, dated as of the date of this Agreement, delivered to the Buyer by the Corporation. 1.26 "CORPORATION SHARES" shall have the meaning set forth in Section 2.1. 1.27 "EMPLOYEE BENEFIT PLAN" shall have the same meaning set forth in Section 5.13. 1.28 "ENCUMBRANCES" shall mean any security interest, pledge, mortgage, lien, charge, adverse claim of ownership or other encumbrance of any kind. 1.29 "ENVIRONMENTAL LAWS" shall mean all applicable laws, regulations, rules, ordinances, codes, licenses, permits, orders, approvals, plans, authorizations, concessions, franchises, and similar items of all in whatever jurisdiction, and all applicable judicial, administrative and regulatory decrees, judgments and orders, any of which relate to the protection of human health or the environment from the effects of hazardous substances, including but not limited to those pertaining to reporting, licensing, permitting, investigating, and remediating emissions, discharges, releases or threatened releases of Hazardous Substances into the air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of Hazardous Substances. 1.30 "EQUITY" shall have the meaning set forth in Section 2.2(c). 1.31 "ERISA" shall have the meaning set forth in Section 5.13. 1.32 "FAMILY MEMBER" shall mean with respect to a particular individual, such individual's spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, and brothers- and sisters-in-law. 1.33 "FINANCIAL STATEMENTS" shall mean the Audited Financial Statements and the Interim Financial Statements of the Corporation. 1.34 "GAAP" shall mean generally accepted accounting principles (as such term is used in the applicable country's professional accounting standards) from time to time in effect. 1.35 "HAZARDOUS SUBSTANCE" shall mean any substance or waste which is listed as hazardous, regulated or toxic, or is a contaminant, pollutant or hazardous or toxic substance or waste under any Environmental Laws, or any substance or waste which has been determined at any time by regulation, ruling or otherwise by any Authority to be a contaminant, pollutant or hazardous or toxic substance and which shall include, without limitation, hazardous waste, any medical waste, biohazardous waste, industrial waste and special waste. 1.36 "INDEMNIFYING SELLERS" shall mean Robert A. Waldie, Mary E. Waldie and Peter Cronk, as a trustee of the Cronk Superannuation Fund. 1.37 "INDEMNIFIED LOSSES" shall have the meaning set forth in Section 9.1(a). 1.38 "INDEMNITEES" shall have the meaning set forth in Section 9.1(a). 7 1.39 "INTERIM FINANCIAL STATEMENTS" shall mean the Balance Sheet as of [NEED DATE] and the related unaudited consolidated statement of operations, changes in shareholders' equity and cash flows for the three month period then ended, including related footnotes, if any, which Interim Financial Statements are included in the Corporation Disclosure Schedule. 1.40 "INTELLECTUAL PROPERTY" means each and every and any and all patents and patent rights, trademarks and trademark rights, trade names and trade name rights, service marks and service mark rights, service names and service name rights, brand names, inventions, procedures, formulae, copyrights and copyright rights, trade dress, business and product names, logos, slogans, trade secrets, processes, designs, methodologies, computer programs (including all source codes) and related documentation, linux embedded platforms and related documentation, technical information, know-how and all pending applications for and registrations of patents, trademarks, service marks and copyrights. 1.41 "IRS" shall mean the U.S. Internal Revenue Service. 1.42 "KNOWLEDGE" shall mean (i) in the case of any Seller, knowledge of such Seller, and if such Seller is an entity, knowledge of any officer or director of such entity, (ii) in the case of the Buyer, knowledge of any officer or director of the Buyer, and (iii) in the case of the Corporation or any Subsidiary, knowledge of any officer or director of the Corporation or such Subsidiary. An individual will be deemed to have "Knowledge" of a particular fact or other matter if (a) such individual is actually aware of such fact or other matter; or (b) with respect to Sections 3.26 and 6.11 only, such individual would likely discover or otherwise become aware of such fact or other matter by exercising the care an ordinarily prudent person in a like position would exercise under similar circumstances. 1.43 "LEASES" shall have the meaning set forth in Section 3.16. 1.44 "LINEO OPTIONS" shall mean the options referred to in Section 2.3(c). 1.45 "LINEO SHARES" shall have the meaning set forth in Section 2.2. 1.46 "MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on the business, operations, properties, assets (including intangible assets), liabilities (contingent or otherwise), financial condition or results of operations of the Corporation and the Subsidiaries, taken as a whole. 1.47 "MBV OPTIONS" shall mean the options on issue in the Corporation as set out in EXHIBIT B. 1.48 "OPTION HOLDERS" shall mean the holders of MBV Options as set out in EXHIBIT B. 1.49 "PERMITS" shall mean all permits, licenses and other approvals, certificates of need, accreditations, participation agreements, consents, authorizations, certificates of authority and orders. 1.50 "PERMITTED ENCUMBRANCES" shall mean (i) Encumbrances for Taxes not yet due and payable and for property Taxes being contested in good faith, (ii) Encumbrances and imperfections of title that do not secure payment of borrowed money and the existence of which, in the aggregate, do not have a Material Adverse Effect. 1.51 "PERSON" shall mean an individual, firm, trust, association, corporation, limited liability company, partnership, limited partnership, limited liability partnership, Authority or other entity. 1.52 "PLAN" shall have the same meaning set forth in Section 5.3. 8 1.53 "PURCHASE PRICE" shall have the meaning set forth in Section 2.2. 1.54 "RELATED PARTY" shall have the meaning set forth in Section 3.12. 1.55 "SELLER" and "SELLERS" are identified on EXHIBIT A hereto. 1.56 "SELLER DISCLOSURE SCHEDULE" shall mean the disclosure schedules, dated as of the date of this Agreement, delivered to the Buyer by any Seller. 1.57 "SHARE PURCHASE" shall have the meaning set forth in the Recitals hereto. 1.58 "SUBSIDIARY" shall mean a corporation, partnership or other entity of which the Corporation (i) has the power to elect more than fifty percent (50%) of the board of directors or other governing authority either directly or indirectly or (ii) owns or controls more than fifty percent (50%) of the outstanding equity securities or equity interests either directly or through an unbroken chain of entities as to each of which fifty percent (50%) or more of the outstanding equity securities or equity interests is owned directly or indirectly by its parent. 1.59 "SUBSIDIARY SHARES" shall have the meaning set forth in Section 3.4(b). 1.60 "SUPPLIER" OR "SUPPLIERS" shall have the same meaning set forth in Section 5.21. 1.61 "SURVIVAL PERIOD" shall have the meaning as set forth in Section 9.1(f). 1.62 "TAKEOVER PROPOSAL" shall mean any proposal for a merger, consolidation, acquisition of all or substantially all of the capital shares or assets of the Corporation or the acquisition of a substantial equity interest in the Corporation or a substantial portion of the consolidated assets of the Corporation, or any solicitation of proxies in connection with any meeting for the purpose of effecting a business combination or change in control. 1.63 "TAX" or "TAXES" shall mean all taxes, levies, imposts, duties, excises, licenses and resignation fees, and charges of any kind or nature whatsoever including, without limitation, income tax withholding, unemployment and social welfare taxes, sales and use taxes and property taxes, stamp duty, fringe benefits tax, capital gains, tax, payroll tax and interest, penalties and additions to tax with respect to any of the above. 1.64 "TAX RETURN" shall mean any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment to such documents and any amendment of such documents. 1.65 "THIRD PARTY INTERESTS" shall mean any security interest, lease, license, option, voting arrangement, easement, covenant, notation, restriction, interest under any agreement, interest under any trust, or other right, equity, entitlement or other interest of any nature held by a third party. 1.66 "U.S. PERSON" shall mean: (i) any natural person resident in the United States; (ii) any partnership or corporation organized or incorporated under the laws of the United States; (iii) any estate of which any executor or administrator is a U.S. person; (iv) any trust of which any trustee is a U.S. person; (v) any agency or branch of a foreign entity located in the United States; (vi) any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person; (vii) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident 9 in the United States; and (viii) any partnership or corporation if: (a) organized or incorporated under the laws of any foreign jurisdiction; and (b) formed by a U.S. person principally for the purpose of investing in securities not registered under the Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a)) who are not natural persons, estates or trusts. 1.67 "UNDISCLOSED LIABILITY" shall mean an obligation, indebtedness or liability of any nature (each of which, for purposes of this definition, is assumed to be material), which is not reserved against or disclosed on the Balance Sheet, or in the notes to the Balance Sheet or to the Interim Financial Statements, and which is not so reflected, reserved against or otherwise disclosed in this Agreement or the Corporation Disclosure Schedule. 1.68 "1933 ACT" shall mean the U.S. Securities Act of 1933, as amended. 1.69 "1934 ACT" shall mean the U.S. Securities Exchange Act of 1934, as amended. 1.70 "1940 ACT" shall have the meaning set forth in Section 5.27. 1.71 OTHER DEFINED TERMS. The terms defined in the first paragraph and in the whereas clauses shall have the meanings given to such terms in such paragraph and whereas clauses. ARTICLE 2. SALE OF SHARES; CLOSING 2.1 PURCHASE AND SALE. Subject to the satisfaction or waiver of the conditions to the Closing set forth in this Agreement, at the Closing the Sellers will sell, and the Buyer will purchase, ordinary shares of the Corporation, free from all Third Party Interests, which constitute, and will constitute as of the Closing, all of the issued and outstanding shares on issue in the Corporation (collectively, the "Corporation Shares"), with the amount of Corporation Shares to be sold by each Seller set forth opposite such Seller's name on EXHIBIT A hereto. 2.2 PURCHASE PRICE. (a) In full payment of the Corporation Shares, the Buyer shall pay and deliver to the Sellers an aggregate purchase price consisting of the Purchase Price. The Purchase Price consists of [956,315] shares of the unregistered Series D Convertible Preferred Stock of the Buyer (the "Lineo Shares"), and Ten Thousand Dollars in currency of the United States of America (USD $10,000). The Closing Purchase Price shall be paid to and allocated among each of the Sellers as set forth opposite each Seller's name on EXHIBIT A hereto. (b) The Corporation will use diligent efforts to cause Arthur Andersen LLP (the "Accountants") to prepare an audited consolidated balance sheet ("Closing Balance Sheet") of the Corporation and its Subsidiaries as of the Closing Date, including a computation of the Corporation's Equity, as defined below, as of the Closing Date. The Corporation will deliver the Closing Balance Sheet to the Buyer and Seller within thirty (30) days after the Closing Date. The Closing Balance Sheet will be prepared in accordance with GAAP applied on a basis consistent with the preparation of the Audited Financial Statements, including without limitation accruals, prepaid expenses and taxes. (c) "Equity" as used herein shall mean the excess of (x) the sum of cash, net receivables and net inventory, over (y) the sum of accounts payable, amounts outstanding under the 10 Corporation's line of credit, long-term debt (including the current portion thereof) and other accrued liabilities. 2.3 DELIVERY OF CORPORATION SHARES; PAYMENT. (a) DELIVERY OF CORPORATION SHARES. At the Closing, each Seller, severally and not jointly, shall sell, assign, transfer and deliver to the Buyer the number of the Corporation Shares set forth opposite such Seller's name on EXHIBIT A by delivery to the Buyer of a certificate or certificates representing such Corporation Shares, accompanied by duly executed share transfer forms, in form and substance satisfactory to the Buyer and free and clear of all Encumbrances. The Corporation agrees to, as soon as practicable after the Closing and subject to stamping, accept for registration each transfer for the Corporation Shares and to issue to the Buyer a certificate or certificates, in the name of the Buyer, representing the Corporation Shares. (b) PAYMENT OF THE PURCHASE PRICE. At the Closing, the Buyer shall pay to the Sellers the Purchase Price as set forth on EXHIBIT A. (c) The Corporation and the Option Holders agree that all MBV Options will be cancelled on and from the date of issue by the Buyer to the Option Holders of Lineo Options in the amounts set forth on EXHIBIT B. The Buyer agrees to issue the Lineo Options within a reasonable time after the Closing. Each Lineo Option will be exercisable for one share of common stock of Buyer at an exercise price of $3.00 per share. 2.4 TIME AND PLACE OF CLOSING. The closing (the "Closing") of the Share Purchase will be held at the office of the Corporation at 2:00 p.m. on May 10, 2000 or such other time and place as shall be agreed to by the parties. 2.5 Waiver of rights. Each of the Sellers: (a) agrees to waive any right under the Articles of Association of the Corporation to require the Corporation or its directors to give any notice in respect of the sale of the Corporation Shares; (b) declares in accordance with the Articles of Association of the Corporation that the Buyer is a desirable person to whom it is in the interests of the Corporation for the Corporation Shares to be transferred; and (c) waives any right to require another Seller or the Corporation to transfer or cause to be transferred any Corporation Shares to the Seller. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF CORPORATION The Corporation represents and warrants to the Buyer that the statements contained in this Article 3 are true and correct, except as set forth in the Corporation Disclosure Schedule. 3.1 ORGANIZATION, ETC. The Corporation and each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdictions of incorporation and has all requisite corporate or other power and authority (i) to conduct its business as it is now conducted and to own or lease all of the properties owned or leased by it, and (ii) in the case of the Corporation, to enter into and perform its obligations under this Agreement and to undertake the 11 transactions contemplated hereby. True, correct and complete copies of the Articles of Incorporation and Bylaws of the Corporation (or other constituting documents) and each Subsidiary as of the date of this Agreement have been previously delivered or made available to the Buyer. The corporate records and minute books of the Corporation and each Subsidiary contain complete, comprehensive and accurate minutes of all meetings and other corporate actions of the incorporators, directors, committees of directors and shareholders of the Corporation and each Subsidiary held, in the case of the Corporation, since its date of incorporation and, in the case of each Subsidiary, since the date of its acquisition by the Corporation, and the share certificate books and register of shareholders of the Corporation and each Subsidiary are complete and accurate, reflecting all transactions in the equity securities of the Corporation and each Subsidiary. The Corporation's and each Subsidiary's share transfer records reflect fully all issuances, transfers and redemptions of the Corporation Shares and each Subsidiary's shares since the date of incorporation. The Corporation and each Subsidiary is duly qualified to do business as a foreign corporation, and is in good standing, in all jurisdictions in which the ownership or lease of property by it or the conduct of its business makes such qualification necessary, a complete list of which jurisdictions is set forth in Section 3.1 of the Corporation Disclosure Schedule. 3.2 AUTHORIZATION; EXECUTION; BINDING EFFECT. The execution, delivery and performance of this Agreement and the consummation of the transactions provided for herein have been duly authorized by all requisite corporate action on the part of the Corporation, and this Agreement has been duly executed and delivered by the Corporation. Assuming due execution and delivery by the other parties, this Agreement constitutes the legal, valid and binding obligation of the Corporation, enforceable against the Corporation in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, or other laws affecting creditors' rights and remedies generally. 3.3 CAPITALIZATION; SHARE OWNERSHIP. The issued shares, options and warrants of the Corporation and each Subsidiary are listed in Section 3.3 of the Corporation Disclosure Schedule. All outstanding capital shares of the Corporation and each Subsidiary have been duly authorized and validly issued, are fully paid, and have in no case been issued in violation of any preemptive rights granted by the Corporation or the applicable Subsidiary. All outstanding capital shares of the Corporation or any Subsidiary were authorized, offered, issued and sold in accordance with applicable law. Neither the Corporation or any Subsidiary has any capital shares in its treasury, other than shares which have been repurchased pursuant to a promissory note that is not yet fully paid. Except as set forth in Section 3.3 of the Corporation Disclosure Schedule, there is no existing subscription, option, warrant, call, right, commitment or other agreement (whether statutory or contractual) to which the Corporation or any Subsidiary is a party requiring, and there are no convertible securities of the Corporation or any Subsidiary outstanding which upon conversion would require, directly or indirectly, the issuance of any additional capital shares of the Corporation, a Subsidiary or other securities convertible into or exercisable or exchangeable for capital shares of the Corporation, a Subsidiary, or any other equity security of the Corporation or a Subsidiary, and there are no obligations (contingent or otherwise) of the Corporation or any Subsidiary (i) to repurchase, redeem or otherwise acquire any outstanding capital shares of the Corporation or the capital shares of, or other equity interests in, any Subsidiary, or (ii) except for guarantees of obligations of, or loans and advances to, the Corporation or any Subsidiary, provide funds to, or make investments in, or provide any guarantee with respect to the obligations of, any other Person. There are no bonds, debentures, notes, lines of credit, letters of credit, or other indebtedness issued and outstanding having the right to vote on any matters on which the Corporation's shareholders may vote. The Corporation Shares to be sold pursuant to this Agreement constitute all of the issued shares of the Corporation. The Corporation has granted no Person any registration rights in respect of capital shares of the corporation or securities convertible into or exercisable or exchangeable for capital shares of the Corporation. Each Seller is the sole record owner of the shares of the Corporation listed beside such Seller's name in EXHIBIT A. 12 3.4 SUBSIDIARIES. (a) Other than the Subsidiaries, if any, set forth in Section 3.4(a) of the Corporation Disclosure Schedule, there are no corporations, partnerships, limited liability companies, joint ventures, business trusts, associations, or other entities (i) over which the Corporation has control (whether absolute or shared) or a right to exercise control, or (ii) in which the Corporation owns, of record or beneficially, any direct or indirect equity interest or any right (contingent or otherwise) to acquire the same. (b) Section 3.4(b) of the Corporation Disclosure Schedule sets forth the jurisdiction of incorporation of each Subsidiary, if any, its authorized capital stock, the number and class or series of its issued and outstanding shares of capital stock, and the current ownership by Corporation and its Subsidiaries of such shares (collectively, the "Subsidiary Shares"). The Subsidiary Shares constitute all the issued and outstanding shares of capital stock of the Subsidiaries. The Subsidiary Shares have been duly authorized and validly issued, are fully paid and non-assessable, and were not issued in violation of any preemptive rights. There are no existing subscriptions, options, warrants, calls, rights of conversion or other rights, agreements, arrangements or commitments relating to the capital stock of any Subsidiary obligating any Subsidiary, directly or indirectly, to issue, sell, or otherwise transfer, or repurchase, redeem, or otherwise acquire any shares of its capital stock. Either the Corporation or another Subsidiary owns the Subsidiary Shares issued by the respective Subsidiaries free and clear of all Encumbrances, except Encumbrances arising out of, under or in connection with this Agreement. There are no voting trusts, shareholder agreements, proxies or other agreements in effect with respect to the voting or transfer of the Subsidiary Shares. 3.5 NO CONFLICTING AGREEMENTS OR CONSTITUTION PROVISIONS. Except as set forth in Section 3.5 of the Corporation Disclosure Schedule, the execution and delivery of this Agreement, the compliance with and performance of the terms and provisions of this Agreement, and the consummation of the transactions contemplated hereby by the Corporation will not (i) conflict with or result in the contravention or breach of the terms, conditions or provisions of, (ii) constitute a default (or an event which, with notice, lapse of time, or both, would constitute a default) under, (iii) result in any violation of, (iv) require the obtaining of any consent or approval of, the taking of any action of, the making of any filing with, or the giving of any notice to, any Person (except such consents, approvals, actions, filings and notices that will have been obtained, taken, made, given or effectively waived prior to the Closing, a true, correct and complete list of which is set forth in Section 3.5 of the Corporation Disclosure Schedule) as a result of or under the terms of, (v) result in or give to any Person any right of termination, cancellation, acceleration, modification, or increased or accelerated rights, entitlements or payments under, or (vi) result in the creation or imposition of any Encumbrance upon the Corporation or any Subsidiary or any of their respective assets or the Corporation Shares under: (A) the Constitution of the Corporation or any Subsidiary or any resolutions adopted by the shareholders or the Board of Directors or any committee of the Board of Directors of the Corporation or any Subsidiary; (B) any order, judgment, decree, license, permit, statute, law, rule, or regulation to which the Corporation or any Subsidiary or any of their respective assets is subject; or (C) any provision of any Contract to which the Corporation or any Subsidiary is party or by which the Corporation or any Subsidiary or any of their respective assets is bound except, in the case of clauses (B) and (C), for any such violations, breaches, defaults, terminations, cancellations or accelerations which in the aggregate would not be reasonably likely to have a Material Adverse Effect or a material adverse effect on the ability of the Corporation or any Subsidiary to consummate the transactions contemplated by this Agreement. 3.6 CONSENTS, APPROVALS, LICENSES, ETC. No Permit by or from, or declaration, filing or registration with, or notification to, any Authority is required to be made or obtained by the Corporation or any Subsidiary in connection with the execution, delivery and performance of this Agreement, or the consummation of the transactions contemplated hereby, except as set forth in Section 3.6 of the 13 Corporation Disclosure Schedule, and except where the failure to obtain the Permit, or make the declaration, filing, registration, or notification would not have a Material Adverse Effect or a material adverse effect on the parties' ability to consummate the transactions contemplated by this Agreement. 3.7 LITIGATION. Except as set forth in Section 3.7 of the Corporation Disclosure Schedule, there is no action, suit, proceeding or investigation in progress or pending or, to the Knowledge of the Corporation or any Subsidiary, threatened or contemplated, at law or in equity, in any court or before or by any Authority against or relating to the Corporation or any Subsidiary or any of their respective properties, or the conduct of the Corporation's or any Subsidiary's business as currently operated or contemplated to be operated, which in any case would be reasonably likely to have a Material Adverse Effect or a material adverse effect on the parties' ability to consummate the transactions contemplated by this Agreement. Except as set forth in Section 3.7 of the Corporation Disclosure Schedule, there is not currently outstanding against the Corporation or any Subsidiary any judgment, decree, injunction, ruling or order of any Authority which, insofar as it can be reasonably foreseen, individually or in the aggregate, would have a Material Adverse Effect. 3.8 FINANCIAL STATEMENTS. The Audited Financial Statements (i) have been prepared based upon, and are consistent with, the books and records of the Corporation and the Subsidiaries (which books and records are correct and complete in all material respects), and (ii) fairly present the financial position, results of operations, changes in shareholders' equity and cash flows of the Corporation on a consolidated basis as of the dates and for the periods set forth in such Audited Financial Statements, in accordance with applicable country GAAP applied consistently throughout the periods involved, except normal year-end audit adjustments with respect to the Interim Financial Statements. The balance sheets included in the Audited Financial Statements accurately reflect all properties and assets of the Corporation and each Subsidiary, whether real, personal or mixed, which are required to be reflected on such balance sheets in accordance with applicable country GAAP, consistently applied. 3.9 NO UNDISCLOSED LIABILITIES. The Corporation and its Subsidiaries have no Undisclosed Liabilities outstanding on the date of this Agreement, whether due or to become due, which individually or in the aggregate would be reasonably likely to have a Material Adverse Effect, except as set forth in Section 3.9 of the Corporation Disclosure Schedule. 3.10 COMPLIANCE WITH LAWS; PERMITS. The Corporation and the Subsidiaries have complied with, and are not in violation of, and have not received any notices of violation with respect to, any national, provincial or local statute, law, regulation or ordinance with respect to the conduct of their business, or the ownership or operation of their business, except for failures to comply or violations that would not be reasonably likely to have a Material Adverse Effect. 3.11 NO ADVERSE CHANGES. Since the date of the Audited Financial Statements, except as set forth in Section 3.11 of the Corporation Disclosure Schedule or as contemplated by this Agreement, there has not been, occurred or arisen: (i) any change, destruction or loss not covered by insurance with respect to the Corporation or any Subsidiary having a Material Adverse Effect; (ii) any material change by the Corporation and any Subsidiary in its accounting methods, principles or practices; (iii) any material revaluation of any of the assets of the Corporation or any Subsidiary, including, without limitation, writing down the value of inventory; or 14 (iv) any other event that resulted in a Material Adverse Effect. 3.12 CERTAIN TRANSACTIONS. Except as set forth in Section 3.12 of the Corporation Disclosure Schedule, to the Knowledge of the Corporation or any Subsidiary: (i) No (A) Seller, and no Family Member, Affiliate or Associate of any Seller (other than the Corporation and its Subsidiaries), (B) officer, director or other Affiliate of the Corporation or any Subsidiary ("Corporation Affiliate"), and (C) Associate or Family Member of any Corporation Affiliate ("Related Party") directly or indirectly (1) sells to or purchases from the Corporation or any Subsidiary any products or services in any material amount, (2) has any interest in any corporation, partnership, limited liability company, proprietorship or other entity which sells to or purchases from the Corporation or any Subsidiary any products or services in any material amount, (3) has any cause of action or claim against the Corporation or any Subsidiary in any material amount; or (4) has a beneficial interest in any Contract to which the Corporation or any Subsidiary is a party or which binds it or its assets; (ii) The Corporation is not, and no Subsidiary is, indebted, either directly or indirectly, to any Related Party in any amount other than current obligations for payments of salaries, bonuses and other fringe benefits for past services rendered and recorded on the books of the Corporation or a Subsidiary; (iii) The Corporation is not, and no Subsidiary is, indebted to any Seller in any amount for any management or other fees. (iv) No Related Party is indebted to the Corporation or any Subsidiary. (v) No Seller is or ever has been a citizen or resident of the United States of America nor has a permanent establishment therein. (vi) The Corporation does not maintain and has never maintained a Permanent Establishment, as defined in the Code, in the United States of America and the Corporation has never filed or is required to file a tax return with the IRS. 3.13 BENEFIT PLANS. (a) The Corporation and each Subsidiary has made available to Buyer true and correct copies of all Benefit Plans and, to the extent applicable, all related trust agreements, summary plan descriptions, actuarial reports, insurance contracts, administrative service agreements, maintained for the benefit of, or relating to, any current or former employee of the Corporation, each Subsidiary, and any Affiliate. (b) With respect to the Benefit Plans, individually and in the aggregate, (i) no event has occurred, and to the Knowledge of the Corporation, there exists no condition or set of circumstances in connection with which the Corporation could be subject to any liability that is reasonably expected to have a Material Adverse Effect. (c) With respect to the Benefit Plans, individually and in the aggregate, there are no funded benefit obligations for which contributions have not been made or properly accrued, and there are no unfunded benefit obligations that have not been accounted for by reserves or otherwise properly footnoted in accordance with GAAP in the Financial Statements, which obligations are reasonably expected to have a Material Adverse Effect. 15 (d) With respect to each Benefit Plan, to the Knowledge of the Corporation, neither such Benefit Plan, nor any trustee, administrator, fiduciary, agent or employee thereof has at any time been involved in a transaction, which could create a liability that is reasonably expected to have a Material Adverse Effect. (e) Except as set forth in Schedule 3.13 of the Corporation Disclosure Schedule, neither the Corporation nor any of its Subsidiaries is a party to any oral or written (i) union or collective bargaining agreement, (ii) agreement with any officer or other key employee of the Corporation or any of its Subsidiaries, the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a change in control of the Corporation or other transaction involving the Corporation of the nature contemplated by this Agreement, (iii) agreement with any officer of the Corporation or any of its Subsidiaries providing any term of employment or compensation guarantee (iv) agreement or plan, including any stock option plan, stock appreciation right plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement; or (v) agreement or commitment to provide health care, life insurance or other benefits after termination of employment, except for retirement benefits under the Corporation's retirement plans. (f) Nothing contained in this Agreement shall limit or restrict the Corporation's or the Buyer's right from and after the Closing Date to amend or modify any Benefit Plan in such manner as the Corporation or the Buyer deems appropriate or to terminate a Benefit Plan. 3.14 TAX MATTERS. (a) The Corporation and each Subsidiary have (i) filed when due (after taking into account applicable extensions) with the appropriate agencies all Tax Returns required to be filed by them, and (ii) paid when due and payable all Taxes owed by them or, to the extent of Taxes not yet due and payable, have accrued or otherwise adequately reserved on the Financial Statements in material compliance with applicable country GAAP for the payment of such Taxes not yet due and payable. All such Tax Returns are correct and complete in all material respects. Complete and accurate copies of all such Tax Returns due or filed have been furnished or made available to the Buyer. (b) There are no Taxes assessed or, to the Knowledge of the Corporation or any Subsidiary, asserted in respect of any Tax Returns filed by the Corporation or any Subsidiary or claimed to be due by any taxing authority or otherwise that are not accrued or adequately reserved for on the Financial Statements in accordance with GAAP. The Corporation is not, and no Subsidiary is, a party to any action or proceeding, and to the Corporation's or any Subsidiary's Knowledge, no action or proceeding is threatened or contemplated, for the assessment or collection of any Taxes, and the Corporation has received no deficiency notices or reports or any Subsidiary in respect of any Tax and has not lodged any private ruling requests with the Australian Tax Office. To the Knowledge of the Corporation or any Subsidiary, no Tax Return of the Corporation or any Subsidiary is currently being audited or, to the Corporation's or any Subsidiary's Knowledge, is scheduled for future audit by any Authority. (c) The Corporation has complied with the provisions of part IIIAA of the Income Tax Assessment Act of 1936 (Cth) and has maintained proper records of franking debits and franking credits for the purposes of that Act. 16 (d) All documents to which the Corporation is a party or may be interested in the enforcement of, and all transfers of any issued shares (other than as contemplated by this Agreement), have been properly stamped if required under applicable stamp duty legislation. 3.15 CONTRACTS. (a) Section 3.15 of the Corporation Disclosure Schedule sets forth each of the following Contracts to which the Corporation or any Subsidiary is a party: (i) any Contract for borrowed money or deferred portion of purchase price; (ii) any loan agreement, credit agreement, promissory note, guarantee, indenture, subordination agreement, letter of credit, use of credit, interest rate or foreign currency protection agreement or any other similar type of Contract; (iii) any consulting or other Contract with attorneys, accountants, actuaries, appraisers, investment bankers, lobbyists, government relations' persons or other professional advisers providing for total payments equal to or in excess of Twenty Five Thousand Dollars (USD $25,000) and that cannot be terminated by the Corporation without penalty on 30 days or less notice; (iv) any Contract (except for Contracts with customers) which, in whole or in part, (A) presently restricts or precludes the Corporation or any present or future Subsidiary or Affiliate of the Corporation from conducting any business anywhere in the world, or (B) upon the occurrence of any event, the giving of notice or the passage of time, by its terms would have such an effect; (v) any Contract that involves aggregate payments by or to the Corporation or any Subsidiary in excess of Twenty Five Thousand Dollars (USD $25,000) and that cannot be terminated by the Corporation without penalty on 30 days or less notice; and (vi) any indemnification agreement (except those entered into in the ordinary course of business), guaranty or power of attorney granted to any Person (other than the Corporation or a Subsidiary). The Corporation has delivered or otherwise made available to the Buyer true, correct and complete copies of the Contracts set forth in Section 3.15 of the Corporation Disclosure Schedule, together with all amendments, waivers, modifications, supplements or side letters affecting the obligations of any party under such Contracts. (b) Except as set forth opposite or otherwise as part of the description of such Contract in Section 3.15 of the Corporation Disclosure Schedule: (i) No party to any Contract listed in Section 3.15 to the Corporation Disclosure Schedule has given to the Corporation or any Subsidiary notice of any breach or default under any such Contract by the Corporation or a Subsidiary, which has not been cured or waived; (ii) The Corporation is not, and no Subsidiary is, in violation or breach of or default of any material term under any Contract listed in Section 3.15 to the Corporation Disclosure Schedule in any respect or, with notice or lapse of time or both, would be in violation or breach of or default under any such Contract; and, to the Knowledge of the Corporation or any Subsidiary no other party to any such Contract is in violation or breach of or default under any such Contract or, with notice or lapse of time or both, would be in violation or breach of or default under any such Contract; and (iii) No consent by or of any party to any Contract listed in Section 3.15 to the Corporation Disclosure Schedule is required in order to consummate the transactions contemplated by this Agreement without causing a breach or violation of or a default under such Contract. 3.16 LEASED PROPERTY. Set forth in Section 3.16 of the Corporation Disclosure Schedule is a true, complete and correct list of all leases, licenses or similar arrangements in respect of the use of real or personal property by the Corporation or any Subsidiary which, in the case of personal property arrangements, require cumulative payments in excess of USD $25,000 by the Corporation or any Subsidiary (the "Leases"). Each Lease is in full force and effect, has not been amended or modified in any way, and the Corporation is not, and no Subsidiary is, in violation or breach of or default under any 17 material term of any such Lease, nor has any event occurred which, with the passage of time or action by a third party, could constitute such a violation, breach or default. To the best of the Corporation's or any Subsidiary's Knowledge, no other party to any Lease is in violation or breach of or default under the terms of such Lease, nor has any event occurred which, with the passage of time or action by a third party, could constitute such a violation, breach or default. Except as set forth opposite or otherwise as part of the description of such Lease in Section 3.16 of the Corporation Disclosure Schedule, no consent by or of any party to any such Lease is required in order to consummate the transactions contemplated by this Agreement without causing a breach or violation of, a default under such Lease or increased charges under such Lease. 3.17 INTELLECTUAL PROPERTY. The Corporation or a Subsidiary either has all right, title and interest in (free and clear of all Encumbrances), or a valid and binding license to use, all of the Intellectual Property used by the Corporation or any Subsidiary in the conduct of their respective businesses, except to the extent that the failure to have such rights have not had and would not be reasonably likely to have a Material Adverse Effect. Except as disclosed in Section 3.17 of the Corporation Disclosure Schedule, (i) all registrations with and applications to Authorities in respect of such Intellectual Property are valid and in full force and effect, (ii) the Corporation has and the Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of their respective trade secrets which Corporation or the Subsidiary considers to be material, and (iii) the Corporation is not, and no Subsidiary is, and the Corporation has not, and no Subsidiary has, received any notice that it is, in violation or breach of or default under (or with the giving of notice or lapse of time or both, would be in violation or breach of or default under) any license to use such Intellectual Property, except to the extent that the failure to have such rights has not had and would not be reasonably likely to have a Material Adverse Effect. The Corporation has not, and no Subsidiary has, received notice that the Corporation or any Subsidiary is infringing any Intellectual Property of any other Person; no claim is pending or, to the Knowledge of the Corporation or any Subsidiary, has been made to such effect that has not been resolved; and to the Knowledge of the Corporation or any Subsidiary, the Corporation is not, and no Subsidiary is, infringing any Intellectual Property rights of any other Person, which infringement would be reasonably likely to have a Material Adverse Effect. 3.18 COMPLIANCE WITH ENVIRONMENTAL LAWS. Except as set forth in Section 3.18 of the Corporation Disclosure Schedule, and except where any such matters or violations would, individually or in the aggregate, not be reasonably expected to have a Material Adverse Effect, (i) the Corporation has not, and no Subsidiary has, generated, used, manufactured, processed, distributed, handled, transported, treated, stored, released or disposed of, and has not suffered or permitted anyone else to generate, use, manufacture, process, distribute, handle, transport, treat, store, release or dispose of, any Hazardous Substance in violation of any Environmental Laws; (ii) there has not been any generation, use, manufacture, processing, distribution, handling, transportation, treatment, storage, release or disposal of any Hazardous Substance in connection with the conduct of the Business or the use of any property or facility leased or owned by the Corporation or any Subsidiary, or to the Knowledge of the Corporation or any Subsidiary, any nearby or adjacent properties or facilities, which has created or might reasonably be expected to create any liability under any Environmental Laws or which would require reporting to or notification of any Authority; (iii) to the Knowledge of the Corporation or any Subsidiary, no friable asbestos or polychlorinated biphenyl, and no underground storage tank, is contained in or located at any property or facility of the Corporation or any Subsidiary; (iv) any Hazardous Substance handled or dealt with in any way in connection with the Business has been and is being handled or dealt with in compliance with any Environmental Laws; (v) there are no investigations, proceedings, actions, orders, claims or notices that are pending, anticipated or, to the Knowledge of the Corporation or any Subsidiary threatened or contemplated against the Corporation or any Subsidiary or involving the Business and relating to Environmental Laws; and (vi) the Corporation has not received, and no Subsidiary has received, any notice of, and the Corporation does not have Knowledge of, and no Subsidiary has 18 Knowledge of, any facts which relate to the ownership or operation of the Business or any of the properties or facilities of the Corporation or any Subsidiary and that might constitute a violation of any Environmental Laws. 3.19 NO BROKERS. No broker, agent, finder, consultant or other Person has been retained by, or has acted on behalf of the Sellers or the Corporation (other than legal and accounting advisors) or is entitled to be paid based upon any agreements or understandings made by such parties in connection with the transactions contemplated by this Agreement, and neither the Buyer nor the Corporation shall have any liability for any broker's fee, finder's fee, consultant's fee or similar third party remuneration payable by reason of any action of the Sellers or the Corporation. 3.20 BOOKS AND RECORDS. The accounting books, minute books, share transfer records, and other records of the Corporation and each Subsidiary, all of which have been made available to the Buyer, are complete and correct in all material respects and to the Knowledge of the Corporation, have been maintained in accordance with sound business practices and the requirements of the Corporations Law of Queensland, Australia, including the maintenance of an adequate system of internal controls. At the Closing, all such books and records will be in the possession of the Corporation. 3.21 TITLE TO PROPERTIES; ENCUMBRANCES. (a) There is no real property owned by the Corporation or any Subsidiary. (b) The Corporation and each Subsidiary owns all the properties and assets (whether tangible or intangible) that it purports to own located in the facilities operated by the Corporation or any Subsidiary or reflected as owned in the books and records of the Corporation or such Subsidiary, including all of the properties and assets reflected in the Balance Sheet and the Interim Financial Statements (except for assets held under capitalized leases disclosed or not required to be disclosed in Section 3.16 of the Corporation Disclosure Schedule and personal property sold since the date of the Balance Sheet and the Interim Financial Statements, as the case may be, in the ordinary course of business), and all of the properties and assets purchased or otherwise acquired by the Corporation or any Subsidiary since the date of the Balance Sheet (except for personal property acquired and sold since the date of the Balance Sheet in the ordinary course of business and consistent with past practice). 3.22 CONDITION AND SUFFICIENCY OF ASSETS. To the Knowledge of the Corporation, the buildings, structures, and equipment of the Corporation and any Subsidiary are in good operating condition and repair, and are adequate for the uses to which they are being put. 3.23 ACCOUNTS RECEIVABLE. All accounts receivable of the Corporation or any Subsidiary that are reflected on the Balance Sheet and on the Closing Balance Sheet (collectively, the "Accounts Receivable") represent or will represent valid obligations arising from sales actually made or services actually performed in the ordinary course of business. Unless paid before the Closing Date, the Accounts Receivable are or will be as of the Closing Date collectible net of the respective reserves shown on the Balance Sheet or the Interim Financial Statements. 3.24 INVENTORY. All inventory of the Corporation or any Subsidiary is usable and salable in the ordinary course of business. 3.25 INSURANCE. The Corporation and each Subsidiary has obtained and maintains insurance policies as listed on Schedule 3.25, and all such policies are in full force and effect. All premiums due on such policies have been paid, and the Corporation or any Subsidiary has not received any notice of cancellation with respect thereto. Neither the Corporation nor any Subsidiary has any obligation, liability 19 or indebtedness for premiums or for retrospective premium adjustments for any period through the date hereof. The Corporation Disclosure Schedule lists the types, amounts of coverage and deductibles of all such insurance policies, and true, correct and complete copies thereof have been delivered to the Buyer. 3.26 LABOR RELATIONS; COMPLIANCE. Neither the Corporation nor any Subsidiary has been or is a party to any collective bargaining or other labor Contract. 3.27 CERTAIN PAYMENTS. Neither the Corporation nor any Subsidiary has, and no director, officer, agent or employee of the Corporation, any Subsidiary, or any other Person associated with or acting for or on behalf of the Corporation or any Subsidiary has, directly or indirectly (a) made any bribe, rebate, payoff, influence payment, kickback, or other payment to any Person, private or public, regardless of form, whether in money, property, or services (i) to obtain favorable treatment in securing business, (ii) to pay for favorable treatment for business secured, (iii) to obtain special concessions or for special concessions already obtained, for or in respect of the Corporation, any Subsidiary or any Affiliate, or (iv) in violation of any legal requirement, or (b) established or maintained any fund or asset that has not been recorded in the books and records of the Corporation or any Subsidiary. 3.28 DISCLOSURE. No representation or warranties of the Corporation and no statement in the Corporation Disclosure Schedule fails to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading. There is no fact known to the Corporation that has specific application to the Corporation or any Subsidiary (other than general economic or industry conditions) and that materially adversely affects the assets, business, prospects, financial condition, or results of operations of the Corporation or any Subsidiary (on a consolidated basis) that has not been set forth in this Agreement or the Corporation Disclosure Schedule. 3.29 EQUITY. The Equity of the Corporation at the Closing is not less than the lesser of USD $600,000 or the amount of Equity reflected in the Audited Financial Statements. ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF THE SELLERS Each Seller, severally and not jointly, represents and warrants to the Buyer that the statements contained in Sections 4.1 to 4.7 of this Agreement are true and correct, except as set forth in the Seller Disclosure Schedule. 4.1 CAPACITY; EXECUTION; VALIDITY; BINDING EFFECT. Such Seller has the full power and capacity necessary to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated herein. This Agreement has been duly executed and delivered by such Seller and, assuming due execution and delivery by the other parties, constitutes the legal, valid and binding obligation of such Seller, enforceable against such Seller in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, or other laws affecting creditors' rights and remedies generally. 4.2 SHARE OWNERSHIP. Except as set forth on Section 4.2 of the Seller Disclosure Schedule, there is no existing subscription, option, warrant, call, right, commitment or other agreement (whether preemptive or contractual) to which such Seller is a party requiring, and there are no convertible securities of the Corporation owned or held by such Seller which upon conversion would require, directly or indirectly, the issuance of any additional capital shares of the Corporation or other securities convertible into or exercisable or exchangeable for capital shares of the Corporation or any other equity security of the Corporation, and there are no obligations (contingent or otherwise) of such Seller to purchase or 20 otherwise acquire any outstanding capital shares of the Corporation. The Corporation Shares to be sold by such Seller pursuant to this Agreement will be delivered to the Buyer free and clear of all Encumbrances (except Encumbrances arising out of, under or in connection with this Agreement), and such delivery will not be in violation of any preemptive rights. Such Seller is the sole beneficial owner of the Corporation Shares listed beside such Seller's name on Exhibit A, and has the full legal right and power to sell, convey, transfer, and assign such Corporation Shares to the Buyer pursuant to this Agreement. Such Seller is not a party to any shareholder agreement, voting agreement, voting trust, proxy or other agreement with respect to the voting or transfer of the Corporation Shares. 4.3 NO OTHER RIGHTS. No Person (other than the Buyer as provided in this Agreement) has any agreement or option or any right or privilege (whether preemptive or contractual) capable of becoming an agreement or option for the purchase from such Seller of any of the Corporation Shares being transferred by such Seller to the Buyer pursuant to this Agreement. 4.4 NO CONFLICTING AGREEMENTS. The execution and delivery of this Agreement, the compliance with and performance of the terms and provisions of this Agreement, and the consummation of the transactions contemplated herein by such Seller will not (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a violation or breach or default (or an event which, with notice, lapse of time, or both, would constitute a default) under, (iii) result in any violation of, (iv) require the obtaining of any consent or approval of, the taking of any action of, the making of any filing with, or the giving of any notice to, any Person (except such consents, approvals, actions, filings and notices that will have been obtained, taken, made, given, or effectively waived prior to the Closing, a true, accurate and complete list of which is set forth in Section 4.4 of the Seller Disclosure Schedule) as a result of or under the terms of, (v) result in or give to any Persons any right of termination, cancellation, acceleration, modification, or increased or accelerated rights, entitlements or payments under, or (vi) result in the creation or imposition of any Encumbrance upon such Seller under: (A) any provision of any Contract to which such Seller is a party or by which it or any of its assets is bound, or (B) any order, decree, license, permit, statute, law, rule or regulation to which such Seller is subject. 4.5 CONSENTS, APPROVALS, LICENSES, ETC. Except for any consent, approval, authorization, license, order or Permit that is also required to be obtained by the Corporation, the Buyer or any other Seller, no consent, approval, authorization, license, order or Permit of, or declaration, filing or registration with, or notification to, any Authority is required to be made or obtained by such Seller in connection with the execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby. 4.6 LITIGATION. There is no action, suit, proceeding or investigation in progress or pending to the Knowledge of such Seller which affects this Agreement or that Seller's Corporation Shares or any action taken or to be taken or documents executed or to be executed by such Seller pursuant to or in connection with the provisions of this Agreement, or that would otherwise prevent the consummation of the transactions by such Seller contemplated by this Agreement. There is no present state of facts or circumstances of which such Seller has Knowledge which might reasonably be expected to result in any such action, suit, proceeding or investigation. 4.7 NO BROKERS. Except as set forth in Section 3.19, no broker, agent, finder, consultant or other Person has been retained by, or has acted on behalf of such Seller (other than legal and accounting advisors) or is entitled to be paid based upon any agreements or understandings made by such parties in connection with the transactions contemplated by this Agreement, and except as set forth in Section 3.19, neither the Buyer nor the Corporation shall have any liability for any broker's fee, finder's fee, consultant's fee or similar third party remuneration payable by reason of any action of such Seller. 21 4.8 NO U.S. PERSONS. Except as disclosed in the Sellers' Disclosure Schedule, such Seller is not a U.S. Person. 4.9 INVESTMENT EXPERIENCE AND INTENT. Such Seller represents to the Buyer that it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment contemplated by this Agreement and making an informed investment decision with respect thereto. Such Seller represents and understands that it is responsible for his own due diligence investigation and satisfying his own due diligence requirements and shall not be entitled to rely on the due diligence investigation of any other person or entity. Such Seller represents to the Buyer that it is purchasing the Lineo Shares for his own account, for investment only and not with a view to, or any present intention of, effecting a distribution of such securities or any part thereof except pursuant to a registration or an available exemption under applicable law. The Investor acknowledges that its Lineo Shares have not been registered under the Securities Act or the securities laws of any state or other jurisdiction and cannot be disposed of unless they are subsequently registered under the Securities Act and any applicable state laws or exemption from such registration is available. ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF BUYER The Buyer represents and warrants to the Corporation and the Sellers that the statements contained in this Article 5 are true and correct, except as set forth in the Buyer Disclosure Schedule: 5.1 ORGANIZATION AND CORPORATE POWER. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, USA, and is qualified to do business as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a Material Adverse Effect. The Buyer has all required corporate power and authority to carry on its business as presently conducted, to enter into and perform this Agreement and all other agreements contemplated hereby to which it is a party and to carry out the transactions contemplated hereby and thereby, including the issuance (or reservation for issuance), sale, delivery and conversion of Lineo Shares. The Buyer is not in violation of any term of the Certificate of Incorporation and Bylaws of the Buyer, as amended to date (the "Certificate of Incorporation" and the "Bylaws," respectively.) 5.2 AUTHORIZATION AND NON-CONTRAVENTION. The execution, delivery and performance by the Buyer of this Agreement and all other agreements, documents and instruments to be executed and delivered by the Buyer as contemplated hereby and the issuance and delivery of the Lineo Shares have been duly authorized by all necessary corporate and other action of the Buyer. This Agreement and each such other agreement, document and instrument constitute valid and binding obligations of the Buyer, enforceable in accordance with their respective terms. The execution and delivery by the Buyer of this Agreement and each other agreement, document and instrument to be executed and delivered by the Buyer pursuant hereto or as contemplated hereby and the performance by the Buyer of the transactions contemplated hereby and thereby, including, without limitation, the issuance and delivery of the Lineo Shares do not and will not (whether after the giving of notice, lapse of time or both): (a) violate, conflict with or result in a default under any instrument, judgment, order, writ, decree, contract, statute, rule, regulation or obligation to which the Buyer is subject to or by which it or its assets are bound, or any provision of the Certificate of Incorporation or Bylaws of the Buyer, and a violation of which would have a material adverse effect on the business, condition, financial or otherwise, or operations of the Buyer, or (b) result in any such violation, or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event that results in the creation of any lien, charge or encumbrance upon any assets of the Buyer or the suspension, revocation, impairment, forfeiture or nonrenewal of any material permit, 22 license, authorization or approval applicable to the Buyer, its business or operations or any of its assets or properties. 5.3 CAPITALIZATION. The authorized capital stock of the Buyer consists of 100,000,000 shares of Common Stock, par value $.001 per share, of which 20,148,724 shares are issued and outstanding, and 30,000,000 shares of Preferred Stock, par value $.001 per share, of which (a) 7,500,000 shares are designated as Series A Preferred Stock, of which (i) 5,000,000 shares are designated as Series A Class 1 Preferred Stock, all of which are issued and outstanding, and (ii) 2,500,000 shares are designated as Series A Class 2 Preferred Stock, all of which are issued and outstanding, (b) 4,850,000 shares are designated as Series B Preferred Stock, of which 4,833,331 shares are issued and outstanding, (c) 3,000,000 shares are designated as Series C Preferred Stock and (d) 2,000,000 are designated as Series D Convertible Preferred Stock. In addition, the Buyer has authorized and reserved for issuance upon conversion of the Series A Preferred Stock up to 7,500,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like), has as authorized and reserved for issuance upon conversion of the Series B Preferred Stock up to 4,850,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like), has authorized and reserved for issuance upon conversion of the Series C Preferred Stock up to 3,000,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like), has authorized and reserved for issuance upon conversion of the Series D Preferred Stock up to 2,000,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like) and has reserved for issuance upon exercise of options under the Buyer's stock option plan (the "Plan") 5,000,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like). Other than as described above, the Buyer has not issued or agreed to issue and is not obligated to issue any warrants, options or other rights to purchase or acquire any shares of its capital stock, or any securities convertible into or exercisable or exchangeable for such shares or any warrants, options or other rights to acquire any such convertible securities. All of the outstanding shares of capital stock of the Buyer are duly and validly authorized and issued, fully paid and nonassessable and, except as set forth herein, not subject to any preemptive rights to purchase or otherwise acquire shares of capital stock of the Buyer, are free of restrictions on transfer, other than restrictions on transfer under applicable state and federal securities laws, and have been offered, issued, sold and delivered in compliance with applicable federal and state securities laws. 5.4 SUBSIDIARIES; INVESTMENTS. Except as set forth in Section 5.4 of the Buyer Disclosure Schedule and other than 1,250,000 shares of Common Stock of Caldera Systems, Inc., a representative office located in Taiwan and a wholly owned subsidiary located in the United Kingdom, the Buyer does not currently own any capital stock or interest or participate in any corporation, joint venture, partnership, trust, limited liability Buyer or other entity. 5.5 FINANCIAL STATEMENTS. The Buyer has previously furnished to the Investor copies of its draft audited financial statements (balance sheet, statement of operations, statement of cash flows and statement of stockholders equity, including notes thereto) for the fiscal year at and ended October 31, 1999 (the "Buyer Financial Statements"). Such financial statements were prepared in conformity with generally accepted United States accounting principles applied on a consistent basis; are complete, correct and consistent in all material respects with the books and records of the Buyer; and fairly and accurately present the financial position of the Buyer as of the dates thereof and the results of operations and cash flows of the Buyer for the periods shown therein. The Buyer maintains and will continue to maintain a standard system of accounting established and administered in accordance with United States GAAP. 5.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the extent reflected or reserved against in the financial statements referred to in Section 5.5 above, the Buyer does not have and is not subject to any material liability or obligation of any nature, whether accrued, absolute, contingent or otherwise. 23 5.7 ABSENCE OF CHANGES. Except as set forth in Section 5.7 of the Buyer Disclosure Schedule, since October 31, 1999 there has not been (a) any material adverse change in the financial condition, results of operations, assets, liabilities, or business of the Buyer, (b) any material asset or property of the Buyer made subject to a lien of any kind, (c) any waiver of any material right of the Buyer, or the cancellation of any material debt or claim held by the Buyer, (d) any payment of dividends on, or other distribution with respect to, or any direct or indirect redemption or acquisition of, any shares of the capital stock of the Buyer, or any agreement or commitment therefore, (e) any mortgage, pledge or hypothecation of any tangible or intangible asset of the Buyer, except in the ordinary course of business, (f) any sale or assignment of any tangible asset of the Buyer having a book value in excess of USD $5,000, except in the ordinary course of business, or of any Intellectual Property Rights (as hereafter defined) or other intangible assets, (g) any loan by the Buyer to, or any loan to the Buyer from, any officer, director, employee or stockholder of the Buyer, or any agreement or commitment therefore (other than travel and other advances in the ordinary course of business), (h) any damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the assets, property or business of the Buyer, (i) any repayment of any loan owed by the Buyer (including, without limitation, any loan owed to any stockholder of the Buyer), (j) any single capital expenditure in excess of USD $50,000 or any capital expenditures aggregating more than USD $250,000, (k) any material change in the accounting methods or practices followed by the Buyer, (l) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Buyer, except in the ordinary course of business and that is not material to the business, properties, prospects or financial condition of the Buyer, (m) any material change to a material contract or agreement by which the Buyer or any of its assets is bound or subject, (n) any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder of the Buyer, (o) to the Buyer's knowledge, any other event or condition of any character that might materially and adversely affect the business, properties, prospects or financial condition of the Buyer , (p) any resignation or termination of employment of any officer or key employee of the Buyer, or (q) any arrangement or commitment by the Buyer to do any of the things described in this Section 5.7. 5.8 TITLE; CONDITION OF PROPERTY. (a) Except as set forth in Section 5.8 of the Buyer's Disclosure Schedule, the Buyer has good title to all of its property and assets, real, personal or mixed, tangible or intangible, free and clear of all liens, security interests, charges and other encumbrances of any kind. (b) Without material exception, all assets used in the Buyer business are in good operating condition and repair and suitable for use in the operation of such business, and none of such assets that (singly or when aggregated with other assets) is material to the business of the Buyer is obsolete. 5.9 CERTAIN CONTRACTS AND ARRANGEMENTS. Except as set forth in Section 5.9 of the Buyer's Disclosure Schedule (with true and correct copies delivered to the Investor), the Buyer is not a party or subject to or bound by: (a) any plan or contract providing for collective bargaining or the like, or any contract or agreement with any labor union; (b) any contract, lease or agreement creating any obligation of the Buyer (contingent or otherwise) to pay to any third party USD $100,000 or more with respect to any single such contract or agreement; 24 (c) any contract or agreement for the sale, license, lease or disposition of products or services in excess of USD $100,000; (d) any contract containing covenants directly or explicitly limiting the freedom of the Buyer to compete in any line of business or with any person or entity; (e) any license agreement (as licensor or licensee); (f) any contract or agreement for the purchase of any leasehold improvements, equipment or fixed assets for a price in excess of USD $100,000; (g) any indenture, mortgage, promissory note, loan agreement, guaranty or other agreement or commitment for borrowing in excess of USD $100,000 or any pledge or security arrangement; (h) any material joint venture, partnership, or manufacturing agreement; (i) any endorsement or any other advertising, promotional or marketing agreement; (j) any employment contracts, or agreements with officers, directors, employees or stockholders of the Buyer or persons or organizations related to or affiliated with any such persons; (k) any pension, profit sharing, retirement (other than the Buyer's 401(k) plan), stock option, phantom stock or other equity incentive plans; (l) any arrangement relating to any royalty payments to employees, customers or independent contractors based on the sales volume of the Buyer; (m) any acquisition, merger or similar agreement; or (n) any contract with a governmental body under which the Buyer may have an obligation for renegotiation. Except as set forth in Section 5.9 of the Buyer's Disclosure Schedule, (i) each of the Buyer's contracts and commitments is in full force and effect and is valid, binding and enforceable in accordance with its terms as to the Buyer and, to the knowledge of the Buyer, as to each other party thereto; (ii) there exists no material breach or material default (or event that with notice or lapse of time would constitute a material breach or material default) on the part of the Buyer or, to the knowledge of the Buyer, on the part of any other party under any of the Buyer's contracts or commitments, except to the extent that any such breach or default would not have a Material Adverse Effect; (iii) the Buyer has not received a written notice of termination or default under any of the Buyer's contracts or commitments; and (iv) as of the date of this Agreement, no party to an agreement under which the Buyer acquired a substantial portion of its assets has asserted any claim for indemnification under such agreement. The Buyer has not engaged in the past three (3) months in any discussion (i) with any representative of any corporation or corporations regarding the merger of the Buyer with or into any such corporation or corporations, (ii) with any representative of any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Buyer or a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Buyer would be disposed of, or (iii) regarding any other form of liquidation, dissolution or winding up of the Buyer. 25 5.10 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS. Except as set forth in Section 5.10 of the Buyer's Disclosure Schedule: (a) The Buyer has the right to use, sell, and license the Intellectual Property material to the conduct of its business as presently conducted, including without limitation all rights to the Buyer name "Lineo" and to the trademarks and the product name "Embedix" (the "Buyer Rights"), free and clear of the rights of all others. (b) The business of the Buyer as presently conducted, the products as marketed or sold and the provision of services by the Buyer do not violate and will not violate any agreements that the Buyer has with any third party or infringe any patent, trademark, service mark, copyright or trade secret or any other Intellectual Property of any third party. (c) No claim is pending or threatened against the Buyer nor has the Buyer received any notice or claim from any person asserting that any of the Buyer's present or contemplated activities infringe or may infringe any Intellectual Property of such person, and the Buyer is not aware of any infringement by any other person of any of the Buyer Rights. (d) Each current and former employee of the Buyer, and each of the Buyer's consultants and independent contractors involved in development of any of the Buyer Rights, has executed an agreement regarding confidentiality, proprietary information and assignment of inventions and copyrights to the Buyer, and none of such employees, consultants or independent contractors is in violation of any agreement or in breach of any agreement or arrangement with former or present employers relating to proprietary information or assignment of inventions. The Buyer has taken all reasonable steps to protect all data, information, ideas, concepts, know-how and materials that the Buyer treats as trade secrets, and all other confidential information and Intellectual Property of the Buyer, which are not part of the public domain or knowledge, nor, to the best knowledge of the Buyer, have they been used, divulged or appropriated for the benefit of any person other than the Buyer or otherwise to the detriment of the Buyer. (e) No royalties or other amounts are payable by the Buyer to persons by reason of the ownership or use of the Intellectual Property of the Buyer. (f) No third party has claimed or, to the best of the Buyer's knowledge, has reason to claim that any person employed by or affiliated with the Buyer has (a) violated or may be violating any of the terms or conditions of his or her employment, non-competition, non-disclosure, non-solicitation or inventions agreement with such third party, (b) disclosed or may be disclosing or utilized or may be utilizing any Intellectual Property, trade secret or proprietary information or documentation of such third party, or (c) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees. 5.11 LITIGATION. There is no litigation or governmental proceeding or investigation pending or threatened against the Buyer or affecting any of its properties or assets or against any officer, director or key employee of the Buyer in his or her capacity as an officer, director or employee of the Buyer, which litigation, proceeding or investigation is reasonably likely to have a Material Adverse Effect, or which may call into question the validity or hinder the enforceability of this Agreement or any other agreements or transactions contemplated hereby; nor has there occurred any event nor does there exist any condition on the basis of which any such litigation, proceeding or investigation might be properly instituted or commenced. Neither the Buyer nor any of its subsidiaries is a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There 26 is no action, suit, proceeding or investigation by the Buyer or any of its subsidiaries currently pending or which the Buyer or any of its subsidiaries intends to initiate. 