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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________ .
Commission file number: 0-29911
CALDERA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0617393
(State of incorporation) (I.R.S. Employer
Identification No.)
240 WEST CENTER STREET
OREM, UTAH 84057 (801) 765-4999
(Address of principal executive (Registrant's telephone
offices, including zip code) number, including area code)
SECURITIES PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, PAR VALUE $.001 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference on Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock (Common Stock)
beneficially owned by non-affiliates of the Registrant, as of January 24, 2001,
was approximately $32,967,000 based upon the last sale price reported for such
date on The Nasdaq Stock Market. For purposes of this disclosure, shares of
Common Stock held by persons who hold more than 5% of the outstanding shares of
Common Stock and shares held by officers and directors of the Registrant have
been excluded because such persons may be deemed to be affiliates.
The number of shares of the Registrant's Common Stock (par value
$0.001) outstanding as of January 24, 2001 was 39,669,552.
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Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement relating to the
Registrant's 2001 Annual Meeting of Stockholders, to be filed prior to February
28, 2001, are incorporated by reference in Part III of this Form 10-K where
indicated.
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Page
Number
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PART I.
Item 1. Business 4
Item 2. Properties 29
Item 3. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of Security Holders 30
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 30
Item 6. Selected Financial Data 30
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 44
Item 8. Financial Statements and Supplementary Data 46
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 81
PART III.
Item 10. Directors and Executive Officers of the Registrant 81
Item 11. Executive Compensation 82
Item 12. Security Ownership of Certain Beneficial Owners and Management 82
Item 13. Certain Relationships and Related Transactions 82
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 82
Signatures 86
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PART I
ITEM 1. BUSINESS
The following discussion of Caldera's business contains forward-looking
statements that involve risks and uncertainties. The Company's 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" in this Item 1, and the other documents we file with the Securities and
Exchange Commission, including our recent filings on Form 10-Q and Form S-4 and
amendments thereto.
OVERVIEW
Caldera enables the development, deployment and management of Linux
specialized servers and internet access devices that simplify computing. Our
Linux software products and service offerings are specifically designed to meet
the complex needs of eBusiness, or business over the internet. During 1999 and
2000, our OpenLinux technology received many awards and recognitions, including
Linux Magazine's Emperor Award, Internetweek's Best of the Best, Network World's
Blue Ribbon Award, CNET Editors' Choice Award, Highest Rated Linux Distribution
by VarBusines in 2000 Annual Report Card, The Linux Show's Best Distribution of
Millennium, Linux Journal's Product of the Year award at Comdex and Network
Computing's Well-Connected Award for Best Network Operating System. We
facilitate the adoption of Linux by providing educational programs designed to
help our customers to develop, deploy and administer Linux systems. We embrace
the open source model and participate as a key member of many open source
industry standards and partner initiatives, including Linux Professional
Institute, Linux Standards Base and Linux International Group. We primarily
distribute our products and services through our indirect distribution channel
model. Our customers include AST Computers, Cendant, First International
Computers, Gates/Arrow, IBM, Ingram Micro, MediaGold, MTI Technology
Corporation, Navarre Corporation, Support Net and Tech Data.
Fiscal information relating to each of our geographic segments for
fiscal years 2000, 1999 and 1998 is presented in Note 14, "Segment Information"
in the Notes to our Consolidated Financial Statements, included elsewhere in
this Form 10-K.
INDUSTRY BACKGROUND
The internet has accelerated the introduction of processes for managing
information, providing services and solutions and handling customers and has
changed the way software applications are developed and deployed. These
processes enable companies to utilize the internet to extend their businesses
closer to their customers, partners and suppliers and to communicate more
effectively with employees. The internet has also enabled and accelerated a
trend towards distributed software applications. With a distributed application,
instead of installing and running software on an individual desktop, end-users
can access the application from remote locations using the internet. The
internet makes the physical location of a software application or service
irrelevant to the end-user. Rather than individually installing programs on a
number of PCs, businesses can use the internet to allow end users to access a
single server maintaining the software. As a result of this trend, application
service providers, or ASPs, have emerged. An ASP is a service provider that
centrally hosts services and software applications and leases them to companies.
These companies can access these applications for a fee through the internet,
rather than buying and installing the programs. However, operating under
previous computing models, many companies have already invested tremendous
amounts of capital in their existing legacy computer systems and applications.
Therefore, new software applications must be
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developed to allow seamless integration between existing legacy systems and
applications being offered by ASPs over the internet.
Another trend in distributed applications is the advent of thin
appliance servers, or specialized servers. These specialized servers perform
specific applications, such as file and print sharing, secure internet services,
backup services and electronic mail services. Companies are realizing that they
can deploy efficient, discrete applications on specialized servers and do not
need to install massive, costly, multi-functional systems merely to install a
new application or add a particular function. Companies have started using
specialized servers to administer the new eBusiness software applications that
are emerging. Having separate servers for each application improves performance
and increases stability, while decreasing overall operating and maintenance
costs.
In addition, the proliferation of information on the internet has
driven the need to customize information for individual use. As a result,
manufacturers have developed ways to separate the visual elements of a standard
PC program from its computing functions, allowing most of the computing function
to be performed remotely. This has facilitated the creation of alternative
internet access devices for individuals, such as personal digital assistants,
internet-capable cellular telephones and television set-top boxes. These
internet access devices are far less costly than personal computers and allow
more users access to the internet and the ability to participate in eBusiness.
Internet devices are becoming popular worldwide as a way of getting businesses
and consumers connected to the new eBusiness economy.
The trend towards distributed software applications and specialized
servers and the proliferation of internet access devices have increased
companies' ability to conduct eBusiness and consumers' access to eBusiness. The
dynamic and fast changing nature of eBusiness requires an operating system, the
software that enables a computer and its various components to interact, that
can change with the accelerated evolution of eBusiness. The optimal operating
system must enable companies to connect specialized servers and internet access
devices to the internet network to conduct eBusiness. It must be customizable to
adapt to the changing software applications environment, shifting hardware
infrastructures and emergence of new internet access devices. It must be
scalable to accommodate the growing number of users and the ways that they
access the internet. The optimal operating system must be highly stable and easy
to maintain to minimize overall operating and maintenance costs. It must allow
for rapid deployment and development and be easily upgradeable to keep pace with
the changing needs of eBusiness. Finally, this operating system must interface
with existing systems and embrace open technical and communications standards
like Java and extensible mark-up language, or XML, to take full advantage of the
internet.
Linux is an operating system well suited for eBusiness. The term open
source applies to software that has its internal source code open to the public
for viewing, copying, examining and modification. As a result, the Linux source
code is available for download over the internet. Open source code allows
thousands of developers around the world to continually collaborate to improve
and enhance the software. The internet has facilitated and greatly enhanced this
collaborative environment. Benefits of Linux include:
- comprehensive internet functionality;
- flexibility and customizability;
- high scalability;
- stability;
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- interoperability with multiple systems and networks;
- multi-appliance capability, including internet access devices;
- low acquisition and maintenance costs; and
- compliance with technical and communications standards.
Despite these benefits, Linux as an open source system is not without
drawbacks. Linux has not yet been widely adopted by business due to:
- the absence of Linux products tailored for business;
- the fragmentation of Linux offerings;
- inadequate education and training;
- the lack of proper distribution channels for Linux solutions;
- the lack of technical knowledge and support;
- difficulty in management and deployment; and
- the limited number of applications available for use on Linux.
Historically, business users have lacked a Linux solution that suits
their needs. For Linux to fully support eBusiness, a solution must consist not
only of advanced technology but also should be enhanced and tailored for
business. This solution must promote the benefits of Linux for eBusiness and
provide the proper education and training to facilitate adoption. Proper
distribution channels are required to facilitate access to the business user.
The Linux for eBusiness solution must be able to accommodate business
applications and be able to interoperate properly with the diverse environment
of internal corporate information systems and the internet. It must have the
flexibility to be maintained centrally or managed remotely. Finally, a solution
must adhere and conform to commercial standards to incorporate the latest
technological advancement and ensure wide acceptance.
THE CALDERA SYSTEMS SOLUTION
We develop and market software based on the Linux operating system and
provide related services that enable the development, deployment and management
of Linux specialized servers and internet access devices that simplify
computing. We believe that our Linux solution is a comprehensive solution for
eBusiness. Key benefits of our solution include:
Focused business framework. We believe we were the first to tailor
Linux open source code from various sources into sound, discrete products that
are usable, deployable and manageable for eBusiness. Our development team
consists of experienced Linux engineers and business professionals. We develop
our products by first carefully choosing the Linux features that are the most
relevant and useful for eBusiness. Then we assemble the code so that it is
logically arranged and works together as seamless applications in which source
and binary code match for logic and order. Our products are then tested for
quality and performance. This enhances reliability and reduces the need for
technical support when used under strenuous business conditions. This process,
known as self-hosting, is unique in the Linux community and accounts for the
high levels of stability and performance of our products. Our products are also
designed to be interoperable with multiple platforms to enable businesses to
make efficient use of existing information technology investments.
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Effective distribution channel. We provide products and services to the
people who serve the business community. Most of our products that are purchased
by corporate information systems departments are sold through our distribution
channel to electronic solution providers. We define electronic solution
providers to include value added resellers, or VARs, original equipment
manufacturers, or OEMs, internet service providers, or ISPs, corporate
information technology managers and partners, ranging from independent local
technical specialists to large system integrator organizations, that offer
value-added solutions for eBusiness. Business customers often rely on solution
providers to recommend which technology to purchase. We provide solution
providers with products, third-party applications, education, training and tools
to effectively facilitate or offer a Linux solution for eBusiness. Solution
providers benefit from the lower maintenance and support costs necessary to
maintain our Linux solution. We offer our services to solution providers on a
worldwide basis.
Comprehensive product offerings. We believe that our OpenLinux
technology is the most advanced for eBusiness. OpenLinux is the technology
foundation on which we are able to build multiple products that perform
different tasks. Each product has specific components that can be modified. For
example, our desktop product can be modified to perform client specific
functions such as running business automation applications or accessing the
internet as an email client on hand-held appliances. Our server product contains
modular components that can be configured to run specialized servers such as an
email server or a web site server. We continually enhance the OpenLinux
technology through our development centers in Germany and the United States. As
a result, we are able to incorporate the latest Linux enhancements or
modifications into our products. Our business experience enables us to build
relevant business enhancements to Linux through add-on segments of code that
connect to the core source code. These enhancements include web administration
applications, the Caldera Systems open administration system, and an easy-to-use
Linux installation wizard. We also offer our products in multiple language
versions.
Complementary value-added services. In order for businesses to
implement our product offerings, we provide a wide range of valuable services.
We believe that our service offerings provide significant benefits for
eBusiness. These service offerings include:
- Technical Support -- Our technical support provides assistance during
installation and operation of OpenLinux;
- Consulting and Custom Development -- Our consultants have extensive
technological and business knowledge, which allows us to assist our
electronic solution provider customers in implementing Linux solutions;
- Hardware Optimization and Certification -- Our consultants can optimize
OpenLinux for a specific hardware platform and provide a rigorous testing
and certification process; and
- Documentation -- We provide consistent and up-to-date documentation on
Linux that is not readily available in the open source development
community.
Comprehensive, distribution-neutral education and training. Many
companies are delivering different versions of Linux called distributions. We
provide a comprehensive distribution-neutral training program for Linux. Our
courses focus on educating and training the business community on Linux's
benefits for business use. We offer a comprehensive set of courses designed to
prepare students to develop, deploy and manage Linux in a business environment,
including system, network and internet administration and programming. A student
who has successfully completed our courses will be proficient with the leading
distributions of
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Linux. We offer high-quality instructor-led training through our own training
center at our headquarters and also offer our educational programs indirectly
through our Caldera Open Learning Providers around the world.
Business community catalyst and open source advocate. We believe we
were the first Linux provider to introduce an open source operating system
designed for the business environment. By demonstrating to key information
technology companies such as Corel and Netscape that open source systems can
work well with proprietary systems, we believe that we have sparked the interest
of more conservative technology adopters and accelerated acceptance of Linux for
business use. We help port, or convert, business applications to the Linux
platform and offer ways to incorporate those products into existing systems. We
are a major driver of Linux standards based initiatives such as Linux
Professional Institute, or LPI, an independent organization dedicated to the
establishment of professional certification standards for Linux professionals,
and Linux Standards Base, or LSB, an initiative that is designed to standardize
application development for the Linux platform. An application that meets all
the criteria for LSB should work on all compliant distributions of Linux. If LSB
is widely adopted, we believe it will significantly reduce the fragmentation of
Linux.
We fully embrace the open source model and continuously contribute
tools and technology to the open source community. We give away CD ROMs
containing our Linux operating system at trade shows and allow it to be freely
downloaded from the internet to encourage interest. We foster multiple
development projects over the internet and help each project progress smoothly.
SOFTWARE PRODUCTS
We develop, market and support Linux products and solutions
specifically designed to meet the complex needs of eBusiness. According to PC
Data, during 1999, Caldera was third in sales of Linux operating systems in the
United States, both in terms of units sold and aggregate dollar amount. Our
products and solutions integrate both commercial and open source software
products developed by third parties and us. For example, we have included
applications that we have open sourced, such as Linux wiZARD (LIZARD), our
award-winning graphical Linux step-by-step installation tool. We apply
development and testing procedures to the open source code included in our
products similar to those procedures applied to commercial products. This
process known as self-hosting is unique in the Linux community and accounts for
the high levels of stability and performance of our products. Our rigorous
development procedures result in a highly consistent product that enables easier
and more rapid customization, integration and support of our solutions. Our
products are designed to work both individually and together to provide a
rapidly expandable platform as enterprises extend their eBusiness
infrastructure.
OpenLinux eDesktop 2.4
We first released our principal product, OpenLinux, a Linux operating
system, in calendar year 1995. In March, 2000, we began shipping our newest
update of OpenLinux, OpenLinux eDesktop 2.4. OpenLinux eDesktop 2.4 is an
integrated and pre-tested collection of approximately 300 business-relevant
third-party software components, which provide for a variety of functions that
can be utilized either on a single desktop computer or in a networked
environment. We have historically developed OpenLinux for the first-time Linux
user, which predominantly has come from a Windows desktop environment. OpenLinux
eDesktop 2.4 is currently available for the Intel and Sun SPARC platforms.
Examples of some of the key components of OpenLinux eDesktop 2.4 and the
functions they perform include:
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Open Source Component Function
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KDE Graphical desktop
Linux Kernel (Version 2.2.10) Operating system core
LIZARD Installation software
Netscape Communicator 4.61 Web browser
Apache Web server
Sendmail E-mail routing software
Commercial Components Function
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StarOffice 5.1 (personal edition) Suite of office applications
Corel WordPerfect 8.0 (personal edition) Word processor
PartitionMagic Hard-drive partitioning
BootMagic Boot-up manager
Applixware 4.4.2 office suite (trial version) Suite of office applications
OpenLinux eServer 2.3
OpenLinux eServer 2.3 is targeted at solution providers, system
integrators and resellers who provide specialized, thin and high-end servers to
their customers. eServer supports server-oriented hardware. It is a
component-based server operating system designed for OEMs, solution providers,
system integrators and resellers and makes Linux server solutions easy to
install, configure and operate. It is readily customizable and, in particular,
has been developed for use by AST Computers, Fujitsu and Motorola. OpenLinux
eServer 2.3 has been shipped to strategic partners such as Fujitsu, IBM and
Motorola and began shipping in late January 2000. Examples of some of the key
components of OpenLinux eServer 2.3 and the functions they perform include:
Component Function
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Webmin Remote administration tool
Linux Kernel (Version 2.2.14) Operating system core
BIND 8 DNS server Domain Name server
DHCP server Configuration Protocol server
Apache Web server
Sendmail E-mail routing software
FTP server FTP server
INN News server
Squid Web proxy server
PPP Dial-in server
SAMBA File and print server
Majordomo List management server
MySQL Database software Database software
IBM Visual Age Java Programming language
Volution
Volution is a comprehensive Linux management solution that reduces the
cost of ownership of implementing and managing Linux systems. Volution does so
by enabling secure, remote management of multiple Linux systems through a
browser. It enables administrators to
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manage the network with policies, without having to individually manage each
system. Volution is distribution-neutral, and designed to work with all major
Linux distributions, and provides broad management functions. Volution provides
the capabilities for administrators to effectively manage their systems through
hardware and software inventory, electronic software distribution, health
monitoring of Linux systems, printer configuration and scheduled scripted
actions. Volution began shipping in late January 2001.
SERVICES
Linux Education and Training Services
Our educational programs and products are designed to help our
customers learn to develop, deploy and administer Linux systems. Our courses
provide preparation for Linux certification tests being provided by the Linux
Professional Institute, an independent organization. We provide a comprehensive
training program for Linux.
We provide Linux training through our training center in Orem, Utah and
through 94 Caldera Open Learning Providers located in the United States and
abroad. Caldera Open Learning Providers are independent centers that we have
authorized to provide courses that we have developed. Currently, we offer eight
separate courses relating to Linux training and network administration, which
are categorized by their educational objective. The three categories of courses
we provide allow multiple educational tracks, including:
- Linux certification;
- system administration; and
- Linux developer training.
eBusiness Consulting, Custom Development and Optimization Services
Our eBusiness consulting services stem from our experience testing and
integrating software products to work in a Linux environment. We assist ISVs and
solution providers by helping them in creating customized internet solutions
that they can then pass along as products and solutions for their customers.
Examples of the eBusiness consulting services we provide include:
- Customization and optimization of our products to support a client's
proprietary system or configuration.
- Assessment services relating to the proposed migration of a client's
software for use with Linux.
- Porting services for customers migrating their software to Linux. Fees
are billed on a daily, weekly or monthly basis.
Technical Support
Customers who purchase OpenLinux products through our distribution
channels are entitled to 90 days or five incidents of e-mail or internet
technical support at no additional charge. We support solution providers with
second-tier support. Customers seeking additional technical support directly
from us may enter into service agreements that best suit their needs. Examples
of our service plans include:
- yearly-unlimited telephone support agreements for $950 per system;
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- yearly-unlimited e-mail support agreements for $495 per system;
- pay-as-you-go support agreements starting at $150 per incident;
- telephone support for up to 5, 10 or 20 calls ranging in price from $625
to $1,500 per call pack; and
- 7 day, 24 hour telephone support available at a 50% premium to the base
rates.
AWARDS AND RECOGNITION
Caldera Systems and its products have received several recognitions and
awards, including:
- CNET Editor's Choice Award (October 2000);
- Network World Blue Ribbon Award (September 2000);
- Linux Magazine's Emperor Award (May 2000);
- PC ONLiNE Testsieger's (April 2000);
- Listing in Upside Magazine's Millennium 2000 eBusiness 150 (March 2000);
- Andover.net Dave Central's Best of Linux winner (February 2000);
- Linux Magazine's Cool Product Award (February 2000);
- PC Direct (Ziff-Davis) Best Buy 2000 award (January 2000);
- Internetweek's Best of the Best award for best software for 1999
(December 1999);
- The Linux Show's Best Distribution of Millennium (December 1999);
- Linux Journal's Product of the Year award at Comdex (November 1999);
- Listing in PC Magazine's Top 100 Technology Companies That Are Changing
the World (October 1999);
- Linuxworld Editor's Choice Award: Best Client and Distribution (August
1999);
- Network Computing's Well-Connected Award for Best Networked Operating
System (May 1999); and
- MikroPC's Product of the Year Award (1999).
CUSTOMERS
We sell our products primarily through indirect channels. Our customers
include:
AST Computers Ingram Micro
Cendant MediaGold
First International Computers MTI Technology Corporation
Frank Kasper & Associates Navarre Corporation
Gates/Arrow Support Net
IBM Tech Data
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Navarre Corporation and Frank Kasper & Associates each accounted for
more than 10% of our revenue in fiscal 1999. Navarre Corporation was the only
customer that accounted for more than 10% of our revenue in the year ended
October 31, 2000. Substantially all of the revenue we have received from these
two parties reflects revenue from sales of our Linux products.
STRATEGIC TECHNOLOGY ALLIANCES
We have business alliances with key global industry partners, including
Citrix Systems, Fujitsu, IBM, Intel, Novell, Oracle and Sun Microsystems. These
relationships encompass product integration, two-way technology transfers,
channel partnerships and revenue generating initiatives in areas of product
bundles, training and education, consulting and third-level technical support
for our partners. The objectives of these partnerships include:
- providing complete hardware and software Linux solutions;
- licensing our education materials to be used in our partners' training
centers;
- supporting our partners' Linux engineering efforts as well as their
end-user customers; and
- mutually developing our sales and distribution channel by coordinating
marketing initiatives in creating demand for our products.
In November 1999, we entered into a contributor agreement with Intel to
port OpenLinux products, including OpenLinux eServer, to Intel's IA64 platform.
In addition we will be porting the Java Development Toolkit and Java Runtime
Environment to the IA64 platform.
These relationships are non-exclusive, leaving us opportunities to
explore other strategic partnerships on a global level. In particular, in
January 2000, we entered into license agreements with Sun Microsystems which
allow us to create and commercially distribute applications developed utilizing
Java2 Standard Edition for Linux, Java HotSpot Performance engine, EmbeddedJava
and PersonalJava for use on the Itanium (Merced), PowerPC, Sun x86, and
UltraSPARC processors. These licenses are non-exclusive. In connection with the
licenses relating to the Java2 Standard Edition and the Java HotSpot Performance
Engine, we paid Sun Microsystems $1.3 million.
PROPOSED AGREEMENT TO ACQUIRE THE SANTA CRUZ OPERATION, INC. SERVER AND
PROFESSIONAL SERVICES DIVISIONS
In August 2000, we entered into a reorganization agreement with The
Santa Cruz Operation, Inc., or SCO. The reorganization agreement provides for a
combination in which Caldera International, a new entity, would purchase SCO's
server and professional services groups by issuing to SCO and its employees who
join Caldera International approximately 18.2 million shares, or approximately
28.6% on a fully diluted basis, of Caldera International's common stock
(including approximately 2.0 million shares reserved for employee options
assumed or replaced by Caldera International for options currently held by SCO
employees joining Caldera International) and paying $7 million cash to SCO. In
the combination, each share of Caldera Systems common stock would be exchanged
for a share of Caldera International common stock.
The server and professional services groups of SCO operate as a
provider of server software and related support for networked business
computing, and is a leading provider of UNIX server operating systems through
their UnixWare line of products. If the combination
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closes, Caldera International will have a new strategy based upon the
integration of Unix and Linux products into broad-based business solutions. It
is currently not known if and when the combination will occur. The closing of
the combination remains subject to ongoing regulatory review and approval by the
shareholders of SCO and the stockholders of Caldera.
In conjunction with the signing of the reorganization agreement,
Caldera and The Canopy Group, Inc., our majority stockholder, agreed to loan to
SCO $7 million and $18 million, respectively. If the combination is completed,
our advance to SCO would be forgiven and would be treated by Caldera
International and SCO as the cash portion of the consideration to SCO for the
server and professional services groups. On January 26, 2001, we loaned the
$7.0 million to SCO.
INDUSTRY PARTICIPATION
We participate as a key member of many industry standard, partner and
open source initiatives, including the following:
- Linux Professional Institute, an independent organization dedicated to
the establishment of professional certification standards for Linux
professionals;
- Linux Standards Base, a Linux community initiative dedicated to
addressing problems and defining standards associated with the many
versions of Linux distributions currently in the marketplace;
- Linux Internationalization Group, a voluntary Linux community working
group, of which we are one of the founding members, dedicated to
addressing interoperability, internationalization and localization of
Linux applications in the international context;
- IA64 Linux Project, an Intel-sponsored initiative to port the Linux
kernel to the Intel Itanium processor;
- Distributed Management Task Force, an independent organization including
most of the largest software and systems vendors in the world, dedicated
to creating new standards for computer systems management. We are working
with this task force to incorporate into our OpenLinux products
commonality standards already in place among enterprise-level businesses;
and
- Java, Sun Microsystem's proprietary software programming language. We
plan to incorporate standards that will allow the majority of current
Java applications to run on Linux and to provide for developers to create
new applications in Java for use on Linux.
SALES, MARKETING AND DISTRIBUTION
Our focus on Linux for eBusiness enables us to promote the development,
deployment, and management of Linux appliances and devices that facilitate the
eBusiness infrastructure. Our primary strategy has been to distribute our
products and services through our indirect distribution channel model.
The majority of our revenue comes from distributors. As of October 31,
2000, we had approximately 38 distributors worldwide who purchase directly from
us. These distributors in turn sell to approximately 4,000 retail outlets in the
United States and approximately 900 equivalent sites internationally. On a
worldwide level, we utilize over 700 VARs to promote
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technology and service integration of our products and solutions to their
end-user business customers.
For the fiscal year ended October 31, 1999, our distributor channel
represented 74% of our total software and related products revenue and included
distributors such as Frank Kasper & Associates, Ingram Micro, Navarre
Corporation and Tech Data, domestically, and MediaGold in Europe. Sales through
this distributor channel represented 85% of our total software and related
products revenue for the year ended October 31, 2000. We plan to continue to
recruit new distributors to introduce OpenLinux technology into new markets,
including into foreign countries with language specific products.
We sell directly to OEM partners, including AST Computers in the United
States and First International Computers in Taiwan. These arrangements are
typically royalty-based and our revenue is determined by volume of OpenLinux
products shipped on our partners' hardware or bundled together in distribution.
Our marketing efforts support our sales and distribution efforts,
promotions and product introductions and include marketing development funds to
push OpenLinux products. Pull marketing, apart from delivering quality products
and services needed in the marketplace, is focused on branding, solutions,
advertising, tradeshows, press releases, white papers and marketing literature.
We focus our marketing on public relations and press relations extensively to
communicate the progress we are making in the business arena. In particular, our
marketing strategy consists of:
- branding "Linux for eBusiness" through public relations announcements and
advertising;
- announcing technology and solution awards;
- creating an effective partner program to generate brand awareness and
promote our products; and
- increasing public awareness through speaking engagements at strategic
tradeshows and conferences worldwide and participating in technology
forums.
Our web site, www.calderasystems.com, is focused on strengthening our
Linux for eBusiness strategy. In addition to allowing visitors to download free
software, our web team is expanding our current web strategy of branding, direct
sales through our online store and linking customers to channel partners.
Through our web site, we plan to join together ISVs, hardware partners,
customers, channel players, developers, ISPs and other Linux players who want to
connect for business reasons and to generate royalties based on introductions,
advertising and transactions.
COMPETITION
The market for eBusiness solutions is emerging rapidly and is therefore
intensely competitive, characterized by rapidly changing technology and evolving
standards. We expect competition to increase both from existing competitors and
new market entrants. We face direct competition in the area of specialized
servers from other providers of solutions for specialized servers. We also face
competition from traditional, non-Linux operating systems, other Linux operating
systems, technical support providers and professional services organizations.
Cygnus Solutions, VA Linux and Wind River provide solutions embedded
into their hardware offerings. In addition, Sun Microsystems has announced plans
to open source its
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Solaris Unix operating system in an attempt to attract more developers to the
platform. Many of these competitors are large, well-established companies with
significantly greater financial resources, more extensive marketing and
distribution capabilities, larger development staffs and more widely recognized
brands and products.
Companies currently offering competitive non-Linux operating systems
include providers of hardware-independent multi-user operating systems for Intel
platforms, such as Microsoft, IBM and Novell. They also include providers of
proprietary versions of the UNIX operating system, such as AT&T, Compaq,
Hewlett-Packard, IBM, Olivetti, Sun Microsystems and Unisys. These competitors
often bundle their operating systems with their hardware products, creating an
additional barrier for us to overcome in penetrating their customer bases. There
are also significantly more user applications available for competing operating
systems, such as Windows NT and UNIX, than there are for Linux operating
systems.
