S-4/A 1 d80098a5s-4a.txt AMENDMENT NO. 5 TO FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 26, 2001. REGISTRATION NO. 333-45936 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 5 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ CALDERA INTERNATIONAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7372 87-0662823 (STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE) IDENTIFICATION NUMBER)
240 WEST CENTER STREET OREM, UT 84057 (801) 765-4999 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ RANSOM H. LOVE CHIEF EXECUTIVE OFFICER CALDERA INTERNATIONAL, INC. 240 WEST CENTER STREET OREM, UT 84057 (801) 765-4999 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: JOHN E. HAYES, III, ESQ. MICHAEL J. DANAHER, ESQ. LEXI S. METHVIN, ESQ. WILSON SONSINI GOODRICH & ROSATI BROBECK, PHLEGER & HARRISON LLP PROFESSIONAL CORPORATION 370 INTERLOCKEN BOULEVARD, SUITE 500 650 PAGE MILL ROAD BROOMFIELD, CO 80021 PALO ALTO, CA 94304 (303) 410-2000 (650) 493-9300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable following the effective time of the consummation of the combination. ------------------------ If the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 [CALDERA LOGO] Dear Caldera Systems Stockholders: I am writing to you today about our proposed combination with the server and professional services groups of The Santa Cruz Operation, Inc. The combination will create a combined company to offer comprehensive business solutions based on both the Linux and UNIX platforms. In the combination, each share of Caldera Systems common stock will be exchanged for one share of common stock of a new entity, Caldera International, Inc. SCO will receive 16 million shares of Caldera International common stock (representing approximately 25.3% of Caldera International on a fully diluted basis), $23 million in cash (of which $7 million was advanced to SCO on January 26, 2001) and a non-interest bearing promissory note in the amount of $8 million that will be paid in quarterly installments of $2 million beginning the fifth quarter after the combination is completed. In addition, if the OpenServer line of business of the server and professional services groups generates revenues in excess of specified thresholds during the three-year period following the completion of the combination, SCO will have earn-out rights entitling it to receive 45% of these excess revenues. Based on a price per share of $1.50, the closing price of a share of Caldera Systems common stock on March 22, 2001, the last full trading day for which closing prices were available at the time of printing this joint proxy statement/prospectus, and not including any future payments SCO may be entitled to receive from its earn-out rights, the estimated value of the consideration to be paid for the server and professional services groups would be approximately $55 million. SCO employees who join Caldera International will receive options to purchase approximately 1.8 million shares of common stock of Caldera International (representing approximately 2.8% of Caldera International on a fully diluted basis). In the combination, Caldera Systems will become a subsidiary of Caldera International. Please refer to page 68 for further discussion of the types and amounts of consideration to be paid to SCO in the combination. The combination is described more fully in the accompanying joint proxy statement/prospectus. You will be asked to vote on a proposal to combine our company with SCO's server and professional services groups and to issue approximately 16 million shares in connection with the combination, at the annual meeting of Caldera Systems stockholders to be held on April 27, 2001 at 10:00 a.m. Mountain time, at Caldera Campus, Building 1, 240 West Center Street, Orem, Utah. The holders of a majority of the outstanding shares of Caldera Systems common stock present in person or by proxy and entitled to vote at the annual meeting must approve these transactions. Only stockholders who hold shares of Caldera Systems at the close of business on March 5, 2001 will be entitled to vote at the annual meeting. At the meeting, you will also be asked to vote on some additional proposals which are described on the attached Notice of Annual Meeting of Stockholders. We are very excited about the opportunities we envision for the combined company. AFTER CAREFUL CONSIDERATION, OUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE COMBINATION AND CONCLUDED THAT IT IS IN THE BEST INTERESTS OF CALDERA SYSTEMS AND YOU, OUR STOCKHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSED COMBINATION AND EACH OF THE ADDITIONAL PROPOSALS. This joint proxy statement/prospectus provides detailed information about Caldera Systems and SCO's server and professional services groups. Please give all of this information your careful attention. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE DISCUSSION IN THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS JOINT PROXY STATEMENT/PROSPECTUS. Holders of over 67% of the outstanding common stock of Caldera Systems as of February 1, 2001 have entered into voting agreements with The Santa Cruz Operation, Inc. whereby they have agreed to vote all of their Caldera Systems common stock "For" the combination and have appointed representatives of The Santa Cruz Operation, Inc. as proxies to vote their Caldera Systems common stock at the meeting. We invite you to attend the meeting. Whether or not you plan to attend, please complete, sign and date the enclosed proxy and return it to us in the enclosed envelope. If you attend the meeting, you may vote in person if you wish, even if you have previously returned your proxy. It is important that your shares be represented and voted at the meeting. 3 You will not be required to exchange your Caldera Systems stock certificates for Caldera International certificates. PLEASE DO NOT SEND YOUR CERTIFICATES. Sincerely, /s/ RANSOM H. LOVE ----------------------------------------- Ransom H. Love President and Chief Executive Officer 4 THIS JOINT PROXY STATEMENT/PROSPECTUS RELATES TO THE ISSUANCE OF UP TO APPROXIMATELY 63.3 MILLION SHARES OF CALDERA INTERNATIONAL, INC. COMMON STOCK IN CONNECTION WITH THE COMBINATION DESCRIBED INSIDE THIS DOCUMENT. WE ANTICIPATE THAT THIS STOCK WILL BE TRADED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "CALD". NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION OR THE CALDERA INTERNATIONAL, INC. COMMON STOCK TO BE ISSUED IN THE COMBINATION, OR DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED MARCH 26, 2001, AND WAS FIRST MAILED TO CALDERA SYSTEMS STOCKHOLDERS ON OR ABOUT MARCH 27, 2001. 5 [CALDERA LOGO] NOTICE OF ANNUAL MEETING OF STOCKHOLDERS To our Stockholders: We will hold the annual meeting of Caldera Systems, Inc. stockholders at Caldera Campus, Building 1, 240 West Center Street, Orem, Utah on April 27, 2001 at 10:00 a.m., Mountain time, to consider and vote on the following proposals: 1. To combine Caldera with the server and professional services groups of The Santa Cruz Operation, Inc. In connection with the combination, SCO will receive 16 million shares of Caldera International, Inc. common stock (representing approximately 25.3% of Caldera International on a fully diluted basis), $23 million in cash (of which $7 million was advanced to SCO on January 26, 2001) and a non-interest bearing promissory note in the amount of $8 million that will be paid in quarterly installments of $2 million beginning the fifth quarter after the combination is completed. In addition, if the OpenServer line of business of the server and professional services groups generates revenues in excess of specified thresholds during the three-year period following the completion of the combination, SCO will have earn-out rights entitling it to receive 45% of these excess revenues. SCO employees who join Caldera International will receive options to purchase approximately 1.8 million shares of common stock of Caldera International (representing approximately 2.8% of Caldera International on a fully diluted basis). In the combination, Caldera will become a subsidiary of Caldera International, which we call New Caldera, and SCO will contribute to New Caldera the assets of its server and professional services groups. 2. To elect six (6) directors to serve for one-year terms ending in the year 2002 or until successors are duly elected and qualified. 3. To amend our 1999 Omnibus Stock Incentive Plan to increase the number of shares reserved for issuance from 4,105,238 to 10,905,238 and to provide for an automated director option grant program. 4. To amend our 2000 Employee Stock Purchase Plan to increase the number of shares reserved for issuance from 500,000 to 2,000,000. 5. To amend our Certificate of Incorporation to increase the authorized number of shares of common stock from 75,000,000 to 175,000,000. 6. To ratify the appointment of Arthur Andersen LLP as Caldera's independent auditors for the fiscal year ending October 31, 2001. 7. To transact such other business as may properly come before the annual meeting or any adjournment or postponement thereof. For more information about the combination, the reorganization agreement and related matters, please review the accompanying joint proxy statement/prospectus. 6 Only stockholders of record at the close of business on March 5, 2001 are entitled to notice of and to vote at the annual meeting. Our stock transfer books will remain open between the record date and the date of the meeting. A list of stockholders entitled to vote at the annual meeting will be available for inspection at Caldera's executive offices. By Order of the Board of Directors of Caldera Systems, Inc. /s/ RANSOM H. LOVE -------------------------------------- Ransom H. Love President and Chief Executive Officer Orem, Utah March 26, 2001 TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. YOU CAN REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED. 7 SCO LOGO 425 ENCINAL STREET SANTA CRUZ, CALIFORNIA 95060 Dear Shareholder of The Santa Cruz Operation: We invite you to attend a special meeting of the shareholders of The Santa Cruz Operation, Inc. ("SCO") to be held at 425 Encinal Street, Santa Cruz, California at 10:00 a.m. local