5.12 TAX MATTERS. The Buyer has filed all federal, state, local and foreign income, excise and franchise tax returns, real estate and personal property tax returns, sales and use tax returns and other tax returns required to be filed by it where the failure to file such returns would have a Material Adverse Effect, and has paid all taxes owing by it, except taxes which have not yet accrued or otherwise become due, for which adequate provision has been made in the pertinent financial statements referred to in Section 5.5 above or which will not have a Material Adverse Effect. The filed tax returns and reports are true and correct in all material respects. All taxes and other assessments and levies which the Buyer is required to withhold or collect have been withheld and collected and have been paid over to the proper governmental authorities except where the failure to withhold or collect and pay over would not have a Material Adverse Effect With regard to the federal income tax returns of the Buyer, the Buyer has never received notice of any audit or of any proposed deficiencies from the Internal Revenue Service. There are in effect no waivers of applicable statutes of limitations with respect to any taxing owed by the Buyer for any year. Neither the Internal Revenue Service nor any other taxing authority is now asserting or, to the knowledge of the Buyer, threatening to assert against the Buyer any deficiency or claim for additional taxes or interest thereon or penalties in connection therewith. 5.13 EMPLOYEE BENEFIT PLANS. The Buyer does not maintain or contribute to any employee benefit plan, stock option, bonus or incentive plan, severance pay policy or agreement, deferred compensation agreement or any similar plan or agreement (an "Employee Benefit Plan") other than the Plan and the Employee Benefit Plans identified and described in Section 5.13 of the Buyer's Disclosure Schedule. The terms and operation of each Employee Benefit Plan comply in all material respects with all applicable laws and regulations relating to such Employee Benefit Plan. There are no unfunded obligations of the Buyer under any retirement, pension, profit-sharing, deferred compensation plan or similar program. The Buyer is not required to make any payments or contributions to any Employee Benefit Plan pursuant to any collective bargaining agreement, and all Employee Benefit Plans are terminable at the discretion of the Buyer without material liability to the Buyer upon or following such termination. The Buyer has never maintained or contributed to any Employee Benefit Plan providing or promising any health or other welfare benefits (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) to terminated employees, except for benefits mandated by applicable law, including, but not limited to, Section 4980B of the Internal Revenue Code of 1986, as amended, and Part 6 of Subtitle B of Title I of ERISA. 5.14 LABOR LAWS. The Buyer employs approximately 105 employees and generally enjoys good employer-employee relationships. The Buyer is not delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed for it as of the date hereof or amounts required to be reimbursed to such employees. The Buyer is in compliance in all material respects with all applicable laws and regulations respecting labor, employment, fair employment practices, terms and conditions of employment, and wages and hours. There are no charges of employment discrimination or unfair labor practices or strikes, slowdowns, stoppages of work or any other concerted interference with normal operations existing, pending or, to the knowledge of the Buyer, threatened against or involving the Buyer. 5.15 EMPLOYEES. Section 5.15 of the Buyer's Disclosure Schedule contains a list of all managers, employees and consultants of the Buyer who, individually, have received compensation from the Buyer for the fiscal year of the Buyer ended October 31, 1999, in excess of $100,000. In each case, Section 5.15 of the Disclosure Schedule includes the current job title, years of service with the Buyer and aggregate annual compensation and benefits of each such individual. To the knowledge of the Buyer, no key employee of the Buyer has any plan or intention to terminate his or her employment with the Buyer. 27 The Buyer has complied in all material respects with the immigration laws of the United States with respect to the hiring, employment and engagement of all of its employees and consultants who are not United States citizens, and, to the knowledge of the Buyer, the immigration or residency status of each of such employees and consultants is sufficient to allow such employees and consultants to remain lawfully employed or engaged by the Buyer. The employment of each officer and employee of the Buyer is terminable at the will of the Buyer. The Buyer is not a party to or bound by any currently effective employment contract. 5.16 HAZARDOUS WASTE, ETC. No hazardous wastes, substances or materials or oil or petroleum products have been generated, transported, used, disposed, stored or treated by the Buyer, and no hazardous wastes, substances or materials or oil or petroleum products have been released, discharged, disposed, transported, placed or otherwise caused to enter the soil or water in, under or upon any real property owned, leased or operated by the Buyer. 5.17 BUSINESS; COMPLIANCE WITH LAWS. The Buyer has all necessary franchises, permits, licenses and other rights and privileges necessary to permit it to own its property and to conduct its business as it is presently or contemplated to be conducted and is not in default in any material respect under any of such franchises, permits, licenses and other similar rights and privileges. The Buyer is currently and has heretofore been in compliance in all material respects with all federal, state, local and foreign laws and regulations. 5.18 INVESTMENT BANKING; BROKERAGE. There are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transaction contemplated by this Agreement payable by the Buyer or based on any arrangement or agreement made by or on behalf of the Buyer or any of the stockholders. 5.19 INSURANCE. The Buyer has fire, casualty, product liability, workers' compensation and business interruption and other insurance policies, with extended coverage, sufficient in amount to allow it to replace any of its material properties which might be damaged or destroyed or sufficient to cover liabilities to which the Buyer may reasonably become subject, and such types and amounts of other insurance with respect to its business and properties, on both a per occurrence and an aggregate basis, as are customarily carried by persons engaged in the same or similar business as the Buyer. There is no default or event which could give rise to a default under any such policy. 5.20 TRANSACTIONS WITH AFFILIATES. There are no loans, leases, contracts or other transactions (directly or indirectly) between the Buyer and any Affiliate of the Buyer or any Family Member or Associate of any such Affiliate, and there have been no such transactions within the past twelve (12) months except as set forth in Section 5.20 of the Buyer's Disclosure Schedule. To the best of the Buyer's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Buyer is affiliated or with which the Buyer has a business relationship, or any firm or corporation that competes with the Buyer, except that employees, officers or directors of the Buyer and members of their families may own stock in publicly traded companies that may compete with the Buyer. 5.21 SUPPLIERS. Section 5.21 of the Buyer's Disclosure Schedule sets forth each supplier of the Buyer who supplied more than five percent (5%) of the Buyer's supplies or materials for the fiscal year ended October 31, 1999 and each supplier who the Buyer believes may supply for more than five percent (5%) of the Buyer's supplies or materials for the fiscal year ended October 31, 2000 (each a "Supplier" and collectively the "Suppliers"). The relationships of the Buyer with its Suppliers are good commercial working relationships. No Supplier of the Buyer has canceled or otherwise terminated its relationship with the Buyer, or has during the last 12 months decreased materially its services, supplies or 28 materials to the Buyer. No Supplier has, to the knowledge of the Buyer, any plan or intention to terminate, cancel or otherwise materially and adversely modify its relationship with the Buyer or to decrease materially or limit its services, supplies or materials to the Buyer. 5.22 CERTAIN EVENTS. (a) During the past ten (10) years, neither the Buyer nor any of the officers or directors of the Buyer has had a petition under the Bankruptcy Reform Act of 1978, as amended, or any state insolvency law, filed by or against any of them which has not as of the date of this Agreement been dismissed. (b) During the past ten (10) years, neither the Buyer nor the officers or directors of the Buyer has been convicted in a criminal proceeding or is a named subject of a criminal proceeding which is presently pending (excluding traffic violations and other minor offenses). (c) During the past ten (10) years, neither the Buyer nor the officers or directors of the Buyer has been, or is, the subject of any order, judgment or decree, whether or not subsequently reversed, suspended or vacated, of any court or any administrative agency, requiring the payment of money damages in excess of USD $100,000 or permanently or temporarily enjoining any of them from, or otherwise limiting any of their abilities to engage in, any type of business practice. 5.23 REGISTRATION RIGHTS. Except as disclosed in Section 5.23 of the Buyer's Disclosure Schedule, the Buyer has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. 5.24 DISCLOSURE. The representations and warranties made or contained in this Agreement, the exhibits hereto and the certificates and statements executed or delivered in connection herewith, and the information concerning the business of the Buyer delivered to the Sellers in connection with or pursuant to this Agreement, when taken together, do not and shall not contain any untrue statement of a material fact and do not and shall not omit to state a material fact required to be stated therein or necessary in order to make such representations, warranties or other material not misleading in light of the circumstances in which they were made or delivered. There have been no events or transactions or information which has come to the attention of the management of the Buyer having a direct impact on the Buyer or its assets, liabilities, financial condition, business, results of operations or prospects which, in the reasonable judgment of such management, could be expected to have a Material Adverse Effect. 5.25 CORPORATE DOCUMENTS. The Certificate of Incorporation and Bylaws of the Buyer have been made available to the Sellers. The minute books of the Buyer containing minutes of all meetings of directors and stockholders and all actions by written consent without a meeting by the directors and stockholders since the date of incorporation have been made available to the Investor and reflect accurately in all material respects all actions by the directors (and any committee of directors) and stockholders with respect to all transactions referred to in such minutes. The stock transfer ledgers and other similar records of the Buyer as made available to the Sellers prior to the execution of this Agreement accurately reflect all record transfers prior to the execution of this Agreement in the capital stock of the Buyer. 5.26 OFFERING. Subject in part to the truth and accuracy of the Investor's representations and warranties set forth in this Agreement, the offer, sale and issuance of the Securities as contemplated by this Agreement are exempt from the registration requirements of the Securities Act and any applicable state securities laws, and neither the Buyer nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 29 5.27 INVESTMENT CORPORATION. The Buyer is not and shall not become an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Corporation Act of 1940, as amended (the "1940 Act"). In the event the Buyer breaches the foregoing, the Buyer shall forthwith notify the Investor and shall take immediate corrective action to remedy such breach. 5.28 SUPPLEMENTAL REMUNERATION. The Buyer has not and shall not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise to any investor or other stockholder of the Buyer as consideration for or as an inducement to entering into by any investor or other stockholder of the Buyer of any waiver or amendment of any of the terms and provisions of the agreements or the Certificate of Incorporation which affects any such party's rights as an investor or stockholder, unless such remuneration is concurrently paid, on the same terms, ratably to all investors or stockholders whether or not such investors or stockholders grant such waiver or agree to such amendment. 5.29 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Buyer is required in connection with the consummation of the transactions contemplated by this Agreement other than as may be required to secure an exemption from qualification of the offer and sale of the Series C Preferred Shares under the Securities Act and applicable state securities laws. ARTICLE 6. COVENANTS OF SELLERS, BUYER AND CORPORATION 6.1 INVESTIGATION OF BUSINESS; ACCESS TO PROPERTIES AND RECORDS. Prior to the Closing or termination of this Agreement, the Corporation shall give to the Buyer and its legal counsel, accountants, lenders and other representatives reasonable access during normal business hours to all of the Corporation's and the Subsidiaries' properties (including books, contracts, commitments and records) for inspection (including financial, legal and environmental), and shall permit them to consult with each Seller and with management employees of the Corporation and the Subsidiaries to allow the Buyer full opportunity to make such investigations as are necessary to review the affairs of the Corporation and the Subsidiaries. If, prior to Closing, the Buyer discovers any breach by any Seller or the Corporation of any representation or warranty contained in this Agreement or any circumstances or condition that would constitute such a breach, the Buyer will notify the Sellers promptly of such facts known to the Buyer and the nature of the breach. 6.2 REGULATORY AND OTHER AUTHORIZATIONS. (a) Subject to the limitations set forth in this Section 6.2, each of the Sellers, the Corporation and the Buyer shall take all reasonable actions to obtain all Permits of all Authorities that may be or become necessary for the execution and delivery of this Agreement and the performance of their respective obligations pursuant to this Agreement (which actions shall include, without limitation, furnishing all information and obtaining all approvals required and will cooperate fully with one another in promptly seeking to obtain all such Permits. Each party to this Agreement agrees to provide information requested by any Authority or the other party in connection with obtaining such Permits, and agrees not to take any action that will have the effect of delaying, impairing or impeding the receipt of any required Permits. 30 (b) Notwithstanding anything in Section 6.2(a) to the contrary, the Corporation shall coordinate on behalf of all parties the obtaining of all such Permits. The Buyer and the Corporation shall by mutual agreement determine the substance of all communications and filings made by the parties with any Authority regarding the transactions contemplated by this Agreement, including without limitation: (i) the extent to which it may be necessary to resolve or settle any concerns on the part of any Authority regarding the legality under any law of the transactions contemplated by this Agreement by entering into negotiations, providing information, making proposals, entering into and performing agreements or submitting to judicial or administrative orders, agreeing to any restrictions on the conduct of business after Closing by the Buyer or the Corporation or any Subsidiary, or selling or otherwise disposing of, or holding separate (through the establishment of a trust or otherwise), particular assets or categories of assets or businesses of the Buyer, including, after the Closing, the Corporation or any Subsidiary; (ii) contesting the entry in a judicial or administrative proceeding brought under any local law by any Authority or any other Person of any permanent or preliminary injunction or other order that would make consummation of the transactions contemplated by this Agreement unlawful or would prevent or delay the transactions, including, without limitation, taking the steps contemplated by Section 6.2(b)(i); (iii) if such an injunction or order has been issued in such a proceeding, taking any and all steps, including, without limitation, appeal thereof, the posting of a bond or the steps contemplated by Section 6.2(b)(i), necessary to vacate, modify or suspend such injunction or order so as to permit the consummation of the transaction on the schedule contemplated by this Agreement; (iv) responding to and complying with any request or subpoena for additional information by any Authority; and (v) determining any other appropriate response or initiative to avoid or eliminate impediments under any law that may be asserted by any Authority or any other Person to the consummation of the transactions contemplated by this Agreement. 6.3 REASONABLE EFFORTS; CONSENTS AND NOTIFICATIONS. Subject to the terms and conditions provided in this Agreement, each Seller, the Corporation and the Buyer each will use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement and to cooperate with one another in connection with the foregoing, including using all reasonable efforts: (i) to obtain all necessary waivers, consents, releases and approvals from other parties to loan agreements, Leases, guarantees and other Contracts; (ii) to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to this Agreement to consummate the transactions contemplated by this Agreement; and to fulfill all conditions to this Agreement. 6.4 FURTHER ASSURANCES. The Sellers, the Corporation and the Buyer agree that, from time to time, at or after the Closing Date, each of them will execute and deliver such further instruments of conveyance and transfer and take such other action as may be reasonably necessary to carry out the purposes of this Agreement. 31 6.5 CONDUCT OF BUSINESS OF THE CORPORATION AND SUBSIDIARIES. From the date of this Agreement through the Closing, except as otherwise provided by this Agreement, disclosed in the Corporation's Disclosure Schedule or consented to or approved by the Buyer in writing, the Corporation covenants and agrees that (and the Sellers covenant and agree as expressly noted below that): (i) the Corporation and the Subsidiaries shall operate their businesses in the ordinary and usual course in all material respects in accordance with past practices; (ii) the Corporation (and the Sellers acting with respect to the shares of the Corporation) shall not, and no Subsidiary shall, issue, purchase or agree to purchase, sell or agree to issue or sell: (A) any of its capital shares; or (B) any securities convertible into or evidencing the right to purchase, or options with respect to, or rights to subscribe for, any of its capital shares; (iii) the Corporation shall not, and no Subsidiary shall, (and the Sellers acting with respect to the capital shares of the Corporation shall not) amend its Articles of Incorporation or Bylaws ( or other governance documents) or declare or pay any dividend (whether in cash or property) or declare or effect any stock split, reclassification or other change in capital structure; (iv) the Corporation and the Subsidiaries shall maintain their respective books and records in the usual, regular and ordinary manner consistent with past practice; (v) the Corporation and the Subsidiaries shall comply in all material respects with all applicable laws; and (vi) the Corporation shall not, and no Subsidiary shall: (A) enter into or consummate any joint venture, partnership or other similar arrangement or form any other new arrangement for the conduct of its business or acquire or enter into any agreement or letter of intent to acquire, by merger, consolidation, or purchase of stock or assets, any business, entity or Person; (B) purchase any material assets or securities of any Person, except for asset purchases in the ordinary course of its business for individual amounts not in excess of Twenty Five Thousand Dollars (USD $25,000); (C) enter into any transactions, commitments or obligations outside the ordinary course of business or incur any indebtedness, including notes payable, current maturities of long-term debt or capital lease obligations, except for trade payables and other normal items accrued as current liabilities; (D) take or agree to take any action prohibited by this Section 6.5 or that would be reasonably likely to cause any representation or warranty made by the Corporation or any Seller in this Agreement to be untrue or inaccurate in any material respect at the Closing Date; (E) take any action to amend or terminate any Benefit Plan or to adopt any other plan, program, arrangement or practice providing benefits for or compensation to or on 32 behalf of its employees or former employees before the Closing Date, except as required by applicable law; (F) increase the base compensation or bonus, incentive, severance or other benefit plan of any employee, consultant or agent, except for increases in base annual salaries in the ordinary course of business; or (G) grant any Encumbrance on any asset, except for Permitted Encumbrances. 6.6 PRESERVATION OF BUSINESS. Subject to the terms and conditions of this Agreement and except as otherwise provided by this Agreement or disclosed in the Corporation's Disclosure Schedule, the Corporation and the Subsidiaries shall use reasonable efforts to: (i) preserve the business of the Corporation and the Subsidiaries and keep generally available to the Corporation and the Subsidiaries the services of the employees, officers, consultants, contractors and agents of the Corporation and the Subsidiaries; (ii) preserve generally the goodwill of customers, suppliers, creditors and others having business relations with the Corporation or any Subsidiary; and (iii) continue performance in the ordinary course of their respective obligations under all Contracts to which the Corporation or any Subsidiary is a party or which binds it or its assets. In connection with the operation of the Business between the date of this Agreement and the Closing, the Corporation shall confer in good faith on a regular and frequent basis with one or more designated representatives of the Buyer (which representatives shall have been designated by the Buyer to the Corporation in writing) with respect to material matters affecting or impacting the operations of the Corporation or any Subsidiaries and shall consult in general with respect to the ongoing operations of the Corporation and the Subsidiaries. The Corporation and the Sellers shall cooperate with the Buyer in its efforts to communicate with the employees, consultants, professionals, agents and others having business relationships with the Corporation regarding the transition of the Corporation's business to ownership by the Buyer. 6.7 ANNOUNCEMENTS. Neither the Sellers, the Corporation, the Subsidiaries or the Buyer, nor any agent or any Affiliate of any of the foregoing, shall make any public statements, including, without limitation, any press releases or other public disclosure, with respect to this Agreement and the transactions contemplated by this Agreement without the prior consent of the Buyer and the Corporation (which consent may not be unreasonably withheld or delayed), except as may be required by law or advisable under the rules of any securities exchange to which the Buyer is subject. 6.8 NO SOLICITATION. From the date of this Agreement to the earlier of (i) the Closing Date or (ii) the termination of this Agreement in accordance with its terms, the Sellers agree that (A) they will not, and (B) they will not authorize or permit any officer, director or employee of the Corporation or any Subsidiary, or any investment banker, attorney, financial advisor, accountant or other Person retained by any Seller or the Corporation or any Subsidiary, directly or indirectly (including by way of furnishing any information) to: (1) solicit, initiate, assist, encourage or accept any Takeover Proposal or any inquiries relating to a Takeover Proposal or to make any proposals which could reasonably be expected to lead to any Takeover Proposal relating to the Corporation or any Subsidiary; (2) engage in any negotiations with respect to, or otherwise attempt to consummate, a Takeover Proposal; (3) provide any public or nonpublic 33 information concerning the Corporation or any Subsidiary to any Person in connection with any Takeover Proposal or to any Person whom any Seller or the Corporation or any Subsidiary knows or has reason to believe is in the process of planning or considering a Takeover Proposal; or (4) reach any agreement or understanding for or with respect to any Takeover Proposal. 6.9 RIGHT TO UPDATE AND CURE. (a) From time to time prior to the Closing, the Buyer, the Corporation and the Sellers shall update or amend their respective disclosure of any matter set forth or required to be set forth in their respective Disclosure Schedules to reflect any changes in (or any inaccuracies in) such Disclosure Schedule. For purposes of Section 7.1 or Section 8.1, any material change in a disclosure, representation or warranty made by the Corporation or any Seller shall entitle the Buyer to terminate this Agreement, unless the Buyer consents in writing to the material change or fails to object within 15 days of its receipt of written notice of such change. Notwithstanding anything in this Agreement to the contrary, any party that receives a material change in the disclosures may defer the Closing Date for up to five Business Days after receipt of such change, provided that the Closing Date shall not under any circumstances be deferred beyond the deadline specified in Section 10.1 hereof. (b) Prior to the Closing, each of the parties to this Agreement agrees to notify the other parties promptly in writing of, and contemporaneously will provide the other parties with true and complete copies of, any and all information or documents relating to, and will use all commercially reasonable efforts to cure before Closing, any event, transaction or circumstance occurring after the date of this Agreement that causes or will cause any covenant or agreement under this Agreement to be breached or that renders or will render untrue any representation or warranty contained in this Agreement as if the same were made on or as of the date of such event, transaction or circumstance. Each of the parties to this Agreement also agrees to notify the other parties promptly in writing of, and will use all commercially reasonable efforts to cure, before the Closing, any violation or breach of any representation, warranty, covenant or agreement made in this Agreement, whether occurring or arising before, on or after the date of this Agreement. 6.10 MARKET STAND-OFF AGREEMENT. In connection with a public offering by the Buyer, the Sellers if requested in good faith by the Buyer and the managing underwriter of the public offering, shall agree not to sell or otherwise transfer or dispose of any securities of the Buyer held by them (except for any securities sold pursuant to such registration statement) for a period following the effective date of the applicable registration statement that in no event shall exceed 180 days. In order to enforce the foregoing, the Buyer may impose stop-transfer instructions with respect to the Lineo Shares held by such Seller (and the shares of securities of every other person subject to the foregoing restriction) until the end of such period. 6.11 SECURITIES LAW COMPLIANCE. (a) Sellers agree that all offers and sales of the Lineo Shares prior to one year after the Closing shall be made only in accordance with the provisions of Rule 903 or Rule 904 under the Securities Act, pursuant to registration of the Lineo Shares under the Securities Act; or pursuant to an available exemption from the registration requirements of the Securities Act; and not to engage in hedging transactions with regard to the Lineo Shares prior to one year after the Closing unless in compliance with the Securities Act. (b) Sellers acknowledge that the Lineo Shares have not been registered under the Securities Act and may not be offered or sold in the United States or to U.S. Persons (other than distributors) unless the Lineo Shares are registered under the Securities Act, or an Exemption from the 34 registration provisions of the Securities Act is available. Sellers further acknowledge that hedging transactions involving the Lineo Shares may not be conducted unless in compliance with the Securities Act. ARTICLE 7. CONDITIONS TO BUYER'S OBLIGATION TO CLOSE The Buyer's obligation to consummate the Share Purchase shall be subject to the satisfaction on or prior to the Closing Date of all of the following conditions (any of which may be waived in writing by the Buyer in its sole discretion): 7.1 REPRESENTATIONS; WARRANTIES AND COVENANTS OF THE CORPORATION AND THE SELLERS. Subject to the second sentence of this Section 7.1, the representations and warranties of the Corporation and the Sellers in this Agreement shall be true and correct on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date, except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true and correct as of such date or time). The Closing condition contained in this Section 7.1, as it relates to representations and warranties, shall be satisfied unless the inaccuracies in and breaches of such representations and warranties, without reference to materiality qualifiers, have or are likely to have an adverse effect on the Corporation and its Subsidiaries, taken as a whole, or on the Buyer's ownership of the Corporation Shares, of Fifty Thousand Dollars (USD$50,000) or more. The covenants and agreements of the Corporation and the Sellers to be performed on or before the Closing Date in accordance with this Agreement shall have been performed in all material respects. 7.2 FILINGS; CONSENTS; WAITING PERIODS. All registrations, filings, applications, notices, consent, approvals, waivers, authorizations, qualifications and orders to be filed, made or obtained by the Buyer, the Corporation or any Seller in order to consummate the transactions contemplated by this Agreement (including, without limitation, any filings or actions required shall have been filed, made or obtained. The Sellers and the Corporation and the Subsidiaries shall have obtained the consent of the requisite parties to the agreements identified in Sections 3.6, 3.15 and 3.16 of the Corporation Disclosure Schedule, which consent shall be in form and substance reasonably satisfactory to the Buyer. The Corporation shall have obtained written enforceable waivers with respect to all existing breaches and any continuing breaches (including any breaches anticipated to continue in the ordinary course of the business of the Corporation and the Subsidiaries after the Closing) of agreement with respect to those Contracts and Leases identified in Sections 3.15 and 3.16 of the Corporation Disclosure Schedule, which waivers shall be in form and substance satisfactory to the Buyer. 7.3 NO INJUNCTION. There shall be no injunction, restraining order or decree of any nature of any Authority or other Person that is in effect and that (i) restrains, prohibits or makes illegal the consummation of the Share Purchase, or (ii) imposes conditions on the consummation of the Share Purchase not otherwise provided for in this Agreement. 7.4 CLOSING DELIVERIES. The Sellers or the Corporation, as appropriate, shall have delivered or caused to be delivered to the Buyer the following: (i) True and correct copies of the Articles of Incorporation of the Corporation (or other organizational document) and each Subsidiary certified as of a date not more than thirty (30) calendar days preceding the Closing Date, and true and correct copies of the Bylaws of the Corporation and each Subsidiary as in effect on the day prior to Closing, certified by the Secretary of the Corporation; 35 (ii) Certificates of good standing, current within thirty (30) calendar days, relating to the Corporation and each Subsidiary from their respective jurisdiction of incorporation and each other jurisdiction in which the Corporation or any Subsidiary is qualified to do business as a foreign corporation; (iii) A resolution of the Board of Directors of the Corporation authorizing the execution, delivery and performance by the Corporation of this Agreement and the consummation of the transactions contemplated herein, certified by the Secretary of the Corporation as remaining in full force and effect on the Closing Date; (iv) A certificate of the Secretary of the Corporation attesting to the incumbency of the officers of the Corporation executing this Agreement or any other certificates or agreements delivered by the Corporation to the Buyer at or prior to the Closing; (v) The common seal (if any), asset register, all other registers, management accounts, budgets and all books of accounts, ledgers, records, documents and other business papers of any kind of the Corporation, certificates of registration of any business names, certificates of title (if any) for any Corporation assets, executed and stamped originals and copies of any property leases, contracts, certificates of registration and other documents of title for any intellectual property rights, cheque books of the Corporation, a list of all bank accounts maintained by the Corporation and the signatories on those accounts maintained by the Corporation and the signatories on those accounts, and akey to business premise owned or leased by the Corporation. Please note that in respect of the items referred to in this sub-paragraph, delivery will be made by leaving the items in a safe and appropriate place at the Corporation's principal place of business or at any other place as the parties may agree. (vi) such written and duly executed resignations with effect from the Closing Date from any directors, secretary, or auditor of the Corporation as the Buyer may nominate in writing prior to the Closing Date. (vii) minutes of a meeting of the directors of the Corporation at which: (a) persons nominated in writing (if any) for the purpose by the Buyer and having consented in writing to the appointment will be appointed directors of the Corporation; (b) the person nominated in writing (if any) for the purpose by the Buyer and having consented in writing to the appointment will be appointed as secretary of the Corporation; (c) a resolution that the directors of the Corporation accept the resignations (if any) referred to above; (d) if requested by the Buyer, a resolution that the directors resolved to change the bank account signatories to persons nominated bythe Buyer; and (e) a resolution of the directors of the Corporation to register the share transfers referred to in paragraph 2.3 of this agreement subject to those transfers being stamped. 36 (viii) any waiver, consent, letter of non-crystallisation or other document necessary to give the Buyer full legal and beneficial ownership of the Corporation Shares. 7.5 ABSENCE OF LITIGATION. No claim, action, suit, arbitration, investigation, inquiry or other proceeding by any Authority or other Person with respect to this Agreement or the transactions contemplated hereby shall be threatened or pending on the Closing Date and, up to the Closing, no party to this Agreement shall have been advised by any Authority (which advisory has not been officially withdrawn by such Authority on or prior to the Closing Date) that such Authority is reviewing this Agreement or the transactions contemplated hereby to determine whether to file or commence any litigation with respect to any aspect of this Agreement or the transactions contemplated hereby. 7.6 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS. There shall not have been made or threatened by any Person any claim asserting that such Person (a) is the holder or the beneficial owner of, or has the right to acquire or to obtain beneficial ownership of, any stock of, or any other voting, equity, or ownership interest in, the Corporation or any Subsidiary, or (b) is entitled to all or any portion of the Purchase Price payable for the Corporation Shares. 7.7 NO MATERIAL ADVERSE EFFECT. Before the Closing Date, there shall have been no material change in the assets or liabilities, the business or condition (financial or otherwise), the results of operations or prospects of the Corporation or any Subsidiary, whether as a result of any legislative or regulatory change, revocation of any license or right to do business, fire, explosion, accident, casualty, labor trouble, flood, drought, riot, storm, condemnation or act of God or other public force or otherwise, that results in a Material Adverse Effect. 7.8 GENERAL RELEASE. The Corporation, the Buyer and each of the employees of the Corporation shall execute and deliver a Deed of Release in the form attached hereto as EXHIBIT C. 7.9 TAX FILING CODE SECTION 338(g) ELECTION. The Corporation, Buyer and Seller shall prepare and File an election under Section 338(g) of the Code to treat this transaction as an asset purchase. 7.10 ACTIONS PENDING REGISTRATION. On Closing, beneficial ownership in the Corporation Shares will pass to the Buyer and the Sellers irrevocably appoint the Buyer as their attorney for the purpose of casting votes at any general meeting of the Corporation up until the time the Corporation Shares are registered. Without limiting the generality of the foregoing, pending registration of the transfers of the Corporation Shares, the Sellers shall take all necessary and desirable action required and directed by the Buyer to exercise its rights in respect of those shares including: (a) attending and voting at the direction of the Buyer at any general meeting of shareholders of the Corporation; (b) executing such proxies or powers of attorney in such reasonable form required by the Buyer appointing the Buyer or its nominee to attend and vote at a particular general meeting or all general meetings of shareholders of the Corporation; (c) executing such written resolutions of shareholders of the Corporation as may be directed by the Buyer. 37 The Buyer indemnifies and will keep indemnified each Seller against all losses, costs, damages or other liabilities of any nature which the Seller may incur directly or indirectly, in whole or in part (and if in part to that extent) as a result of acting at the direction of the Buyer under this section 7.10. ARTICLE 8. CONDITIONS TO SELLERS' OBLIGATIONS TO CLOSE Each Seller's obligation to consummate the Share Purchase is subject to the satisfaction on or prior to the Closing Date of all of the following conditions (any of which may be waived in writing by such Seller, in its sole discretion): 8.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BUYER. The representations and warranties of the Buyer in this Agreement shall be true and correct on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true and correct as of such date, or time), and the covenants and agreements of the Buyer to be performed on or before the Closing Date in accordance with this Agreement shall have been performed in all material respects. 8.2 FILINGS; CONSENTS; WAITING PERIODS. All registrations, filings, applications, notices, consents, approvals, waivers, authorizations, qualifications and orders to be filed, made or obtained by the Buyer, the Corporation or any Seller in order to consummate the transactions contemplated by this Agreement shall have been filed, made or obtained. The Buyer shall have obtained the consents identified in Section 5.3 of the Buyer Disclosure Schedule, which consents shall be in form and substance reasonably satisfactory to the Corporation. 8.3 NO INJUNCTION. The condition set forth in Section 7.3 shall have been satisfied. 8.4 CLOSING DELIVERIES. The Buyer shall have delivered or caused to be delivered to the Corporation's legal counsel (in the case of clauses (i), (ii) and (iii) below) and to each Seller (in the case of clause (iv) below) the following: (i) Certificates of good standing, current within thirty (30) calendar days, relating to the Buyer from its jurisdiction of incorporation and each other jurisdiction in which the Buyer is qualified to do business as a foreign corporation; (ii) A certificate of the Secretary of the Buyer attesting to the incumbency of the officers of the Buyer executing this Agreement and any other certificates or agreements delivered by the Buyer to the Sellers at or prior to the Closing; (iii) A resolution of the Board of Directors of the Buyer authorizing the execution, delivery and performance by the Buyer of this Agreement and the consummation of the transactions contemplated herein, certified by the Secretary of the Buyer; and (iv) The Purchase Price payable in accordance with Section 2.3 to each Seller (as specified in Section 2.2) pursuant to this Agreement. 8.5 ABSENCE OF LITIGATION. The condition set forth in Section 7.5 shall have been satisfied. 38 8.6 NO MATERIAL ADVERSE EFFECT. Before the Closing Date, there shall have been no material change in the assets or liabilities, the business or condition (financial or otherwise), the results of operations or prospects of the Buyers or any Subsidiary, whether as a result of any legislative or regulatory change, revocation of any license or right to do business, fire, explosion, accident, casualty, labor trouble, flood, drought, riot, storm, condemnation or act of God or other public force or otherwise, that results in a Material Adverse Effect. ARTICLE 9. SURVIVAL; INDEMNIFICATION 9.1 INDEMNIFICATION. (a) If the Closing occurs, and subject to the limitations set forth in this Article 9, the Indemnifying Sellers, severally and not jointly (according to their pro-rata ownership of their respective Corporation Shares as set forth in EXHIBIT A) shall indemnify and hold harmless the Buyer and its Affiliates (collectively, the "Buyer Indemnitees") from and against and in respect of any and all loss, damage, diminution in value, liability, cost and expense, including reasonable attorneys' fees and amounts paid in settlement (collectively, the "Indemnified Losses"), suffered or incurred by any one or more of the Buyer Indemnitees by reason of, or arising out of: (i) any misrepresentation or breach of representation or warranty of the Corporation contained in this Agreement, the Corporation Disclosure Schedule, or any certificate, instrument, agreement or other writing delivered by or on behalf of the Corporation pursuant to this Agreement or in connection with the transactions contemplated herein, or the breach of any covenant or agreement of the Corporation contained in this Agreement, the Corporation Disclosure Schedule, or any certificate, instrument, agreement or other writing delivered to the Buyer by or on behalf of the Corporation pursuant to this Agreement or in connection with the transactions contemplated herein; (ii) any claim by any holder of options or warrants to purchase securities of the Corporation that such instruments were not either canceled as of the Closing Date or cancelable within 90 days of the Closing without any consideration payable by the Corporation; and (iii) any and all actions, orders, assessments, fees and expenses incident to any of the foregoing or incurred in investigating or attempting to avoid the same or to oppose the imposition thereof, or in enforcing this indemnification. (b) Each Seller, severally and not jointly, shall indemnify and hold harmless the Buyer Indemnitees from and against any Indemnified Losses caused by a breach of that Seller's representations, warranties or agreements set forth in this Agreement. For avoidance of doubt, no Seller shall have responsibility for a breach by any other Seller. (c) If the Closing occurs, and subject to the limitations set forth in this Article 9, the Buyer shall indemnify and hold harmless the Sellers and their Affiliates (collectively, the "Seller Indemnitees") from and against and in respect of any and all Indemnified Losses suffered or incurred by any one or more of the Seller Indemnitees by reason of, or arising out of: (i) any misrepresentation or breach of representation or warranty of the Buyer contained in this Agreement, the Buyer Disclosure Schedule, or any certificate, instrument, agreement or other writing delivered by or on behalf of the Buyer pursuant to this Agreement or in connection with the transactions contemplated herein, or the breach of any covenant or agreement of the 39 Buyer contained in this Agreement, the Buyer Disclosure Schedule, or any certificate, instrument, agreement or other writing delivered to the Sellers by or on behalf of the Buyer pursuant to this Agreement or in connection with the transactions contemplated herein; and (ii) any and all actions, orders, assessments, fees and expenses incident to any of the foregoing or incurred in investigating or attempting to avoid the same or to oppose the imposition thereof, or in enforcing this indemnification. (d) The party or parties entitled to indemnification under any provision of this Article 9 are sometimes collectively referred to herein as the "Indemnitees" and the party or parties obligated to indemnify under any provision of this Article 9 are sometimes collectively referred to herein as the "Indemnifying Parties". The Indemnifying Parties shall reimburse Indemnitees on demand for any Indemnified Losses suffered by the Indemnitees, based on the judgment of any court of competent jurisdiction or pursuant to a bona fide compromise or settlement of claims, demands or actions in respect of any Indemnified Losses, provided however that no third party claim may be settled without the prior written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. The Indemnifying Parties shall have the opportunity to defend at their expense any claim, action or demand for which the Indemnitees claim indemnity against the Indemnifying Parties, provided that: (i) the defense is conducted by reputable counsel approved by the Indemnitees, which approval shall not be unreasonably withheld or delayed; (ii) the defense is expressly assumed in writing within 15 days after written notice of the claim, action or demand is given to the Indemnifying Parties; and (iii) counsel for the Indemnitees may participate at all times and in all proceedings (formal and informal) relating to the defense, compromise and settlement of the claim, action or demand at the expense of the Indemnitees. (e) No claim shall be brought by any Indemnitee under this Article 9 for Indemnified Losses, and none of them shall be entitled to receive any payment with respect thereto, unless and until the aggregate amount of such claim(s) equals or exceeds USD$600,000, and the Indemnities will only be entitled to reimbursement hereunder for Indemnified Losses in excess of such USD$600,000 amount; provided, that any indemnified Losses arising from breaches of the representations set forth in Section 4.1, 4.2, 4.3 and 4.4 or pursuant to subsection (a)(ii) above shall be reimbursed from the first dollar of loss. Anything to the contrary notwithstanding, (A) with respect to the representations and warranties set forth in Article 3, (i) each Indemnifying Seller will only be liable to the Buyer Indemnitees for the pro rata portion of such Indemnified Losses in accordance with the percentages set forth opposite that Indemnifying Seller's name on Exhibit A; (ii) no Indemnifying Seller shall be liable to the Buyer Indemnitees for Indemnified Losses in excess of the percentages set forth opposite that Indemnifying Sellers name on Exhibit A; (iii) the Indemnifying Sellers shall not be liable to the Buyer Indemnitees under this Article 9 to reimburse Indemnified Losses, if any, in excess in the aggregate amount of USD$3,000,000 (which equals a USD$3,600,000 maximum after taking into account the aforementioned USD$600,000 deductible); provided, however, that such limitation shall not apply to any loss suffered by the Buyer Indemnitees attributable to fraudulent misrepresentations or to breaches of the representations set forth in Sections 4.1, 4.2, 4.3 and 4.4, and (iv) no Seller shall be liable with respect to the breach of any representation or warranty of any other Seller. (f) The Corporation shall not have any liability, obligation or indebtedness to any Seller as a result of any misrepresentation or breach of representation or warranty by any Seller contained in this Agreement, the Corporation Disclosure Schedule, the Seller Disclosure Schedule or any certificate, instrument, agreement or other writing delivered by or on behalf of any Seller or the Corporation pursuant to this Agreement, or in connection with the transactions contemplated herein, or the breach of any covenant or agreement of any Seller or the Corporation contained in this Agreement, the Corporation Disclosure Schedule or the Seller Disclosure Schedule, or any certificate, instrument, agreement or other 40 writing by or on behalf of any Seller pursuant to the provisions of this Agreement or in connection with the transactions contemplated herein. 9.2 LIMITATIONS ON INDEMNIFICATION. (a) The representations and warranties of Buyer and each Seller (including without limitation each Indemnifying Seller) contained in this Agreement, the Buyer Disclosure Schedule, the Corporation Disclosure Schedule, the Seller Disclosure Schedule or in any certificate, instrument, agreement or other writing delivered by or on behalf of Buyer or any Seller pursuant to this Agreement or in connection with the transactions contemplated herein shall survive any investigation heretofore or hereafter made by or on behalf of the Buyer or the Seller, as applicable (subject to the provisions of this Article 9), and the consummation of the transactions contemplated herein, and all such representations and warranties shall be of no further force and effect after two years from the date of the Closing, except for matters set forth in Sections 3.14, 3.17, 3.18, 4.1, 4.2, 4.3, 4.4, 5.10, 5.12 and 5.16, for which the survival period shall extend until the expiration of the applicable statutory limitations period (as applicable, the "Survival Period"). Anything to the contrary notwithstanding, a claim for indemnification which is made in writing but not resolved prior to the expiration of the Survival Period may be pursued and resolved after such expiration. (b) An Indemnitee shall be obligated to prosecute diligently and in good faith any claim for Indemnified Losses with any applicable insurer prior to collecting any indemnification payment hereunder, provided that an Indemnitee shall be entitled to collect an indemnification payment otherwise due to it hereunder if such Indemnitee has not received reimbursement from the applicable insurer(s) within twelve (12) months after it has given such insurer(s) appropriate written notice of its claim. (c) In the case where an Indemnitee recovers from third parties all or any part of any amount previously paid to it by any Seller hereunder, such Indemnitee shall promptly pay over to such Seller the amount so recovered (net of any expenses actually incurred by it in procuring such recovery), but not in excess of any amount previously so paid by the Indemnifying Party. No amount shall become payable by an Indemnifying Party to an Indemnity in respect of any third party claim unless and to the extent that the Indemnity shall have become required to pay after exhausting all available remedies, and shall actually have paid, the relevant Indemnified Losses to the relevant third party. (d) The amount of any claim made hereunder shall be reduced by taking into account (i) any amount payable to the Buyer or the Corporation by any insurer or other third party in respect of the relevant Indemnified Losses, and (ii) any offsetting benefit (including any tax reduction) to the relevant Corporation or to any Affiliate thereof, either in the year in which the Indemnified Losses are sustained or in any other year. (e) For purposes of computing the amount of any Indemnified Losses, only the loss actually sustained shall be taken into account, to the exclusion of any price/earnings or similar multiplier implicit in the Purchase Price, and in no event shall any Indemnifying Party be liable for unforeseen or consequential damages. (f) The Indemnitees shall not be entitled to any indemnification payments if they have not timely notified the Indemnifying Parties and otherwise complied in all material respects with all the other provisions of this Article 9. (g) The Indemnitees shall not be entitled to any indemnification in connection with Indemnified Losses resulting from facts of which the Indemnitees were aware at the time of executing this Agreement. 41 (h) Sellers shall have no liability under any provision of this Agreement for Indemnified Losses which arise as a result of (i) actions taken by the Buyer or the Corporation after the Closing Date, or (ii) the passing of, or any change in, after the date hereof, any law or administrative practice of any government, governmental department, agency or regulatory body in any such case not actually in force at the date of this Agreement. (i) The Indemnitees shall use their best efforts, and the Buyer Indemnitees shall cause the Corporation to use its best efforts, to mitigate any Indemnified Losses which any of them may suffer as a result of any matters giving rise to a claim for indemnification hereunder. (j) The provisions of this Article 9 shall constitute the sole remedy of all of the parties hereto for any misrepresentation or breach of representation or warranty contained in this Agreement, any Disclosure Schedule, or any certificate, instrument, agreement or other writing delivered by or on behalf of any such party pursuant to this Agreement or in connection with the transactions contemplated herein. ARTICLE 10. TERMINATION 10.1 TERMINATION. This Agreement may be terminated at any time prior to Closing by: (a) the mutual consent of the Buyer and the holders of a majority in interest of the ordinary shares of the Corporation; (b) the Buyer or the holders of a majority in interest of the ordinary shares of the Corporation if the Closing has not occurred by the close of business on the date which is 30 calendar days following the date of this Agreement, so long as the failure to consummate the transaction on or before such date did not result from a breach of this Agreement by the party seeking termination of this Agreement; (c) at any time before the Closing, by any Seller or the Buyer, (A) in the event of a material breach of this Agreement hereof by any non-terminating party if such non-terminating party fails to cure such breach within 10 Business Days following notification by any one or more of the terminating parties, or (B) upon notification to the non-terminating parties by the terminating party that the satisfaction of any condition to the terminating party's obligations under this Agreement has become impossible or impracticable with the use of best efforts unless the failure of such condition to be satisfied is caused by a breach of this Agreement by the terminating party or the non-terminating parties waive such condition within 10 Business Days of receipt of such notification (and, for purposes of (ii) and (iii) only, a breach or material breach by any Seller shall constitute a breach or material breach, as the case may be, by all of the Sellers); (d) if such termination is required pursuant to any final and nonappealable judgment or order entered in any judicial or administrative proceeding initiated by an Authority; (e) as provided in Section 6.9; and (f) as provided in Section 11.11. 42 10.2 PROCEDURE AND EFFECT OF TERMINATION. In the event of termination of this Agreement pursuant to Section 10.1, written notice of such termination shall promptly be given by the terminating party to the other parties, and this Agreement shall upon that notice terminate and become void and have no effect, and the transactions contemplated by this The parties shall abandon agreement without further action, except that the provisions of Section 11.5 shall survive the termination of this Agreement; provided, however, that such termination shall not relieve any party of any liability for any breach by it of this Agreement. ARTICLE 11. MISCELLANEOUS 11.1 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which taken together shall be considered one and the same agreement. The Agreement and signatures on this Agreement, may be transmitted by facsimile, and such shall deem such a transmission a delivery of this Agreement signing party. 11.2 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Utah, USA applicable to a contract executed and performed in such state without reference to the choice of law principles of such state. 11.3 NO THIRD PARTY BENEFICIARIES. Except as provided in Section 6.10 above, nothing in this Agreement is intended, nor shall it be construed, to confer any rights or benefits upon any Person that is not a party to this Agreement, and no other Person not a party to this Agreement shall have any rights or remedies under this Agreement. 11.4 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties with respect to the subject matter of this Agreement, and this Agreement supersedes all prior drafts of such agreement, and all prior and contemporaneous agreements, representations, negotiations, discussions, correspondence, communications, term sheets and understandings of the parties, except for the Confidentiality Agreement, which agreement is ratified and remains in full force and effect. There are no agreements, understandings, representations and warranties between the parties other than those set forth or referred to in this Agreement. 11.5 EXPENSES. Except as set forth in this Agreement (and particularly Section 2.3), whether the Share Purchase is or is not consummated, all costs and expenses, including but not limited to fees and expenses of attorneys, advisers, agents, and accountants, incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such costs and expenses, whether such costs and expenses were incurred prior to or are incurred after the date hereof, and in particular, all such costs and expenses incurred by or on behalf of the Sellers shall be borne by the Sellers or the Corporation. All Australian stamp duty payable on, or in relation to the transactions contemplated by, this Agreement or any document executed pursuant to this Agreement shall be paid by the Buyer. 11.6 NOTICES. All notices under this Agreement shall be sufficiently given for all purposes under this Agreement if in writing (a) when delivered personally; (b) in the case of domestic deliveries within the United States, three Business Days after deposited for first class mailing by the United States Postal Service; (c) in the case of domestic deliveries within the United States, one day after deposited for delivery by a nationally recognized overnight delivery service; (d) in the case of foreign deliveries, two days after deposited for delivery by a reputable foreign or overseas air courier; or (e) when receipt is confirmed, by telecopy, telefax or other electronic transmission service to the appropriate address or 43 number as set forth below. Notices to the Sellers shall be addressed to each Seller at the address noted in Exhibit A hereto or at such other address and to the attention of such other Person as each Seller may designate by written notice to the Buyer. Notices to the Corporation shall be addressed to: Moreton Bay Ventures Pty Ltd. Unit 12/97 Jljaws Street, Summer Park Brisbane, Australia QLD 4047 Attention: Bob Waldie, Managing Director Telecopy: +1 61 73 2791820 or at such other address and to the attention of such other Person as each Seller may designate by written notice to the Buyer. Notices to the Buyer shall be addressed to: Lineo, Inc. 1505 Westlake Avenue North, Suite 400 Seattle, Washington 98109 Attention: Matthew Harris, Vice President & General Counsel Telecopy: (206) 281-9882 or to such other address and to the attention of such other Person as the Buyer may designate by written notice to the Sellers. 11.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and permitted assigns. No party to this Agreement shall have the right to assign its rights or interests in or delegate its obligations under this Agreement without the express prior written consent of all other parties to this Agreement; provided, however, the Buyer may assign its rights or interests under this Agreement to any direct or indirect wholly owned subsidiary of the Buyer, in which event the Buyer shall remain liable under this Agreement; and provided further that any Seller may, by notice to the Buyer, direct that no Seller may direct any or all of his share of the Closing Purchase Price be paid to any other Person. No such assignment shall release the Buyer from its obligations hereunder without the Sellers' written consent. 11.8 HEADINGS; DEFINITIONS. The Section and article headings contained in this Agreement are inserted for convenience and reference only and will not affect the meaning or interpretation of this Agreement. All references to Sections or Articles contained in this Agreement mean Sections or Articles of this Agreement unless otherwise stated. All capitalized terms defined in this Agreement are equally applicable to both the singular and plural forms of such terms. As the context requires, the singular form of any term includes the plural and vice versa, and all pronouns used herein shall be deemed to refer to the masculine, feminine or neuter gender. 11.9 AMENDMENTS AND WAIVERS. This Agreement may not be modified or amended except by an instrument or instruments in writing signed by the party against whom enforcement of any such modification or amendment is sought. Any party to this Agreement may, only by an instrument in writing, waive compliance by any other party to this Agreement with any term or provision of this Agreement. The waiver by any parties to this Agreement of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach. 11.10 VENUE; SERVICE OF PROCESS. In the event that any litigation or other judicial relief should be commenced or applied for, but without limitation to the provision requiring arbitration set forth in Section 11.11 below, each party to this Agreement hereby consents to the exclusive jurisdiction of the state and federal courts sitting in Salt Lake City, Utah, United States of America, in any action on a claim 44 arising out of, under or in connection with this Agreement or the transactions contemplated by this Agreement. Each party to this Agreement further agrees that personal jurisdiction over him may be effected by service of process by registered or certified mail addressed as provided in Section 11.6 above and that when so made shall be as if served upon him personally within the State of Utah. 11.11 ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("Rules of AAA"), and the procedures set forth below. In the event of any inconsistency between the Rules of AAA and the procedures set forth below, the procedures set forth below shall control. Judgment upon the award rendered by the arbitrator may be enforced in any court having jurisdiction thereof. (a) LOCATION. The location of the arbitration shall be Salt Lake City, Utah, United States of America. (b) SELECTION OF ARBITRATOR. The arbitration shall be conducted by one neutral arbitrator who is independent and disinterested with respect to the parties, this Agreement, and the outcome of the arbitration and who is an attorney having at least fifteen (15) year's experience in corporate and securities issues. The arbitrator shall be selected by the parties to the arbitration in the manner provided in the Rules of the AAA. (c) DISCOVERY. Unless the parties mutually agree in writing to some additional and specific pre-hearing discovery, the only pre-hearing discovery shall be (a) reasonably limited production of relevant and non-privileged documents, and (b) the identification of witnesses to be called at the hearing, which identification shall give the witness's name, general qualifications and position, and a brief statement as to the general scope of the testimony to be given by the witness. The arbitrator shall decide any disputes and shall control the process concerning these pre-hearing discovery matters. Pursuant to the Rules of AAA, the parties may subpoena witnesses and documents for presentation at the hearing. (d) CASE MANAGEMENT. Prompt resolution of any dispute is important to both parties; and the parties agree that the arbitration of any dispute shall be conducted expeditiously. The arbitrator is instructed and directed to assume case management initiative and control over the arbitration process (including scheduling of events, pre-hearing discovery and activities, and the conduct of the hearing), in order to complete the arbitration as expeditiously as is reasonably practical for obtaining a just resolution of the dispute. (e) REMEDIES. The arbitrator shall follow and apply applicable law and the provisions of this Agreement. The arbitrator shall grant such legal or equitable remedies and relief in compliance with applicable law that the arbitrator deems just and equitable, to the same extent that remedies or relief could be granted by a state or federal court, provided however, that no punitive damages may be awarded. No court action may be maintained seeking punitive damages. The decision of the arbitrator shall be binding upon the parties. (f) EXPENSES. The expenses of the arbitration, including the arbitrator's fees and expert witness fees, but not including the attorneys' fees (which are addressed in Section 11.12 below) incurred by the parties to the arbitration, may be awarded to the prevailing party, in the discretion of the arbitrator, or may be apportioned between the parties in any manner deemed appropriate by the arbitrator. Unless and until the arbitrator decides that one party is to pay for all (or a share) of such expenses, both parties shall share equally in the payment of the arbitrator's fees as and when billed by the arbitrator. 45 (g) CONFIDENTIALITY. Except as set forth below, the parties shall keep confidential the fact of the arbitration, the dispute being arbitrated, and the decision of the arbitrator. Notwithstanding the foregoing, the parties may disclose information about the arbitration to persons who have a need to know, such as directors, trustees, management employees, witnesses, experts, investors, attorneys, lenders, insurers, and others who may be directly affected. Additionally, each party may make such disclosures as are required by applicable securities laws or other applicable law or regulation. Further, if a party is expressly asked by a third party about the dispute or the arbitration, the party may disclose and acknowledge in general and limited terms that there is a dispute with the other party which is being (or has been) arbitrated. Once the arbitration award has become final, if the arbitration award is not promptly satisfied, then these confidentiality provisions shall no longer be applicable. 11.12 ATTORNEYS' FEES. In the event that any dispute between any two or more of the parties to this Agreement should result in litigation or arbitration, the prevailing party in such dispute shall be entitled to recover from the other party all reasonable fees, costs and expenses of enforcing any right of the prevailing party, including without limitation, reasonable attorneys' fees, arbitration fees and other expenses, all of which shall be deemed to have accrued upon the commencement of such action and shall be paid whether or not such action is prosecuted to judgment or arbitration award. Any judgment, order or arbitration award entered in such action shall contain a specific provision providing for the recovery of attorney fees and costs incurred in enforcing such judgment or award and an award of prejudgment interest from the date of the breach at the maximum rate of interest allowed by law. For the purposes of this Section 11.12: (a) attorney's fees shall include, without limitation, fees incurred in the following: (1) post-judgment motions; (2) contempt proceedings; (3) garnishment, levy, and debtor and third party examinations; (4) discovery; and (5) bankruptcy litigation and (b) prevailing party shall mean the party who is determined by the tier of fact in the proceeding to have prevailed or who prevails by dismissal, default or otherwise. 11.13 SEVERABILITY OF PROVISIONS; JEOPARDY. (a) If any provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated by this Agreement is not affected in any manner adverse to any party. Upon a determination that such an adverse affect will occur, the parties to this Agreement shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated to this Agreement are fulfilled to the greatest extent possible. (b) Notwithstanding anything to the contrary contained in this Agreement, in the event that it is determined prior to the Closing that the performance by any party hereto of any term, covenant, condition or provision of this Agreement should be in violation of any statute, ordinance, or be otherwise deemed illegal, the parties shall immediately attempt to negotiate an amendment to this Agreement to eliminate such jeopardy. In the event that such an amendment is not practicable or cannot be agreed upon within fifteen (15) days of notice of the need thereof, either party may, at its option, terminate this Agreement forthwith. 11.14 SELLER APPROVAL. The execution and delivery of this Agreement by all Sellers shall constitute unanimous shareholder approval of the execution and delivery of this Agreement by the Corporation. IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of each of the parties effective as of the date first above written. 46 47 CORPORATION: Moreton Bay Ventures Pty Ltd, an Australian corporation By: --------------------------------------- Its: -------------------------------------- SELLERS: Robert B Waldie ------------------------------------------ Mary E Waldie ------------------------------------------ Antonio B Merenda ------------------------------------------ Peter Cronk, Sandra Judith Cronk and Lynda Sandra Cronk as Trustees of the Cronk Super Fund ------------------------------------------ ------------------------------------------ ------------------------------------------ 48 Richard S J Stevenson ------------------------------------------ Graeme R Kitchen ------------------------------------------ Gregory Ungerer ------------------------------------------ Roger Brown ------------------------------------------ Matthew Ramsay ------------------------------------------ Christopher Trew ------------------------------------------ Peter A Waldie ------------------------------------------ 49 Robert A Waldie ------------------------------------------ Sirius Technologies, an Australian corporation By: --------------------------------------- Its: -------------------------------------- Southern Cross Fund 1, a Delaware limited partnership By: --------------------------------------- Its: -------------------------------------- BUYER: LINEO, INC., a Delaware corporation By: --------------------------------------- Bryan W. Sparks, Chairman and President 50 EX-10.14 18 EXHIBIT 10.14 EXHIBIT 10.14 STOCK PURCHASE AGREEMENT BY AND AMONG LINEO, INC. AND THE SELLERS NAMED HEREIN DATED AS OF MAY 1, 2000 -i- TABLE OF CONTENTS