In the Linux operating system market, our competitors include Corel,
MacMillan, Red Hat, SuSE and TurboLinux. In addition, IBM and Sun Microsystems
have announced plans to invest significant resources into the development of
Linux. Several of these competitors have established customer bases, strong
brand names and continue to attract new customers. Red Hat, in particular, has
had more visibility and a stronger brand. In addition, this market is not
characterized by the traditional barriers to entry that are found in most other
markets, due to the open source nature of our products. For example, anyone can
readily download the Linux kernel and packages from the internet, optimize and
add value to it, and thereafter market their own version of the Linux operating
system. Similarly, anyone can copy, modify and freely redistribute the open
source components of OpenLinux. Accordingly, new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Our
product, however, is specifically suited for and targeted toward the
requirements of business. In addition, our education and training program is
more pervasive and our distribution channel is more developed and mature. We
believe that these three key advantages give us a competitive advantage in the
Linux operating system market.
We also compete for service revenue with a number of companies that
provide technical support and other professional services to users of Linux
operating systems, including some original equipment manufacturers with which we
have agreements. Many of these companies have larger and more experienced
service organizations than we do. We also may face competition on this front
from companies with larger customer bases and greater financial resources and
name recognition, such as Corel, Cygnus Solutions and Sun Microsystems, which
have indicated interest in the Linux operating systems market.
Based upon these market factors, we believe that the most significant
criteria affecting the competitive landscape for our products include:
- networking capability;
- distribution strength;
- market perception of vendor;
- education and training;
- ease of customization;
- commercial development process;
- product performance, functionality and price;
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- education and training;
- ease of use;
- breadth of hardware compatibility;
- quality of support and customer services;
- strength of relationships in the open source community; and
- availability of user applications.
We believe that we compete favorably with many of our competitors in a
number of respects, including product performance, functionality and price,
networking capability and breadth of hardware compatibility. To solidify and
improve our competitive ability, our near-term strategy is to strengthen our
existing strategic relationships and enter into new ones in an effort to enhance
our name recognition, expand our distribution capabilities and attract more
attention to the open source movement, which in turn should create additional
incentives for software developers to write more applications for OpenLinux.
SOFTWARE ENGINEERING 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 Linux solutions and input from key customers. We seek to deliver
consistently strong Linux products targeted at specific usage as opposed to the
more traditional one-size-fits-all Linux distribution in which the customer may
be required to re-build the kernel to attain the proper configuration. This
product segmentation of eServer and eDesktop allows us to tailor the delivery of
the product to work optimally as installed off the CD, yet continue to provide
customization, one of the essential values of Linux.
One of our key strategies has been to focus on identifying and removing
the traditional barriers for mass deployment of Linux operating systems (e.g.,
installation, system configuration and management). The delivery of the
award-winning LIZARD installation system, initially shipped in OpenLinux 2.2 in
April 1999, successfully paved the way for a much broader base of users to
experience Linux with a much lower learning curve. Going forward, we intend to
continue to apply this philosophy as we work toward addressing the broader
issues of system configuration management and administration, specifically as it
pertains to the deployment of eServer-based information appliances and eDesktop
platforms. Our latest component of this architecture, the LUI (Linux Unattended
Install) was developed in cooperation with a large European University to allow
many systems (eServer or eDesktop) to be installed and upgraded without
requiring direct user interaction. We intend to introduce new components with
each subsequent product.
Our major commitment in the area of research is how to extract the
management aspects of individual systems, new and legacy applications to enable
the deployment, management and administration of platforms and applications to
be handled from anywhere on the network. Leveraging Linux, open source and open
standard technologies is a way of providing necessary infrastructure components.
We believe that contributing back to Linux much of our research will facilitate
more of an industry standard as well as industry cooperation.
Our product development process is modeled to standard, commercial
software engineering practices. We apply these practices to both documentation
and procedures to ensure consistent product quality. As a result, we are able to
offer our platform products to OEM
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customers in several configurations without significant effort. We are also able
to move our platform products efficiently to new processor platforms as new
business opportunities arise.
As of October 31, 2000, we employed an in-house engineering staff of 63
in addition to maintaining a contract consulting arrangement with a Japanese
firm for product development needs specific to the Japanese market. The
engineering staff consists of two primary teams, the U.S. Engineering group
located near corporate headquarters in Utah and the European group located in
Erlangen, Germany. Our staff members possess a broad range of both Linux and
other industry experience.
INTELLECTUAL PROPERTY
Our success depends significantly on our ability to protect our
trademarks, trade secrets, and certain proprietary technology. To accomplish
this, we rely primarily on a combination of trademark and copyright laws and
trade secrets. We also require that our employees and consultants sign
confidentiality and nondisclosure agreements. We generally regulate access to
and distribution of our documentation and other proprietary information.
Certain components of OpenLinux have been developed and made available
for licensing under the GNU General Public License and similar licenses, which
generally allow any person or organization to copy, modify and distribute the
software. The only restriction is that any resulting or derivative work must be
made available to the public under the same terms. Therefore, although we retain
the copyrights to the code that we develop ourselves, due to the open source
nature of our software products and the licenses under which we develop and
distribute them, our collection of trademarks constitutes our most important
intellectual property.
We own the registered trademark "CALDERA(R)" and also have license
rights relating to "CALDERA SYSTEMS(TM)", a pending trademark application. In
September 1999, the United States Trademark Office, or USTO, rejected our
applications for "OpenLinux(TM)" and "Linux for Business(TM)". We filed our
response with respect to the rejection of the "OpenLinux" trademark on March 28,
2000. Our trademark application for "Linux for Business" was suspended on April
24, 2000, pending disposition of prior applications. We have recently been
informed by the USTO that resolution of these applications will remain pending
until a determination has been made by the USTO as to the treatment of LINUX
related trademark applications generally. In Europe, the European Community
Trade Marks Office has approved our application for registration of the
trademark "OpenLinux(TM)".
Despite our efforts to protect our trademark rights, unauthorized third
parties have in the past attempted and in the future may attempt to
misappropriate our trademark rights. We cannot be certain that we will succeed
in preventing the continued misappropriation of our trade name and trademarks in
these circumstances or that we will be able to prevent this type of unauthorized
use in the future. The laws of some foreign countries do not protect our
trademark rights to the same extent as do the laws of the United States. In
addition, policing unauthorized use of our trademark rights is difficult,
expensive and time consuming. The loss of any material trademark or trade name
could have a significant negative effect on our business, operating results and
financial condition.
We do not believe that our products infringe the rights of third
parties. However, our products are comprised of many distinct software
components, developed by many independent parties, and therefore third parties
have in the past asserted, and may in the future assert infringement claims
against us which may result in costly litigation or require us to obtain a
license to third-party intellectual rights. There can be no assurance that such
licenses will be
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available on reasonable terms or at all, which could have a negative effect on
our business, operating results and financial condition.
GOVERNMENT REGULATION
Our success depends on the Linux operating systems industry, which in
turn depends on increased use of the internet for eBusiness and other commercial
and personal activities. Laws and regulations have been proposed in the United
States and Europe to address privacy and security concerns related to the
collection and transmission of information over the internet. The United States
Congress recently enacted internet laws regarding children's privacy and the
transmission of sexually explicit material. The Federal Trade Commission, or
FTC, may reconsider regulations that may require companies to:
- give adequate notice to consumers regarding information collection and
disclosure practices;
- provide consumers with the ability to have personal, identifying
information deleted from a company's database;
- clearly identify affiliations or a lack thereof with third parties that
may collect information or sponsor activities on a company's website; and
- obtain express parental consent prior to collecting and using personal
identifying information obtained from children under 13 years of age.
Under the proposed FTC regulations, businesses that violate the
regulations could face monetary fines. At the international level, the European
Union, or EU, has adopted a directive that imposes restrictions on the
collection and use of personal data from individuals in EU member countries.
This EU directive could affect internet businesses elsewhere that have users in
one or more EU member countries.
The proposed FTC regulations, if adopted, or the EU directive, as
adopted, could adversely affect the ability of internet businesses to collect
demographic and personal information from users, which could have an adverse
effect on the ability of internet businesses to target product offerings and
attract advertisers. Any of these developments could harm the results of
operations and financial condition of internet businesses and impair the growth
of the internet.
In addition to government regulations related to internet privacy
concerns, it is possible that any number of additional laws and regulations may
be adopted with respect to the internet covering issues such as obscenity,
freedom of expression, pricing, content and quality of products and services,
copyright and other intellectual property issues and taxation. As an example, a
number of proposals have been made at the federal and local level and by various
foreign governments to impose taxes on the sale of goods and services and other
internet activities. Recently, the U.S. Internet Tax Information Act was
enacted, which places a three-year moratorium on new state and local taxes on
internet commerce. However, the moratorium does not prevent the U.S. federal
government or foreign governments from adopting laws that impose taxes on
internet commerce.
The law of the internet still remains largely unsettled, even in areas
where legislative action has already been undertaken. The passage of new laws or
changes to existing laws intended to address use of the internet could create
uncertainty in the marketplace, increase the cost of doing business on the
internet, increase legal liabilities from doing business on the internet or in
some other manner have a negative impact on internet commerce and substantially
impair its growth. In addition, the growth and development of the market for
online commerce may initiate
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more stringent consumer protection laws, both in the United States and abroad,
which may impose additional restrictions on companies conducting business
online.
Since many of our customers conduct much of their business over the
internet, if use of the internet decreases, our customers may see a decreased
demand for their products. In that event, our customers may purchase fewer
licenses for our products, which would cause our license and services revenue to
fall.
EMPLOYEES
As of October 31, 2000, we had a total of 178 employees. Of the total
employees, 63 were in software engineering, 50 in sales and marketing, 19 in
customer service and technical support, 11 in operations and 35 in finance and
administration. From time to time we also employ independent contractors to
support our professional services, product development, sales, marketing and
business development organizations. Our employees are not represented by any
labor union and are not subject to a collective bargaining agreement, and we
have never experienced a work stoppage. We believe our relations with our
employees are good.
RISK FACTORS
We are a new company with a limited operating history, which may make it
difficult for you to assess the risks related to our business
Although we began operations in 1994, during the past 24 months we have
substantially revised our business plan to focus on Linux for eBusiness, or
business conducted over the internet, made additions to our product line and
hired a significant number of new employees, including key members of our
management team. In January 2000, we released our server product, eServer. Our
historical sales have been primarily from our OpenLinux products, including
OpenLinux 2.3 (renamed eDesktop because of its focus on the desktop
environment), which were historically developed for first-time Linux users who
predominantly have experience using Windows desktop environments. As a company
in a new and rapidly evolving industry, we face risks and uncertainties relating
to our ability to successfully implement our strategy. You must consider the
risks, expenses and uncertainties facing a company like ours, operating with an
unproven business model in a new and rapidly evolving market such as the market
for Linux software. These risks also include our ability to:
- broaden awareness of the Caldera Systems brand;
- maintain our current, and develop new, strategic relationships with
technology partners and solutions providers;
- attract, integrate and retain qualified management personnel;
- attract, integrate and retain qualified personnel for the expansion of
our sales, professional services, engineering, marketing and customer
support organizations;
- continue to develop and upgrade product offerings tailored for business;
- respond effectively to competitive pressures; and
- generate revenue from the sale of software products, services, education
and training.
If we cannot address these risks and uncertainties or are unable to
execute our strategy, we may not be successful.
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We have not been profitable and we expect our losses to continue
We have never been profitable and do not expect to achieve
profitability until at least fiscal year 2002. If our revenue declines or grows
at a slower rate than we anticipate, or if our spending levels exceed our
expectations or cannot be adjusted to reflect slower revenue growth, we may not
generate sufficient revenue to achieve or sustain profitability or generate
positive cash flow. For the year ended October 31, 2000, we incurred a net loss
of approximately $26.9 million. As of October 31, 2000, we had incurred total
net losses of approximately $56.5 million since the inception of our business in
1994. We expect to continue to incur net losses because we anticipate incurring
significant expenses in connection with developing our products, hiring and
training employees, expanding our market reach and building awareness of our
brand. We forecast our future expense levels based on our operating plans and
our estimates of future revenue. We may find it necessary to accelerate
expenditures relating to product development and support and our sales and
marketing efforts beyond our current expectations or otherwise increase our
financial commitment to creating and maintaining brand awareness among potential
customers.
You should not rely on our quarterly operating results as an indication of our
future results because they are subject to significant fluctuations.
Fluctuations in our operating results or the failure of our operating results to
meet the expectations of public market analysts and investors may negatively
impact our stock price.
Our quarterly operating results have varied in the past and we expect
them to fluctuate significantly in the future due to a variety of factors that
could affect revenue or expenses in any particular quarter. Historically, we
have experienced substantial fluctuations in our software and related products
revenue from period to period relating to the introduction of new products and
new versions of our existing products. For example, revenue from software and
related products for the quarter ended January 31, 1999 was approximately
$508,000. Software and related products revenue decreased to approximately
$482,000 during the quarter ended April 30, 1999 but increased to approximately
$1.0 million during the quarter ended July 31, 1999. Software and related
products revenue decreased to approximately $775,000 during the quarter ended
October 31, 1999, further decreased to approximately $395,000 during the quarter
ended January 31, 2000 and then increased to approximately $1.1 million for the
quarter ended April 30, 2000. Software and related products revenue then
decreased to approximately $631,000 during the quarter ended July 31, 2000 and
then increased to approximately $845,000 for the quarter ended October 31, 2000.
These quarterly revenue fluctuations were primarily due to the fluctuation of
sales of our OpenLinux products, and these fluctuations in revenue can be
expected to continue as a result of fluctuating sales of all of our products,
including our new product offerings.
Upon announcement of an expected release date for a new product or
upgrade, we often experience a significant decrease in sales of our existing
products. Additionally, we often experience the strongest sales for a new
product during the first 30 days after its introduction as we fill advance
orders from our distribution channel. Fluctuations in quarterly operating
results could cause our stock price to decline. You should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
future performance. Factors that may affect our quarterly results include:
- the interest level of electronic solutions providers in recommending our
Linux business solutions to end users;
- the introduction, development, timing, competitive pricing and market
acceptance of our products and services and those of our competitors;
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- changes in general economic conditions, such as recessions, that could
affect capital expenditures and recruiting efforts in the software
industry in general and in the Linux environment in particular;
- the magnitude and timing of marketing initiatives;
- changing business attitudes toward Linux as a viable operating system
alternative to other competing systems;
- the maintenance and development of our strategic relationships with
technology partners and solution providers;
- the attraction, retention and training of key personnel; and
- our ability to manage anticipated growth and expansion.
As a result of the factors listed above and elsewhere, it is possible
that in some future periods our results of operations may be below the
expectations of public market analysts and investors. This could cause our stock
price to decline. In addition, we plan to increase our operating expenses to
expand our sales and marketing, administration, consulting and training,
maintenance and technical support and research and development groups. If
revenue falls below expectations in any quarter and we are unable to quickly
reduce our spending in response, our operating results would be lower than
expected and our stock price may fall.
We rely on our indirect sales channel for distribution of our products, and any
disruption of our channel at any level could adversely affect the sales of our
products
We have a two-tiered distribution channel through which the majority of
our sales occur. As of October 31, 2000, we had approximately 38 distributors
worldwide who purchased directly from us. These distributors in turn sell to
approximately 4,000 retail outlets in the United States and approximately 900
equivalent sites internationally. These relationships allow us to offer our
products and services to a much larger customer base than we would otherwise be
able to reach through our direct sales and marketing efforts. Some electronic
solutions providers also purchase eBusiness solutions through our distributors,
and we anticipate they will continue to do so as we expand our product offerings
for eBusiness. Because we usually sell indirectly through distributors to
electronic solutions providers, we cannot control the relationships through
which they purchase our products. In turn we do not control the presentation of
our products by electronic solutions providers to end-users. Therefore, our
distribution channel could be affected by disruptions in the relationships
between our distributors and electronic solutions providers or between
electronic solutions providers and end users. Also, distributors and electronic
solutions providers may choose not to emphasize use of our products to their
customers. Any of these occurrences could diminish the effectiveness of our
distribution channel and lead to decreased sales. However, to our knowledge,
none of our international distributors engages in discounting or other business
practices unique to their respective geographic regions that materially affects
or could materially affect our results of operations, although they could do so
in the future.
In particular, we are highly dependent on our relationships with our
distribution partners, such as Frank Kasper & Associates, Ingram Micro, Navarre
Corporation and Tech Data, domestically, and MediaGold in Europe, for the
distribution of our products. Sales to all distributors accounted for
approximately 59% of our total revenue for the year ended October 31, 2000. We
plan to continue to develop relationships with new distributors to introduce
product and service offerings into new markets, including into foreign
countries. If any of these distribution partners do not provide opportunities
for growth or become closed to us, or if we are
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unable to create new distribution channels for new markets, we will be required
to seek alternative channels of distribution for our products and services. We
may be unable to do so, in which case our business would suffer.
Our business model, which relies on a combination of open source software and
proprietary technology, is unproven
Our business model incorporates as integral elements of our product
offerings both commercial products and open source software. We know of no
company that has built a profitable business based in whole or in part on open
source software. By incorporating open source components in our product
offerings, we face many of the same risks that other open source company's
experience, including the inability to offer warranties and indemnities on
products and services. In addition, by developing products based on proprietary
technology that is not freely downloadable, we may run counter to the perception
of Linux as an open source model and alienate the Linux community. Negative
reaction, if widely shared by our customers, developers or the open source
community, could harm our reputation, diminish our brand and decrease our
revenue. Our business will fail if we are unable to successfully implement our
business model.
Our business model also depends upon incorporating contributions from
the open source community into products that we open source. The viability of
our product offerings depends in large measure upon the efforts of the open
source community in enhancing products and making them compatible for use across
multiple software and hardware platforms. There are no guarantees that these
products will be embraced by the open source community such that programmers
will contribute sufficient resources for their development. If the open source
community does not embrace products that we view as integral to providing
eBusiness solutions, we will be required to devote significant resources to
develop these products on our own.
The sales cycle for our products is long and we may incur substantial
non-recoverable expenses; we devote significant resources to sales that may not
occur when anticipated or at all
The length of time between initial contact with a potential customer
and sale of a product, or our sales cycle, outside the retail channel is
typically complex and lengthy, lasting from three to nine months. These direct
sales also represent our largest orders. Therefore, our revenue for a period is
likely to be affected by the timing of larger orders, which makes the related
revenue difficult to predict. Our revenue for a quarter could be reduced if
large orders forecasted for a certain quarter are delayed or are not realized.
The cycle factors that could delay or defer an order, include:
- time needed for technical evaluations of our software by customers;
- customer budget restrictions;
- customer internal review and testing procedures; and
- engineering work needed to integrate our software with the customer's
systems.
Because our products have relatively short life cycles, we must develop and
introduce new products to sustain our level of sales
Our software products have a limited life cycle and it is difficult to
estimate when they will become obsolete. If we do not develop and introduce new
products before our existing products have completed their life cycles, we will
not be able to sustain our level of sales. In
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addition, to succeed, many customers must adopt our new products early in the
product's life cycle. Therefore, if we do not attract sufficient customers early
in a product's life, we may not realize the amount of revenue that we anticipate
for the product. We cannot be sure that we will continue to be successful in
marketing our key products.
We rely on independent developers in the open source community, such as Linus
Torvalds, in order to release upgrades of our Linux-based products
Many of the components of our software products, including the Linux
kernel, the core of the Linux operating system, are developed by independent
developers in the open source community and are available for inclusion in our
products without cost. Linus Torvalds, the original developer of the Linux
kernel, and a small group of independent engineers have in the past developed
and upgraded the Linux kernel. Neither Mr. Torvalds nor any significant
contributor to the Linux kernel is an employee of ours, and none of these
individuals are required to further update the Linux kernel. If these
independent developers and others in the open source community do not further
develop the Linux kernel and other open source software included in our products
on a timely basis, or at all, our ability to enhance our product offerings will
suffer. As a consequence, we will be forced to rely to a greater extent on our
own development efforts or license commercial software products as replacements,
which would increase our expenses and delay enhancements to our products. For
example, in the past, we have sometimes been unable to upgrade all open source
components of a product in connection with a proposed release because
enhancements had not yet been made by these independent developers. Any failure
on the part of the kernel developers to further develop and enhance the kernel
could also stifle the development of additional Linux applications.
Our reliance on independent third parties who develop most of the software
included in our Linux products could result in delays or unreliable products and
damage to our reputation
Our products consist of many different software components and
applications, most of which are developed by independent third parties over whom
we have limited or no control. While we use rigid engineering standards in
testing the products or applications that we integrate in our products, we
cannot guarantee that we have selected or will select in the future the most
reliable components available in the market or that we will successfully
integrate the many components of our products. In addition, if any of these
third-party products are not reliable or available, we may have to develop them
internally, which would significantly increase our development expenses and
delay the time to market. Our customers could be dissatisfied if any of these
products fail to work as designed or if adequate support is not provided, which
could damage our reputation and lead to potential litigation.
If the market for Linux business solutions does not grow as we anticipate, we
may not be able to continue our business plan and grow our business
Our strategy for marketing Linux solutions to businesses depends in
part upon our belief that many businesses will follow a trend away from the use
of networked computers linked by centralized servers and move toward the use of
distributed applications through thin appliance servers, or specialized servers,
internet access devices and application service providers. We are also relying
on electronic solution providers making these technologies available on Linux
and on Linux then becoming a desirable operating system under these
circumstances. We also plan to market our Linux products for use on these
specialized servers and internet access devices, which we believe will become
widely used for eBusiness. However, if businesses, which at present favor
Microsoft and other non-Linux operating systems, do not adopt these trends in
the near future, or if Linux is not viewed as a desirable operating system in
connection with these trends, a
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significant market for our products may not develop. Factors that may keep
businesses from adopting these trends include:
- costs of installing and implementing new hardware devices;
- costs of porting legacy systems into new platforms;
- security concerns regarding manipulation of data through application
service providers;
- limited adoption of Linux among businesses generally;
- previous significant investments in competing systems;
- lack of adequate Linux-trained professionals and support services;
- lack of standards among Linux products and applications; and
- lack of acceptance of the internet as a medium for distributing business
applications.
Even if these trends toward distributed applications are adopted, if
the development of Linux products and Linux applications is not sufficient to
meet the needs of eBusiness, a significant market for Linux business solutions
such as ours may not materialize.
We could be prevented from selling or developing our products if the GNU general
public license and similar licenses under which our products are developed and
licensed are not enforceable
The Linux kernel and certain other 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, all compliance with these licenses has been voluntary. It
is possible that a court would hold one or more of these licenses to be
unenforceable in the event that someone were to file a claim asserting
proprietary rights in a program developed and distributed under them. Any ruling
by a court that these licenses are not enforceable, or that Linux operating
systems, or significant portions of them, may not be liberally copied, modified
or distributed freely, would have the effect of preventing us from selling or
developing our products, unless we are able to negotiate a license to use the
software or replace the affected portions. These licenses could be expensive,
which could impair our ability to price our products competitively.
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 thousands 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
exacerbated by the fact that most of the code in our products is developed by
independent parties over whom we exercise no supervision or control and who,
themselves, might not have the same financial resources as us to pay damages to
a successful litigant. 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. In addition, an adverse legal decision affecting our
intellectual property, or the use of significant resources to
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defend against this type of claim, could place a significant strain on our
financial resources and harm our reputation.
Failure to protect our intellectual property rights adequately would result in
significant harm to our business
While much of the code for our products is open source, our success
depends significantly on our ability to protect our trademarks, trade secrets
and certain proprietary technology contained in our products. We rely on a
combination of copyright and trademark laws, and on trade secrets and
confidentiality provisions and other contractual provisions to protect our
proprietary rights. These measures afford only limited protection. Some
trademarks that have been registered in the United States have been licensed to
us, and we have other trademark applications pending in the United States.
Effective trademark 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 in the United States or abroad may not be adequate and
competitors may independently develop similar technologies. Our future success
will depend in part on our ability to protect our proprietary rights. Despite
our efforts to protect our proprietary rights and technologies, unauthorized
parties may attempt to copy aspects of our products or to obtain and use trade
secrets or other information that we regard as proprietary. Legal proceedings to
enforce our intellectual property rights could be burdensome and expensive and
could involve a high degree of uncertainty. These legal proceedings may also
divert management's attention from growing our business. In addition, the laws
of some foreign countries do not protect our proprietary rights as fully as do
the laws of the United States. If we do not enforce and protect our intellectual
property, our business may suffer substantial harm.
We may face potential liability for material published or made available on our
web site and other sites linked to it
We may be sued for defamation, civil rights infringement, negligence,
copyright or trademark infringement, personal injury, product liability or other
legal claims relating to information that is published or made available on our
web site and the other sites linked to it. These types of claims have been
brought, sometimes successfully, against providers of online services in the
past. We could also be sued for the content that is accessible from our web site
and through links to other internet sites or through content and materials that
may be posted by members in chat rooms or on bulletin boards. Our insurance does
not specifically provide for coverage of these types of claims and therefore may
not adequately protect us against these types of claims. In addition, we could
incur significant costs in investigating and defending such claims, even if we
are ultimately not liable. If any of these events occur, our revenue and the
value of your investment could be materially adversely affected.
We must achieve rapid market penetration of our products in order to compete
successfully
Because the Linux and eBusiness markets are new and emerging, companies
that are early in providing products and solutions for these markets will have
an advantage in building awareness and consumer loyalty. Therefore, in order for
us to successfully market our products on a wide scale, we must rapidly achieve
market penetration. For example, if we are unable to demonstrate the viability
of our products through rapid growth:
- software developers will be less likely to develop applications for our
products;
- we will be unable to achieve economies of scale;
- we will be less able to negotiate favorable terms with distributors and
other partners; and
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- customers will be less likely to devote resources to purchasing and
implementing our products if they are not seen as an industry standard.
We may lack the economic and managerial resources necessary to promote
this growth. Also, the fact that we rely almost entirely on the success of a few
principal products affects our ability to penetrate diversified markets. In
addition, while we believe our process of self-hosting results in superior
products, it requires time and resources that may delay new product releases and
upgrades. These delays could affect our ability to take advantage of market
opportunities on a timely basis.
To achieve the type of broad recognition necessary to succeed, we will need to
expend significant financial and management resources; There is no guarantee
that these expenditures will enable us to receive the recognition necessary to
our success
We believe that broad recognition and a favorable audience perception
of the Caldera brand will be essential to our success. If our brand does not
achieve broad recognition as the leading provider of Linux solutions for
eBusiness, our success will be limited. We intend to build brand recognition
through advertising our products and services. During the fiscal year ended
October 31, 1999, we spent approximately $1.2 million for advertising. During
the fiscal year ended October 31, 2000, we spent approximately $1.5 million for
advertising. We expect to increase our advertising expenses in future periods as
we build the Caldera brand and awareness of our products and services. In
addition, we provide education and training to build brand recognition, which
may not be successful if we are unable to generate wide-acceptance of these
services. We may lack the resources necessary to accomplish these initiatives.
Even if the resources are available, we cannot be certain that our brand
enhancement strategy will deliver the brand recognition and favorable audience
perception that we seek. If our strategy is unsuccessful, these expenses may
never be recovered and we may be unable to increase future revenue. Even if we
achieve greater recognition of our brand, competitors with greater resources or
a more recognizable brand could reduce our market share of the emerging Linux
market, as well as the broader market for the provision of eBusiness solutions.
Our strategy to provide solutions for eBusiness depends upon our ability to
successfully introduce products tailored for eBusiness and there is no assurance
that these products will gain commercial acceptance
To date, practically all of our sales revenue has come from retail
sales of OpenLinux, which is designed to assist the first-time Linux user who
may be familiar with a Windows, desktop environment. However, our business model
is targeted toward using Linux solutions to facilitate eBusiness. In order for
our strategy of providing Linux solutions for eBusiness to be successful, we
must provide products that meet the needs of solution providers and their
eBusiness customers. In January 2000, we released our server product, OpenLinux
eServer. In January 2001, we released Volution, our second eBusiness product.