time, on May 4, 2001. At the special meeting, we will ask you to consider a proposal to approve and adopt the agreement and plan of reorganization that we entered into with Caldera Systems, Inc. and Caldera International, Inc. on August 1, 2000 and amended on September 13, 2000, December 12, 2000 and February 9, 2001, and a proposal to change our corporate name to "Tarantella, Inc." Under the agreement and plan of reorganization, Caldera Systems, Inc. will acquire the assets of our server and our professional services groups. A new company, Caldera International, Inc., will be formed, combining the assets of Caldera Systems with the assets acquired from SCO. After the combination is completed, we will continue to operate our Tarantella business, and accordingly, have decided to change our corporate name. Under the proposed transaction, SCO will receive 16 million shares of Caldera International (representing approximately 25.3% of Caldera International on a fully diluted basis), $23 million in cash (of which $7 million was received on January 26, 2001) and a non-interest bearing promissory note in the amount of $8 million that will be received in quarterly installments of $2 million beginning the fifth quarter after the combination is completed. In addition, if the OpenServer line of business of the server and professional services groups generates revenues in excess of specified thresholds during the three-year period following the completion of the combination SCO will have earn-out rights entitling it to receive 45% of these excess revenues. Based on a price per share of $1.50, the closing price of a share of Caldera Systems common stock on March 22, 2001, the last full trading day for which closing prices were available at the time of printing this joint proxy statement/prospectus, and not including any future payments SCO may be entitled to receive from its earn-out rights, the estimated value of the consideration to be paid for the server and professional services groups would be approximately $55 million. SCO employees who join Caldera International will receive options to purchase approximately 1.8 million shares of common stock of Caldera International (representing approximately 2.8% of Caldera International on a fully diluted basis). Please refer to page 68 for further discussion of the types and amounts of consideration to be received by SCO in the combination. We are very excited about the opportunities we envision for the combined company and for our ongoing operations. However, we cannot complete the combination unless all of the conditions to the closing are satisfied, including the approval and adoption of the reorganization agreement by holders of a majority of SCO voting stock. Douglas Michels, our President and Chief Executive Officer and largest shareholder with beneficial ownership of approximately 10% of the outstanding SCO common stock as of February 1, 2001, has entered into a voting agreement with Caldera Systems to vote all of his SCO common stock in favor of approving and adopting the reorganization agreement and to appoint representatives of Caldera Systems as proxies to vote his SCO common stock at the meeting. Your vote is very important. Whether or not you plan to attend the special meeting, you should complete, sign, date and promptly return the enclosed proxy card in the enclosed envelope or complete the your proxy via telephone or the internet to ensure that your shares will be represented at the meeting. If you attend the meeting, you may vote in person if you wish, even though you have previously returned your proxy. AFTER CAREFUL CONSIDERATION, OUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE COMBINATION AND CONCLUDED THAT IT IS IN THE BEST INTERESTS OF SCO AND YOU, OUR SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSED COMBINATION AND THAT YOU VOTE "FOR" THE PROPOSED NAME CHANGE. This joint proxy statement/prospectus provides detailed information about Caldera Systems and the server and professional services groups. Please give all of this information your careful attention. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE DISCUSSION IN THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS JOINT PROXY STATEMENT/PROSPECTUS. /s/ STEVEN M. SABBATH -------------------------------------- Steven M. Sabbath Secretary This joint proxy statement/prospectus is dated March 26, 2001, and was first mailed to shareholders of The Santa Cruz Operation on or about March 27, 2001. 