PAGE ARTICLE 1.DEFINITIONS............................................................................................1 ARTICLE 2.SALE OF SHARES; CLOSING................................................................................5 2.1 Purchase and Sale.....................................................................................5 2.2 Purchase Price........................................................................................6 2.3 Time and Place of Closing.............................................................................6 ARTICLE 3.REPRESENTATIONS AND WARRANTIES OF THE MAJORITY SHAREHOLDERS............................................6 3.1 Organization and Corporate Power......................................................................6 3.2 Capitalization; Share Ownership.......................................................................6 3.3 Subsidiaries; Investments.............................................................................7 3.4 Financial Statements..................................................................................7 3.5 Absence of Undisclosed Liabilities....................................................................7 3.6 Absence of Changes....................................................................................7 3.7 Title; Condition of Property..........................................................................8 3.8 Certain Contracts and Arrangements....................................................................8 3.9 Intellectual Property Rights; Employee Restrictions...................................................9 3.10 Litigation...........................................................................................10 3.11 Tax Matters..........................................................................................11 3.12 Employee Benefits....................................................................................11 3.13 Labor Laws...........................................................................................11 3.14 Employees............................................................................................11 3.15 Hazardous Waste, Etc.................................................................................12 3.16 Business; Compliance with Laws.......................................................................12 3.17 Investment Banking; Brokerage........................................................................12 3.18 Insurance............................................................................................12 3.19 Transactions with Affiliates.........................................................................12 3.20 Suppliers............................................................................................13 3.21 Certain Events.......................................................................................13 3.22 Registration Rights..................................................................................13 3.23 Disclosure...........................................................................................13 3.24 Corporate Documents..................................................................................14 3.25 Governmental Consents................................................................................14 3.26 Equity...............................................................................................14 ARTICLE 4.REPRESENTATIONS AND WARRANTIES OF THE SELLERS.........................................................14 4.1 Capacity; Execution; Validity; Binding Effect........................................................14 4.2 Share Ownership......................................................................................14 4.3 No Other Rights......................................................................................15 4.4 No Conflicting Agreements............................................................................15 4.5 Consents, Approvals, Licenses, Etc...................................................................15 4.6 Litigation...........................................................................................15 4.7 No Brokers...........................................................................................16 4.8 No U.S. Persons......................................................................................16 -i- ARTICLE 5.REPRESENTATIONS AND WARRANTIES OF BUYER...............................................................16 5.1 Organization and Corporate Power.....................................................................16 5.2 Authorization and Non-Contravention..................................................................16 5.3 Capitalization.......................................................................................17 5.4 Subsidiaries; Investments............................................................................17 5.5 Financial Statements.................................................................................17 5.6 Absence of Undisclosed Liabilities...................................................................18 5.7 Absence of Changes...................................................................................18 5.8 Title; Condition of Property.........................................................................18 5.9 Certain Contracts and Arrangements...................................................................19 5.10 Intellectual Property Rights; Employee Restrictions..................................................20 5.11 Litigation...........................................................................................21 5.12 Tax Matters..........................................................................................21 5.13 Employee Benefit Plans...............................................................................21 5.14 Labor Laws...........................................................................................22 5.15 Employees............................................................................................22 5.16 Hazardous Waste, Etc.................................................................................22 5.17 Business; Compliance with Laws.......................................................................22 5.18 Insurance............................................................................................23 5.19 Transactions with Affiliates.........................................................................23 5.20 Suppliers............................................................................................23 5.21 Certain Events.......................................................................................23 5.22 Registration Rights..................................................................................24 5.23 Disclosure...........................................................................................24 5.24 Corporate Documents..................................................................................24 5.25 Offering.............................................................................................24 5.26 Investment Company...................................................................................24 5.27 Supplemental Remuneration............................................................................24 5.28 Governmental Consents................................................................................25 ARTICLE 6.COVENANTS OF SELLERS AND BUYER........................................................................25 6.1 Investigation of Business; Access to Properties and Records..........................................25 6.2 Regulatory and Other Authorizations..................................................................25 6.3 Reasonable Efforts; Consents and Notifications.......................................................26 6.4 Further Assurances...................................................................................26 6.5 Conduct of Business of the Company...................................................................26 6.6 Preservation of Business.............................................................................28 6.7 Announcements........................................................................................28 6.8 No Solicitation......................................................................................28 6.9 Right to Update and Cure.............................................................................29 6.10 Market Stand-Off Agreement...........................................................................29 6.11 Securities Law Compliance............................................................................30 6.12 Tax Filing Code Section 338(g) Election..............................................................30 6.13 Covenant Not to Compete/Nonsolicitation..............................................................30 ARTICLE 7.CONDITIONS TO BUYER'S OBLIGATION TO CLOSE.............................................................31 7.1 Representations; Warranties and Covenants of the Majority Shareholders and the Sellers...............31 7.2 Filings; Consents; Waiting Periods...................................................................32 7.3 No Injunction........................................................................................32 7.4 Closing Deliveries...................................................................................32 7.5 Absence of Litigation................................................................................32 -ii- 7.6 No Claim Regarding Stock Ownership or Sale Proceeds..................................................32 7.7 No Material Adverse Effect...........................................................................33 ARTICLE 8.CONDITIONS TO SELLERS' OBLIGATIONS TO CLOSE...........................................................33 8.1 Representations, Warranties and Covenants of the Buyer...............................................33 8.2 Filings; Consents; Waiting Periods...................................................................33 8.3 No Injunction........................................................................................33 8.4 Closing Deliveries...................................................................................33 8.5 Series C Convertible Preferred Stock of the Buyer....................................................34 8.6 Absence of Litigation................................................................................34 8.7 No Material Adverse Effect...........................................................................34 ARTICLE 9.SURVIVAL; INDEMNIFICATION.............................................................................34 9.1 Indemnification......................................................................................34 9.2 Limitations on Indemnification.......................................................................37 ARTICLE 10.TERMINATION..........................................................................................38 10.1 Termination..........................................................................................38 10.2 Procedure and Effect of Termination..................................................................39 ARTICLE 11.MISCELLANEOUS........................................................................................39 11.1 Counterparts.........................................................................................39 11.2 Governing Law........................................................................................39 11.3 No Third Party Beneficiaries.........................................................................39 11.4 Entire Agreement.....................................................................................39 11.5 Expenses.............................................................................................39 11.6 Notices..............................................................................................40 11.7 Successors and Assigns...............................................................................40 11.8 Headings; Definitions................................................................................40 11.9 Amendments and Waivers...............................................................................40 11.10 Arbitration..........................................................................................41 11.11 Attorneys' Fees......................................................................................42 11.12 Severability of Provisions; Jeopardy.................................................................42
EXHIBITS Exhibit A List of Sellers Exhibit B Liquidity Agreement Exhibit C Stock Option Undertaking Exhibit D Employment Agreements SCHEDULES Majority Shareholders Disclosure Schedule Buyer Disclosure Schedule Seller Disclosure Schedule -iii- STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT dated as of May 1, 2000 is made and entered into by and among all of the Sellers listed on Exhibit A hereto (each a "Seller" and collectively the "Sellers"), and Lineo, Inc., a Delaware, USA, corporation (the "Buyer"). WHEREAS, the Sellers own all of the shares of Inup S.A., a "societe anonyme" (the "Company"), having its registered office at 9-11, avenue Michelet - 93400 Saint Ouen - France, incorporated at the Trade Registry of Bobigny B 421 701 384, with an issued share capital of 187,500 Euros as of the date of this Agreement, with each Seller owning that number of shares of the Company set forth opposite such Seller's name in EXHIBIT A hereto; and WHEREAS, the Buyer desires to purchase from the Sellers, and the Sellers desire to sell to the Buyer, all of the shares of the Company issued and outstanding as of the date of this Agreement upon the terms and subject to the conditions set forth in this Agreement (the sale and purchase of such shares are referred to in this Agreement as the "Share Purchase"); NOW, THEREFORE, in consideration of the mutual agreements, covenants, representations and warranties contained herein, and subject to the terms and conditions hereinafter set forth, the parties to this Agreement hereby agree as follows: ARTICLE 1. DEFINITIONS As used in this Agreement, the following terms shall have the following meanings: 1.1 "ACCOUNTANTS" shall have the meaning set forth in Section 2.2(b). 1.2 "ACCOUNTS RECEIVABLE" shall have the meaning set forth in Section 3.23. 1.3 "AFFILIATE" shall mean, with respect to any Person, a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person. 1.4 "AGREEMENT" shall mean this Share Purchase Agreement, together with the Buyer Disclosure Schedule, the Majority Shareholders Disclosure Schedule and the Seller Disclosure Schedule, as the same may be updated or amended from time to time as provided herein. 1.5 "ASSOCIATE" shall mean, with respect to any Person, any corporation or other business organization of which such Person is an executive officer (as such term is defined in Rule 3b-7 under the 1934 Act) or partner or is the beneficial owner, directly or indirectly, of [ten] percent or more of any class of equity securities, any trust or estate in which such Person has a substantial beneficial interest or as to which such Person serves as a trustee or in a similar capacity and any relative or spouse of such Person. 1.6 "AUTHORITY" shall mean any United States, French, foreign, federal, provincial state or local entity or municipality or subdivision thereof or any authority, department, commission, board, bureau, agency, court or instrumentality thereof. 1.7 "BUSINESS" shall mean the software development business of Inup S.A as conducted at the date hereof. 1.8 "BUSINESS DAY" shall mean any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by law to be closed in Salt Lake City, Utah, USA or Paris, France. 1.9 "BUYER" shall have the meaning set forth in the first paragraph of the Agreement. 1.10 "BUYER INDEMNITIES" shall have the meaning set forth in Section 9.1(a). 1.11 "BUYER RIGHTS" shall have the meaning set forth in Section 5.10. 1.12 "BUYER DISCLOSURE SCHEDULE" shall mean the disclosure schedule, dated as of the date of this Agreement, delivered to the Sellers by the Buyer. 1.13 "BUYER'S FINANCIAL STATEMENTS" shall have the meaning set forth in Section 5.5. 1.14 "CASH BALANCE" shall have the meaning set forth in Section 3.2.6. 1.15 "CLOSING" shall have the meaning set forth in Section 2.4. 1.16 "CLOSING BALANCE SHEET" shall have the meaning set forth in Section 2.2(b). 1.17 "CLOSING DATE" shall mean the date and effective time at which the Closing occurs. 1.18 "CODE" shall mean the United States of America Internal Revenue Code of 1986, as amended, together with the regulations promulgated thereunder. 1.19 "COMPANY FINANCIAL STATEMENTS" shall have the meaning set forth in Section 3.4. 1.20 "CONTRACT" shall mean any contract, agreement, indenture, note, bond, loan agreement, letter of credit agreement, line of credit agreement, instrument, lien, conditional sales contract, mortgage, franchise, commitment, obligation or other arrangement or agreement, but shall exclude leases of real or personal property and insurance policies. 1.21 "COMPANY" shall mean Inup S.A., a French company. 1.22 "COMPANY SHARES" shall have the meaning set forth in Section 2.1. 1.23 "DISCLOSURE SCHEDULE" shall mean any of the Majority Shareholders Disclosure Schedule, the Buyer Disclosure Schedule or the Seller Disclosure. -2- 1.24 "EMPLOYEE BENEFIT PLAN" shall have the meaning set forth in Sections 3.12 and 5.13 with respect to the Company and the Buyer, respectively. 1.25 "ENCUMBRANCES" shall mean any security interest, pledge, mortgage, lien, charge, adverse claim of ownership or other encumbrance of any kind. 1.26 "ERISA" shall have the meaning set forth in Section 3.13. 1.27 "FAMILY MEMBER" shall mean with respect to a particular individual, such individual's spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, and brothers- and sisters-in-law. 1.28 "GAAP" shall mean generally accepted accounting principles (as such term is used in the applicable country's professional accounting standards) from time to time in effect. 1.29 "INDEMNIFIED LOSSES" shall have the meaning set forth in Section 9.1(a). 1.30 "INDEMNIFYING PARTY" shall have the meaning set forth in Section 9.1(d). 1.31 "INDEMNITEES" shall have the meaning set forth in Section 9.1(d). 1.32 "INTELLECTUAL PROPERTY" shall mean each and every and any and all patents and patent rights, trademarks and trademark rights, trade names and trade name rights, service marks and service mark rights, service names and service name rights, brand names, inventions, procedures, formulae, copyrights and copyright rights, trade dress, business and product names, logos, slogans, trade secrets, processes, designs, methodologies, computer programs (including all source codes) and related documentation, linux embedded platforms and related documentation, technical information, know-how and all pending applications for and registrations of patents, trademarks, service marks and copyrights. 1.33 "IRS" shall mean the U.S. Internal Revenue Service. 1.34 "KNOWLEDGE" shall mean (i) in the case of any Seller, knowledge of such Seller, and if such Seller is an entity, knowledge of any director or any member of senior management of such entity and (ii) in the case of the Buyer, knowledge of any officer or director of the Buyer. An individual will be deemed to have "Knowledge" of a particular fact or other matter if such individual is actually aware of such fact or other matter. 1.35 "LINEO SHARES" shall have the meaning set forth in Section 2.2. 1.36 "PERMITS" shall mean all permits, licenses and other approvals, certificates of need, accreditations, participation agreements, consents, authorizations, certificates of authority and orders 1.37 "MAJORITY SHAREHOLDERS" shall mean Hugo Delchini and Laurent Rousseau. 1.38 "MAJORITY SHAREHOLDERS DISCLOSURE SCHEDULE" shall mean the disclosure schedule, dated as of the date of this Agreement, delivered to the Buyer by the Majority Shareholders. -3- 1.39 "MATERIAL ADVERSE EFFECT" on a Person shall mean a material adverse effect on the business, operations, properties, assets (including intangible assets), liabilities (contingent or otherwise), financial conditi0on or results of operations of such Person and its Subsidiaries, taken as a whole. 1.40 "PERMITTED ENCUMBRANCES" shall mean (i) Encumbrances for Taxes not yet due and payable and for property Taxes being contested in good faith, (ii) Encumbrances and imperfections of title that do not secure payment of borrowed money and the existence of which, in the aggregate, do not have a Material Adverse Effect. 1.41 "PERSON" shall mean an individual, firm, trust, association, corporation, limited liability company, partnership, limited partnership, limited liability partnership, Authority or other entity. 1.42 "PURCHASE PRICE" shall have the meaning set forth in Section 2.2. 1.43 "RELATED PARTY" shall have the meaning set forth in Section 3.12. 1.44 "SELLER" and "SELLERS" are identified on Exhibit A hereto. 1.45 "SELLER DISCLOSURE SCHEDULE" shall mean the disclosure schedules, dated as of the date of this Agreement, delivered to the Buyer by any Seller. 1.46 "SELLER INDEMNITIES" shall have the meaning set forth in Section 9.1(c). 1.47 "SHARE PURCHASE" shall have the meaning set forth in the Recitals hereto. 1.48 "SUBSIDIARY" of a Person shall mean a corporation, partnership or other entity of which such Person (i) has the power to elect more than fifty percent (50%) of the board of directors or other governing authority either directly or indirectly or (ii) owns or controls more than fifty percent (50%) of the outstanding equity securities or equity interests either directly or through an unbroken chain of entities as to each of which fifty percent (50%) or more of the outstanding equity securities or equity interests is owned directly or indirectly by its parent. 1.49 "SURVIVAL PERIOD" shall have the meaning as set forth in Section 9.2(a). 1.50 "TAKEOVER PROPOSAL" shall mean any proposal for a merger, consolidation, acquisition of all or substantially all of the capital shares or assets of a Person or the acquisition of a substantial equity interest in such Person or a substantial portion of the consolidated assets of such Person, or any solicitation of proxies in connection with any meeting for the purpose of effecting a business combination or change in control. 1.51 "TAX" or "TAXES" shall mean all taxes, levies, imposts, duties, excises, licenses and resignation fees, and charges of any kind or nature whatsoever including, without limitation, income tax withholding, unemployment and social security or welfare taxes, value added, sales and use taxes and property taxes, and interest, penalties and additions to tax with respect to any of the above. -4- 1.52 "TAX RETURN" shall mean any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment to such documents and any amendment of such documents. 1.53 "U.S. PERSON" shall mean: (i) any natural person resident in the United States; (ii) any partnership or corporation organized or incorporated under the laws of the United States; (iii) any estate of which any executor or administrator is a U.S. person; (iv) any trust of which any trustee is a U.S. person; (v) any agency or branch of a foreign entity located in the United States; (vi) any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person; (vii) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the United States; and (viii) any partnership or corporation if: (a) organized or incorporated under the laws of any foreign jurisdiction; and (b) formed by a U.S. person principally for the purpose of investing in securities not registered under the Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a)) who are not natural persons, estates or trusts. 1.54 "UNDISCLOSED LIABILITY" of a Person shall mean an obligation, indebtedness or liability of any nature (each of which, for purposes of this definition, is assumed to be material), which is required by applicable country GAAP to be reserved against or disclosed on a balance sheet of such Person, which is not so reserved against or disclosed on such Person's balance sheet, or in the notes thereto, and which is not so reflected, reserved against or otherwise disclosed in this Agreement or a Disclosure Schedule hereto. 1.55 "1933 ACT" shall mean the U.S. Securities Act of 1933, as amended. 1.56 "1934 ACT" shall mean the U.S. Securities Exchange Act of 1934, as amended. 1.57 "1940 ACT" shall have the meaning set forth in Section 5.27. 1.58 OTHER DEFINED TERMS. The terms defined in the first paragraph and in the whereas clauses shall have the meanings given to such terms in such paragraph and whereas clauses. ARTICLE 2. SALE OF SHARES; CLOSING 2.1 PURCHASE AND SALE. Subject to the satisfaction or waiver of the conditions to the Closing set forth in this Agreement, at the Closing the Sellers will sell, and the Buyer will purchase, common shares of the Company which constitute, and will constitute as of the Closing, all of the issued and outstanding shares of capital stock of the Company (collectively, the "Company Shares"), with the amount of Company Shares to be sold by each Seller set forth opposite such Seller's name on EXHIBIT A hereto. The parties agree that, for the sole purposes of United States GAAP, the Company Shares shall be deemed to be sold with effect as of May 1, 2000, notwithstanding that the share transfer forms with respect thereto will have been executed and the Closing will occur at a subsequent time. -5- 2.2 PURCHASE PRICE. (a) In full payment of the Company Shares, the Buyer shall pay and deliver to the Sellers an aggregate purchase price consisting of 83,334 shares of the unregistered Series C Convertible Preferred Stock of the Buyer and 1,333,333 shares of the unregistered Common Stock of Buyer (together the "Lineo Shares"), and Ten Thousand Dollars in currency of the United States of America (USD $10,000) (the "Purchase Price"). The Purchase Price shall be paid to and allocated among each of the Sellers as set forth opposite each Seller's name on EXHIBIT A hereto. (b) The Sellers acknowledge and agree that the Purchase Price includes full payment to them of any amounts that may otherwise be owing to or claimed by them as supplemental remuneration or otherwise with respect to all patents, patent rights and other Intellectual Property owned by the Company. (c) Delivery of Company Shares. At the Closing, each Seller, severally and not jointly, shall sell, assign, transfer and deliver to the Buyer the number of the Company Shares set forth opposite such Seller's name on EXHIBIT A by delivery to the Buyer of duly executed share transfer forms relating to such Company Shares, in form and substance satisfactory to the Buyer and free and clear of all Encumbrances. (d) Payment of the Purchase Price. At the Closing, the Buyer shall pay the Purchase Price by delivery to the Sellers of duly issued certificates representing the Lineo Shares and certified checks in accordance with EXHIBIT A. 2.3 TIME AND PLACE OF CLOSING. The closing (the "Closing") of the Share Purchase will be held at the office of Salans Hertzfeld & Heilbronn, 9 rue Boissy d'Anglas, 75008 Paris, France at 4:00 p.m. on Friday, May 5, 2000 or such other time and place as shall be agreed to by the parties. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF THE MAJORITY SHAREHOLDERS The Majority Shareholders represent and warrant to the Buyer that the statements contained in this Article 3 are true and correct, except as set forth in the Majority Shareholders Disclosure Schedule. 3.1 ORGANIZATION AND CORPORATE POWER. The Company is a SOCIETE ANONYME duly organized and validly existing under the laws of the Republic of France, and is qualified to do business as a foreign company in each jurisdiction in which the failure to be so qualified would have a Material Adverse Effect on the Company. The Company has all required corporate power and authority to carry on its business as presently conducted. The Company is not in violation of any term of the Bylaws of the Company, as amended to date (i.e., its statuts, hereafter referred to as its "Bylaws".) The execution, delivery and performance of this Agreement and the consummation of the transactions provided for herein does not violate the Company's By-laws or any material agreement by which it is bound. 3.2 CAPITALIZATION; SHARE OWNERSHIP. The authorized and outstanding capital shares, options and warrants of the Company are listed in Section 3.2 of the Majority -6- Shareholders Disclosure Schedule. Other than as set forth in Section 3.2 of the Majority Shareholders Disclosure Schedule, the Company has not issued or agreed to issue and is not obligated to issue any warrants, options or other rights to purchase or acquire any shares of its capital stock, or any securities convertible into or exercisable or exchangeable for such shares or any warrants, options or other rights to acquire any such convertible securities. All of the outstanding shares of capital stock of the Company are duly and validly authorized and issued, fully paid and nonassessable and, except as set forth herein and except for the Shareholders Agreement dated November 3, 1999 among the Sellers which the Sellers agree shall terminate upon the Closing, not subject to any preemptive rights to purchase or otherwise acquire shares of capital stock of the Company, are free of restrictions on transfer. 3.3 SUBSIDIARIES; INVESTMENTS. The Company does not currently own any capital stock or interest or participate in any corporation, joint venture, partnership, trust, limited liability corporation or other entity. 3.4 FINANCIAL STATEMENTS. The Company has previously furnished to the Buyer copies of its draft audited financial statements (balance sheet, statement of operations, statement of cash flows and statement of stockholders equity, including notes thereto) for the fiscal year at and ended December 31, 1999 (the "Company Financial Statements"), a copy of which is included in Section 3.4 of the Majority Shareholders Disclosure Schedule. Such financial statements were prepared in conformity with French GAAP applied on a consistent basis; are complete, correct and consistent in all material respects with the books and records of the Company; and fairly and accurately present the financial position of the Company as of the dates thereof and the results of operations and cash flows of the Company for the periods shown therein. The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with French GAAP. 3.5 ABSENCE OF UNDISCLOSED LIABILITIES. The Company does not have and is not subject to any material Undisclosed Liability. 3.6 ABSENCE OF CHANGES. Since December 31, 1999 there has not been (a) any material adverse change in the financial condition, results of operations, assets, liabilities, or business of the Company, (b) any material asset or property of the Company made subject to a lien of any kind, (c) any waiver of any material right of the Company, or the cancellation of any material debt or claim held by the Company, (d) any payment of dividends on, or other distribution with respect to, or any direct or indirect redemption or acquisition by the Company of, any shares of the capital stock of the Company, or any agreement or commitment therefore, (e) any mortgage, pledge or hypothecation of any tangible or intangible asset of the Company, except in the ordinary course of business, (f) any sale or assignment of any tangible asset of the Company having a book value in excess of 5,000 Euros, except in the ordinary course of business, or of any Intellectual Property Rights (as hereafter defined) or other intangible assets, (g) any loan by the Company to, or any loan to the Company from, any officer, director, employee or stockholder of the Company, or any agreement or commitment therefore (other than travel and other advances in the ordinary course of business), (h) any damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the assets, property or business of the Company, (i) any repayment of any loan owed by the Company (including, without limitation, any loan owed to any stockholder of the Company), (j) any single capital expenditure in excess of 20,000 Euros or any capital expenditures aggregating more than 50,000 Euros, (k) any material change in the accounting methods or practices followed by the -7- Company, (l) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and that is not material to the business, properties, prospects or financial condition of the Company, (m) any material change to or termination of a material contract or agreement by which the Company or any of its assets is bound or subject, (n) any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder of the Company, (o) to the Majority Shareholders knowledge, any other event or condition of any character that might materially and adversely affect the business, properties, prospects or financial condition of the Company, (p) any resignation or termination of employment of any officer or key employee of the Company, or (q) any arrangement or commitment by the Company to do any of the things described in this Section 3.6. 3.7 TITLE; CONDITION OF PROPERTY. (a) Except as set forth in Section 3.7 of the Majority Shareholders Disclosure Schedule, the Company has good title to all of its property and assets, real, personal or mixed, tangible or intangible, free and clear of all liens, security interests, charges and other encumbrances of any kind. (b) Without material exception, all assets used in the Company's business are in good operating condition and repair and suitable for use in the operation of such business, and none of such assets that (singly or when aggregated with other assets) is material to the business of the Company is obsolete. 3.8 CERTAIN CONTRACTS AND ARRANGEMENTS. (a) Except as set forth in Section 3.8 of the Majority Shareholders Disclosure Schedule (with true and correct copies delivered to the Buyer), the Company is not a party or subject to or bound by: (i) any plan or contract providing for collective bargaining or the like, or any contract or agreement with any labor union; (ii) any contract, lease or agreement creating any obligation of the Company (contingent or otherwise) to pay to any third party 25,000 Euros or more per year with respect to any single such contract or agreement; (iii) any contract or agreement for the sale, license, lease or disposition of products or services in excess of 25,000 Euros per year; (iv) any contract containing covenants directly or explicitly limiting the freedom of the Company to compete in any line of business or with any person or entity; (v) any license agreement (as licensor or licensee); (vi) any contract or agreement for the purchase of any leasehold improvements, equipment or fixed assets for a price in excess of 25,000 Euros per year; (vii) any indenture, mortgage, promissory note, loan agreement, guaranty or other agreement or commitment for borrowing in excess of 25,000 Euros or any pledge or security arrangement; -8- (viii) any material joint venture, partnership, or manufacturing agreement; (ix) any endorsement or any other advertising, promotional or marketing agreement; (x) any employment contracts, or agreements with officers, directors, employees or stockholders of the Company or persons or organizations related to or affiliated with any such persons; (xi) any pension, profit sharing, stock option, phantom stock or other equity incentive plans; (xii) any arrangement relating to any royalty payments to employees, customers or independent contractors based on the sales volume of the Company; (xiii) any acquisition, merger or similar agreement; or (xiv) any contract with a governmental body under which the Company may have an obligation for renegotiation.. (b) Except as set forth in Section 3.8 of the Majority Shareholders Disclosure Schedule, (i) each of the Company's contracts and commitments is in full force and effect and is valid, binding and enforceable in accordance with its terms as to the Company and, to the knowledge of the Majority Shareholders, as to each other party thereto; (ii) there exists no material breach or material default (or event that with notice or lapse of time would constitute a material breach or material default) on the part of the Company or, to the knowledge of the Majority Shareholders, on the part of any other party under any of the Company's contracts or commitments, except to the extent that any such breach or default would not have a Material Adverse Effect on the Company; (iii) to the knowledge of the Majority Shareholders, the Company has not received a written notice of termination or default under any of the Company's contracts or commitments; and (iv) to the knowledge of the Majority Shareholders, as of the date of this Agreement, no party to an agreement under which the Company acquired a substantial portion of its assets has asserted any claim for indemnification under such agreement. (c) Except as set forth in Section 3.8 of the Majority Shareholders Disclosure Schedule, the Company has not engaged in the past three (3) months in any discussion (i) with any representative of any corporation or corporations regarding the merger of the Company with or into any such corporation or corporations, (ii) with any representative of any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company or a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company would be disposed of, or (iii) regarding any other form of liquidation, dissolution or winding up of the Company. 3.9 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS. Except as set forth in Section 3.9 of the Majority Shareholders Disclosure Schedule: (a) The Company has the right to use, sell, and license the Intellectual Property material to the conduct of its business as presently conducted and listed in Section 3.9 of the Majority Shareholders Disclosure Schedule, including without limitation all rights -9- to the Company name "Inup" (the "Company Rights"), free and clear of the rights of all others. (b) To the knowledge of the Majority Shareholders, the business of the Company as presently conducted, the products as marketed or sold and the provision of services by the Company do not violate and will not violate any agreements that the Company has with any third party or infringe any patent, trademark, service mark, copyright or trade secret or any other Intellectual Property of any third party. (c) To the knowledge of the Majority Shareholders, no claim is pending or threatened against the Company nor has the Company received any notice or claim from any person asserting that any of the Company's present or contemplated activities infringe or may infringe any Intellectual Property of such person, and the Majority Shareholders are not aware of any infringement by any other person of any of the Company Rights. (d) Each current and former employee of the Company, and each of the Company's consultants and independent contractors involved in development of any of the Company Rights, has executed an agreement regarding confidentiality, proprietary information and assignment of inventions and copyrights to the Company, as described in Section 3.9 of the Majority Shareholders Disclosure Schedule, and to the knowledge of the Majority Shareholders, none of such employees, consultants or independent contractors is in violation of any agreement or in breach of any agreement or arrangement with former or present employers relating to proprietary information or assignment of inventions. The Company has taken all reasonable steps to protect all data, information, ideas, concepts, know-how and materials that the Company treats as trade secrets, and all other confidential information and Intellectual Property of the Company, which are not part of the public domain or knowledge, nor, to the knowledge of the Majority Shareholders, have they been used, divulged or appropriated for the benefit of any person other than the Company or otherwise to the detriment of the Company. (e) No royalties or other amounts are payable by the Company to persons by reason of the ownership or use of the Intellectual Property of the Company. (f) No third party has claimed to the Company or, to the best of the Majority Shareholders knowledge, has reason to claim that any person employed by or affiliated with the Company has (a) violated or may be violating any of the terms or conditions of his or her employment, non-competition, non-disclosure, non-solicitation or inventions agreement with such third party, (b) disclosed or may be disclosing or utilized or may be utilizing any Intellectual Property, trade secret or proprietary information or documentation of such third party, or (c) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees. 3.10 LITIGATION. There is no litigation or governmental proceeding or investigation pending or threatened against the Company or affecting any of its properties or assets or against any officer, director or key employee of the Company in his or her capacity as an officer, director or employee of the Company, which litigation, proceeding or investigation is reasonably likely to have a Material Adverse Effect on the Company, or which may call into question the validity or hinder the enforceability of this Agreement or any other agreements or transactions contemplated hereby; nor to the Majority Shareholder's knowledge, has there occurred any event nor does there exist any condition on the basis of which any such -10- litigation, proceeding or investigation might be properly instituted or commenced. The Company is not a party or to the Majority Shareholder's knowledge, is subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate. 3.11 TAX MATTERS. As of the date hereof (i) the Company has filed on a timely basis all returns and reports in respect of Taxes for which the Company may be liable; (ii) all Taxes required to be paid by the Company that were due and payable prior to the date hereof have been paid; (iii) there are no pending audits or investigations or pending or, to the best knowledge of the Majority Shareholders, threatened claims relating to Taxes for which the Company may become liable; and (iv) no deficiencies for any Taxes have been assessed against the Company which remain unpaid. 3.12 EMPLOYEE BENEFITS. Except as set forth on Section 3.12 of the Majority Shareholders Disclosure Schedule, as of the date hereof there are no plans, policies or arrangements, whether written or oral, providing for insurance coverage, disability benefits, vacation benefits, severance benefits, retirement benefits, deferred compensation, profit sharing, bonus or other incentives, stock options or other forms of other employee or post-retirement benefits ("Employee Benefit Plans") covering directors or employees or former directors or employees of the Companies which provide for any individual or collective terms and conditions of employment that are more favorable than the applicable CONVENTION COLLECTIVE or the applicable requirements of law in any material respect. The terms and operation of each Employee Benefit Plan comply in all material respects with all applicable laws and regulations relating to such Employee Benefit Plan. There are no unfunded obligations of the Company under any retirement, pension, profit-sharing, deferred compensation plan or similar program. The Company is not required to make any payments or contributions to any Employee Benefit Plan other than pursuant to applicable law and the applicable collective bargaining agreement. 3.13 LABOR LAWS. The Company employs approximately seven (7) employees and generally enjoys good employer-employee relationships. The Company is not delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed for it as of the date hereof or amounts required to be reimbursed to such employees. The Company is in compliance in all material respects with all applicable laws and regulations respecting labor, employment, fair employment practices, terms and conditions of employment, and wages and hours. There are no charges of employment discrimination or unfair labor practices or strikes, slowdowns, stoppages of work or any other concerted interference with normal operations existing, pending or, to the knowledge of the Majority Shareholders, threatened against or involving the Company. There are no other material controversies pending or, to the knowledge of the Majority Shareholders, threatened, between the Company and any of its respective employees. 3.14 EMPLOYEES. Section 3.14 of the Majority Shareholders Disclosure Schedule contains a list of all managers, employees and consultants of the Company who, individually, have received compensation from the Company for the fiscal year of the Company ended December 31, 1999 in excess of 100,000 Euros. In each case, Section 3.14 of the Majority Shareholders Disclosure Schedule includes the current job title, years of service with the -11- Company and aggregate annual compensation and benefits of each such individual. To the knowledge of the Majority Shareholders, no key employee of the Company has any plan or intention to terminate his or her employment with the Company. The Company has complied in all material respects with the immigration laws of France with respect to the hiring, employment and engagement of all of its employees and consultants who are not French citizens, and, to the knowledge of the Majority Shareholders, except as set forth in Section 3.14 of the Majority Shareholders Disclosure Schedule, the immigration or residency status of each of such employees and consultants is sufficient to allow such employees and consultants to remain lawfully employed or engaged by the Company. The Company is not a party to or bound by any currently effective employment contract other than those relating to employees listed in Section 3.14 of the Majority Shareholders Disclosure Schedule. 3.15 HAZARDOUS WASTE, ETC. No hazardous wastes, substances or materials or oil or petroleum products have been generated, transported, used, disposed, stored or treated by the Company, and, to the Majority Shareholders' knowledge, no hazardous wastes, substances or materials or oil or petroleum products have been released, discharged, disposed, transported, placed or otherwise caused to enter the soil or water in, under or upon any real property owned, leased or operated by the Company. 3.16 BUSINESS; COMPLIANCE WITH LAWS. The Company has all necessary franchises, permits, licenses and other rights and privileges necessary to permit it to own its property and to conduct its business as it is presently or contemplated to be conducted and is not in default in any material respect under any of such franchises, permits, licenses and other similar rights and privileges. The Company is currently and has heretofore been in compliance in all material respects with all federal, state, local and foreign laws and regulations applicable to it. 3.17 INVESTMENT BANKING; BROKERAGE. Except as set forth in Section 3.17 of the Majority Shareholders Disclosure Schedule, there are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transaction contemplated by this Agreement payable by the Company or based on any arrangement or agreement made by or on behalf of the Company or any of the Majority Shareholders. 3.18 INSURANCE. The Company has the insurance policies listed in Section 3.18 of the Majority Shareholders Disclosure Schedule, sufficient in amount to allow it to replace any of its material properties which might be damaged or destroyed or sufficient to cover liabilities to which the Company may reasonably become subject, and such types and amounts of other insurance with respect to its business and properties, on both a per occurrence and an aggregate basis, as are customarily carried by persons engaged in the same or similar business as the Company. To the Majority Shareholders' knowledge, there is no default or event which could give rise to a default under any such policy. 3.19 TRANSACTIONS WITH AFFILIATES. There are no loans, leases, contracts or other transactions (directly or indirectly) between the Company and any Affiliate of the Company any Family Member or Associate of any such Affiliate, and there have been no such transactions within the past twelve (12) months except as set forth in Section 3.19 of the Majority Shareholders Disclosure Schedule. To the best of the Majority Shareholders' knowledge, except as set forth in Section 3.19 of the Majority Shareholders Disclosure Schedule, none of such persons has any direct or indirect ownership interest in any firm or -12- corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officers or directors of the Company and members of their families may own stock in publicly traded companies that may compete with the Company. 3.20 SUPPLIERS. Section 3.20 of the Majority Shareholders Disclosure Schedule sets forth each supplier of the Company who supplied more than five percent (5%) of the Company's supplies or materials for the fiscal year ended December 31, 1999 and each supplier who the Company believes may supply for more than five percent (5%) of the Company's supplies or materials for the fiscal year ended December 31, 2000 (each a "Supplier" and collectively the "Suppliers"). To the Majority Shareholders' knowledge, the relationships of the Company with its Suppliers are good commercial working relationships. No Supplier of the Company has canceled or otherwise terminated its relationship with the Company, or has during the last 12 months decreased materially its services, supplies or materials to the Company. No Supplier has, to the Majority Shareholders' knowledge, any plan or intention to terminate, cancel or otherwise materially and adversely modify its relationship with the Company or to decrease materially or limit its services, supplies or materials to the Company. 3.21 CERTAIN EVENTS. (a) During the past ten (10) years, neither the Company nor to the Majority Shareholders' knowledge, any of the members of senior management or directors of the Company has had a petition under the French insolvency law of January 25, 1985, filed by or against any of them which has not as of the date of this Agreement been dismissed. (b) During the past ten (10) years, neither the Company nor to the Majority Shareholders' knowledge, any of the members of senior management or directors of the Company has been convicted in a criminal proceeding or is a named subject of a criminal proceeding which is presently pending (excluding traffic violations and other minor offenses). (c) During the past ten (10) years, neither the Company nor to the Majority Shareholders' knowledge, any of the members of senior management or directors of the Company has been, or is, the subject of any order, judgment or decree, whether or not subsequently reversed, suspended or vacated, of any court or any administrative agency, requiring the payment of money damages in excess of 100,000 Euros or permanently or temporarily enjoining any of them from, or otherwise limiting any of their abilities to engage in, any type of business practice. 3.22 REGISTRATION RIGHTS. The Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. 3.23 DISCLOSURE. The representations and warranties made or contained in this Section, the exhibits hereto and the certificates and statements executed or delivered in connection herewith, and the information concerning the business of the Company delivered to the Buyer in connection with or pursuant to this Agreement, when taken together, do not and shall not contain any untrue statement of a material fact and do not and shall not omit to state a material fact required to be stated therein or necessary in order to make such representations, warranties or other material not misleading in light of the circumstances in -13- which they were made or delivered. There have been no events or transactions or information which has come to the attention of the management of the Company having a direct impact on the Company or its assets, liabilities, financial condition, business, results of operations or prospects which, in the reasonable judgment of such management, could be expected to have a Material Adverse Effect on the Company. 3.24 CORPORATE DOCUMENTS. The Bylaws of the Company have been made available to the Buyer. The minute books of the Company containing minutes of all meetings of directors and stockholders and all actions by written consent without a meeting by the directors and stockholders since the date of incorporation have been made available to the Buyer and reflect accurately in all material respects all actions by the directors (and any committee of directors) and stockholders with respect to all transactions referred to in such minutes. The stock transfer ledgers and other similar records of the Company as made available to the Buyer prior to the execution of this Agreement accurately reflect all record transfers prior to the execution of this Agreement in the capital stock of the Company. 3.25 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement. 3.26 CASH BALANCES. The Company has cash on deposit in the form of SICAV DE TRESORIE with the BNP as of the date hereof in an amount of not less than FRF 3,082,250 (the "Cash Balance"). ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF THE SELLERS Each Seller, severally and not jointly, represents and warrants to the Buyer that the statements contained in Sections 4.1 to 4.8 of this Agreement are true and correct, except as set forth in the Seller Disclosure Schedule. 4.1 CAPACITY; EXECUTION; VALIDITY; BINDING EFFECT. Such Seller has the full power and capacity necessary to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated herein. This Agreement has been duly executed and delivered by such Seller and, assuming due execution and delivery by the other parties, constitutes the legal, valid and binding obligation of such Seller, enforceable against such Seller in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, or other laws affecting creditors' rights and remedies generally. 4.2 SHARE OWNERSHIP. Except as set forth on Section 4.2 of the Seller Disclosure Schedule, there is no existing subscription, option, warrant, call, right, commitment or other agreement (whether preemptive or contractual) to which such Seller is a party requiring, and there are no convertible securities of the Company owned or held by such Seller which upon conversion would require, directly or indirectly, the issuance of any additional capital shares of the Company or other securities convertible into or exercisable or exchangeable for capital shares of the Company or any other equity security of the Company, and there are no obligations (contingent or otherwise) of such Seller to purchase or otherwise acquire any outstanding capital shares of the Company. The Company Shares to be sold by such Seller -14- pursuant to this Agreement will be delivered to the Buyer free and clear of all Encumbrances (except Encumbrances arising out of, under or in connection with this Agreement), and such delivery will not be in violation of any preemptive rights. Such Seller is the sole beneficial owner of the Company Shares listed beside such Seller's name on Exhibit A, and has the full legal right and power to sell, convey, transfer, and assign such Company Shares to the Buyer pursuant to this Agreement. Except for the Shareholders Agreement dated November 3, 1999 among the Sellers which the Sellers agree shall be deemed to terminate upon Closing, such Seller is not a party to any shareholder agreement, voting agreement, voting trust, proxy or other agreement with respect to the voting or transfer of the Company Shares. 4.3 NO OTHER RIGHTS. No Person (other than the Buyer as provided in this Agreement) has any agreement or option or any right or privilege (whether preemptive or contractual) capable of becoming an agreement or option for the purchase from such Seller of any of the Company Shares being transferred by such Seller to the Buyer pursuant to this Agreement. 4.4 NO CONFLICTING AGREEMENTS. The execution and delivery of this Agreement, the compliance with and performance of the terms and provisions of this Agreement, and the consummation of the transactions contemplated herein by such Seller will not (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a violation or breach of default (or an event which, with notice, lapse of time, or both, would constitute a default) under, (iii) result in any violation of, (iv) require the obtaining of any consent or approval of, the taking of any action of, the making of any filing with, or the giving of any notice to, any Person (except such consents, approvals, actions, filings and notices that will have been obtained, taken, made, given, or effectively waived prior to the Closing, a true, accurate and complete list of which is set forth in Section 4.4 of the Seller Disclosure Schedule) as a result of or under the terms of, (v) result in or give to any Persons any right of termination, cancellation, acceleration, modification, or increased or accelerated rights, entitlements or payments under, or (vi) result in the creation or imposition of any Encumbrance upon such Seller under: (A) any provision of any Contract relating to the Shares to which such Seller is a party or by which it or any of the Shares are bound, or (B) any order, decree, license, permit, statute, law, rule or regulation to which such Seller is subject. 4.5 CONSENTS, APPROVALS, LICENSES, ETC. Except for any consent, approval, authorization, license, order or Permit that is also required to be obtained by the Company, the Buyer or any other Seller, no consent, approval, authorization, license, order or Permit of, or declaration, filing or registration with, or notification to, any Authority is required to be made or obtained by such Seller in connection with the execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby. 4.6 LITIGATION. There is no action, suit, proceeding or investigation in progress or pending to the Knowledge of such Seller which affects this Agreement or the Company Shares or any action taken or to be taken or documents executed or to be executed by such Seller pursuant to or in connection with the provisions of this Agreement, or that would otherwise prevent the consummation of the transactions by such Seller contemplated by this Agreement. There is no present state of facts or circumstances of which such Seller has Knowledge which might reasonably be expected to result in any such action, suit, proceeding or investigation. -15- 4.7 NO BROKERS. Except as set forth in Section 3.17, no broker, agent, finder, consultant or other Person has been retained by, or has acted on behalf of such Seller (other than legal and accounting advisors) or is entitled to be paid based upon any agreements or understandings made by such parties in connection with the transactions contemplated by this Agreement, and except as set forth in Section 3.17, neither the Buyer nor the Company shall have any liability for any broker's fee, finder's fee, consultant's fee or similar third party remuneration payable by reason of any action of such Seller. 4.8 NO U.S. PERSONS. Except as set forth in Section 4.8 of the Seller Disclosure, such Seller is not a U.S. Person. ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF BUYER The Buyer represents and warrants to the Sellers that the Statements contained in this Article 5 are true and correct, except as set forth in the Buyer Disclosure Schedule: 5.1 ORGANIZATION AND CORPORATE POWER. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, USA, and is qualified to do business as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a Material Adverse Effect on the Buyer. The Buyer has all required corporate power and authority to carry on its business as presently conducted, to enter into and perform this Agreement and all other agreements contemplated hereby to which it is a party and to carry out the transactions contemplated hereby and thereby, including the issuance (or reservation for issuance), sale, delivery and conversion of Lineo Shares. The Buyer is not in violation of any term of the Certificate of Incorporation and Bylaws of the Buyer, as amended to date (the "Certificate of Incorporation" and the "Bylaws," respectively.) 5.2 AUTHORIZATION AND NON-CONTRAVENTION. The execution, delivery and performance by the Buyer of this Agreement and all other agreements, documents and instruments to be executed and delivered by the Buyer as contemplated hereby and the issuance and delivery of the Lineo Shares have been duly authorized by all necessary corporate and other action of the Buyer. This Agreement and each such other agreement, document and instrument constitute valid and binding obligations of the Buyer, enforceable in accordance with their respective terms. The execution and delivery by the Buyer of this Agreement and each other agreement, document and instrument to be executed and delivered by the Buyer pursuant hereto or as contemplated hereby and the performance by the Buyer of the transactions contemplated hereby and thereby, including, without limitation, the issuance and delivery of the Lineo Shares do not and will not (whether after the giving of notice, lapse of time or both): (a) violate, conflict with or result in a default under any instrument, judgment, order, writ, decree, contract, statute, rule, regulation or obligation to which the Buyer is subject to or by which it or its assets are bound, or any provision of the Certificate of Incorporation or Bylaws of the Buyer, and a violation of which would have a material adverse effect on the business, condition, financial or otherwise, or operations of the Buyer, or (b) result in any such violation, or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event that results in the creation of any lien, charge or encumbrance upon any assets of the Buyer or the suspension, revocation, -16- impairment, forfeiture or nonrenewal of any material permit, license, authorization or approval applicable to the Buyer, its business or operations or any of its assets or properties. 5.3 CAPITALIZATION. The authorized capital stock of the Buyer consists of 100,000,000 shares of Common Stock, par value $.001 per share, of which 20,148,724 shares are issued and outstanding, and 30,000,000 shares of Preferred Stock, par value $.001 per share, of which (a) 7,500,000 shares are designated as Series A Preferred Stock, of which (i) 5,000,000 shares are designated as Series A Class 1 Preferred Stock, all of which are issued and outstanding, and (ii) 2,500,000 shares are designated as Series A Class 2 Preferred Stock, all of which are issued and outstanding, (b) 4,850,000 shares are designated as Series B Preferred Stock, of which 4,833,331 shares are issued and outstanding, and (c) 3,000,000 shares are designated as Series C Preferred Stock. In addition, the Buyer has authorized and reserved for issuance upon conversion of the Series A Preferred Stock up to 7,500,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like), has authorized and reserved for issuance upon conversion of the Series B Preferred Stock up to 4,850,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like), has authorized and reserved for issuance upon conversion of the Series C Preferred Stock up to 3,000,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like) and has reserved for issuance upon exercise of options under the Buyer's stock option plan (the "Plan") 5,000,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like). Other than as described above, the Buyer has not issued or agreed to issue and is not obligated to issue any warrants, options or other rights to purchase or acquire any shares of its capital stock, or any securities convertible into or exercisable or exchangeable for such shares or any warrants, options or other rights to acquire any such convertible securities. All of the outstanding shares of capital stock of the Buyer are duly and validly authorized and issued, fully paid and nonassessable and, except as set forth herein, not subject to any preemptive rights to purchase or otherwise acquire shares of capital stock of the Buyer, are free of restrictions on transfer, other than restrictions on transfer under applicable state and federal securities laws, and have been offered, issued, sold and delivered in compliance with applicable federal and state securities laws. When issued in accordance with Article 2, the Lineo Shares will be duly and validly authorized and issued, fully paid and nonassessable and, except as set forth herein, not subject to any preemptive rights to purchase or otherwise acquire shares of capital stock of the Buyer, will be free of restrictions on transfer, other than restrictions on transfer under applicable state and federal securities laws, and will have been offered, issued, sold and delivered in compliance with applicable federal and state securities laws. 5.4 SUBSIDIARIES; INVESTMENTS. Except as set forth in Section 5.4 of the Buyer Disclosure Schedule and other than 1,250,000 shares of Common Stock of Caldera Systems, Inc., a representative office located in Taiwan and a wholly owned subsidiary located in the United Kingdom, the Buyer does not currently own any capital stock or interest or participate in any corporation, joint venture, partnership, trust, limited liability Buyer or other entity. 5.5 FINANCIAL STATEMENTS. The Buyer has previously furnished to the Sellers copies of its draft audited financial statements (balance sheet, statement of operations, statement of cash flows and statement of stockholders equity, including notes thereto) for the fiscal year at and ended October 31, 1999 (the "Buyer Financial Statements"). Such financial statements were prepared in conformity with U.S. GAAP applied on a consistent basis; are complete, correct and consistent in all material respects with the books and records of the Buyer; and fairly and accurately present the financial position of the Buyer as of the dates thereof and the -17- results of operations and cash flows of the Buyer for the periods shown therein. The Buyer maintains and will continue to maintain a standard system of accounting established and administered in accordance with United States GAAP. 5.6 ABSENCE OF UNDISCLOSED LIABILITIES. The Buyer does not have and is not subject to any material undisclosed liability. 5.7 ABSENCE OF CHANGES. Except as set forth in Section 5.7 of the Buyer Disclosure Schedule, since October 31, 1999 there has not been (a) any material adverse change in the financial condition, results of operations, assets, liabilities, or business of the Buyer, (b) any material asset or property of the Buyer made subject to a lien of any kind, (c) any waiver of any material right of the Buyer, or the cancellation of any material debt or claim held by the Buyer, (d) any payment of dividends on, or other distribution with respect to, or any direct or indirect redemption or acquisition of, any shares of the capital stock of the Buyer, or any agreement or commitment therefore, (e) any mortgage, pledge or hypothecation of any tangible or intangible asset of the Buyer, except in the ordinary course of business, (f) any sale or assignment of any tangible asset of the Buyer having a book value in excess of USD $5,000, except in the ordinary course of business, or of any Intellectual Property Rights (as hereafter defined) or other intangible assets, (g) any loan by the Buyer to, or any loan to the Buyer from, any officer, director, employee or stockholder of the Buyer, or any agreement or commitment therefore (other than travel and other advances in the ordinary course of business), (h) any damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the assets, property or business of the Buyer, (i) any repayment of any loan owed by the Buyer (including, without limitation, any loan owed to any stockholder of the Buyer), (j) any single capital expenditure in excess of USD $50,000 or any capital expenditures aggregating more than USD $250,000, (k) any material change in the accounting methods or practices followed by the Buyer, (l) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Buyer, except in the ordinary course of business and that is not material to the business, properties, prospects or financial condition of the Buyer, (m) any material change to a material contract or agreement by which the Buyer or any of its assets is bound or subject, (n) any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder of the Buyer, (o) to the Buyer's knowledge, any other event or condition of any character that might materially and adversely affect the business, properties, prospects or financial condition of the Buyer , (p) any resignation or termination of employment of any officer or key employee of the Buyer, or (q) any arrangement or commitment by the Buyer to do any of the things described in this Section 5.7. 5.8 TITLE; CONDITION OF PROPERTY. (a) Except as set forth in Section 5.8 of the Buyer Disclosure Schedule, the Buyer has good title to all of its property and assets, real, personal or mixed, tangible or intangible, free and clear of all liens, security interests, charges and other encumbrances of any kind. (b) Without material exception, all assets used in the Buyer business are in good operating condition and repair and suitable for use in the operation of such business, and none of such assets that (singly or when aggregated with other assets) is material to the business of the Buyer is obsolete. -18- 5.9 CERTAIN CONTRACTS AND ARRANGEMENTS. (a) Except as set forth in Section 5.9 of the Buyer Disclosure Schedule (with true and correct copies delivered to the Seller), the Buyer is not a party or subject to or bound by: (i) any plan or contract providing for collective bargaining or the like, or any contract or agreement with any labor union; (ii) any contract, lease or agreement creating any obligation of the Buyer (contingent or otherwise) to pay to any third party USD $100,000 or more with respect to any single such contract or agreement; (iii) any contract or agreement for the sale, license, lease or disposition of products or services in excess of USD $100,000; (iv) any contract containing covenants directly or explicitly limiting the freedom of the Buyer to compete in any line of business or with any person or entity; (v) any license agreement (as licensor or licensee); (vi) any contract or agreement for the purchase of any leasehold improvements, equipment or fixed assets for a price in excess of USD $100,000; (vii) any indenture, mortgage, promissory note, loan agreement, guaranty or other agreement or commitment for borrowing in excess of USD $100,000 or any pledge or security arrangement; (viii) any material joint venture, partnership, or manufacturing agreement; (ix) any endorsement or any other advertising, promotional or marketing agreement; (x) any employment contracts, or agreements with officers, directors, employees or stockholders of the Buyer or persons or organizations related to or affiliated with any such persons; (xi) any pension, profit sharing, retirement (other than the Buyer's 401(k) plan), stock option, phantom stock or other equity incentive plans; (xii) any arrangement relating to any royalty payments to employees, customers or independent contractors based on the sales volume of the Buyer; (xiii) any acquisition, merger or similar agreement; or (xiv) any contract with a governmental body under which the Buyer may have an obligation for renegotiation. (b) Except as set forth in Section 5.9 of the Buyer Disclosure Schedule, (i) each of the Buyer's contracts and commitments is in full force and effect and is valid, binding and enforceable in accordance with its terms as to the Buyer and, to the knowledge of the Buyer, as to each other party thereto; (ii) there exists no material breach or material default -19- (or event that with notice or lapse of time would constitute a material breach or material default) on the part of the Buyer or, to the knowledge of the Buyer, on the part of any other party under any of the Buyer's contracts or commitments, except to the extent that any such breach or default would not have a Material Adverse Effect on the Buyer; (iii) the Buyer has not received a written notice of termination or default under any of the Buyer's contracts or commitments; and (iv) as of the date of this Agreement, no party to an agreement under which the Buyer acquired a substantial portion of its assets has asserted any claim for indemnification under such agreement. (c) The Buyer has not engaged in the past three (3) months in any discussion (i) with any representative of any corporation or corporations regarding the merger of the Buyer with or into any such corporation or corporation, (ii) with any representative of any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Buyer or a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Buyer would be disposed of, or (iii) regarding any other form of liquidation, dissolution or winding up of the Buyer. 5.10 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS. Except as set forth in Section 5.10 of the Buyer Disclosure Schedule: (a) The Buyer has the right to use, sell, and license the Intellectual Property material to the conduct of its business as presently conducted, including without limitation all rights to the Buyer name "Lineo" and to the trademarks and the product name "Embedix" (the "Buyer Rights"), free and clear of the rights of all others. (b) The business of the Buyer as presently conducted, the products as marketed or sold and the provision of services by the Buyer do not violate and will not violate any agreements that the Buyer has with any third party or infringe any patent, trademark, service mark, copyright or trade secret or any other Intellectual Property of any third party. (c) No claim is pending or threatened against the Buyer nor has the Buyer received any notice or claim from any person asserting that any of the Buyer's present or contemplated activities infringe or may infringe any Intellectual Property of such person, and the Buyer is not aware of any infringement by any other person of any of the Buyer Rights. (d) Each current and former employee of the Buyer, and each of the Buyer's consultants and independent contractors involved in development of any of the Buyer Rights, has executed an agreement regarding confidentiality, proprietary information and assignment of inventions and copyrights to the Buyer, and none of such employees, consultants or independent contractors is in violation of any agreement or in breach of any agreement or arrangement with former or present employers relating to proprietary information or assignment of inventions. The Buyer has taken all reasonable steps to protect all data, information, ideas, concepts, know-how and materials that the Buyer treats as trade secrets, and all other confidential information and Intellectual Property of the Buyer, which are not part of the public domain or knowledge, nor, to the best knowledge of the Buyer, have they been used, divulged or appropriated for the benefit of any person other than the Buyer or otherwise to the detriment of the Buyer. -20- (e) No royalties or other amounts are payable by the Buyer to persons by reason of the ownership or use of the Intellectual Property of the Buyer. (f) No third party has claimed or, to the best of the Buyer's knowledge, has reason to claim that any person employed by or affiliated with the Buyer has (a) violated or may be violating any of the terms or conditions of his or her employment, non-competition, non-disclosure, non-solicitation or inventions agreement with such third party, (b) disclosed or may be disclosing or utilized or may be utilizing any Intellectual Property, trade secret or proprietary information or documentation of such third party, or (c) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees. 5.11 LITIGATION. There is no litigation or governmental proceeding or investigation pending or threatened against the Buyer or affecting any of its properties or assets or against any officer, director or key employee of the Buyer in his or her capacity as an officer, director or employee of the Buyer, which litigation, proceeding or investigation is reasonably likely to have a Material Adverse Effect on the Buyer, or which may call into question the validity or hinder the enforceability of this Agreement or any other agreements or transactions contemplated hereby; nor has there occurred any event nor does there exist any condition on the basis of which any such litigation, proceeding or investigation might be properly instituted or commenced. Neither the Buyer nor any of its subsidiaries is a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Buyer or any of its subsidiaries currently pending or which the Buyer or any of its subsidiaries intends to initiate. 