Digging through IPO registrations is hard work; they tend to be long,
legalese-infested, and full of hype. Your editor, however, has been
spending much of the last year looking at lawsuit filings, which are a lot
worse. The chance to get into an IPO filing was too good to pass up, so,
when Lindows submitted
its form S-1
, we dug right in. Besides, how many SEC filings come with
Lindows proposes to sell $57.5 million worth of shares in its initial
company will be using WR Hambrecht's "OpenIPO" process, which seeks to
price the stock at the highest level the market will bear via an auction
process. Other companies
which have used this method include Salon and Andover.Net (which is now
OSDN and part of VA Software).
So what is Lindows? From the filing:
We are a developer and vendor of Linux-based operating systems,
application software and services designed specifically for desktop
and laptop computers in homes, schools and businesses. We use
technology and software developed by the collaboration of
independent Linux developers, referred to as the open source
community, with our own technology and software to offer
affordable, easy-to-use software products and services, many of
which are similar in feel and functionality to our higher-priced
competitors. The cornerstone of our product line is our Linspire
The company states that, as computers get cheaper, the cost of Windows
becomes more predominant, especially for desktop systems. Price pressures,
they say, will cause manufacturers and consumers to look more seriously at
Linux. And Lindows, of course, hopes to have the version of Linux which is
best suited to this market.
A big part of the Lindows plan is to get its distribution installed widely
in a short period of time. The company is targeting small computer
manufacturers, offering them a "low cost" licensing program. There is also
a deal with Seagate, which is pre-installing Linspire on some of its
drives. Remember, ten years ago, how you could buy disks with Linux
preinstalled? That market is back, it would seem.
Similarly, Elektra, a retail store chain with over 800 stores
throughout Mexico, sells a low-cost computer with Linspire
pre-installed. According to Elektra, since December 2003 and as of
April 2004, Elektra's best selling computer was the Linspire
system, outselling all other desktop computers it offers running
other operating systems.
How does Lindows plan to use the money?
We expect to use a majority of the net proceeds of this offering to
further develop the distribution channels for our Linux-based
operating system, application software and services, to expand our
sales and marketing activities, to continue to develop existing and
new products, technologies and services, to increase personnel, and
to repay substantially all of our outstanding debt obligations to
our founder of approximately $10,400,000.
In other words, the day Lindows goes public will be a good day for Michael
Robertson. Lindows says it may also use some of the money for
Lindows has to disclose its financial state as part of this offering, of
course. The company, it turns out, brought in all of $63,131 in 2002, but
that jumped up to just over $2 million in 2003. Even so, Lindows
managed to lose over $4 million that year. As of the end of 2003, the
company had $250,000 in the bank, a "working capital" figure of
$-1.8 million, and $4.7 million in debt. How that figure squares
with the $10 million owed to Mr. Robertson (and earning
10% interest) is not entirely
From the obligatory "scary risk factors" section:
- They just might run into some financial problems when trying to
compete directly with Microsoft for desktop sales.
- "We have not demonstrated the success of our open source
software business model, which gives our customers the right to freely
copy and distribute some of the software in our operating system and
in the applications we develop and distribute. There is uncertainty in
connection with open source business models, particularly as to
whether or not businesses based on open source software can operate
- Customers may not go for a model based on service and license fees.
- Their Japanese distributions are handled by Livedoor, which, having
just acquired Turbolinux, may lose interest in Lindows. Livedoor was
responsible for 11% of the company's 2003 revenue.
- Third-party applications for Linux may not be forthcoming.
- "We have received an audit report from our independent auditors
containing an explanatory paragraph stating that our historical losses
and negative cash flows from operations raise substantial doubt about
our ability to continue as a going concern."
- The trademark fight with Microsoft could yet sink them. They are
also, it appears, in a court battle with their insurance carrier over
whether the costs of the Microsoft litigation are covered.
Lindows claims a little over 250,000 installed systems. How do they know?
Each time a computer running the Linspire operating system is
connected to the Internet for the first time, our CNR technology
automatically records this connection on our servers. We refer to
this connection as a light up. We use light ups to monitor the
growth of our installed base, the effectiveness of our marketing
and distribution efforts and the quality and breadth of our
products and services.
Among other things, Lindows learns who sold you the system when the "light
These end-user systems generated some 1.7 million in revenue in 2003.
The company has spent some $1.4 million in legal fights with
Microsoft. It has extracted most of that back from its insurance carrier
but that case is still outstanding. If things go badly, Lindows may have
to repay the insurance carrier, which would hurt. There are still
outstanding Microsoft suits in Spain, Canada, and France, and a fight
in South Africa would appear to be in the works.
Lindows has also sued Xandros, as it turns out. It would appear that
Lindows loaned Xandros $750,000 which has not been repaid.