8 SCO LOGO NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD MAY 4, 2001 To our Shareholders: NOTICE IS HEREBY GIVEN that a special meeting of the shareholders of The Santa Cruz Operation, Inc., will be held on May 4, 2001 at 10:00 a.m., local time at 425 Encinal Street, Santa Cruz, California for the following purposes: 1. To approve and adopt the agreement and plan of reorganization, dated August 1, 2000 and amended on September 13, 2000, December 12, 2000 and February 9, 2001, by and among The Santa Cruz Operation, Inc., Caldera Systems, Inc., and Caldera International, Inc. 2. To approve an amendment to our articles of incorporation to change our corporate name to "Tarantella, Inc." 3. To transact such other business as may properly come before the special meeting or any adjournment or postponement thereof. These items of business are more fully described in the joint proxy statement/prospectus accompanying this notice. Shareholders of record at the close of business on March 8, 2001, are entitled to notice of and to vote at the special meeting and any adjournment or postponement thereof. All shareholders are cordially invited to attend the special meeting in person. If the reorganization agreement is approved by SCO shareholders, holders of SCO common stock who elect to dissent from the approval and who follow the procedural requirements of the California Corporations Code may, under certain circumstances, be entitled to receive cash for their SCO common stock at their fair market value. YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE IN THE POSTAGE-PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE OR TO CAST YOUR VOTE VIA TELEPHONE OR THE INTERNET. You may revoke your proxy in the manner described in the attached document at any time before it has been voted at the special meeting. Any shareholder attending the meeting may vote in person even if he or she has returned a proxy. Sincerely, /s/ STEVEN M. SABBATH ------------------------------------ Steven M. Sabbath Secretary Santa Cruz, California March 26, 2001 9 TABLE OF CONTENTS
PAGE ---- FREQUENTLY ASKED QUESTIONS.................................. iii SUMMARY..................................................... 1 MARKET PRICE INFORMATION.................................... 15 RISK FACTORS................................................ 17 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... 32 SCO IS INCORPORATING ITS SEC FILINGS IN THIS DOCUMENT BY REFERENCE................................................. 32 WHERE YOU CAN FIND MORE INFORMATION......................... 33 THE CALDERA ANNUAL MEETING.................................. 34 THE SCO MEETING............................................. 38 THE COMBINATION............................................. 41 INTERESTS OF PERSONS IN THE COMBINATION..................... 66 THE REORGANIZATION AGREEMENT................................ 67 AGREEMENTS RELATED TO THE COMBINATION....................... 76 THE EMPLOYEE STOCK OPTION ALTERNATIVES...................... 80 SELECTED FINANCIAL DATA OF CALDERA.......................... 84 CALDERA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 86 SELECTED FINANCIAL DATA OF THE SANTA CRUZ OPERATION, INC.... 103 SELECTED FINANCIAL DATA OF THE SERVER AND PROFESSIONAL SERVICES GROUPS........................................... 104 SERVER AND PROFESSIONAL SERVICES GROUPS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................. 105 BUSINESS OF CALDERA......................................... 115 BUSINESS OF SERVER AND PROFESSIONAL SERVICES GROUPS......... 129 BUSINESS OF NEW CALDERA..................................... 134 MANAGEMENT OF CALDERA AND NEW CALDERA....................... 134 CERTAIN TRANSACTIONS OF CALDERA AND NEW CALDERA............. 147 PRINCIPAL STOCKHOLDERS OF NEW CALDERA....................... 151 PRINCIPAL STOCKHOLDERS OF CALDERA........................... 153 PRINCIPAL SHAREHOLDERS OF SCO............................... 155 DESCRIPTION OF CALDERA AND NEW CALDERA CAPITAL STOCK........ 157 COMPARISON OF RIGHTS OF HOLDERS OF SCO COMMON STOCK AND NEW CALDERA COMMON STOCK...................................... 160 PROPOSALS TO BE VOTED UPON BY CALDERA STOCKHOLDERS AT THE CALDERA ANNUAL MEETING.................................... 166 PROPOSAL ONE: APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF REORGANIZATION.................................... 167 PROPOSAL TWO: ELECTION OF DIRECTORS......................... 168 PROPOSAL THREE: APPROVAL OF AMENDMENTS TO THE STOCK INCENTIVE PLAN............................................ 170 OPTION TRANSACTIONS......................................... 182 PROPOSAL FOUR: APPROVAL OF AMENDMENTS TO THE EMPLOYEE STOCK PURCHASE PLAN............................................. 185 PURCHASE PLAN TRANSACTIONS.................................. 189 PROPOSAL FIVE: AMENDMENTS TO CALDERA'S CERTIFICATE OF INCORPORATION............................................. 191 PROPOSAL SIX: RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS............................................... 192 PROPOSALS TO BE VOTED UPON BY SCO SHAREHOLDERS AT THE SCO SPECIAL MEETING........................................... 196 PROPOSAL ONE: APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF REORGANIZATION.................................... 196
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PAGE ---- PROPOSAL TWO: APPROVAL OF AN AMENDMENT TO THE SCO ARTICLES OF INCORPORATION TO CHANGE SCO'S CORPORATE NAME TO "TARANTELLA, INC."........................................ 196 LEGAL MATTERS............................................... 198 EXPERTS..................................................... 198 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION............................................... P-1 INDEX TO FINANCIAL STATEMENTS............................... F-1 INDEX TO APPENDICES......................................... IA-1
