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Lineo scrambling for cash

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Whether one is running a start-up or a well-established enterprise, there is probably no worse feeling than that moment when an executive realizes there is not enough money in the bank account to meet the next payroll.

It was this experience that led Matt Harris to draft and distribute an e-mail last week that no chief executive officer ever wants to write.

In essence it stated Harris' company, Lindon-based Lineo, had not received a clear funding commitment (as hoped) and that there was no guarantee money would be in place to meet payroll on April 15.

"We don't expect anyone to work for free," Harris explained, hence he offered in his e-mail of last Monday that if employees didn't want to show up for work the next day, he would understand.

But an interesting thing happened after Harris clicked the send button on his e-mail application — 70 to 80 percent of Lineo's employees showed up the next day for work — even without a guarantee of pay.

"We've got a pretty amazing set of people here at the Lineo," said Mark Novakovich, Lineo's chief financial officer. "They're really committed to seeing this thing through."

For those of you readers not "up to speed" on the Lineo story, let me paint a quick background for you.

The true roots of Lineo go all the way back to 1994 when two former Novellians, Ransom Love and Bryan Sparks, formed Caldera, Inc. (today known as Caldera International).

In July 1996, Lineo was formed as a part of Caldera, with Sparks taking the Lineo helm and Love taking the Caldera helm. (FYI: Both entities focused on the "alternative" operating system, Linux, with Caldera targeting Linux software to run on personal computers and servers, and Lineo targeting embedded Linux software — software that generally runs in the background to control devices or systems.)

In August 1998, Lineo was incorporated as a separate entity as Caldera Thin Clients, and the Lineo name came into being in July 1999.

During its relatively brief history as an independent firm, Lineo has raised approximately $60 million in outside investments from a number of parties, including investments from Lindon-based Canopy Group.

As part of its growth strategy, Lineo filed an S-1 registration statement with the U.S. Securities and Exchange Commission on May 18, 2000 with the goal of raising $60 million in an initial public offering. At the time, the company had more than $30 million "in the bank."

Unfortunately, although no one knew it at the time, Lineo missed the IPO window. Five months later (October), Lineo amended its S-1 filing, and finally withdrew its S-1 in mid-January 2001.

Nevertheless, two months later, in March of 2001, Lineo broke ground on what would be a 90,000-square-foot headquarters in Lindon. During the 10 months since it had filed its S-1, Lineo had acquired eight "key companies" and had grown to more than 325 employees worldwide.

During the latter part of August 2001, Lineo announced it had closed a $20 million round of investments, including significant monies from strategic partners Hitachi and Sun Microsystems.

However, less than three weeks later and just days before the terrorist attacks of 9/11, Lineo announced it had laid-off 60 employees and that it planned to spin-off its hardware business, further eliminating 100 additional employees in the process.

By mid-December, the hardware spinout had been completed and the company also closed on an additional $3 million of funding.

So why were close to 80 percent of Lineo's employees at work on Thursday afternoon when I visited with Harris and Novakovich? Perhaps it's because of the $5 million in order backlog that Lineo has on its books. Or perhaps it's because its technology is winning rave reviews in the media, as seen in the recent write-up by CNET about the Sharp Zarus SL-5500, a nifty handheld computer running on Linux technology provided by Lineo (see CNET First Take review). Or maybe it's just because they believed that things would get turned around. And in that regard, their faith may have been rewarded as Lineo apparently received a funding commitment late Thursday afternoon that will keep the company running and its employees paid.

Harris spoke of a "recapitalization" of Lineo, a term often heard at venture capital-backed firms during the past 18 months. "At some point," he explained, "you have to clean-up the capital structure to help attract new investors."

Whether Lineo has actually attracted new investors is yet to be seen. But for now, it appears the company has been pulled back from the edge of the abyss and that the enthusiasm of most of its employees may yet be rewarded. Personally, I hope they're right.

David L. Politis is the president of Politis Communications, a public relations, investor relations and marketing communications agency specializing in the high-tech industry.

E-mail: dpolitis@politis.com