5.12 TAX MATTERS. The Buyer has filed all federal, state, local and foreign income, excise and franchise tax returns, real estate and personal property tax returns, sales and use tax returns and other tax returns required to be filed by it where the failure to file such returns would have a Material Adverse Effect on the Buyer, and has paid all taxes owing by it, except taxes which have not yet accrued or otherwise become due, for which adequate provision has been made in the pertinent financial statements referred to in Section 5.5 above or which will not have a Material Adverse Effect on the Buyer. The filed tax returns and reports are true and correct in all material respects. All taxes and other assessments and levies which the Buyer is required to withhold or collect have been withheld and collected and have been paid over to the proper governmental authorities except where the failure to withhold or collect and pay over would not have a Material Adverse Effect on the Buyer. With regard to the federal income tax returns of the Buyer, the Buyer has never received notice of any audit or of any proposed deficiencies from the Internal Revenue Service. There are in effect no waivers of applicable statutes of limitations with respect to any taxing owed by the Buyer for any year. Neither the Internal Revenue Service nor any other taxing authority is now asserting or, to the knowledge of the Buyer, threatening to assert against the Buyer any deficiency or claim for additional taxes or interest thereon or penalties in connection therewith. 5.13 EMPLOYEE BENEFIT PLANS. The Buyer does not maintain or contribute to any to any employee benefit plan, stock option, bonus or incentive plan, pension plan, severance pay policy or agreement, deferred compensation agreement or any similar plan or agreement (an "Employee Benefit Plan") other than the Employee Benefit Plans identified and described in Section 5.13 of the Buyer Disclosure Schedule. The terms and operation of each Employee -21- Benefit Plan comply in all material respects with all applicable laws and regulations relating to such Employee Benefit Plan. There are no unfunded obligations of the Buyer under any retirement, pension, profit-sharing, deferred compensation plan or similar program. The Buyer is not required to make any payments or contributions to any Employee Benefit Plan pursuant to any collective bargaining agreement, and all Employee Benefit Plans are terminable at the discretion of the Buyer without material liability to the Buyer upon or following such termination. The Buyer has never maintained or contributed to any Employee Benefit Plan providing or promising any health or other welfare benefits (within the meaning of Section 3(3) of ERISA) to terminated employees, except for benefits mandated by applicable law, including, but not limited to, Section 4980B of the Internal Revenue Code of 1986, as amended, and Part 6 of Subtitle B of Title I of ERISA. 5.14 LABOR LAWS. The Buyer employs approximately 105 employees and generally enjoys good employer-employee relationships. The Buyer is not delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed for it as of the date hereof or amounts required to be reimbursed to such employees. The Buyer is in compliance in all material respects with all applicable laws and regulations respecting labor, employment, fair employment practices, terms and conditions of employment, and wages and hours. There are no charges of employment discrimination or unfair labor practices or strikes, slowdowns, stoppages of work or any other concerted interference with normal operations existing, pending or, to the knowledge of the Buyer, threatened against or involving the Buyer. 5.15 EMPLOYEES. Section 5.15 of the Buyer Disclosure Schedule contains a list of all managers, employees and consultants of the Buyer who, individually, have received compensation from the Buyer for the fiscal year of the Buyer ended October 31, 1999, in excess of $100,000. In each case, Section 5.15 of the Buyer Disclosure Schedule includes the current job title, years of service with the Buyer and aggregate annual compensation and benefits of each such individual. To the knowledge of the Buyer, no key employee of the Buyer has any plan or intention to terminate his or her employment with the Buyer. The Buyer has complied in all material respects with the immigration laws of the United States with respect to the hiring, employment and engagement of all of its employees and consultants who are not United States citizens, and, to the knowledge of the Buyer, the immigration or residency status of each of such employees and consultants is sufficient to allow such employees and consultants to remain lawfully employed or engaged by the Buyer. The employment of each officer and employee of the Buyer is terminable at the will of the Buyer. The Buyer is not a party to or bound by any currently effective employment contract. 5.16 HAZARDOUS WASTE, ETC. No hazardous wastes, substances or materials or oil or petroleum products have been generated, transported, used, disposed, stored or treated by the Buyer, and no hazardous wastes, substances or materials or oil or petroleum products have been released, discharged, disposed, transported, placed or otherwise caused to enter the soil or water in, under or upon any real property owned, leased or operated by the Buyer. 5.17 BUSINESS; COMPLIANCE WITH LAWS. The Buyer has all necessary franchises, permits, licenses and other rights and privileges necessary to permit it to own its property and to conduct its business as it is presently or contemplated to be conducted and is not in default in any material respect under any of such franchises, permits, licenses and other similar rights and privileges. The Buyer is currently and has heretofore been in compliance in all material respects with all federal, state, local and foreign laws and regulations. -22- 5.18 INVESTMENT BANKING; BROKERAGE. There are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transaction contemplated by this Agreement payable by the Buyer or based on any arrangement or agreement made by or on behalf of the Buyer or any of the stockholders. 5.19 INSURANCE. The Buyer has fire, casualty, product liability, workers' compensation and business interruption and other insurance policies, with extended coverage, sufficient in amount to allow it to replace any of its material properties which might be damaged or destroyed or sufficient to cover liabilities to which the Buyer may reasonably become subject, and such types and amounts of other insurance with respect to its business and properties, on both a per occurrence and an aggregate basis, as are customarily carried by persons engaged in the same or similar business as the Buyer. There is no default or event which could give rise to a default under any such policy. 5.20 TRANSACTIONS WITH AFFILIATES. There are no loans, leases, contracts or other transactions (directly or indirectly) between the Buyer and any Affiliate of the Buyer or any Family Member or Associate of any such Affiliate, and there have been no such transactions within the past twelve (12) months except as set forth in Section 5.20 of the Buyer Disclosure Schedule. To the best of the Buyer's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Buyer is affiliated or with which the Buyer has a business relationship, or any firm or corporation that competes with the Buyer, except that employees, officers or directors of the Buyer and members of their families may own stock in publicly traded companies that may compete with the Buyer. 5.21 SUPPLIERS. Section 5.21 of the Buyer Disclosure Schedule sets forth each supplier of the Buyer who supplied more than five percent (5%) of the Buyer's supplies or materials for the fiscal year ended October 31, 1999 and each supplier who the Buyer believes may supply for more than five percent (5%) of the Buyer's supplies or materials for the fiscal year ended October 31, 2000 (each a "Supplier" and collectively the "Suppliers"). The relationships of the Buyer with its Suppliers are good commercial working relationships. No Supplier of the Buyer has canceled or otherwise terminated its relationship with the Buyer, or has during the last 12 months decreased materially its services, supplies or materials to the Buyer. No Supplier has, to the knowledge of the Buyer, any plan or intention to terminate, cancel or otherwise materially and adversely modify its relationship with the Buyer or to decrease materially or limit its services, supplies or materials to the Buyer. 5.22 CERTAIN EVENTS. (a) During the past ten (10) years, neither the Buyer nor any of the officers or directors of the Buyer has had a petition under the Bankruptcy Reform Act of 1978, as amended, or any state insolvency law, filed by or against any of them which has not as of the date of this Agreement been dismissed. (b) During the past ten (10) years, neither the Buyer nor the officers or directors of the Buyer has been convicted in a criminal proceeding or is a named subject of a criminal proceeding which is presently pending (excluding traffic violations and other minor offenses). -23- (c) During the past ten (10) years, neither the Buyer nor the officers or directors of the Buyer has been, or is, the subject of any order, judgment or decree, whether or not subsequently reversed, suspended or vacated, of any court or any administrative agency, requiring the payment of money damages in excess of USD $100,000 or permanently or temporarily enjoining any of them from, or otherwise limiting any of their abilities to engage in, any type of business practice. 5.23 REGISTRATION RIGHTS. Except as disclosed in Section 5.23 of the Buyer Disclosure Schedule, the Buyer has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. 5.24 DISCLOSURE. The representations and warranties made or contained in this Agreement, the exhibits hereto and the certificates and statements executed or delivered in connection herewith, and the information concerning the business of the Buyer delivered to the Sellers in connection with or pursuant to this Agreement, when taken together, do not and shall not contain any untrue statement of a material fact and do not and shall not omit to state a material fact required to be stated therein or necessary in order to make such representations, warranties or other material not misleading in light of the circumstances in which they were made or delivered. There have been no events or transactions or information which has come to the attention of the management of the Buyer having a direct impact on the Buyer or its assets, liabilities, financial condition, business, results of operations or prospects which, in the reasonable judgment of such management, could be expected to have a Material Adverse Effect on the Buyer. 5.25 CORPORATE DOCUMENTS. The Certificate of Incorporation and Bylaws of the Buyer have been made available to the Sellers. The minute books of the Buyer containing minutes of all meetings of directors and stockholders and all actions by written consent without a meeting by the directors and stockholders since the date of incorporation have been made available to the Sellers and reflect accurately in all material respects all actions by the directors (and any committee of directors) and stockholders with respect to all transactions referred to in such minutes. The stock transfer ledgers and other similar records of the Buyer as made available to the Sellers prior to the execution of this Agreement accurately reflect all record transfers prior to the execution of this Agreement in the capital stock of the Buyer. 5.26 OFFERING. Subject in part to the truth and accuracy of the Sellers representations and warranties set forth in this Agreement, the offer, sale and issuance of the Securities as contemplated by this Agreement are exempt from the registration requirements of the Securities Act and any applicable state securities laws, and neither the Buyer nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 5.27 INVESTMENT COMPANY. The Buyer is not and shall not become an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"). In the event the Buyer breaches the foregoing, the Buyer shall forthwith notify the Sellers and shall take immediate corrective action to remedy such breach. 5.28 SUPPLEMENTAL REMUNERATION. The Buyer has not and shall not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise to any investor or other stockholder of the Buyer as -24- consideration for or as an inducement to entering into by any investor or other stockholder of the Buyer of any waiver or amendment of any of the terms and provisions of the agreements or the Certificate of Incorporation which affects any such party's rights as an investor or stockholder, unless such remuneration is concurrently paid, on the same terms, ratably to all investors or stockholders whether or not such investors or stockholders grant such waiver or agree to such amendment. 5.29 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Buyer is required in connection with the consummation of the transactions contemplated by this Agreement other than as may be required to secure an exemption from qualification of the offer and sale of the Lineo Shares under the Securities Act and applicable state securities laws. ARTICLE 6. COVENANTS OF SELLERS AND BUYER 6.1 INVESTIGATION OF BUSINESS; ACCESS TO PROPERTIES AND RECORDS. Prior to the Closing or termination of this Agreement, the Sellers shall cause the Company to give to the Buyer and its legal counsel, accountants, lenders and other representatives reasonable access during normal business hours to all of the Company's and the Subsidiaries' properties (including books, contracts, commitments and records) for inspection (including financial, legal and environmental), and shall permit them to consult with each Seller and with management employees of the Company and the Subsidiaries to allow the Buyer full opportunity to make such investigations as are necessary to review the affairs of the Company and the Subsidiaries. If, prior to Closing, the Buyer discovers any breach by any Seller or the Company of any representation or warranty contained in this Agreement or any circumstances or condition that would constitute such a breach, the Buyer will notify the Sellers promptly of such facts known to the Buyer and the nature of the breach. 6.2 REGULATORY AND OTHER AUTHORIZATIONS. (a) Subject to the limitations set forth in this Section 6.2, each of the Sellers and the Buyer shall take all reasonable actions to obtain all Permits of all Authorities that may be or become necessary for the execution and delivery of this Agreement and the performance of their respective obligations pursuant to this Agreement (which actions shall include, without limitation, furnishing all information and obtaining all approvals required) and will cooperate fully with one another in promptly seeking to obtain all such Permits. Each party to this Agreement agrees to provide information requested by any Authority or the other party in connection with obtaining such Permits, and agrees not to take any action that will have the effect of delaying, impairing or impeding the receipt of any required Permits. (b) Notwithstanding anything in Section 6.2(a) to the contrary, the Sellers shall cause the Company to coordinate on behalf of all parties the obtaining of all such Permits. The Buyer and the Sellers in association with the Company, to the extent permitted by applicable law and subject to the Company's best corporate interest, shall by mutual agreement determine the substance of all communications and filings made by the parties with any Authority regarding the transactions contemplated by this Agreement, including without limitation: -25- (i) the extent to which it may be necessary to resolve or settle any concerns on the part of any Authority regarding the legality under any law of the transactions contemplated by this Agreement by entering into negotiations, providing information, making proposals, entering into and performing agreements or submitting to judicial or administrative orders, agreeing to any restrictions on the conduct of business after Closing by the Buyer or the Company or any Subsidiary, or selling or otherwise disposing of, or holding separate (through the establishment of a trust or otherwise), particular assets or categories of assets or businesses of the Buyer, including, after the Closing, the Company or any Subsidiary; (ii) contesting the entry in a judicial or administrative proceeding brought under any local law by any Authority or any other Person of any permanent or preliminary injunction or other order that would make consummation of the transactions contemplated by this Agreement unlawful or would prevent or delay the transactions, including, without limitation, taking the steps contemplated by Section 6.2(b)(i); (iii)if such an injunction or order has been issued in such a proceeding, taking any and all steps, including, without limitation, appeal thereof, the posting of a bond or the steps contemplated by Section 6.2(b)(i), necessary to vacate, modify or suspend such injunction or order so as to permit the consummation of the transaction on the schedule contemplated by this Agreement; (iv) responding to and complying with any request or subpoena for additional information by any Authority; and (v) determining any other appropriate response or initiative to avoid or eliminate impediments under any law that may be asserted by any Authority or any other Person to the consummation of the transactions contemplated by this Agreement. 6.3 REASONABLE EFFORTS; CONSENTS AND NOTIFICATIONS. Subject to the terms and conditions provided in this Agreement, each Seller and the Buyer each will use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement and to cooperate with one another in connection with the foregoing, including using all reasonable efforts: (i) to obtain all necessary waivers, consents, releases and approvals from other parties to loan agreements, Leases, guarantees and other Contracts; (ii) to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to this Agreement to consummate the transactions contemplated by this Agreement; and to fulfill all conditions to this Agreement. 6.4 FURTHER ASSURANCES. The Sellers and the Buyer agree that, from time to time, at or after the Closing Date, each of them will execute and deliver such further instruments of conveyance and transfer and take such other action as may be reasonably necessary to carry out the purposes of this Agreement. 6.5 CONDUCT OF BUSINESS OF THE COMPANY. From the date of this Agreement through the Closing, except as otherwise provided by this Agreement or consented to or approved by the Buyer in writing: -26- (i) the Company shall operate its businesses in the ordinary and usual course in all material respects in accordance with past practices; (ii) the Company (and the Sellers acting with respect to the shares of the Company) shall not issue, purchase or agree to purchase, sell or agree to issue or sell: (A) any of its capital shares; or (B) any securities convertible into or evidencing the right to purchase, or options with respect to, or rights to subscribe for, any of its capital shares; (iii) the Company shall not (and the Sellers acting with respect to the capital shares of the Company shall not) amend its Articles of Incorporation or Bylaws ( or other governance documents) or declare or pay any dividend (whether in cash or property) or declare or effect any stock split, reclassification or other change in capital structure; (iv) the Company shall maintain its respective books and records in the usual, regular and ordinary manner consistent with past practice; (v) the Company shall comply in all material respects with all applicable laws; and (vi) the Company shall not: (A) enter into or consummate any joint venture, partnership or other similar arrangement or form any other new arrangement for the conduct of its business or acquire or enter into any agreement or letter of intent to acquire, by merger, consolidation, or purchase of stock or assets, any business, entity or Person; (B) purchase any material assets or securities of any Person, except for asset purchases in the ordinary course of its business for individual amounts not in excess of Twenty Five Thousand Dollars (USD $25,000); (C) enter into any transactions, commitments or obligations outside the ordinary course of business or incur any indebtedness, including notes payable, current maturities of long-term debt or capital lease obligations, except for trade payables and other normal items accrued as current liabilities; (D) take or agree to take any action prohibited by this Section 6.5 or that would be reasonably likely to cause any representation or warranty made by any Seller in this Agreement to be untrue or inaccurate in any material respect at the Closing Date; (E) take any action to amend or terminate any Employee Benefit Plan or to adopt any other plan, program, arrangement or practice providing benefits for or compensation to or on behalf of its employees or former employees before the Closing Date, except as required by applicable law or by the applicable collective bargaining agreement ; (F) increase the base compensation or bonus, incentive, severance or other benefit plan of any employee, consultant or agent, except for increases in base annual salaries in the ordinary course of business; or -27- (G) grant any Encumbrance on any asset, except for Permitted Encumbrances. Notwithstanding the foregoing, the parties acknowledge that the Majority Shareholders have resigned from the Company's Board of Directors with effect as of May 3, 2000, and that S. You Huang has been appointed by the Board of Directors as President-Directeur-General. Buyer agrees that S. You Huang shall execute the Employment Agreements in the form attached hereto as Exhibit D on behalf of the Company at the Closing, and that Buyer shall thereafter convene a meeting of the shareholders of the Company in order to appoint such new directors as Buyer shall see fit. 6.6 PRESERVATION OF BUSINESS. (a) Subject to the terms and conditions of this Agreement and except as otherwise provided by this Agreement, the Company shall use reasonable efforts to: (i) preserve the business of the Company and keep generally available to the Company the services of the employees, officers, consultants, contractors and agents of the Company; (ii) preserve generally the goodwill of customers, suppliers, creditors and others having business relations with the Company; and (iii) continue performance in the ordinary course of their respective obligations under all Contracts to which the Company is a party or which binds it or its assets. (b) In connection with the operation of the Business between the date of this Agreement and the Closing, to the extent permitted by applicable law and subject to the Company's best corporate interest, the Sellers shall cause the Company to confer in good faith on a regular basis with one or more designated representatives of the Buyer (which representatives shall have been designated by the Buyer to the Sellers and to the Company in writing) with respect to material matters affecting or impacting the operations of the Company or any Subsidiaries and shall consult in general with respect to the ongoing operations of the Company and the Subsidiaries. The Sellers shall cooperate with the Buyer in its efforts to communicate with the employees, consultants, professionals, agents and others having business relationships with the Company regarding the transition of the Company's business to ownership by the Buyer. 6.7 ANNOUNCEMENTS. Neither the Sellers, the Company, or the Buyer, nor any agent or any Affiliate of any of the foregoing, shall make any public statements, including, without limitation, any press releases or other public disclosure, with respect to this Agreement and the transactions contemplated by this Agreement without the prior consent of the other party and the Company (which consent may not be unreasonably withheld or delayed), except as may be required by law or advisable under the rules of any securities exchange to which the Buyer is subject. 6.8 NO SOLICITATION. From the date of this Agreement to the earlier of (i) the Closing Date or (ii) the termination of this Agreement in accordance with its terms, the Sellers agree that (A) they will not, and (B) they will not authorize or permit any officer, director or -28- employee of the Company, or any investment banker, attorney, financial advisor, accountant or other Person retained by any Seller or the Company, directly or indirectly (including by way of furnishing any information) to: (1) solicit, initiate, assist, encourage or accept any Takeover Proposal or any inquiries relating to a Takeover Proposal or to make any proposals which could reasonably be expected to lead to any Takeover Proposal relating to the Company Subsidiary; (2) engage in any negotiations with respect to, or otherwise attempt to consummate, a Takeover Proposal; (3) provide any public or nonpublic information concerning the Company to any Person in connection with any Takeover Proposal or to any Person whom any Seller or the Company knows or has reason to believe is in the process of planning or considering a Takeover Proposal; or (4) reach any agreement or understanding for or with respect to any Takeover Proposal. 6.9 RIGHT TO UPDATE AND CURE. (a) From time to time prior to the Closing, the Buyer and the Sellers shall update or amend their respective disclosure of any matter set forth or required to be set forth in their respective Disclosure Schedules to reflect any changes in (or any inaccuracies in) such Disclosure Schedule. For purposes of Section 7.1 or Section 8.1, any material change in a disclosure, representation or warranty made by the Majority Shareholders or any Seller following the execution and delivery of this Agreement and prior to the Closing shall entitle the Buyer to terminate this Agreement, and any material change in a disclosure, representation or warranty made by the Buyer following the execution and delivery of this Agreement and prior to the Closing shall entitle the Sellers to terminate this Agreement, in each case by written notice to the other given within 15 days of its receipt of written notice of such change and in any event prior to the Closing. Notwithstanding anything in this Agreement to the contrary, any party that receives notice of a material change in the disclosures may defer the Closing Date for up to five Business Days after receipt of such change, provided that the Closing Date shall not under any circumstances be deferred beyond the deadline specified in Section 10.1 hereof. (b) Prior to the Closing, each of the parties to this Agreement agrees to notify the other parties promptly in writing of, and contemporaneously will provide the other parties with true and complete copies of, any and all information or documents relating to, and will use all commercially reasonable efforts to cure before Closing, any event, transaction or circumstance occurring after the date of this Agreement that causes or will cause any covenant or agreement under this Agreement to be breached or that renders or will render untrue any representation or warranty contained in this Agreement as if the same were made on or as of the date of such event, transaction or circumstance. Each of the parties to this Agreement also agrees to notify the other parties promptly in writing of, and will use all commercially reasonable efforts to cure, before the Closing, any violation or breach of any representation, warranty, covenant or agreement made in this Agreement, whether occurring or arising before, on or after the date of this Agreement. 6.10 MARKET STAND-OFF AGREEMENT. In connection with a public offering by the Buyer, the Sellers if requested in good faith by the Buyer and the managing underwriter of the public offering, shall agree not to sell or otherwise transfer or dispose of any securities of the Buyer held by them (except for any securities sold pursuant to such registration statement) for a period following the effective date of the applicable registration statement that in no event shall exceed 180 days or, if shorter, the amount of time applicable to Lineo's officers and directors generally for such purpose. In order to enforce the foregoing, the -29- Buyer may impose stop-transfer instructions with respect to the Lineo Shares held by such Seller (and the shares of securities of every other person subject to the foregoing restriction) until the end of such period. 6.11 SECURITIES LAW COMPLIANCE. (a) Sellers agree that all offers and sales of the Lineo Shares prior to one year after the Closing shall be made only in accordance with the provisions of Rule 903 or Rule 904 under the Securities Act, pursuant to registration of the Lineo Shares under the Securities Act; or pursuant to an available exemption from the registration requirements of the Securities Act; and not to engage in hedging transactions with regard to the Lineo Shares prior to one year after the Closing unless in compliance with the Securities Act. (b) Sellers acknowledge that the Lineo Shares have not been registered under the Securities Act and may not be offered or sold in the United States or to U.S. Persons (other than distributors) unless the Lineo Shares are registered under the Securities Act, or an Exemption from the registration provisions of the Securities Act is available, and that the Lineo Shares may not be sold outside the United States except in compliance with all other applicable securities laws. Sellers further acknowledge that hedging transactions involving the Lineo Shares may not be conducted unless in compliance with the Securities Act. (c) Each Seller represents to the Company that such Seller has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment contemplated by this Agreement and making an informed investment decision with respect thereto. Each Seller who is a U.S Person represents that such Seller is an "accredited investor" as such term is defined in Rule 501 under the Securities Act. Each Seller represents and understands that such Seller is responsible for its own due diligence investigation and satisfying its own due diligence requirements and shall not be entitled to rely on the due diligence investigation of any other person or entity. Each Seller represents to the Buyer that it is acquiring the Lineo Shares for such Seller's own account, for investment only and not with a view to, or any present intention of, effecting a distribution of such securities or any part thereof except pursuant to a registration or an available exemption under applicable law. Each Seller acknowledges that such Seller's Lineo Shares have not been registered under the Securities Act or the securities laws of any state or other jurisdiction and cannot be disposed of unless they are subsequently registered under the Securities Act and any applicable state laws or exemption from such registration is available. 6.12 TAX FILING CODE SECTION 338(g) ELECTION. The Buyer has indicated to the Sellers that it will prepare and File an election under Section 338(g) of the Code to treat this transaction as an asset purchase. In this respect, upon demand of the Buyer, the Sellers shall reasonably cooperate with the Buyer provided that the Sellers shall incur no costs or other liability now or in the future in this respect. 6.13 COVENANT NOT TO COMPETE/NONSOLICITATION. (a) Covenant. Each of the Majority Shareholders agrees not to directly or indirectly compete (as defined in sub-section 6.13(b) below) with the Company in the noncompetition area (as defined in sub-section 6.13( c) below) for a period of two (2) years from the Closing Date (the "Non-Compete Period"). -30- (b) Direct and Indirect Competition. Each of the Majority Shareholders agrees that the phrase "directly or indirectly compete" shall include: (i) owning, managing, operating, or controlling, or participating in the ownership, management, operation, or control of, or being connected with or having any interest in, as a stockholder, director, officer, employee, agent, consultant, assistant, advisor, sole proprietor, partner, or otherwise, any business (other than the Company's) that is involved in the development, marketing, and/or sale of Linux-based embedded software components and applications (including, but not limited to, traditional embedded devices, handheld devices, personal digital assistants, thin clients, and thin servers), provided, however, that this prohibition shall not apply to the ownership of less than five percent (5%) of the voting stock in companies whose stock is traded on a national securities exchange or in the over-the-counter market; (ii) soliciting, causing to be solicited, contracting with, or otherwise engaging in business with any person or business entity, whom or which at the time is a current client of the Company, and whom or which is known to such Majority Shareholder and with whom or which such Majority Shareholder has dealt, directly or indirectly, during the final 12 months of the Non-Compete Period, for the purpose of the development, marketing, and/or sale of Linux-based embedded software components or applications; (iii) soliciting, persuading, inducing, or otherwise causing employees of the Company to leave the Company's employ; or (iv) soliciting or engaging in any employment or other activity that is the same or similar to any business in which the Company is now, or has plans to become, engaged. (c) Noncompetition Area. Each of the Majority Shareholders agrees that the phrase "noncompetition area" means any national market in which the Buyer or its Subsidiaries, within twelve (12) months prior to the commencement of any direct or indirect competitive action(s) by Majority Shareholder, (i) has developed, marketed, or sold Linux-based embedded software components or applications, or (ii) has made material commitments to do so. ARTICLE 7. CONDITIONS TO BUYER'S OBLIGATION TO CLOSE The Buyer's obligation to consummate the Share Purchase shall be subject to the satisfaction on or prior to the Closing Date of all of the following conditions (any of which may be waived in writing by the Buyer in its sole discretion): 7.1 REPRESENTATIONS; WARRANTIES AND COVENANTS OF THE MAJORITY SHAREHOLDERS AND THE SELLERS. Subject to the second sentence of this Section 7.1, the representations and warranties of the Majority Shareholders and the Sellers in this Agreement shall be true and correct on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date, except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true -31- and correct as of such date or time). The Closing condition contained in this Section 7.1, as it relates to representations and warranties, shall be satisfied unless the inaccuracies in and breaches of such representations and warranties, without reference to materiality qualifiers, have or are likely to have an adverse effect on the Company, taken as a whole, or on the Buyer's ownership of the Company Shares, of Fifty Thousand Dollars (USD$50,000) or more. The covenants and agreements of the Sellers to be performed on or before the Closing Date in accordance with this Agreement shall have been performed in all material respects. 7.2 FILINGS; CONSENTS; WAITING PERIODS. All registrations, filings, applications, notices, consent, approvals, waivers, authorizations, qualifications and orders to be filed, made or obtained by the Sellers in order to consummate the transactions contemplated by this Agreement (including, without limitation, any filings or actions required) shall have been filed, made or obtained. 7.3 NO INJUNCTION. There shall be no injunction, restraining order or decree of any nature of any Authority or other Person that is in effect and that (i) restrains, prohibits or makes illegal the consummation of the Share Purchase, or (ii) imposes conditions on the consummation of the Share Purchase not otherwise provided for in this Agreement. 7.4 CLOSING DELIVERIES. The Sellers or the Majority Shareholders, as appropriate, shall have delivered or caused to be delivered to the Buyer the following: (i) True and correct copies of the Bylaws of the Company as in effect on the day prior to Closing; (ii) A certificate of the Majority Shareholders and each of the Sellers, if requested by the Buyer, attesting to the matters set forth in Section 7.1; (iii)The documents to be delivered by the Sellers as described in Section 2.2(c); (iv) The Company Financial Statements; (v) Evidence reasonably satisfactory to the Buyer of the existence of the Cash Balance as at Closing; and (vi) Copies of the Liquidity Agreement, the Stock Option Undertaking, and the Employment Agreements in the form attached as Exhibit A, B and C, respectively, duly signed by the Majority Shareholders. 7.5 ABSENCE OF LITIGATION. No claim, action, suit, arbitration, investigation, inquiry or other proceeding by any Authority or other Person with respect to this Agreement or the transactions contemplated hereby shall be threatened or pending on the Closing Date and, up to the Closing, no party to this Agreement shall have been advised by any Authority (which advisory has not been officially withdrawn by such Authority on or prior to the Closing Date) that such Authority is reviewing this Agreement or the transactions contemplated hereby to determine whether to file or commence any litigation with respect to any aspect of this Agreement or the transactions contemplated hereby. 7.6 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS. There shall not have been made or threatened by any Person any claim asserting that such Person (a) is the holder -32- or the beneficial owner of, or has the right to acquire or to obtain beneficial ownership of, any stock of, or any other voting, equity, or ownership interest in the Company, or (b) is entitled to all or any portion of the Purchase Price payable for the Company Shares. 7.7 NO MATERIAL ADVERSE EFFECT. Before the Closing Date, there shall have been no material change in the assets or liabilities, the business or condition (financial or otherwise), the results of operations or prospects of the Company or any Subsidiary, whether as a result of any legislative or regulatory change, revocation of any license or right to do business, fire, explosion, accident, casualty, labor trouble, flood, drought, riot, storm, condemnation or act of God or other public force or otherwise, that results in a Material Adverse Effect. ARTICLE 8. CONDITIONS TO SELLERS' OBLIGATIONS TO CLOSE Each Seller's obligation to consummate the Share Purchase is subject to the satisfaction on or prior to the Closing Date of all of the following conditions (any of which may be waived in writing by such Seller, in its sole discretion): 8.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BUYER. The representations and warranties of the Buyer in this Agreement shall be true and correct on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true and correct as of such date, or time), and the covenants and agreements of the Buyer to be performed on or before the Closing Date in accordance with this Agreement shall have been performed in all material respects. 8.2 FILINGS; CONSENTS; WAITING PERIODS. All registrations, filings, applications, notices, consents, approvals, waivers, authorizations, qualifications and orders to be filed, made or obtained by the Buyer, the Company or any Seller in order to consummate the transactions contemplated by this Agreement shall have been filed, made or obtained. The Buyer shall have obtained the consents identified in Section 5.3 of the Buyer Disclosure Schedule, which consents shall be in form and substance reasonably satisfactory to the Majority Shareholders. 8.3 NO INJUNCTION. The condition set forth in Section 7.3 shall have been satisfied. 8.4 CLOSING DELIVERIES. The Buyer shall have delivered or caused to be delivered to the Sellers' legal counsel (in the case of clauses (i), (ii) and (iii) below), to each Seller (in the case of clause (iv) below), and to the Majority Shareholders (in the case of clause (v) below) the following: (i) A certificate of the Secretary of the Buyer attesting to the incumbency of the officers of the Buyer executing this Agreement and any other certificates or agreements delivered by the Buyer to the Sellers at or prior to the Closing; (ii) A certificate of the Chairman of the Board or President of the Buyer attesting on behalf of the Buyer to the matters set forth in Section 8.1; -33- (iii) A resolution of the Board of Directors of the Buyer authorizing the execution, delivery and performance by the Buyer of this Agreement and the consummation of the transactions contemplated herein, certified by the Secretary of the Buyer; (iv) The Purchase Price payable in accordance with Section 2.2 to each Seller (as specified in Section 2.2) pursuant to this Agreement; and (v) Duly executed copies of the Liquidity Agreement and Stock Option Undertaking in the forms attached hereto as Exhibit B and C respectively and the Employment Agreements in the form attached as Exhibit C (duly signed by the Company). 8.5 SERIES C CONVERTIBLE PREFERRED STOCK OF THE BUYER. The Buyer shall have consummated the issuance of at least 3,000,000 shares of its Series C Convertible Preferred Stock. 8.6 ABSENCE OF LITIGATION. No claim, action, suit, arbitration, investigation, inquiry or other proceeding by any Authority or other Person with respect to this Agreement or the transactions contemplated hereby shall be threatened or pending on the Closing Date and, up to the Closing, no party to this Agreement shall have been advised by any Authority (which advisory has not been officially withdrawn by such Authority on or prior to the Closing Date) that such Authority is reviewing this Agreement or the transactions contemplated hereby to determine whether to file or commence any litigation with respect to any aspect of this Agreement or the transactions contemplated hereby. 8.7 NO MATERIAL ADVERSE EFFECT. Before the Closing Date, there shall have been no material change in the assets or liabilities, the business or condition (financial or otherwise), the results of operations or prospects of the Buyer or any of its Subsidiaries, whether as a result of any legislative or regulatory change, revocation of any license or right to do business, fire, explosion, accident, casualty, labor trouble, flood, drought, riot, storm, condemnation or act of God or other public force or otherwise, that results in a Material Adverse Effect. ARTICLE 9. SURVIVAL; INDEMNIFICATION 9.1 INDEMNIFICATION . (a) If the Closing occurs, and subject to the limitations set forth in this Article 9, the Majority Shareholders, severally and not jointly (according to their pro-rata ownership of the Company shares as set forth in EXHIBIT A) shall indemnify and hold harmless the Buyer and its Affiliates (collectively, the "Buyer Indemnitees") from and against and in respect of any and all loss, damage, diminution in value, liability, cost and expense, including reasonable attorneys' fees and amounts paid in settlement (collectively, the "Indemnified Losses"), suffered or incurred by any one or more of the Buyer Indemnitees by reason of, or arising out of: (i) any misrepresentation or breach of representation or warranty of the Majority Shareholders contained in this Agreement, the Majority Shareholders Disclosure Schedule, or any certificate, instrument, agreement or other writing delivered by or on behalf of the Majority Shareholders pursuant to this Agreement or in connection with the -34- transactions contemplated herein, or the breach of any covenant or agreement of the Majority Shareholders contained in this Agreement, the Majority Shareholders Disclosure Schedule, or any certificate, instrument, agreement or other writing delivered to the Buyer by or on behalf of the Majority Shareholders pursuant to this Agreement or in connection with the transactions contemplated herein; and (ii) any and all actions, orders, assessments, fees and expenses incident to any of the foregoing or incurred in investigating or attempting to avoid the same or to oppose the imposition thereof, or in enforcing this indemnification. (b) Each Seller, severally and not jointly, shall indemnify and hold harmless the Buyer Indemnitees from and against any Indemnified Losses caused by a breach of that Seller's representations, warranties or agreements set forth in this Agreement. For avoidance of doubt, no Seller shall have responsibility for a breach by any other Seller. (c) If the Closing occurs, and subject to the limitations set forth in this Article 9, the Buyer shall indemnify and hold harmless the Sellers and their Affiliates (collectively, the "Seller Indemnitees") from and against and in respect of any and all Indemnified Losses suffered or incurred by any one or more of the Seller Indemnitees by reason of, or arising out of: (i) any misrepresentation or breach of representation or warranty of the Buyer contained in this Agreement, the Buyer Disclosure Schedule, or any certificate, instrument, agreement or other writing delivered by or on behalf of the Buyer pursuant to this Agreement or in connection with the transactions contemplated herein, or the breach of any covenant or agreement of the Buyer contained in this Agreement, the Buyer Disclosure Schedule, or any certificate, instrument, agreement or other writing delivered to the Sellers by or on behalf of the Buyer pursuant to this Agreement or in connection with the transactions contemplated herein; and (ii) any and all actions, orders, assessments, fees and expenses incident to any of the foregoing or incurred in investigating or attempting to avoid the same or to oppose the imposition thereof, or in enforcing this indemnification. (d) The party or parties entitled to indemnification under any provision of this Article 9 are sometimes collectively referred to herein as the "Indemnitees" and the party or parties obligated to indemnify under any provision of this Article 9 are sometimes collectively referred to herein as the "Indemnifying Parties". The Indemnifying Parties shall reimburse Indemnitees on demand for any Indemnified Losses suffered by the Indemnitees, based on the judgment of any court of competent jurisdiction or pursuant to a bona fide compromise or settlement of claims, demands or actions in respect of any Indemnified Losses, provided however that no third party claim may be settled without the prior written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. The Indemnifying Parties shall have the opportunity to defend at their expense any claim, action or demand for which the Indemnitees claim indemnity against the Indemnifying Parties, provided that: (i) the defense is conducted by reputable counsel approved by the Indemnitees, which approval shall not be unreasonably withheld or delayed; (ii) the defense is expressly assumed in writing within 15 days after written notice of the claim, action or demand is given to the Indemnifying Parties; and (iii) counsel for the Indemnitees may -35- participate at all times and in all proceedings (formal and informal) relating to the defense, compromise and settlement of the claim, action or demand at the expense of the Indemnitees. (e) No claim shall be brought by any Indemnitee under this Article 9 for Indemnified Losses, and none of them shall be entitled to receive any payment with respect thereto, unless and until the aggregate amount of such claim(s) equals or exceeds USD$150,000, in which case the Indemnitees will be entitled to reimbursement hereunder for Indemnified Losses from the first dollar of loss. Anything to the contrary notwithstanding, (A) with respect to the representations and warranties set forth in Article 3, (i) each Majority Shareholder will be liable to the Buyer Indemnitees for the pro rata portion of such Indemnified Losses in accordance with the percentages set forth opposite that Majority Shareholder's name on Exhibit A; (ii) no Majority Shareholder shall be liable to the Buyer Indemnitees for Indemnified Losses in excess of the percentages set forth opposite that Majority Shareholder's name on Exhibit A; and (iii) the Majority Shareholders shall not be liable to the Buyer Indemnitees under this Article 9 to reimburse Indemnified Losses, if any, in excess in the aggregate of the product of the number of Lineo shares received by him times USD$6.00; provided, however, that such limitation shall not apply to any loss suffered by the Buyer Indemnitees attributable to fraudulent misrepresentations; and (B) with respect to the representations and warranties set forth in Article 4, (x) no Seller shall be liable for Indemnified Losses in excess in the aggregate of the product of the number of Lineo shares received by him times USD$6.00, provided, however, that such limitation shall not apply to any loss suffered by the Buyer Indemnitees attributable to fraudulent misrepresentations or to breaches of the representations set forth in Sections 4.1, 4.2, 4.3 and 4.4, and (y) no Seller shall be liable with respect to the breach of any representation or warranty of any other Seller. (f) Any Seller (including any Majority Shareholder) may satisfy any obligation for indemnification under this Article 9 by delivering to the applicable Buyer Indemnitees Lineo Shares having a fair market value (determined in accordance with the following sentence) equal to the Indemnified Losses or other amounts for which such Seller is liable hereunder. For purposes of this Section 9.1(f), "fair market value" shall mean the greater of $6.00 per share (adjusted for any stock splits, stock dividends, recapitalizations and other similar events occurring after the date hereof) and the average of the closing prices (last sale) of the Lineo Shares on the principal U.S. national securities exchange or market system on which they are traded for the ten trading days immediately prior to the payment. (g) The Company shall not have any liability, obligation or indebtedness to any Seller as a result of any misrepresentation or breach of representation or warranty by any Seller contained in this Agreement, the Majority Shareholders Disclosure Schedule, the Seller Disclosure Schedule or any certificate, instrument, agreement or other writing delivered by or on behalf of any Seller pursuant to this Agreement, or in connection with the transactions contemplated herein, or the breach of any covenant or agreement of any Seller contained in this Agreement, the Majority Shareholders Disclosure Schedule or the Seller Disclosure Schedule, or any certificate, instrument, agreement or other writing by or on behalf of any Seller pursuant to the provisions of this Agreement or in connection with the transactions contemplated herein. -36- 9.2 LIMITATIONS ON INDEMNIFICATION. (a) The representations and warranties of Buyer and each Seller (including without limitation each Majority Shareholder) contained in this Agreement, the Buyer Disclosure Schedule, the Majority Shareholders Disclosure Schedule, the Seller Disclosure Schedule or in any certificate, instrument, agreement or other writing delivered by or on behalf of Buyer or any Seller pursuant to this Agreement or in connection with the transactions contemplated herein shall survive any investigation heretofore or hereafter made by or on behalf of the Buyer or the Seller, as applicable (subject to the provisions of this Article 9), and the consummation of the transactions contemplated herein, and all such representations and warranties shall be of no further force and effect after two years from the date of the Closing, except for matters set forth in Sections 3.11, 3.12, 3.13, 3.14, 3.15, 4.1, 4.2, 4.3, 4.4, 5.2, 5.3, 5.12, 5.13, 5.14, 5.15 and 5.16, for which the survival period shall extend until the expiration of the applicable statutory limitations period (as applicable, the "Survival Period"). Anything to the contrary notwithstanding, a claim for indemnification which is made in writing but not resolved prior to the expiration of the Survival Period may be pursued and resolved after such expiration. (b) An Indemnitee shall be obligated to prosecute diligently and in good faith any claim for Indemnified Losses with any applicable insurer prior to collecting any indemnification payment hereunder, provided that an Indemnitee shall be entitled to collect an indemnification payment otherwise due to it hereunder if such Indemnitee has not received reimbursement from the applicable insurer(s) within twelve (12) months after it has given such insurer(s) appropriate written notice of its claim. (c) In the case where an Indemnitee recovers from third parties all or any part of any amount previously paid to it by any Seller hereunder, such Indemnitee shall promptly pay over to such Seller the amount so recovered (net of any expenses actually incurred by it in procuring such recovery), but not in excess of any amount previously so paid by the Indemnifying Party. No amount shall become payable by an Indemnifying Party to an Indemnity in respect of any third party claim unless and to the extent that the Indemnity shall have become required to pay after exhausting all available remedies, and shall actually have paid, the relevant Indemnified Losses to the relevant third party. (d) The amount of any claim made hereunder shall be reduced by taking into account (i) any amount payable to the Buyer or the Company by any insurer or other third party in respect of the relevant Indemnified Losses, and (ii) any offsetting benefit (including any tax reduction) to the relevant Company or to any Affiliate thereof, either in the year in which the Indemnified Losses are sustained or in any other year. (e) For purposes of computing the amount of any Indemnified Losses, only the loss actually sustained shall be taken into account, to the exclusion of any price/earnings or similar multiplier implicit in the Purchase Price, and in no event shall any Indemnifying Party be liable for unforeseen or consequential damages. (f) The Indemnitees shall not be entitled to any indemnification payments if they have not timely notified the Indemnifying Parties and otherwise complied in all material respects with all the other provisions of this Article 9. -37- (g) The Indemnitees shall not be entitled to any indemnification in connection with Indemnified Losses resulting from facts of which the Indemnitees were aware at the time of executing this Agreement. (h) Sellers shall have no liability under any provision of this Agreement for Indemnified Losses which arise as a result of (i) actions taken by the Buyer or the Company after the Closing Date, or (ii) the passing of, or any change in, after the date hereof, any law or administrative practice of any government, governmental department, agency or regulatory body in any such case not actually in force at the date of this Agreement. (i) The Indemnitees shall use their best efforts, and the Buyer Indemnitees shall cause the Company to use its best efforts, to mitigate any Indemnified Losses which any of them may suffer as a result of any matters giving rise to a claim for indemnification hereunder. (j) The provisions of this Article 9 shall constitute the sole remedy of all of the parties hereto for any misrepresentation or breach of representation or warranty contained in this Agreement, any Disclosure Schedule, or any certificate, instrument, agreement or other writing delivered by or on behalf of any such party pursuant to this Agreement or in connection with the transactions contemplated herein ARTICLE 10. TERMINATION 10.1 TERMINATION. This Agreement may be terminated at any time prior to Closing by: (a) the mutual consent of the Buyer and the holders of a majority in interest of the common shares of the Company; (b) the Buyer or the holders of a majority in interest of the common shares of the Company if the Closing has not occurred by the close of business on the date which is 30 calendar days following the date of this Agreement, so long as the failure to consummate the transaction on or before such date did not result from a breach of this Agreement by the party seeking termination of this Agreement; (c) at any time before the Closing, by any Seller or the Buyer, (A) in the event of a material breach of this Agreement hereof by any non-terminating party if such non-terminating party fails to cure such breach within five Business Days following notification by any one or more of the terminating parties, or (B) upon notification to the non-terminating parties by the terminating party that the satisfaction of any condition to the terminating party's obligations under this Agreement has become impossible or impracticable with the use of best efforts unless the failure of such condition to be satisfied is caused by a breach of this Agreement by the terminating party or the non-terminating parties waive such condition within five Business Days of receipt of such notification (and, for purposes of (ii) and (iii) only, a breach or material breach by any Seller shall constitute a breach or material breach, as the case may be, by all of the Sellers); and -38- if such termination is required pursuant to any final and nonappealable judgment or order entered in any judicial or administrative proceeding initiated by an Authority. 10.2 PROCEDURE AND EFFECT OF TERMINATION. In the event of termination of this Agreement pursuant to Section 10.1, written notice of such termination shall promptly be given by the terminating party to the other parties, and this Agreement shall upon that notice terminate and become void and have no effect, and the transactions contemplated by this The parties shall abandon agreement without further action, except that the provisions of Section 11.5 shall survive the termination of this Agreement; provided, however, that such termination shall not relieve any party of any liability for any breach by it of this Agreement. ARTICLE 11. MISCELLANEOUS 11.1 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which taken together shall be considered one and the same agreement. The Agreement and signatures on this Agreement, may be transmitted by facsimile, and such shall deem such a transmission a delivery of this Agreement signing party. 11.2 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to a contract executed and performed in such state without reference to the choice of law principles of such state. 11.3 NO THIRD PARTY BENEFICIARIES. Except as provided in Section 6.10 above, nothing in this Agreement is intended, nor shall it be construed, to confer any rights or benefits upon any Person that is not a party to this Agreement, and no other Person not a party to this Agreement shall have any rights or remedies under this Agreement. 11.4 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties with respect to the subject matter of this Agreement, and this Agreement supersedes all prior drafts of such agreement, and all prior and contemporaneous agreements, representations, negotiations, discussions, correspondence, communications, term sheets and understandings of the parties, except for the Confidentiality Agreement, which agreement is ratified and remains in full force and effect. There are no agreements, understandings, representations and warranties between the parties other than those set forth or referred to in this Agreement. 11.5 EXPENSES. Except as set forth in this Agreement, whether the Share Purchase is or is not consummated, all costs and expenses, including but not limited to fees and expenses of attorneys, advisers, agents, and accountants, incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such costs and expenses, whether such costs and expenses were incurred prior to or are incurred after the date hereof, and in particular, all such costs and expenses incurred by or on behalf of the Sellers shall be borne by the Sellers and not charged to the Company. Notwithstanding the foregoing, the audit contemplated by Section 2.2(b) shall be at the Buyer's sole expense. -39- 11.6 NOTICES. All notices under this Agreement shall be sufficiently given for all purposes under this Agreement if in writing (a) when delivered personally; (b) in the case of domestic deliveries within the United States, three Business Days after deposited for first class mailing by the United States Postal Service; (c) in the case of domestic deliveries within the United States, one day after deposited for delivery by a nationally recognized overnight delivery service; (d) in the case of foreign deliveries, two days after deposited for delivery by a reputable foreign or overseas air courier; or (e) when receipt is confirmed, by telecopy, telefax or other electronic transmission service to the appropriate address or number as set forth below. Notices to the Sellers shall be addressed to each Seller at the address noted in Exhibit A hereto or at such other address and to the attention of such other Person as each Seller may designate by written notice to the Buyer. Notices to the Buyer shall be addressed to: Lineo, Inc. 1505 Westlake Avenue North, Suite 400 Seattle, Washington 98109 Attention: Matthew Harris, Vice President & General Counsel Telecopy: (206) 281-9882 or to such other address and to the attention of such other Person as the Buyer may designate by written notice to the Sellers. 11.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and permitted assigns. No party to this Agreement shall have the right to assign its rights or interests in or delegate its obligations under this Agreement without the express prior written consent of all other parties to this Agreement; provided, however, the Buyer may assign its rights or interests under this Agreement to any direct or indirect wholly owned subsidiary of the Buyer, in which event the Buyer shall remain liable under this Agreement; and provided further that any Seller may, by notice to the Buyer, direct that no Seller may direct any or all of his share of the Closing Purchase Price be paid to any other Person. No such assignment shall release the Buyer from its obligations hereunder without the Sellers' written consent. 11.8 HEADINGS; DEFINITIONS. The Section and article headings contained in this Agreement are inserted for convenience and reference only and will not affect the meaning or interpretation of this Agreement. All references to Sections or Articles contained in this Agreement mean Sections or Articles of this Agreement unless otherwise stated. All capitalized terms defined in this Agreement are equally applicable to both the singular and plural forms of such terms. As the context requires, the singular form of any term includes the plural and vice versa, and all pronouns used herein shall be deemed to refer to the masculine, feminine or neuter gender. 11.9 AMENDMENTS AND WAIVERS. This Agreement may not be modified or amended except by an instrument or instruments in writing signed by the party against whom enforcement of any such modification or amendment is sought. Any party to this Agreement may, only by an instrument in writing, waive compliance by any other party to this Agreement with any term or provision of this Agreement. The waiver by any parties to this Agreement of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach. -40- 11.10 ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by binding arbitration in accordance with the International Arbitration Rules of the American Arbitration Association ("Rules of AAA"), and the procedures set forth below. In the event of any inconsistency between the Rules of AAA and the procedures set forth below, the procedures set forth below shall control. Judgment upon the award rendered by the arbitrator may be enforced in any court having jurisdiction thereof. (a) Location and Language. The location of the arbitration shall be New York, New York, United States of America. The language of the arbitration shall be English. (b) Selection of Arbitrator. Unless the parties subsequently agree otherwise, the arbitration shall be conducted by three arbitrators, one of whom shall be appointed by the Majority Shareholders and/or the Sellers (or any of them as are parties to the arbitration), one of whom shall be appointed by the Buyer, and the third of whom, who shall be the presiding arbitrator, shall be appointed by the two party-appointed arbitrators, or, in the event of their failure to agree within a reasonable time on such third arbitrator, by the AAA. If the AAA appoints the presiding arbitrator, it shall endeavor to appoint as such presiding arbitrator an attorney having at least fifteen (15) year's experience in corporate and securities issues and who has previously acted as an arbitrator in an international arbitration. Notwithstanding the foregoing, in the event that the Majority Shareholders or the Sellers cannot agree on the appointment of their arbitrator, all of the arbitrators shall be appointed by the AAA. (c) Discovery. Unless the parties mutually agree in writing to some additional and specific pre-hearing discovery, the only pre-hearing discovery shall be (a) reasonably limited production of relevant, non-privileged and specifically identifiable documents, and (b) the identification of witnesses to be called at the hearing, which identification shall give the witness's name, general qualifications and position, and a brief statement as to the general scope of the testimony to be given by the witness. The arbitrators shall decide any disputes over and shall control the process concerning these pre-hearing discovery matters. (d) Case Management. Prompt resolution of any dispute is important to all of the parties; and the parties agree that the arbitration of any dispute shall be conducted expeditiously. The arbitrators are instructed and directed to assume case management initiative and control over the arbitration process (including scheduling of exchanges of submissions, pre-hearing discovery, and the conduct of the hearing), in order to complete the arbitration as expeditiously as is reasonably practical for obtaining a just resolution of the dispute. (e) Remedies. In reaching their decision, the arbitrators shall follow and apply applicable law and the provisions of this Agreement. The decision of the arbitrators shall be binding upon the parties. (f) Expenses. The expenses of the arbitration, including the fees of the arbitrators and the AAA, any expert witness fees, and the attorneys' fees incurred by the parties to the arbitration, may be awarded to the prevailing party, in the discretion of the arbitrator, or may be apportioned between the parties in any manner deemed appropriate by the arbitrator. -41- (g) Confidentiality. Except as set forth below, the parties shall keep confidential the fact of the arbitration, the dispute being arbitrated, and the decision of the arbitrators. Notwithstanding the foregoing, the parties may disclose information about the arbitration to persons who have a need to know, such as directors, trustees, management employees, witnesses, experts, investors, attorneys, lenders, insurers, and others who may be directly affected. Additionally, each party may make such disclosures as are required by applicable securities laws or other applicable law or regulation. Further, if a party is expressly asked by a third party about the dispute or the arbitration, the party may disclose and acknowledge in general and limited terms that there is a dispute with the other party which is being (or has been) arbitrated. Once the arbitration award has become final, if the arbitration award is not promptly satisfied, then these confidentiality provisions shall no longer be applicable. 11.11 ATTORNEYS' FEES. In the event that any dispute between any two or more of the parties to this Agreement should result in litigation or arbitration, the prevailing party in such dispute (if any) shall be entitled to recover from the other party all reasonable fees, costs and expenses of enforcing any right of the prevailing party, including without limitation, reasonable attorneys' fees, arbitration fees and other expenses, all of which shall be deemed to have accrued upon the commencement of such action and shall be paid whether or not such action is prosecuted to judgment or arbitration award. Any judgment, order or arbitration award entered in such action shall contain a specific provision providing for the recovery of attorney fees and costs incurred in enforcing such judgment or award and an award of prejudgment interest from the date of the breach at the maximum rate of interest allowed by law. For the purposes of this Section 11.11: (a) attorney's fees shall include, without limitation, fees incurred in the following: (1) post-judgment motions; (2) contempt proceedings; (3) garnishment, levy, and debtor and third party examinations; (4) discovery; and (5) bankruptcy litigation and (b) prevailing party shall mean the party who is determined by the trier of fact in the proceeding to have prevailed as to a substantial preponderance of the issues or who prevails by dismissal, default or otherwise. 