These new products, our primary eBusiness products, may not be adopted by
solution providers and their customers for any number of reasons, including lack
of customer awareness of us and our products, malfunction of the products and
failure to meet needs of eBusiness. If our eBusiness products are not
successful, we will fail to execute our strategy and our sales may not grow.
Because software programs frequently contain errors or defects, we could lose
significant revenue if our software programs do not perform as expected.
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Software programs frequently contain errors or defects, especially when
first introduced or when new versions are released. We could, in the future,
lose revenue as a result of errors or defects in our software products. We
cannot assure you that errors will not be found in new products or releases.
Although we have both product liability and errors and omissions insurance, we
might incur losses in excess of the dollar limits or beyond the scope of
coverage of our policies. While we test our products prior to release, the fact
that most of the components of our software offerings are developed by
independent parties over whom we exercise no supervision or control make it
particularly difficult to identify and remedy any errors or defects that could
exist. Any errors could result in loss of revenue, or delay in market
introduction or acceptance, diversion of development resources, damage to our
reputation or increased service costs.
The network solutions and operating systems industries are intensely competitive
and we may be unable to compete effectively with providers of operating systems
solutions for modular computing, providers of Linux operating systems and other
more established operating systems
We face direct competition in the area of software for specialized
servers. VA Linux and Wind River provide similar solutions embedded into their
hardware offerings. In addition, Sun Microsystems has announced plans to open
source its Solaris Unix operating system in an attempt to attract more
developers to that platform. Many of these competitors are large,
well-established companies that have significantly greater financial resources,
more extensive marketing and distribution capabilities, larger development
staffs and more widely recognized brands and products than we have.
We also compete with other providers of Linux operating systems,
particularly, Corel, MacMillan, Red Hat, SuSE and TurboLinux. In addition, IBM
and Sun Microsystems have announced plans to invest significant resources into
the development of Linux. Many of these competitors, such as Red Hat, have more
established customer bases and stronger brand names than we do. Also, due to the
open source nature of Linux, anyone can freely download Linux and many Linux
applications and modify and re-distribute them with few restrictions. For
example, solution providers upon whom we depend for the distribution of our
eBusiness products could instead create their own Linux solutions to provide to
their customers. Also, established companies and other institutions could easily
produce competing versions of Linux. In particular, distributors of UNIX
operating systems could leverage their existing service organizations, due to
the fact that Linux and UNIX operating systems share many common features.
We compete with providers of other, more established operating systems.
AT&T, Compaq, Hewlett-Packard, IBM, Microsoft, Novell, Olivetti, Sun
Microsystems, and Unisys are each providers of competing operating systems,
which, in most cases, are more established among business users. We also compete
for services revenue with a number of companies that provide technical support
and other professional services to users of Linux operating systems, including
some original equipment manufacturers with which we have agreements. Many of
these companies have larger and more experienced service organizations than we
have, and have the benefit of being earlier market entrants.
Our competitive position could decline if we are unable to obtain additional
financing to acquire businesses or technologies that are strategic for our
success, or otherwise execute our business strategy, or if we fail to
successfully integrate any acquisitions with our current business
We believe that our current cash and cash equivalents will be
sufficient to fund our working capital and capital expenditure requirements for
at least the next 12 months. However, we may need to raise additional funds to
support more rapid expansion, respond to competitive pressures, acquire
complementary businesses or technologies or respond to unanticipated
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requirements. We cannot assure you that additional funding will 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, take advantage of acquisition opportunities, develop or enhance our
services or products, or otherwise respond to competitive pressures would be
significantly limited.
If appropriate opportunities arise, we intend to acquire businesses,
technologies, services or products that we believe are strategic for our
success. The market for eBusiness solutions such as Linux products is new and is
rapidly evolving and our competitive position could decline if we are unable to
identify and acquire businesses or technologies that are strategic for our
success in this market.
The acquisition of SCO's server software and professional services groups may
not close, in which case significant resources will have been wasted
The combination is subject to various closing conditions, including
approval by SCO shareholders and approval by our stockholders. If the
combination does not close, our business may suffer from the significant time
and resources expended in negotiating and preparing to execute the combination.
The lost time and resources would detrimentally affect our competitive position,
perhaps materially.
Our success depends on our ability to successfully manage growth
We have recently experienced a period of rapid growth. In order to
execute our business plan, we must continue to grow. We had 28 employees when we
began operations as a separate legal entity in September 1998. As of October 31,
2000, the number had increased to 178. We expect that the number of our
employees will continue to increase for the foreseeable future.
Our planned growth entails risk. If we do not expand our operations in
an efficient manner, our expenses could grow disproportionately to revenue or
our revenue could decline or grow more slowly than expected, either of which
could negatively affect the value of your investment. Our current and
anticipated future growth, will place a significant strain on our management,
systems and resources. Our key personnel have limited experience managing this
type of growth. We also need to improve our financial and managerial controls
and reporting systems and procedures and to continue to expand and maintain
close coordination among our technical, accounting, finance and sales and
marketing organizations. If we do not succeed in these efforts, it could reduce
our revenue and the value of your investment.
Our current and potential customers may find it difficult to hire and train
qualified employees to handle installation and implementation of our products,
which could negatively affect sales of our products to new customers and lead to
dissatisfaction among current customers
There are limited numbers of individuals that are trained and qualified
to manage Linux systems, including OpenLinux and our other products. End users
and our distribution partners may lack the resources to hire or train such
qualified personnel to install and implement our products, which could lead to
dissatisfaction with our products among end users and deter potential end users
from purchasing our product.
The growth of our business will be diminished if the internet is not accepted as
a medium for commerce and business networking applications
An important part of our business strategy is to develop and market our
products for the support of secure business networks hosted on the internet. In
addition, we plan to sell our products and provide a significant amount of
technical support and education via our web site. If
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the internet is not accepted as a medium for commerce and business networking
applications, demand for our products and services will be diminished. A number
of factors may inhibit internet usage, including:
- inadequate network infrastructure;
- lack of knowledge and training on internet use and benefits;
- consumer concerns for internet privacy and security;
- lack of availability of cost-effective, high-speed service;
- interruptions in internet commerce caused by unauthorized users;
- changes in government regulation relating to the internet; and
- internet taxation.
If internet usage grows, the infrastructure may not be able to support
the demands placed on it by that growth and its performance and reliability may
decline. Web sites have experienced interruptions as a result of delays or
outages throughout the internet infrastructure. If these interruptions continue,
internet usage may decline.
Loss of any of our key management personnel could negatively impact our business
The loss or departure of any of our officers or key employees could
harm our ability to implement our business plan and could lower our revenue. Our
future success depends to a significant extent on the continued service and
coordination of our management team, particularly Ransom H. Love, our President
and Chief Executive Officer. We do not maintain key person insurance for any
member of our management team, but may elect to do so in future periods.
Future sales of our common stock may negatively affect our stock price
The market price of our common stock could decline as a result of sales
of a large number of shares of our common stock in the market in the future, or
the perception that such sales could occur. We have a large number of shares of
common stock outstanding and available for resale beginning at various points in
time in the future. These sales also might make it more difficult for us to sell
equity securities in the future at a time and at a price that it deems
appropriate. The shares of our common stock currently outstanding will become
eligible for sale without registration pursuant to Rule 144 under the Securities
Act, subject to certain conditions of Rule 144. Certain holders of our common
stock also have certain demand and piggyback registration rights enabling them
to register their shares under the Securities Act for sale.
ITEM 2. PROPERTIES
Caldera's headquarters is located in Orem, Utah. In Orem and the
surrounding area, Caldera leases approximately 45,500 square feet of space for
its corporate offices, education facility and warehouse operations. Office space
for Caldera's only international location is approximately 3,400 square feet in
Erlangen, Germany, for Caldera's non-U.S. research and development operations.
Caldera's management believes that its existing facilities are adequate to meet
current business and operating requirements and that additional office space
will be available to meet its needs if required.
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ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Caldera's common stock has traded on the Nasdaq National Market under
the symbol "CALD" since March 21, 2000.
The table below sets forth the range of high and low closing prices of
Caldera common stock as reported on the Nasdaq National Market since March 21,
2000, the date of Caldera's initial public offering.
Caldera Common Stock
--------------------
High Low
---- ---
FISCAL 2000
Quarter ended April 30, 2000 (from March 21, 2000) $ 29.44 $ 9.56
Quarter ended July 31, 2000 16.25 7.05
Quarter ended October 31, 2000 8.50 3.25
As of October 31, 2000, Caldera had 132 stockholders of record. Caldera
has not declared or paid any cash dividends on shares of its common stock and
plans to retain its future earnings, if any, to fund the development and growth
of its business.
Caldera did not make any unregistered sales of its common stock during
the fourth quarter of fiscal 2000.
ITEM 6. SELECTED FINANCIAL DATA
The following tables present portions of our financial statements. You
should read the selected financial data set forth below in conjunction with the
consolidated financial statements and the related notes included elsewhere in
this Form 10-K and in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this Form
10-K. The selected statement of operations data for the years ended October 31,
2000, 1999 and 1998 and the selected balance sheet data as of October 31, 2000
and 1999 are derived from, and are qualified by reference to, the audited
financial statements and related notes appearing elsewhere in this Form 10-K.
The selected statement of operations data for the years ended October 31, 1997
and 1996 and the selected balance sheet data as of October 31, 1998, 1997 and
1996 are derived from audited and unaudited financial statements not appearing
in this Form 10-K.
Caldera began operations in 1994 as Caldera, Inc., a Utah corporation
(the "Predecessor"). In July 1996, the Predecessor acquired an additional
business line that was not engaged in developing and marketing Linux software.
The Predecessor subsequently made the strategic determination to separate its
two business lines into separate entities and, under an asset purchase
agreement, dated as of September 1, 1998, as amended, sold the assets relating
to its business of developing and marketing Linux software to Caldera Systems,
Inc., a newly formed corporation. Caldera Systems, Inc. has operated as a
separate legal entity engaged in developing
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and marketing Linux software since September 1, 1998. For purposes of presenting
Caldera's financial statements, Caldera has segregated or "carved-out" the
operations relating to the Linux business from the historical financial
statements of the Predecessor. Accordingly, the consolidated financial
statements included elsewhere in this Form 10-K and the selected financial data
present Caldera's financial condition and results of operations as if Caldera
had existed as a separate legal entity for all periods presented. The carved-out
historical results presented are not necessarily indicative of what would have
actually occurred had Caldera existed as a separate legal entity and any
historical results are not necessarily indicative of results that may be
expected for any future period.
Years Ended October 31,
------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(unaudited)
(In thousands, except share and per share data)
STATEMENT OF OPERATIONS DATA:
Total revenue $ 4,274 $ 3,050 $ 1,057 $ 1,117 $ 1,108
Gross margin (deficit) 253 124 (1,341) (25) 228
Operating loss (31,999) (9,103) (6,853) (7,578) (2,649)
Net loss (26,923) (9,367) (7,963) (8,148) (2,757)
Net loss to common stockholders (39,176) (9,367) (7,963) (8,148) (2,757)
Basic and diluted net loss per
common share $ (1.19) $ (0.51) $ (0.50) $ (0.51) $ (0.17)
Weighted average basic and
diluted common shares 32,922 18,458 16,000 16,000 16,000
As of October 31,
------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(unaudited)
(In thousands)
BALANCE SHEET DATA
Cash and equivalents $ 36,560 $ 122 $ 76 $ 398 $ 207
Working capital (deficit) 88,680 678 290 1313 (122)
Total assets 107,518 3,714 16,353 3,915 1,639
Long-term liabilities -- 6 -- -- --
Predecessor's equity in
carved-out operations -- -- -- 2,319 576
Total stockholders' equity 102,215 1,516 708 -- --
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
condensed consolidated financial statements and notes thereto, included
elsewhere in this Form 10-K and contains forward-looking statements that involve
risks and uncertainties. Caldera's 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" and elsewhere in this
Form 10-K.
OVERVIEW
Caldera began operations in 1994 as Caldera, Inc., a Utah Corporation
(the "Predecessor"). In July 1996, through an asset purchase, the Predecessor
acquired an additional business unit, which was not engaged in developing and
marketing Linux software. The Predecessor subsequently made the strategic
determination to separate its two business lines into separate entities and,
under an asset purchase agreement dated as of September 1, 1998, as
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amended, sold the assets relating to its business of developing and marketing
Linux software to Caldera Systems, Inc., a newly formed corporation. Caldera
Systems, Inc. has operated as a separate legal entity engaged in developing and
marketing Linux software since September 1, 1998. For purposes of presenting
their financial statements Caldera has segregated or carved-out the operations
related to the Linux business from the historical financial statements of the
Predecessor. Accordingly, Caldera's consolidated financial statements and the
following discussion present Caldera's financial condition and results of
operations as if Caldera had existed as a separate legal entity for all periods
presented.
Since September 1, 1998, Caldera has invested heavily in the expansion
of its sales, marketing, engineering, support and professional services
organizations to support its long-term growth strategy. As a result, employee
headcount has increased from 28 at September 1, 1998 to 178 at October 31, 2000.
Caldera has incurred net losses in each fiscal period since inception and as of
October 31, 2000, had an accumulated deficit of $50.1 million.
Substantially all of Caldera's revenue since fiscal 1996 has been
derived from sales of Linux products and related services. Management expects
that until the closing of the SCO server software and professional services
groups acquisition, the majority of Caldera's revenue will continue to be
derived from sales of eDesktop, eServer and education related products.
Historically, Caldera has experienced substantial fluctuations in
revenue from period to period relating to the introduction of new products and
new versions of existing products. Upon announcement of an expected release date
for new products or upgrades, Caldera often experiences a significant decrease
in sales of existing products. Additionally, Caldera often experiences the
strongest sales for a new product during the first 30 days after its
introduction as Caldera fills advance orders from its distribution channels.
Caldera began shipping its OpenLinux product in fiscal 1996 through
indirect distribution channels such as distributors, value added resellers,
original equipment manufacturers, system integrators, as well as directly to the
end user using its internal sales and marketing staff. Caldera began offering
Linux training, support and consulting services during fiscal 1999. Over time,
Caldera's business model has evolved such that Caldera now sells primarily
through its two-tier distribution channel.
Caldera markets its software and related products primarily in North
America, Europe, Asia and Australia. Revenue from customers outside the United
States was $1.3 million in fiscal 2000, $203,000 in fiscal 1999 and $56,000 in
fiscal 1998. The largest growth in international revenue has been in the Asia
Pacific region where revenue increased from $91,000 in fiscal 1999 to $706,000
in fiscal 2000.
Caldera recognizes revenue in accordance with the American Institute of
Certified Public Accountants, or AICPA, Statement of Position 97-2, or SOP 97-2.
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 and collection is probable. All sales into the distribution channel
or to OEMs and VARs require a binding purchase order. Sales to resellers for
which payment is considered to be substantially contingent on the reseller's
success in distributing individual units of the product or sales to resellers
with which Caldera does not have historical experience are accounted for as
consignments and the revenue is recognized once sell-through verification has
been received and payments from customers become due. Prior to October 31, 1999,
Caldera did not have any consignment arrangements. During the year ended October
31,
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2000, approximately 22 percent of product revenue was derived on a sell-through
basis. Direct sales to end-users are evidenced by concurrent payment for the
product via credit card and are governed by a license agreement. Generally, the
only multiple element arrangement of initial software sales is certain telephone
and e-mail technical support services Caldera provides at no additional charge.
These services do not include product update or upgrade rights. After the
initial support period, customers can elect to enter into separate support
agreements. The cost of providing the initial support services is not
significant; accordingly, Caldera accrues the estimated costs of providing the
services at the time of revenue recognition. 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, revenue is deferred until no
significant obligations remain or acceptance has occurred. To date, Caldera has
not shipped any software and related products subject to acceptance terms or
subject to other post-delivery vendor obligations. Additionally, Caldera 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.
Caldera also offers its customers training, consulting 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. These
services revenue are recognized as the services are performed.
Since inception, Caldera has incurred substantial research and
development costs and has invested heavily in the expansion of its sales,
marketing, support and professional services organizations to support its
long-term growth strategy. As a result of these investments, Caldera has
incurred net losses in each fiscal period since inception and, as of October 31,
2000, had incurred total net losses of approximately $56.5 million since
inception. Management anticipates that operating expenses will increase
substantially for the foreseeable future as Caldera increases the number of
people and programs in sales and marketing, product development and professional
services. Accordingly, management expects to incur net losses until at least
fiscal year 2002.
In connection with the grant of stock options to employees during
fiscal 2000 and 1999, Caldera recorded deferred compensation of $6.8 million and
$3.1 million, respectively, representing the difference between the deemed fair
market value of the common stock for accounting purposes and the exercise price
of these options as of the date of grant. Deferred compensation is presented as
a reduction of stockholders' equity and is amortized over the vesting period of
the applicable options. Caldera expensed $5.2 million of deferred compensation
in fiscal 2000 and $409,000 in fiscal 1999. With respect to the options
outstanding as of October 31, 2000, Caldera expects to expense $2.1 million of
deferred compensation in fiscal 2001, $1.1 million in fiscal 2002, $493,000 in
fiscal 2003, and $57,000 in fiscal 2004.
As a result of an option agreement between The Canopy Group and Ralph
J. Yarro III, which was subsequently rescinded, Caldera expensed a one-time
compensation charge of approximately $372,000 during fiscal 2000. The option
agreement allowed Mr. Yarro to purchase shares of Caldera common stock directly
from The Canopy Group. No shares were purchased under the agreement. Mr. Yarro
is the president and chief executive officer of The Canopy Group and the
Chairman of Caldera's board of directors.
In December 1999 and January 2000, Caldera sold 5.0 million shares of
Series B convertible preferred stock at $6.00 per share, resulting in net
proceeds of approximately $29.8 million. Each share of Series B convertible
preferred stock was immediately convertible into one share of common stock. Due
to the beneficial conversion feature associated with the Series B
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convertible preferred stock, during the first quarter of fiscal 2000, Caldera
recorded a preferred stock dividend in the amount of $10.0 million thereby
increasing the net loss applicable to common stockholders. On March 13, 2000,
Caldera's major stockholder, The Canopy Group, sold a warrant for $10,000 to
purchase 416,667 shares of our common stock held by The Canopy Group at $5.98
per share for a two-year period to one of the Series B convertible preferred
stockholders. Upon exercise of the warrant, all proceeds will be paid to The
Canopy Group. Caldera recorded this transaction during the second quarter of
fiscal 2000 as if Caldera had sold the warrant to the stockholder with the fair
value of the warrant of $2,252,717 being recorded as a dividend related to
convertible preferred stock and an offsetting contribution to capital.
In December 1999 and January 2000, Caldera acquired an equity
investment in Lineo, Inc. in exchange for 1,250,000 shares of common stock,
acquired an equity investment in Evergreen Internet, Inc. in exchange for $2.0
million in cash and 200,000 shares of common stock and acquired an equity
investment in Troll Tech AS and certain license rights in exchange for 106,356
shares of common stock. These three companies provide strategic technology
solutions for the Linux industry. Caldera has entered into agreements with Troll
Tech AS and Evergreen Internet whereby it will be licensing their technology for
inclusion in Caldera's products and service offerings. Caldera will pay future
royalties to Troll Tech and Evergreen Internet based on its sales of products,
which incorporate their technology. Caldera's licensing agreement with Evergreen
Internet also calls for Evergreen Internet to include Caldera's technology in
its products for which Caldera will be paid future royalties by Evergreen
Internet based on sales of products that incorporate Caldera's technology.
Management believes that these investments have the potential to benefit Caldera
through increased revenue from product sales, royalties and service
opportunities. Management does not expect that these investments will have a
material adverse impact on future liquidity. The investments in Evergreen
Internet and Troll Tech have been accounted for under the cost method of
accounting. Management has determined that Caldera's investment in Lineo should
be accounted for as a transaction between entities under common control with the
transfer being reflected in its financial statements at Lineo's carryover basis.
However, at the date of the transfer, Lineo had a stockholders' deficit, of
which approximately $124,000 would be associated with the 14% interest Caldera
acquired. Accordingly, Caldera recorded the investment at a nominal value of
$1.00 because Caldera does not have any obligation to fund or reimburse Lineo
for its allocated portion of Lineo's stockholders' deficit. Caldera recorded the
estimated fair value of the shares of its common stock issued to Lineo at $10.0
million with the difference between the $10.0 million and the $1.00 investment
being a distribution to The Canopy Group.
On May 11, 2000, The Canopy Group transferred 1,761,563 shares of
Lineo's common stock held by The Canopy Group to Caldera. This transfer has been
reflected as a capital contribution by The Canopy Group at Lineo's carryover
basis of $1,966,173. As a result of this transaction, Caldera held a total of
5,000,000 shares of Lineo's common stock (approximately 14% of Lineo's
outstanding voting stock).
In September 2000, Caldera and Metrowerks Holdings, Inc., an affiliate
of Motorola, Inc., entered into a Stock Purchase and Sale Agreement whereby
Caldera and The Canopy Group sold 2.0 million and 1.0 million shares,
respectively, of common stock of Lineo, Inc. to Metrowerks Holdings at $7.50 per
share. The difference between the $7.50 per share price and Caldera's carrying
amount was reflected as a capital contribution.
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RESULTS OF OPERATIONS
Software and related products revenue is comprised of revenue from the
sale of software and other products such as shipments of incomplete box units or
documentation materials. Services revenue is comprised of training and education
fees, consulting fees and customer support fees.
Cost of software and related products revenue primarily consists of
costs for production, packaging, fulfillment and shipment of product offerings.
Additionally, royalties paid to third parties for inclusion of their software
products in Caldera's product offering are included in these costs. Cost of
services revenue is primarily comprised of salaries and related costs of support
services employees.
Included in sales and marketing expenses are the following:
advertising, channel promotions, marketing development funds, promotional
activities, public relations, trade show and personnel-related expenses such as
salaries, benefits, commissions, recruiting fees, travel and entertainment
expenses.
Research and development expenses consist of payroll and related costs
for software engineers, technical writers, quality assurance and research and
development management personnel and the costs of materials used by these
employees in the development of new or enhanced product offerings.
General and administrative expenses are comprised of professional fees,
salaries and related costs for accounting, administrative, finance, human
resources, information systems and legal personnel as well as costs associated
with implementing and expanding our internal information and management
reporting systems.
The following table sets forth certain statement of operations data as
a percentage of total revenue for the years indicated:
YEAR ENDED OCTOBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Revenue:
Software and related products .................... 70.0% 90.9% 100.0%
Services ......................................... 30.0 9.1 --
------ ------ ------
Total revenue .................................. 100.0 100.0 100.0
------ ------ ------
Cost of Revenue:
Software and related products .................... 48.3 78.3 96.2
Services ......................................... 45.8 17.6 --
Other ............................................ -- -- 130.7
------ ------ ------
Total cost of revenue .......................... 94.1 95.9 226.9
------ ------ ------
Gross margin (deficit) ............................ 5.9 4.1 (126.9)
------ ------ ------
Operating Expenses:
Sales and marketing (exclusive of non-cash
compensation).................................. 345.2 156.3 210.4
Research and development (exclusive of
non-cash compensation)......................... 115.9 75.5 140.8
General and administrative (exclusive of
non-cash compensation)......................... 150.4 57.3 170.2
Other ............................................ 143.0 13.4 --
------ ------ ------
Total operating expenses ....................... 754.5 302.5 521.4
------ ------ ------
Loss from operations .............................. (748.6) (298.4) (648.3)
Equity in loss of affiliate ....................... (9.1) -- --
Other income (expense), net ....................... 129.7 (7.5) (101.8)
------ ------ ------
Loss before income taxes .......................... (628.0) (305.9) (750.1)
Provision for income taxes ........................ (1.9) (1.1) (3.2)
------ ------ ------
Net loss .......................................... (629.9) (307.0) (753.3)
====== ====== ======
Dividends related to convertible preferred
stock ......................................... (286.7) -- --
====== ====== ======
Net loss attributable to common stockholders ...... (916.6)% (307.0)% (753.3)%
====== ====== ======
Fiscal Years Ended October 31, 2000, 1999 and 1998
Revenue
Revenue was $4.3 million for fiscal 2000, $3.1 million for fiscal 1999
and $1.1 million for fiscal 1998. During fiscal 2000, approximately 70 percent
of our revenue was generated from the sale of software and related products.
During fiscal 1999 approximately 91 percent of our revenue was generated from
the sale of software and related products. During fiscal 1998, all revenue was
derived from our software and related products offerings. Even though the
percentage of software and related products revenue as a percentage of total
revenue has declined the last two years, software and related products revenue
has increased in each of those years. Revenue from international customers was
approximately 30 percent in fiscal 2000, 7 percent in fiscal 1999 and 5 percent
in fiscal 1998. The increases in international revenue are the result of
Caldera's increased focus on customers and markets outside the United States.
Software and Related Products. Software and related products revenue
was $3.0 million in fiscal 2000, $2.8 million in fiscal 1999, and $1.1 million
in fiscal 1998, representing an increase of $221,000, or 8 percent, from fiscal
1999 to fiscal 2000 and a $1.7 million, or 162
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percent, increase from fiscal 1998 to fiscal 1999. The increase in fiscal 2000
over fiscal 1999 was due to improved internal sales and marketing strategies and
sales to customers in international locations. The increase in software and
related product revenue from fiscal 1998 to fiscal 1999 was a result of
management's expansion of marketing efforts, as well as the increased market
awareness of the Linux operating system.
Services. Services revenue was $1.3 million in fiscal 2000, $277,000 in
fiscal 1999 and $0 in fiscal 1998, representing an increase of $1.0 million or
362 percent from fiscal 1999 to fiscal 2000. The increase in services revenue
was primarily attributed to the formal introduction of our education and
training-related offerings as well as from promotional fees received from our
Linux training program. The Linux training program is targeted at informing and
training customers and partners about the Linux operating system by conducting
training and seminars in cities across North America. This program began in
Caldera's third quarter of fiscal 2000 and a second program is planned for the
first quarter of fiscal 2001. Caldera also plans to continue to expand its
education, training and other services-related offerings and will increase sales
and marketing efforts for these programs.
Cost of Revenue
Cost of Software and Related Products Revenue. Cost of software and
related products revenue was $2.1 million in fiscal 2000, $2.4 million in fiscal
1999 and $1.0 million in fiscal 1998, representing a decrease of $326,000, or 14
percent, from fiscal 1999 to fiscal 2000 and a $1.4 million, or 135 percent,
increase from fiscal 1998 to fiscal 1999. On a percentage basis of related
revenue, cost of software and related products revenue was 69 percent in fiscal
2000, 86 percent in fiscal 1999 and 96 percent in fiscal 1999. The decrease in
the cost of software and related products revenue percentage in fiscal 2000 from
fiscal 1999 was due to increased efficiencies in the production and fulfillment
process as well as from reduced charges for obsolete inventory. During fiscal
2000, the Company recorded an inventory reserve of approximately $43,000 as a
result of lower than expected sales of OpenLinux 2.3 and as a result of certain
raw materials becoming unusable to changes in product packaging. During fiscal
1999, the Company recorded an inventory reserve of approximately $267,000
brought about by the over production of finished products in connection with the
release of OpenLinux 2.3. The Company has continued to sell OpenLinux 2.3 since
the introduction of OpenLinux eDesktop 2.4 and has not recorded any additional
impairment charges. None of the reserved inventory will be scrapped, abandoned
or disposed of until sales of OpenLinux 2.3 are terminated.
The decrease in the cost of revenue percentage from fiscal 1998 to
fiscal 1999 primarily resulted from reduced royalty expenses as a component of
product costs as certain third-party software packages were open sourced and the
elimination of certain other royalty-bearing components. In addition, the
decrease from fiscal 1998 to fiscal 1999 resulted from improved margins on
increased volumes.
Cost of Services Revenue. Cost of services revenue was $2.0 million in
fiscal 2000, $538,000 in fiscal 1999 and $0 in fiscal 1998, an increase of $1.4
million or 264 percent from fiscal 1999 to fiscal 2000. Caldera did not begin to
recognize services revenue until fiscal 1999. The negative margin incurred
during fiscal 2000 and fiscal 1999 is due to Caldera's hiring of employees and
building infrastructure in anticipation of future training and support revenue.