As of the end of March, Lindows has 62 employees, 38 of whom are software
engineers. The CEO is Michael Robertson, of course, who, under a new
agreement, is to be paid $410,000 per year, plus bonuses. Mr. Robertson
owns something over 48 million shares of the company - 81% of the
total. The number of shares to be sold in the IPO has not yet been
specified, but it seems clear that Mr. Robertson will remain in possession
of a majority of the outstanding shares. The next biggest holder is the
"Burcham Community Property Trust," which is controlled by the parents of
Mr. Robertson's wife. Kevin Carmony, the company's president, holds
3 million shares.
The aggregate message from this filing is clear: Lindows is trying to go
public now because it very much needs the money. The company has large
debts, a series of ongoing legal battles, and a need for money to carry its
business plan forward. If the IPO fails, Lindows will have to come up with
another source of funds in a hurry, or, as its accountants warn, its
"ability to continue as a going concern" will be very much in doubt.
Someday there will be a thriving market around
desktop Linux, and Lindows may, indeed, be well positioned to profit in
that market. Getting there will be a challenge, however.
Comments (16 posted)
It has been a busy week in the SCO world. Remember last October, when
BayStar and the Royal Bank of Canada invested $50 million into SCO?
That was when SCO's stock hit its high point; it has been all downhill from
there. On April 15, BayStar sent SCO
saying that it wants its money ($20 million) back.
BayStar has concluded that SCO is in breach of the investment agreement,
and thus must return the money - plus interest. BayStar has not said, in
any public way, how it believes that SCO has breached the agreement;
speculation centers, among other things, on SCO's creative representations
of its intellectual property rights and failure to disclose Novell's
letters contesting the ownership of the Unix copyrights.
RBC has not yet tried to
call back its share, but may well do so in the next few days.
Where this will go is hard to predict. Extracting money by force in
this way is not an easy thing to do; BayStar must face the threat that SCO
will choose to spend the money on more lawyers fighting the recall rather
than hand it over. BayStar's lawyers do have some leverage, however; among
other things, the amended
agreement reads (Section XV(g)):
[SCO] acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the holders of Series A-1
Preferred Stock and that the remedy at law for any such breach may
be inadequate. The Corporation therefore agrees, in the event of
any such breach or threatened breach, that the holders of Series
A-1 Preferred Stock shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach,
without the necessity of showing economic loss and without any bond
or other security being required.
That language would suggest that BayStar can go to a judge and have a good
chance at getting an injunction forcing the money to be escrowed until the
issue is resolved. Regular stockholders will lose out (not that they had
great prospects anyway) but BayStar and RBC will do better.
This recall has serious implications for SCO. If both investors pull their
money, SCO's remaining bank account will be tiny. The chances of finding
other investors are also tiny. SCO's legal fees are not going to get any
smaller anytime soon; the prospect of a legal battle with BayStar and RBC
can only make that problem worse. Unless some sort of more overt aid
comes from companies like Microsoft or Sun, SCO could find itself looking
at bankruptcy in the near future.
SCO's April 21 announcement
that its chief financial officer, Robert Bench, has been replaced may just
be coincidental. Mr. Bench will become the "acting vice president of
corporate development" until he retires later this year. His new
responsibilities will be to "focus on external growth opportunities and
industry partnerships" - scrambling for money, in other words. The new CFO
will be Bert Young, whose history with companies like Waste Management,
Inc. would seem to suit him well to SCO's way of business.
Red Hat, meanwhile, has filed a motion
for reconsideration in its suit against SCO. The company claims:
Red Hat will suffer manifest injustice from a stay, since SCO
apparently intends to continue to harass and threaten suit against
Red Hat's customers in other jurisdictions, while Red Hat's
declaratory judgment suit here, which was intended to prevent this
precise harm to it and its customers, is forced to languish.
Getting the judge to rethink her ruling (which put the case on hold until
the IBM case has run its course) looks like a difficult prospect, but Red
Hat had to try.
In the IBM case, the latest events have to do with IBM's subpoena for
information from S2 Strategic Consulting. S2, remember, is the company
that helped to bring Microsoft, BayStar, and SCO together, so it's not
surprising that IBM is interested in what was going on there. S2 is objecting
to the subpoena, stating that it is not part of this battle and that
much of the requested information is confidential. There is some
interesting information to be found in this document, however, including:
Without waiver of those objections, S2 responds that it has in its
possession, custody and control documents that entail
communications between it and Microsoft, that relate to parties in
S2 would appearing to be pushing for a protective order to keep these
documents from being publicly disclosed. Chances are it will succeed. So
we may never see just what was going on between these companies, but IBM
can be expected to have some fun with that information.
Finally, this whole mess has drawn the attention of another species of
shark: lawyers who do shareholder lawsuits. Among those trolling the
message boards for potential plaintiffs are
& O'Reilly and, inevitably, Milberg
Weiss Bershad Hynes & Lerach. If you were silly enough to buy
stock in SCO, believe that SCO should be held legally responsible for the
predictable loss of your money, feel like enriching this particular class
of lawyer, and believe that there might actually be something left for a
settlement with shareholders when the dust settles, these folks would like
to talk with you.