11.12 SEVERABILITY OF PROVISIONS; JEOPARDY. (a) If any provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated by this Agreement is not affected in any manner adverse to any party. Upon a determination that such an adverse affect will occur, the parties to this Agreement shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated to this Agreement are fulfilled to the greatest extent possible. (b) Notwithstanding anything to the contrary contained in this Agreement, in the event that it is determined prior to the Closing that the performance by any party hereto of any term, covenant, condition or provision of this Agreement should be in violation of any statute, ordinance, or be otherwise deemed illegal, the parties shall immediately attempt to negotiate an amendment to this Agreement to eliminate such jeopardy. In the event that such an amendment is not practicable or cannot be agreed upon within fifteen (15) days of notice of the need thereof, either party may, at its option, terminate this Agreement forthwith. -42- IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of each of the parties effective as of the date first above written. SELLERS: - ----------------------- ----------------------- Hugo Delchni Laurent Rousseau - ----------------------- ----------------------- Thomas Louis Eric Sauzedde - ----------------------- ----------------------- Eric Pinon Yves Cognet - ----------------------- ----------------------- Thierry Freyche Jean Joya - ----------------------- ----------------------- Francis Maunoury Frederic Vasseur - ----------------------- ----------------------- Thierry Letrilliart Gerard Delon - ----------------------- ----------------------- Alain Bankier Francois Chateau - ----------------------- ----------------------- Andre Taliercio Isabelle Pesquie-Geday TECHNOCOM VENTURES TECHNOVENTURES By: _______________________ By: _______________________ Name: Name: Title: Title: STOCK PURCHASE AGREEMENT SIGNATURE PAGE PAGE 1 OF 48 AXEL INV FUND NOTOIR SA By: _______________________ By: _______________________ Name: Name: Title: Title SOFIGIP SA By: _______________________ Name: Title: BUYER: LINEO, INC., a Delaware corporation By: _______________________________ Its: ______________________________ STOCK PURCHASE AGREEMENT SIGNATURE PAGE PAGE 2 OF 48 EX-10.15 19 EXHIBIT 10.15 EXHIBIT 10.15 SHARE PURCHASE AGREEMENT THIS SHARE PURCHASE AGREEMENT (this "Agreement") is made as of this 9th day of May, 2000, by and among Lineo, Inc., a Delaware corporation ("Lineo"), RT-Control Inc., an Ontario corporation (the "Company") and the persons listed in SCHEDULE "1.1(a)" Column I hereto (together the "Shareholders") and the persons listed in SCHEDULE "1.1(a)" Column II hereto (together the "Principals"). WHEREAS, the Shareholders own 300 common shares in the capital of the Company; WHEREAS, the 300 common shares referred to in the previous recital (collectively, the "Company Shares," and individually, a "Company Share") constitute all of the issued and outstanding shares in the capital of the Company; WHEREAS, the Shareholders desire to sell the Company Shares to Lineo, and Lineo desires to purchase the Company Shares from the Shareholders, upon the terms and conditions set forth herein; and WHEREAS, the parties wish to set forth certain other agreements among them. NOW THEREFORE, in consideration of the mutual covenants of the parties set forth in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 - PURCHASE AND SALE 1.1 SHARES. On the terms and subject to the conditions set forth in this Agreement, at the Closing and upon the basis of the representations, warranties, covenants and agreements contained herein, the Shareholders shall sell, convey, transfer and deliver to Lineo, and Lineo shall purchase from the Shareholders, the Company Shares in consideration for the purchase price which is to be satisfied in cash and by the issuance of 404,169 unregistered shares of Lineo Series D Convertible Preferred Stock (as defined below) as set forth in SCHEDULE "1.1(a)" hereto. As used herein, the term "Lineo Shares" means shares of Series D Convertible Preferred Stock, U.S. $.001 par value per share, of Lineo as more particularly described in the Certificate of Designation attached hereto as SCHEDULE "1.1(b)". The shares of Lineo Series D Preferred Stock issuable to the Shareholders hereunder in exchange for the Company Shares are sometimes collectively referred to as the "Lineo Shares" and individually as a "Lineo Share" and the Shares of the Common Stock of Lineo issuable upon the conversion of the Lineo Shares shall be referred to as -2- "Conversion Shares". The cash and Lineo Shares shall be delivered at Closing to the Shareholders as set out in SCHEDULE "1.1(a)" hereto. ARTICLE 2 - MANNER OFEXCHANGE 2.1 PURCHASE PRICE. At the Closing, each Shareholder shall deliver to Lineo a certificate or certificates representing all of the Company Shares held by the Shareholder in the number set out in SCHEDULE "1.1(a)" hereto, accompanied by a stock power or powers duly executed in blank, with all necessary stock transfer and other documentary stamps attached, and Lineo shall deliver to the Shareholders, as set forth in SCHEDULE "1.1(a)" hereto, (i) cash consideration in immediately available funds and/or (ii) one or more certificates representing Lineo Shares due to the Shareholders issued in the name of the Shareholders. ARTICLE 3 - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPALS As an inducement to Lineo to enter into and perform its obligations under this Agreement, the Company and the Principals (and the other Shareholders only to the extent so specifically provided), jointly and severally, represent and warrant to Lineo as set out below. The parties acknowledge and agree that all representations and warranties in respect of the Company are given by the Principals on a joint and several basis. Any representation and warranty or covenant given below by a Shareholder who is not a Principal is given severally and not jointly and severally and only in respect of himself. 3.1 ORGANIZATION AND GOOD STANDING. The Company is a corporation duly organized, validly existing under the laws of the Province of Ontario and has full power and authority to conduct its business as it is now being conducted and to own, operate or lease the properties and assets it currently owns, operates or holds under lease. The Company is duly licensed and qualified to do business in the jurisdiction in which it operates its business, except for those jurisdictions where the failure to be so registered, qualified or licensed would not individually or in the aggregate have a material adverse effect on the business, prospects, results of operations, financial condition or assets of the Company. 3.2 POWER AND AUTHORIZATION. The Company has full corporate power and authority to execute and deliver this Agreement and any agreement, document, certificate or instrument being delivered pursuant to or in connection with the transactions contemplated by this Agreement (collectively the "Transaction Documents"), to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. Each Shareholder has full power and authority to execute and deliver this Agreement and each of the other Transaction Documents to which he is or will be a party, and to perform his obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Transaction Documents, and the performance by the Company of its obligations -3- hereunder and thereunder, and the consummation of the transactions contemplated hereunder and thereunder, have been duly authorized by the board of directors of the Company and by the Shareholders. This Agreement and the Transaction Documents have been duly executed and delivered by the Company and by each Shareholder and constitute the legal, valid and binding obligations of the Company and of each Shareholder, enforceable against the Company and each Shareholder in accordance with their respective terms, subject to the fact that enforcement may be limited by bankruptcy, insolvency, liquidation, reorganization, reconstruction and other similar laws generally effecting enforceability of creditors' rights and equitable remedies such as specific performance and injunction are in the discretion of the court from which they are sought. 3.3 SUBSIDIARIES. The Company does not own or control (directly or indirectly), or own or hold any right to acquire, any share, partnership interest, joint venture interest, equity participation or other security or interest in any other entity, corporation, partnership, trust or any other business association. 3.4 ORGANIZATIONAL DOCUMENTS. The copies of the Articles of Incorporation and Bylaws of the Company, each as heretofore amended, which have been delivered to Lineo are true, complete and correct. The minute books of the Company made available to Lineo are correct and complete and contain a complete summary of all meetings of directors and shareholders since the time of incorporation of the Company and accurately reflect all transactions referred to in such minutes in all material respects, and all material corporate actions and decisions taken by the Company's board of directors, shareholders and any committees of the board of directors. SCHEDULE "3.4" contains a complete list of all officers and directors of the Company. 3.5 OWNERSHIP OF THE COMPANY. The Company and the Shareholders represent and warrant that the authorized capital of the Company consists of an unlimited number of common shares, of which, at the time of Closing, 300 are issued and outstanding, all of which are owned of record and beneficially by the Shareholders as described in SCHEDULE "1.1(a)", who have good and marketable title therero, free and clear of any and all Liens. The designations, powers, preferences, rights, conditions, limitations and restrictions in respect of each class and series of authorized capital of the Company are as set forth in the Articles of Incorporation of the Company, as amended to the date hereof, and all such designations, powers, preferences, rights, conditions, limitations and restrictions are valid, binding and enforceable and in accordance with all applicable laws. All outstanding shares of the Company have been duly authorized and validly issued, are fully paid and non-assessable. None of the outstanding securities of the Company have been issued in violation of any pre-emptive rights, rights of first refusal or similar rights and are not now nor shall be subject to any such pre-emptive rights, rights of first refusal or similar rights. No contract, commitment or undertaking of any kind has been made for the issuance of additional shares or other securities of the Company, nor is there in effect or outstanding any subscription, option, warrant or other right to acquire any shares of the Company or other instruments convertible into or exchangeable for such shares. There are no voting trust agreements or other contracts, agreements or arrangements restricting or otherwise relating to voting, dividend or -4- other rights with respect to the Company's capital. The Company does not hold any shares in its treasury. Upon delivery of the Company Shares to Lineo pursuant to the provisions of this Agreement, Lineo will acquire good, valid and marketable title to the Company Shares, free and clear of any and all Liens. 3.6 NO VIOLATION. The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that the execution, delivery and performance by the Company and each Shareholder of this Agreement and the Transaction Documents and the consummation of the transactions contemplated herein and therein do not and will not: (a) except as specified herein, conflict with, result in the breach, modification, termination or violation of, or loss of any benefit under, constitute a default under, accelerate the performance required by, result in or give rise to a right to amend or modify the terms of, result in the creation of any Lien upon any assets or properties, or in any manner release any party thereto from any obligation under, any mortgage, note, bond, indenture, contract, agreement, lease, license or other instrument or obligation of any kind or nature by which the Company or each Principal, or any of their respective properties or assets, may be bound or affected; (b) conflict with,violate or result in any loss of benefit under, any permit, concession, franchise, order, judgment, writ, injunction, regulation, statute or decree; or (c) conflict with or violate any provision of the Articles of Incorporation or Bylaws, each as heretofore amended, of the Company. 3.7 NO CONSENT REQUIRED. Except as set forth on SCHEDULE "3.7", The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that no consent, approval, order or authorization of, or declaration, filing or registration with, any person, entity or governmental authority is required to be made or obtained by the Company or a Principal in connection with the authorization, execution, delivery or performance of this Agreement, the Transaction Documents or the transactions contemplated hereby and thereby. 3.8 FINANCIAL STATEMENTS. (a) SCHEDULE "3.8(a)" contains the audited balance sheets and statements of earnings and retained earnings as of and for the fiscal period ended December 31, 1999 for the Company. The foregoing financial statements are referred to in this Agreement as the "Financial Statements". The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that the Financial Statements are complete and correct in all material respects, are consistent with the books and records of the Company and are in accordance with generally accepted accounting principles consistently applied and fairly present the Company's financial condition, assets, liabilities and retained earnings as of their respective dates and the -5- statements of income, retained earnings and cash flow for the periods related thereto. Except as disclosed in SCHEDULE "3.8(b)" and to the best knowledge of the Principals, all material liabilities and obligations, whether accrued or absolute, and whether due or to become due, which existed as of the date of a balance sheet have been disclosed in the balance sheets included in the Financial Statements or in the notes thereto. The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that the statements of income included in the Financial Statements do not contain any material items of special or non-recurring income or other income not earned in the ordinary course of business. 3.9 ABSENCE OF UNDISCLOSED LIABILITIES. The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that as of the date hereof, the Company has not, and as of the Closing Date, the Company will not have, any material debts, liabilities or obligations of any nature arising out of transactions entered into on or prior to the Closing Date, or any transaction, series of transactions, action or inaction occurring on or prior to the Closing Date, or any state of facts or condition existing on or prior to the Closing Date except (a) for liabilities and obligations under agreements, contracts, leases or commitments disclosed in this Agreement or in a Schedule hereto, and (b) for liabilities and obligations arising in the ordinary course of business, consistent in form and amount with past practice, since December 31, 1999, none of which liabilities or obligations, individually or in the aggregate, is material in amount with respect to the business, prospects, results of operations, financial condition or assets of the Company. Except as disclosed on SCHEDULE "4.9(a)". The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that the Company is not under any obligation, contingent or otherwise, to refund or rebate any amounts paid or payable to it for services rendered prior to the date hereof. As of the date hereof, the Company does not have, and as of the Closing Date, the Company will not have, any debts, liabilities or obligations of any nature to, or owing from, the Shareholders except for those contained in SCHEDULE "3.9". 3.10 COMPLIANCE WITH LAWS; PERMITS. The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that the Company is in compliance with all laws, regulations, rules, ordinances, orders and other requirements applicable to the operation, conduct or ownership of its property or business in all material respects. Neither the Company nor the Shareholders has received notice of the violation or of any claim of violation of any law, regulation, rule, ordinance, order or other requirement or Permit (as defined below) applicable to it. The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that, the Company holds all of the permits, licenses, approvals and authorizations of governmental authorities or third parties (collectively, "Permits") necessary for the conduct of its business. All such Permits are in full force and effect, and will remain with the Company upon, and will not be affected by, the Closing. The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that there is no condition, nor has any event occurred, which constitutes or with the giving of notice or passage of time or both would constitute a violation of the terms of any Permit and no cancellation, modification or revocation of any of the Permits is pending or threatened. -6- 3.11 PROPERTY. (a) The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that the Company owns no real property, has good and marketable title or rights as lessee to all real, personal, mixed, tangible and intangible property of any kind or nature owned or used by it, and it owns each of the assets shown or reflected or to be shown or reflected on the Financial Statements, in each case free and clear of all Liens, except for Liens identified on SCHEDULE "3.11(a)" hereto on the date hereof. (b) All leases of real property and all material leases of personal property leased by the Company and utilized in its business, including any and all leases with related parties (collectively, the "Leased Property"), are listed on SCHEDULE "3.11(b)", and correct and complete copies previously have been furnished to Lineo. To the best knowledge of the Principals, the Company enjoys peaceful and undisturbed possession under all such leases. To the best knowledge of the Principals, any real property that the Company occupies or leases under such leases is in good condition and repair with adequate plumbing, heating and air conditioning and with public access as required for the conduct of its business, except for such deficiencies which are not material, individually or in the aggregate, in nature or cost. 3.12 CONDITION OF PROPERTY AND RELATED MATTERS. The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that all buildings, machinery, equipment and other tangible assets used by the Company are in fair or good operating condition and repair, reasonable wear and tear excepted, are useable in the ordinary course of their business and are adequate and suitable for the uses to which they are being put. None of such items requires any repairs or replacement except for maintenance in the ordinary course of business or such other repairs or replacements which are not material, individually or in the aggregate, in nature or cost. All such assets and property are located at real property locations constituting the Leased Property, or as otherwise identified on SCHEDULE "3.12" hereto. 3.13 MATERIAL CONTRACTS. The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that the Company has not entered into nor is it bound by any contract, agreement, relationship or commitment, written or oral, including without limitation any obligations for money borrowed or under leases, or any arrangements with customers, pursuant to which the Company is obligated to pay or entitled to receive, in the aggregate, in excess of U.S. $15,000, other than those identified on SCHEDULE "3.13" hereto (the "Material Contracts"); true, correct and complete copies of all written Material Contracts and true and complete descriptions of all oral Material Contracts previously have been furnished to Lineo. Except as set forth on SCHEDULE "3.13" and to the best knowledge of the Principals, the Company is not in default, and no event has occurred which with the giving of notice or the passage of time or both would constitute a default by the Company, or to the knowledge of the Company or the Principals, any other party under any Material Contract or any other obligation owed by the -7- Company, and, to the knowledge of the Company and the Principals, no event has occurred which with the giving of notice or the passage of time or both would constitute a default by any other party to any such Material Contract or obligation. The continuation, validity and effectiveness of all Material Contracts will in no way be affected by the transactions contemplated hereby and there are no negotiations pending to revise the terms of any such Material Contracts. The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that the Company is not a party to or bound by any contract, agreement, relationship or commitment, whether or not deemed material, which in any way restricts or purports to restrict the Company's ability to acquire any property or assets or conduct business or provide services to any person or entity anywhere in the world. None of the Company nor the Shareholders is a party to, or obligated to any party under, any partnership agreement, shareholders' agreement, buy/sell agreement or any other agreement, written or oral, relating to or in any way affecting the disposition of the Company Shares. 3.14 INTELLECTUAL PROPERTY. (a) The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that the Company owns and possesses all right, title and interest in and to, all of the Proprietary Rights identified in SCHEDULE "3.14(c)" (as defined below) and none of such Proprietary Rights have been abandoned; (b) Except as disclosed in SCHEDULE "3.14(c)" and to the best knowledge of the Principals, no claim by any third party contesting the validity, enforceability, use or ownership of any such Proprietary Rights has been made, is currently outstanding or is threatened; (c) Except as disclosed in SCHEDULE "3.14(c)" and to the best knowledge of the Principals, neither the Company nor the Principals have received any notice of, nor is the Company aware of any reasonable basis for an allegation of, any infringement or misappropriation by, or conflict with, any third party with respect to such Proprietary Rights, nor has the Company nor the Principals, or any registered agent of the Company received any claim of infringement or misappropriation of or other conflict with any Proprietary Rights of any third party; (d) Except as disclosed in SCHEDULE "3.14(c)", to the best knowledge of the Principals the Company has not infringed, misappropriated or otherwise violated any Proprietary Rights of any third parties, and none of the Company nor the Principals is aware of any infringement, misappropriation or conflict which will occur as a result of the continued operation of the Company as presently operated and as contemplated to be operated or as a result of the consummation of the transactions contemplated hereby; and (e) Except as described in SCHEDULE "3.14(e)" all personnel, including without limitation employees, agents, consultants and contractors, who have contributed to or participated in the conception and/or development of all or any part of the Proprietary Rights which are not licensed to the Company from a third party or which by their nature are not the -8- sole proprietary property of the Company either (1) have been party to a "work-for-hire" arrangement or agreement with the Company, in accordance with applicable federal and provincial law, that has accorded the Company full, effective, exclusive and original ownership of all tangible and intangible property thereby arising, or (2) have executed appropriate instruments of assignment in favour of the Company as assignee that have conveyed to the Company full, effective and exclusive ownership of all tangible and intangible property thereby arising. As used herein, the term "Proprietary Rights" means all proprietary information of the Company, including all the patents, patent applications, patent disclosures and inventions (whether or not patentable and whether or not reduced to practice), all trademarks, service marks, trade dress, trade names, corporate names, domain names, copyrights, all trade secrets, confidential information, ideas, formulae, compositions, know-how, processes and techniques, drawings, specifications, designs, logos, plans, improvements, proposals, technical and computer data, documentation and software, financial, business and marketing plans, and related information and all other proprietary, industrial or intellectual property rights relating to the business of the Company, set forth in SCHEDULE "3.14(c)", the consummation of the transactions contemplated by this Agreement and the Transaction Documents will not adversely affect the right of Lineo or the Company to continue to use the Company's Proprietary Rights. 3.15 EMPLOYEE BENEFIT PLANS. Except as set forth in SCHEDULE "3.15", the Company has not maintained, sponsored, adopted, made contributions to or obligated itself to make contributions to or to pay any benefits or grant rights under or with respect to or made any commitments to create any employee benefit plan, pension plan, plan of deferred compensation, medical plan, life insurance plan, long-term disability plan, dental plan or other plan providing for the welfare of either the Company's employees or former employees or beneficiaries thereof, personnel policy (including but not limited to vacation time, holiday pay, bonus programs, moving expense reimbursement programs and sick leave), excess benefit plan, bonus or incentive plan (including but not limited to stock options, restricted stock, phantom stock, stock bonus and deferred bonus plans), salary reduction agreement, change-of-control agreement, golden parachute, employment agreement, consulting agreement or any other benefit, program or contract (collectively, "Employee Benefit Plans") which could give rise to or result in the Company or Lineo having any debt, liability, claim or obligation of any kind or nature, whether accrued, absolute, contingent, direct, indirect, known or unknown, perfected or inchoate or otherwise and whether or not due or to become due. 3.16 SALARIES. SCHEDULE "3.16" contains a complete and correct list setting forth (i) the names, job descriptions/titles, current compensation rate, date of hire, vacation accrual rate and accrued vacation time of all individuals presently employed by the Company other than the Principals. The Company has made and remitted all deductions required by law to be made for wages and salaries, which deductions are consistent with past practices. The Company has not made any prepayments of salaries, bonuses or any other amounts due to any of its employees or former employees. The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that all obligations to employees, whether for salaries, -9- commissions, bonuses, vacation or otherwise, which are required to be accrued on the Financial Statements in accordance with Canadian generally accepted accounting principles consistently applied have been accrued on the Financial Statements in accordance with Canadian generally accepted accounting principles consistently applied. 3.17 PERSONNEL AGREEMENTS, PLANS AND ARRANGEMENTS. Except as listed in SCHEDULES "3.15" or "3.16", the Company is not a party to or obligated with respect to any (a) outstanding contracts with current or former employees, agents, consultants, advisers, salesmen, sales representatives, distributors, sales agents, independent contractors, or dealers, or (b) collective bargaining agreements or contracts with any labour or trade union, employee bargaining agency or other representative of employees or any employee benefits provided for by any such agreement. The Company has complied in all material respects with all applicable laws relating to the employment of labour, including but not limited to provisions thereof relating to wages, hours, vacation pay, collective bargaining and the payment, deduction and remittance of all amounts required to be deducted and/or remitted in respect of wages and salaries and of other Taxes and such deductions are consistent with past practices and in accordance with Canadian generally accepted accounting principles consistently applied. Neither the Company nor the Principals have received notice from any employee of the Company that any such employee is terminating his or her employment with the Company, nor to the best knowledge of the Company and the Principals does any employee intend to terminate his or her employment with the Company as a result of the transactions contemplated hereby. 3.18 BOOKS AND RECORDS. The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that all the books, records and accounts of the Company are in all material respects accurate and complete, accurately reflect all matters normally entered into the books, records or accounts maintained by similar businesses, are in all material respects in accordance with all laws, regulations and rules applicable to the Company and accurately present and reflect in all material respects all of the transactions described therein. 3.19 INSURANCE POLICIES. SCHEDULE "3.19" contains correct and complete lists and descriptions, including policy numbers, of all insurance policies owned or held by the Company. The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that such policies are in full force and effect, and the Company is not in default under any of them. 3.20 BANK ACCOUNTS. SCHEDULE "3.20" is a complete and correct list of each bank and brokerage firm in which the Company has an account or safe deposit box, the number of each such account or box, the names of all persons authorized to draw thereon or to have access thereto, and a description of the items in each such box as of a date not more than seven days prior to the date hereof. 3.21 TAXES. Except as set forth on SCHEDULE "3.21": -10- (a) The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that the Company has properly prepared and duly and timely filed with the appropriate taxing authorities all Tax Returns that are required to have been filed for, by, on behalf of or with regard to the Company and its assets, operations and businesses, and such returns are correct and complete and reflect all liabilities for Taxes for the periods covered thereby. (b) The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that all Taxes due and payable by or with respect to the Company for all periods through the Closing Date have been or will be fully and timely paid when due, and adequate accruals for Taxes (rather than for deferred Taxes) have been provided in the books and records of the Company with respect to any period for which Tax Returns have not yet been filed or for which Taxes are not yet due and owing. (c) The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that the Company has complied in all material respects with all applicable laws, rules and regulations relating to the remittance and withholding of Taxes and has duly and timely withheld from employee salaries, wages and other compensation all amounts required to be so withheld for all periods under all applicable laws and has remitted to the appropriate taxing authorities all amounts due to be remitted and established adequate reserves for all amounts not yet due to be remitted. (d) The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that any deficiencies asserted, assessed or proposed as a result of any governmental audits of the Tax Returns of the Company have been paid or settled, and there are no present disputes as to Taxes payable by the Company. The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that there is no audit, investigation, or proceeding in progress, pending or threatened in writing against the Company by any governmental agency in connection with Taxes; nor, to the knowledge of the Company or the Principals, is there any reasonable basis for any such audit, investigation or proceeding. No issue has been raised by a federal, provincial, local or foreign taxing authority in any current or prior examination of the Company which, by application of the same or similar principles, could reasonably be expected to result in a proposed deficiency for any subsequent taxable period. (e) The Company has not (1) executed or filed with any taxing authority any agreement extending the period for assessment or collection of any Taxes, including but not limited to any applicable statute of limitations; (2) requested any extension of time within which to file any Tax Return, which Tax Return has not since been filed; or (3) received any written ruling of a taxing authority related to Taxes or entered into any written and legally binding agreement with a taxing authority relating to Taxes. (f) After the date hereof, no election or consent with respect to any Tax (or the computation thereof) affecting the Company will be made without Lineo's prior written consent. -11- (g) To the extent that income Tax Returns have been required to be filed by the Company, the Principals have provided Lineo with correct and complete copies of all income Tax Returns of the Company for the Company's last full fiscal year. (h) Each of the Shareholders is not a non-resident within the meaning of Section 116 of the INCOME TAX ACT (Canada). (i) The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that the Company is not subject to any private letter ruling of the Canada Customs and Revenue Agency or comparable rulings of other taxing authorities. 3.22 LITIGATION. Except as set forth in SCHEDULE "3.22", there is no claim, counter-claim, action, suit, order, proceeding or investigation pending or, to the knowledge of the Company or the Principals, threatened against or involving the Company (or pending or, to the knowledge of the Company or the Principals, threatened against any of the officers, directors or key employees of the Company with respect to business activities on behalf of the Company) with respect to or affecting the Company, its accounts, business, properties, assets or rights, or relating to the transactions contemplated hereby, before any court, agency, regulatory, administrative or other governmental body or officer or before any arbitrator; nor, to the knowledge of the Company or the Principals, is there any reasonable basis for any such claim, action, suit, proceeding or governmental, administrative or regulatory investigation. The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that the Company is not directly subject to or affected by any order, judgment, decree or ruling of any court or governmental agency. Except as set forth in SCHEDULE "3.22", none of the Company nor the Principals have received any written opinion or memorandum of legal advice from legal counsel to the effect that any of them is exposed to any liability which may be material to the business, prospects, results of operations, financial condition or assets of the Company. Except as set forth in SCHEDULE "3.22", the Company is not engaged in any legal action to recover monies due it or for damages sustained by it, and none of the assets of the Company nor any of its business practices is in any manner, directly or indirectly, affected by injunction of any court or governmental, administrative or regulatory agency or body. 3.23 CONDUCT OF THE BUSINESS. Except as set forth on SCHEDULE "3.23" and except for any material adverse change exceeding a value of $25,000, since December 31, 1999 the Company has conducted its business only in the ordinary course of business consistent with past custom and practice, and has incurred no liabilities or obligations whatsoever other than in the ordinary course of business consistent with past custom and practice and there has been no material adverse change exceeding a value of $25,000 in the assets, condition (financial or otherwise), results of operations, employee or customer relations, business activities or business prospects of the Company, nor does the Company nor the Principals know of any such change which is threatened, nor has there been any damage, destruction or loss materially adversely affecting any of the assets, or the business -12- condition (financial or otherwise), results of operations, prospects or activities of the Company. Without limitation of the foregoing and except as set forth on SCHEDULES "3.16" or "3.23" and except for any material adverse change exceeding a value of $25,000, since December 31, 1999 the Company has not: (a) voluntarily or involuntarily sold, transferred, abandoned, surrendered, subjected to a Lien or otherwise disposed of any assets or property rights except in the ordinary course of business consistent with past custom and practice; (b) changed any accounting principles, methods or practices utilized by it or changed any of its depreciation rates or amortization policies or rates; (c) made any loan or advance to any party in excess of $15,000; (d) issued, redeemed or purchased any stock, bond or corporate security or declared or made any payment or distribution on or with respect to its capital stock; (e) incurred debt, liabilities, or obligations of any nature whether accrued, absolute, contingent, direct, indirect, perfected or otherwise and whether due or to become due except (i) current liabilities incurred and liabilities under contracts entered into in the ordinary course of business consistent with past custom and practice and (ii) bonus obligations to the Shareholders and Principals incurred in the ordinary course of business consistent with past custom and practice; (f) save and except for increasing the salaries of the Principals to $152,000 per annum, increased the compensation payable to any of its officers, employees or agents; (g) save and except for repayments of loans to the Principals, paid any amounts to or for the benefit of the Principals, any officer, employee, consultant, contractor or agent other than salaries at the rates set forth on SCHEDULE "3.16"; (h) waived any rights of substantial value; (i) transferred or disposed of any cash or cash equivalents outside of the ordinary course of business, consistent with past custom and practice; (j) entered into any other material transaction out of the ordinary course of business which has had a material adverse effect on the Company; or (k) committed to any of the foregoing. 3.24 BROKERS. None of the Company, nor the Shareholders have (i) incurred any obligation or liability, contingent or otherwise, for brokers' or finders' fees or commissions in connection with the transactions contemplated by this Agreement or the Transaction Documents or (ii) made any -13- statement or representation or entered into any discussion which could give rise to any such obligation or liability of the Company or Lineo. 3.25 OWNERSHIP OF LINEO SHARES. None of the Company, nor the Shareholders, nor, to the knowledge (such knowledge being limited to actual knowledge without any duty to inquire) of the Company, the Shareholders, any of the employees of the Company, own any shares of Lineo. 3.26 NO ILLEGAL OR IMPROPER TRANSACTIONS. None of the Company, nor the Principals, nor to the knowledge of the Principals, any of the Company's directors, officers or employees has, directly or indirectly used funds or other assets of the Company, or made any promise or undertaking in such regard, for (a) illegal contributions, gifts, entertainment or other expenses relating to political activity; (b) illegal payments to or for the benefit of governmental officials or employees, whether domestic or foreign; (c) illegal payments to or for the benefit of any person, firm, corporation or other entity, or any director, officer, employee, agent or representative thereof; or (d) the establishment or maintenance of a secret or unrecorded fund; and there have been no false or fictitious entries made in the books or records of the Company with respect thereto. 3.27 NO MISREPRESENTATION. The Company represents and warrants, and the Principals to the best of their knowledge represent and warrant, that none of the representations and warranties of the Company, the Principals or the Shareholders set forth in this Agreement or any of the Transaction Documents contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading. To the knowledge of the Company and the Shareholders, there is no material fact or information which has not been disclosed to Lineo in writing which materially adversely affects or could reasonably be anticipated to materially adversely affect the business, condition (financial or otherwise), property or assets of the Company or the ability of the Company and the Shareholders to consummate the transactions contemplated hereby. ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF LINEO As an inducement to the Company and to each Shareholder to enter into and perform their respective obligations under this Agreement, Lineo hereby represents and warrants to the Company and to each Shareholder as follows: 4.1 LINEO SHARES. Lineo's authorized capital stock consists of 100,000,000 shares of Common Stock and 30,000,000 shares of Preferred Stock, par value $.001 per share. Of such shares of Preferred Stock, 2,000,000 shares are designated as Series D Convertible Preferred Stock as set forth in the Certificate of Designation. Lineo has authorized and has reserved, and covenants to continue to reserve, free and clear of preemptive and other preferential rights, a sufficient number of shares -14- of its Common Stock to satisfy the rights of conversion of the holders of the Series D Convertible Preferred Stock (the "Conversion Stock"). 4.2 ORGANIZATION AND CORPORATE POWER. Lineo is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is qualified to do business as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a material adverse effect on its assets, liabilities, condition (financial or other), business, results of operations or prospects (a "Material Adverse Effect"). Lineo has all required corporate power and authority to carry on its business as presently conducted, to enter into and perform this Agreement and the agreements contemplated hereby to which it is a party and to carry out the transactions contemplated hereby and thereby, including the issuance of Lineo Shares and the issuance of the Conversion Shares. Lineo is not in violation of any term of its Certificate of Incorporation and Bylaws, as amended to date (the "Certificate of Incorporation" and "Bylaws", respectively). 4.3 AUTHORIZATION AND NON-CONTRAVENTION. The execution, delivery and performance by Lineo of this Agreement and all other agreements, documents and instruments to be executed and delivered by Lineo as contemplated hereby (including, without limitation, the Certificate of Designation) and the issuance and delivery of (i) the Series D Convertible Preferred Shares and (ii) upon the conversion of the Series D Convertible Preferred Shares, the Conversion Shares, have been duly authorized by all necessary corporate and other action of Lineo. This Agreement and each such other agreement, document and instrument (including, without limitation, the Certificate of Designation) constitute valid and binding obligations of Lineo, enforceable in accordance with their respective terms. The execution and delivery by Lineo of this Agreement and each other agreement, document and instrument to be executed and delivered by Lineo pursuant hereto or as contemplated hereby (including, without limitation, the Certificate of Designation) and the performance by Lineo of the transactions contemplated hereby and thereby, including, without limitation, the issuance and delivery of (i) the Series D Convertible Preferred Shares and (ii) upon the conversion of the Series D Convertible Preferred Shares, the Conversion Shares, do not and will not: (A) violate, conflict with or result in a default (whether after the giving of notice, lapse of time or both) under any material contract or obligation to which Lineo is a party or by which it or its assets are bound, or any provision of the Certificate of Incorporation or Bylaws of Lineo, or cause the creation of any material encumbrance upon any of the assets of Lineo; (B) violate or result in a violation of, or constitute a default under, any provision of any material law, regulation or rule, or any order of, or any restriction imposed by, any court or governmental agency applicable to Lineo; (C) require from Lineo any notice to, declaration or filing with, or consent or approval of any governmental authority or third party other than as may be required to secure an exemption from qualification of the offer and sale of the Series D Convertible Preferred Shares under the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities and blue sky laws; or (D) accelerate any obligation under, or give rise to a right of termination of, any material agreement, permit, license or authorization to which Lineo or any of its assets is a party or by which Lineo or any of its assets is bound. -15- 4.4 CAPITALIZATION. As of the Closing and after giving effect to the transactions contemplated hereby, the authorized capital stock of Lineo will consist of 100,000,000 shares of Common Stock, par value $.001 per share, of which 21,482,057 shares will be issued and outstanding, and 30,000,000 shares of Preferred Stock, par value $.001 per share, of which (a) 7,500,000 shares will be designated as Series A Preferred Stock, of which (i) 5,000,000 shares shall be designated as Series A Class 1 Preferred Stock all of which are issued and outstanding and (ii) 2,500,000 shares shall be designated as Series A Class 2 Preferred Stock all of which are issued and outstanding, (b) 4,850,000 shares will be designated as Series B Preferred Stock, of which 4,833,331 shares are issued and outstanding, (c) 3,000,000 shares will be designated as Series C Preferred Stock and 2,000,000 will be designated as Series D Convertible Preferred Stock. In addition, Lineo has authorized and reserved for issuance upon conversion of the Series A Preferred Stock up to 7,500,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like), has authorized and reserved for issuance upon conversion of the Series B Preferred Stock up to 4,850,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like), has authorized and reserved for issuance upon conversion of the Series C Preferred Stock up to 3,000,000 shares of Common Stock, has authorized and reserved for issuance upon conversion of the Series D Convertible Preferred Stock up to 2,000,000 Common Stock (subject to adjustment for stock splits, dividends and the like) and has reserved for issuance upon exercise of options under Lineo's stock option plans (the "Plans") 5,000,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends and the like). Other than as described above, Lineo has not issued or agreed to issue and is not obligated to issue any warrants, options or other rights to purchase or acquire any shares of its capital stock, or any securities convertible into or exercisable or exchangeable for such shares or any warrants, options or other rights to acquire any such convertible securities. As of the Closing, and after giving effect to the transactions contemplated hereby, all of the outstanding shares of capital stock of Lineo (including, without limitation, the Series D Convertible Preferred Shares) will have been duly and validly authorized and issued, fully paid and nonassessable and, except as set forth herein, not subject to any preemptive rights to purchase or otherwise acquire shares of capital stock of Lineo and will have been offered, issued, sold and delivered in compliance with applicable federal and state securities and blue sky laws. The Conversion Shares will, upon issuance, be duly and validly authorized and issued, fully paid and nonassessable, and not subject to any preemptive rights, and will be offered, issued, sold and delivered in compliance with applicable federal and state securities and blue sky laws. 4.5 FINANCIAL STATEMENTS. Lineo has previously furnished to the Investor copies of its draft audited financial statements (balance sheet, statement of operations, statement of cash flows and statement of stockholders equity) for the fiscal year at and ended October 31, 1999. Such financial statements were prepared in conformity with generally accepted accounting principles applied on a consistent basis; are complete, correct and consistent in all material respects with the books and records of -16- Lineo; and fairly and accurately present the financial position of Lineo as of the dates thereof and the results of operations and cash flows of Lineo for the periods shown therein. 4.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the extent reflected or reserved against in the financial statements referred to in Section 4.5 above, Lineo does not have and is not subject to any material liability or obligation of any nature, whether accrued, absolute, contingent or otherwise. (a) 4.7 NO CONSENT REQUIRED. Except for a filing under the INVESTMENT CANADA ACT as provided in Section 8.5 and applicable filings under the Securities Act of 1933, as amended, no consent, approval, order or authorization of, or declaration, filing or registration with, any person, entity or governmental authority is required to be made or obtained by Lineo in connection with the authorization, execution, delivery or performance of this Agreement, the Transaction Documents or the transactions contemplated hereby including the Hart-Scott-Rodino Act (assuming the truth and accuracy of the representations and warranties in Section 5.7). 4.8 MATERIAL INFORMATION The representations and warranties made or contained in this Agreement, the Confidential Private Placement Memorandum contained in SCHEDULE 4.8, the exhibits hereto and the certificates or statements executed or delivered in connection herewith, and the information concerning the business of Lineo delivered to the Shareholders in connection with or pursuant to this Agreement, when taken together, do not and shall not contain any untrue statement of a material fact and do not and shall not omit to state a material fact required to be stated therein or necessary in order to make such representations, warranties or other material not misleading in light of the circumstances in which they were made or delivered. Lineo has fully provided the Shareholders with all the information that the Shareholders have requested for deciding whether to consummate the transactions contemplated by this Agreement. ARTICLE 5 -PRE-CLOSING COVENANTS AND OTHER TERMS 5.1 INVESTIGATION BY LINEO. Prior to the Closing, the Principals and the Company have and will afford to the officers, counsel, accountants or other authorized representatives of Lineo reasonable access during normal business hours to, and otherwise make available to Lineo, the offices, facilities, properties, files, documents, contracts, insurance policies, books and records of the Company so as to afford Lineo the opportunity to make such review, examination and investigation of the Company as Lineo may request and the Shareholders and the Company at the sole cost of Lineo will cooperate with Lineo in connection with any permits, approvals, filings or consents required by law to be obtained. Lineo will be permitted to make extracts from or to make copies of such -17- books and records as may be reasonably necessary. Except for the materials and information contained in the Schedules to this Agreement, no investigation, review, study or examination by Lineo or their representatives shall offset, limit or diminish the scope of the representations and warranties of the Company and the Shareholders in this Agreement or reduce or limit the liability of the Company and the Shareholders for any breach thereof. 5.2 CONDUCT OF BUSINESS. From the date hereof through the Closing, except as otherwise expressly provided for in this Agreement, the Company covenants and agrees that it will, and the Principals agree to cause the Company to carry on the Company's business diligently, in the ordinary course and in substantially the same manner as such business has previously been carried out. Without limiting the foregoing or the other provisions of this Agreement, the Company and the Principals, jointly and severally, covenant and agree that: (a) Except as otherwise expressly permitted in this Agreement, or except as consented to by Lineo, the Company will not (i) increase in any manner the base compensation of, or enter into any new bonus or incentive agreement or arrangement with, any of the Company's employees, consultants or contractors, (ii) pay or agree to pay any additional pension, retirement allowance or other employee benefit to any such employee, consultant or contractor whether past or present, (iii) enter into any new employment, severance, consulting, or other compensation agreement with any existing employee, consultant or contractor, (iv) hire or offer to hire any new employees, consultants or contractors, (v) pay any amount to or for the benefit of the Shareholders or any officer, employee, consultant, contractor or agent other than salaries at the rates set forth on SCHEDULE "3.16" and other distributions referred to in SCHEDULE "3.13", or (vi) amend any existing or enter into any new Employee Benefit Plan. (b) The Company will use its best efforts to keep available the services of its present employees, consultants and contractors and preserve the goodwill, reputation and present relationships of the Company with its suppliers, customers, licensors and others having business relations with the Company. (c) The Company shall not create any obligation or liability (absolute or contingent) except current liabilities incurred in the ordinary course of business consistent with past custom and practice and obligations under contracts entered into in the ordinary course of business consistent with past custom and practice. (d) The Company will (i) maintain its property and assets in good repair, order and condition (ordinary wear and tear excepted), (ii) maintain and keep in full force existing insurance, (iii) maintain the books and records in the usual, regular and ordinary manner on a basis consistent with past practices, and (iv) perform and comply with its contractual obligations, including without limitation obligations under Material Contracts and Permits. The Company shall not mortgage, hypothecate, grant Liens in or otherwise encumber its interest in the Leased Property, or sublease its interest in the Leased Property or amend any material lease to which it is a party or by which it is bound. -18- (e) The Company shall not amend its Articles of Incorporation or Bylaws. (f) Except in the ordinary course of business consistent with past custom and practice or as otherwise expressly provided for in this Agreement, the Company shall not: (i) sell, lease, transfer or otherwise dispose of any of its properties or assets, including without limitation cash and cash equivalents, (ii) create or permit to exist any new Lien on any of its properties or assets, (iii) enter into any joint venture, partnership or other similar arrangement, (iv) accelerate or delay any service to be rendered to a customer of the Company in a manner inconsistent with past practices, (v) make any new commitments for capital expenditures, or (vi) enter into any commitment to borrow money. (g) The Company shall duly and timely file all Tax Returns and information returns and pay all Taxes when due. (h) The Company shall not undertake any action or fail to take any action that will result in a breach of the representations and warranties set forth in Article 3 hereof as if made on and as of the Closing Date. (i) The Company will not declare or pay any dividend or make any other distribution to any shareholders with respect to the shares of the Company, will not purchase or redeem any of its shares, will not issue rights or options to purchase or subscribe to any shares, issue or sell any shares or alter its equity interests. (j) The Company will not grant any power of attorney. (k) The Company and the Principals will promptly supply to Lineo copies of all litigation or legal proceedings pertaining in any way to the Company or the assets or business which may arise after the date hereof and will advise Lineo promptly in writing of any threat of litigation or other legal proceedings pertaining thereto. 5.3 NON-NEGOTIATION. In consideration of the substantial expenditure of time, effort and expense undertaken by Lineo in connection with its due diligence review and the preparation and execution of this Agreement and the Transaction Documents, the Company and the Shareholders agree that none of the Company and the Shareholders, or any of their respective representatives, agents or employees will, after the execution of this Agreement until the earlier of (i) the termination of this Agreement, or (ii) the Closing, directly or indirectly, solicit, encourage, initiate, negotiate or discuss with any third party or permit the consummation of any acquisition proposal relating to or affecting the Company or any part of the Company, or any direct or indirect interests in the Company, whether by purchase of assets or stock, purchase of interests, business combination, merger or other transaction, and that the Company and the Shareholders will promptly advise Lineo of the terms of any communications, the Company or the Shareholders may receive or become aware of relating to any bid for all or any part of any such interest in the Company. -19- 5.4 REASONABLE COMMERCIAL EFFORTS. The Company and the Shareholders will each use reasonable commercial efforts between the date hereof and the Closing to secure fulfilment of all of the conditions precedent to Lineo's obligations hereunder, and Lineo will use reasonable commercial efforts between the date hereof and the Closing to secure fulfilment of all of the conditions precedent to the obligations of the Company and the Shareholders hereunder. 5.5 PRINCIPALS. The Principals will cause the Company to comply with the provisions of this ARTICLE 5. The Shareholders agree not to grant any power of attorney with respect to the Company Shares, the Company, or the Company's business or assets. The Shareholders will not sell any Company Shares or in any way reduce prior to the Closing their risk or commit to reduce their risk with respect to Company Shares owned by the Shareholders or the Lineo Shares to be acquired by the Shareholders hereunder. 5.6 MARKET STAND-OFF AGREEMENT. In connection with a public offering by Lineo, the Shareholders if requested in good faith by Lineo and the managing underwriter of the public offering, shall agree not to sell or otherwise transfer or dispose of any securities of Lineo held by them (except for any securities sold pursuant to such registration statement) for a period following the effective date of the applicable registration statement that in no event shall exceed 180 days. In order to enforce the foregoing, Lineo may impose stop-transfer instructions with respect to the Lineo Shares held by such Shareholder (and the shares of securities of every other person subject to the foregoing restriction) until the end of such period. 5.7 SECURITIES LAW COMPLIANCE. (a) Each of the Shareholders agrees that all offers and sales of the Lineo Shares prior to one year after the Closing shall be made only in accordance with the provisions of Rule 904 under the Securities Act, pursuant to registration of the Lineo Shares under the Securities Act; or pursuant to an available exemption from the registration requirements of the Securities Act; and not to engage in hedging transactions with regard to the Lineo Shares prior to one year after the Closing unless in compliance with the Securities Act. (b) The Shareholders acknowledge that the Lineo Shares have not been registered under the Securities Act and may not be offered or sold in the United States or to U.S. persons (other than distributors) unless the Lineo Shares are registered under the Securities Act, or an exemption from the registration provisions of the Securities Act is available. The Shareholders further acknowledge that hedging transactions involving the Lineo Shares may not be conducted unless in compliance with the Securities Act. (c) Each of the Shareholders represents to Lineo that he has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the investment contemplated by this Agreement and making an informed investment -20- decision with respect thereto. Each of the Shareholders represents and understands that he is responsible for his own due diligence investigation and satisfying his own due diligence requirements and shall not be entitled to rely on the due diligence investigation of any other person or entity. Each of the Shareholders represents to Lineo that he is acquiring the Lineo Stock for his own account, for investment only and not with a view to, or any present intention of, effecting a distribution of such securities or any part thereof except pursuant to a registration or an available exemption under applicable law. Each of the Shareholders acknowledges that the Lineo Stock has not been registered under the Securities Act of 1933 or the securities laws of any state or other jurisdiction and cannot be disposed of unless it is subsequently registered under the Securities Act and any applicable state laws or exemption from such registration is available. Each of the Shareholders represents that there are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of such Shareholder. ARTICLE 6 - CONDITIONS PRECEDENT TO THE CLOSING 6.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF LINEO. The obligations of Lineo under this Agreement to consummate the transactions contemplated hereby will be subject to the satisfaction, at or prior to the Closing, of all of the following conditions, any one or more of which may be waived at the option of Lineo: (a) NO BREACH OF COVENANTS; TRUE AND CORRECT REPRESENTATIONS AND WARRANTIES. There shall have been no material breach by the Company or the Shareholders in the performance of any of their respective covenants herein to be performed by any or all of them in whole or in part prior to the Closing, and the representations and warranties of the Company and the Shareholders contained in this Agreement, if specifically qualified by materiality, shall be true and correct as of the Closing and, if not so qualified, shall be true and correct in all material respects as of the Closing, except for representations or warranties that are made by their terms as of a date specified by month, day and year, which shall be true and correct or true and correct in all material respects, as applicable, as of such specified date. Lineo shall receive at the Closing a certificate dated and validly executed on behalf of the Company certifying, in such detail as Lineo may reasonably require, the fulfilment of the foregoing conditions, and restating and reconfirming as of the Closing all of the covenants, representations and warranties of the Company and the Shareholders contained in this Agreement, specifying in detail the extent of any breaches thereof. (b) DELIVERY OF DOCUMENTS. Lineo shall have received all documents and other items to be delivered under Section 7.2. (c) NO LEGAL OBSTRUCTION. No suit, action or proceeding not disclosed in the Schedules to this Agreement by any person, entity or governmental agency shall be pending or threatened in writing, which if determined adverse to the Company or Lineo's interests in the Company, could reasonably be expected to have a material adverse effect upon (i) the properties, assets, condition (financial or otherwise), operating results, employee, customer or supplier -21- relations, business activities or business prospects of the Company, (ii) Lineo, or (iii) the benefits to Lineo of the transactions contemplated hereby. No injunction, restraining order or order of any nature shall have been issued by or be pending before any court of competent jurisdiction or any governmental agency challenging the validity or legality of the transactions contemplated hereby or restraining or prohibiting the consummation of such transactions or compelling Lineo to dispose of or discontinue or materially restrict the operations of a significant portion of the Company. All material permits, approvals, filings and consents required or advisable to be obtained or made, and all waiting periods required or contemplated to expire, prior to the consummation of the transactions contemplated hereby or applicable laws of any country having jurisdiction over the transactions contemplated hereby shall have been obtained, made or expired, as the case may be (all such permits, approvals, filings and consents and the lapse of all such waiting periods being referred to as the "Requisite Regulatory Approvals"), and all such Requisite Regulatory Approvals shall be in full force and effect. (d) DAMAGE OR DESTRUCTION. From the date hereof until the Closing, there shall have been no material loss or destruction of any portion of the properties or assets of the Company, nor any institution or threat of any condemnation or other proceedings to acquire or limit the use of any of the properties or assets of the Company. (e) NO MATERIAL ADVERSE CHANGE. From the date hereof until the Closing, there shall have been no material adverse change in the properties, assets, condition (financial or otherwise), operating results, employee, customer or supplier relations, business activities or business prospects of the Company and the Company shall not have lost any material customer (or, in the aggregate, any material portion of the Company's business). (f) APPROVAL BY LINEO'S COUNSEL AND ACCOUNTANTS. All actions, proceedings, instruments and documents reasonably required to carry out this Agreement and all other related legal and accounting matters shall have been reasonably approved as to form and substance by counsel and accountants for Lineo. (g) LEASE. The landlord with respect to the premises located at 195 The West Mall, Suite 608, Toronto, Ontario, shall have provided its consent or the Principals shall have taken action to obtain such consent, if required, to the transaction contemplated by this Agreement. (h) TAXES. The Company and the Shareholders shall cooperate with Lineo to file an election under Section 338(g) of the Internal Revenue Code at Lineo's sole cost and expense. 6.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE SHAREHOLDERS. The obligations of the Company and the Shareholders under this Agreement to consummate the transactions contemplated hereby will be subject to the satisfaction, at or prior to the Closing, of all the following conditions, any one or more of which may be waived at the option of the Company and the Shareholders: -22- (a) NO BREACH OF COVENANTS; TRUE AND CORRECT REPRESENTATIONS AND WARRANTIES. There shall have been no material breach by Lineo in the performance of any of the covenants herein to be performed by it in whole or in part prior to the Closing, and the representations and warranties of Lineo contained in this Agreement, if specifically qualified by materiality, shall be true and correct as of the Closing and, if not so qualified, shall be true and correct in all material respects as of the Closing, except for representations or warranties that are made by their terms as of a date specified by month, day and year, which shall be true and correct or true and correct in all material respects, as applicable, as of such specified date. The Company and the Shareholders shall receive at the Closing a certificate dated as of the Closing and executed on behalf of Lineo, certifying in such detail as the Company and the Shareholders may reasonably require, the fulfilment of the foregoing conditions, and restating and reconfirming as of the Closing all of the covenants, representations and warranties of Lineo contained in this Agreement, specifying in detail the extent of any breaches thereof. (b) DELIVERY OF DOCUMENTS. The Company and the Shareholders shall have received all documents and other items to be delivered by Lineo under Section 7.3. (c) NO LEGAL OBSTRUCTION. All Requisite Regulatory Approvals shall be in full force and effect. (d) APPROVAL BY COUNSEL AND ACCOUNTANTS. All actions, proceedings, instruments and documents reasonably required to carry out this Agreement and all other related legal and accounting matters shall have been reasonably approved as to form and substance by counsel and accountants for the Company and the Shareholders. (e) NO MATERIAL ADVERSE CHANGE. From the date hereof until the Closing, there shall have been no material adverse change in the properties, assets, condition (financial or otherwise), operating results, employee, customer or supplier relations, business activities or business prospects of Lineo. ARTICLE 7 - CLOSING 7.1 CLOSING. The consummation of the transactions that are the subject of this Agreement will be closed (the "Closing") at the office of Owens, Wright, Suite 401, 20 Holly Street, Toronto, Ontario, no later than the third business day after the satisfaction or waiver of the conditions to the parties' obligations set forth in Article 6 hereof (other than the delivery of certificates and opinions contemplated to be delivered at the Closing, which shall be delivered at the Closing) or at such other time or place as the parties may mutually agree (the "Closing Date") and in any event no later than 5:00 p.m. Toronto time on May 16, 2000. In the event that the transactions contemplated hereby have not closed on or before 5:00 p.m. Toronto time on May 16, 2000, and (i) on such date the Company and the Shareholders on the one hand or Lineo on the other is ready, willing and able to satisfy the conditions precedent to Closing of the other party or parties (the "Ready Party"), and the other party or parties is or are not so ready, willing and able, or (ii) -23- the conditions to a party's obligations set forth in Article 6 hereof are not satisfied (except as a result of a material default or breach of this Agreement by such party) (the "Specified Party"), then the Ready Party or Specified Party may, in addition to any other remedies it may have, terminate this Agreement upon written notice to the others without liability to such other parties. 7.2 DELIVERIES BY THE COMPANY AND THE SHAREHOLDERS. At the Closing, the Company and the Shareholders shall deliver or cause to be delivered to Lineo: (a) SHARE CERTIFICATES AND INSTRUMENTS OF CONVEYANCE. Certificates for all of the Company Shares, accompanied by stock powers duly executed in blank, with all necessary stock transfer and other documentary stamps attached; (b) CONSENTS. Copies of all written consents required to be obtained by the Company or the Shareholders in connection with the transactions contemplated by this Agreement and the Transaction Documents, and specified in SCHEDULE "3.7", in form and substance reasonably satisfactory to Lineo; (c) OPINION OF COUNSEL. An opinion of counsel for the Company, dated as of the Closing Date, in form and substance reasonably satisfactory to counsel for Lineo; (d) CORPORATE DOCUMENTS. The Company's Articles of Incorporation and Bylaws certified by an appropriate officer of the Company as in effect at the Closing; (e) CERTIFICATES OF GOOD STANDING. Certificates of good standing, dated as of a recent date for each of the Company and any corporate Shareholder, issued by an appropriate official of the Province of Ontario; (f) RESOLUTIONS. A copy of the resolutions of the Board of Directors of the Company certified by the secretary of the Company as having been duly and validly adopted and in full force and effect as of the Closing Date authorizing execution and delivery of this Agreement and the Transaction Documents and performance, and the appointment and elections of officers and directors of the Company nominated by Lineo, and consummation of the transactions contemplated hereby and thereby by the Company; and (g) OTHER DOCUMENTS. Such other documents and instruments as Lineo or its counsel or accountants reasonably shall deem necessary to consummate the transactions contemplated hereby. All documents delivered to Lineo shall be in form and substance reasonably satisfactory to counsel and accountants for Lineo. 7.3 DELIVERIES BY LINEO. At the Closing, Lineo will deliver to the Company and/or the Shareholders, simultaneously with delivery of the items referred to in Section 7.2 above: -24- (a) LINEO SHARES. Certificates representing the Lineo Shares being issued to the Shareholders, issued in the name of the Shareholders together with all necessary share transfer and other documentary stamps attached; (b) CASH ON Closing. Cash, certified cheques or bank drafts in the amounts described in SCHEDULE "1.1(a)" representing the cash consideration; (c) EXPENSES. Cash, certified cheques, or bank drafts representing the expenses described in paragraph 9.6; (d) PUT AGREEMENT. An agreement satisfactory to all parties hereto between the Principals and Lineo which grants the right to each of the Shareholders to cause Lineo to purchase by cash or certified cheque from each of the Principals the Lineo Shares or Conversion Shares; (e) EMPLOYMENT AND STOCK OPTION AGREEMENTS. Employment Agreements entered into by each of the Principals and the Company, and Stock Option Agreements entered into by each of Darren Best, Steve Robinson and the Company, in each case satisfactory to the Principals, Messrs. Best and Robison, as the case may be, and Lineo; (f) OPINION OF COUNSEL. An opinion of counsel for Lineo, dated as of the Closing Date, in form and substance reasonably satisfactory to counsel for Lineo; (g) CORPORATE DOCUMENTS. Lineo's Articles of Incorporation and Bylaws certified by an appropriate officer of Lineo as in effect at the Closing; (h) CERTIFICATES OF GOOD STANDING. Certificates of good standing, dated as of a recent date for Lineo, issued by an appropriate official of the State of Delaware; (i) RESOLUTIONS. A copy of the resolutions of the Board of Directors of Lineo certified by the secretary of Lineo, as having been duly and validly adopted and in full force and effect as of the Closing Date authorizing execution and delivery of this Agreement and the Transaction Documents and performance, and consummation of the transactions contemplated hereby and thereby by Lineo; and (j) OTHER DOCUMENTS. Such other documents and instruments as the Company, the Shareholders or their counsel or accountants reasonably shall deem necessary to consummate the transactions contemplated hereby. All documents delivered to the Company and/or the Shareholders shall be in form and substance reasonably satisfactory to counsel for the Company and the Shareholders. -25- ARTICLE 8 - OTHER AGREEMENTS 8.1 CONFIDENTIALITY. (a) CONFIDENTIALITY. After the Closing, each Shareholder and Principal shall strictly maintain the confidentiality of all information, documents and materials relating to the Company or the transactions contemplated by this Agreement, including without limitation the terms of this Agreement, except to the extent disclosure of any such information is required by law or authorized by Lineo or reasonably occurs in connection with disputes over the terms of this Agreement. In the event that a Shareholder or a Principal reasonably believes after consultation with counsel that it is required by law to disclose any confidential information described in this SECTION 8.1(a), the Shareholders will (i) provide Lineo with prompt notice before such disclosure in order that Lineo may attempt to obtain a protective order or other assurance that confidential treatment will be accorded to confidential information, and (ii) cooperate with Lineo in attempting to obtain such order or assurance. The provisions of this SECTION 8.1(a) shall not apply to any information, documents or materials which are in the public domain or shall come into the public domain, other than by reason of default by the Shareholders or any of their Affiliates of this Agreement or becomes known in the industry through no wrongful act on the part of the Shareholders. (b) REMEDIES. Without limiting the right of Lineo to pursue all other legal and equitable rights available to it, including without limitation, damages for the actual or threatened violation of this SECTION 8.1 by the Shareholders, it is agreed that other remedies cannot fully compensate Lineo for such a violation and that Lineo shall be entitled to injunctive relief and/or specific performance to prevent violation or continuing violation thereof. It is the intent and understanding of each party hereto that if, in any action before any court or agency legally empowered to enforce this SECTION 8.1, any term, restriction, covenant or promise in this SECTION 8.1 is found to be unreasonable and for that reason unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. 