In addition, cost of services revenue for fiscal 2000 also includes the costs
incurred in connection with the Linux training program. As a percentage of
services revenue, cost of services was 153 percent of services revenue in fiscal
2000 and 194 percent of services revenue in fiscal 1999. The marginal
improvement in fiscal 2000 over fiscal 1999 was due to increased revenue from
services activities. The deficit achieved on services revenue is materially
different from the margins on
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software and related products revenue due to the startup and infrastructure
costs being incurred. Upon completion of the server software and professional
services groups acquisition, Caldera expects the margins on services revenue to
improve because of the fully developed support services group in place.
Write-off of Prepaid Royalties. During fiscal 1996 and 1997, Caldera
entered into royalty agreements with a supplier pursuant to which Caldera
prepaid royalties of approximately $2.1 million. During fiscal 1998, Caldera
asserted that the supplier breached the terms of the royalty agreements and
determined that the remaining prepaid royalties, in the amount of $1.4 million,
were impaired and accordingly Caldera wrote off the remaining balance.
Management determined the asset was impaired because its value was tied to the
intellectual property value of the licenses Caldera had purchased. The vendor
breached the terms of the contract in management's view, when it open sourced
some of the related software. When the vendor decided to open source the
software, the licenses Caldera had purchased had no value in relation to that
software. Additionally, Caldera discontinued the development of a product
related to the licensed software resulting in the complete impairment of the
prepaid asset. Management determined that any attempt to pursue legal action
against the supplier would be costly and uncertain given the resources required
to pursue such an action and the uncertainties relating to interpreting the
royalty agreements.
Operating Expenses
Sales and Marketing. Sales and marketing expenses were $14.8 million in
fiscal 2000, $4.8 million in fiscal 1999 and $2.2 million in fiscal 1998,
representing an increase of $10.0 million, or 209 percent from fiscal 1999 to
fiscal 2000 and an increase of $2.5 million, or 114 percent from fiscal 1998 to
fiscal 1999. Sales and marketing expenses represented 345 percent of total
revenue in fiscal 2000, 156 percent of total revenue in fiscal 1999 and 210
percent of total revenue in fiscal 1998. During fiscal 2000 and fiscal 1999,
Caldera significantly expanded its internal sales and marketing staff as well as
increased its marketing programs and campaigns, advertising, channel and
marketing development and trade show participation. Upon consummation of the
server software and professional services groups acquisition, sales and
marketing expenses are expected to continue to increase in an effort to increase
awareness of Linux, Unix and combined products and related offerings.
Research and Development. Research and development expenses were $5.0
million in fiscal 2000, $2.3 million in fiscal 1999 and $1.5 million in fiscal
1998, representing an increase of $2.7 million, or 115 percent, from fiscal 1999
to fiscal 2000 and an increase of $813,000, or 55 percent, from fiscal 1998 to
fiscal 1999. Research and development costs represented 116 percent of total
revenue in fiscal 2000, 76 percent of total revenue in fiscal 1999 and 141
percent of total revenue in fiscal 1998. The increase in research and
development expenses from fiscal 1999 to fiscal 2000 and from fiscal 1998 to
fiscal 1999 was due to an increased investment in the number of software
developers, quality assurance personnel and outside contractors to support
Caldera's product development and testing activities including the development
of training courses and technical support offerings.
General and Administrative. General and administrative expenses were
$6.4 million in fiscal 2000, $1.7 million in fiscal 1999, and $1.8 million in
fiscal 1998, representing an increase of $4.7 million, or 268 percent from
fiscal 1999 to fiscal 2000 and a decrease of $51,000, or 3 percent from fiscal
1998 to fiscal 1999. General and administrative costs represented 150 percent of
total revenue in fiscal 2000, 57 percent of total revenue in fiscal 1999 and 170
percent of total revenue in fiscal 1998. The significant increase from fiscal
1999 to fiscal 2000 is the result of increased salaries and related personnel
costs associated with additional employees in finance,
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administration, legal, human resources and information systems consistent with
our growth in headcount and overall business. Other increases in general and
administration expense were for increased professional services and facilities
costs. General and administrative expenses remained constant from fiscal 1998 to
fiscal 1999, as the nonrecurrence of the costs of reorganization of Caldera,
Inc. was more than offset by the increase in personnel in fiscal 1999.
SCO Cost-sharing Arrangement. During August 2000 and after entering
into the reorganization agreement with SCO to acquire the server software and
professional services groups, the Company and SCO agreed that Caldera would
reimburse SCO for certain employee payroll and related costs. The costs for
which Caldera agreed to reimburse SCO for were related to employees that SCO had
identified for termination in a company-wide layoff in September 2000. Caldera
viewed these employees as a critical part of the success of the new combined
company and SCO agreed to retain the employees if Caldera would reimburse SCO
for a portion of their payroll and related costs. At the time Caldera committed
to reimburse SCO for these employee costs, the ultimate amount was not
determinable and both parties agreed that the amount would be determined prior
to the completion of the acquisition. During December 2000, both parties agreed,
pursuant to an amendment to the reorganization agreement, that Caldera would
reimburse SCO $1.5 million relating to services rendered from August though
December 2000. Accordingly, as of October 31, 2000, Caldera has accrued
$898,026. The Company will record the remaining $601,974 during the first
quarter of fiscal 2001. The actual payment will be made to SCO during Caldera's
first quarter of fiscal 2001.
Non-cash Compensation. In connection with the granting of stock options
to employees during fiscal 2000 and fiscal 1999, Caldera recorded deferred
compensation of $6.8 million and $3.1 million, respectively. During fiscal 2000
and fiscal 1999, Caldera amortized $5.2 million and $409,000, respectively, of
deferred compensation. Caldera did not record any deferred compensation or
amortization during fiscal 1998 as no stock options were granted during fiscal
1998.
Equity in Loss of Affiliate
Caldera is accounting for its investment in Ebiz Enterprises, Inc.
("Ebiz") using the equity method of accounting. Under the equity method, Caldera
recognizes its portion of the net income or net loss of Ebiz in its consolidated
statement of operations. For the year ended October 31, 2000, Caldera recognized
$224,339 in its statement of operations that represented its portion of Ebiz's
net loss since the time of Caldera's equity investment. In addition, because
Ebiz had a stockholders' deficit at the time of Caldera's investment, Caldera is
amortizing on a straight-line basis, the difference between its portion of the
Ebiz net stockholders' deficit and Caldera's basis in the Ebiz common stock. For
the year ended October 31, 2000, Caldera recognized $162,656 in its statement of
operations that represented this amortization. As of October 31, 2000, Caldera's
net investment amounted to $4,957,325.
Subsequent to October 31, 2000, Caldera's ownership interest in Ebiz
has been diluted to approximately 12 percent as a result of Ebiz issuing new
shares in connection with an acquisition and the conversion of convertible
securities. As a result of these transactions, on January 5, 2001, Caldera
discontinued the use of the equity method of accounting for its investment in
Ebiz. Caldera will account for the investment as an available-for-sale security
in accordance with SFAS 115. Under SFAS 115, Caldera will carry its investment
at fair market value using quoted trading prices and will record any
unrecognized gains or losses as a component of other comprehensive income
(loss). At the date of the change, Caldera reduced the carrying value of its
investment to approximately $1.4 million.
Other Income (Expense), net
Other income (expense), net, which consists principally of interest
expense, interest income and other income, was $5.5 million in fiscal 2000,
($228,000) in fiscal 1999 and ($1.1) million in fiscal 1998. The significant
increase from net other expense in fiscal 1999 to net other income in fiscal
2000 was attributed to $3.2 million in total interest income earned on the
proceeds from the Series B preferred stock offering and the initial public
offering and a gain recognized on the sale of the electronic Linux marketplace
assets. The decrease in
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net expense from fiscal 1998 to fiscal 1999 was primarily the result of
decreased borrowings from the Predecessor. After the incorporation in fiscal
1998, Caldera entered into a secured convertible promissory note arrangement
with its major stockholder. Caldera borrowed amounts during the last portion of
fiscal 1998 and during fiscal 1999 under this agreement. These borrowings were
converted into common stock through the exercise of the conversion feature in
August 1999.
Income Taxes
For fiscal years 2000, 1999 and 1998, Caldera's German subsidiary,
Caldera Deutschland, GmbH, incurred income tax expense of $81,000, $35,000 and
$34,000, respectively. As of October 31, 2000, Caldera had net operating loss
carryforwards for federal and state income tax reporting purposes of
approximately $21.5 million that expire at various dates from 2018 to 2020. The
Internal Revenue Code contains provisions that likely could reduce or limit the
availability and utilization of Caldera's net operating loss carryforwards if
certain ownership changes have taken place or will take place. As of October 31,
2000, no such ownership changes had occurred.
Caldera had deferred tax assets, including net operating loss
carryforwards and other temporary differences between book and tax deductions,
totaling approximately $15.4 million as of October 31, 2000. A valuation
allowance in the amount of $15.3 million has been recorded as of October 31,
2000 as a result of uncertainties regarding the realizability of the deferred
tax asset balance.
Dividends Related to Convertible Preferred Stock
During the year ended October 31, 2000, the Company recorded preferred
stock dividends of $12.3 million. The preferred stock dividends were comprised
of (i) a warrant that was sold to Egan-Managed Capital, an investor in the
Company's Series B preferred stock, by Canopy and (ii) a beneficial conversion
feature related to the issuance of 5.0 million shares of Series B convertible
preferred stock. The estimated fair market value of the warrant was determined
to be $2.3 million using the Black-Scholes option-pricing model, and the value
of the beneficial conversion feature was determined to be $10.0 million.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for the last eight quarters. This information has been derived
from Caldera's unaudited consolidated financial statements, which, in
management's opinion, have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the quarters presented. This information should be read in conjunction with the
audited financial statements and related notes included elsewhere in this annual
report. Caldera has experienced, and expects to continue to experience,
fluctuations in operating results from quarter to quarter. The operating results
for any quarter are not necessarily indicative of the operating results for any
future period.
Quarter Ended
---------------------------------------------------------------------------------------------------
Jan. 31, April 30, July 31, Oct. 31, Jan. 31, April 30, July 31, Oct. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- -------- -------- -------- -------- -------- --------
(unaudited)
(in thousands)
Revenue
Software and related
products $ 508 $ 482 $ 1,008 $ 775 $ 395 $ 1,123 $ 631 $ 845
Services 30 62 87 98 158 238 557 327
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue $ 538 $ 544 $ 1,095 $ 873 $ 553 $ 1,361 $ 1,188 $ 1,172
======== ======== ======== ======== ======== ======== ======== ========
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FLUCTUATIONS IN QUARTERLY RESULTS
Historically, Caldera has experienced substantial fluctuations in
revenue from period to period relating to the introduction of new products and
new versions of existing products. Upon announcement of an expected release date
for new products or upgrades, Caldera often experiences a significant decrease
in sales of existing products. Additionally, Caldera often experiences the
strongest sales for a new product during the first 30 days after its
introduction as it fills advance orders from its distribution partners.
Our software and related products revenue decreased slightly in the
quarter ended April 30, 1999 from the quarter ended January 31, 1999 due to the
timing of the release of version 2.2 of OpenLinux, which occurred in late April
1999. As a result of the version 2.2 release, software revenue for the quarter
ended July 31, 1999 increased significantly from the prior quarter. Software and
related products revenue during the quarter ended October 31, 1999 decreased
from the prior quarter in spite of the release of version 2.3 of OpenLinux in
September 1999. Sales of version 2.3 were lower than sales of version 2.2 due to
version 2.3 including only minor enhancements from version 2.2. The lower sales
of version 2.3 continued into the quarter ended January 31, 2000, which resulted
in a decrease in software revenue during the quarter ended January 31, 2000 from
the prior quarter. Caldera released eDesktop 2.4 during the quarter ended April
30, 2000, and consequently revenue increased from the prior quarter. Caldera did
not have a new release during the quarter ended July 31, 2000 when our revenue
decreased from the prior quarter. Product revenue did increase during the
quarter ended October 31, 2000 from the prior quarter even though a new product
release was not made.
Services revenue has increased consistently from fiscal 1999 through
July 31, 2000 as Caldera has increased its education and training-related
offerings, as well as support and consulting services. Services revenue during
the quarter ended October 31, 2000 decreased from the prior quarter as Caldera
did not have a Linux training program during the current quarter, but
anticipates the training program to occur again during the first quarter of
fiscal 2001. Caldera has also increased personnel to promote its services
offerings.
Caldera has incurred operating losses since inception and may never
achieve profitability in the future. Management believes that future operating
results will be subject to quarterly fluctuations due to a variety of factors,
many of which are beyond its control. Factors that may affect quarterly results
include:
- the interest level of electronic solution providers in recommending
Caldera's Linux business solutions to end users;
- the introduction, development, timing, competitive pricing and market
acceptance of Caldera's products and services and those of its
competitors;
- changes in general economic conditions, such as recessions, that could
affect capital expenditures and recruiting efforts in the software
industry in general and in the Linux environment in particular;
- the magnitude and timing of marketing initiatives;
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- changing business attitudes toward Linux as a viable operating system
alternative to other competing systems;
- the maintenance and development of Caldera's strategic relationships
with technology partners and solution providers;
- the attraction, retention and training of key personnel; and
- Caldera's ability to manage our anticipated growth and expansion
As a result of the factors listed above and elsewhere in the "Risk
Factors" section of this Form 10-K, it is possible that in some future periods
Caldera's results of operations may fall below management's expectations as well
as the expectations of public market analysts and investors. In addition,
Caldera plans to significantly increase operating expenses to expand sales and
marketing, administration, consulting and training, maintenance and technical
support and research and development groups. If revenue falls below management's
expectations in any quarter and Caldera is unable to reduce spending quickly in
response, operating results would be lower than expected.
LIQUIDITY AND CAPITAL RESOURCES
Since inception as a separate legal entity in August 1998, Caldera has
funded its operations primarily through loans from its major stockholder and
through sales of common and preferred stock.
As of October 31, 2000, Caldera had cash and cash equivalents of $36.6
million and working capital of $88.7 million. Increases in cash and cash
equivalents and working capital from October 31, 1999 were the result of net
proceeds received from the Series B preferred stock offering completed in
January 2000, net proceeds received from the initial public offering completed
in March 2000 and the sale of Lineo, Inc., common stock to Metrowerks Holdings
in September 2000. These increases in cash and cash equivalents have been
partially offset by cash used in operations, investments in available-for-sale
securities, a $2.0 million cash investment in Evergreen Internet, Inc., and a
$3.0 million cash investment in Ebiz.
Net cash used in operations during the year ended October 31, 2000 was
$21.8 million. Cash used in operations was primarily attributed to the net loss
of $26.9 million. Caldera also paid $1.25 million to Sun Microsystems, Inc. for
certain rights to license software. These uses of cash were partially offset by
non-cash charges for the amortization of deferred compensation of $5.2 million
and depreciation and amortization of $580,000. Net cash used in operating
activities was $7.6 million in fiscal 1999 and $5.1 million in fiscal 1998. Cash
used in operating activities was primarily attributed to the net loss of $9.4
million in fiscal 1999 and $8.0 million in fiscal 1998 offset by non-cash
expenses and changes in working capital.
Investing activities have historically consisted of purchases of
property and equipment and certain intangible assets, investments in strategic
partners as well as a $15.0 million payment during fiscal 1999 to the
Predecessor, in connection with the reorganization of the Predecessor and
Caldera's own incorporation. During the year ended October 31, 2000, cash used
in investing activities was $47.0 million, of which $102.0 million was used to
purchase available-for-sale securities to maximize the yield on available cash
balances. Additionally, during the year ended October 31, 2000, Caldera invested
$2.0 million in the common stock of Evergreen Internet, Inc., a strategic
partner, paid $3.0 million to Ebiz Enterprises, Inc. for 3.0 million shares of
common stock and $1.4 million for property and equipment. Capital expenditures
totaled $587,000 in
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fiscal 1999 and $170,000 in fiscal 1998. Additionally, Caldera invested $80,000
in certain intangible technology during fiscal 1999. Historically, the
acquisition of property and equipment has been primarily through cash purchases.
Management anticipates that Caldera will experience an increase in the level of
capital expenditures, lease commitments and investment activities as Caldera
grows its operations and completes the acquisition of the server software and
professional services groups.
Financing activities provided $105.3 million during the year ended
October 31, 2000. The primary sources of cash during the year ended October 31,
2000 included net proceeds of $29.8 million received in connection with the
Series B preferred stock financing completed in January 2000 and net proceeds of
$71.8 million received in connection with the initial public offering in March
2000. Caldera also received $3.0 million from a stock subscription receivable.
Financing activities provided $23.3 million in fiscal 1999 and $4.9
million in fiscal 1998. During fiscal 1999, cash provided by financing
activities consisted primarily of $15.5 million of equity funding received from
The Canopy Group and $3.0 million of equity funding from MTI Technology
Corporation. Additionally, Caldera received $4.8 million from The Canopy Group
under a secured convertible promissory note agreement that accrued interest at
the prime rate less one-half percent that was calculated at 7.25 percent.
Caldera accrued $88,000 in interest associated with these borrowings. These
proceeds plus accrued interest were converted to equity during fiscal 1999. In
fiscal 1998, cash provided by financing activities consisted primarily of $4.4
million additional borrowings from The Canopy Group that accrued interest at
rates ranging from 8.00 percent to 8.50 percent based on the prime rate. Caldera
accrued $882,000 in interest associated with these borrowings. Caldera also
received $519,000 in equity funding from The Canopy Group upon its
incorporation.
In conjunction with the signing of the reorganization agreement,
Caldera agreed to advance the $7 million cash portion of the purchase price for
the server and professional services groups in the form of a promissory note
that matures on either of the closing of the combination or the date of
termination of the reorganization agreement. The loan was made on January 26,
2001. If the combination closes, the loan will be treated by Caldera and SCO as
the cash portion of the consideration to SCO for the server and professional
services groups. The loan is secured by a first priority security interest in
all of SCO's assets and is convertible at Caldera's option into SCO common stock
at a price per share of $2.44, the closing price of SCO's common stock on
January 26, 2001.
As of October 31, 2000, Caldera had no outstanding debt obligations. As
of October 31, 1999, Caldera had only one debt arrangement for approximately
$9,500. As of that date, Caldera had no other bank or other borrowing
arrangements in place.
Caldera's accounts receivable balance increased from $670,000 as of
October 31, 1999 to $1.5 million as of October 31, 2000, an increase of
$874,000. The increase in accounts receivable relates to an increase in
international sales of Caldera's products, which historically have had longer
collection cycles than domestic customers. The allowance for doubtful accounts
increased from $90,000 as of October 31, 1999 to $312,000 as of October 31,
2000, an increase of $222,000. As a percentage of total accounts receivable, the
allowance increased from 11.8 percent as of October 31, 1999 to 16.8 percent as
of October 31, 2000, as Caldera increased its general provision for
uncollectable accounts as a result of concerns related to certain past due
accounts.
The accrued sales returns and other allowances balance increased from
$169,000 as of October 31, 1999 to $364,000 as of October 31, 2000, an increase
of $195,000. The increase was to provide for estimated future returns of
products by Caldera's distributors, which were subject to
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return and stock rotation rights. No unusual provisions or modifications were
made to the accrued sales returns and other allowances accounts as of October
31, 2000.
On September 15, 2000, Caldera sold to Ebiz the rights, title and
interest in and to all of the intellectual property and assets comprising
Caldera's Electronic Linux Marketplace (the "ELM Assets"). Caldera transferred
assets with a net book value of $38,000 as well as cash of $3,000,000 for
4,000,000 shares of Ebiz common stock with an estimated fair value of
$6,400,000. Caldera may also receive up to 4,000,000 additional shares of Ebiz
common stock, depending on the amount of gross revenue generated by the ELM
Assets during the twelve-month period ending December 15, 2001. Immediately
after the closing of the transaction, Caldera owned approximately 31 percent of
the outstanding voting shares of Ebiz. On an ongoing basis, Caldera will account
for its investment in Ebiz using the equity method of accounting. As a result,
Caldera will include its proportional share of Ebiz' net income or loss in
Caldera's results of operations.
Management believes that its current cash and cash equivalents and
available-for-sale securities will be sufficient to meet capital expenditures
and working capital requirements for at least the next twelve months. However,
Caldera may need to raise additional funds to support more rapid expansion,
respond to competitive pressures, acquire complimentary businesses or
technologies or respond to unanticipated requirements. Management cannot assure
you that additional funding will be available in amounts or on terms acceptable
to Caldera. If sufficient funds are not available or are not available on
acceptable terms, the ability to fund expansion, take advantage of acquisition
opportunities, develop or enhance our services or products, or otherwise respond
to competitive pressures would be significantly limited.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", or SFAS 133. 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, as amended, is effective for financial statements
issued for all fiscal quarters of fiscal years beginning after June 15, 2000.
Management does not expect this statement to have a material impact on our
results of operations, financial position or liquidity.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101 ("SAB 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 101 during the first
quarter of fiscal year 2001. The adoption of SAB 101 will not have a material
impact on the Company's results of operations, financial position or liquidity.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of
Accounting Principles Board Opinion No. 25 ("APB 25")". This interpretation
clarifies the definition of employee for purposes of applying APB 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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Caldera's products and services are primarily developed in the United
States and marketed in North America, and to a lesser extent in Europe and
Asia/Pacific regions. As a result, financial results could be affected by
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. Because all of the Caldera's revenue is currently denominated
in U.S. dollars, a strengthening of the dollar could make its Linux products
less competitive in foreign markets.
FOREIGN CURRENCY RISK
Caldera's German subsidiary, Caldera Deutschland, GmbH, performs
research and development activities. This subsidiary is currently Caldera's only
foreign operation. To date, foreign currency fluctuations have had little effect
on Caldera's business because only its German subsidiary's contracts, payables
and receivables are denominated in a foreign currency. As of October 31, 2000,
the assets of Caldera Deutschland were approximately $943,000. All other
transactions of Caldera's business are denominated in the U.S. dollar. As time
passes and as management sees fit, more transactions in Europe and Asia may be
denominated in local currencies. As Caldera expands operations in Europe and
Asia, management will continue to evaluate its foreign currency exposures and
risks and develop appropriate hedging or other strategies to manage those risks.
Management has not revised its current business practices to conform to Europe's
conversion to the euro. Caldera has not modified any of its products to address
Europe's conversion to the euro. Additionally, Caldera has not engaged in any
foreign currency hedging activities.
Caldera is aware of the issues associated with the new European
economic and monetary union (the "EMU"). One of the changes resulting from this
union required EMU member states to irrevocably fix their respective currencies
to a new currency, the Euro, on January 1, 1999. On that day, the Euro became a
functional legal currency within these countries. During the subsequent two
years, business in the EMU member states will have been conducted in both the 25
existing national currencies, such as the Franc or Deutsche Mark, and the Euro.
As a result, companies operating in or conducting business in EMU member states
will need to ensure that their financial and other software systems are capable
of processing transactions and properly handling these currencies, including the
Euro. Caldera has not yet determined all of the costs related to addressing this
issue, and there can be no assurance that this issue and its related costs will
not have a materially adverse affect on Caldera's business, operating results
and financial condition.
Because the EMU member states fixed the value of their respective
national currencies to the Euro, the dispositive exchange rate for determining
the effects of foreign currency fluctuation on the results of operations of a
U.S. company earning significant revenues from Europe is the U.S. dollar-Euro
exchange rate. The overall trend since the adoption of the Euro in January 1999
has been a devaluation compared to the U.S. dollar. Historically, Caldera has
not been materially effected by fluctuations in the U.S. dollar-Euro exchange
rates because the level of activity denominated in Euros has not been
significant.
INTEREST RATE RISK
The primary objective of Caldera's cash management strategy is to
invest available funds in a manner that assures maximum safety and liquidity and
maximizes yield within such constraints. A portion of the securities that
Caldera invests in may be subject to market risk, which means that a change in
prevailing rates or market conditions may adversely affect the principal amount
of the investment. To minimize this risk, Caldera will invest in a broad range
of short-term fixed income securities with varying maturities. As of October 31,
2000, available-for-sale securities included money market instruments,
tax-exempt municipal funds, notes, and bonds, and US government security backed
instruments. Caldera does not borrow money for short-term investment purposes.
44
45
INVESTMENT RISK
Caldera has invested in equity instruments of privately held and public
companies for business and strategic purposes. Investments in privately held
companies are included under the caption Investments in the consolidated balance
sheet and are accounted for under the cost method as Caldera's ownership is less
than 20 percent and Caldera is not able to exercise influence over operations.
Caldera's only investment to date in a public Company is in Ebiz, which is
recorded as Equity Investment in Affiliate. Caldera's investment policy is to
regularly review the assumptions and operating performance of these companies
and to record impairment losses when events and circumstances indicate that
these investments may be impaired. To date, no such impairment losses have been
recorded.
45
46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Annual Financial Statements
Index to Consolidated Financial Statements
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants 47
Consolidated Balance Sheets 48
Consolidated Statements of Operations and Comprehensive Loss 49
Consolidated Statements of Stockholders' Equity 50
Consolidated Statements of Cash Flows 51
Notes to Consolidated Financial Statements 53
FINANCIAL STATEMENT SCHEDULES:
Report of Independent Accountants on Financial Data Schedule 79
II - Valuation and Qualifying Accounts for each of the three years in the period ended October 31,
2000 80
SUPPLEMENTARY FINANCIAL DATA:
Quarterly Financial Data (unaudited) for each of the two years ended October 31, 2000 and 1999 81
46
47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Caldera Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Caldera
Systems, Inc. (a Delaware corporation), the carved-out portion of Caldera, Inc.