Comments (7 posted)
On Monday, Open Source Risk
(OSRM) put out several interesting press
. The company has "certified" that the Linux kernel is free of
"source code that could provide a basis for meritorious copyright
." OSRM has also announced the "Open Source Legal
Defense Center" (OSLDC) based in Washington D.C., which will offer
membership programs for developers and corporations that might find
themselves being sued by SCO or another company looking to make claims on
the Linux kernel. We contacted OSRM executive director John St. Clair and
OSRM director of research Pamela Jones about the announcements. Jones was
kind enough to respond to several questions via e-mail, and St. Clair took
the time to grant LWN a phone interview.
One might wonder how OSRM could "certify" that the Linux kernel is free of
infringement. According to St. Clair, OSRM is not saying that they have
proven that none of the code in the Linux kernel is tainted. However, he
says that the company has done due diligence and is willing to take
the risk of providing legal protection for copyright infringement claims
against the kernel. According to Jones:
OSRM's certification can never mean that there will be no claims in the
future; it means that they've taken a look and believe the risk is de
minimus and insurable, and OSRM is sufficiently confident that it is
willing to put its money where its mouth is.
St. Clair declined to provide specifics of the process that OSRM used to
research the Linux kernel, but he did say that OSRM has built up "an
extensive database of Unix variants... and compared that database against
two versions of the kernel, 2.4 and 2.6, to detect matches between those
two groups of source code." According to St. Clair, OSRM used
in-house technology "unique to OSRM in terms of
pattern-matching" and looked for straight text matches and
"more obfuscated" code that might be taken from Unix. We asked
whether OSRM might release the tools that they used for this research to
the community, but St. Clair said there were no plans to do so at this
We were also curious how the OSLDC would work for developers, and whether
$25,000 would be sufficient protection for developers if SCO or another
party were to sue them. According to St. Clair:
This will provide developers, who are off on their own many times, a
cost-effective way at $250 to be able to get advice and legal counsel with
respect to their contributions to the Linux kernel. Should they be served
with a subpoena or other legal action regarding their contributions they
would receive up to $25,000 in legal protection from that.
He said that the $25,000 amount should be "pretty sufficient to cover
much of their exposure." St. Clair stressed that the OSRM offering
is vendor-neutral, and allows developers and corporations to make changes
to the code and still receive protection, unlike some of the
vendor-specific indemnification plans. He also pointed out that OSRM is not
selling insurance, but rather "certifying and indemnifying our work
around the kernel and with these clients to provide them an indemnification
that we as OSRM have an insurance policy behind us that provides the
financial wherewithal to offer that indemnification."
Since much of Microsoft's FUD these days is aimed at convincing customers
that the Total Cost of Ownership (TCO) for Linux is higher than for
Microsoft products, we asked St. John whether it was likely that their
offering would be seen as raising the TCO of Linux. St. Clair said that the
Legal Defense Center membership fees shouldn't harm Linux in the TCO
discussion. "This is something that end users can choose to have or
not have, it's not automatically bundled as part of Linux." Even
adding in the cost of OSRM's offerings, St. Clair said that he believes
that Linux will still have a lower TCO than its competitors. He also said
that OSRM's offerings "put a stake in the ground" to show what
indemnification may cost, rather than an unknown figure that opponents may
exaggerate when debating TCO.
OSRM is not planning to limit itself to copyright issues or the Linux
kernel. We asked whether OSRM was planning to examine other open source
software commonly used with the Linux kernel, and whether the company would
be expanding its protection to patent issues. The answer is yes on both
counts. St. Clair told LWN that dealing with legal issues from patents is
absolutely in our plans," and Jones replied that she is
currently doing research on providing protection for patent issues:
Obviously, this is is a very large and complex undertaking that will
require help from numerous kernel developers, organizations, specialized
technical and legal experts, and hopefully volunteers in the community.
We will be asking for help finding and collecting prior art through our new
Grokline project, for example, which will go online shortly.
St. Clair said he believes that the SCO lawsuit will go away, but that SCO
has "pointed to a potential vulnerability" that will last
beyond SCO's suits. He said that OSRM also recognizes a need to go
"up the stack" of open source software beyond the kernel that
is also widely used. St. Clair said that he could not specify any software
that would be covered by OSRM beyond the kernel at the moment, or give a
timeline for announcing additional software.
Another area where OSRM is working, according to St. Clair, is in helping
companies with risk assessment and developing indemnification programs that
they can offer to their customers. He said that OSRM also helps
"place their risk with third parties to provide that
[indemnification] for their customers."
There is a "heavy amount of interest" in OSRM's offerings,
according to St. Clair. It will be interesting to see if OSRM is successful
in making a business out of offering indemnification for Linux and open
source software, and whether they remain the sole business that offers this
service if it proves to be popular.
Comments (1 posted)
Page editor: Jonathan Corbet
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