8.2 SURVIVAL OF REPRESENTATION AND WARRANTIES. All of the representations and warranties set forth in this Agreement or in any of the Transaction Documents shall survive the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, regardless of any investigation, inquiry or examination made for or on behalf of or any knowledge of Lineo, the Company or the Shareholders or the acceptance by any of them of any certificate or opinion for two years after Closing. 8.3 COOPERATION AFTER THE CLOSING. Lineo, the Company and the Shareholders will, at any time, and from time to time, after the Closing Date, execute and deliver such further instruments of conveyance and transfer and take such additional action as may be reasonably necessary to effect, consummate, confirm or evidence the transactions contemplated by this Agreement and the Transaction Documents. -26- Without limiting the other obligations of the Shareholders hereunder, the Shareholders agree that, after the Closing, the Shareholders shall provide reasonable cooperation and assistance to Lineo or the Company, at Lineo's or the Company's sole cost and expense, with respect to any matters, disputes, suits or claims by or against any person not a party to this Agreement. 8.4 TAX MATTERS. (a) TAX PERIODS ENDING ON OR BEFORE THE CLOSING DATE. The Principals shall be responsible for the preparation of the Tax Returns of the Company for all taxable periods ending on or prior to the Closing Date. Such Tax Returns, together with all work papers and schedules related thereto, shall be delivered to Lineo for its review and acceptance no later than thirty (30) days prior to the earlier of (i) the date on which Lineo anticipates that Lineo's independent chartered accountants will issue their final report and opinion with respect to Lineo's audit of the financial statements containing combined operations of Lineo and the Company for the fiscal year in which the Closing occurs and (ii) the filing of such returns, and shall be prepared in a manner consistent with prior practice unless otherwise required by applicable laws. The Principals shall reimburse Lineo for Taxes payable by the Company with respect to such period within fifteen (15) days after payment by Lineo of such Taxes to the extent such unpaid Taxes are not reflected in reserves for Tax liabilities (other than any reserve for deferred taxes) on the books and records of the Company. In this regard, Lineo will require the Company to provide representatives of the Principals with access to the books and records of the Company during normal business hours. (b) TAX PERIODS BEGINNING BEFORE AND ENDING AFTER THE CLOSING DATE. Lineo shall prepare or cause to be prepared and file or cause to be filed all Tax Returns of the Company for all periods which begin on or prior to the Closing Date and end after the Closing Date. All liability for Taxes of the Company with respect to such period shall rest with Lineo. (c) PRE-CLOSING PERIOD/POST-CLOSING PERIOD. For purposes of this Agreement, (i) the allocation of Taxes for a straddle period between the period prior to the Closing Date (the "Pre-Closing Period") and the period after the Closing Date (the "Post-Closing Period") shall be made on the basis of an interim Closing of the books as of the end of the Closing Date; (ii) any Tax resulting from any transaction undertaken pursuant to or contemplated by this Agreement is attributable to the Post-Closing Period. 8.5 INVESTMENT CANADA Within 30 days after the Closing, Lineo agrees to file a Notification of the transaction in accordance with the INVESTMENT CANADA ACT. -27- ARTICLE 9 - MISCELLANEOUS 9.1 NOTICES, CONSENTS, ETC. Any notices, consents or other communication required to be sent or given hereunder by any of the parties shall in every case be in writing and shall be deemed properly served if (a) delivered personally, or (b) delivered by courier, at the addresses as set forth below or at such other addresses as may be furnished in writing. All such notices and communications shall be deemed received upon the delivery thereof in accordance with the foregoing. (a) If to the Shareholders, c/o: John Fabrizio 195 The West Mall Suite 608 Toronto, Ontario M9C 5K1 with a copy to: Owens, Wright 20 Holly Street Suite 401 Toronto, Ontario M4S 3B1 Attn: Steven A. Robinson (b) If to the Company (prior to the Closing): RT-Control Inc. 195 The West Mall Suite 608 Toronto, Ontario M9C 5K1 Attn: John Fabrizio If prior to the Closing, with a copy to: Owens, Wright 20 Holly Street Suite 401 Toronto, Ontario M4S 3B1 -28- Attn: Steven A. Robinson (c) If to Lineo or, after the Closing, the Company: Lineo, Inc. 390 South 400 West Lindon, Utah 84042 Attn: Matthew R. Harris with a copy to: Summit Law Group, PLLC 1505 Westlake Avenue North, Unit 300 Seattle, Washington 98109 Attn: Michael J. Erickson 9.2 SEVERABILITY. The unenforceability or invalidity of any provision of this Agreement shall not affect the enforceability or validity of any other provision which shall remain in full force and effect and be enforceable to the fullest extent permitted by law. 9.3 AMENDMENT AND WAIVER. This Agreement may not be amended orally but may only be amended in writing by all of the parties hereto. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any other breach or as a waiver by any other party hereto. 9.4 DOCUMENTS. Each party will execute all documents and take such other actions as any other party may reasonably request in order to consummate the transactions provided for herein and to accomplish the purposes of this Agreement. 9.5 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same agreement. 9.6 EXPENSES. Lineo shall pay all reasonable costs and expenses incurred or to be incurred by the Shareholders and/or the Company in negotiating and preparing this Agreement and in closing and carrying out the transactions contemplated by this Agreement and the Transaction Documents, including -29- without limitation all legal and accounting fees and expenses and fees and expenses relating to the preparation of the Financial Statements deemed obligations of the Company for purposes of the Financial Statements and tax advice. Lineo shall pay all costs and expenses incurred or to be incurred by Lineo in negotiating and preparing this Agreement and in closing and carrying out the transactions contemplated by this Agreement and the Transaction Documents. 9.7 GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Agreement shall be governed by, the laws of the State of Delaware and the laws of the United States applicable therein, without giving effect to provisions thereof regarding conflicts of law. 9.8 HEADINGS. The subject headings of Articles and Sections of this Agreement are included for purposes of convenience only and shall not affect the construction or interpretation of any of its provisions. 9.9 ASSIGNMENT. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned or delegated by a Shareholder in any manner whatsoever, whether directly or by operation of law or otherwise, without the prior written consent of Lineo. Lineo shall have the right to assign this Agreement to an Affiliate, provided Lineo shall continue to be obligated hereunder, including to issue the Lineo Shares. 9.10 DEFINITIONS. For purposes of this Agreement, the following terms have the meaning set forth below: "BUSINESS" shall be a collective reference to any and all aspects of the embedded linux business of the Company. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "KNOWLEDGE" or "TO THE BEST KNOWLEDGE" means actual knowledge without investigation. "LIENS" means any liens, claims, mortgages, charges, security interests, pledges or other encumbrances or adverse claims or interests of any nature. "TAX" and "TAXES" means all taxes including any federal, provincial, local or foreign income, gross receipts, capital, franchise, import, goods and services, value added, sales and use, alternative minimum, add-on minimum, sales, use, transfer, registration, excise, natural resources, severance, stamp, occupation, premium, windfall profit, environmental, customs, duties, real property, personal property, capital stock, social security, unemployment, disability, payroll, license, employee withholding, or other tax, of any kind whatsoever, including any interest, penalties or additions to tax or additional amounts in respect of the foregoing. -30- "TAX RETURNS" means returns, declarations, reports, claims for refund, information returns or other documents (including any related or supporting Schedules, statements or information) filed or required to be filed in connection with the determination, assessment or collection of any Taxes of any party or the administration of any laws, regulations or administrative requirements relating to any Taxes. "U.S. PERSON" shall mean: (i) any natural person resident in the United States; (ii) any partnership or corporation organized or incorporated under the laws of the United States; (iii) any estate of which any executor or administrator is a U.S. person; (iv) any trust of which any trustee is a U.S. person; (v) any agency or branch of a foreign entity located in the United States; (vi) any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person; (vii) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated , or (if an individual) resident in the United States; and (viii) any partnership or corporation if: (a) organized or incorporated under the laws of any foreign jurisdiction; and (b) formed by a U.S. person principally for the purpose of investing in securities not registered under the Securities Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a) of the Securities Act) who are not natural persons, estates or trusts. 9.11 ENTIRE AGREEMENT. This Agreement, the Transaction Documents, and the documents, schedules and exhibits described herein or attached or delivered pursuant hereto constitutes the sole and only agreement among the parties with respect to the subject matter hereof. Any agreements, representations or documentation respecting the transactions contemplated by this Agreement, including without limitation, any correspondence, discussions or course of dealing, which are not expressly set forth in this Agreement, the Transaction Documents, or the documents, schedules and exhibits described herein or attached or delivered pursuant hereto or are null and void, it being understood that no party has relied on any representation not set forth in this Agreement, the Transaction Documents or the documents, schedules and exhibits described herein or attached or delivered pursuant hereto. It is expressly understood and agreed that upon Closing, the Confidentiality Agreement shall automatically be rendered null and void to the same extent as if it were never executed. 9.12 THIRD PARTIES. Except as expressly set forth in Section 11.9 or 3.1(c) of this Agreement, nothing herein expressed or implied is intended or shall be construed to confer upon or give to any person or entity, other than the parties to this Agreement and their respective permitted successors and assigns, any rights or remedies under or by reason of this Agreement. 9.13 INTERPRETATIVE MATTERS. Unless the context otherwise requires, (a) all references to Articles, Sections or Schedules are to Articles, Sections or Schedules in and to this Agreement, and (b) words in the singular or plural include the singular and plural, pronouns stated in either the masculine, the feminine or neuter gender shall include the masculine, feminine and neuter, and (d) the term "including" shall mean -31- by way of example and not by way of limitation. All references to "dollars", "$", and "CDN" in this Agreement are references to Canadian dollars unless prefixed by "U.S.". 9.14 NO STRICT CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party hereto. 9.15 DEFAULT. The mere lapse of time for performing any obligation or covenant contained herein shall serve to put the party who is obliged to perform or fulfil such obligation or covenant in default, without any notice or demand being required therefor. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LINEO, INC. Per: --------------------------- Name: Title: RT-CONTROL INC. Per: --------------------------- Name: Title: -32- SIGNED, SEALED & DELIVERED ) in the presence of: ) ) ) - -------------------------------- ) ----------------------------------- WITNESS ) John Fabrizio ) ) ) - -------------------------------- ) ----------------------------------- WITNESS ) Michael David Durrant ) ) ) - -------------------------------- ) ----------------------------------- WITNESS ) Donald Jeff Dionne ) ) ) - -------------------------------- ) ----------------------------------- WITNESS ) Steven A. Robinson ) ) ) - -------------------------------- ) ----------------------------------- WITNESS ) Darren Best ) ) -33- SCHEDULE "1.1(a)"
I II NUMBER OF NUMBER OF SHARES OF NAME OF NAME OF COMPANY SERIES D CASH SHAREHOLDER PRINCIPAL SHARES CONVERTIBLE PAYMENT PREFERRED STOCK John Fabrizio John Fabrizio 97 134,723 -- Michael D. Durrant Michael D. Durrant 97 134,723 -- Donald J. Dionne Donald J. Dionne 97 134,723 -- Steve A. Robinson 3 -- $5,000 U.S. Darren Best 6 -- $10,000 U.S. TOTALS 300 404,169 (x $6 = $15,000 U.S. $2,425,014
-34- SCHEDULE "1.1(b)" CERTIFICATE OF DESIGNATION OF SERIES D CONVERTIBLE PREFERRED SHARES -35- SCHEDULE "3.4" ORGANIZATIONAL DOCUMENTS - RT-CONTROL INC. -36- SCHEDULE "3.7" Consent of Oxford Properties Group Inc. required under the lease of the Premises located at 195 The West Mall, Suite 608, Toronto, Ontario as such lease is contained in Schedule 3.11(b). -37- SCHEDULE "3.8(a)" FINANCIAL STATEMENTS -38- SCHEDULE "3.8(b)" Professional Fees accrued but not billed $5,183.19 -39- SCHEDULE "3.9" SHAREHOLDER'S LIABILITY SHAREHOLDER LOANS (NOT INCLUDING ACCRUED EMPLOYMENT PAYMENTS) As at April 30, 2000: Michael Durrant $9,662.91 Jeff Dionne $3,556.37 John Fabrizio $2,372.46 -40- SCHEDULE "3.11(a)" Liens pursuant to a search of the Personal Property Security Act Registry, Ontario with a file currency date of May 4, 2000 RT-CONTROL INC. - NIL JOHN FABRIZIO
- ------------------------------------ --------------- -------------------- ------------------------ ------------------- Registration File Collateral Number Number Secured Party Classification Expiry Date - ------------------------------------ --------------- -------------------- ------------------------ ------------------- 19990428 1842 1531 8747 850496004 General Motors Consumer Goods, Apr. 28, 2003 Acceptance Other, incl. Motor Corporation of Vehicle Canada Limited - ------------------------------------ --------------- -------------------- ------------------------ -------------------
MICHAEL DURRANT - NIL JEFFREY DIONNE
- ------------------------------------ --------------- -------------------- ------------------------ ------------------- Registration File Collateral Number Number Secured Party Classification Expiry Date - ------------------------------------ --------------- -------------------- ------------------------ ------------------- 19980402 1810 1531 4289 839492757 HongKong Consumer Goods, Apr. 2, 2002 Bank of Other, incl. Motor Canada Vehicle - ------------------------------------ --------------- -------------------- ------------------------ -------------------
DARREN BEST
- ------------------------------------ --------------- -------------------- ------------------------ ------------------- Registration File Collateral Number Number Secured Party Classification Expiry Date - ------------------------------------ --------------- -------------------- ------------------------ ------------------- 19990818 1844 1531 4347 854099685 Bank of Nova Consumer Goods, Aug. 13, 2003 Scotia incl. Motor Vehicle - ------------------------------------ --------------- -------------------- ------------------------ -------------------
STEVEN ROBINSON
- ------------------------------------ --------------- -------------------- ------------------------ ------------------- Registration File Collateral Number Number Secured Party Classification Expiry Date - ------------------------------------ --------------- -------------------- ------------------------ ------------------- 20000418 1823 1531 5229 861038469 Bank of Nova Consumer Goods, April 15, 2004 Scotia incl. Motor Vehicle - ------------------------------------ --------------- -------------------- ------------------------ -------------------
-41- SCHEDULE "3.11(b)" LEASED PROPERTY 1. Offer to Sublease 2. Landlord's Consent to Sublease 3. Lease 4. Copier Lease -42- SCHEDULE "3.12" PROPERTY AT OTHER LOCATIONS NIL -43- SCHEDULE "3.13" MATERIAL CONTRACTS Earthlink Value: $18,850 US 3100 New York Due: May 15, 2000 Pasedena, CA USA 91107 Science Horizons Value: $31,800 US 1333 Gateway Dr. Due: May 28, 2000 Suite 1028 Melbourne, Florida ZiLOG Value: $51,000 US 4201 Bee Caves Due: May 28, 2000 Suite C-100 Austin, Texas Cancelled as of April, 2000 Lease: Associate Carriers Value Outstanding: $77,361.50 CDN 365 Evans Avenue Outstanding Periods: 25 months Suite 400 Toronto, Ontario M8Z 1K2 Copier & Fax Machine Lease: E.O.E. Value Outstanding: $16,958.40 CDN 2 Berkley Street Outstanding Periods: 57 months Suite 204 Toronto, Ontario M5A 2W3 -44- SCHEDULE "3.14(c)" PROPRIETARY RIGHTS 1. Canadian Trademark Applications filed on April 14, 2000 and U.S. Trademark Applications sent for filing: (a) Cdn. Appln. for I NET READY (b) U.S. Appln. for I NET READY (c) Cdn. Appln. for I NET READY & Design (d) U.S. Appln. for I NET READY & Design (e) Cdn. Appln. for GEEKCREEK (f) U.S. Appln. for GEEKCREEK (g) Cdn. Appln. for UCLINUX (h) U.S. Appln. for UCLINUX (i) Cdn. Appln. for UCLINUX & Design (j) U.S. Appln. for UCLINUX & Design (k) Cdn. Appln. for UCSIMM (l) U.S. Appln. for UCSIMM (m) Cdn. Appln. for UCSIMM & Design (n) U.S. Appln. for UCSIMM & Design (o) Cdn. Appln. for UCKERNEL (p) U.S. Appln. for UCKERNEL (q) Cdn. Appln. for UCKERNEL & Design (r) U.S. Appln. for UCKERNEL & Design (s) U.S. Appln, for Cdn. Appln. for PALMLINUX (t) U.S. Appln. for PALMLINUX (u) Cdn. Appln. for RT-KERNEL (v) U.S. Appln. for RT-KERNEL (w) Cdn. Appln. for RT-CONTROL (x) U.S. Appln. for RT-CONTROL (y) Cdn. Appln. for RT-CONTROL & Design (z) U.S. Appln. for RT-CONTROL & Design 2. Dispute with Rick Farmer and Adicon Consulting & Design Letters to Rick Farmer and Adicon Consulting & Design dated September 17, 1999 concerning potential copyright infringement. -45- SCHEDULE "3.14(e)" To the extent that all or any part of the Proprietary Rights constitute open source software, the Company does not have full, effective, exclusive and original ownership thereof. 1. Confidentiality Agreement with Circuit Images Inc. 2. Assignment of Intellectual Property by Circuit Images Inc. -46- SCHEDULE "3.15" EMPLOYEE BENEFIT PLANS 1. Options to purchase shares of Lineo, Inc. at $1.50 have been offered to each of the following employees in the following amounts: Paula Main 4,000 Mike Schlifer 4,000 Darren Best 8,000 2. Employment offer currently made to Michael Leslie includes options to purchase 4,000 shares of Lineo, Inc. at $1.50. -47- SCHEDULE "3.16" EMPLOYEES AND SALARIES [EXCLUDING PRINCIPALS] Paula Main, Executive Assistant $35,000 CDN per annum Date of Hire: January 1, 2000 Vacation Accrual Rate: 3 weeks per year Accrued Vacation Time: 5 days Darren Best, Project Manager $65,000 CDN per annum Date of Hire: part-time January 1 - March 27, 2000; full-time: March 27, 2000 Vacation Accrual Rate: 3 weeks per year Accrued Vacation Time: 1.25 days Ed Lui, Corporate Communications $13.00/hr CDN Date of Hire: April 1, 2000 Vacation Accrual Rate: 4% of gross pay Accrued Vacation Time: .5 days Michael Schlifer, Design Engineer $45,000 CDN per annum Date of Hire: March 1, 2000 Vacation Accrual Rate: 3 weeks per year Accrued Vacation Time: 2.5 days -48- SCHEDULE "3.19" INSURANCE POLICIES Commercial Business Policy with Zurich Insurance Company -49- SCHEDULE "3.20" BANK ACCOUNTS AND HOLDINGS Bank of Nova Scotia 44 King Street West Toronto, Ontario M5H 1H1 Attn: John DaCosta Tel: (416) 933-1180 Fax: (416) 866-2828 Acct: 6133312 Acct: 441813 GIC: 07923-73 Metro Credit Union Jorgenson Hall, L158 350 Victoria Street Toronto, Ontario M5B 2K3 Attn: Monia De Clara Tel: (416) 252-5621 Tel: (800) 777-8507 Acct: 6900518 Harris Trust & Savings P.O. Box 94033 Palatine, Illinois USA 60094-4033 Tel: (888) 340-2265 Acct: 29100 17637 Money Market Acct: 29100 17926 -50- SCHEDULE "3.21" TAXES Corporate Tax: First filing due and payable June, 2000 for 1999. No previous outstanding. Provincial Sales Tax: Current to February 29, 2000, filed quarterly Period March 1, 2000 - May 30, 2000 due June 23, 2000 Goods and Services Tax (GST): Due December 31, 1999, filed yearly Refund owing of $10,156.01 CDN; Claim subject to review by Canada Customs and Revenue Agency by letter dated April 25, 2000 (attached) Payroll Tax Deductions: Due May 15, 2000 (owing for April) Income Tax: $13,724.14 CDN CPP: $ 3,096.28 CDN EI: $ 2,395.06 CDN -51- SCHEDULE "3.22" LITIGATION Letters to Rick Farmer and Adicon Consulting & Design dated September 17, 1999 concerning potential copyright infringement. -52- SCHEDULE "3.23" Operations out of the ordinary course since December 31, 1999 1. $200,000 U.S. borrowed from Lineo, Inc. not reflected in Financial Statements dated December 31, 1999 -53- SCHEDULE "4.8" CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM EX-10.16 20 EXHIBIT 10.16 EXHIBIT 10.16 LINEO, INC. INVESTOR RIGHTS AGREEMENT THIS INVESTOR RIGHTS AGREEMENT (this "Agreement") is made as of February __, 2000 by and among LINEO, INC., a Delaware corporation (the "Company") and the investors named on Schedule 1 hereto (the "Investors"). RECITALS A. The Investors are acquiring shares of Series A Convertible Preferred Stock, $.001 par value per share, of the Company (the "Series A Preferred Stock") pursuant to the terms of a Stock Purchase Agreement and a Recapitalization Agreement dated as of the date hereof between the Company and the Investors (the "Purchase Agreement"). B. It is a condition to the obligations of the Investors under the Purchase Agreement that this Agreement be executed by the parties. AGREEMENT 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: "Affiliate" and "Affiliated" refer to any person who is an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. For purposes of this definition, "person" means any individual, firm, corporation, constituent members of a partnership, constituent members of a limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, governmental authority or other entity of any kind, and includes any successor (by merger or otherwise) of such entity. "Common Stock" means the Company's common stock, $.001 par value per share. "Common Stock Equivalent" means shares of: (a) Common Stock; (b) Common Stock issuable upon conversion of Series A Preferred Stock; and (c) any other Common Stock issuable upon conversion or exercise of any security (other than Series A Preferred Stock), including options, issued or granted by the Company that is convertible into or exercisable for Common Stock. "Holder" shall mean an Investor who holds Registrable Securities and any holder of Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with the terms and conditions hereof. "Preferred Stock" means the Series A Preferred Stock and any other shares of preferred stock of any series any time issued by the Company. -1- "Public Offering" means a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock of the Corporation to the public at a minimum price of $10.00 per share and pursuant to which the gross proceeds received by the Corporation equal or exceed $15,000,000. "Register," "Registered" and "Registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of effectiveness of such registration statement. "Registrable Securities" shall mean any shares of Common Stock held by the Investors and permitted assignees (or subject to acquisition by the Investors and permitted assignees upon conversion of Series A Preferred Stock), including any shares issued by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization; provided, however, that if a Holder owns Series A Preferred Stock, the Holder may exercise its registration rights hereunder by converting the shares to be sold publicly into Common Stock as of the closing of the relevant offering and shall not be required to cause such Series A Preferred Stock to be converted to Common Stock until and unless such closing occurs; and provided, further, that any Common Stock that is sold in a registered sale pursuant to an effective registration statement under the Securities Act or pursuant to Rule 144 thereunder, or that may be sold without restriction as to volume or otherwise pursuant to Rule 144 under the Securities Act (as confirmed by an unqualified opinion of counsel to the Company), shall not be deemed Registrable Securities; "Securities Act" means the Securities Act of 1933, as amended. "Stockholder" and "Stockholders" mean the Investors and any other stockholders of the Company that become parties to this Agreement.. "Shares" mean all shares of Stock now owned, or hereafter acquired, by any Stockholder. "Stock" means all shares of Common Stock and Preferred Stock, and all other securities of the Company that may be issued in exchange for or in respect of shares of Common Stock and Preferred Stock (whether by way of stock split, stock dividend, combination, reclassification, reorganization or any other means), the number of which is determined on an as-converted-into-Common Stock basis. "Transfer" means to sell, assign, transfer, pledge, hypothecate, mortgage, encumber or dispose of all or any part of its Shares. 2. RIGHT TO PARTICIPATE IN COMPANY SALES. Subject to the terms and conditions specified in this Section 2, and until such time as the Company's Public Offering, the Company grants to each Investor the right to purchase such Investor's pro rata portion of any company shares that the Company may, from time to time, propose to sell after the date of this Agreement. -2- 2.1 NOTICE If the Company proposes to sell Company Shares, it shall give each Investor written notice of its intention (the "Company Notice") ten (10) days prior to the proposed date of closing of the transaction in which the Company Shares are to be issued (the "Company Shares Closing Date"). The Company Notice shall include, to the extent such information is known by the Company: (a) a description of the type of Company Shares; (b) the number and the anticipated per share price of the Company Shares; (c) the name of any proposed purchaser; (d) the Company Shares Closing Date; and (e) in reasonable detail, the other terms and conditions, if any, pursuant to which the Company is proposing to sell the Company Shares. 2.2 ELECTION Each Investor shall have until five (5) days after the date of the Company Notice to notify the Company in writing of its election and agreement to purchase its respective pro rata portion of such Company Shares at the same price and upon the same terms as any other investors in such offering or, if there are no investors in such offering other than the Investors, then at the price and upon the terms specified in the Company's Notice. Each such notice by an Investor to the Company shall specify the maximum quantity of Company Shares that such Investor is willing to agree to purchase. 2.3 PRO RATA PORTION For purposes of this Section 2, each purchasing Investor's pro rata portion of the Company Shares is that proportion of the Company Shares as the number of Shares then held by such purchasing Investor bears to the total number of Common Stock Equivalents then outstanding. 2.4 SUBSEQUENT OFFERING If all Company Shares referred to in the Company Notice are not elected to be purchased as provided in this Section 2 or if for any reason any Investor that had elected to purchase such Company Shares does not timely consummate such purchase, then the Company may, on the Company Shares Closing Date or during the ninety (90)-day period following the Company Shares Closing Date, sell such unsubscribed Company Shares to any person or persons at a price not less, and upon terms no more favorable to the purchasers of such securities, than those specified in the Company Notice. If the Company has not sold all of the Company Shares within such ninety (90)-day period, then this Section 2 participation right shall be revived and such Company Shares shall not be offered unless first reoffered to the Stockholders in accordance with this Section 2. 2.5 EXCLUDED OFFERINGS The right of participation in this Section 2 shall not apply to the Company's currently anticipated Series B Preferred Stock financing, information about which has been disclosed separately to the Investors. The right of participation in this Section 2 shall also not apply where the Company, with the approval of the Board of Directors, issues or reserves shares of common stock in connection with (i) a stock dividend to holders of common stock or upon the subdivision or combination of shares of common stock, (ii) any stock option plan or other restricted stock plan or employee stock bonus program or grant or other similar arrangement designated and approved by the Board of Directors, (iii) the conversion of convertible preferred stock, (iv) in connection with the merger or consolidation -3- of the Company or a subsidiary of the Company with any other operating company, or the exchange of the capital stock of the Company for the capital stock of another operating company, (v) the acquisition of any assets, stock or other interest in any other operating entity, and (vi) pursuant to any equipment leasing arrangement or debt financing from a bank or similar financial institution; provided, that in the case of any transaction described in clauses (iv) or (v) of this Section 2.5, such transaction must receive prior approval by the Company's Board of Directors and shall not be excluded from the right of participation in this Section 2 where such transaction is with a five percent or greater stockholder of the Company or an "affiliate" of the Company, as that term is defined in Rule 144 under the Securities Act of 1933, as amended. Any determination made by the Company's Board of Directors with respect to any matter described in this Section 2.5 shall be conclusive. 2.6 ASSIGNMENT The right of participation under this Section 2 is not assignable except by an Investor: (a) to an Affiliated entity or to a partner or retired partner of such Investor or to a partner or retired partner of an Affiliated entity; or (b) to a constituent member of an Affiliated entity that is a limited liability company. 3. COMPANY COVENANTS. 3.1 INFORMATION RIGHTS The Company shall deliver to the Investors the following: (a) Annual financial statements prepared in accordance with Generally Accepted Accounting Principles ("GAAP") within 90 days following the fiscal year end. (b) Quarterly unaudited financial statements prepared in accordance with GAAP within 45 days following each fiscal quarter. 3.2 INSPECTION RIGHTS The Investors shall have the right to inspect the books and records of the Company during normal business hours upon written request made at least one (1) business day in advance; provided, that the Investors shall avail themselves of such right no more often than once every fiscal quarter. 3.3 INSURANCE (a) The Company agrees to maintain in full force and effect a policy or policies of insurance issued by insurers of recognized responsibility, insuring it and its properties and business against such losses and risks, and in such amounts, as are customary in the case of corporations of established reputation engaged in the same or a similar business and similarly situated, and within ninety (90) days following the Closing, obtain and maintain in full force and effect thereafter a policy of directors and officers liability insurance in an amount that is commercially reasonable. (b) The Company agrees to maintain in full force and effect a policy or policies of key person life insurance issued by insurers of recognized responsibility covering the life of Bryan Sparks in the amount of no less that $2,000,000. -4- 3.4 PROPRIETARY RIGHTS AGREEMENTS All of the Company's current and future employees and consultants shall enter into a proprietary rights agreement or another standard proprietary rights agreements containing such provisions regarding confidentiality, non-use and invention assignments as are customary for similarly situated companies. 3.5 BOARD APPROVAL The following matters shall be approved by the Company's Board of Directors in accordance with the Company's Bylaws and Delaware law: (a) Annual Company budgets; (b) Appointment of corporate officers; (c) Changes in Compensation for any Company officer with annual compensation of more than $100,000 per year; (d) Amendments to the Company's Stock Option Plan; (e) Grants of stock options; (f) Sale or issuance of any capital stock; (g) The purchase of any non-budgeted capital equipment for more than $100,000; and (h) Transactions between the Company and any officer or director of the Company, or their affiliates (such approval to be granted only by the Company's disinterested directors). (i) Any merger or consolidation of the Company with another company or any acquistion by the Company of the stock or substantially all the assets of another business. 3.6 BOARD COMPENSATION Non-employee directors shall be reimbursed for their reasonable out-of-pocket expenses incurred in connection with attending meetings of the Board of Directors or any Committee thereof. 4. CONFIDENTIALITY AGREEMENT. Each Investor, and any successor or assign of such Investor, who receives from the Company or its agents, directly or indirectly, any information that the Company has not made generally available to the public, pursuant to the preparation and execution of this Agreement or disclosure in connection therewith or pursuant to the provisions of Section 3: (a) acknowledges and agrees that such information is confidential and for its use only in connection with evaluating its investment in the Company; (b) agrees that it will not disseminate such information to any person other than its -5- accountant, investment advisor, limited partners or attorney and that such dissemination shall be only for purposes of evaluating its investment; and (c) agrees to execute and to cause Affiliates to execute such confidentiality agreements as are necessary or desirable to further the intent of this Section 4. 5. REGISTRATION RIGHTS. 5.1. REQUEST FOR REGISTRATION (a) If the Company shall receive at any time after the earlier of (i) January __ 2003 or (ii) six (6) months after the effective date of a Public Offering, a written request from the holders (the "Initiating Holders") of a majority of the Registrable Securities that the Company file a registration statement under the Securities Act covering the registration of all or part of the Registrable Securities having an aggregate offering price, net of underwriting discounts and commissions, equal to or exceeding $5,000,000, then the Company shall, subject to Section 5.1(b) below: (i) Promptly give written notice of the proposed registration to all other Holders; and (ii) As soon as practicable, either (A) elect to make a primary offering, in which case the rights of such Holders shall be as set forth in Section 5.2 hereof or (B) use its best efforts to effect such registration (including, without limitation, filing post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws, and appropriate compliance with the Securities Act) and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within twenty (20) days after such written notice from the Company is mailed or delivered. (b) The Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 5.1 after the Company has initiated two (2) such registrations pursuant to this Section 5.1 (counting for these purposes only registrations which have been declared or ordered effective and pursuant to which securities have been sold and registrations which have been withdrawn by the Holders as to which the Holders have not elected to bear the expenses of registration pursuant to Section 5.3 hereof and would, absent such election, have been required to bear such expenses). (c) Subject to Section 5.1(b) above, the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the Initiating Holders; provided, however, that if (i) in the good faith judgment of the Board of Directors of the Company, such registration would be detrimental to the Company, and the Board of Directors of the Company concludes, as a result, that it is essential to defer the filing of such registration statement at such time, and (ii) the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be detrimental to the Company for such registration statement to be filed in the near future and that it is, therefore, essential to defer the filing of such registration statement, then the Company shall have the right to defer such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders, and, provided further, -6- that the Company shall not defer its obligation in this manner more than once in any twelve-month period. (d) The registration statement filed pursuant to the request of the Initiating Holders may, subject to the provisions of Section 5.13 hereof, include other securities of the Company with respect to which registration rights have been granted, and may include securities of the Company being sold for the account of the Company. (e) The right of any Holder to registration pursuant to this Section 5.1 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder with respect to such participation and inclusion) to the extent provided herein. A Holder may elect to include in such underwriting all or a part of the Registrable Securities it holds. (f) If the Company shall request inclusion in any registration pursuant to this Section 5.1 of securities being sold for its own account, or if other persons shall request inclusion in any registration pursuant to this Section 5.1, the Initiating Holders shall, on behalf of all Holders, offer to include such securities in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Agreement. The Company shall (together with all Holders and other persons proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders, which underwriters are reasonably acceptable to the Company. Notwithstanding any other provision of this Section 5.1, if the representative of the underwriters in good faith advises the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, the number of shares to be included in the underwriting or registration shall be allocated as set forth in Section 5.11 hereof. If a person who has requested inclusion in such registration as provided above does not agree to the terms of any such underwriting, such person shall be excluded therefrom by written notice from the Company, the underwriter or the Initiating Holders. The securities so excluded shall also be withdrawn from registration. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall also be withdrawn from such registration. If shares are so withdrawn from the registration and if the number of shares to be included in such registration was previously reduced as a result of marketing factors pursuant to this Section 5.1(f), then the Company shall offer to all Holders who have retained rights to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among such Holders requesting additional inclusion in accordance with Section 5.11. 5.2 COMPANY REGISTRATION (a) Subject to Section 5.2(e) below, if at any time or times after the date hereof the Company shall determine to register any of its equity securities either for its own account or the account of a security holder or holders exercising their respective demand registration rights, the Company will: (i) Promptly give to each Holder written notice thereof; and -7- (ii) Use its best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), except as set forth in Section 5.2(c) below, and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by any Holder and received by the Company within ten (10) days after the written notice from the Company described in (i) above is mailed or delivered by the Company. Such written request may specify all or a part of a Holder's Registrable Securities. (b) If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 5.2(a)(i) above. In such event, the right of any Holder to registration pursuant to this Section 5.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders of securities of the Company with registration rights to participate therein distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company. (c) Notwithstanding any other provision of this Section 5.2, if the representative of the underwriters in good faith advises the Company in writing that marketing factors require a limitation on the number of shares to be underwritten, the representative may (subject to the limitation set forth below) exclude all Registrable Securities from, or limit the number of Registrable Securities to be included in, the registration and underwriting. The Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated first to the Company for securities being sold for its own account and thereafter as set forth in Section 5.11. If any person does not agree to the terms of any such underwriting, he, she or it shall be excluded therefrom by written notice from the Company or the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. (d) If shares are so withdrawn from the registration or if the number of shares of Registrable Securities to be included in such registration was previously reduced as a result of marketing factors, the Company shall then offer to all persons who have retained the right to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among the persons requesting additional inclusion in accordance with Section 5.11 hereof. (e) This Section 5.2 shall not apply to a registration on any registration form that does not permit secondary sales or to registrations relating solely to (i) employee benefit plans, (ii) transactions pursuant to Rule 145 or any other similar rule promulgated under the Securities Act or (iii) securities issued in connection with mergers with or acquisitions of other corporations by the Company. 5.3. EXPENSES In the case of any registration under Sections 5.1 and 5.2 hereof, the Company shall bear all costs and expenses of each such registration, including, but not limited to, printing, legal and -8- accounting expenses, Securities and Exchange Commission ("SEC") filing fees and "blue sky" fees and expenses (the "Registration Expenses"); provided, however, that the Company shall have no obligation to pay or otherwise bear (i) any portion of the fees or disbursements of more than one (1) counsel for the selling Holders of Registrable Securities in connection with the registration of their Registrable Securities, and in any event shall not responsible for fees for such counsel in excess of $10,000, or (ii) any portion of the underwriter's commissions or discounts attributable to the Registrable Securities being offered and sold by the Holders of Registrable Securities; and, provided further, that if the Holders bear the Registration Expenses for any registration proceeding commenced pursuant to this Agreement and subsequently withdrawn by the Holders registering shares therein, such registration proceeding shall not be counted as a requested registration pursuant to Section 5.1 hereof. Furthermore, in the event that a withdrawal by the Holders is based upon material adverse information relating to the Company that is different from the information known or available (upon request from the Company or otherwise) to the Holders requesting registration at the time of their request for registration under Section 5.1, such registration shall not be treated as a counted registration for purposes of Section 5.1 hereof, even though the Holders do not bear the Registration Expenses for such registration. 5.4 OBLIGATIONS OF THE COMPANY In the case of each registration effected by the Company pursuant to this Agreement, the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will use its best efforts to: (a) Keep such registration effective for a period of one (1) month or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (c) Furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request; (d) Notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing, and at the request of any such seller, prepare and furnish to such seller a reasonable number of copies of a supplement or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light to the circumstances then existing; -9- (e) Enter into any reasonable underwriting agreement required by the proposed underwriter, if any, in such form and containing such terms as are customary; provided, however, that no Holder shall be required to make any representations or warranties other than with respect to its title to the Registrable Securities and any written information provided by the Holder to the Company, and if the underwriter requires that representations or warranties be made and that indemnification be provided, the Company shall make all such representations and warranties and provide all such indemnities, including, without limitation, in respect of the Company's business, operations and financial information and the disclosures relating thereto in the prospectus; (f) Use its best efforts to register or qualify the securities covered by said registration statement under the securities or "blue sky" laws of such jurisdictions as any selling Holder may reasonably request, provided that the Company shall not be required to register or qualify the securities in any jurisdictions which require it to qualify to do business therein; (g) Cause all such Registrable Securities to be listed on each securities exchange or quotation system on which similar securities issued by the Company are then listed or quoted; (h) Otherwise use its best efforts to comply with the securities laws of the United States and other applicable jurisdictions and all applicable rules and regulations of the SEC and comparable governmental agencies in other applicable jurisdictions and make generally available to its stockholders, in each case as soon as practicable, but not later than 45 days after the close of the period covered thereby, an earnings statement of the Company which will satisfy the provisions of Section 11(a) of the Securities Act; (i) Obtain and furnish to each selling Holder, immediately prior to the effectiveness of the registration statement (and, in the case of an underwritten offering, at the time of delivery of any Registrable Securities sold pursuant thereto), a cold comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters as the Holders of a majority of the Registrable Securities being sold may reasonably request; and (j) Otherwise cooperate with the underwriter or underwriters, the Commission and other regulatory agencies and take all actions and execute and deliver or cause to be executed and delivered all documents necessary to effect the registration of any Registrable Securities under this Agreement. 5.5 SUSPENSION In the case of a registration for the sale of Registrable Securities, upon receipt of any notice (a "Suspension Notice") from the Company of the happening of any event which makes any statement made in the registration statement or related prospectus untrue or which requires the making of any changes in such registration statement or prospectus so that they will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading, each Holder of Registrable Securities registered under such registration statement shall forthwith discontinue disposition of such Registrable Securities pursuant to such registration statement until such Holder's receipt of the copies of the supplemented or amended prospectus or until it is advised in writing (the "Advice") by the Company that the use of the prospectus may be resumed, and has -10- received copies of any additional or supplemental filings which are incorporated by reference in the prospectus; provided, however, that the Company shall not give a Suspension Notice until after the registration statement has been declared effective and shall not give more than one Suspension Notice to the Holders in respect to all Registrable Securities and pursuant to this Section 5.5 during any period of 12 consecutive months and in no event shall the period from the date on which any Holder receives a Suspension Notice to the date on which any Holder receives either the Advice or copies of the supplemented or amended prospectus (the "Suspension Period") exceed 60 days. In the event that the Company shall give any Suspension Notice, the Company shall use its best efforts and take such actions as are reasonably necessary to render the Advice and end the Suspension Period as promptly as practicable. 5.6 INDEMNIFICATION (a) Incident to any registration statement referred to herein, the Company will indemnify and hold harmless each Holder who offers or sells any such Registrable Securities in connection with such registration statement (including its partners (including partners of partners and stockholders of any such partners), and directors, officers, employees and agents of any of them (a "Selling Holder"), and each person who controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (a "Controlling Person"), from and against any and all losses, claims, damages, expenses and liabilities, joint or several (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, as the same are incurred), to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based on (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement (including any related preliminary or definitive prospectus, or any amendment or supplement to such registration statement or prospectus), (ii) any omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading, or (iii) any violation by the Company of the Securities Act, any state securities or "blue sky" laws or any rule or regulation thereunder in connection with such registration; provided, however, that the Company will not be liable to the extent that such loss, claim, damage, expense or liability arises from and is based on an untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information furnished in writing to the Company by such underwriter, Selling Holder or Controlling Person expressly for use in such registration statement. With respect to such untrue statement or omission or alleged untrue statement or omission in the information furnished in writing to the Company by such Selling Holder expressly for use in such registration statement, such Selling Holder will indemnify and hold harmless each underwriter, the Company (including its directors, officers, employees and agents), each other Holder (including its partners (including partners of partners and stockholders of such partners) and directors, officers, employees and agents of any of them, and each person who controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)), from and against any and all losses, claims, damages, expenses and liabilities, joint or several, to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise to the same extent provided in the immediately preceding sentence. -11- (b) The foregoing indemnity provisions are subject to the condition that, insofar as they relate to any violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement in question becomes effective or in the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final Prospectus"), such indemnity provisions shall not inure to the benefit of any person if a copy of the Final Prospectus was furnished to the indemnified party and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. (c) If the indemnification provided for in Section 5.6(a) above for any reason is held by a court of competent jurisdiction to be unavailable to an indemnified party in respect of any losses, claims, damages, expenses or liabilities referred to therein, then each indemnifying party under this Section 5.6, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, expenses or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the other Selling Holders and the underwriters from the offering of the Registrable Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, the other Selling Holders and the underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Selling Holders and the underwriters shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Company and the Selling Holders and the underwriting discount received by the underwriters, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the Registrable Securities. The relative fault of the Company, the Selling Holders and the underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Holders or the underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Selling Holders agree that it would not be just and equitable if contribution pursuant to this Section 5.6(c) were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. In no event, however, shall a Selling Holder be required to contribute any amount under this Section 5.6(c) in excess of the lesser of (i) that proportion of the total of such losses, claims, damages or liabilities indemnified against equal to the proportion of the total Registrable Securities sold under such registration statement which are being sold by such Selling Holder or (ii) the proceeds received by such Selling Holder from its sale of Registrable Securities under such registration statement. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. (d) Promptly after receipt by the indemnified party under this Section 5.6 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 5.6, deliver to the indemnifying party a written notice of the commencement thereof, and the -12- indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that the indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if, in the opinion of counsel for the indemnifying party, representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. (e) The amount paid by an indemnifying party or payable to an indemnified party as a result of the losses, claims, damages and liabilities referred to in this Section 5.6 shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim, payable as the same are incurred. The indemnification and contribution provided for in this Section 5.6 will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified parties or any officer, director, employee, agent or controlling person of the indemnified parties. 5.7 INFORMATION BY HOLDER Each Holder of Registrable Securities shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement. 5.8 RULE 144 REPORTING In the event that the Company becomes subject to Section 13 or Section 15(d) of the Exchange Act, the Company shall use its best efforts to take all action as may be required as a condition to the availability of Rule 144 or Rule 144A under the Securities Act (or any successor or similar exemptive rules hereafter in effect). The Company shall furnish to any Holder, within 15 days of a written request, a written statement executed by the Company as to the steps it has taken to comply with the current public information requirement of Rule 144 or Rule 144A or such successor rules. 5.9 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS The registration rights of the Holders of Registrable Securities under this Agreement may be transferred or assigned by any Holder to (i) any general or limited partner or other comparable affiliate of such Holder, (ii) any fund managed by or associated with such Holder or (iii) any transferee or assignee of such Holder's Registrable Securities who after such transfer or assignment will hold at least fifty percent (50%) of the Registrable Securities owned by such Holder on the date hereof; provided that the Company is given prior written notice of such transfer or assignment setting forth the name and address of the transferee or assignee and identifying the number of Registrable Securities so transferred or assigned, and, provided further, that the transferee or assignee of such rights assumes in writing the obligations of such Holder under this Agreement. 5.10 MARKET STAND-OFF AGREEMENT -13- In connection with a public offering by the Company, the Holders, if requested in good faith by the Company and the managing underwriter of the public offering, shall agree not to sell or otherwise transfer or dispose of any securities of the Company held by them (except for any securities sold pursuant to such registration statement) for a period following the effective date of the applicable registration statement that in no event shall exceed 180 days. Notwithstanding the foregoing, such an agreement shall not be required unless all of the officers and directors and five percent (5%) or greater stockholders of the Company and all other persons with registration rights enter into similar agreements. In order to enforce the foregoing, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Holder (and the shares of securities of every other person subject to the foregoing restriction) until the end of such period. 5.11 ALLOCATION OF REGISTRATION OPPORTUNITIES In any circumstance in which all of the Registrable Securities and other shares of Common Stock of the Company (including shares of Common Stock issued or issuable upon conversion of shares of any currently unissued series of Preferred Stock of the Company) with registration rights (the "Other Shares") requested to be included in a registration on behalf of the Holders or other selling stockholders cannot be so included as a result of limitations of the aggregate number of shares of Registrable Securities and Other Shares that may be so included, the number of shares of Registrable Securities and Other Shares that may be so included shall be allocated among the Holders and other selling stockholders requesting inclusion of shares pro rata on the basis of the number of shares of Registrable Securities and Other Shares that would be held by such Holders and other selling stockholders, assuming conversion; provided, however, that if any Holder or other selling stockholder does not request inclusion of the minimum number of shares of Registrable Securities and Other Shares allocated to him, her or it pursuant to the above-described procedure, the remaining portion of his, her or its allocation shall be reallocated among those requesting Holders and other selling stockholders whose allocations did not satisfy their requests pro rata on the basis of the number of shares of Registrable Securities and Other Shares that would be held by such Holders and other selling stockholders, assuming conversion, and this procedure shall be repeated until all of the shares of Registrable Securities and Other Shares which may be included in the registration on behalf of the Holders and other selling stockholders have been so allocated. 5.12 TERMINATION OF REGISTRATION RIGHTS The rights of any Holder to request registration or inclusion in any registration pursuant to this Agreement shall terminate upon the earlier of (i) five (5) years after the closing of the Company's first Public Offering or (ii) as to any Investor on such date after the closing of the Company's first Public Offering as such Investor owns less then thirty percent (30%) of the number of Registrable Securities originally purchased by such Investor. 6. MISCELLANEOUS. 6.1 TERM This Agreement, except for the provisions set forth in Section 5, shall terminate upon the closing of the Company's first Public Offering. -14- 6.2 SPECIFIC ENFORCEMENT The Company and the Stockholders expressly agree that they will be irreparably damaged if this Agreement is not specifically enforced. Upon a breach or threatened breach of the terms, covenants and/or conditions of this Agreement by any party, the Company and the Stockholders shall, in addition to all other remedies, each be entitled to a temporary or permanent injunction, without showing any actual damage, and/or a decree for specific performance, in accordance with the provisions of this Agreement. 6.3 LEGEND Each certificate evidencing any of the Shares shall bear a legend substantially as follows: The shares represented by this certificate are subject to the terms and conditions of a certain Investor Rights Agreement dated as of FEBRUARY __, 2000, as at any time amended, and may not be sold, transferred or encumbered except in accordance with the terms and provisions of said Agreement, a copy of which is on file at the principal executive office of the Company and will be furnished to the holder of this certificate upon request and without charge. 6.4 NOTICES Unless otherwise provided, any notice under this Agreement shall be given in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) upon confirmation of receipt by fax by the party to be notified; (c) one business day after deposit with a reputable overnight courier, prepaid for overnight delivery and addressed as set forth in (d); or (d) three days after deposit with the U.S. Post Office, postage prepaid, registered or certified with return receipt requested and addressed to the party to be notified at the address indicated for such party on the signature page, or at such other address as such party may designate by 10 days' advance written notice to the other parties given in the foregoing manner. 6.5 AMENDMENTS AND WAIVERS Any term of this Agreement may be amended and the observance of any term may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the holders of a majority of the then outstanding Shares held by the Investors. 6.7 GOVERNING LAW; JURISDICTION; VENUE This Agreement shall be governed by and construed under the laws of the State of Delaware without regard to principles of conflict of laws. -15- 6.8 SUCCESSORS AND ASSIGNS The terms and conditions of this Agreement shall inure to the benefit of and be binding on the respective successors and assigns of the parties. 6.9 SEVERABILITY If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement, and the balance of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 6.10 ENTIRE AGREEMENT; COUNTERPARTS This Agreement constitutes the entire agreement between the parties about its subject and supersedes all prior agreements. This Agreement may be executed in two or more counterparts, which together shall constitute one instrument. 6.11 AUTHORIZATION Each party represents that this Agreement has been duly authorized, executed and delivered by such party and constitutes a valid and binding obligation of such party, enforceable against such party in accordance with its terms. [Signature page follows] -16- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. Lineo, Inc. By: ------------------------------------ Bryan Sparks, President and Chairman Egan-Managed Capital, L.P. By EMC Partners, L.P., its General Partner --------------------------- By Michael H. Shanahan General Partner Motorola, Inc. By: ----------------------- Its: ------------------- -17- Canopy Group, Inc. By: ----------------------- Its: ------------------- -18- SCHEDULE 1 INVESTORS Egan-Managed Capital, L.P. Motorola, Inc The Canopy Group, Inc. -19- EX-10.17 21 EXHIBIT 10.17 EXHIBIT 10.17 AMENDMENT NO. 1 TO INVESTOR RIGHTS AGREEMENT This AMENDMENT NO. 1 TO INVESTOR RIGHTS AGREEMENT (this "Amendment No. 1") is made as of March __, 2000 by and among Lineo, Inc., a Delaware corporation (the "Company"), the investors listed on Schedule 1 hereto (individually and collectively, the "Series A Investors"), and the investors listed on Schedule 2 hereto (individually and collectively, the "Series B Investors"), with respect to that certain Investor Rights Agreement dated February 17, 2000 by and among the Company and the Series A Investors (the "Investor Rights Agreement"). WHEREAS, in connection with their purchase of shares of the Company's Series A Convertible Preferred Stock, the Series A Investors were extended certain registration, information and inspection rights as set forth in the Investor Rights Agreement, and WHEREAS, the Company is willing to grant registration, information and inspection rights as set forth on EXHIBIT A and EXHIBIT B hereto, respectively, to the Series B Investors on terms identical to those already granted to the Series A Investors pursuant to the Investor Rights Agreement; NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants, and conditions set forth herein and in the Series B Preferred Stock Purchase Agreement of even date herewith, the parties hereto mutually agree to amend the Investor Rights Agreement, for the benefit of the Series B Investors, to provide as follows: 1. DEFINITIONS. A. The definition of "Registrable Securities" set forth in the Investor Rights Agreement is hereby deleted in its entirety and replaced with the following definition: "Registrable Securities" shall mean any shares of Common Stock held by the Investors and permitted assignees (or subject to acquisition by the Investors and permitted assignees upon conversion of Series A Preferred Stock or Series B Convertible Preferred Stock, $.001 par value per share, of the Company ("Series B Preferred Stock")), including any shares issued by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization; provided, however, that if a Holder owns Series A Preferred Stock or Series B Preferred Stock, the Holder may exercise its registration rights hereunder by converting the shares to be sold publicly into Common Stock as of the closing of the relevant offering and shall not be required to cause such Series A Preferred Stock or Series B Preferred Stock to be converted to Common Stock until and unless such closing occurs; and provided, further, that any Common Stock that is sold in a registered sale pursuant to an effective registration statement under the Securities Act or pursuant to 1 Rule 144 thereunder, or that may be sold without restriction as to volume or otherwise pursuant to Rule 144 under the Securities Act (as confirmed by an unqualified opinion of counsel to the Company), shall not be deemed Registrable Securities. B. For purposes of the definition of "Holder" in Section 1 and for purposes of Sections 3, 4 (regarding "Confidentiality Agreement," as set forth in EXHIBIT C hereto) and 5 of the Investor Rights Agreement only, the definition of "Investor" and "Investors" as set forth in the preamble to the Investor Rights Agreement is hereby amended by adding the Series B Investors such that, for purposes of the definition of "Holder" in Section 1 and for purposes of Sections 3, 4 and 5 only, each of the Series A Investors and Series B Investors shall individually be considered an "Investor," and collectively they shall be considered "Investors." 2. MISCELLANEOUS. 2.1 RATIFICATION. Except as expressly set forth in this Amendment No. 1, the terms of the Investor Rights Agreement shall remain in full force and effect. In the event of a conflict between the terms of this Amendment No. 1 and the terms of the Investor Rights Agreement, the terms of this Amendment No. 1 shall control. 2.2 SPECIFIC ENFORCEMENT. The Company, the Series A Investors and the Series B Investors expressly agree that they will be irreparably damaged if this Amendment No. 1 is not specifically enforced. Upon a breach or threatened breach of the terms, covenants and/or conditions of this Amendment No. 1 by any party, the Company and the Series A and B Investors shall, in addition to all other remedies, each be entitled to a temporary or permanent injunction, without showing any actual damage, and/or a decree for specific performance, in accordance with the provisions of this Amendment No. 1. 2.3 NOTICES. Unless otherwise provided, any notice under this Amendment No. 1 shall be given in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) upon confirmation of receipt by fax by the party to be notified; (c) one business day after deposit with a reputable overnight courier, prepaid for overnight delivery and addressed as set forth in (d); or (d) three days after deposit with the U.S. Post Office, postage prepaid, registered or certified with return receipt requested and addressed to the party to be notified at the address indicated for such party on the signature page, or at such other address as such party may designate by 10 days' advance written notice to the other parties given in the foregoing manner. 2.4 GOVERNING LAW. This Amendment No. 1 shall be governed by and construed under the laws of the State of Delaware without regard to principles of conflict of laws. 2.5 SUCCESSORS AND ASSIGNS. The terms and conditions of this Amendment No. 1 shall inure to the benefit of and be binding on the respective successors and assigns of the parties. 2.6 SEVERABILITY. If one or more provisions of this Amendment No. 1 are held to be unenforceable under applicable law, such provision shall be excluded from this Amendment No. 2 1, and the balance of this Amendment No. 1 shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 2.7 COUNTERPARTS. This Amendment No. 1 may be executed in two or more counterparts, which together shall constitute one instrument. 2.8 AUTHORIZATION. Each party represents that this Amendment No. 1 has been duly authorized, executed and delivered by such party and constitutes a valid and binding obligation of such party, enforceable against such party in accordance with its terms. 2.9 LEGEND. Each certificate evidencing any of the shares of capital stock of the Company owned by the Series B Investors shall bear a legend substantially as follows: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN INVESTOR RIGHTS AGREEMENT DATED AS OF MARCH 15, 2000, AS AT ANY TIME AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR ENCUMBERED EXCEPT IN ACCORDANCE WITH THE TERMS AND PROVISIONS OF SAID AGREEMENT, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICE OF THE COMPANY AND WILL BE FURNISHED TO THE HOLDER OF THIS CERTIFICATE UPON REQUEST AND WITHOUT CHARGE. [Signature pages follow] 3 IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 as of the date first above written. COMPANY: Lineo, Inc., a Delaware corporation By:________________________________________ Bryan Sparks, President and Chairman SERIES A INVESTORS Egan-Managed Capital, L.P. By EMC Partners, L.P., its General Partner By____________________________ Michael H. Shanahan General Partner Motorola, Inc. By: ______________________ Its: __________________ The Canopy Group, Inc. By: ______________________ Its: __________________ 4 SERIES B INVESTORS Rainier Investors, LLC By__________________________________ Michael J. Erickson, Member 5 SCHEDULE 1 SERIES A INVESTORS Egan-Managed Capital, L.P. Motorola, Inc The Canopy Group, Inc. 6 SCHEDULE 2 SERIES B INVESTORS 7 EXHIBIT A REGISTRATION RIGHTS 5. REGISTRATION RIGHTS. 5.1. REQUEST FOR REGISTRATION (a) If the Company shall receive at any time after the earlier of (i) February 17, 2003 or (ii) six (6) months after the effective date of a Public Offering, a written request from the holders (the "Initiating Holders") of a majority of the Registrable Securities that the Company file a registration statement under the Securities Act covering the registration of all or part of the Registrable Securities having an aggregate offering price, net of underwriting discounts and commissions, equal to or exceeding $5,000,000, then the Company shall, subject to Section 5.1(b) below: (i) Promptly give written notice of the proposed registration to all other Holders; and (ii) As soon as practicable, either (A) elect to make a primary offering, in which case the rights of such Holders shall be as set forth in Section 5.2 hereof or (B) use its best efforts to effect such registration (including, without limitation, filing post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws, and appropriate compliance with the Securities Act) and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within twenty (20) days after such written notice from the Company is mailed or delivered. (b) The Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 5.1 after the Company has initiated two (2) such registrations pursuant to this Section 5.1 (counting for these purposes only registrations which have been declared or ordered effective and pursuant to which securities have been sold and registrations which have been withdrawn by the Holders as to which the Holders have not elected to bear the expenses of registration pursuant to Section 5.3 hereof and would, absent such election, have been required to bear such expenses). (c) Subject to Section 5.1(b) above, the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the Initiating Holders; provided, however, that if (i) in the good faith judgment of the Board of Directors of the Company, such registration would be detrimental to the Company, and the Board of Directors of the Company concludes, as a result, that it is essential to defer the filing of such registration statement at such time, and (ii) the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be detrimental to the Company for such registration statement to be filed in the near future and that it is, therefore, essential to defer the filing of such registration statement, then the Company shall have the right to defer such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders, and, provided further, that the Company shall not defer its obligation in this manner more than once in any twelve-month period. (d) The registration statement filed pursuant to the request of the Initiating Holders may, subject to the provisions of Section 5.13 hereof, include other securities of the Company with respect to 8 which registration rights have been granted, and may include securities of the Company being sold for the account of the Company. (e) The right of any Holder to registration pursuant to this Section 5.1 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder with respect to such participation and inclusion) to the extent provided herein. A Holder may elect to include in such underwriting all or a part of the Registrable Securities it holds. (f) If the Company shall request inclusion in any registration pursuant to this Section 5.1 of securities being sold for its own account, or if other persons shall request inclusion in any registration pursuant to this Section 5.1, the Initiating Holders shall, on behalf of all Holders, offer to include such securities in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Agreement. The Company shall (together with all Holders and other persons proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders, which underwriters are reasonably acceptable to the Company. Notwithstanding any other provision of this Section 5.1, if the representative of the underwriters in good faith advises the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, the number of shares to be included in the underwriting or registration shall be allocated as set forth in Section 5.11 hereof. If a person who has requested inclusion in such registration as provided above does not agree to the terms of any such underwriting, such person shall be excluded therefrom by written notice from the Company, the underwriter or the Initiating Holders. The securities so excluded shall also be withdrawn from registration. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall also be withdrawn from such registration. If shares are so withdrawn from the registration and if the number of shares to be included in such registration was previously reduced as a result of marketing factors pursuant to this Section 5.1(f), then the Company shall offer to all Holders who have retained rights to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among such Holders requesting additional inclusion in accordance with Section 5.11. 5.2 COMPANY REGISTRATION (a) Subject to Section 5.2(e) below, if at any time or times after the date hereof the Company shall determine to register any of its equity securities either for its own account or the account of a security holder or holders exercising their respective demand registration rights, the Company will: (i) Promptly give to each Holder written notice thereof; and (ii) Use its best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), except as set forth in Section 5.2(c) below, and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by any Holder and received by the Company within ten (10) days after the written notice from the Company described in (i) above is mailed or delivered by the Company. Such written request may specify all or a part of a Holder's Registrable Securities. (b) If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 5.2(a)(i) above. In such event, the right of any Holder to registration pursuant to this Section 5.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion 9 of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders of securities of the Company with registration rights to participate therein distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company. (c) Notwithstanding any other provision of this Section 5.2, if the representative of the underwriters in good faith advises the Company in writing that marketing factors require a limitation on the number of shares to be underwritten, the representative may (subject to the limitation set forth below) exclude all Registrable Securities from, or limit the number of Registrable Securities to be included in, the registration and underwriting. The Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated first to the Company for securities being sold for its own account and thereafter as set forth in Section 5.11. If any person does not agree to the terms of any such underwriting, he, she or it shall be excluded therefrom by written notice from the Company or the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. (d) If shares are so withdrawn from the registration or if the number of shares of Registrable Securities to be included in such registration was previously reduced as a result of marketing factors, the Company shall then offer to all persons who have retained the right to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among the persons requesting additional inclusion in accordance with Section 5.11 hereof. (e) This Section 5.2 shall not apply to a registration on any registration form that does not permit secondary sales or to registrations relating solely to (i) employee benefit plans, (ii) transactions pursuant to Rule 145 or any other similar rule promulgated under the Securities Act or (iii) securities issued in connection with mergers with or acquisitions of other corporations by the Company. 5.3. EXPENSES In the case of any registration under Sections 5.1 and 5.2 hereof, the Company shall bear all costs and expenses of each such registration, including, but not limited to, printing, legal and accounting expenses, Securities and Exchange Commission ("SEC") filing fees and "blue sky" fees and expenses (the "Registration Expenses"); provided, however, that the Company shall have no obligation to pay or otherwise bear (i) any portion of the fees or disbursements of more than one (1) counsel for the selling Holders of Registrable Securities in connection with the registration of their Registrable Securities, and in any event shall not responsible for fees for such counsel in excess of $10,000, or (ii) any portion of the underwriter's commissions or discounts attributable to the Registrable Securities being offered and sold by the Holders of Registrable Securities; and, provided further, that if the Holders bear the Registration Expenses for any registration proceeding commenced pursuant to this Agreement and subsequently withdrawn by the Holders registering shares therein, such registration proceeding shall not be counted as a requested registration pursuant to Section 5.1 hereof. Furthermore, in the event that a withdrawal by the Holders is based upon material adverse information relating to the Company that is different from the information known or available (upon request from the Company or otherwise) to the Holders requesting registration at the time of their request for registration under Section 5.1, such registration shall not be treated as a counted registration for purposes of Section 5.1 hereof, even though the Holders do not bear the Registration Expenses for such registration. 10 5.4 OBLIGATIONS OF THE COMPANY In the case of each registration effected by the Company pursuant to this Agreement, the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will use its best efforts to: (a) Keep such registration effective for a period of one (1) month or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (c) Furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request; (d) Notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing, and at the request of any such seller, prepare and furnish to such seller a reasonable number of copies of a supplement or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light to the circumstances then existing; (e) Enter into any reasonable underwriting agreement required by the proposed underwriter, if any, in such form and containing such terms as are customary; provided, however, that no Holder shall be required to make any representations or warranties other than with respect to its title to the Registrable Securities and any written information provided by the Holder to the Company, and if the underwriter requires that representations or warranties be made and that indemnification be provided, the Company shall make all such representations and warranties and provide all such indemnities, including, without limitation, in respect of the Company's business, operations and financial information and the disclosures relating thereto in the prospectus; (f) Use its best efforts to register or qualify the securities covered by said registration statement under the securities or "blue sky" laws of such jurisdictions as any selling Holder may reasonably request, provided that the Company shall not be required to register or qualify the securities in any jurisdictions which require it to qualify to do business therein; (g) Cause all such Registrable Securities to be listed on each securities exchange or quotation system on which similar securities issued by the Company are then listed or quoted; (h) Otherwise use its best efforts to comply with the securities laws of the United States and other applicable jurisdictions and all applicable rules and regulations of the SEC and comparable governmental agencies in other applicable jurisdictions and make generally available to its stockholders, in each case as soon as practicable, but not later than 45 days after the close of the period covered thereby, 11 an earnings statement of the Company which will satisfy the provisions of Section 11(a) of the Securities Act; (i) Obtain and furnish to each selling Holder, immediately prior to the effectiveness of the registration statement (and, in the case of an underwritten offering, at the time of delivery of any Registrable Securities sold pursuant thereto), a cold comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters as the Holders of a majority of the Registrable Securities being sold may reasonably request; and (j) Otherwise cooperate with the underwriter or underwriters, the Commission and other regulatory agencies and take all actions and execute and deliver or cause to be executed and delivered all documents necessary to effect the registration of any Registrable Securities under this Agreement. 5.5 SUSPENSION In the case of a registration for the sale of Registrable Securities, upon receipt of any notice (a "Suspension Notice") from the Company of the happening of any event which makes any statement made in the registration statement or related prospectus untrue or which requires the making of any changes in such registration statement or prospectus so that they will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading, each Holder of Registrable Securities registered under such registration statement shall forthwith discontinue disposition of such Registrable Securities pursuant to such registration statement until such Holder's receipt of the copies of the supplemented or amended prospectus or until it is advised in writing (the "Advice") by the Company that the use of the prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the prospectus; provided, however, that the Company shall not give a Suspension Notice until after the registration statement has been declared effective and shall not give more than one Suspension Notice to the Holders in respect to all Registrable Securities and pursuant to this Section 5.5 during any period of 12 consecutive months and in no event shall the period from the date on which any Holder receives a Suspension Notice to the date on which any Holder receives either the Advice or copies of the supplemented or amended prospectus (the "Suspension Period") exceed 60 days. In the event that the Company shall give any Suspension Notice, the Company shall use its best efforts and take such actions as are reasonably necessary to render the Advice and end the Suspension Period as promptly as practicable. 5.6 INDEMNIFICATION (a) Incident to any registration statement referred to herein, the Company will indemnify and hold harmless each Holder who offers or sells any such Registrable Securities in connection with such registration statement (including its partners (including partners of partners and stockholders of any such partners), and directors, officers, employees and agents of any of them (a "Selling Holder"), and each person who controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (a "Controlling Person"), from and against any and all losses, claims, damages, expenses and liabilities, joint or several (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, as the same are incurred), to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based on (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement (including any related preliminary or definitive prospectus, or any amendment or supplement to such registration 12 statement or prospectus), (ii) any omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading, or (iii) any violation by the Company of the Securities Act, any state securities or "blue sky" laws or any rule or regulation thereunder in connection with such registration; provided, however, that the Company will not be liable to the extent that such loss, claim, damage, expense or liability arises from and is based on an untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information furnished in writing to the Company by such underwriter, Selling Holder or Controlling Person expressly for use in such registration statement. With respect to such untrue statement or omission or alleged untrue statement or omission in the information furnished in writing to the Company by such Selling Holder expressly for use in such registration statement, such Selling Holder will indemnify and hold harmless each underwriter, the Company (including its directors, officers, employees and agents), each other Holder (including its partners (including partners of partners and stockholders of such partners) and directors, officers, employees and agents of any of them, and each person who controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)), from and against any and all losses, claims, damages, expenses and liabilities, joint or several, to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise to the same extent provided in the immediately preceding sentence. (b) The foregoing indemnity provisions are subject to the condition that, insofar as they relate to any violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement in question becomes effective or in the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final Prospectus"), such indemnity provisions shall not inure to the benefit of any person if a copy of the Final Prospectus was furnished to the indemnified party and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. (c) If the indemnification provided for in Section 5.6(a) above for any reason is held by a court of competent jurisdiction to be unavailable to an indemnified party in respect of any losses, claims, damages, expenses or liabilities referred to therein, then each indemnifying party under this Section 5.6, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, expenses or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the other Selling Holders and the underwriters from the offering of the Registrable Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, the other Selling Holders and the underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Selling Holders and the underwriters shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Company and the Selling Holders and the underwriting discount received by the underwriters, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the Registrable Securities. The relative fault of the Company, the Selling Holders and the underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Holders or the underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Selling Holders agree that it would not be just and equitable if contribution pursuant to this Section 5.6(c) were determined by pro rata or per capita allocation or by any 13 other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. In no event, however, shall a Selling Holder be required to contribute any amount under this Section 5.6(c) in excess of the lesser of (i) that proportion of the total of such losses, claims, damages or liabilities indemnified against equal to the proportion of the total Registrable Securities sold under such registration statement which are being sold by such Selling Holder or (ii) the proceeds received by such Selling Holder from its sale of Registrable Securities under such registration statement. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. (d) Promptly after receipt by the indemnified party under this Section 5.6 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 5.6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that the indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if, in the opinion of counsel for the indemnifying party, representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. (e) The amount paid by an indemnifying party or payable to an indemnified party as a result of the losses, claims, damages and liabilities referred to in this Section 5.6 shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim, payable as the same are incurred. The indemnification and contribution provided for in this Section 5.6 will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified parties or any officer, director, employee, agent or controlling person of the indemnified parties. 5.7 INFORMATION BY HOLDER Each Holder of Registrable Securities shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement. 5.8 RULE 144 REPORTING In the event that the Company becomes subject to Section 13 or Section 15(d) of the Exchange Act, the Company shall use its best efforts to take all action as may be required as a condition to the availability of Rule 144 or Rule 144A under the Securities Act (or any successor or similar exemptive rules hereafter in effect). The Company shall furnish to any Holder, within 15 days of a written request, a written statement executed by the Company as to the steps it has taken to comply with the current public information requirement of Rule 144 or Rule 144A or such successor rules. 5.9 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS The registration rights of the Holders of Registrable Securities under this Agreement may be transferred or assigned by any Holder to (i) any general or limited partner or other comparable affiliate of such Holder, (ii) any fund managed by or associated with such Holder or (iii) any transferee or assignee 14 of such Holder's Registrable Securities who after such transfer or assignment will hold at least fifty percent (50%) of the Registrable Securities owned by such Holder on the date hereof; provided that the Company is given prior written notice of such transfer or assignment setting forth the name and address of the transferee or assignee and identifying the number of Registrable Securities so transferred or assigned, and, provided further, that the transferee or assignee of such rights assumes in writing the obligations of such Holder under this Agreement. 5.10 MARKET STAND-OFF AGREEMENT In connection with a public offering by the Company, the Holders, if requested in good faith by the Company and the managing underwriter of the public offering, shall agree not to sell or otherwise transfer or dispose of any securities of the Company held by them (except for any securities sold pursuant to such registration statement) for a period following the effective date of the applicable registration statement that in no event shall exceed 180 days. Notwithstanding the foregoing, such an agreement shall not be required unless all of the officers and directors and five percent (5%) or greater stockholders of the Company and all other persons with registration rights enter into similar agreements. In order to enforce the foregoing, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Holder (and the shares of securities of every other person subject to the foregoing restriction) until the end of such period. 5.11 ALLOCATION OF REGISTRATION OPPORTUNITIES In any circumstance in which all of the Registrable Securities and other shares of Common Stock of the Company (including shares of Common Stock issued or issuable upon conversion of shares of any currently unissued series of Preferred Stock of the Company) with registration rights (the "Other Shares") requested to be included in a registration on behalf of the Holders or other selling stockholders cannot be so included as a result of limitations of the aggregate number of shares of Registrable Securities and Other Shares that may be so included, the number of shares of Registrable Securities and Other Shares that may be so included shall be allocated among the Holders and other selling stockholders requesting inclusion of shares pro rata on the basis of the number of shares of Registrable Securities and Other Shares that would be held by such Holders and other selling stockholders, assuming conversion; provided, however, that if any Holder or other selling stockholder does not request inclusion of the minimum number of shares of Registrable Securities and Other Shares allocated to him, her or it pursuant to the above-described procedure, the remaining portion of his, her or its allocation shall be reallocated among those requesting Holders and other selling stockholders whose allocations did not satisfy their requests pro rata on the basis of the number of shares of Registrable Securities and Other Shares that would be held by such Holders and other selling stockholders, assuming conversion, and this procedure shall be repeated until all of the shares of Registrable Securities and Other Shares which may be included in the registration on behalf of the Holders and other selling stockholders have been so allocated. 5.12 TERMINATION OF REGISTRATION RIGHTS The rights of any Holder to request registration or inclusion in any registration pursuant to this Agreement shall terminate upon the earlier of (i) five (5) years after the closing of the Company's first Public Offering or (ii) as to any Investor on such date after the closing of the Company's first Public Offering as such Investor owns less then thirty percent (30%) of the number of Registrable Securities originally purchased by such Investor. 15 EXHIBIT B INFORMATION AND INSPECTION RIGHTS 3.1 INFORMATION RIGHTS The Company shall deliver to the Investors the following: (a) Annual financial statements prepared in accordance with Generally Accepted Accounting Principles ("GAAP") within 90 days following the fiscal year end. (b) Quarterly unaudited financial statements prepared in accordance with GAAP within 45 days following each fiscal quarter. 3.2 INSPECTION RIGHTS The Investors shall have the right to inspect the books and records of the Company during normal business hours upon written request made at least one (1) business day in advance; provided, that the Investors shall avail themselves of such right no more often than once every fiscal quarter. 16 EXHIBIT C CONFIDENTIALITY AGREEMENT 4. CONFIDENTIALITY AGREEMENT. Each Investor, and any successor or assign of such Investor, who receives from the Company or its agents, directly or indirectly, any information that the Company has not made generally available to the public, pursuant to the preparation and execution of this Agreement or disclosure in connection therewith or pursuant to the provisions of Section 3: (a) acknowledges and agrees that such information is confidential and for its use only in connection with evaluating its investment in the Company; (b) agrees that it will not disseminate such information to any person other than its accountant, investment advisor, limited partners or attorney and that such dissemination shall be only for purposes of evaluating its investment; and (c) agrees to execute and to cause Affiliates to execute such confidentiality agreements as are necessary or desirable to further the intent of this Section 4. 17 EX-10.18 22 EXHIBIT 10.18 EXHIBIT 10.18 AMENDMENT NO. 2 TO INVESTOR RIGHTS AGREEMENT This AMENDMENT NO. 2 TO INVESTOR RIGHTS AGREEMENT (this "Amendment No. 2") is made as of April __, 2000 by and among Lineo, Inc., a Delaware corporation (the "Company"), the investors listed on Schedule 1 hereto (individually and collectively, the "Series A Investors"), the investors listed on Schedule 2 hereto (individually and collectively, the "Series B Investors") and the investors listed on Schedule 3 hereto (individually and collectively, the "Series C Investors") with respect to that certain Investor Rights Agreement dated February 17, 2000 by and among the Company and the Series A Investors (the "Investor Rights Agreement"). WHEREAS, in connection with their purchase of shares of the Company's Series A Convertible Preferred Stock, the Series A Investors were extended certain registration, information and inspection rights as set forth in the Investor Rights Agreement, WHEREAS, in connection with their purchase of shares of the Company's Series B Convertible Preferred Stock, the Series B Investors were extended certain registration, information and inspection rights as set forth in Amendment No. 1 to the Investor Rights Agreement dated March 15, 2000 ("Amendment No. 1"), and WHEREAS, the Company, the Series A Investors and the Series B Investors wish to amend the registration, information and inspection rights set forth in the Investor Rights Agreement and Amendment No. 1, and the Company is willing to grant such registration, information and inspection rights to the Series C Investors as set forth on EXHIBIT A and EXHIBIT B hereto; NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants, and conditions set forth herein and in the Series C Preferred Stock Purchase Agreement of even date herewith, the parties hereto mutually agree to amend the Investor Rights Agreement to provide as follows: 1. DEFINITIONS. A. The definition of "Registrable Securities" set forth in the Investor Rights Agreement is hereby deleted in its entirety and replaced with the following definition: "Registrable Securities" shall mean any shares of Common Stock held by the Investors and permitted assignees (or subject to acquisition by the Investors and permitted assignees upon conversion of Series A Preferred Stock, Series B Convertible Preferred Stock, $.001 par value per share, of the Company ("Series B Preferred Stock") or Series C Convertible Preferred Stock, $.001 par value per share, of the Company ("Series C Preferred Stock")), including any shares issued by way of a stock dividend or stock split 1 or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization; provided, however, that if a Holder owns Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, the Holder may exercise its registration rights hereunder by converting the shares to be sold publicly into Common Stock as of the closing of the relevant offering and shall not be required to cause such Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock to be converted to Common Stock until and unless such closing occurs; and provided, further, that any Common Stock that is sold in a registered sale pursuant to an effective registration statement under the Securities Act or pursuant to Rule 144 thereunder, or that may be sold without restriction as to volume or otherwise pursuant to Rule 144 under the Securities Act (as confirmed by an unqualified opinion of counsel to the Company), shall not be deemed Registrable Securities. B. For purposes of the definition of "Holder" in Section 1 and for purposes of Sections 3, 4 (regarding "Confidentiality Agreement," as set forth in EXHIBIT C hereto), 5 and 6.5 of the Investor Rights Agreement only, the definition of "Investor" and "Investors" as set forth in the preamble to the Investor Rights Agreement is hereby amended by adding the Series B Investors and Series C Investors such that, for purposes of the definition of "Holder" in Section 1 and for purposes of Sections 3, 4, 5 and 6.5 only, each of the Series A Investors, Series B Investors and Series C Investors shall individually be considered an "Investor," and collectively they shall be considered "Investors." 2. REGISTRATION RIGHTS. Section 5 of the Investor Rights Agreement is hereby amended and restated in its entirety as set forth on EXHIBIT A hereto. 3. INFORMATION AND INSPECTION RIGHTS. Sections 3.1 and 3.2 of the Investor Rights Agreement are hereby amended and restated in their entirety as set forth on EXHIBIT B hereto. 4. CONFIDENTIALITY. Section 4 of the Investor Rights Agreement is hereby amended and restated in its entirety as set forth on EXHIBIT C hereto. 5. MISCELLANEOUS. 5.1 RATIFICATION. Except as expressly set forth in this Amendment No. 2, the terms of the Investor Rights Agreement, as amended by Amendment No. 1, shall remain in full force and effect. In the event of a conflict between the terms of this Amendment No. 2 and the terms of the Investor Rights Agreement, as amended by Amendment No. 1, the terms of this Amendment No. 2 shall control. 5.2 SPECIFIC ENFORCEMENT. The Company, the Series A Investors, the Series B Investors and the Series C Investors expressly agree that they will be irreparably damaged if this Amendment No. 2 is not specifically enforced. Upon a breach or threatened breach of the terms, covenants and/or conditions of this Amendment No. 2 by any party, the Company and the Series A, B and C Investors shall, in addition to all other remedies, each be entitled to a temporary or permanent injunction, without showing any actual damage, and/or a decree for specific performance, in accordance with the provisions of this Amendment No. 2. 2 5.3 NOTICES. Unless otherwise provided, any notice under this Amendment No. 2 shall be in writing and shall be deemed given (i) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (ii) one (1) day (or five (5) days in the case of international deliveries) after the deposit with a nationally recognized overnight courier, having specified next day delivery, with written verification of receipt. All notices shall be addressed to each holder of record at the address of such holder appearing on the books of the Corporation. 5.4 GOVERNING LAW. This Amendment No. 2 shall be governed by and construed under the laws of the State of Delaware without regard to principles of conflict of laws. 5.5 SUCCESSORS AND ASSIGNS. The terms and conditions of this Amendment No. 2 shall inure to the benefit of and be binding on the respective successors and assigns of the parties. 5.6 SEVERABILITY. If one or more provisions of this Amendment No. 2 are held to be unenforceable under applicable law, such provision shall be excluded from this Amendment No. 2, and the balance of this Amendment No. 2 shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 5.7 COUNTERPARTS. This Amendment No. 2 may be executed in two or more counterparts, which together shall constitute one instrument. 5.8 AUTHORIZATION. Each party represents that this Amendment No. 2 has been duly authorized, executed and delivered by such party and constitutes a valid and binding obligation of such party, enforceable against such party in accordance with its terms. 5.9 LEGEND. Each certificate evidencing any of the shares of capital stock of the Company owned by the Series C Investors shall bear a legend substantially as follows: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN INVESTOR RIGHTS AGREEMENT DATED AS OF FEBRUARY 17, 2000, AS AT ANY TIME AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR ENCUMBERED EXCEPT IN ACCORDANCE WITH THE TERMS AND PROVISIONS OF SAID AGREEMENT, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICE OF THE COMPANY AND WILL BE FURNISHED TO THE HOLDER OF THIS CERTIFICATE UPON REQUEST AND WITHOUT CHARGE. [Signature pages follow] 3 IN WITNESS WHEREOF, the parties have executed this Amendment No. 2 as of the date first above written. COMPANY: Lineo, Inc., a Delaware corporation By: ___________________________________________ Bryan Sparks, President and Chairman SERIES A INVESTORS Egan-Managed Capital, L.P. By EMC Partners, L.P., its General Partner By___________________________ Michael H. Shanahan General Partner Motorola, Inc. By: ______________________ Its: _____________________ The Canopy Group, Inc. By: ______________________ Its: ____________________ 4 SERIES B INVESTORS Acer Investment Worldwide Rainier Investors, LLC By:_______________________________ By:_____________________________________ Its:______________________________ Its:____________________________________ AII Holding Samsung Electro-Mechanics Co., Ltd. By:_______________________________ By:_____________________________________ Its:______________________________ Its:____________________________________ Arima Computer Corporation Seligman New Technologies Fund, Inc. By:_______________________________ By:_____________________________________ Its:______________________________ Its:____________________________________ Brilliant World Limited Seligman Investment Opportunities (Master) Fund - NTV Portfolio By:_______________________________ By:_____________________________________ Its:______________________________ Its:____________________________________ Budworth Investments Limited Silver Star Developments Limited By:_______________________________ By:_____________________________________ Its:______________________________ Its:____________________________________ Compal Electronics, Inc. Summit Law Group, PLLC By:_______________________________ By:_____________________________________ Its:______________________________ Its:____________________________________ 5 Egan-Managed Capital, L.P. Wisecom Investments, LLC By:_______________________________ By:_____________________________________ Its:______________________________ Its:____________________________________ Exchange Place Investments, LLC By:_______________________________ Its:______________________________ 6 SERIES C INVESTORS _____________________________________ Name of Investor By __________________________________ Its _________________________________ 7 SCHEDULE 1 SERIES A INVESTORS Egan-Managed Capital, L.P. Motorola, Inc The Canopy Group, Inc. 8 SCHEDULE 2 SERIES B INVESTORS Acer Investment Worldwide AII Holding Arima Computer Corporation Brilliant World Limited Budworth Investments Limited Compal Electronics, Inc. Egan-Managed Capital, L.P. Exchange Place Investments, LLC Rainier Investors, LLC Samsung Electro-Mechanics Co., Ltd. Seligman New Technologies Fund, Inc. Seligman Investment Opportunities (Master) Fund - NTV Portfolio Silver Star Developments Limited Summit Law Group, PLLC Wisecom Investments, LLC 9 SCHEDULE 3 SERIES C INVESTORS 10 EXHIBIT A REGISTRATION RIGHTS 5. REGISTRATION RIGHTS. 5.1. REQUEST FOR REGISTRATION (a) If the Company shall receive at any time after the earlier of (i) February 17, 2003 or (ii) six (6) months after the effective date of a Public Offering, a written request from the holders (the "Initiating Holders") of a majority of the Registrable Securities then outstanding that the Company file a registration statement under the Securities Act covering the registration of all or part of the Registrable Securities having an aggregate offering price, net of underwriting discounts and commissions, equal to or exceeding $5,000,000, then the Company shall, subject to Section 5.1(b) below: (i) Within ten (10) days of the receipt of such request, give written notice of the proposed registration to all Holders; and (ii) As soon as practicable, either (A) elect to make a primary offering, in which case the rights of such Holders shall be as set forth in Section 5.2 hereof or (B) use its best efforts to effect such registration (including, without limitation, filing post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws, and appropriate compliance with the Securities Act) and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within twenty (20) days after such written notice from the Company is mailed or delivered. (b) The Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 5.1 after the Company has initiated two (2) such registrations pursuant to this Section 5.1 (counting for these purposes only registrations which have been declared or ordered effective and pursuant to which securities have been sold and registrations which have been withdrawn by the Holders as to which the Holders have not elected to bear the expenses of registration pursuant to Section 5.4 hereof and would, absent such election, have been required to bear such expenses). (c) Subject to Section 5.1(b) above, the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable and in any event within sixty (60) days of receipt of the request or requests of the Initiating Holders; provided, however, that if (i) in the good faith judgment of the Board of Directors of the Company, such registration would be detrimental to the Company, and the Board of Directors of the Company concludes, as a result, that it is essential to defer the filing of such registration statement at such time, and (ii) the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be detrimental to the Company for such registration statement to be filed in the near future and that it is, therefore, essential to defer the filing of such registration statement, then the Company shall have the right to defer such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders, and, provided further, that the Company shall not defer its obligation in this manner more than once in any twelve-month period. 11 (d) The registration statement filed pursuant to the request of the Initiating Holders may, subject to the provisions of Section 5.13 hereof, include other securities of the Company with respect to which registration rights have been granted, and may include securities of the Company being sold for the account of the Company. (e) The right of any Holder to registration pursuant to this Section 5.1 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder with respect to such participation and inclusion) to the extent provided herein. A Holder may elect to include in such underwriting all or a part of the Registrable Securities it holds. (f) If the Company shall request inclusion in any registration pursuant to this Section 5.1 of securities being sold for its own account, or if other persons shall request inclusion in any registration pursuant to this Section 5.1, the Initiating Holders shall, on behalf of all Holders, offer to include such securities in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Agreement. The Company shall (together with all Holders and other persons proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders, which underwriters are reasonably acceptable to the Company. Notwithstanding any other provision of this Section 5.1, if the representative of the underwriters in good faith advises the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, the number of shares to be included in the underwriting or registration shall be allocated as set forth in Section 5.13 hereof. If a person who has requested inclusion in such registration as provided above does not agree to the terms of any such underwriting, such person shall be excluded therefrom by written notice from the Company, the underwriter or the Initiating Holders. The securities so excluded shall also be withdrawn from registration. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall also be withdrawn from such registration. If shares are so withdrawn from the registration and if the number of shares to be included in such registration was previously reduced as a result of marketing factors pursuant to this Section 5.1(f), then the Company shall offer to all Holders who have retained rights to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among such Holders requesting additional inclusion in accordance with Section 5.13. 5.2 COMPANY REGISTRATION (a) Subject to Section 5.2(e) below, if at any time or times after the date hereof the Company shall determine to register any of its equity securities either for its own account or the account of a security holder or holders exercising their respective demand registration rights, the Company will: (i) Promptly give to each Holder written notice thereof; and (ii) Use its best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), except as set forth in Section 5.2(c) below, and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by any Holder and received by the Company within twenty (20) days after the written notice from the Company described in (i) above is mailed or delivered by the Company. Such written request may specify all or a part of a Holder's Registrable Securities. (b) If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given 12 pursuant to Section 5.2(a)(i) above. In such event, the right of any Holder to registration pursuant to this Section 5.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders of securities of the Company with registration rights to participate therein distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company. (c) Notwithstanding any other provision of this Section 5.2, if the representative of the underwriters in good faith advises the Company in writing that marketing factors require a limitation on the number of shares to be underwritten, the number of shares to be included in the underwriting or registration shall be allocated as set forth in Section 5.13. If any person does not agree to the terms of any such underwriting, he, she or it shall be excluded therefrom by written notice from the Company or the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. (d) If shares are so withdrawn from the registration or if the number of shares of Registrable Securities to be included in such registration was previously reduced as a result of marketing factors, the Company shall then offer to all persons who have retained the right to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among the persons requesting additional inclusion in accordance with Section 5.12 hereof. (e) This Section 5.2 shall not apply to a registration on any registration form that does not permit secondary sales or to registrations relating solely to (i) employee benefit plans, (ii) transactions pursuant to Rule 145 or any other similar rule promulgated under the Securities Act or (iii) securities issued in connection with mergers with or acquisitions of other corporations by the Company. 5.3 REGISTRATIONS ON FORM S-3 (a) After its initial public offering, the Company shall use its best efforts to qualify and remain qualified for registration on Form S-3 or any comparable or successor form or forms. After the Company has qualified for the use of Form S-3, in addition to the rights contained in the foregoing provisions of this Agreement, the Holders of Registrable Securities shall have the right to request registrations on Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended methods of disposition of such shares by such Holders or Holders); provided, however, that the Company shall not be obligated to effect any such registration if (i) the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) on Form S-3 at an aggregate price to the public of less than or equal to $500,000 (net of any underwriters' discounts or commissions); (ii) the Company shall furnish the certification described in Section 5.1(c) (but subject to the limitations set forth therein); or (iii) in a given twelve-month period, the Company has already effected two (2) such registrations pursuant to this Section 5.3. (b) If a request complying with the requirements of Section 5.3(a) hereof is delivered to the Company, the provisions of Sections 5.1(c) and (d) hereof shall apply to such registration. If the registration is for an underwritten offering, the provisions of Sections 5.1(e) and (f) hereof shall apply to such registration. Registrations effected pursuant to this Section 5.3 shall not be counted as demands for registration or registrations effected pursuant to Sections 5.1 and 5.2. 13 5.4 EXPENSES In the case of any registration under Sections 5.1, 5.2 and 5.3 hereof, the Company shall bear all costs and expenses of each such registration, including, but not limited to, printing, legal and accounting expenses, Securities and Exchange Commission ("SEC") filing fees and "blue sky" fees and expenses (the "Registration Expenses"); provided, however, that the Company shall have no obligation to pay or otherwise bear (i) any portion of the fees or disbursements of more than one (1) counsel for the selling Holders of Registrable Securities in connection with the registration of their Registrable Securities, and in any event shall not responsible for fees for such counsel in excess of $20,000, or (ii) any portion of the underwriter's commissions or discounts attributable to the Registrable Securities being offered and sold by the Holders of Registrable Securities; and, provided further, that if the Holders bear the Registration Expenses for any registration proceeding commenced pursuant to this Agreement and if the registration request is subsequently withdrawn by the Holders registering shares therein, such registration proceeding shall not be counted as a requested registration pursuant to Section 5.1 hereof. Furthermore, in the event that a withdrawal by the Holders is based upon material adverse information relating to the Company that is different from the information known or available (upon request from the Company or otherwise) to the Holders requesting registration at the time of their request for registration under Section 5.1, such registration shall not be treated as a counted registration for purposes of Section 5.1 hereof and the Holders shall not be required to pay any of the Registration Expenses for such registration. 5.5 OBLIGATIONS OF THE COMPANY In the case of each registration effected by the Company pursuant to this Agreement, the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will use its best efforts to: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective; (b) Keep such registration effective for a period of one hundred twenty (120) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; (c) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (d) Furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them; (e) Notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing, and at the request of any such seller, prepare and furnish to such seller a reasonable number of copies of a supplement or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include any untrue 14 statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light to the circumstances then existing; (f) Enter into any reasonable underwriting agreement required by the proposed underwriter, if any, in such form and containing such terms as are customary; provided, however, that no Holder shall be required to make any representations or warranties other than with respect to its title to the Registrable Securities and any written information provided by the Holder to the Company, and if the underwriter requires that representations or warranties be made and that indemnification be provided, the Company shall make all such representations and warranties and provide all such indemnities, including, without limitation, in respect of the Company's business, operations and financial information and the disclosures relating thereto in the prospectus; (g) Use its best efforts to register or qualify the securities covered by said registration statement under the securities or "blue sky" laws of such jurisdictions as any selling Holder may reasonably request, provided that the Company shall not be required to register or qualify the securities in any jurisdictions which require it to qualify to do business therein; (h) Cause all such Registrable Securities to be listed on each securities exchange or quotation system on which similar securities issued by the Company are then listed or quoted; (i) Otherwise use its best efforts to comply with the securities laws of the United States and other applicable jurisdictions and all applicable rules and regulations of the SEC and comparable governmental agencies in other applicable jurisdictions and make generally available to its stockholders, in each case as soon as practicable, but not later than 45 days after the close of the period covered thereby, an earnings statement of the Company which will satisfy the provisions of Section 11(a) of the Securities Act; (j) Obtain and furnish to each selling Holder, immediately prior to the effectiveness of the registration statement (and, in the case of an underwritten offering, at the time of delivery of any Registrable Securities sold pursuant thereto), (i) a cold comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters as the Holders of a majority of the Registrable Securities being sold may reasonably request and (ii) an opinion of counsel representing the Company in form and substance as is customary given to the underwriters in an underwritten public offering; (k) Otherwise cooperate with the underwriter or underwriters, the Commission and other regulatory agencies and take all actions and execute and deliver or cause to be executed and delivered all documents necessary to effect the registration of any Registrable Securities under this Agreement; and (l) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration. 5.6 SUSPENSION In the case of a registration for the sale of Registrable Securities, upon receipt of any notice (a "Suspension Notice") from the Company of the happening of any event which makes any statement made in the registration statement or related prospectus untrue or which requires the making of any changes in such registration statement or prospectus so that they will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading, each Holder of 15 Registrable Securities registered under such registration statement shall forthwith discontinue disposition of such Registrable Securities pursuant to such registration statement until such Holder's receipt of the copies of the supplemented or amended prospectus or until it is advised in writing (the "Advice") by the Company that the use of the prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the prospectus; provided, however, that the Company shall not give a Suspension Notice until after the registration statement has been declared effective and shall not give more than one Suspension Notice to the Holders in respect to all Registrable Securities and pursuant to this Section 5.6 during any period of 12 consecutive months and in no event shall the period from the date on which any Holder receives a Suspension Notice to the date on which any Holder receives either the Advice or copies of the supplemented or amended prospectus (the "Suspension Period") exceed 60 days. In the event that the Company shall give any Suspension Notice, the Company shall use its best efforts and take such actions as are reasonably necessary to render the Advice and end the Suspension Period as promptly as practicable. 5.7 INDEMNIFICATION (a) Incident to any registration statement referred to herein, the Company will indemnify and hold harmless each Holder who offers or sells any such Registrable Securities in connection with such registration statement (including its partners (including partners of partners and stockholders of any such partners), and directors, officers, employees and agents of any of them (a "Selling Holder"), and each person who controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (a "Controlling Person"), from and against any and all losses, claims, damages, expenses and liabilities, joint or several (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, as the same are incurred), to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based on (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement (including any related preliminary or definitive prospectus, or any amendment or supplement to such registration statement or prospectus), (ii) any omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, any state securities or "blue sky" laws or any rule or regulation thereunder in connection with such registration; provided, however, that the Company will not be liable to the extent that such loss, claim, damage, expense or liability arises from and is based on an untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information furnished in writing to the Company by such underwriter, Selling Holder or Controlling Person expressly for use in such registration statement. With respect to such untrue statement or omission or alleged untrue statement or omission in the information furnished in writing to the Company by such Selling Holder expressly for use in such registration statement, such Selling Holder will indemnify and hold harmless each underwriter, the Company (including its directors, officers, employees and agents), each other Holder (including its partners (including partners of partners and stockholders of such partners) and directors, officers, employees and agents of any of them, and each person who controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)), from and against any and all losses, claims, damages, expenses and liabilities, joint or several, to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise to the same extent provided in the immediately preceding sentence. (b) The foregoing indemnity provisions are subject to the condition that, insofar as they relate to any violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement in question becomes effective 16 or in the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final Prospectus"), such indemnity provisions shall not inure to the benefit of any person if a copy of the Final Prospectus was furnished to the indemnified party and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. (c) If the indemnification provided for in Section 5.7(a) above for any reason is held by a court of competent jurisdiction to be unavailable to an indemnified party in respect of any losses, claims, damages, expenses or liabilities referred to therein, then each indemnifying party under this Section 5.7, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, expenses or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the other Selling Holders and the underwriters from the offering of the Registrable Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, the other Selling Holders and the underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Selling Holders and the underwriters shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Company and the Selling Holders and the underwriting discount received by the underwriters, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the Registrable Securities. The relative fault of the Company, the Selling Holders and the underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Holders or the underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Selling Holders agree that it would not be just and equitable if contribution pursuant to this Section 5.7(c) were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. In no event, however, shall a Selling Holder be required to contribute any amount under this Section 5.7(c) in excess of the lesser of (i) that proportion of the total of such losses, claims, damages or liabilities indemnified against equal to the proportion of the total Registrable Securities sold under such registration statement which are being sold by such Selling Holder or (ii) the net proceeds received by such Selling Holder from its sale of Registrable Securities under such registration statement. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. (d) Promptly after receipt by the indemnified party under this Section 5.7 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 5.7, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that the indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if, in the opinion of counsel for the indemnifying party, representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the 17 commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 5.7, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 5.7. No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or entry into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party a release from all liability in respect to such claim or litigation. (e) The amount paid by an indemnifying party or payable to an indemnified party as a result of the losses, claims, damages and liabilities referred to in this Section 5.7 shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim, payable as the same are incurred. The indemnification and contribution provided for in this Section 5.7 will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified parties or any officer, director, employee, agent or controlling person of the indemnified parties, and the obligations of the Company and Holders under this Section 5.7 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 5, and otherwise. (f) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. 5.8 INFORMATION BY HOLDER Each Holder of Registrable Securities shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement. 5.9 REPORTS UNDER RULE 144, SECURITIES EXCHANGE ACT 1934 With a view to making available to the Holders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: (i) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety (90) days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public so long as the Company remains subject to the reporting requirements under Sections 13 or 15(d) of the Exchange Act; (ii) use its best efforts to take such action, including the voluntary registration of its Common Stock under Section 12 of the Exchange Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective; 18 (iii) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (iv) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company as to the steps it has taken to comply with the current public information requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), or to qualify as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 5.10 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS The registration rights of the Holders of Registrable Securities under this Agreement may be transferred or assigned by any Holder to (i) any general or limited partner or other comparable affiliate of such Holder, (ii) any fund managed by or associated with such Holder or (iii) any transferee or assignee of such Holder's Registrable Securities who after such transfer or assignment will hold at least fifty percent (50%) of the Registrable Securities owned by such Holder on the date hereof; provided that the Company is given prior written notice of such transfer or assignment setting forth the name and address of the transferee or assignee and identifying the number of Registrable Securities so transferred or assigned, and, provided further, that the transferee or assignee of such rights assumes in writing the obligations of such Holder under this Agreement. 5.11 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 5.1 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his Securities will not reduce the amount of the Registrable Securities of the Holders which is included or (b) to make a demand registration which could result in such registration statement being declared effective prior to the earlier of either of the dates set forth in subsection 5.1(a) or within one hundred eighty (180) days of the effective date of any registration effected pursuant to Section 5.1. 5.12 MARKET STAND-OFF AGREEMENT In connection with a public offering by the Company, the Holders, if requested in good faith by the Company and the managing underwriter of the public offering, shall agree not to sell or otherwise transfer or dispose of any securities of the Company held by them (except for any securities sold pursuant to such registration statement) for a period following the effective date of the first such registration statement of the Company that covers Common Stock (or other securities) that in no event shall exceed one hundred eighty (180) days. Notwithstanding the foregoing, such an agreement shall not be required unless all of the officers and directors and one percent (1%) or greater stockholders of the Company and all other persons with registration rights enter into similar agreements. In order to enforce the foregoing, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Holder (and the shares of securities of every other person subject to the foregoing restriction) until the end 19 of such period. This Section 5.12 shall not be amended without the consent of each Investor that is an investment company as that term is defined in the Investment Company Act of 1940. 5.13 ALLOCATION OF REGISTRATION OPPORTUNITIES In any circumstance in which all of the Registrable Securities and other shares of Common Stock of the Company (including shares of Common Stock issued or issuable upon conversion of shares of any currently unissued series of Preferred Stock of the Company) with registration rights (the "Other Shares") requested to be included in a registration on behalf of the Holders or other selling stockholders cannot be so included as a result of limitations of the aggregate number of shares of Registrable Securities and Other Shares that may be so included, the number of shares of Registrable Securities and Other Shares that may be so included shall be allocated among the Holders and other selling stockholders requesting inclusion of shares as follows: (i) If a requested registration pursuant to Section 5.1 involves an underwritten offering, and the managing underwriter shall advise the Company in writing (with a copy to each Holder requesting registration) that, in its opinion, the number of securities requested to be included in such registration exceeds the number which can be sold in such offering, then the Registrable Securities requested to be registered pursuant to Section 5.1 shall be reduced to the number of Registrable Securities which the Company is so advised can be sold in (or during the time of) such offering by (i) first decreasing the Other Shares requested to be registered (pro rata among the persons requesting such registration on the basis of the percentage of Other Shares held by such person immediately prior to the filing of the registration statement with respect to such registration) and (ii) then, to the extent necessary, by decreasing the Registrable Securities (other than the Other Shares) requested to be registered (pro rata on the basis of the percentage of Registrable Securities (other than Other Shares) held by such Holder immediately prior to the filing of the registration statement with respect to such registration). (ii) If (a) a registration pursuant to Section 5.2 involves an underwritten offering of the securities so being registered, whether or not for sale for the account of the Company, to be distributed (on a firm commitment basis) by or through one or more underwriters of recognized standing, whether or not the Registrable Securities so requested to be registered for sale for the account of Holders of Registrable Securities are also to be included in such underwritten offering, and (b) the managing underwriter of such underwritten offering shall inform the Company and the Holders of the Registrable Securities requesting such registration by letter of its belief that the number of securities requested to be included in such registration exceeds the number which can be sold in (or during the time of) such offering, then the Company may include in such offering all securities proposed by the Company to be sold for its own account and may decrease the number of Registrable Securities and Other Shares that have been requested to be included in such registration by decreasing the securities requested to be included in such registration (whether Registrable Securities or Other Shares) pro rata among the Holders and other persons requesting such registration on the basis of the percentage held by such Holder or other person immediately prior to the filing of the registration statement with respect to such registration of the securities so requested to be included in such registration, or in any other manner determined by the managing underwriter of such registration; provided, however, that if such offering is not an initial public offering and is a registration statement filed on behalf of the Company, no such reduction may reduce the number of Registrable Securities to less than 30% of the shares being sold in the offering. No Registrable Securities shall be included in such registration if not also included in such underwritten offering unless the managing underwriter thereof so determines. 20 5.14 TERMINATION OF REGISTRATION RIGHTS The rights of any Holder to request registration or inclusion in any registration pursuant to this Agreement shall terminate upon the earlier of (i) five (5) years after the closing of the Company's first Public Offering or (ii) as to any Investor on such date after the closing of the Company's first Public Offering as such Investor owns less then thirty percent (30%) of the number of Registrable Securities originally purchased by such Investor. 21 EXHIBIT B INFORMATION AND INSPECTION RIGHTS 3.1 INFORMATION RIGHTS The Company shall deliver to the Investors the following: (a) as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of shareholder's equity as of the end of such year, and a schedule as to the sources and applications of funds for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), and audited and certified by independent public accountants of nationally recognized standing selected by the Company; and (b) as soon as practicable, but in any event within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, an unaudited profit or loss statement, a schedule showing the sources and application of funds for such fiscal quarter and an unaudited balance sheet as of the end of such fiscal quarter prepared in accordance with GAAP. 3.2 INSPECTION RIGHTS Each Investor or its authorized representative or agent shall have the right to inspect the books and records of the Company during normal business hours upon written request made at least one (1) business day in advance; provided, that the Investors shall avail themselves of such right no more often than once every month. 22 EXHIBIT C CONFIDENTIALITY AGREEMENT 4. CONFIDENTIALITY AGREEMENT. Each Investor, and any successor or assign of such Investor, who receives from the Company or its agents, directly or indirectly, any information that the Company has not made generally available to the public, pursuant to the preparation and execution of this Agreement or disclosure in connection therewith or pursuant to the provisions of Section 3: (a) acknowledges and agrees that such information is confidential and for its use only in connection with evaluating and servicing its investment in the Company and (b) agrees that it will not disseminate such information to any person other than (i) its accountant, attorney, investment advisor, limited partners, board of directors, consultants and other similar professionals and that such dissemination shall be only for purposes of evaluating its investment or its strategic alliance with the Company, (ii) to any Affiliates, provided that such Affiliates agree to hold such information confidential as provided in this Section 4, and (iii) as required by applicable law or regulation, regulatory body, stock exchange, court or administrative order, or any listing or trading agreement concerning the Investor or the Company. 23 EX-10.19 23 EXHIBIT 10.19 EXHIBIT 10.19 INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT (the "Agreement") is made and entered into this ___ day of _________, 2000, by and between Lineo, Inc., a Delaware corporation (the "Company"), and _____________________ ("Indemnitee"). A. Indemnitee, as a member of the Company's Board of Directors and/or an officer of the Company, performs valuable services for the Company; B. The Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for corporate directors, officers, employees, controlling persons, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance. C. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, controlling persons, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. D. The stockholders of the Company have adopted Bylaws (the "Bylaws") providing for the indemnification of the officers, directors, agents and employees of the Company to the maximum extent authorized by Section 145 of the Delaware Corporations Code, as amended ("Code"). E. Indemnitee does not regard the current protection available for the Company's directors, officers, employees, controlling persons, agents and fiduciaries as adequate under the present circumstances, and Indemnitee and other directors, officers, employees, controlling persons, agents and fiduciaries of the Company may not be willing to serve or continue to serve in such capacities without additional protection. F. The Bylaws and the Code, by their non-exclusive nature, permit contracts between the Company and its directors, officers, employees, controlling persons, agents or fiduciaries with respect to indemnification of such directors. G. The Company (i) desires to attract and retain the involvement of highly qualified individuals, such as Indemnitee, to serve the Company and, in part, in order to induce Indemnitee to be involved with the Company, and (ii) wishes to provide for the indemnification and advancing of expenses to Indemnitee to the maximum extent permitted by law. H. In view of the considerations set forth above, the Company desires that Indemnitee be indemnified by the Company as set forth herein. NOW, THEREFORE, in consideration of Indemnitee's service to the Company, the parties hereto agree as follows: 1. INDEMNITY OF INDEMNITEE. The Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by law, even if such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation - -------------------------------------------------------------------------------- -1 (the "Certificate"), the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its Board of Directors or an officer, employee, controlling person, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its Board of Directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 9(a) hereof. 2. Additional Indemnity. The Company hereby agrees to hold harmless and indemnify the Indemnitee: (a) against any and all expenses incurred by Indemnitee, as set forth in Section 3(a) below; and (b) otherwise to the fullest extent not prohibited by the Certificate, the Bylaws or the Code. 3. INDEMNIFICATION RIGHTS. (a) Indemnification of Expenses. The Company shall indemnify and hold harmless Indemnitee, together with Indemnitee's partners, affiliates, employees, agents and spouse and each person who controls any of them or who may be liable within the meaning of Section 15 of the Securities Act of 1933, as amended (the "Securities Act"), or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to the fullest extent permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee and the Company believe might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other (hereinafter a "Claim") against any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any such action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation, judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) of such Claim and any federal, state, local or foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement (collectively, hereinafter "Expenses"), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, incurred by Indemnitee by reason of (or arising in part out of) any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, controlling person, agent or fiduciary of the Company or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, controlling person, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity including, without limitation, any and all losses, claims, damages, expenses and liabilities, joint or several (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit, proceeding or any claim asserted) under the Securities Act, the Exchange Act or other - -------------------------------------------------------------------------------- -2 federal or state statutory law or regulation, at common law or otherwise, which relate directly or indirectly to the registration, purchase, sale or ownership of any securities of the Company or to any fiduciary obligation owed with respect thereto (hereinafter an "Indemnification Event"). Such payment of Expenses shall be made by the Company as soon as practicable but in any event no later than 25 days after written demand by Indemnitee therefor is presented to the Company. (b) Reviewing Party. Notwithstanding the foregoing, (i) the obligations of the Company under Section 2 shall be subject to the condition that the Reviewing Party (as described in Section 11(e) hereof) shall not have determined (in a written opinion, in any case in which the Independent Legal Counsel as defined in Section 11(d) hereof is involved) that Indemnitee would not be permitted to be indemnified under applicable law, and (ii) and Indemnitee acknowledges and agrees that the obligation of the Company to make an advance payment of Expenses to Indemnitee pursuant to Section 4(a) (an "Expense Advance") shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any Expense Advance shall be unsecured and no interest shall be charged thereon. If there has not been a Change in Control (as defined in Section 11(c) hereof), the Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), the Reviewing Party shall be the Independent Legal Counsel referred to in Section 3(e) hereof. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee. (c) Contribution. If the indemnification provided for in Section 3(a) above for any reason is held by a court of competent jurisdiction to be unavailable to an Indemnitee in respect of any losses, claims, damages, expenses or liabilities referred to therein, then the Company, in lieu of indemnifying Indemnitee thereunder, shall contribute to the amount paid or payable by Indemnitee as a result of such losses, claims, damages, expenses or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and Indemnitee, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and Indemnitee in connection with the action or inaction which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. In connection with the registration of the Company's securities, the relative benefits received by the Company and Indemnitee shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Company and the Indemnitee, in each case as set forth in the - -------------------------------------------------------------------------------- -3 table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the securities so offered. The relative fault of the Company and Indemnitee shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or Indemnitee and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and Indemnitee agree that it would not be just and equitable if contribution pursuant to this Section 3(c) were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. In connection with the registration of the Company's securities, in no event shall an Indemnitee be required to contribute any amount under this Section 3(c) in excess of the lesser of (i) that proportion of the total of such losses, claims, damages or liabilities indemnified against equal to the proportion of the total securities sold under such registration statement which is being sold by Indemnitee or (ii) the proceeds received by Indemnitee from its sale of securities under such registration statement. No person found guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. (d) Survival Regardless of Investigation. The indemnification and contribution provided for herein will remain in full force and effect regardless of any investigation made by or on behalf of Indemnitee or any officer, director, employee, agent or controlling person of Indemnitee. (e) Change in Control. After the date hereof, the Company agrees that if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control) then, with respect to all matters thereafter arising concerning the rights of Indemnitee to payments of Expenses under this Agreement or any other agreement or under the Company's Certificate or Bylaws as now or hereafter in effect, Independent Legal Counsel (as defined in Section 11(d) hereof) shall be selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law. The Company agrees to abide by such opinion and to pay the reasonable fees of the Independent Legal Counsel referred to above and to fully indemnify such counsel against any and all reasonable expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. (f) Mandatory Payment of Expenses. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in the defense of any action, suit, proceeding, inquiry or investigation referred to in Section 3(a) hereof or in the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection herewith. 4. EXPENSES; INDEMNIFICATION PROCEDURE. (a) Advancement of Expenses. The Company shall advance all Expenses incurred by Indemnitee. The advances to be made hereunder shall be paid by the Company to Indemnitee - -------------------------------------------------------------------------------- -4 as soon as practicable but in any event no later than ten business days after written demand by Indemnitee therefor to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall give the Company notice in writing in accordance with Section 15 of this Agreement as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. (c) No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. In addition, neither the failure of the Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by the Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. (d) Notice to Insurers. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in each of the Company's policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such action, suit, proceeding, inquiry or investigation in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated hereunder to pay the Expenses of any Claim, the Company shall be entitled to assume the defense of such Claim, with counsel approved by the Indemnitee (which approval shall not be unreasonably withheld) upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Claim; provided that (i) Indemnitee shall have the right to employ Indemnitee's counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there is a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 5. NONEXCLUSIVITY. The indemnification provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise. The indemnification provided under this Agreement shall continue as to Indemnitee for any action Indemnitee took or did not - -------------------------------------------------------------------------------- -5 take while serving in an indemnified capacity even though Indemnitee may have ceased to serve in such capacity. 6. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against any Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, Certificate of Incorporation, Bylaw or otherwise) of the amounts otherwise indemnifiable hereunder. 7. PARTIAL INDEMNIFICATION. If any Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for any portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 8. MUTUAL ACKNOWLEDGEMENT. The Company and Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, controlling persons, agents or fiduciaries under this Agreement or otherwise. Each Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's rights under public policy to indemnify Indemnitee. 9. EXCEPTIONS. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to any Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, except (i) with respect to actions or proceedings to establish or enforce a right to indemnify under this Agreement or any other agreement or insurance policy or under the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Indemnifiable Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Section 145 of the Delaware General Corporation Law, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be; or (b) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Exchange Act or any similar successor statute; or (c) Claims Excluded Under Section 145 of the Delaware General Corporation Law. To indemnify Indemnitee if (i) Indemnitee did not act in good faith or in a manner reasonably believed by such Indemnitee to be in or not opposed to the best interests of the Company, or (ii) with respect to any criminal action or proceeding, Indemnitee had reasonable cause to believe Indemnitee's conduct was unlawful, or (iii) Indemnitee shall have been adjudged to be liable to the Company unless and only to the extent the court in which such action was brought shall permit indemnification as provided in Section 145(b) of the Delaware General Corporation Law. - -------------------------------------------------------------------------------- -6 10. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against any Indemnitee, any Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of five years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such five-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 11. CONSTRUCTION OF CERTAIN PHRASES. (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent, control person, or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, control person, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on any Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if any Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interests of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. (c) For purposes of this Agreement a "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, (A) who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding Voting Securities, increases his or her beneficial ownership of such securities by 5% or more over the percentage so owned by such person, or (B) becomes the "beneficial owner" (as defined in Rule 13d-3 under said Exchange Act), directly or indirectly, of securities of the Company representing more than 20% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the - -------------------------------------------------------------------------------- -7 stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of transactions) all or substantially all of the Company's assets. (d) For purposes of this Agreement, "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 3(d) hereof, who shall not have otherwise performed services for the Company or any Indemnitee within the last three years (other than with respect to matters concerning the right of any Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements). (e) For purposes of this Agreement, a "Reviewing Party" shall mean any appropriate person or body consisting of a member or members of the Company's Board of Directors or any other person or body appointed by the Board of Directors who is not a party to the particular Claim for which Indemnitee are seeking indemnification, or Independent Legal Counsel. (f) For purposes of this Agreement, "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. 12. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 13. BINDING EFFECT; SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, spouses, heirs, and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect with respect to Claims relating to Indemnifiable Events regardless of whether any Indemnitee continues to serve as a director, officer, employee, agent, controlling person, or fiduciary of the Company or of any other enterprise, including subsidiaries of the Company, at the Company's request. 14. ATTORNEYS' FEES. In the event that any action is instituted by an Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, any Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee with respect to such action if Indemnitee is ultimately successful in such action, and shall be entitled to the advancement of Expenses with respect to such action, unless, as a part of such action, a court of competent jurisdiction over such action determines that the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, - -------------------------------------------------------------------------------- -8 Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in defense of such action (including costs and expenses incurred with respect to Indemnitee counterclaims and cross-claims made in such action), and shall be entitled to the advancement of Expenses with respect to such action, unless, as a part of such action, a court having jurisdiction over such action determines that the Indemnitee's material defenses to such action were made in bad faith or were frivolous. 15. NOTICE. All notices and other communications required or permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given (a) five calendar days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid, or (d) one day after the business day of delivery by facsimile transmission, if deliverable by facsimile transmission, with copy by first class mail, postage prepaid, and shall be addressed if to Indemnitee, at Indemnitee's address as set forth beneath Indemnitee's signature to this Agreement and if to the Company at the address of its principal corporate offices (attention: Chief Executive Officer) or at such other address as such party may designate by ten calendar days' advance written notice to the other party hereto. 16. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the Court of Chancery of the State of Delaware in and for New Castle County, which shall be the exclusive and only proper forum for adjudicating such a claim. 17. SEVERABILITY. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitations, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 18. CHOICE OF LAW. This Agreement shall be governed by and its provisions construed and enforced in accordance with the laws of the State of Delaware, as applied to contracts between Delaware residents, entered into and to be performed entirely within the State of Delaware, without regard to the conflict of laws principles thereof. 19. SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 20. AMENDMENT AND TERMINATION. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by all parties hereto. No waiver of any of the provisions of this Agreement shall - -------------------------------------------------------------------------------- -9 be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 21. INTEGRATION AND ENTIRE AGREEMENT. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 22. NO CONSTRUCTION AS EMPLOYMENT AGREEMENT. Nothing contained in this Agreement shall be construed as giving the Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries. 23. CORPORATE AUTHORITY. The Board of Directors of the Company has approved the terms of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. COMPANY: LINEO, INC., a Delaware corporation By: -------------------------------- Bryan Sparks, President INDEMNITEE: Signature: ------------------------- Name: ------------------------------ - -------------------------------------------------------------------------------- -10 EX-10.20 24 EXHIBIT 10.20 SUBLEASE This Sublease is entered into as of January 31, 2000 by and between SwitchSoft Systems, Inc., a Delaware corporation ("Sublessor") and Lineo, Inc., a Delaware corporation ("Sublessee"). Terms not specifically defined herein are as defined in the Master Lease. A. Sublessor, as Tenant is leasing from EsNet Properties. L.C., a Utah limited liability company ("Master Lessor") those certain premises located at 380 South 400 West Lindon, Utah 84042 ("Premises") pursuant to that certain lease dated July 20, 1998, (the "Master Lease"). Sublessee acknowledges having reviewed a copy of the Master Lease, which is attached hereto as EXHIBIT A. B. Sublessor desires to lease to Sublessee and Sublessee desires to lease from Sublessor the Sublease Premises (as defined below) on the terms and conditions set forth in this Sublease. 1. SUBLEASE PREMISES a. Sublessor leases to Sublessee and Sublessee hires from Sublessor the following described portion of the Premises together with the appurtenances thereto, situated in the City of Lindon, County of Utah, State of Utah commonly known and described as 380 South 400 West, Suite B, located on the first floor ("Sublease Premises"). The Sublease Premises shall consist of approximately 10,000 rentable square feet, which are outlined on EXHIBIT B. b. Sublessee will be taking possession of the Sublease Premises "as is," in its condition existing on the date of delivery of the Sublease Premises to Sublessee. Sublessee acknowledges that Sublessee is leasing the Sublease Premises based on its own inspection of the Sublease Premises and those of its agents, and is not relying on any representations or warranties of the Sublessor regarding the physical condition of the Sublease Premises. Sublessee's taking of possession of the Sublease Premises shall constitute conclusive evidence that the Sublease Premises were, as of that date, in good, clean and tenantable condition. Sublessee acknowledges that the square footages of the Sublease Promises as specified in Subparagraph 1.a are estimates and that Sublessor does not warrant the exact square footage of the Sublease Premises. By taking possession of the Sublease Premises, Sublessee accepts the square footages of the Sublease Premises as those specified in Subparagraph 1.a above. c. The Sublease Premises shall have its own separate entrance and security system as of the Sublease Commencement Date. 2. INCORPORATION OF MASTER LEASE This Sublease is subject to all of the terms and conditions of the Master Lease and Sublessee hereby accepts, assumes and agrees to perform all of the obligations of Sublessor as Sublessee under the Master Lease to the extent such obligations are applicable to the Sublease Premises and all of the terms and conditions of the Master Lease are incorporated herein as terms and conditions of this Sublease (with each reference therein to Landlord, Tenant and Premises to be deemed to refer to Sublessor, Sublessee, and Sublease Premises respectively), excepting only Article 2, Article 3, Section 5.1, Section 5.4, Article 6, Article 7, Section 8.2, Section 9.1, Section 24.18, Section 24.19, Exhibit C, Exhibit E and Exhibit G of the Master Lease and as set forth in Paragraph 9 below. In the event of any conflict or inconsistency between the incorporated terms of the Master Lease and the terms of the Sublease which are set forth in full, the terms of the Sublease which are set forth in full shall prevail to the extent of any such inconsistency, it being understood that in any event the Sublease provisions are subject to the Master Lease provisions. 3. TERM AND RENTAL COMMENCEMENT a. The term of this Sublease shall be for a period of twenty-four (24) months, plus any partial month at the beginning of the Sublease Term ("Sublease Term"), commencing on February 1, 2000 ("Commencement Date"). b. In the event of the termination for any reason of Sublessor's interest as tenant under the Master Lease, then this Sublease shall terminate therewith without any liability of Sublessor to Sublessee; provided, however, that Sublessor may be liable to Sublessee for any termination of the Sublease that results from Sublessor's breach of the Master Lease, so long as such breach is not caused in whole or in part by Sublessee. c. In the event the Commencement Date has not occurred by March 31, 2000 for any reason, then Sublessor shall not be liable for any damage caused thereby, but either party may, by notice in writing to Sublessor within ten (10) days thereafter, cancel this Sublease, in which event the parties shall be discharged from all obligations under this Sublease, and Sublessor shall return to Sublessee any prepaid rent and security deposit. 4. USE a. Sublessee shall use the Sublease Premises solely for general office use and for no other purpose without the consent of Sublessor. Sublessee agrees that its use shall comply with all applicable governmental laws and ordinances, and that it shall not use or permit the Sublease Premises to be used for any purposes other than those described above. Sublessee shall not commit or permit to be committed on the Sublease Premises any act or omission which shall violate any term or condition of the Master Lease. b. Sublessee shall be responsible for the installation and cost of any and all improvements, alterations or other work on or to the Sublease Premises or to any other portion of the property and/or building of which the Sublease Premises are a part, required by applicable governmental laws, rules, orders and ordinances because of the particular use to which the Sublease Premises are put by Sublessee, including any improvements, alterations or other work required under the Americans With Disabilities Act of 1990 due to Sublessee's particular use of the Sublease Premises or due to changes or alterations to the Sublease Premises made or proposed to be made by Sublessee. 2 5. RENTAL a. Sublessee shall pay Rent Sublessor as follows, without offset or deduction for the Sublease Premises, in advance, on the first day of each month, in lawful money of the United States. Rent for the partial month shall be prorated on the basis of the number of days in such month. RENT $ 16,667.00 per month b. Sublessor acknowledges receipt from Sublessee, on the execution hereof the sum of $16,667.00 to be applied against rent for the first month of the Sublease Term to be paid hereunder. c. In addition to the Rent indicated in Section 5.a above, Sublessee shall procure and pay directly for its own telephone costs and shall procure its own janitorial service at Sublessee's cost. Sublessor shall pay for Sublessee's other utilities. Sublessee shall not be responsible for the payment of Common Area Expenses (such as taxes, Master Lessor's insurance and common area maintenance costs), for which Sublessor is responsible under Section 8.2 of the Master Lease. 6. NOTICES All notices and demands of any kind required to be given by Sublessor or Sublessee hereunder shall be in writing and effective the next business day after depositing with a nationally recognized overnight courier service such as Federal Express or three (3) days after depositing in the United States certified mail, return receipt requested, postage prepaid, and addressed to Sublessor or Sublessee, as the case may be, at the address set forth below their respective signatures or at such other address as they may designate from time to time. All rent and other payments due under this Sublease or the Master Lease shall be made to Sublessor it the same address. 7. HAZARDOUS MATERIALS Sublessee will indemnify, defend and hold Sublessor harmless from any judgment, damages, losses, claims, actions, attorneys' fees, consultant's fees, costs or expenses which result from Sublessee's or any of Sublessee's agents (including employees, contractors and visitors) use, storage, or disposal of Hazardous Materials in or about the Sublease Premises. As used herein the term "Hazardous Materials" will mean and include asbestos, petroleum products and any and all toxic or hazardous substances, materials or wastes listed in the United States Department of Transportation Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances (40 CFR 302) and in any and all amendments to such lists or such substances, materials or wastes otherwise regulated under applicable local, state or federal law. The provisions of this paragraph shall survive the expiration or termination of the Sublease. To the best of Sublessor's knowledge, no Hazardous Materials are currently on the Premises. 3 8. DEFAULTS The default provisions are articulated in the Master Lease. In addition, in the event of Sublessee's failure to pay Rent under this Sublease, which failure is not cured within ten (10) days after Sublessor delivers a written notice to Sublessee stating the nature and amount of such past due Rent, then Sublessor shall have no continuing obligation to Sublessee to maintain the Master Lease for Sublessee's benefit. 9. PROVISIONS OF MASTER LEASE Notwithstanding anything to the contrary contained in this Sublease: a. Sublessee shall indemnify and hold both Sublessor and Master Lessor harmless pursuant to the provisions of Article 18 and any other indemnity provision of the Master Lease (with reference therein to "Premises" being replaced with "Sublease Premises"); b. The obligations of Master Lessor under the Master Lease to repair or replace the Premises shall remain the obligations of Master Lessor and shall not be assumed by Sublessor; c. The right of entry of Master Lessor under Article 13 of the Master Lease shall be the right of each of Master Lessor and Sublessor; d. Sublessee shall pay Sublessor interest and late charges as provided in Section 5.3 of the Master Lease, if rent is not received by Sublessor when due; and e. Any assignment or subletting by Sublessee of the Sublease or the Sublease Premises shall be governed by Article 10 of the Master Lease, and the term "Landlord" in Article 10 shall mean each of Master Lessor and Sublessor. f. Sublessee shall provide Sublessor with a certificate of Sublessee's insurance, as required under the Master Lease, naming Sublessor as an additional insured, prior to Sublessee's occupancy of the Sublease Premises. 10. ALTERATIONS The current design for configuration of the cubicles in the Sublease Premises shall not be altered by Sublessee. Sublessee shall make no alterations, additions or improvements in or to the Sublease Premises without the prior written consent of Sublessor and Master Lessor. Any Such approved alterations, additions or improvements shall be installed in accordance with the terms of the Master Lease. Sublessee shall restore the Premises at the expiration or earlier termination of the Sublease Term to its condition existing as of the Commencement Date (including the removal of all alterations and equipment installed by Sublessee and the repairing of any resulting damage), reasonable wear and tear excepted. 11. SURRENDER AND HOLDOVER Upon the expiration or earlier termination of this Sublease, Sublessee shall promptly quit and surrender to Sublessor the Sublease Premises broom clean, in the same condition as 4 received, ordinary wear and tear and loss by fire and other casualty excepted. Sublessee shall removal all of its movable furniture and other effects. If Sublessee fails to so vacate the Sublease Premises on a timely basis as required, Sublessee shall pay holdover rent at the rate of 150% of Rent, and shall be responsible to Sublessor and to Master Lessor for all costs, expenses, attorneys fees and damages (including but not limited to any amounts required to be paid to third parties who were to have occupied the Sublease Premises) incurred by Sublessor and/or Master Lessor as a result of such failure to vacate, plus interest thereon at the rate of the lesser of 18% per annum or the maximum rate allowed by law, on all amounts not paid by Sublessee within ten (10) days of demand. 12. SECURITY DEPOSIT Concurrently with Sublessee's execution of this Sublease, Sublessee shall deposit With Sublessor the sum of $16,667.00 as a non-interest bearing security deposit for Sublessee's performance under this Sublease. The amount paid as a security deposit shall be returned to Sublessee within 14 days after Sublessee's vacating the Sublease Premises, after first deducting any sums owing to Sublessor due to a breach by Sublessee of any obligation, covenant, term or condition of this Sublease. Simultaneously with the return of the security deposit (less any deductions as described in the preceding sentence) Sublessor shall provide Sublessee with a reasonably detailed accounting of any deduction from the security deposit. In the event Sublessee breaches any obligation, term, condition or covenant under this Sublease, Sublessor will be entitled but not obligated to use or retain some or all of this security deposit to compensate for any loss, expense or risk associated with the breach, all without seeking judicial relief In the event of such recourse to the security deposit, Sublessor is entitled to require Sublessee to replenish the security deposit funds on thirty days' written notice. In no event will Sublessee be entitled to have access to or require any portion of Sublessor's deposit with the Master Lessor. 13. SIGNAGE Sublessee shall have the right to have a "Lineo, Inc" sign on the front door to the Building and in the lobby on the wall adjacent to Sublessee's office, subject to Sublessor's and Master Lessor's approval as to size, design and location. Sublessor's approval shall not be unreasonably withheld. 14. MISCELLANEOUS a. Each of Sublessor and Sublessee represents and warrants to the other that it has not had dealings with any real estate broker, finder or other person who could claim a commission or finder's fee with respect to this Sublease. Each of Sublessor and Sublessee shall hold the other harmless from all damages resulting from its breach of the foregoing representation and warranty. 5 b. This Sublease (and delivery of possession of the Sublease Premises to Sublessee) is subject to Master Lessor approval pursuant to a written letter of consent. Sublessor $hall use all reasonable efforts to obtain Master Lessor's approval of this Sublease as soon as possible following execution of this Sublease but in no event later than twenty (20) days after such execution. In the event that Master Lessor's approval as stated herein is not obtained within said twenty (20) day period, then either party may, by written notice to the other, terminate this Sublease, and each party shall be relieved of any further obligation to the other with respect to this Sublease.
"SUBLESSOR" "SUBLESSEE" SwitchSoft Systems, Inc. LINEO, INC a Delaware corporation a Delaware corporation By: [ILLEGIBLE] By: /s/ Bryan Sparks ------------------------------------------- ------------------------------------------- Print Name: [ILLEGIBLE] Print Name: Bryan Sparks ----------------------------------- ----------------------------------- Title: CEO Title: President and CEO ---------------------------------------- ---------------------------------------- Date Executed: 1-31-00 Date Executed: Jan 24, 2000 -------------------------------- -------------------------------- ADDRESS: ADDRESS: 805 Veterans Blvd, Suite 316 383 South 520 West Redwood City, CA 94063 Lindon, Utah 84042 Attn: Kurt Johnson, Vice President Finance and Attn: Greg Hill, Chief Financial Officer Administration and Chief Financial Officer
6 EXHIBITS TO BE ATTACHED TO SUBLEASE Exhibit A Master Lease Exhibit B Site Plan of Sublease Premises [GRAPHICS] Exhibit B - Expansion Sublease Premises EX-10.21 25 EXHIBIT 10.21 SUBLEASE 380 SOUTH 400 WEST, SUITE C This Sublease is entered into as of February 21, 2000 by and between VPNX.com, a Delaware corporation ("Sublessor") and Lineo, Inc., a Delaware corporation ("Sublessee"). Terms not specifically defined herein are as defined in the Master Lease. A. Sublessor, as Tenant, as successor-in-interest to SwitchSoft Systems, Inc., is leasing from EsNet Properties, L.C., a Utah limited liability company ("Master Lessor") those certain premises located at 380 South 400 West Lindon, Utah 84042 ("Premises") pursuant to that certain lease dated July 20, 1998, (the "Master Lease"). Sublessee acknowledges having reviewed a copy of the Master Lease, which is attached hereto as Exhibit A. B. Sublessor desires to lease to Sublessee and Sublessee desires to lease from Sublessor the Sublease Premises (as defined below) on the terms and conditions set forth in this Sublease. 1. SUBLEASE PREMISES a. Sublessor leases to Sublessee and Sublessee hires from Sublessor the following described portion of the Premises together with the appurtenances thereto, situated in the City of Lindon, County of Utah, State of Utah commonly known and described as 380 South 400 West, Suite C, located on the second floor ("Sublease Premises"). The Sublease Premises shall consist of approximately 10,000 rentable square feet, which are outlined on Exhibit B. b. Sublessee will be taking possession of the Sublease Premises "as is," in its condition existing on the date of delivery of the Sublease Premises to Sublessee. Sublessee, acknowledges that Sublessee is leasing the Sublease Premises based on its own inspection of the Sublease Premises and those of its agents, and is not relying on any representations or warranties of the Sublessor regarding the physical condition of the Sublease Premises. Sublessee's taking of possession of the Sublease Premises shall constitute conclusive evidence that the Sublease Premises were, as of that date, in good, clean and tenantable condition. Sublessee acknowledges that the square footages of the Sublease Premises as specified in Subparagraph 1.a are estimates and that Sublessor does not warrant the exact square footage of the Sublease Premises. By taking possession of the Sublease Premises, Sublessee accepts the square footages of the Sublease Premises as those specified in Subparagraph 1.a above. c. The Sublease Premises shall have its own separate entrance and security system as of the Sublease Commencement Date. 2. INCORPORATION OF MASTER LEASE This Sublease is subject to all of the terms and conditions of the Master Lease and Sublessee hereby accepts, assumes and agrees to perform all of the obligations of Sublessor as Sublessee under the Master Lease to the extent such obligations are applicable to the Sublease Premises and all of the terms and conditions of the Master Lease are incorporated herein as terms and conditions of this Sublease (with each reference therein to Landlord, Tenant and Premises to be deemed to refer to Sublessor, Sublessee, and Sublease Premises respectively), excepting only Article 2, Article 3, Section 5.1, Section 5.4, Article 6, Article 7, Section 8.2, Section 9.1, Section 24.18, Section 24.19, Exhibit C, Exhibit E and Exhibit G of the Master Lease and as set forth in Paragraph 9 below. In the event of any conflict or inconsistency between the incorporated terms of the Master Lease and the terms of the Sublease which are set forth in full, the terms of the Sublease which are set forth in full shall prevail to the extent of any such inconsistency, it being understood that in any event the Sublease provisions are subject to Master Lease provisions. 3. TERM AND RENTAL COMMENCEMENT a. The term of this Sublease shall be for a period of twelve (12) months ("Sublease Term"), commencing on March 1, 2000 ("Commencement Date"). b. In the event of the termination for any reason of Sublessor's interest as tenant under the Master Lease, then this Sublease shall terminate therewith without any liability of Sublessor to Sublessee; provided, however, that Sublessor may be liable to Sublessee for any termination of the Sublease that results from Sublessor's breach of the Master Lease, so long as such breach is not caused in whole or in part by Sublessee. c. In the event the Commencement Date has not occurred by March 31, 2000 for any reason, then Sublessor shall not be liable for any damage caused thereby, but either party may, by notice in writing to Sublessor within ten (10) days thereafter, cancel this Sublease, in which event the parties shall be discharged from all obligations under this Sublease, and Sublessor shall return to Sublessee any prepaid rent and security deposit. 4. USE a. Sublessee shall use the Sublease Premises solely for general office use and for no other purpose without the consent of Sublessor. Sublessee agrees that its use shall comply with all applicable governmental laws and ordinances, and that it shall not use or permit the Sublease Premises to be used for any purposes other than those described above. Sublessee shall not commit or permit to be committed on the Sublease Premises any act or omission which shall violate any term or condition of the Master Lease. b. Sublessee shall be responsible for the installation and cost of any and all improvements, alterations or other work on or to the Sublease Premises or to any other portion of the property and/or building of which the Sublease Premises are a part, required by applicable governmental laws, rules, orders and ordinances because of the particular use to which the Sublease Premises are put Sublessee, including any improvements, alterations or other work required under the Americans With Disabilities Act of 1990 due to Sublessee's particular use of the Sublease Premises or due to changes or alterations to the Sublease Premises made or proposed to be made by Sublessee. 2 5. RENTAL a. Sublessee shall pay Rent to Sublessor as follows, without offset or deduction for the Sublease Premises, in advance, on the first day of each month, in lawful money of the United States. Rent for the partial month shall be prorated on the basis of the number of days in such month. RENT $16,667.00 per month b. Sublessor acknowledges receipt from Sublessee, on the execution hereof the sum of $16,667.00 to be applied against rent for the first month of the Sublease Term to be paid hereunder. c. In addition to the Rent indicated in Section 5.a above, Sublessee shall procure and pay directly for its own telephone costs and shall procure its own janitorial service at Sublessee's cost. Sublessor shall pay for Sublessee's other utilities. Sublessee shall not be responsible for the payment of Common Area Expenses (such as taxes, Master Lessor's insurance and common area maintenance costs), for which Sublessor is responsible under Section 8.2 of the Master Lease. 6. NOTICES All notices and demands of any kind required to be given by Sublessor or Sublessee hereunder shall be in writing and effective the next business day after depositing with a nationally recognized overnight courier service such as Federal Express or three (3) days after depositing in the United States certified mail, return receipt requested, postage prepaid, and addressed to Sublessor or Sublessee, as the case may be, at the address set forth below their respective signatures or at such other address as they may designate from time to time. All rent and other payments due under this Sublease or the Master Lease shall be made to Sublessor at the same address. 7. HAZARDOUS MATERIALS Sublessee will indemnify, defend and hold Sublessor harmless from any judgment, damages, losses, claims, actions, attorneys' fees, consultant's fees, costs or expenses which result from Sublessee's or any of Sublessee's agents (including employees, contractors and visitors) use, storage, or disposal of Hazardous Materials in or about the Sublease Premises. As used herein the term "Hazardous Materials" will mean and include asbestos, petroleum products and any and all toxic or hazardous substances, materials or wastes listed in the United States Department of Transportation Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances (40 CFR 302) and in any and all amendments to such lists or such substances, materials or wastes otherwise regulated under applicable local, state or federal law. The provisions of this paragraph shall survive the expiration or termination of the Sublease. To the best of Sublessor's knowledge, no Hazardous Materials are currently on the Premises. 3 8. DEFAULTS The default provisions are articulated in the Master Lease. In addition, in the event of Sublessee's failure to pay Rent under this Sublease, which failure is not cured within ten (10) days after Sublessor delivers a written notice to Sublessee stating the nature and amount of such past due Rent, then Sublessor shall have no continuing obligation to Sublessee to maintain the Master Lease for Sublessee's benefit. 9. PROVISIONS OF MASTER LEASE Notwithstanding anything to the contrary contained in this Sublease: a. Sublessee shall indemnify and hold both Sublessor and Master Lessor harmless pursuant to the provisions of Article 18 and any other indemnity provision of the Master Lease (with reference therein to "Premises" replaced with "Sublease Premises"); b. The obligations of Master Lessor under the Master Lease to repair or replace the Premises shall remain the obligations of Master Lessor and shall not be assumed by Sublessor; c. The right of entry of Master Lessor under Article 13 of the Master Lease shall be the right of each of Master Lessor and Sublessor; d. Sublessee shall pay Sublessor interest and late charges as provided in Section 5.3 of the Master Lease, if rent is not received by Sublessor when due; and e. Any assignment or subletting by Sublessee of the Sublease or the Sublease Premises shall be governed by Article 10 of the Master Lease, and the term "Landlord" in Article 10 shall mean each of Master Lessor and Sublessor. f. Sublessee shall provide Sublessor with a certificate of Sublessee's insurance, as required under the Master Lease, naming Sublessor as an additional insured, prior to Sublessee's occupancy of the Sublease Premises. 10. ALTERATIONS The current design for configuration of the cubicles in the Sublease Premises shall not be altered by Sublessee. Sublessee shall make no alterations, additions or improvements in or to the Sublease Premises without the prior written consent of Sublessor and Master Lessor. Any such approved alterations, additions or improvements shall be installed in accordance with the terms of the Master Lease. Sublessee shall restore the Premises at the expiration or earlier termination of the Sublease Term to its condition existing as of the Commencement Date (including the removal of all alterations and equipment installed by Sublessee and the repairing of any resulting damage), reasonable wear and tear excepted. 11. SURRENDER AND HOLDOVER Upon the expiration or earlier termination of this Sublease, Sublessee shall promptly quit and surrender to Sublessor the Sublease Premises broom clean, in the same condition as 4 received, ordinary wear and tear and loss by fire and other casualty excepted. Sublessee shall removal all of its movable furniture and other effects. If Sublessee fails to so vacate the Sublease Premises on a timely basis as required, Sublessee shall pay holdover rent at the rate of 150% of Rent and shall be responsible to Sublessor and to Master Lessor for all costs, expenses, attorneys fees and damages (including but not limited to any amounts required to be paid to third parties who were to have occupied the Sublease Premises) incurred by Sublessor and/or Master Lessor as a result of such failure to vacate, plus interest thereon at the rate of the lesser of 18% per annum or the maximum rate allowed by law, on all amounts not paid by Sublessee within ten (10) days of demand. 12. SECURITY DEPOSIT Concurrently with Sublessee's execution of this Sublease, Sublessee shall deposit with Sublessor the sum of $16,667.00 as a non-interest bearing security deposit for Sublessee's performance under this Sublease. The amount paid as a security deposit shall be returned to Sublessee within 14 days after Sublessee's vacating the Sublease Premises, after first deducting any sums owing to Sublessor due to a breach by Sublessee of any obligation, covenant, term or condition of this Sublease. Simultaneously with the return of the security deposit (less any deductions as described in the preceding sentence) Sublessor shall provide Sublessee with a reasonably detailed accounting of any deduction from the security deposit. In the event Sublessee breaches any obligation, term, condition or covenant under this Sublease, Sublessor or will be entitled but not obligated to use or retain some or all of this security deposit to compensate for any loss, expense or risk associated with the breach, all without seeking judicial relief. In the event of such recourse to the security deposit, Sublessor is entitled to require Sublessee to replenish the security deposit funds on thirty days' written notice. In no event will Sublessee be entitled to have access to or require any portion of Sublessor's deposit with the Master Lessor. 13. SIGNAGE Sublessee shall have the right to have a "Lineo, Inc." sign on the wall adjacent to Sublessee's office entrance on the second floor, subject to Sublessor's and Master Lessor's approval as to size, design and location. Sublessor's approval shall not be unreasonably withheld. 14. MISCELLANEOUS a. Each of Sublessor and Sublessee represents and warrants to the other that it has not had dealings with any real estate broker, finder or other person who could claim a commission or finder's fee with respect to this Sublease. Each of Sublessor and Sublessee shall hold the other harmless from all damages resulting from its breach of the foregoing representation and warranty. 5 b. This Sublease (and delivery of possession of the Sublease Premises to Sublessee) is subject to Master Lessor approval pursuant to a written letter of consent. Sublessor shall use all reasonable efforts to obtain Master Lessor's approval of this Sublease as soon as possible following execution of this Sublease, but in no event later than twenty (20) days after such execution. In the event that Master Lessor's approval as stated herein is not obtained within said twenty (20) day period, then either party may, by written notice to the other, terminate this Sublease, and each party shall be relieved of any further obligation to the other with respect to this Sublease. "SUBLESSOR" "SUBLESSEE" VPNX.com LINEO, INC. a Delaware corporation a Delaware corporation By: /s/ Tyrone Farrar Pike By: /s/ Bryan Sparks ------------------------------------------- ------------------------------------------- Print Name: Tyrone Farrar Pike Print Name: Bryan Sparks ----------------------------------- ----------------------------------- Title: President & CEO Title: President & CEO ---------------------------------------- ---------------------------------------- Date Executed: 2/28/2000 Date Executed: 2/14/2000 -------------------------------- -------------------------------- ADDRESS: ADDRESS: 805 Veterans Blvd, Suite 316 383 South 520 West Redwood City, CA 94063 Lindon, Utah 84042 Attn: Kurt Johnson, Vice President Finance and Attn: Greg Hill, Chief Financial Officer Administration and Chief Financial Officer
6 EXHIBITS TO BE ATTACHED TO SUBLEASE Exhibit A Master Lease Exhibit B Site Plan of Sublease Premises EX-10.22 26 EXHIBIT 10.22 EXHIBIT 10.22 EMPLOYMENT AGREEMENT (U.S.) THIS EMPLOYMENT AGREEMENT ("Agreement") by and between Lineo, Inc., a Delaware corporation (the "Company"), and Bryan Sparks ("Employee") is dated and entered into as of this 16th day of May 2000. RECITALS A. The Company desires to employ and ensure itself of the continued services of Employee. B. Employee is willing to render services to the Company in accordance with and subject to the terms and conditions of this Agreement. ACCORDINGLY, the parties hereby agree as follows: AGREEMENT 1. EMPLOYMENT. The Company will employ Employee and Employee, upon accepting such employment, agrees to perform and discharge his duties hereunder diligently, faithfully, and in accordance with the highest professional standards. Employee's initial assignment shall be as President and Chief Executive Officer and he will perform such duties as are customarily associated with such position. Employee will have the authority as may be granted from time to time by the President of the Company. Employee may be reassigned or required to perform such other duties of a similar nature as the Company in its sole discretion may request. 2. DEVOTION OF TIME AND ENERGY. Employee will devote his entire working time, ability, effort, and attention to the affairs of the Company and will skillfully serve its interests during the term of this Agreement; provided, however, that the foregoing shall not prevent Employee from serving as a member of the board of directors of a corporation if the Company determines that such membership is not adverse to the interests of the Company. 3. DUTY OF LOYALTY. During Employee's engagement with the Company, Employee will bring to the Company any bona fide corporate opportunity of which Employee becomes aware that relates to the Company's current or potential business. 4. COMPENSATION. During the term of this Agreement, the Company agrees to pay or cause to be paid to Employee, and Employee agrees to accept in exchange for the services rendered hereunder by him, the following compensation: 4.1 BASE SALARY. Employee's compensation shall consist of an annual base salary of one hundred fifty thousand ($150,000.00) before all customary payroll deductions. Such annual base salary shall be paid in substantially equal installments and at the same intervals as other employees of the Company are paid. The Company shall determine increases, if any, in the amount of the annual base salary in future years. 4.2 BENEFITS. The Company also agrees to provide Employee with benefits pursuant to Company policy and practice for its employees and their dependents, including participation in the Company's group health, life, and disability insurance plans. Details about these benefits will be provided to Employee. 4.3 BONUS. The Company may, but has no obligation to, also award Employee discretionary compensation or bonuses ("Additional Compensation"). The amount of any Additional Compensation, if any, and the criteria for determining the amount of the Additional Compensation, if any, shall be at the sole discretion of the Company. 5. TERM. The period of employment under this agreement shall be deemed to have commenced as of the ____ day of May 2000, and shall continue for a period of 24 full calendar months thereafter, unless or until it ceases or is terminated sooner as provided in Section 6 ("Termination"); provided, however, that the employment hereunder may be renewed one or more times upon agreement between the Company and Employee, on such terms and conditions as agreed between them. 6. TERMINATION. Employment of Employee pursuant to this Agreement may be terminated as follows, but in any case, the provisions of Sections 7, 8, and 9 hereof shall survive the termination of this Agreement and the termination of Employee's employment hereunder: 6.1 UPON NOTICE. Either party may terminate the employment of Employee at any time during the term of employment upon mailing or delivering written notice not less than two weeks prior to the date when termination is to become effective; provided, however, that during such period, the Company will not be obligated to provide any work for Employee, or to assign to or vest in Employee any powers, duties, or functions, and may in its discretion suspend Employee on full salary and other contractual benefits. During such period, the Company may also require Employee: 6.1.1 not to enter any premises of the Company or any subsidiary, division, or affiliated company; and 6.1.2 to abstain from contacting any customers, clients, employees, or suppliers of the Company or any subsidiary, division, or affiliated company. Employee shall not be employed by or provide services to any third party during the period for which he is suspended with compensation pursuant to this clause. 6.2 AUTOMATIC TERMINATION. This Agreement and Employee's employment hereunder shall terminate automatically upon the death or total disability of Employee. The term "total disability" as used herein shall mean Employee's inability to perform, even with reasonable accommodation, substantially all of the duties required of him as set forth in Section 1 hereof as a result of physical or mental illness, loss of legal capacity, or any other cause beyond Employee's control, and such inability shall continue for a period or periods aggregating 120 calendar days in any 12-month period. Termination hereunder shall be deemed to be effective (a) at the end of the calendar month in which Employee's death occurs or (b) immediately upon a determination by the Company of Employee's total disability, as defined herein. 6.3 FOR CAUSE. Either party may terminate this agreement for cause. Cause shall include any material breach of the terms of this Agreement by either party. Actions by Employee that may constitute cause include, but are not limited to, actions taken in conflict with the Company's best interests or that may tend to damage the Company's business or reputation, violations of any material Company policy or practice, the failure or refusal to carry out the lawful duties of Employee as described in Section 1 herein (for reasons other than "total disability"), or actions in violation of Employee's fiduciary duties to the Company. 6.4 SEVERANCE. In the event that Employee is terminated pursuant to Section 6.1 herein, the Company will continue Employee's salary (minus all deductions required by law) for twelve 2 (12) months from the date of termination; provided, however, that Employee will not be entitled to any such compensation for any period during which he is receiving comparable compensation from a third party. 7. CONFIDENTIALITY. 7.1 CONFIDENTIAL INFORMATION. Employee recognizes that the Company now possesses or will possess information of a confidential or secret nature that has commercial value in the business in which the Company is engaged (hereinafter referred to as "Confidential Information"). Confidential Information for this purpose is information that Employee obtains during and in the course of his employment, including, but not limited to, trade secrets, processes, formulas, computer programs, data, know-how, inventions, improvements, techniques, marketing plans, product plans, strategies, forecasts, and customer lists. Employee understands that his employment with the Company creates a relationship of trust and confidence between him and the Company with respect to the Confidential Information that he may learn or develop during the period of his employment with the Company. 7.2 OBLIGATION NOT TO DISCLOSE. At all times, both during and after the termination of Employee's employment with the Company, Employee agrees to keep in strict confidence all Confidential Information and not to use or disclose any Confidential Information or anything relating to it in whole or in part, nor permit others to use or disclose it in any way, without the prior written consent of the Company, except as may be necessary in the ordinary course of performing Employee's duties under this Agreement. 7.3 THIRD PARTY INFORMATION. Employee recognizes that the Company has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on the Company's part to maintain confidentiality of such information and to use it only for limited purposes. Employee agrees to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm, or corporation, or to use it except as necessary in carrying out his work for the Company in a manner consistent with the Company's agreement with the third party. 7.4 RETURN OF MATERIALS. Upon termination of employment with the Company, or at any other time at the Company's request, Employee agrees to promptly deliver to the Company all drawings, blueprints, manuals, letters, notes, notebooks, reports, sketches, formulas, computer programs or files, memoranda, customer lists, and all other materials, and all copies thereof, relating in any way to the Company's business and in any way obtained by Employee during the period of employment with the Company, that are in Employee's possession or control. Employee further agrees not to make or retain any copies of any of the foregoing and will so represent to the Company upon termination of employment. 7.5 REVERSE ENGINEERING. Employee agrees that Employee will not engage, nor cause any other person, firm, corporation or other entity to engage, in the reproduction of Confidential Information through the techniques of "reverse engineering," as described in Title 17, United States Code, Section 906, as such statute may be amended from time to time. 8. COVENANT NOT TO COMPETE/NONSOLICITATION. 8.1 COVENANT. Employee agrees not to directly or indirectly compete (as defined in Section 8.2, below) with the Company in the noncompetition area (as defined in Section 8.3, below) during the term of employment with the Company and for a period of twelve (12) months from the date of termination of employment for any reason. This twelve-month period will be tolled during the period of any breach of the covenants herein. 3 8.2 DIRECT AND INDIRECT COMPETITION. Employee agrees that the phrase "directly or indirectly compete" shall include: 8.2.1 owning, managing, operating, or controlling, or participating in the ownership, management, operation, or control of, or being connected with or having any interest in, as a stockholder, director, officer, employee, agent, consultant, assistant, advisor, sole proprietor, partner, or otherwise, any business (other than the Company's) that is involved in the development, marketing, and/or sale of Linux-based embedded software components and applications (including, but not limited to, traditional embedded devices, handheld devices, personal digital assistants, thin clients, and thin servers), provided, however, that this prohibition shall not apply to the ownership of less than five percent (5%) of the voting stock in companies whose stock is traded on a national securities exchange or in the over-the-counter market; 8.2.2 soliciting, causing to be solicited, contracting with, or otherwise engaging in business with any person or business entity, whom or which at the time is a current client of the Company, and whom or which is known to Employee and with whom or which Employee has dealt, directly or indirectly, in the 12 months prior to the termination of employment, for the purpose of the development, marketing, and/or sale of Linux-based embedded software components or applications; 8.2.3 soliciting, persuading, inducing, or otherwise causing employees of the Company to leave the Company's employ; or 8.2.4 while an employee of the Company, soliciting or engaging in any employment or other activity that is the same or similar to any business in which the Company is now, or has plans to become, engaged. 8.3 NONCOMPETITION AREA. Employee agrees that the phrase "noncompetition area" means any national market in which the Company, during employment and as of the date of termination of employment hereunder, (a) has developed, marketed, or sold Linux-based embedded software components or applications, or (b) has made material commitments to do so; provided, however, that the "noncompetition area" shall not include any such national market in which the Company, as of the date of commencement of any directly or indirectly competitive action(s), has ceased such activities or withdrawn such commitments. 9. INVENTIONS. 9.1 DISCLOSURE OF INVENTIONS. If Employee conceives, learns, makes, or first reduces to practice either alone or jointly with others, any inventions, improvements, original works or authorship, formulas, processes, computer programs, techniques, know-how, or data (hereinafter referred to as "Inventions") relating to the business and/or technology of the Company while employed by the Company, Employee will promptly disclose such Inventions to the Company or to any person designated by it. 9.2 MAINTENANCE OF RECORDS. Employee agrees to keep, maintain, and ensure proper and secure storage of adequate and current written records of all Inventions made by Employee (alone or jointly with others) during the term employment. The records may be in the form of notes, sketches, drawings, flow charts, electronic data or recordings, laboratory notebooks, or any other format. The records will be available to and remain the sole property of the Company at all times. Employee agrees not to remove such records from the Company's place of business except as expressly permitted by 4 Company policy, which may, from time to time, be revised at the sole election of the Company for the purpose of furthering the Company's business. 9.3 OWNERSHIP, ASSIGNMENT, ASSISTANCE, AND POWER OF ATTORNEY. All Inventions that are related to or useful in the Company's business or in the research and development of the Company's business and that result from work performed by Employee for the Company during the period of employment shall be the sole and exclusive property of the Company, and the Company shall have the right to use and to apply for patents, copyrights, or other statutory or common law protections for such Inventions in any country. Employee hereby assigns to the Company any rights that he has acquired or may acquire in such Inventions. Furthermore, Employee will assist the Company in every proper way at the Company's expense to obtain patents, copyrights, and other statutory or common law protections for such Inventions in any country and to enforce such rights from time to time. Specifically, Employee will execute all documents as the Company may use in applying for, obtaining, or enforcing such patents, copyrights, and other statutory or common law protections, together with any assignments thereof to the Company or to any person designated by the Company. Employee's obligations under this paragraph shall continue beyond the termination of employment with the Company in regards to Inventions resulting from work performed by Employee for the Company during employment with the Company. The Company shall compensate Employee at a reasonable rate after such termination for time spent at the Company's request in rendering such assistance. In the event the Company is unable for any reason whatsoever to secure Employee's signature to any lawful document required to apply for or to enforce any patent, copyright, or other statutory or common law protections for such Inventions, Employee hereby irrevocably and severally designates and appoints the Company and its duly authorized officers and agents as his agents and attorneys-in-fact to act in his stead to execute such documents. Employee agrees that such documents or such acts shall have the same legal force and effect as if he executed such documents or he did such acts. 9.4 WORKS MADE FOR HIRE. Employee acknowledges that all original works of authorship that are made by Employee (solely or jointly with others) within the scope of his employment and that are protectable by copyright are "works made for hire," as that term is defined in the United States Copyright Act (17 U.S.C. Section 101). To the extent that any original works of authorship created by Employee for the Company and in furtherance of his employment by the Company would be deemed not to be "works made for hire" unless specially ordered or commissioned, Employee and the Company hereby mutually agree that such works are specially ordered or commissioned. To the extent that such works are not deemed to be "works made for hire" as that term is defined in the Copyright Act because, for example, Employee is deemed to be an independent contractor and/or such works do not fall within the category of works that are commissionable as "works made for hire," Employee hereby assigns to the Company, as author, all of Employee's right, title, and interest in the Copyright to such works. 9.5 NOTICE OF EMPLOYEE RIGHT TO INVENTIONS. This Agreement does not apply to an invention if no equipment, supplies, facilities, or trade secret information of the Company was used, and the invention was developed entirely on Employee's own time, unless (a) the invention relates (i) directly to the business of the Company, or (ii) to the Company's actual or demonstrably anticipated research or development, or (b) results from any work that Employee has performed for the Company. 9.6 EXCLUSION OF PRIOR INVENTIONS. Employee has identified on Exhibit A attached hereto a complete list of all Inventions that he has conceived, learned, made, or first reduced to practice, either alone or jointly with others, prior to employment with the Company and that Employee desires to exclude from the operation of this Agreement. If no Inventions are listed on this Exhibit A, Employee represents that he has made no such Inventions at the time of signing this Agreement. 5 10. NOTIFICATION TO OTHER PARTIES. In the event that Employee leaves the employ of the Company, he hereby consents to notification by the Company to Employee's new employer or parties with whom Employee has a consulting relationship about Employee's rights and obligations under Sections 7, 8, and 9 of this Agreement. 11. CONFLICTS. 11.1 PRIOR AGREEMENTS OR DUTIES. Employee represents that, to the best of his knowledge, his performance of all the terms of this Agreement and his work as an employee of the Company does not breach any oral or written agreement that Employee has made, or violate a duty, to keep in confidence proprietary or trade secret information acquired by him prior to employment with the Company. Attached as Exhibit B to this Agreement are copies of any such written agreements and descriptions of any such oral agreements. 11.2 MATERIALS OR CONFIDENTIAL INFORMATION OF PRIOR EMPLOYERS. Employee represents that he has not used, nor will he use, in the performance of his duties for the Company, any materials or documents, or confidential or trade secret information, of a former employer that are not generally available to the public, unless Employee has first obtained written authorization from the former employer allowing their possession and/or use and has delivered a copy of such written authorization to the Company before using such materials or documents, or confidential or trade secret information, in connection with the performance of Employee's duties for the Company. 11.3 OTHER AGREEMENTS. While employed by the Company, Employee will not enter into any oral or written agreement that conflicts with his obligations under this Agreement or with the performance of his work as an employee of the Company. 12. REMEDIES. 12.1 INJUNCTIVE RELIEF. Employee acknowledges that any violation by him of this Agreement may cause the Company irreparable injury that may not be adequately compensated by money damages. Therefore, Employee agrees that the Company will be entitled, in addition to any remedies it may have under this Agreement or at law, to injunctive and other equitable relief to prevent or curtail any breach of this Agreement by Employee. Employee consents to venue and jurisdiction in the State of Utah in any action brought by the Company to obtain such relief, and agrees that no bond will be required. 12.2 SEVERABILITY. If any provision (or subpart) of this Agreement shall be held invalid, illegal, or unenforceable in any jurisdiction, for any reason, including, without limitation, the duration of such provision, its geographical scope, or the extent of the activities prohibited or required by it, then, to the full extent permitted by law (a) all other provisions (or subparts) hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intent of the parties hereto as nearly as may be possible, (b) such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision hereof, and (c) any court or arbitrator having jurisdiction thereover shall have the power to reform such provision to the extent necessary for such provision to be enforceable under applicable law. 12.3 SURVIVAL OF REMEDIES. Employee agrees that his covenants and agreements made in and the requirements imposed on him by Sections 7, 8, and 9 and this Section 12 will be construed as an agreement independent of any of the provisions of this Agreement as set forth in the respective provisions. The existence of any claim or cause of action of Employee against the Company or any of its affiliates, irrespective of whether predicated on the terms of this Agreement, will not constitute a defense 6 to the enforcement of the covenants and agreements of Employee contained in Sections 7, 8, or 9 or the requirements imposed on him by this Section 12. 12.4 ATTORNEYS' FEES. If any breach of or default under this Agreement results in litigation, the substantially prevailing party shall be entitled to costs, expenses, and reasonable attorneys' fees. 12.5 ARMS' LENGTH AGREEMENT. The provisions of this Agreement have been negotiated by both parties at arms' length. Employee acknowledges that he has carefully read and reviewed the provisions of this final Agreement, including the provisions contained in Sections 7, 8, and 9 and this Section 12, has had an opportunity to discuss the meaning and effect of these provisions with counsel, and agrees that they are reasonable. 12.6 ARBITRATION. Subject to the provisions of Section 12.1 hereof, any controversies or claims arising out of or relating to this Agreement shall be fully and finally settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect (the "AAA RULES"), conducted by one arbitrator either mutually agreed upon by Employer and Employee or chosen in accordance with the AAA Rules, except that the parties thereto shall have any right to discovery as would be permitted by the Federal Rules of Civil Procedure for a period of 90 days following the commencement of such arbitration and the arbitrator thereof shall resolve any dispute which arises in connection with such discovery. The prevailing party shall be entitled to costs, expenses and reasonable attorneys' fees, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. 13. GENERAL PROVISIONS. 13.1 GOVERNING LAW. This Agreement shall in all respects, including all matters of construction, validity, and performance, be governed by, and construed and enforced in accordance with, the laws of the State of Utah. 13.2 ASSIGNMENT. This Agreement is personal to Employee and shall not be assignable by Employee. The Company may assign its rights hereunder to (a) any corporation resulting from any merger, consolidation, or other reorganization to which the Company is a party or (b) any corporation, partnership, association, or other person to which the Company may transfer all or substantially all of the assets and business of the Company existing at such time. All of the terms and provisions of this Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. 13.3 WAIVERS. No delay or failure by any party hereto in exercising, protecting, or enforcing any of its rights, titles, interests, or remedies hereunder, and no course of dealing or performance with respect thereto, shall constitute a waiver thereof. The express waiver by a party hereto of any right, title, interest, or remedy in a particular instance or circumstance shall not constitute a waiver thereof in any other instance or circumstance. All rights and remedies shall be cumulative and not exclusive of any other rights or remedies. 13.4 AMENDMENTS IN WRITING. No amendment, modification, or waiver of this Agreement will be binding or effective unless agreed by both parties. It may not be changed orally but only by an Agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension, or discharge is sought. The course of dealing between the parties will not be deemed to affect, modify, amend, or discharge any provision or term of this Agreement. 7 13.5 ENTIRE AGREEMENT. This Agreement on and as of the date hereof constitutes the entire agreement between the Company and Employee with respect to the subject matter hereof and all prior or contemporaneous oral or written communications, understandings or agreements between the Company and Employee with respect to such subject matter are hereby superseded and nullified in their entireties. 13.6 HEADINGS. All headings used herein are for convenience only and shall not in any way affect the construction of, or be taken into consideration in interpreting, this Agreement. 13.7 NOTICE. All notices permitted or required hereunder shall be in writing and shall be delivered in person, sent by email, sent by electronic facsimile (fax), or mailed by certified or registered mail, postage prepaid and return receipt requested, and addressed as set forth immediately following the signature blocks in this Agreement. Either party may change the address of notice by giving proper notice to the other party according to the terms of this section. If notice is given in person, email, or by fax, it shall be effective upon confirmed receipt; and if notice is given by mail, it shall be effective three business days after deposit in the mail. IN WITNESS WHEREOF, the parties have executed and entered into this Agreement on the date set forth above. LINEO, INC. EMPLOYEE By /s/ Matthew R. Harris /s/ Bryan Sparks --------------------------------- ----------------------------------- Type Name: Matthew R. Harris Type Name: Bryan Sparks Title: General Counsel Address: 390 South 400 West Address: 390 South 400 West Lindon, Utah 84042 Lindon, Utah 84042 8 EX-21.1 27 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Zentropic Computing, LLC, a Virginia limited liability company United System Engineers, Inc., a Japanese corporation Fireplug Computers Inc., a Vancouver, B.C. corporation INUP S.A., a societe anonyme French corporation Moreton Bay Ventures Pty Ltd, an Australian corporation RT-Control, Inc., a Toronto, Ontario corporation EX-23.2 28 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports relating to the financial statements and schedule of Lineo, Inc. and the financial statements of Zentropic Computing, LLC and to all references to our Firm included in or made part of this registration statement and prospectus. ARTHUR ANDERSEN LLP Salt Lake City, Utah May 15, 2000 EX-23.3 29 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report relating to the financial statements of United System Engineers, Inc. and to all references to our Firm included in or made a part of this registration statement. ARTHUR ANDERSEN Tokyo, Japan May 15, 2000 EX-23.4 30 EXHIBIT 23.4 EXHIBIT 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report relating to the financial statements of Fireplug Computers Inc. and to all references to our Firm included in or made a part of this registration statement. ARTHUR ANDERSEN Vancouver, British Columbia May 15, 2000 EX-23.5 31 EXHIBIT 23.5 EXHIBIT 23.5 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated April 28, 2000, except as to the subsequent events described in Notes 3 and 8 which are as of May 1, 2000, relating to the financial statements of INUP S.A., which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" in such Registration Statement. THE STATUTORY AUDITOR Befec -- Price Waterhouse Member of PricewaterhouseCoopers Paris, France May 17, 2000 EX-23.6 32 EXHIBIT 23.6 EXHIBIT 23.6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report relating to the financial statements of the acquired portion of Moreton Bay Pty Ltd and to all references to our Firm included in or made a part of this registration statement. ARTHUR ANDERSEN Brisbane, Australia May 15, 2000 EX-23.7 33 EXHIBIT 23.7 EXHIBIT 23.7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report related to the financial statements of RT-Control, Inc. and to all references to our Firm included in or made a part of this registration statement. ARTHUR ANDERSEN Toronto, Canada May 15, 2000 EX-27.1 34 EXHIBIT 27.1
5 0001112479 LINEO, INC. 1,000 YEAR YEAR YEAR 6-MOS 6-MOS OCT-31-1997 OCT-31-1998 OCT-31-1999 APR-30-1999 APR-30-2000 NOV-01-1996 NOV-01-1997 NOV-01-1998 NOV-01-1998 NOV-01-1999 OCT-31-1997 OCT-31-1998 OCT-31-1999 APR-30-1999 APR-30-2000 0 117 68 0 30,464 0 0 0 0 0 0 148 922 0 759 0 13 68 0 68 0 0 0 0 0 0 294 960 0 32,860 0 181 239 0 482 0 96 65 0 102 0 465 1,134 0 41,202 0 1,648 3,117 0 1,576 0 0 0 0 0 0 0 0 0 0 0 0 0 0 15 0 18 18 0 20 0 (1,202) (2,001) 0 39,475 0 465 1,134 0 41,202 945 1,376 2,801 806 1,751 945 1,376 2,801 806 1,751 248 361 185 37 84 248 361 185 37 84 1,525 3,021 3,506 1,802 5,954 0 13 164 0 0 51 187 139 49 58 (877) (2,186) (1,054) (1,076) (4,242) 0 0 0 0 (140) (877) (2,186) (1,054) (1,076) (4,103) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (877) (2,186) (1,054) (1,076) (4,103) (0.05) (0.12) (0.06) (0.06) (0.21) (0.05) (0.12) (0.06) (0.06) (0.21)
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