(a Utah corporation) and their subsidiary as of October 31, 2000 and 1999, and
the related consolidated statements of operations and comprehensive loss,
stockholders' equity and cash flows for each of the three years in the period
ended October 31, 2000. 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 Caldera
Systems, Inc., the carved-out portion of Caldera, Inc. and their subsidiary as
of October 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 2000 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Salt Lake City, Utah
December 5, 2000
(except with respect to Note 15, as to
which the date is January 26, 2001)
47
48
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC AND THEIR SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
October 31, October 31,
2000 1999
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 36,560,267 $ 121,989
Available-for-sale securities 54,179,307 --
Accounts receivable, net of allowance for doubtful accounts of
$312,300 and $90,000, respectively 1,544,526 670,043
Stock subscription receivable -- 1,500,000
Other receivables -- 375,000
Inventories 389,438 169,409
Other current assets 1,310,173 33,524
------------- -------------
Total current assets 93,983,711 2,869,965
------------- -------------
PROPERTY AND EQUIPMENT:
Computer equipment 1,321,806 609,665
Furniture and fixtures 1,097,048 675,181
Leasehold improvements 342,015 86,973
------------- -------------
2,760,869 1,371,819
Less accumulated depreciation and amortization (1,171,549) (652,399)
------------- -------------
Net property and equipment 1,589,320 719,420
------------- -------------
INVESTMENTS IN NON-MARKETABLE SECURITIES:
Affiliate 1,179,704 --
Non-affiliates 3,999,497 --
------------- -------------
5,179,201 --
------------- -------------
EQUITY INVESTMENT IN AFFILIATE 4,957,325 --
------------- -------------
OTHER ASSETS, net 1,808,746 124,430
------------- -------------
Total assets $ 107,518,303 $ 3,713,815
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,414,359 $ 1,309,255
Payable to The Santa Cruz Operation 898,026 --
Accrued liabilities 1,300,890 623,057
Accrued sales returns and other allowances 363,928 169,000
Deferred revenue 326,330 38,080
Current portion of long-term debt -- 3,698
Related party payables -- 48,933
------------- -------------
Total current liabilities 5,303,533 2,192,023
------------- -------------
LONG-TERM DEBT, net of current portion -- 5,762
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 25,000,000 shares authorized -- --
Common stock, $0.001 par value; 75,000,000 shares authorized,
39,444,457 and 26,607,329 shares outstanding, respectively 39,444 26,607
Additional paid-in capital 155,649,244 16,160,312
Stock subscription receivable -- (1,500,000)
Deferred compensation (3,714,720) (2,734,934)
Accumulated comprehensive income (loss) 299,456 (4,365)
Accumulated deficit (50,058,654) (10,431,590)
------------- -------------
Total stockholders' equity 102,214,770 1,516,030
------------- -------------
Total liabilities and stockholders' equity $ 107,518,303 $ 3,713,815
============= =============
See accompanying notes to consolidated financial statements
48
49
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Year Ended October 31,
2000 1999 1998
------------ ------------ ------------
REVENUE:
Software and related products $ 2,993,489 $ 2,772,878 $ 1,057,088
Services 1,280,834 277,429 --
------------ ------------ ------------
Total revenue 4,274,323 3,050,307 1,057,088
------------ ------------ ------------
COST OF REVENUE:
Software and related products 2,062,724 2,388,601 1,016,682
Services 1,958,612 537,877 --
Write-off of prepaid royalties -- -- 1,381,695
------------ ------------ ------------
Total cost of revenue 4,021,336 2,926,478 2,398,377
------------ ------------ ------------
GROSS MARGIN (DEFICIT) 252,987 123,829 (1,341,289)
------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing (exclusive of non-cash compensation of
$1,969,903, $177,050 and $0, respectively) 14,753,756 4,767,508 2,223,814
General and administrative (exclusive of non-cash compensation
of $2,099,623, $129,176 and $0, respectively) 6,429,874 1,748,087 1,798,872
Research and development (exclusive of non-cash compensation
of $1,146,490, $103,070 and $0, respectively) 4,954,354 2,302,302 1,489,041
SCO cost-sharing arrangement 898,026 -- --
Non-cash compensation 5,216,016 409,296 --
------------ ------------ ------------
Total operating expenses 32,252,026 9,227,193 5,511,727
------------ ------------ ------------
LOSS FROM OPERATIONS (31,999,039) (9,103,364) (6,853,016)
------------ ------------ ------------
EQUITY IN LOSS OF AFFILIATE (386,995) -- --
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense -- (225,657) (1,081,179)
Interest income 3,237,798 2,512 --
Gain on sale of assets to Ebiz, Inc. 2,306,357 -- --
Other (expense) income, net (478) (5,304) 4,838
------------ ------------ ------------
Other income (expense), net 5,543,677 (228,449) (1,076,341)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (26,842,357) (9,331,813) (7,929,357)
PROVISION FOR INCOME TAXES (81,141) (34,775) (33,780)
------------ ------------ ------------
NET LOSS $(26,923,498) $ (9,366,588) $ (7,963,137)
============ ============ ============
DIVIDENDS RELATED TO CONVERTIBLE PREFERRED STOCK $(12,252,717) $ -- $ --
============ ============ ============
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(39,176,215) $ (9,366,588) $ (7,963,137)
============ ============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (1.19) $ (0.51) $ (0.50)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 32,922,135 18,457,543 16,000,000
============ ============ ============
OTHER COMPREHENSIVE LOSS:
Net loss attributable to common stockholders $(39,176,215) $ (9,366,588) $ (7,963,137)
Unrealized gain on available-for-sale securities 356,419 -- --
Foreign currency translation adjustments (52,598) (8,356) 3,991
------------ ------------ ------------
COMPREHENSIVE LOSS: $(38,872,394) $ (9,374,944) $ (7,959,146)
============ ============ ============
See accompanying notes to consolidated financial statements
49
50
CALDERA SYSTEMS, INC., AND THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
------------ ---------- ---------- ---------- -------------
Balance, October 31, 1997 -- $ -- -- $ -- $ --
Debt funding and related accrued interest
applicable to carved-out operations of
Caldera, Inc. -- -- -- -- --
Net loss applicable to carved-out operations
of Caldera, Inc. -- -- -- -- --
Incorporation of Caldera Systems, Inc. and
issuance of common shares to majority stock-
holder for cash and note receivable -- -- 16,000,000 16,000 20,912,848
Distribution to Caldera, Inc. for amount paid in
excess of the net book value of assets received in
reorganization -- -- -- -- (19,160,155)
Cumulative translation adjustment -- -- -- -- --
Net loss for the period subsequent to
incorporation -- -- -- -- --
------------ ---------- ---------- ---------- -------------
Balance, October 31, 1998 -- -- 16,000,000 16,000 1,752,693
Conversion of promissory note and accrued
interest to common shares at $ 1.00 per share -- -- 5,273,974 5,274 5,268,700
Issuance of common shares for cash and stock
subscription receivable at $1-13 per share -- -- 5,333,333 5,333 5,994,667
Issuance of common shares upon exercise of
stock options at $1.00 per share -- -- 22 -- 22
Cumulative translation adjustment -- -- -- -- --
Deferred compensation related to stock option
grants -- -- -- -- 3,144,230
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
------------ ---------- ---------- ---------- -------------
Balance, October 31, 1999 -- -- 26,607,329 26,607 16,160,312
Conversion of common shares to Series A
convertible preferred shares 6,596,146 6,596 (6,596,146) (6,596) --
Issuance of Series B convertible preferred
shares for cash at $6.00 per share, net 5,000,000 5,000 -- -- 29,785,674
Dividend related to Series B convertible
preferred shares -- -- -- -- 10,000,000
Dividend related to stock warrant -- -- -- -- 2,252,717
Issuance of common shares upon exercise of stock
options at prices ranging from $1.00 - $6.00 per share -- -- 452,132 452 531,673
Issuance of common shares under employee stock
purchase program at $2.98 per share -- -- 61,807 62 183,814
Issuance of common shares in exchange for
investments -- -- 306,356 306 2,450,040
Distribution to majority stockholder for acquired
license rights -- -- -- -- --
Issuance of common shares in exchange for investment in
Lineo, Inc. and distribution to majority stockholder
for fair value of shares issued in excess of the carry
over basis of investment -- -- 1,250,000 1,250 9,998,750
Capital contribution from majority stockholder
of Lineo, Inc., recorded at carryover basis -- -- -- -- 1,966,173
Sale of common shares of Lineo, Inc. at $7.50 per
share -- -- -- -- 4,213,531
Issuance of common shares for services -- -- 16,833 17 134,647
Conversion of preferred shares to common shares (11,596,146) (11,596) 11,596,146 11,596 --
Issuance of common shares for cash in an initial
public offering at $14.00 per share -- -- 5,750,000 5,750 71,776,111
Reclassification of stock subscription receivable
due to subsequent receipt of cash -- -- -- -- --
Deferred compensation related to stock option
grants -- -- -- -- 5,370,605
Amortization of deferred compensation -- -- -- -- --
Compensation expense for modifications made
to certain option grants -- -- -- -- 825,197
Cumulative translation adjustment -- -- -- -- --
Unrealized gain on available for sale
securities -- -- -- -- --
Net loss -- -- -- -- --
------------ ---------- ---------- ---------- -------------
Balance, October 31, 2000 -- $ -- 39,444,457 $ 39,444 $155,649,244
============ ========== ========== ========== =============
Stock Accumulated
Subscription Deferred Comprehensive
Receivable Compensation Income (Loss) License Fee
------------ ------------ ------------- -------------
Balance, October 31, 1997 $ -- $ -- $ -- $ --
Debt funding and related accrued interest
applicable to carved-out operations of
Caldera, Inc. -- -- -- --
Net loss applicable to carved-out operations
of Caldera, Inc. -- -- -- --
Incorporation of Caldera Systems, Inc. and
issuance of common shares to majority stock-
holder for cash and note receivable -- -- -- --
Distribution to Caldera, Inc. for amount paid in
excess of the net book value of assets received in
reorganization -- -- -- --
Cumulative translation adjustment -- -- 3,991 --
Net loss for the period subsequent to
incorporation -- -- -- --
---------- ----------- ------------- -------------
Balance, October 31, 1998 -- -- 3,991 --
Conversion of promissory note and accrued
interest to common shares at $ 1.00 per share -- -- -- --
Issuance of common shares for cash and stock
subscription receivable at $1-13 per share (1,500,000) -- -- --
Issuance of common shares upon exercise of
stock options at $1.00 per share -- -- -- --
Cumulative translation adjustment -- -- (8,356) --
Deferred compensation related to stock option
grants -- (3,144,230) -- --
Amortization of deferred compensation -- 409,296 -- --
Net loss -- -- -- --
---------- ----------- ------------- -------------
Balance, October 31, 1999 (1,500,000) (2,734,934) (4,365) --
Conversion of common shares to Series A
convertible preferred shares -- -- -- --
Issuance of Series B convertible preferred
shares for cash at $6.00 per share, net -- -- -- --
Dividend related to Series B convertible
preferred shares -- -- -- --
Dividend related to stock warrant -- -- -- --
Issuance of common shares upon exercise of stock
options at prices ranging from $1.00 - $6.00 per share -- -- -- --
Issuance of common shares under employee stock
purchase program at $2.98 per share -- -- -- --
Issuance of common shares in exchange for
investments -- -- -- (450,849)
Distribution to majority stockholder for acquired
license rights -- -- -- 450,849
Issuance of common shares in exchange for investment in
Lineo, Inc. and distribution to majority stockholder
for fair value of shares issued in excess of the carry
over basis of investment -- -- -- --
Capital contribution from majority stockholder
of Lineo, Inc., recorded at carryover basis -- -- -- --
Sale of common shares of Lineo, Inc. at $7.50 per
share -- -- -- --
Issuance of common shares for services -- -- -- --
Conversion of preferred shares to common shares -- -- -- --
Issuance of common shares for cash in an initial
public offering at $14.00 per share -- -- -- --
Reclassification of stock subscription receivable
due to subsequent receipt of cash 1,500,000 -- -- --
Deferred compensation related to stock option
grants -- (5,370,605) -- --
Amortization of deferred compensation -- 4,390,819 -- --
Compensation expense for modifications made
to certain option grants -- -- -- --
Cumulative translation adjustment -- -- (52,598) --
Unrealized gain on available for sale
securities -- -- 356,419 --
Net loss -- -- -- --
---------- ----------- ------------- -------------
Balance, October 31, 2000 $ -- $(3,714,720) $ 299,456 $ --
========== =========== ============= =============
Caldera, Inc.'s
Equity in
Accumulated Carved-out
Deficit Operations
------------- ---------------
Balance, October 31, 1997 $ -- $ 2,319,393
Debt funding and related accrued interest
applicable to carved-out operations of
Caldera, Inc. -- 5,347,435
Net loss applicable to carved-out operations
of Caldera, Inc. -- (6,898,135)
Incorporation of Caldera Systems, Inc. and
issuance of common shares to majority stock-
holder for cash and note receivable -- --
Distribution to Caldera, Inc. for amount paid in
excess of the net book value of assets received in
reorganization -- (768,693)
Cumulative translation adjustment -- --
Net loss for the period subsequent to
incorporation (1,065,002) --
------------- -------------
Balance, October 31, 1998 (1,065,002) --
Conversion of promissory note and accrued
interest to common shares at $ 1.00 per share -- --
Issuance of common shares for cash and stock
subscription receivable at $1-13 per share -- --
Issuance of common shares upon exercise of
stock options at $1.00 per share -- --
Cumulative translation adjustment -- --
Deferred compensation related to stock option
grants -- --
Amortization of deferred compensation -- --
Net loss (9,366,588) --
------------- -------------
Balance, October 31, 1999 (10,431,590) --
Conversion of common shares to Series A
convertible preferred shares -- --
Issuance of Series B convertible preferred
shares for cash at $6.00 per share, net -- --
Dividend related to Series B convertible
preferred shares (10,000,000) --
Dividend related to stock warrant (2,252,717) --
Issuance of common shares upon exercise of stock
options at prices ranging from $1.00 - $6.00 per share -- --
Issuance of common shares under employee stock
purchase program at $2.98 per share -- --
Issuance of common shares in exchange for
investments -- --
Distribution to majority stockholder for acquired
license rights (450,849) --
Issuance of common shares in exchange for investment in
Lineo, Inc. and distribution to majority stockholder
for fair value of shares issued in excess of the carry
over basis of investment (9,999,999) --
Capital contribution from majority stockholder
of Lineo, Inc., recorded at carryover basis -- --
Sale of common shares of Lineo, Inc. at $7.50 per
share 9,999,999 --
Issuance of common shares for services -- --
Conversion of preferred shares to common shares -- --
Issuance of common shares for cash in an initial
public offering at $14.00 per share -- --
Reclassification of stock subscription receivable
due to subsequent receipt of cash -- --
Deferred compensation related to stock option
grants -- --
Amortization of deferred compensation -- --
Compensation expense for modifications made
to certain option grants -- --
Cumulative translation adjustment -- --
Unrealized gain on available for sale
securities -- --
Net loss (26,923,498) --
------------- -------------
Balance, October 31, 2000 $ (50,058,654) $ --
============= =============
See accompanying notes to consolidated financial statements.
50
51
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
2000 1999 1998
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (26,923,498) $ (9,366,588) $ (7,963,137)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 579,552 288,797 132,221
Non-cash compensation 5,216,016 409,296 --
Equity in loss of affiliate 386,995 -- --
Gain on sale of assets to Ebiz, Inc. (2,306,357) -- --
Issuance of common stock for services 134,664 -- --
Accrued interest converted to equity -- 254,910 1,082,260
Changes in operating assets and liabilities:
Accounts receivable, net (874,483) (518,497) 134,075
Other receivables 375,000 (375,000) --
Inventories (220,029) (119,663) 281,936
Other current assets (1,276,649) 143,081 1,617,138
Other assets 10,356 (10,097) 625,712
Accounts payable 1,056,171 1,044,050 (908,994)
Accrued liabilities 677,833 510,109 (59,496)
Payable to The Santa Cruz Operation 898,026 -- --
Accrued sales returns and other allowances 194,928 115,000 (46,000)
Deferred revenue 288,250 38,080 --
------------- ------------- -------------
Net cash used in operating activities (21,783,225) (7,586,522) (5,104,285)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash payment to Caldera, Inc. in asset acquisition -- (14,963,826) --
Purchase of property and equipment (1,443,416) (587,375) (169,764)
Purchase of other long-lived assets -- (80,000) --
Purchase of available-for-sale securities (101,989,203) -- --
Sale of available-for-sale securities 48,188,287 -- --
Deferred acquisition costs (1,731,672) -- --
Sale of Lineo, Inc. common stock 15,000,000 -- --
Acquisition of investment in affiliate (3,000,000) -- --
Acquisition of investment in non-marketable security (2,000,000) -- --
------------- ------------- -------------
Net cash used in investing activities (46,976,004) (15,631,201) (169,764)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from majority stockholder under convertible promissory note -- 4,819,000 --
Borrowings from majority stockholder 300,000 -- --
Repayment of borrowings from majority stockholder (300,000) -- --
Proceeds from long-term debt -- 11,486 --
Repayments of long-term debt (9,460) (2,026) --
Borrowings from majority stockholder prior to reorganization -- -- 4,429,065
Proceeds from common shares upon incorporation -- 15,481,000 519,000
Proceeds from sale of common stock, net of offering costs 74,781,861 2,963,000 --
Proceeds from sale of Series B convertible preferred stock, net of
offering costs 29,790,674 -- --
Proceeds from sale of common stock through ESP program 183,876 -- --
Proceeds from exercise of common stock options 532,125 22 --
------------- ------------- -------------
Net cash provided by financing activities 105,279,076 23,272,482 4,948,065
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 36,519,847 54,759 (325,984)
EFFECT OF FOREIGN EXCHANGE RATES ON CASH (81,569) (8,356) 3,991
CASH AND CASH EQUIVALENTS, beginning of year 121,989 75,586 397,579
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 36,560,267 $ 121,989 $ 75,586
============= ============= =============
See accompanying notes to consolidated financial statements.
51
52
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year Ended October 31,
2000 1999 1998
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 41,031 $ -- $ --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common shares upon incorporation for
Subscription receivable $ -- $ -- $ 15,481,000
Note receivable from Caldera, Inc. $ -- $ -- $ 4,928,848
Liabilities assumed in acquisition of assets from Caldera, Inc. $ -- $ -- (36,174)
Issuance of common shares for a note receivable $ -- $ 3,000,000 $ --
Issuance of common shares upon conversion of secured convertible promissory
note payable to majority stockholder and related accrued
interest $ -- $ 5,273,974 $ --
Issuance of common shares and the acquisition of a license fee for
non-marketable securities $ 1,999,497 $ -- $ --
Conversion of 6,596,146 shares of common stock to 6,596,146
shares of Series A convertible preferred stock $ 6,596 $ -- $ --
Conversion of 6,596,146 shares of Series A convertible preferred stock and
5,000,000 shares of Series B convertible preferred stock to 11,596,146
shares of common stock $ 11,596 $ -- $ --
Dividends related to Series B convertible preferred stock $ 12,252,717 $ -- $ --
Issuance of common shares in exchange for investment in Lineo, Inc. $ 10,000,000 $ -- $ --
Distribution to majority stockholder for fair value of shares issued in
excess of the carryover basis of the investment in Lineo, Inc. $ (9,999,999) $ -- $ --
Distribution to majority stockholder for license rights $ (450,849) $ -- $ --
Receipt of additional shares of Lineo, Inc. from majority stockholder $ 1,966,173 $ -- $ --
Net book value of Electronic Linux Marketplace assets exchanged for
equity investment in Ebiz, Inc. $ (37,963) $ -- $ --
See accompanying notes to consolidated financial statements.
52
53
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Caldera Systems, Inc. ("Caldera"), which was incorporated as a Utah
corporation on August 21, 1998, and reincorporated as a Delaware corporation on
March 6, 2000. Caldera began operations in 1994 as Caldera, Inc. (the
"Predecessor"). The Predecessor developed and marketed Linux operating system
software and related products.
In July 1996, through an asset purchase, the Predecessor acquired an
additional business line that was not engaged in developing and marketing Linux
software and related products. The Predecessor subsequently made the strategic
determination to separate its two business lines into separate entities and,
under an asset purchase agreement, dated as of September 1, 1998, as amended,
sold the assets relating to its business of developing and marketing Linux
software and related products to Caldera for $19,928,848. This amount was based
upon the amount of funding that had been received by the Predecessor related to
the Linux software business. The purchase price was paid as follows: a cash
payment of $14,963,826 (8% interest bearing demand note) in fiscal year 1999,
the assumption of $36,174 of liabilities, and the transfer of a note receivable
due from the Predecessor in the amount of $4,928,848 (see below).
Upon incorporation, Caldera agreed to issue 16,000,000 shares of common
stock to The Canopy Group ("Canopy"), the majority stockholder of the
Predecessor, in exchange for $20,928,848. Of this amount, $16,000,000 was paid
in cash ($519,000 in fiscal year 1998 and $15,481,000 -- non-interest bearing --
in fiscal year 1999) and Canopy transferred to Caldera a note receivable from
the Predecessor of $4,928,848.
Since Canopy was the majority stockholder of the Predecessor and the
sole stockholder of Caldera, this transaction has been accounted for as a
reorganization of entities under common control with the assets and liabilities
reflected at carry-over basis in a manner similar to pooling of interests. The
accompanying consolidated financial statements include the carved-out operations
of the Predecessor related to the Linux business through September 1, 1998, the
date of the reorganization. The acquired assets and liabilities had a net book
value of $768,693. The excess of the purchase price of $19,928,848 over the net
book value of the assets acquired of $768,693 was charged to equity.
The revenue of the carved-out operations of the Predecessor reflects
actual revenue derived from Linux software sales and the expenses of the
carved-out operations reflect actual expenses associated with the Linux 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 headcount.
Interest was allocated based upon borrowings related to the carved-out
operations of the Predecessor. Management believes that the allocation methods
used are reasonable.
Prior to the reorganization, the net losses of the Predecessor 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 in Carved-out Operations included in the accompanying
consolidated statements of stockholders' equity. This funding has been offset by
the accumulated losses applicable to the carved-out operations.
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In connection with the reorganization, Caldera acquired a wholly owned
subsidiary in Germany, Caldera Deutschland, GmbH ("Caldera GmbH") that performs
research and development activities. Collectively, Caldera, the carved-out
operations of the Predecessor and Caldera GmbH are referred to as the "Company."
The Company develops, markets and supports Linux operating system
software products and related services. The Company's strategy is to provide
commercial products and services that enable the development, deployment and
management of Linux-based specialized servers and Internet devices that extend
the e-Business infrastructure. The Company sells and distributes its software
and related products indirectly through distributors, value added resellers
("VARs"), original equipment manufacturers ("OEMs"), and system integrators and
directly to end-user customers. These sales occur throughout the United States
and in certain international locations.
On August 1, 2000 and as amended on September 13, 2000 and December 12,
2000, Caldera, Caldera International, Inc. ("New Caldera"), and The Santa Cruz
Operation ("SCO") entered into an Agreement and Plan of Reorganization (the
"Reorganization Agreement"). As a result of the transactions proposed by the
Reorganization Agreement (the "Reorganization"), (i) a newly formed, wholly
owned subsidiary of New Caldera will be merged with and into Caldera, with
Caldera being the surviving corporation, and all outstanding Caldera securities
will be converted, on a share for share basis, into New Caldera securities
having identical rights, preferences and privileges, with New Caldera assuming
any and all outstanding options and other rights to purchase shares of capital
stock of Caldera (with all such New Caldera securities issued to former Caldera
security holders initially representing a fully-diluted equity interest in New
Caldera equal to approximately 71.4 percent in New Caldera); (ii) SCO and
certain of its subsidiaries will contribute to New Caldera, all of the capital
stock held of certain contributed companies as well as certain assets of SCO,
collectively representing the Server and Professional Services Groups of SCO, in
consideration for the issuance by New Caldera to SCO of shares of common stock
of New Caldera, $0.001 par value ("New Caldera Common Stock"); (iii) New Caldera
will assume or replace all options to acquire common stock of SCO held by SCO
employees (other than certain officers of SCO) hired or retained by Caldera and
such options will be converted into options to purchase New Caldera Common Stock
on a two SCO option for one New Caldera option basis (the "New Caldera
Options"); and (iv) SCO will receive shares of New Caldera Common Stock
(including shares reserved for New Caldera Options) representing in the
aggregate a fully diluted equity interest in New Caldera equal to approximately
28.6 percent of New Caldera and $7 million in cash. In conjunction with the
Reorganization Agreement, Canopy has agreed to loan $18 million to SCO and
Caldera has advanced the $7 million cash payment to SCO subsequent to October
31, 2000 (see Note 15). If the Reorganization is not completed, SCO will be
obligated to repay the advance. Assets of SCO will secure each of these loans.
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 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
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
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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, other receivables 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. The
fair values of available-for-sale securities are determined using quoted market
prices for these securities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
carved-out operations of the Predecessor prior to Caldera's incorporation,
Caldera and its wholly owned subsidiary, Caldera Deutschland GmbH ("Caldera
GmbH"), after elimination of intercompany accounts and transactions.
FOREIGN CURRENCY TRANSLATION
For purposes of consolidating the Caldera GmbH operations, the Company
has determined the functional currency for the Caldera GmbH operations to be the
German Mark. Accordingly, translation gains and losses are included as a
component of comprehensive loss.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with maturities of three or fewer
months to be cash equivalents. Cash equivalents primarily consist of investments
in money market mutual funds, commercial paper or other short-term debt
instruments.
AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities include investments in debt securities
such as commercial paper, treasury notes and bonds. These investments are
recorded at fair market value, based on quoted market prices and unrealized
gains and losses are recorded as a component of comprehensive income (loss).
Realized gains and losses, which are calculated based on the specific
identification method, are recorded in operations as incurred. As of October 31,
2000, debt securities with maturity dates less than one year totaled
approximately $38.2 million and investments with maturity dates ranging from one
year to two years totaled approximately $16.0 million.
INVENTORIES
Inventories consist primarily of completed products and raw materials.
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market value. As of October 31, 2000 and 1999, inventories consisted
of raw materials of approximately $201,800 and $79,400, respectively, and
finished goods of approximately $187,600 and $90,000, respectively.
Provisions, when required, are made to reduce excess and obsolete
inventories to their estimated net realizable values. Due to competitive
pressures and technological innovation, it is possible that estimates of the net
realizable value could change in the near term.
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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 applicable lease.
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. Upon 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 No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"),
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, 2000, 1999 and 1998. 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 deposits and purchased technology that is to be
used in the development of the Company's current web-based products. The
purchased technology is being amortized using the straight-line method over a
period of two years. Other non-current assets consist primarily of deferred
acquisition costs incurred through October 31, 2000 that are directly
attributable to the pending reorganization with SCO. The deferred acquisition
costs consist primarily of legal, accounting and human resource due diligence
costs, legal, accounting and registration fees associated with obtaining
shareholder approval and costs associated with obtaining a fairness opinion.
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, 2000, the Company does not consider any of its
long-lived assets to be impaired.
ACCRUED LIABILITIES
As of October 31, 2000 and 1999, accrued liabilities consisted of the
following:
2000 1999
------------ ------------
Accrued vacation $ 319,863 $ 98,425
Accrued accounting, legal and annual report fees 205,000 -
Accrued payroll and related costs 200,887 45,284
Post contract support 145,000 50,000
Accrued marketing development funds 119,993 172,900
Foreign income taxes payable 78,808 30,139
Other accrued liabilities 231,339 226,309
------------ ------------
Total accrued liabilities $ 1,300,890 $ 623,057
============ ============
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REVENUE RECOGNITION
The Company generates revenue from software and related products sold
indirectly through distributors and solutions providers and directly to
end-users. The Company also generates services revenue from training royalties
and tuition fees, consulting fees, and customer support fees. During fiscal
1998, all of the Company's revenue was derived from software offerings and
related products such as shipments of incomplete box units or documentation
materials.
Revenue from the sale of software and related 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 or to OEMs and VAR's require a binding purchase order.
Sales to resellers for which payment is considered to be substantially
contingent on the reseller's success in distributing individual units of the
product or sales to resellers with which the Company does not have historical
experience are accounted for as consignments and the revenue is recognized once
sell-through verification has been received and payments from customers become
due. Direct sales to end-users are evidenced by concurrent payment for the
product via credit card and are governed by a license agreement. Generally, the
only multiple element arrangement of the Company's initial software sales is
certain telephone and e-mail technical support services the Company provides at
no additional charge. These services do not include product update or upgrade
rights. After the initial support period, customers can elect to enter into
separate support agreements. The cost of providing the initial support services
is not significant; accordingly, the Company accrues the estimated costs of
providing the services at the time of revenue recognition. 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, revenue is deferred until no
significant obligations remain or acceptance has occurred. To date, the Company
has not shipped any software and related 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 consulting, 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. These
services revenue are recognized as the services are performed.
Sales to certain distributors are subject to agreements allowing for
rights of return and price protection. Allowances for estimated future returns,
price protection, stock rotations, and other customer incentives, are provided
at the time of sale based on the Company's policies and historical experience.
At October 31, 2000 and 1999, allowances for returns, price protection and stock
rotations totaled approximately $363,900 and $169,000, respectively, and are
reflected as a current liability in the accompanying consolidated balance
sheets.
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ROYALTY COSTS
Royalties paid by the Company on applications licensed from third
parties that are incorporated into the software products sold by the Company are
expensed as cost of revenue on a per unit basis as software products are sold.
Royalties paid in advance of product sales are included in prepaid expenses and
recorded as cost of revenue when the related products are sold.
During the years ended October 31, 1996 and 1997, the Company entered
into royalty agreements with a supplier pursuant to which the Company prepaid
royalties of approximately $2,055,000. During fiscal year 1998, the Company
asserted that the supplier breached the terms of the royalty agreements and
management determined that the remaining prepaid royalties, in the amount of
$1,381,700, were impaired and accordingly were written off and classified as
part of cost of revenue in the accompanying consolidated statement of operations
for the year ended October 31, 1998. Management determined the asset was
impaired because its value was tied to the intellectual property value of the
licenses the Company had purchased. The vendor breached the terms of the
contract in management's view, when it open sourced some of the related
software. When the vendor decided to open source the software, the license the
Company had purchased had no value in relation to that software. Additionally,
the Company discontinued the development of a product related to the licensed
software resulting in the complete impairment of the prepaid asset. Management
further determined that any attempt to pursue legal action against the supplier
would be costly and uncertain given the resources required to pursue such an
action and the uncertainties related to interpreting the provisions of the
royalty agreements.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist of the following: advertising,
channel promotions, marketing development funds, promotional activities, public
relations, trade shows and the salaries, commissions and related expenses of all
personnel involved in the sales process. The Company expenses the cost of
advertising the first time the advertising takes place. Advertising expenses
totaled approximately $1,508,200, $1,228,600 and $967,700 for the years ended
October 31, 2000, 1999 and 1998, respectively.
The Company has agreements with certain retailers whereby the Company
issues a credit for certain marketing development activities initiated by the
retailer that directly relate to the promotion of the Company's products. As of
October 31, 2000 and 1999, the Company recorded an accrual of $120,000 and
$172,900, respectively, for these costs.
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 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 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.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
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 maintains an allowance for uncollectable accounts receivable based
upon the expected collectibility of all accounts
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receivable. As of October 31, 2000, four distributors accounted for
approximately 35 percent of the gross accounts receivable balance. As of October
31, 1999, three distributors accounted for approximately 71 percent of the gross
accounts receivable balance. As of October 31, 2000 and 1999, the allowance for
bad debts was $312,300 and $90,000, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards ("SFAS") 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 ("SAB") 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 101 during the first
quarter of fiscal year 2001. The adoption of SAB 101 will not have a material
impact on the Company's results of operations, financial position or liquidity.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions involving Stock Compensation, an
interpretation of Accounting Principles Board Opinion No. 25 ("APB 25")." This
interpretation clarifies the definition of an employee for purposes of applying
APB 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, at which time it was adopted by the
Company. The adoption of FIN 44 had no impact on the Company's results of
operations, financial position or liquidity at the time of adoption.
COMPREHENSIVE INCOME (LOSS)
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income".
SFAS 130 establishes standards for reporting comprehensive income (loss) and its
components in financial statements and unrealized gains on short-term
investments. Comprehensive income (loss) consists of net loss, foreign currency
translation adjustments and unrealized gain (loss) on available for sale
securities and is presented in the accompanying consolidated statements of
operations and comprehensive loss. The adoption of SFAS 130 had no impact on
total stockholders' equity at the time of adoption.
NET LOSS PER COMMON SHARE
The Company computes net loss per share in accordance with SFAS No.
128, "Earnings Per Share", and SAB No. 98 ("SAB 98"). Under the provisions of
SFAS 128 and SAB 98, basic net loss per common share ("Basic EPS") is computed
by dividing net loss available 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 potential common share equivalents then
outstanding. Potential common share equivalents consist of shares issuable upon
the exercise of stock options and shares issuable upon the conversion of Series
A and Series B convertible
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preferred stock for periods during which they were outstanding. For the years
ended October 31, 2000, 1999 and 1998, 6,326,247, 1,241,390 and 0 common share
equivalents, respectively 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. For the year ended October 31, 1998,
the 16,000,000 shares of common stock issued in the initial capitalization of
Caldera were treated as outstanding for the entire fiscal year.
(3) INITIAL PUBLIC OFFERING
On March 20, 2000, the Company completed the sale of an aggregate of
5.0 million shares of common stock at a price of $14.00 per share in its initial
public offering. The offering was affected pursuant to a Registration Statement
on Form S-1 (Registration No. 333-94351), which was declared effective on March
20, 2000 by the SEC. On April 17, 2000, the underwriters exercised there over
allotment option for an additional 750,000 shares of our common stock at $14.00
per share.
The Company received approximately $80.5 million in gross proceeds from
this offering, of which approximately $5.6 million was paid to the underwriters
and approximately $3.0 million was paid for direct offering expenses.
(4) OTHER RECEIVABLES
Other receivables as of October 31, 1999 consisted of amounts due from
two strategic partners that participated in a marketing program with the
Company. The amounts received by the Company from the strategic partners have
been applied against actual expenses incurred and have reduced the related sales
and marketing expense of the Company. Aside from the collection of the
short-term receivable balances, there are no other future commitments or
consideration related to these arrangements.
(5) INVESTMENTS IN NON-MARKETABLE SECURITIES
The Company is accounting for each of these investments in
non-marketable securities under the cost method, as the Company has no ability
to exercise significant influence over any of the entities. The Company's
management routinely assesses its investments for impairment and adjusts the
carrying amount to estimated realizable values when impairment has occurred. As
of October 31, 2000, the Company does not consider any of its investments to be
impaired.
BUSINESS ALLIANCE WITH EVERGREEN INTERNET, INC.
In January 2000, the Company and Evergreen Internet, Inc. ("Evergreen")
entered into a master agreement which sets forth the terms and conditions of a
business alliance. Evergreen and the Company agreed as follows: (i) Evergreen
granted to the Company an original equipment manufacturer license permitting the
bundling of certain of Evergreen's software products with the Company's software
products in exchange for the Company paying royalties to Evergreen based on
future sales; (ii) the Company and Evergreen will engage in joint development
and integration of their respective software products; (iii) the Company and
Evergreen will cooperate to create educational training courses for the combined
products; (iv) the Company acquired 370,370 shares of common stock of Evergreen
for $2,000,000 and Evergreen transferred an additional 222,222 shares of its
common stock to the Company in exchange for 200,000 shares of the Company's
common stock; and (v) the parties agreed to work together to identify new
business solution opportunities for their joint products. On January 10, 2000,
the Company paid the $2.0 million and issued 200,000 shares of common stock in
exchange for the 592,592 shares of Evergreen's common stock.
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The Company and Evergreen have agreed to certain referral fees. If the
Company enters into a support agreement with a customer that has been referred
by Evergreen, the Company will pay a portion of the total contract to Evergreen
as a referral fee. The remaining portion of the support agreement will be
recorded as deferred revenue, and recognized ratably over the term of the
agreement. The referral fees will be recorded as sales and marketing expenses as
earned by Evergreen.
The Company has recorded its investment in Evergreen at cost, based on
the cash consideration paid by the Company and the estimated fair market value
of the Company's common stock on the date of the agreement of $8.00 per share.
The Company determined that the estimated fair value of the Company's common
stock is more clearly evident of the value of the transaction since Evergreen is
a privately owned company. In management's opinion, the consideration exchanged
by the Company for the common shares of Evergreen was equal to the fair value of
the shares acquired. Furthermore, in management's opinion the terms of the OEM
arrangement and joint development and educational efforts are based on strategic
rationales and the related transactions will be at arm's length. The Company
currently intends on holding the shares indefinitely.
The total investment of $3.6 million is included in the caption
Investments in Non-marketable Securities - Non-affiliates in the accompanying
October 31, 2000 consolidated balance sheet.
STOCK EXCHANGE AGREEMENT WITH TROLL TECH AS
In December 1999, the Company and Canopy entered into an agreement with
Troll Tech AS and its stockholders. Pursuant to the agreement, the Company
acquired 159 shares of common stock of Troll Tech (approximately 2 percent of
Troll Tech's outstanding common stock) in exchange for 106,356 shares of the
Company's common stock and Canopy acquired 398 shares of common stock of Troll
Tech in exchange for $1,000,000, payable in monthly installments of $100,000.
The agreement also grants to Canopy and its affiliates certain license rights
with respect to Troll Tech's software. Royalties will be paid based upon future
sales of products by the Company. To date, the Company has not sold any products
that incorporate Troll Tech's technology and has not paid any royalties to Troll
Tech.
The Company has recorded its investment in Troll Tech's common stock at
$399,999, based on the cash price per share paid by Canopy. The Company
determined that the cash price per share paid by Canopy is the most reliable
evidence of the value of Troll Tech's common stock. The difference between the
estimated fair value of the 106,356 shares of the Company's common stock at
$8.00 per share of $850,848 and the $399,999 investment was recorded as a
license fee. The license fee was classified as contra-equity and was
subsequently reflected as a distribution to Canopy because the license rights
were used by Canopy and its affiliates. The Company currently intends on holding
the shares of Troll Tech indefinitely.
The total investment of $399,999 is included in the caption Investments
in Non-marketable Securities - Non-affiliates in the accompanying October 31,
2000 consolidated balance sheet.
LINEO, INC.
In January 2000, the Company and Lineo, Inc. ("Lineo") entered into a
stock purchase and sale agreement. Lineo is the successor entity to the
operations of the Predecessor, which were not acquired by Caldera in the
reorganization discussed in Note 1. As of January 2000, Lineo was majority owned
by Canopy. Pursuant to the stock purchase agreement, the Company
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acquired 3,238,437 shares of common stock of Lineo (approximately 14 percent of
Lineo's outstanding voting stock) in exchange for 1,250,000 shares of the
Company's common stock.
Because Lineo is also majority owned by Canopy, the investment in Lineo
has been accounted for as a transaction between entities under common control
with the transfer being reflected in the Company's financial statements at
Lineo's carry over basis. At the date of the agreement, Lineo had a
stockholders' deficit of which approximately $124,000 would be associated with
the 14 percent interest the Company acquired. Accordingly, the investment was
recorded at a nominal value of $1.00 because the Company does not have any
obligation to provide additional funding to Lineo. The Company has recorded the
estimated fair value of the shares of its common stock issued to Lineo at $10.0
million with the difference between the $10.0 million and the $1.00 investment
recorded as a distribution to Canopy.
On May 11, 2000, Canopy transferred 1,761,563 shares of Lineo's common
stock held by Canopy to the Company. This transfer has been reflected as a
capital contribution by Canopy at Lineo's carry over basis of $1,966,173. As a
result of this transaction, the Company had a total of 5,000,000 shares of
Lineo's common stock (approximately 14 percent of Lineo's outstanding voting
stock).
On August 31, 2000, the Company, Canopy and Metrowerks Holdings, Inc.
("Metrowerks"), an affiliate of Motorola, Inc., entered into a Stock Purchase
and Sale Agreement whereby the Company and Canopy sold 2.0 million and 1.0
million shares, respectively, of common stock of Lineo, Inc. to Metrowerks at
$7.50 per share. Prior to this transaction, Caldera, Canopy and Lineo had no
relationship with Metrowerks; however, Motorola, Inc. is a preferred stockholder
of Lineo. The Company received the $15.0 million net proceeds of the sale in
October 2000.
In conjunction with the sale of the common stock of Lineo, the Company
also entered into a stockholder agreement by and among Canopy, Lineo, and
certain other stockholders of Lineo that provides for a right of first refusal
for the benefit of Metrowerks with respect to Lineo shares held by the Company
and other Lineo stockholders. The Company has also agreed to indemnify
Metrowerks for any damages sustained by Metrowerks as a result of breaches by
the Company under the stock purchase and sale agreement and the stockholder
agreement or for breaches by Lineo under a warrant agreement between Lineo and
Metrowerks. The Company's indemnification obligation is limited to the amount of
proceeds received by the Company in its sale to Metrowerks.
The difference between the $7.50 per share and the Company's per share
carrying value was recorded as a contribution to equity. The total investment of
$1,179,704 is included in the caption Investments in Non-marketable Securities -
Affiliate in the accompanying October 31, 2000 consolidated balance sheet.
(6) EQUITY INVESTMENT IN EBIZ ENTERPRISES, INC.
On September 15, 2000, Caldera sold to Ebiz Enterprises, Inc. ("Ebiz")
the rights, title and interest in and to all of the intellectual property and
assets comprising Caldera's Electronic Linux Marketplace concept (the "ELM
assets"). Caldera transferred assets with a net book value of $38,000 as well as
cash of $3,000,000 for 4,000,000 shares of Ebiz common stock. Caldera may also
receive up to 4,000,000 additional shares of Ebiz common stock, depending upon
the amount of gross revenue generated by the ELM assets during the twelve-month
period ending December 15, 2001. Immediately after the closing of the
transaction, Caldera owned approximately 31 percent of the outstanding voting
shares of Ebiz. Subsequent to Caldera's
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investment, additional shares of Ebiz common stock -- including 2,500,000 shares
to Canopy -- were issued that reduced Caldera's ownership interest to
approximately 17 percent.
Caldera has accounted for its interest in Ebiz using the equity method
of accounting due to its ability to exercise influence on Ebiz (see Note 15).
Under the equity method, Caldera recognizes its portion of the net income or net
loss of Ebiz in its consolidated statement of operations. For the year ended
October 31, 2000, Caldera recognized $224,339 in its statement of operations
that represented its portion of Ebiz's net loss. In addition, because Ebiz had a
stockholders' deficit at the time of Caldera's investment, Caldera is amortizing
on a straight-line basis, the difference between its investment and the amount
of underlying equity in the net assets of Ebiz, which has been calculated as
follows:
Fair value of Ebiz shares received (4,000,000 shares at $1.60 per share) $ 6,400,000
Less portion of gain deferred due to Caldera's continuing ownership interest (1,055,680)
-------------
Basis of recorded investment 5,344,320
Caldera's portion of Ebiz deficit 1,162,000
-------------
$ 6,506,320
=============
Caldera has allocated this difference to goodwill and is amortizing
this amount on a straight-line basis over five years. At the time of the
investment, Ebiz had no other substantial identifiable intangible assets. For
the year ended October 31, 2000, Caldera recognized $162,656 in its statement of
operations that represented this amortization. The net investment of $4,957,325
is included in the caption Equity Investment in Affiliate in the accompanying
October 31, 2000 consolidated balance sheet.
Ebiz' common stock is currently traded on the Over-the-Counter Bulletin
Board. On October 31, 2000, Ebiz common stock closed at approximately $0.88 per
share. Caldera's carrying amount per share of Ebiz' common stock on October 31,
2000 was approximately $1.24 per share. Management believes that this decline in
market value of the stock is not permanent in nature and resulted primarily from
market conditions related to technology stocks and that Caldera's ability to
recover the carrying amount of its investment has not been permanently impaired.
Caldera will continue to evaluate the carrying amount of its investment in Ebiz
on an ongoing basis and will record impairment charges as necessary from
permanent impairment of its investment. Caldera has the intent and the
wherewithal to hold its investment in Ebiz long term in order to recover the
current decline in market value.
(7) BORROWINGS FROM CANOPY
SECURED CONVERTIBLE PROMISSORY NOTE PAYABLE
In connection with the incorporation of Caldera, Caldera and Canopy
entered into a Secured Convertible Promissory Note Agreement (the "Note
Agreement") pursuant to which the Company could borrow up to $2,000,000, or such
other greater amount as determined necessary, to fund ongoing operations.
Interest accrued on borrowings under the Note Agreement at the prime rate, less
one-half percent compounded annually, which was 7.25 percent. Borrowings under
the Note Agreement were convertible to shares of Caldera's common stock at $1.00
per share, which was deemed to be the estimated fair market value of Caldera's
common stock on September 1, 1998. Under the Note Agreement, the Company
borrowed $4,819,000 during the year ended October 31, 1999. Additionally,
accrued interest of $454,974 was incurred by the Company related to borrowings
under the Note Agreement and the amount payable to the Predecessor for the
assets acquired in the reorganization (see Note 1). On August 19, 1999, the
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principal borrowings and accrued interest were converted into 5,273,974 shares
of common stock and the Note Agreement was cancelled.
SECURED PROMISSORY NOTE WITH CANOPY
On December 29, 1999, Caldera entered into a Secured Promissory Note
Agreement with Canopy under which the Company borrowed $300,000. Borrowings
under this note bore interest at 9.5 percent per annum and were repaid in full
during January 2000.
(8) STOCKHOLDERS' EQUITY
REINCORPORATION AS A DELAWARE CORPORATION
On March 6, 2000, Caldera reincorporated in Delaware. The
reincorporation into Delaware 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
stockholders of record. Additionally, stockholders of record of Series A and
Series B of the Company received shares of Series A and Series B preferred stock
of the subsidiary. All share and per share amounts in the accompanying
consolidated financial statements have been adjusted to give effect to the
reincorporation.
STOCK SPLIT
On December 29, 1998, Caldera'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.
PREFERRED STOCK
On December 30, 1999, the stockholders approved articles of amendment
to the Company's articles of incorporation. The amended articles of
incorporation authorized the Company to issue 25,000,000 shares of no par value
preferred stock and 75,000,000 shares of no par value common stock. The
Company's board of directors is authorized, without stockholder approval, to
designate and determine the preferences, limitations and relative rights granted
to or imposed upon each share of preferred stock which are not fixed by the
amended articles of incorporation. The amended articles of incorporation
designated 6,596,146 shares as Series A Convertible Preferred Stock ("Series A")
and 5,000,000 shares as Series B Convertible Preferred Stock ("Series B").
The Series A and B shares had initial stated values per share of $4.03
and $6.00, respectively, and ranked on parity with each other and prior to any
other class or series of capital stock of the Company with respect to dividend
rights, rights upon liquidation, winding up or dissolution, and redemption
rights. The Series A and B shares were entitled to receive, when, as and if
declared by the board of directors, cumulative and accruing preferential
dividends at eight percent per annum, compounded annually, based on the stated
value per share; provided, however, solely for dividend purposes the Series A
stated value per share was deemed to be $6.00. Any holder of Series A or B
shares could convert all or any shares of Series A or B into common shares and
each share of Series A or B automatically converted into common shares
immediately prior to the closing of a firm commitment underwritten public
offering of at least $25,000,000, as defined. Each Series A and B share
initially converted into one share of common stock. The holders of Series A and
B shares were entitled to vote on all matters submitted to the stockholders of
the Company, including the election of directors, together with the holders of
common stock voting together as a single class. Each share of Series A and B was
entitled to one vote for each share of common stock that would be issuable upon
conversion of such share.
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In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, each holder of Series A and B then outstanding
would 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 or B
shares would hold had all shares of Series A and B been converted to common
immediately prior to the liquidation, dissolution or winding up.
In connection with the Company's initial public offering, all
outstanding preferred stock was converted to common stock on March 20, 2000.
CONVERSION OF COMMON SHARES INTO SERIES A SHARES
Prior to the offering of Series B shares discussed below, on December
30, 1999, the Company entered into a Conversion Agreement with its two major
stockholders, Canopy and MTI Technology Corporation ("MTI"). These two
stockholders held 99 percent of the outstanding shares of the Company's common
stock at December 30, 1999. Pursuant to the Conversion Agreement, the Company
converted 6,596,146 shares of outstanding common stock held by Canopy and MTI
into 6,596,146 shares of Series A.
ISSUANCE OF SERIES B CONVERTIBLE PREFERRED STOCK
On December 30, 1999, the Company's board of directors authorized the
issuance of 5,000,000 shares of Series B convertible preferred stock at $6 per
share with the rights, preferences, privileges and restrictions as described
above. On January 10, 2000, the 5,000,000 shares were sold for net proceeds of
$29,790,674.
Each share of Series B convertible preferred stock was immediately
convertible to one share of common stock upon issuance. During the year ended
October 31, 2000, the Company recorded a dividend related to the Series B
convertible preferred stock in the amount of $10 million representing the value
of the beneficial conversion feature. The beneficial conversion feature was
calculated based on the difference between the conversion price of $6.00 per
share and the estimated fair value of the common stock of $8.00 per share for
financial reporting purposes based on the estimated price range for the
Company's IPO. The Company's board of directors determined that the $6.00 per
share price for the Series B preferred stock represented their estimate of the
fair value of the Series B preferred stock at the time sold and that the Series
B preferred shares were not issued for other consideration or goods and
services.
In connection with the preferred stock purchase agreements, the Company
and the investors entered into a second amended and restated investor rights
agreement (the "Rights Agreement") and a voting agreement. Pursuant to the
voting agreement, the Company and the preferred stockholders established the
composition of the Company's board of directors.
Pursuant to the Rights Agreement, Canopy and MTI, the Series A
preferred stockholders, and the investors in the Series B preferred stock
(collectively the "Preferred Stockholders") have certain rights beginning six
months following the closing of a qualified public offering with respect to
registration of the common shares issued or issuable upon conversion of the
Series A and Series B preferred shares in compliance with the Securities
Exchange Act of 1934. The Preferred Stockholders have certain demand and
piggyback rights that require the Company to use its best efforts to register
the requested shares and/or permit the Preferred Stockholders to include shares
in certain secondary offerings of the Company's common stock. The Company has
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agreed to bear all expenses in connection with any registration, other than
underwriting discounts and commissions.
WARRANT AGREEMENT BETWEEN CANOPY AND SERIES B PREFERRED STOCKHOLDER
In connection with the Series B preferred stock offering, Canopy and
Egan-Managed Capital, L.P. ("EMC"), one of the investors in the Series B
preferred stock offering, entered into an agreement wherein Canopy agreed to
purchase the shares of Series B convertible preferred stock purchased by EMC if
EMC did not receive a warrant in a satisfactory form to EMC to purchase 416,667
shares of the Company's common stock from Canopy. On March 13, 2000, Canopy sold
to EMC a warrant for $10,000 to purchase 416,667 shares of the Company's common
stock held by Canopy at $5.98 per share for a two-year period. Upon exercise of
the warrant, all proceeds will be paid to Canopy. Since the sale of this warrant
directly related to the issuance of the Series B preferred stock, the Company
accounted for this transaction as if the Company had sold the warrant to EMC
with an offsetting contribution to capital. Accordingly, the Company recorded
the fair value of the warrant of $2,252,717, determined using the Black-Scholes
option-pricing model, as a beneficial conversion feature reflected as a dividend
related to the Series B preferred stock during the year ended October 31, 2000.
Assumptions used in the Black-Scholes option-pricing model were the following:
estimated fair value of common stock of $8.00 per share; risk-free interest rate
of 6 percent; expected dividend yield of 0 percent; volatility of 118 percent;
and expected exercise life of two years.
COMMON STOCK TRANSACTIONS
Effective September 1, 1998, in connection with the initial
capitalization of Caldera, Canopy purchased 16,000,000 shares of Caldera's
common stock for $20,928,848. Of this amount, $16,000,000 was paid in cash
($519,000 in fiscal year 1998 and $15,481,000 in fiscal year 1999) and Canopy
transferred to Caldera a note receivable from the Predecessor of $4,928,848. As
of October 31, 1998, the Company had recorded the $15,481,000 to be received
from Canopy as a stock subscription receivable and the purchase price and
related accrued interest of $15,163,890 as a payable to Caldera, Inc. (see Note
1).
At the time of incorporation, Canopy agreed to continue to fund the
operations of the Company through a secured convertible promissory note (see
Note 7). The conversion terms of the secured promissory note allowed Canopy to
convert the borrowings and accrued interest into common stock at a price of
$1.00 per share, which was determined by the Company's board of directors to be
the estimated fair market value of the Company's common stock on September 1,
1998, the date of the convertible promissory note agreement. In August 1999,
Canopy elected to convert the outstanding principal borrowings and accrued
interest into 5,273,974 shares of the Company's common stock.
In July 1999, the Company negotiated with MTI, a publicly traded
company which at the time was 50 percent owned by Canopy, to sell 5,333,333
common shares for $6,000,000, or $1.13 per share. The Company received
$3,000,000 in cash at the time of closing and issued a note receivable for
$3,000,000 that bore interest at the prime rate plus one percent (9 1/4 percent
as of October 31, 1999). This note receivable was to be received in two
installments of $1,500,000 due in January and July 2000. The Company negotiated
to receive the initial installment of $1,500,000 in November 1999 in exchange
for the Company agreeing to forego the interest component attached to the note
receivable. As a result of this modification, the Company did not record any
accrued interest in the consolidated balance sheet as of October 31, 1999. The
$1,500,000 received in November 1999 and the $1,500,000 received in August 2000
has been reflected as current assets and contra-equity in the accompanying
consolidated balance sheets as
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of October 31, 2000 and October 31, 1999. In connection with MTI's investment,
the Company entered into an Investors' Rights Agreement with MTI and Canopy
pursuant to which MTI received registration rights applicable to the stock
acquired. This Investors' Rights Agreement was amended and superceded in
connection with the Conversion Agreement and the offering of Series B preferred
shares discussed above.
STOCK OPTION PLANS
During fiscal year 1998, the Company adopted the 1998 Stock Option Plan
(the "1998 Plan") that provided for the granting of nonqualified stock options
to purchase shares of common stock. Under the 1998 Plan, the Company could grant
up to 5,000,000 options to employees, non-employee members of the board of
directors or consultants who provide services to the Company. Options granted
under the 1998 Plan are subject to expiration and vesting terms as determined by
a committee of the Company's board of directors. 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 in shares of the Company's common stock valued at fair market value
on the exercise date. The options may also be exercised through a same-day sale
program without any cash outlay by the optionee. At October 31, 2000, options to
purchase 218,202 shares of common stock were available for future grants under
the 1998 Plan.
On December 1, 1999, the Company's board of directors approved the 1999
Omnibus Stock Incentive Plan (the "1999 Plan"), which is intended to serve as
the successor equity incentive program to the 1998 Plan. The 1999 Plan initially
increased the aggregate number of shares available for issuance under both plans
to 6,700,000 and designated that 700,000 shares be used as director incentives.
On March 10, 2000, the Company's board of directors authorized an additional
500,000 shares to be issued under the 1999 Plan and during July 2000 the board
of directors approved an additional 2,300,000 shares to be issued under the 1999
Plan. The 1999 Plan allows for the grant of awards in the form of incentive and
non-qualified stock options, stock appreciation rights, restricted shares,
phantom stock and stock bonuses. Awards may be granted to individuals in the
Company's employ or service.
The 1999 Plan is administered by the compensation committee of the
board of directors. This committee determines which eligible individuals are to
receive awards under the 1999 Plan, the type of award to be made, the time or
times when such awards are to be made, the number of shares subject to each such
award, and the vesting schedule and the other terms to be in effect for the
award.
The exercise price for the options may be paid in cash, in shares of
the Company's common stock valued at fair market value on the exercise date or
by having the Company retain sufficient shares of common stock from shares which
would be issuable upon the exercise of the option. The option may also be
exercised through a same-day sale program without any cash outlay by the
optionee. To date, all options granted under the 1998 and 1999 Plans require the
exercise price to be paid in cash. If future grants are made with a cashless
exercise feature, the Company will be required to use variable plan accounting
for those grants.
Tandem stock appreciation rights may be issued under the 1999 Plan
which will provide the holders with the election to surrender their outstanding
options for a cash appreciation distribution from the Company equal to the fair
market value of the vested shares subject to the surrendered option less the
aggregate exercise price payable for such shares. In addition, the Company may
issue stand-alone stock appreciation rights which will entitle the holder to
receive a cash payment from the Company equal to the fair market value of the
vested shares subject to the right less the base price for such right.
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Phantom stock awards will entitle the holder to receive in cash the
fair market value of common stock on the vesting date.
If the Company is acquired (whether by merger or asset sale) or there
is a change in control (effected through an acquisition of 50% or more of the
Company's voting stock or by proxy contest for the election of board members),
options and stand-alone stock appreciation rights exercisable at that time will
remain exercisable until their expiration, and options and stand-alone stock
appreciation rights not exercisable at that time will expire. Also, if the
Company is acquired or experiences a change in control, all restrictions on
outstanding vested shares of restricted stock granted under the 1999 Plan will
lapse, and all outstanding, unvested shares of such restricted stock will expire
and be cancelled. Similarly, all outstanding, unvested shares of phantom stock
will expire and be cancelled.
On July 14, 2000, Caldera's board of directors approved an amendment to
the 1999 Plan. This amendment allows the board to extend the exercise period
after termination of service from 90 days to 120 days. The amendment also
permits the exercise of options for up to 30 days after termination of service
for cause. Through October 31, 2000, the board had granted the extended terms to
line function employees and senior management employees who held a total of
approximately 1.3 million options to purchase common shares. The modified shares
had exercise prices ranging from $1.00 - $7.00 per share and the fair market
value of Caldera's common stock ranged from $3.94 - $7.09 per share on the dates
that modifications were made. The modifications to the exercise terms constitute
a new measurement date in accordance with FIN 44 on the date the modifications
were made. However, any compensation related to the modifications will only be
recorded to the extent the option holders actually benefit from the
modification. All modifications during fiscal 2000 did benefit the option
holders due to their termination. Accordingly, compensation expense of
approximately $640,000 was recorded during the fourth quarter of fiscal 2000
related to these option modifications.
The July 14, 2000 amendment to the 1999 Plan also provides that in
connection with a sale, change of control or liquidation of Caldera, Caldera or
the acquiring entity may elect to cash out, convert to options of the acquiring
entity or assume any vested options granted under the 1999 Plan. Additionally,
non-vested shares shall terminate unless otherwise provided in the governing
agreements or as determined by the compensation committee of the board of
directors. The amendment also permits Caldera to grant shares of restricted
stock and phantom stock that vest without regard to the satisfaction of
pre-established performance goals.
In addition, the board has approved amendments that will effect the
following changes: (i) establish an automatic share increase feature pursuant to
which the number of shares available for issuance under the 1999 Plan will
automatically increase, beginning with the 2000 calendar year, as of November 1
of each year, by 3% of the total number of shares of common stock outstanding on
the previous October 31st, and (ii) add a formula awards program pursuant to
which directors of the Company will automatically be granted options to purchase
shares of common stock at specified times, including an option to purchase
100,000 shares of common stock on the date of the annual stockholders meeting
during each even numbered calendar year beginning in 2004. All amendments are
subject to approval by the stockholders of Caldera.
During September and October 2000, the Company approved the accelerated
vesting of stock options for certain employees who were terminated as a result
of the sale of the ELM assets to Ebiz or were terminated in preparation for the
SCO acquisition. Each employee received three months of additional vesting on
existing stock option grants on their last day of employment with the Company.
All of the affected employees had ceased employment with the Company prior to
October 31, 2000. The existing option grants had exercise prices ranging from
$1.00 - $9.50 per
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share and the fair market value of Caldera's common stock ranged from $5.75 -
$7.09 per share on the dates that employment was terminated. Because the
accelerated vesting for these stock options represented a modification to the
existing stock option, the Company recorded compensation expense on each option
to the extent the difference between the fair market value and the exercise
price was greater than compensation cost previously recorded. The Company
recorded approximately $184,200 in non-cash compensation related to the
accelerated vesting of approximately 129,000 stock options for the year ended
October 31, 2000.
A summary of stock option activity under the stock option plans for the
years ended October 31, 2000 and 1999 is as follows:
Weighted Ave.
Options Price Range Exercise Price
------- ----------- --------------
Granted 3,106,566 $ 1.00 - $ 1.13 1.04
Exercised (22) 1.00 1.00
Forfeited (142,304) 1.00 1.00
-------------
Balance, October 31, 1999 2,964,240 1.00 - 1.13 1.04
Granted 4,451,020 1.13 - 14.75 6.53
Exercised (452,132) 1.00 - 6.00 1.18
Forfeited (786,386) 1.00 - 9.50 4.98
-------------
Balance, October 31, 2000 6,176,742 $ 1.00 - $ 14.75 4.48
=============
A summary of stock option grants with exercise prices equal to or less
than the estimated fair market value on the date of grant during the years ended
October 31, 2000 and 1999 is as follows:
Weighted Ave.
Options Weighted Ave. Fair Value
Granted Exercise Price Of Options
--------- -------------- -------------
FISCAL 1999
Grants with exercise price equal to
estimated fair market value 645,728 $ 1.00 $ 0.20
Grants with exercise price less than
estimated fair market value 2,460,838 1.04 1.54
---------
3,106,566 1.04 1.26
=========
FISCAL 2000
Grants with exercise price equal to
estimated fair market value 592,883 8.57 0.57
Grants with exercise price less than
estimated fair market value 3,858,137 6.22 1.29
---------
4,451,020 $ 6.53 $ 1.19
=========
A summary of stock options outstanding and exercisable under the
Company's stock option plans as of October 31, 2000 is as follows:
Options Outstanding Options Exercisable
------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- ---------- ----------- ----------
$ 1.00 1,678,862 8.51 years $ 1.00 899,029 $ 1.00
$ 1.13 - $3.99 744,426 8.95 1.13 187,416 1.13
$ 4.00 - $5.99 210,109 9.60 5.21 4,609 4.00
$ 6.00 - $7.99 3,015,274 9.22 6.34 949,507 6.03
$ 8.00 and above 528,071 9.49 9.37 9,446 9.14
----------- ---------
6,176,742 9.03 $ 4.48 2,050,007 $ 3.39
=========== =========
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2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 Employee Stock Purchase Plan was adopted by the board of
directors on February 15, 2000 and was approved by the stockholders on March 1,
2000. The plan became effective upon the closing of the Company's initial public
offering. The plan is designed to allow eligible employees of Caldera and its
participating subsidiaries to purchase shares of Caldera common stock, at
semi-annual intervals, through periodic payroll deductions. A total of 500,000
shares of common stock have been reserved for issuance under the plan. The share
reserve will increase on the first trading day of each calendar year beginning
with the 2001 calendar year by 1% of the total number of shares of common stock
outstanding on the last day of the immediately preceding year but no such annual
increase will exceed 750,000 shares. In no event, however, may a participant
purchase more than 750 shares, nor may all participants in the aggregate
purchase more than 125,000 shares on any semi-annual purchase date.
The plan will have a series of successive offering periods, each with a
maximum duration of 24 months. The initial offering period began on the date of
the Company's initial public offering and will end on the last business day in
April 2002. The next offering period will begin on May 1, 2002. Subsequent
offering periods will be set by the compensation committee. Shares will be
purchased on semi-annual purchase dates (the last business day of April and
October each year) during the offering period. The first purchase date was
October 31, 2000. Should the fair market value of the Company's common stock on
any semi-annual purchase date be less than the fair market value on the first
day of the offering period, then the current offering period will automatically
end and a new offering period will begin, based on the lower fair market value.
Individuals who are eligible employees on the start date of any
offering period may enter the Plan on that start date or on any subsequent
semi-annual entry date (generally May 1 or November 1 each year). Individuals
who become eligible employees after the start date of the offering period may
join the plan on any subsequent semi-annual entry date within that period.
A participant may contribute up to 10% of his or her cash earnings
through payroll deductions and the accumulated payroll deductions will be
applied to the purchase of shares on the participant's behalf on each
semi-annual purchase date (the last business day in April and October of each
year). The purchase price per share will be 85% of the lower of the fair market
value of our common stock on the participant's entry date into the offering
period or the fair market value on the semi-annual purchase date.
The board may at any time amend or modify the plan. The plan will
terminate no later than the last business day in April 2010.
In July 2000, the board of directors amended the plan to increase the
maximum number of shares of common stock authorized for issuance over the term
of the plan by an additional 1,500,000 shares.
On October 31, 2000, 61,807 shares of common stock of the Company were
purchased through the plan at a price of $2.98 per share.
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STOCK-BASED COMPENSATION
The Company accounts for its stock options issued to directors,
officers and employees under APB 25 and related interpretations ("APB 25").
Under APB 25, compensation expense is recognized if an option's exercise price
on the measurement date is below the fair market value of the Company's common
stock. During the year ended October 31, 1999, the Company granted 2,460,838
stock options with exercise prices that were below the estimated fair market
value on the measurement date resulting in $3,144,230 in deferred compensation.
This deferred compensation has been recorded as a component of stockholders'
equity and will be expensed consistent with the vesting of the underlying stock
options. Amortization of deferred compensation amounted to $409,296 for the year
ended October 31, 1999. During the year ended October 31, 2000, the Company
granted 3,858,137 additional stock options with exercise prices below the fair
market value on the measurement date resulting in $6,790,264 of additional
deferred compensation to be recognized as expense over the vesting period of the
options. Amortization of deferred compensation amounted to $5,216,016 during the
year ended October 31, 2000. During the year ended October 31, 2000 the Company
reversed the cumulative amortization of deferred compensation previously
recorded from unvested options of terminated employees. As a result, $652,875
was recorded as an offset to the non-cash compensation caption in the
accompanying fiscal 2000 statement of operations.
As a result of an option agreement between Canopy and Ralph J. Yarro
III, which was subsequently rescinded, the Company expensed a one-time
compensation charge of $372,000 during the year ended October 31, 2000. The
option agreement allowed Mr. Yarro to purchase shares of the Company's common
stock directly from Canopy. No shares were purchased under the agreement. Mr.
Yarro is the president and chief executive officer of Canopy and the Chairman of
the Company's board of directors.
SFAS 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 method. The fair market value of the stock
options is estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions for grants during the years ended October
31, 2000 and 1999: risk-free interest rate of 6.1 and 5.5 percent, respectively;
expected dividend yield of 0 percent; volatility of 132 percent and 0 percent,
respectively; and expected exercise lives of four and five years, respectively.
For purposes of the pro forma disclosure, 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 years ended October 31, 2000 and 1999:
2000 1999
-------------- --------------
Net loss attributable to common stockholders, as reported $ (39,176,215) $ (9,366,588)
Net loss attributable to common stockholders, pro forma (43,291,164) (9,773,906)
Per share:
Net loss attributable to common stockholders, as reported $ (1.19) $ (0.51)
Net loss attributable to common stockholders, pro forma (1.31) (0.53)
(9) INCOME TAXES
As described in Note l, Caldera became a separate legal entity
effective September 1, 1998. The income tax attributes associated with the
carved-out portion of the Predecessor prior to September 1, 1998 remained with
the Predecessor.
Since incorporation, Caldera has reported for income tax purposes as a
stand-alone taxable entity. For income tax purposes, the reorganization of the
Predecessor and the sale of the
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Linux software business to Caldera have been treated as a taxable asset sale.
Accordingly, the tax basis of the assets received from the Predecessor is based
on the $19,928,848 purchase price (see Note 1). The reorganization did not
qualify as a tax-free reorganization because the Predecessor did not transfer
substantially all of its assets to Caldera.
The net loss before income taxes consisted of the following components
for the years ended October 31, 2000 and 1999, and the period from the
reorganization (September 1, 1998) through October 31, 1998 is as follows:
2000 1999 1998
------------ ------------ ------------
Domestic U.S. operations $(26,980,396) $ (9,401,363) $ (1,070,632)
Operations of foreign subsidiary, Caldera GmbH 138,039 69,550 11,260
------------ ------------ ------------
Total $(26,842,357) $ (9,331,813) $ (1,059,372)
============ ============ ============
The components of the provision for income taxes for the years ended
October 31, 2000 and 1999, and the period from the reorganization (September 1,
1998) through October 31, 1998 are as follows:
2000 1999 1998
----------- ----------- -----------
Current:
U.S. Federal $ -- $ -- $ --
U.S. State -- -- --
Non - U.S. 81,141 34,775 33,780
----------- ----------- -----------
81,141 34,775 33,780
Deferred:
U.S. Federal $(3,976,810) (3,022,242) (368,163)
U.S. State (385,985) (293,335) (53,436)
Change in valuation allowance 4,362,795 3,315,577 421,599
----------- ----------- -----------
Total provision for income taxes $ 81,141 $ 34,775 $ 33,780
=========== =========== ===========
Deferred tax assets and liabilities are determined 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. The
significant components of the Company's deferred income tax assets and
liabilities at October 31, 2000 and 1999 are as follows:
2000 1999
------------ ------------
Deferred income tax assets:
Net operating loss carryforwards $ 8,029,416 $ 3,967,242
Tax basis in excess of book basis related to
assets acquired by Caldera from Predecessor 6,122,838 6,599,942
Book to tax basis difference in equity investee 393,769 --
Reserves and accrued expenses 606,389 268,510
Book depreciation in excess of tax 114,002 62,570
Foreign tax credit 101,793 46,617
------------ ------------
Total deferred income tax assets 15,368,207 10,944,881
------------ ------------
Deferred tax liability - tax on foreign earnings (111,673) (51,142)
Valuation allowance (15,256,534) (10,893,739)
------------ ------------
Net deferred income tax assets $ -- $ --
============ ============
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The amount of and ultimate realization of the deferred income tax
assets is dependant, in part, upon the tax laws in effect, Caldera's future
earnings, and other future events, the effects of which cannot be determined.
The Company has established a full valuation allowance against its deferred
income tax assets. Management believes that as of October 31, 2000, based on a
number of factors, the available objective evidence creates sufficient
uncertainty regarding the realizability of these deferred income tax assets.
As of October 31, 2000, the Company had net operating loss
carryforwards for federal income tax reporting purposes totaling approximately
$21,527,000 that expire in 2018 to 2020. The net operating loss carryforwards
expire as follows:
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. As of October
31, 2000, no such ownership changes had occurred.
The differences between the provision for income taxes at the U.S.
statutory rate and the Company's effective tax rate is as follows:
2000 1999 1998
---------- ---------- ----------
Benefit at statutory rate (34.0%) (34.0%) (34.0%)
Non-deductible items 21.2% 0.1% 0.1%
State income taxes, net of federal effect (3.3%) (3.3%) (3.3%)
Foreign income taxes 0.1% (0.1%) 0.6%
Increase in valuation allowances 16.3% 37.7% 39.8%
---------- ---------- ----------
Total provision for income taxes 0.3% 0.4% 3.2%
========== ========== ==========
(10) COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a party to certain legal proceedings arising in the
ordinary course of business. Management believes, after consultation with legal
counsel, that the ultimate outcome of such legal proceedings will not have a
material adverse effect on the Company's financial results, liquidity or results
of operations.
SCO COST-SHARING ARRANGEMENT
In connection with the Definitive Agreement with SCO to acquire the
server software and professional services groups (see Note 1), the Company and
SCO agreed that Caldera would reimburse SCO for certain employee payroll and
related costs. The costs to be reimbursed by Caldera related to SCO employees
that SCO had identified for termination in a company-wide layoff in September.
Caldera viewed these employees as critical to the new combined company and SCO
agreed to retain the employees if Caldera would reimburse SCO for a portion of
their payroll and related costs. At the time Caldera committed to reimburse SCO
for these employee costs, the ultimate amount was not determinable and both
parties agreed that the amount would be determined prior to the completion of
the acquisition. During December 2000, both parties agreed that Caldera would
reimburse SCO $1.5 million relating to services rendered from August through
December 2000. Accordingly, as of October 31, 2000, Caldera has accrued $898,026
representing the portion incurred through that time. The Company will record the
remaining $601,974 during the first quarter of fiscal 2001. The actual payment
will be made to SCO during Caldera's first quarter of fiscal 2001.
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OPERATING LEASE AGREEMENTS
The Company had been leasing its corporate office facilities from the
Predecessor. On April 5, 2000, the Company entered into an amended operating
lease agreement whereby the Company leases additional office space adjacent to
its corporate offices. The amended lease agreement requires lease payments of
approximately $55,300 per month, and the lease expires in October 2002. The
lease may be terminated at an earlier date in accordance with the provisions of
the original lease agreement. Rent expense under this arrangement totaled
approximately $474,000, $144,700 and $19,200 for the years ended October 31,
2000, 1999 and 1998, respectively. This lease requires the Company to pay taxes,
maintenance, insurance and certain other operating costs of the leased property.
After entering into the amended operating lease, the Company subleased a portion
of the space to the Predecessor and to another majority owned company of the
Predecessor. These sublease agreements were month-to-month agreements that
required payments of approximately $5,100 per tenant to be paid to the Company.
These subleases terminated in October 2000.
The Company had been leasing additional office space from an unrelated
party. The lease requires monthly payments of $8,990 to be made through June
2002. Subsequent to the Company's sale of its Electronic Linux Marketplace
assets to Ebiz, the Company entered into an agreement to sublease this office
space to Ebiz. The sublease is for a period of one year and the Company is
receiving $4,000 per month.
On September 1, 1999, the Company entered into an operating lease
arrangement for its Caldera GmbH facility. The lease requires monthly minimum
payments of 8,750 DM (approximately $3,850 U.S. dollars based on the exchange
rate as of October 31, 2000) and expires five years from the date of
commencement. Caldera GmbH also has the option of extending the agreement for
two consecutive five-year terms. This lease requires the Company to pay taxes,
maintenance, insurance and certain other operating costs of the property.
The Company leases warehouse space from two unrelated parties under
separate operating lease agreements. Each agreement is for a term of eighteen
months and expires in November 2000. Rent expense under the lease is
approximately $37,200 per year.
On March 30, 2000, the Company entered into an operating lease
agreement for its education facilities whereby the Company agreed to lease 5,146
square feet of office space for $8,255 per month. This lease is for a term of
five years and commenced on June 1, 2000.
Total rent expense for all of the Company's operating leases was
$722,000, $161,200 and $19,200 for the years ended October 31, 2000, 1999 and
1998. Operating lease commitments for the next five years are $1.0 million for
fiscal 2001, $897,000 for fiscal 2002, $158,000 for fiscal 2003, $153,000 for
fiscal 2004 and $66,000 for fiscal 2005 and thereafter.
SOFTWARE LOCALIZATION AGREEMENT
On October 1, 1999, the Company entered into an agreement with United
Systems Engineers, Inc. ("USE") to localize certain of the Company's software
products for the Japanese market. As consideration, the Company agreed to pay
$250,000 in cash or issue to the engineering firm shares of the Company's common
stock with a market value of $202,000, based on the initial public offering
price per share. On January 4, 2000, the Company and USE amended the agreement
pursuant to which the Company agreed to issue 33,667 shares of common stock to
USE for the services, of which 16,833 were to be issued immediately for services
rendered and the remaining 16,834 are to be issued upon completion of the
services. Should USE not perform under the agreement, USE will not be issued the
remaining 16,834
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shares of common stock, and USE has committed to pay $100,000 to the Company.
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 the
Company's common stock on that date of $269,336, or $8 per share, will be
expensed as the services are rendered. As of October 31, 2000, $134,664 has been
expensed.
SOFTWARE LICENSE AGREEMENTS WITH SUN MICROSYSTEMS, INC.
In January 2000, the Company and Sun Microsystems, Inc. ("Sun"), an
investor in the Company's Series B preferred stock, entered into certain
software license agreements. These license agreements are for a term of 18
months and expire in June 2001. Pursuant to one of the software license
agreements, the Company agreed to pay Sun a nonrefundable payment in the amount
of $1,250,000. During the year ended October 31, 2000, the Company made the
required payments to Sun and recorded the payments as prepaid license fees and
marketing expense. Under the agreements, the Company has access to certain of
Sun's technologies and participates with Sun in various marketing activities
such as tradeshow appearances, speaking events and web site advertising. The
value allocated to the marketing activities of $450,000 was determined based
upon management's estimate of the amount the Company would pay for similar
marketing services. The portion of the fee allocated to the marketing activities
is being expensed as the marketing activities occur. The Company is expensing
$800,000 of the fee allocated to the technology as cost of revenue and research
and development expense over the 18-month term of the license agreements. The
technology is principally being used for internal purposes to create and enhance
e-commerce applications to be used in connection with current and future Caldera
products. Beginning in the fourth quarter of fiscal 2000, certain of the
technology has been included in one of the Company's products. A portion of the
license fee has been allocated to cost of revenue based on the estimated fair
value of the included technology. For the year ended October 31, 2000, the
Company has expensed the total $450,000 of marketing expenses and approximately
$314,200 of the total $800,000 in engineering expenses. As of October 31, 2000,
the balance of prepaid fees was approximately $485,800.
STRATEGIC BUSINESS AGREEMENT WITH THE SANTA CRUZ OPERATION
On February 1, 2000, the Company and The Santa Cruz Operation ("SCO")
entered into a strategic business agreement. The agreement provides for certain
joint marketing activities between the parties, including, but not limited to
participation in tradeshows, cross recruiting and cross matching of partners,
cross-referencing each others' websites and product solutions, and discussing
certain channel initiatives. In addition, the Company agreed to provide ten
copies of OpenLinux to SCO for its internal use and SCO agreed to provide three
copies of SCO's Tarantella Express product to the Company for internal use. The
Company recorded the fair value of the OpenLinux products provided to SCO as an
engineering expense since the products received were used for internal
development purposes. In addition, the Company will record the costs of the
joint initiatives as either marketing or engineering expenses depending on the
nature of the activities conducted.
SEVERANCE AGREEMENTS
During July and August 2000, the Company entered into severance
agreements with certain members of management. The agreements apply to a change
of control or termination or effective termination of employment with the
Company. Change of control is defined as: (1) any person or entity who becomes
the beneficial owner of 51 percent or more of the Company's common stock, (2)
sale of substantially all of the Company's assets, (3) approval of a merger or
consolidation in which at least 50 percent of the voting securities are
acquired, and (4) during any
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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. The acquisition of the SCO server
and professional services groups and resulting addition of two board members
does not qualify as a change in control. Specific provisions for Senior Vice
Presidents and Executive Officers include but are not limited to the following;
salary and bonus payments equal to 150 percent of the then current annual base
salary and bonuses, 18 months of accelerated vesting for outstanding stock
options and continuing insurance benefits for a period up to six months.
Specific provisions for Vice Presidents include but are not limited to the
following; salary and bonus payments equal to 100% of the then current annual
base salary and bonuses, 12 months of accelerated vesting on outstanding stock
options and continuing insurance benefits for a period of six months.
Because each of the severance agreements allows for the accelerated
vesting of stock options that was not included in each employees' original stock
option grant, a new measurement date has occurred. The total potential
compensation cost associated with the accelerated vesting provisions of the
severance agreements is approximately $1.4 million. The members of the executive
management team who entered into severance agreements hold a total of 1.7
million options to purchase common shares at prices ranging from $1.00 to $9.50
per share. The fair value of caldera's common stock on the dates the severance
agreements were signed ranged from $5.50 to $9.25 per share. This amount will be
expensed in future financial statements to the extent of unvested shares
outstanding at the date of a change in control based on remaining service period
and employee turnover rates.
(11) RELATED PARTY TRANSACTIONS
As of October 31, 2000, the Company did not owe or have any amounts due
from related parties.
CANOPY
As discussed in Note 1, Canopy was the sole stockholder of Caldera upon
incorporation and was the majority stockholder of the Predecessor. Canopy
invested $20,928,848 in Caldera in exchange for 16,000,000 shares of common
stock. In addition to the initial equity investment, Canopy advanced $4,819,000
under a secured convertible promissory note agreement (see Note 7). In August
1999, the principal borrowings and accrued interest of $454,974 were converted
into 5,273,974 shares of common stock. The chairman 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.
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 joint insurance coverage, training and testing services, and
rent. The Company believes that the terms of these related party transactions
are at least as favorable as the terms that could have been obtained from an
unaffiliated third party in similar transactions. During the years ended October
31, 2000, 1999 and 1998, transactions with these related parties were as
follows:
2000 1999 1998
---------- ---------- ----------
Revenue $ 46,600 $ -- $ --
Rent (see Note 10) 94,200 144,700 19,200
Training, testing and other 82,600 48,200 --
Insurance 6,700 13,800 13,200
---------- ---------- ----------
Total expenses $ 183,500 $ 206,700 $ 32,400
========== ========== ==========
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LINEO, INC.
As discussed in Note 5, in January 2000, the Company acquired an
ownership interest in Lineo, Inc. ("Lineo"), the successor entity to the
operations of the Predecessor that were not acquired by Caldera in the
reorganization discussed in Note 1. The chairman of the Company's board of
directors and two directors are also directors of Lineo. During the years ended
October 31, 2000 and 1999, sales to Lineo amounted to $34,300 and $1,700,
respectively.
MTI TECHNOLOGY CORPORATION
In July 1999, MTI, a company which at the time was 50 percent owned by
Canopy, agreed to purchase 5,333,333 shares of common stock for $6,000,000 of
which $3,000,000 was paid at closing and $3,000,000 was payable through an
interest bearing note receivable. Subsequent to signing the agreement, the
Company agreed to forego the interest component of the note receivable in
exchange for an acceleration of the payment terms (see Note 8). A director of
the Company is the chairman of the board of MTI. Additionally, another Company
director is the current president and chief executive officer of MTI. The
Company is using certain computer equipment provided by MTI without charge. The
equipment is valued at approximately $105,000. During the years ended October
31, 2000 and 1999, sales to MTI were $31,350 and $2,985, respectively.
(12) EMPLOYEE BENEFIT PLAN
Until June 2000, Caldera utilized a 401(k) plan sponsored by Canopy for
its employees, through which Caldera made matching contributions from January 1
through June 2000. In June 2000, Caldera adopted its own 401(k) plan through
which eligible participants can elect to make contributions to the plan, subject
to certain limitations under the Internal Revenue Code. Under the terms of the
new plan, the Company may make discretionary matching contributions up to
predetermined limits to partially match employee contributions to the plan.
During the year ended October 31, 2000, the Company contributed approximately
$145,000 to the plan for matching contributions.
(13) SIGNIFICANT CUSTOMERS
To date, the Company's largest customers have typically been
distributors of the Company's products. During the year ended October 31, 2000,
the Company had sales to one customer that accounted for approximately 19
percent of total revenue. During the year ended October 31, 1999, the Company
had sales to two customers that accounted for approximately 33 percent and 20
percent of total revenue, respectively. During the year ended October 31, 1998,
the Company had sales to one customer that accounted for approximately 11
percent of total revenue. No other customer accounted for more than 10 percent
of total revenue during the years ended October 31, 2000, 1999 and 1998.
(14) SEGMENT INFORMATION
In June 1998, the FASB issued SFAS 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 the Company's chief operating decision makers in
deciding how to allocate resources and in assessing
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performance. It also requires segment disclosures about products and services as
well as geographic areas. The Company has determined that it does not have any
separately reportable operating segments as of October 31, 2000, 1999 and 1998.
However, the Company does sell software and related products in geographic
locations outside of the United States.
Revenue attributed to individual countries based on the location of
sales to unaffiliated customers for the years ended October 31, 2000, 1999 and
1998 is as follows:
2000 1999 1998
---------- ---------- ----------
Revenue:
United States $2,982,275 $2,847,789 $1,000,943
Asia pacific 705,701 91,133 --
Europe 366,682 81,007 33,687
Other countries 219,665 30,378 22,458
---------- ---------- ----------
Total revenue $4,274,323 $3,050,307 $1,057,088
========== ========== ==========
Long-lived assets by location consists of the following as of October 31, 2000
and 1999:
2000 1999
---------- ----------
Long-lived assets:
United States $1,494,582 $ 673,002
Europe 94,738 46,418
---------- ----------
Total long-lived assets $1,589,320 $ 719,420
========== ==========
15. SUBSEQUENT EVENTS
DILUTION OF EBIZ OWNERSHIP
Subsequent to October 31, 2000, Caldera's ownership interest in Ebiz (see
Note 6) has been diluted to approximately 12 percent as a result of Ebiz issuing
new shares in connection with an acquisition and the conversion of convertible
securities. As a result of these transactions, on January 5, 2001, Caldera
discontinued the use of the equity method of accounting for its investment in
Ebiz. Caldera will account for the investment as an available-for-sale security
in accordance with SFAS 115. Under SFAS 115, Caldera will carry its investment
at fair market value using quoted trading prices and will record any
unrecognized gains or losses as a component of other comprehensive income
(loss). At the date of the change, Caldera reduced the carrying value of its
investment to approximately $1.4 million.
ADVANCE TO SCO
In conjunction with the signing of the reorganization agreement,
Caldera agreed to advance the $7 million cash portion of the purchase price for
the server and professional services groups in the form of a promissory note
that matures on either of the closing of the combination or the date of
termination of the reorganization agreement. The loan was made on January 26,
2001. If the combination closes, the loan will be treated by Caldera and SCO as
the cash portion of the consideration to SCO for the server and professional
services groups. The loan is secured by a first priority security interest in
all of SCO's assets and is convertible at Caldera's option into SCO common stock
at a price per share of $2.44, the closing price of SCO's common stock on
January 26, 2001.
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REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To Caldera Systems, Inc.:
We have audited in accordance with auditing standards generally
accepted in the United States, the consolidated financial statements of Caldera
Systems, Inc, the carved-out portion of Caldera, Inc. and their subsidiary and
have issued our report thereon dated December 5, 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
December 5, 2000
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CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
Balance at Charged to
Beginning of Costs and Balance at End
Description Period Expenses Deductions of Period
----------- ------------ ----------- ----------- --------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended October 31, 2000 $ 90,000 $ 325,000 $ (103,000)(a) $ 312,000
Year ended October 31, 1999 15,000 222,000 (147,000)(a) 90,000
Year ended October 31, 1998 112,000 265,000 (362,000)(a) 15,000
INVENTORY RESERVES:
Year ended October 31, 2000 354,000 43,000 (113,000)(b) 284,000
Year ended October 31, 1999 63,000 356,000 (65,000)(b) 354,000
Year ended October 31, 1998 157,000 28,000 (122,000)(b) 63,000
ALLOWANCE FOR SALES RETURNS:
Year ended October 31, 2000 169,000 555,000 (360,000)(c) 364,000
Year ended October 31, 1999 54,000 350,000 (235,000)(c) 169,000
Year ended October 31, 1998 100,000 97,000 (143,000)(c) 54,000
DEFERRED TAX ASSETS VALUATION ALLOWANCE:
Year ended October 31, 2000 10,894,000 4,363,000 -- 15,257,000
Year ended October 31, 1999 7,578,000 3,316,000 -- 10,894,000
Year ended October 31, 1998 -- 422,000 7,156,000(d) 7,578,000
(a) Represents write-offs of uncollectable accounts receivable
(b) Represents inventory destroyed or scrapped
(c) Represents product returns
(d) Represents allowance recorded in connection with the purchase of assets from
Caldera, Inc.
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Selected Quarterly Results of Operations
The following selected quarterly data should be read in conjunction
with the Consolidated Financial Statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Form 10-K. This information has been derived from
the unaudited consolidated financial statements of Caldera that, in management's
opinion, reflect all recurring adjustments necessary to fairly present this
information when read in conjunction with our Consolidated Financial Statements
and notes thereto. The results of operations for any quarter are not necessarily
indicative of the results to be expected for any future period.
Quarter Ended
-----------------------------------------------------------------
January 31, April 30, July 31, October 31,
2000 2000 2000 2000
----------- ----------- ----------- -----------
(unaudited)
(In thousands, except share and per share data)
FISCAL 2000
Total revenue $ 553 $ 1,361 $ 1,188 $ 1,172
Gross margin (deficit) 3 279 (43) 14
Operating loss (5,614) (7,726) (8,808) (9,851)
Net loss (5,513) (6,992) (7,531) (6,887)
Net loss to common stockholders
(15,513) (9,245) (7,531) (6,887)
Basic and diluted net loss per
common share $ (0.63) $ (0.32) $ (0.19) $ (0.18)
Weighted average basic and
diluted common shares 24,780 28,602 39,037 39,176
Quarter Ended
---------------------------------------------------------------------
January 31, April 30, July 31, October 31,
1999 1999 1999 1999
------------ ------------ ------------ ------------
(unaudited)
(In thousands, except share and per share data)
FISCAL 1999
Total revenue $ 538 $ 544 $ 1,095 $ 873
Gross margin (deficit) 265 139 117 (397)
Operating loss (812) (1,725) (2,097) (4,469)
Net loss (992) (1,753) (2,157) (4,465)
Net loss to common stockholders
(992) (1,753) (2,157) (4,465)
Basic and diluted net loss per
common share $ (0.06) $ (0.11) $ (0.13) $ (0.17)
Weighted average basic and
diluted common shares 16,000 16,000 16,232 25,518
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item may be found in the section
titled "Directors and Executive Officers of the Registrant" appearing in the
definitive proxy statement to be delivered
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to stockholders in connection with the 2001 Annual Meeting of Stockholders. Such
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item may be found in the section
titled "Executive Compensation" appearing in the definitive proxy statement to
be delivered to stockholders in connection with the 2001 Annual Meeting of
Stockholders. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item may be found in the section
titled "Security Ownership of Certain Beneficial Owners and Management"
appearing in the definitive proxy statement to be delivered to stockholders in
connection with the 2001 Annual Meeting of Stockholders. Such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item may be found in the section
titled "Certain Relationships and Related Transactions" appearing in the
definitive proxy statement to be delivered to stockholders in connection with
the 2001 Annual Meeting of Stockholders. Such information is incorporated herein
by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements: See Index to Consolidated
Financial Statements at Item 8 on page 46 of this report.
(2) Financial Statement Schedule: See Index to Consolidated
Financial Statements at Item 8 on page 46 of this report.
(3) Exhibits are incorporated herein by reference or are filed
with this report as indicated below:
EXHIBIT
NUMBER DESCRIPTION
3.1 Form of Amended and Restated Certificate of
Incorporation incorporated by reference to Exhibit 3.2
to Caldera's Registration Statement on Form S-1 (File
No. 333-94351))
3.2 Form of Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.4 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351))
4.1 Form of Certificate of Common Stock (incorporated by
reference to Exhibit 4.1 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351))
10.1 Conversion Agreement, dated December 30, 1999, between
Caldera, The Canopy Group, Inc. and MTI Technology
Corporation (incorporated by reference to Exhibit 10.1
to Caldera's Registration Statement on Form S-1 (File
No. 333-94351))
10.2 Form of Series B Preferred Stock Purchase Agreement
between Caldera and the Series B investors (incorporated
by reference to Exhibit 10.2 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351))
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10.3 Caldera 1998 Stock Option Plan (incorporated by
reference to Exhibit 10.3 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351)
10.4 Caldera 1999 Omnibus Stock Incentive Plan (incorporated
by reference to Exhibit 10.4 to Caldera's Registration
Statement on Form S-4 (File No. 333-45936))
10.5 Amendment No. 1 to Caldera 1999 Omnibus Stock Incentive
Plan (incorporated by reference to Exhibit 10.5 to
Caldera's Registration Statement on Form S-4 (File No.
333-45936))
10.6 Amendment No. 2 to Caldera 1999 Omnibus Stock Incentive
Plan (incorporated by reference to Exhibit 10.6 to
Caldera's Registration Statement on Form S-4 (File No.
333-45936))
10.7 Amendment No. 3 to Caldera 1999 Omnibus Stock Incentive
Plan (incorporated by reference to Exhibit 10.7 to
Caldera's Registration Statement on Form S-4 (File No.
333-45936))
10.8 Amendment No. 4 to Caldera 1999 Omnibus Stock Incentive
Plan (incorporated by reference to Exhibit 10.8
Caldera's Registration Statement on Form S-4 (File No.
333-45936))
10.9 Caldera 2000 Employee Stock Purchase Plan, as amended
(incorporated by reference to Exhibit 10.9 Caldera's
Registration Statement on Form S-4 (File No. 333-45936))
10.10 Secured Convertible Promissory Note, dated September 1,
1998, by Caldera in favor of The Canopy Group, Inc.
(incorporated by reference to Exhibit 10.6 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351))
10.11 Security Agreement, dated September 1, 1998, between
Caldera and The Canopy Group, Inc. (incorporated by
reference to Exhibit 10.7 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351))
10.12 Asset Purchase and Sale Agreement, dated September 1,
1998, between Caldera, Inc., a Utah corporation and
Caldera (incorporated by reference to Exhibit 10.8 to
Caldera's Registration Statement on Form S-1 (File No.
333-94351))
10.13 Amended and Restated Asset Purchase Agreement, dated as
of September 1, 1998, between Caldera, Inc., a Utah
corporation and Caldera (incorporated by reference to
Exhibit 10.9 to Caldera's Registration Statement on Form
S-1 (File No. 333-94351))
10.14 Stock Purchase Agreement, dated January 27, 1999, by and
among Caldera, The Canopy Group, Inc. and MTI Technology
Corporation (incorporated by reference to Exhibit 10.10
to Caldera's Registration Statement on Form S-1 (File
No. 333-94351))
10.15 Stock Purchase Agreement, dated January 6, 2000, between
Caldera and Lineo, Inc. (incorporated by reference to
Exhibit 10.11 to Caldera's Registration Statement on
Form S-1 (File No. 333-94351))
10.16 Form of Second Amended and Restated Investors Rights
Agreement by and among Caldera and the holders of the
Series A and Series B convertible preferred stock named
therein (incorporated by reference to Exhibit 10.12 to
Caldera's Registration Statement on Form S-1 (File No.
333-94351))
10.17 GNU General Public License (incorporated by reference to
Exhibit 10.14 to Caldera's Registration Statement on
Form S-1 (File No. 333-94351))
+10.18 Computer Software Distribution Agreement, dated December
14, 1998 between Caldera and Navarre Corporation
(incorporated by reference to Exhibit 10.15 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351))
83
84
+10.19 OEM Reciprocal License Agreement, dated January 6, 2000
between Caldera and Evergreen Internet, Inc.
(incorporated by reference to Exhibit 10.16 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351))
+10.20 Sun Community Source License version 2.3 dated January
7, 2000, between Caldera and Sun Microsystems, Inc.
(incorporated by reference to Exhibit 10.17 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351))
+10.21 Sun Community Source License version 2.7 dated January
7, 2000, between Caldera and Sun Microsystems, Inc.
(incorporated by reference to Exhibit 10.18 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351))
10.22 Lease Agreement, dated September 1, 1998, between
Caldera and Caldera, Inc., a Utah corporation
(incorporated by reference to Exhibit 10.19 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351))
10.23 Assignment and Extension of Lease, dated October 6,
1999, between Caldera and Voxel, Inc. (incorporated by
reference to Exhibit 10.20 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351))
10.24 Secured Promissory Note, dated December 29, 1999, by
Caldera in favor of The Canopy Group (incorporated by
reference to Exhibit 10.22 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351))
10.25 Assignment of Lease, dated January 21, 2000, between
Caldera and Nextpage L.C. (incorporated by reference to
Exhibit 10.23 to Caldera's Registration Statement on
Form S-1 (File No. 333-94351))
10.26 Form of Indemnification Agreement by and between Caldera
and its executive officers and directors (incorporated
by reference to Exhibit 10.24 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351))
+10.27 Distribution Agreement, dated February 8, 2000, between
Caldera and Frank Kasper & Associates, Inc.
(incorporated by reference to Exhibit 10.1 to Caldera's
quarterly report on Form 10-Q for the quarter ended
April 30, 2000)
10.28 Second Amendment to Lease Agreement, dated April 5,
2000, between Caldera and EsNet Properties, L.C.
(incorporated by reference to Exhibit 10.2 to Caldera's
quarterly report on Form 10-Q for the quarter ended
April 30, 2000)
10.29 Lease Agreement, dated October 9, 1997, between Caldera,
Inc., a Utah corporation, and EsNet Properties, L.C.
(incorporated by reference to Exhibit 10.3 to Caldera's
quarterly report on Form 10-Q for the quarter ended
April 30, 2000)
10.30 Master Lease, dated March 30, 2000, between Caldera and
106th South Business Park, L.C. (incorporated by
reference to Exhibit 10.4 to Caldera's quarterly report
on Form 10-Q for the quarter ended April 20, 2000)
10.31 Form of Senior Executive Severance Agreement
(incorporated by reference to Exhibit 10.31 to Caldera's
Registration Statement on Form S-4 (File No. 333-45936))
10.32 Form of Voting Agreement between Caldera and Doug
Michels (incorporated by reference to Exhibit 10.32 to
Caldera's Registration Statement on Form S-4 (File No.
333-45936))
10.33 Form of Voting Agreement between The Santa Cruz
Operation, Inc. and The Canopy Group, Inc. and MTI
Technology Corporation (incorporated by reference to
Exhibit 10.33 to Caldera's Registration Statement on
Form S-4 (File No. 333-45936))
84
85
10.34 Form of Stockholder Agreement, among Caldera, The Santa
Cruz Operation, Inc., MTI Technology Corporation and The
Canopy Group, Inc. (incorporated by reference to Exhibit
10.34 to Caldera's Registration Statement on Form S-4
(File No. 333-45936))
10.35 Form of Sales Representative and Support Agreement,
between Caldera and The Santa Cruz Operation, Inc.
(incorporated by reference to Exhibit 10.35 to Caldera's
Registration Statement on Form S-4 (File No. 333-45936))
10.36 Form of Open Server Research & Development Agreement
between Caldera and The Santa Cruz Operation, Inc.
(incorporated by reference to Exhibit 10.36 to Caldera's
Registration Statement on Form S-4 (File No. 333-45936))
10.37 OEM Distribution Agreement, dated June 27, 2000, between
Caldera and The Santa Cruz Operation, Inc. (incorporated
by reference to Exhibit 10.37 to Caldera's Registration
Statement on Form S-4 (File No. 333-45936))
10.38 Agreement for Linux Professional Consulting Services
between The Santa Cruz Operation, Inc. and Caldera
(incorporated by reference to Exhibit 10.38 to Caldera's
Registration Statement on Form S-4 (File No. 333-45936))
10.39 Strategic Business Agreement between The Santa Cruz
Operation, Inc. and Caldera (incorporated by reference
to Exhibit 10.39 to Caldera's Registration Statement on
Form S-4 (File No. 333-45936))
10.40 Stock Purchase and Sale Agreement between The Canopy
Group, Inc., Caldera and Metrowerks Holding, Inc.
(incorporated by reference to Exhibit 10.40 to Caldera's
Registration Statement on Form S-4 (File No. 333-45936))
10.41 Stockholder Agreement between Lineo, Inc., Bryan Sparks,
Dry Canyon Holding Company LLC and Metrowerks Holdings,
Inc. (incorporated by reference to Exhibit 10.41 to
Caldera's Registration Statement on Form S-4 (File No.
333-45936))
10.42 Warrant Purchase Agreement between Lineo, Inc. and
Metrowerks Holdings, Inc. (incorporated by reference to
Exhibit 10.42 to Caldera's Registration Statement on
Form S-4 (File No. 333-45936))
10.43 Form of Secured Convertible Promissory Note between The
Santa Cruz Operation, Inc. and Caldera (incorporated by
reference to Exhibit 10.43 to Caldera's Registration
Statement on Form S-4 (File No. 333-45936))
10.44 Form of Security Agreement between The Santa Cruz
Operation, Inc. and Caldera (incorporated by reference
to Exhibit 10.44 to Caldera's Registration Statement on
Form S-4 (File No. 333-45936))
10.45 Form of Intercreditor Agreement among The Canopy Group,
Inc., The Santa Cruz Operation, Inc. and Caldera
(incorporated by reference to Exhibit 10.45 to Caldera's
Registration Statement on Form S-4 (File No. 333-45936))
10.46 Form of Loan Agreement between The Canopy Group, Inc.
and The Santa Cruz Operation, Inc. (incorporated by
reference to Exhibit 10.46 to Caldera's Registration
Statement on Form S-4 (File No. 333-45936))
10.47 Form of Security Agreement between The Canopy Group,
Inc. and The Santa Cruz Operation, Inc. (incorporated by
reference to Exhibit 10.47 to Caldera's Registration
Statement on Form S-4 (File No. 333-45936))
10.48 Form of Secured Convertible Promissory Note between The
Canopy Group, Inc. and The Santa Cruz Operation, Inc.
(incorporated by reference to Exhibit 10.48 to Caldera's
Registration Statement on Form S-4 (File No. 333-45936))
85
86
22.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants of Caldera
+ Confidential treatment was granted by the Commission for certain
provisions. Omitted material for which confidential treatment has
been granted has been filed separately with the Commission.
(b) Reports on Form 8-K
On August 2, 2000, the Company filed a report on Form 8-K announcing the signing
of a Definitive Agreement with The Santa Cruz Operation to acquire the server
software and professional services groups.
On August 16, 2000, the Company filed a report on Form 8-K that included
additional information and exhibits regarding the Definitive Agreement between
the Company and The Santa Cruz Operation.
On September 29, 2000, the Company filed a report on Form 8-K announcing the
sale of certain non-operating assets to Ebiz Enterprises, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused the report to be signed on
its behalf by the undersigned, thereunto duly authorized, on January 29, 2001.
CALDERA SYSTEMS, INC.
By: /s/ Robert K. Bench
----------------------------
Robert K. Bench
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
PRINCIPAL EXECUTIVE OFFICER:
/s/ Ransom H. Love President and Chief January 29, 2001
- ------------------------------- Executive Officer
Ransom H. Love
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
/s/ Robert K. Bench Chief Financial Officer January 29, 2001
- -------------------------------
Robert K. Bench
86
87
ADDITIONAL DIRECTORS:
/s/ Raymond J. Noorda Director January 29, 2001
- -------------------------------
Raymond J. Noorda
/s/ Ralph J. Yarro III Chairman of the Board January 29, 2001
- -------------------------------
Ralph J. Yarro III
/s/ Ed I. Iacobucci Director January 29, 2001
- -------------------------------
Ed I. Iacobucci
/s/ Steven M. Cakebread Director January 29, 2001
- -------------------------------
Steven M. Cakebread
/s/ Jack R. Egan Director January 29, 2001
- -------------------------------
Jack R. Egan
/s/ Thomas P. Raimondi Director January 29, 2001
- -------------------------------
Thomas P. Raimondi
87
88
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Form of Amended and Restated Certificate of
Incorporation incorporated by reference to Exhibit 3.2
to Caldera's Registration Statement on Form S-1 (File
No. 333-94351))
3.2 Form of Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.4 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351))
4.1 Form of Certificate of Common Stock (incorporated by
reference to Exhibit 4.1 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351))
10.1 Conversion Agreement, dated December 30, 1999, between
Caldera, The Canopy Group, Inc. and MTI Technology
Corporation (incorporated by reference to Exhibit 10.1
to Caldera's Registration Statement on Form S-1 (File
No. 333-94351))
10.2 Form of Series B Preferred Stock Purchase Agreement
between Caldera and the Series B investors (incorporated
by reference to Exhibit 10.2 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351))
89
10.3 Caldera 1998 Stock Option Plan (incorporated by
reference to Exhibit 10.3 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351)
10.4 Caldera 1999 Omnibus Stock Incentive Plan (incorporated
by reference to Exhibit 10.4 to Caldera's Registration
Statement on Form S-4 (File No. 333-45936))
10.5 Amendment No. 1 to Caldera 1999 Omnibus Stock Incentive
Plan (incorporated by reference to Exhibit 10.5 to
Caldera's Registration Statement on Form S-4 (File No.
333-45936))
10.6 Amendment No. 2 to Caldera 1999 Omnibus Stock Incentive
Plan (incorporated by reference to Exhibit 10.6 to
Caldera's Registration Statement on Form S-4 (File No.
333-45936))
10.7 Amendment No. 3 to Caldera 1999 Omnibus Stock Incentive
Plan (incorporated by reference to Exhibit 10.7 to
Caldera's Registration Statement on Form S-4 (File No.
333-45936))
10.8 Amendment No. 4 to Caldera 1999 Omnibus Stock Incentive
Plan (incorporated by reference to Exhibit 10.8
Caldera's Registration Statement on Form S-4 (File No.
333-45936))
10.9 Caldera 2000 Employee Stock Purchase Plan, as amended
(incorporated by reference to Exhibit 10.9 Caldera's
Registration Statement on Form S-4 (File No. 333-45936))
10.10 Secured Convertible Promissory Note, dated September 1,
1998, by Caldera in favor of The Canopy Group, Inc.
(incorporated by reference to Exhibit 10.6 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351))
10.11 Security Agreement, dated September 1, 1998, between
Caldera and The Canopy Group, Inc. (incorporated by
reference to Exhibit 10.7 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351))
10.12 Asset Purchase and Sale Agreement, dated September 1,
1998, between Caldera, Inc., a Utah corporation and
Caldera (incorporated by reference to Exhibit 10.8 to
Caldera's Registration Statement on Form S-1 (File No.
333-94351))
10.13 Amended and Restated Asset Purchase Agreement, dated as
of September 1, 1998, between Caldera, Inc., a Utah
corporation and Caldera (incorporated by reference to
Exhibit 10.9 to Caldera's Registration Statement on Form
S-1 (File No. 333-94351))
10.14 Stock Purchase Agreement, dated January 27, 1999, by and
among Caldera, The Canopy Group, Inc. and MTI Technology
Corporation (incorporated by reference to Exhibit 10.10
to Caldera's Registration Statement on Form S-1 (File
No. 333-94351))
10.15 Stock Purchase Agreement, dated January 6, 2000, between
Caldera and Lineo, Inc. (incorporated by reference to
Exhibit 10.11 to Caldera's Registration Statement on
Form S-1 (File No. 333-94351))
10.16 Form of Second Amended and Restated Investors Rights
Agreement by and among Caldera and the holders of the
Series A and Series B convertible preferred stock named
therein (incorporated by reference to Exhibit 10.12 to
Caldera's Registration Statement on Form S-1 (File No.
333-94351))
10.17 GNU General Public License (incorporated by reference to
Exhibit 10.14 to Caldera's Registration Statement on
Form S-1 (File No. 333-94351))
+10.18 Computer Software Distribution Agreement, dated December
14, 1998 between Caldera and Navarre Corporation
(incorporated by reference to Exhibit 10.15 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351))
90
+10.19 OEM Reciprocal License Agreement, dated January 6, 2000
between Caldera and Evergreen Internet, Inc.
(incorporated by reference to Exhibit 10.16 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351))
+10.20 Sun Community Source License version 2.3 dated January
7, 2000, between Caldera and Sun Microsystems, Inc.
(incorporated by reference to Exhibit 10.17 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351))
+10.21 Sun Community Source License version 2.7 dated January
7, 2000, between Caldera and Sun Microsystems, Inc.
(incorporated by reference to Exhibit 10.18 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351))
10.22 Lease Agreement, dated September 1, 1998, between
Caldera and Caldera, Inc., a Utah corporation
(incorporated by reference to Exhibit 10.19 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351))
10.23 Assignment and Extension of Lease, dated October 6,
1999, between Caldera and Voxel, Inc. (incorporated by
reference to Exhibit 10.20 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351))
10.24 Secured Promissory Note, dated December 29, 1999, by
Caldera in favor of The Canopy Group (incorporated by
reference to Exhibit 10.22 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351))
10.25 Assignment of Lease, dated January 21, 2000, between
Caldera and Nextpage L.C. (incorporated by reference to
Exhibit 10.23 to Caldera's Registration Statement on
Form S-1 (File No. 333-94351))
10.26 Form of Indemnification Agreement by and between Caldera
and its executive officers and directors (incorporated
by reference to Exhibit 10.24 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351))
+10.27 Distribution Agreement, dated February 8, 2000, between
Caldera and Frank Kasper & Associates, Inc.
(incorporated by reference to Exhibit 10.1 to Caldera's
quarterly report on Form 10-Q for the quarter ended
April 30, 2000)
10.28 Second Amendment to Lease Agreement, dated April 5,
2000, between Caldera and EsNet Properties, L.C.
(incorporated by reference to Exhibit 10.2 to Caldera's
quarterly report on Form 10-Q for the quarter ended
April 30, 2000)
10.29 Lease Agreement, dated October 9, 1997, between Caldera,
Inc., a Utah corporation, and EsNet Properties, L.C.
(incorporated by reference to Exhibit 10.3 to Caldera's
quarterly report on Form 10-Q for the quarter ended
April 30, 2000)
10.30 Master Lease, dated March 30, 2000, between Caldera and
106th South Business Park, L.C. (incorporated by
reference to Exhibit 10.4 to Caldera's quarterly report
on Form 10-Q for the quarter ended April 20, 2000)
10.31 Form of Senior Executive Severance Agreement
(incorporated by reference to Exhibit 10.31 to Caldera's
Registration Statement on Form S-4 (File No. 333-45936))
10.32 Form of Voting Agreement between Caldera and Doug
Michels (incorporated by reference to Exhibit 10.32 to
Caldera's Registration Statement on Form S-4 (File No.
333-45936))
10.33 Form of Voting Agreement between The Santa Cruz
Operation, Inc. and The Canopy Group, Inc. and MTI
Technology Corporation (incorporated by reference to
Exhibit 10.33 to Caldera's Registration Statement on
Form S-4 (File No. 333-45936))
91
10.34 Form of Stockholder Agreement, among Caldera, The Santa
Cruz Operation, Inc., MTI Technology Corporation and The
Canopy Group, Inc. (incorporated by reference to Exhibit
10.34 to Caldera's Registration Statement on Form S-4
(File No. 333-45936))
10.35 Form of Sales Representative and Support Agreement,
between Caldera and The Santa Cruz Operation, Inc.
(incorporated by reference to Exhibit 10.35 to Caldera's
Registration Statement on Form S-4 (File No. 333-45936))
10.36 Form of Open Server Research & Development Agreement
between Caldera and The Santa Cruz Operation, Inc.
(incorporated by reference to Exhibit 10.36 to Caldera's
Registration Statement on Form S-4 (File No. 333-45936))
10.37 OEM Distribution Agreement, dated June 27, 2000, between
Caldera and The Santa Cruz Operation, Inc. (incorporated
by reference to Exhibit 10.37 to Caldera's Registration
Statement on Form S-4 (File No. 333-45936))
10.38 Agreement for Linux Professional Consulting Services
between The Santa Cruz Operation, Inc. and Caldera
(incorporated by reference to Exhibit 10.38 to Caldera's
Registration Statement on Form S-4 (File No. 333-45936))
10.39 Strategic Business Agreement between The Santa Cruz
Operation, Inc. and Caldera (incorporated by reference
to Exhibit 10.39 to Caldera's Registration Statement on
Form S-4 (File No. 333-45936))
10.40 Stock Purchase and Sale Agreement between The Canopy
Group, Inc., Caldera and Metrowerks Holding, Inc.
(incorporated by reference to Exhibit 10.40 to Caldera's
Registration Statement on Form S-4 (File No. 333-45936))
10.41 Stockholder Agreement between Lineo, Inc., Bryan Sparks,
Dry Canyon Holding Company LLC and Metrowerks Holdings,
Inc. (incorporated by reference to Exhibit 10.41 to
Caldera's Registration Statement on Form S-4 (File No.
333-45936))
10.42 Warrant Purchase Agreement between Lineo, Inc. and
Metrowerks Holdings, Inc. (incorporated by reference to
Exhibit 10.42 to Caldera's Registration Statement on
Form S-4 (File No. 333-45936))
10.43 Form of Secured Convertible Promissory Note between The
Santa Cruz Operation, Inc. and Caldera (incorporated by
reference to Exhibit 10.43 to Caldera's Registration
Statement on Form S-4 (File No. 333-45936))
10.44 Form of Security Agreement between The Santa Cruz
Operation, Inc. and Caldera (incorporated by reference
to Exhibit 10.44 to Caldera's Registration Statement on
Form S-4 (File No. 333-45936))
10.45 Form of Intercreditor Agreement among The Canopy Group,
Inc., The Santa Cruz Operation, Inc. and Caldera
(incorporated by reference to Exhibit 10.45 to Caldera's
Registration Statement on Form S-4 (File No. 333-45936))
10.46 Form of Loan Agreement between The Canopy Group, Inc.
and The Santa Cruz Operation, Inc. (incorporated by
reference to Exhibit 10.46 to Caldera's Registration
Statement on Form S-4 (File No. 333-45936))
10.47 Form of Security Agreement between The Canopy Group,
Inc. and The Santa Cruz Operation, Inc. (incorporated by
reference to Exhibit 10.47 to Caldera's Registration
Statement on Form S-4 (File No. 333-45936))
10.48 Form of Secured Convertible Promissory Note between The
Canopy Group, Inc. and The Santa Cruz Operation, Inc.
(incorporated by reference to Exhibit 10.48 to Caldera's
Registration Statement on Form S-4 (File No. 333-45936))
92
22.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants of Caldera
+ Confidential treatment was granted by the Commission for certain
provisions. Omitted material for which confidential treatment has
been granted has been filed separately with the Commission.