ii 11 FREQUENTLY ASKED QUESTIONS This document contains a great deal of important information. Your individual circumstances will determine which aspects of that information apply to you, and the decisions you will make in connection with this document. For these reasons, this series of frequently asked questions will not answer all of the questions you may have. Rather they are designed to give you a clearer understanding of the choices you will make. INTRODUCTORY QUESTIONS Q: WHAT IS THE COMBINATION BEING PROPOSED? A: The transaction being proposed is as follows: - a new company, Caldera International, Inc., or New Caldera, has been formed to facilitate the proposed combination. - Caldera Systems, Inc., or Caldera, will merge to become a wholly-owned subsidiary of New Caldera. - The Santa Cruz Operation, Inc., or SCO, will contribute the assets of its server and professional services groups to New Caldera. Q: WHAT IS "NEW CALDERA"? A: New Caldera is what we call the combined company after the combination in this joint proxy statement/prospectus. The entity will be named Caldera International, Inc., and it will become the parent company of Caldera Systems. New Caldera will also directly own the server and professional services groups contributed by SCO. QUESTIONS FOR CALDERA STOCKHOLDERS Q: WHAT WILL I RECEIVE IN THE COMBINATION? A: If we complete the combination, each share of Caldera common stock you own will automatically be converted into one share of New Caldera common stock. Your current Caldera stock certificate will then no longer represent shares of Caldera, and will instead represent shares of New Caldera. The Caldera stockholders and stock option holders will own approximately 71.9% of New Caldera on a fully diluted basis. Q: WHAT WILL I GIVE UP IN THE COMBINATION? A: You will give up your stock ownership in Caldera. However, you will not give up your stock certificate or make any payment because your old stock certificate will represent your interest in New Caldera. PLEASE DO NOT SEND YOUR CALDERA STOCK CERTIFICATES. Q: WHAT TAXES WILL I OWE AS A RESULT OF THE COMBINATION? A: None. The combination will be tax-free to Caldera and its stockholders for U.S. federal income tax purposes. See page 61. Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE COMBINATION? A: Yes. In evaluating the combination, you should keep in mind that if the combination occurs, you will be subject to the risks related to the business of New Caldera. You should, therefore, consider the factors discussed in the section entitled "Risk Factors" beginning on page 17. Q: DOES THE BOARD OF DIRECTORS OF CALDERA RECOMMEND APPROVAL OF THE REORGANIZATION AGREEMENT AND THE PROPOSED COMBINATION? A: Yes. After careful consideration, the board of directors of Caldera unanimously recommends that its stockholders vote in favor of the approval and adoption of the reorganization agreement and the proposed combination. Q: WHAT RIGHTS DO I HAVE TO DISSENT FROM THE COMBINATION? A: None. If the reorganization agreement is approved, you will not, under Delaware General Corporation Law, have the right to dissent from the approval. QUESTIONS FOR SCO SHAREHOLDERS Q: WHAT WILL SCO RECEIVE IN THE COMBINATION? A: In exchange for the assets of SCO's server and professional services groups, SCO will receive 16 million shares of New Caldera common stock (representing approximately iii 12 25.3% of New Caldera on a fully diluted basis), $23 million in cash (of which $7 million was received on January 26, 2001) and a non-interest bearing promissory note in the amount of $8 million that will be received in quarterly installments of $2 million beginning the fifth quarter after the combination is completed. In addition, if the OpenServer line of business of the server and professional services groups generates revenues in excess of specified thresholds during the three-year period following the completion of the combination, SCO will have earn-out rights entitling it to receive 45% of these excess revenues. Q: WILL THE CURRENT SHAREHOLDERS OF SCO BE ISSUED SHARES OF NEW CALDERA WHEN THE COMBINATION CLOSES? A: No. The New Caldera shares received by SCO in the combination will become an asset of SCO. There is no current intention to distribute New Caldera stock directly to SCO shareholders because of the adverse tax impact of distributing the shares and because the shares will serve as security for the $18 million line of credit to SCO from The Canopy Group, the majority stockholder of Caldera. There are also distribution limitations that are part of the reorganization agreement with Caldera. Q: WHAT IS THE EFFECT ON SCO IF THE COMBINATION TAKES PLACE? A: SCO will continue to operate its Tarantella division and hold the assets of that division and the assets of its investment holdings, including shares of New Caldera common stock received in the combination. SCO's headquarters will remain in Santa Cruz, California and there will be approximately 230 employees worldwide. Q: DOES THE BOARD OF DIRECTORS OF SCO RECOMMEND VOTING IN FAVOR OF THE PROPOSED COMBINATION? A: Yes. After careful consideration, the board of directors of SCO unanimously recommends that its shareholders vote in favor of the approval and adoption of the reorganization agreement and the proposed combination. Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE COMBINATION? A: Yes. In evaluating the combination, you should keep in mind that if the combination occurs, you will be subject to the risks related to the business of Caldera as well as risks that relate to SCO's business. You should, therefore, consider the factors discussed in the section entitled "Risk Factors" beginning on page 17. QUESTIONS FOR SCO OPTION HOLDERS WHO BECOME NEW CALDERA EMPLOYEES Q: WHAT WILL BECOME OF THE OPTIONS I CURRENTLY HOLD FOR SCO COMMON STOCK? A: Assuming you are offered and accept employment with New Caldera, you will be entitled to select between two alternatives with respect to the treatment of each of your SCO option grants. Under the first alternative, you may elect to have some or all of your option grants assumed by New Caldera. Under the second alternative, you may elect to have some or all your existing SCO option grants cancelled and replaced with new options to purchase New Caldera common stock. Q: WHAT WILL HAPPEN TO MY SCO STOCK OPTIONS IF I CHOOSE THE "ASSUMPTION" ALTERNATIVE? A: Each SCO stock option grant assumed by New Caldera will continue to have its original terms (including vesting schedule and termination provisions), and be subject to its original conditions that were applicable immediately prior to the effective time, except that: - each SCO stock option will become exercisable for shares of New Caldera common stock, - the number of shares of New Caldera common stock issuable upon the exercise of any given SCO option will be one half of the number of shares of SCO common stock subject to the option immediately prior to the effective time, rounded down to the nearest whole number, - the per share exercise price of any given option will be two times the exercise price iv 13 of the option immediately prior to the effective time, rounded up to the nearest whole cent, and - the option for shares of New Caldera may not qualify as an incentive stock option even though the SCO option may have. For an illustration of how this alternative works, please see page 80. Q: WHAT WILL HAPPEN TO MY SCO STOCK OPTIONS IF I CHOOSE THE "REPLACEMENT" ALTERNATIVE? A: Under the "replacement" alternative: - each SCO stock option will be exchanged for an option exercisable for shares of New Caldera common stock, - the number of shares of New Caldera common stock issuable upon the exercise of the replacement option will be one half of the number of shares of SCO common stock under the cancelled option immediately prior to the effective time, rounded down to the nearest whole number, - the per share exercise price of an option will be the fair market value of New Caldera common stock immediately after the closing of the combination, - the vesting schedule of the New Caldera options will be the same as the vesting schedule of the exchanged SCO stock option, and - the replacement option grants will qualify as incentive stock options to the maximum extent permissible under the federal tax laws. For an illustration of how this alternative works, please see page 81. Q: WHAT WILL BE THE TAX CONSEQUENCES OF THESE OPTION ALTERNATIVES? A: There will be no immediate tax consequences from either alternative. However, under the assumption alternative, if you had an incentive stock option while at SCO, you may have a non-qualified option after the assumption. Q: WHAT WILL HAPPEN IF I DO NOT ELECT TO HAVE MY SCO OPTIONS ASSUMED OR REPLACED? A: If you do not elect to participate in the employee stock option assumption and replacement, the unvested portion of your SCO stock options will be canceled as of the date the combination is completed. You will have only 90 days after the completion of the combination to exercise the vested portion of your SCO stock options. Q: WHAT DO I NEED TO DO NOW? A: Your options will not be assumed or replaced automatically when you become an employee of New Caldera. If you wish to have your SCO stock options assumed by New Caldera or cancelled and replaced with New Caldera stock options, please follow the instructions beginning on page 82. IF YOU DO NOT FOLLOW THESE DIRECTIONS, YOUR OPTIONS WILL EXPIRE. OTHER QUESTIONS FOR ALL STOCKHOLDERS/SHAREHOLDERS Q: WHAT DO I NEED TO DO NOW? A: We urge you to read this joint proxy statement/prospectus, including its appendices, carefully, and to consider how the merger will affect you as a shareholder. You may also want to review the documents referenced under "Where You Can Find More Information" on page 33. Q: WHEN DO YOU EXPECT THE COMBINATION TO BE COMPLETED? A: We are working toward completing the combination as quickly as possible. We hope to complete the combination during the second calendar quarter of 2001. Q: WHAT DO I NEED TO DO NOW TO VOTE? A: Just indicate on your proxy card how you want to vote, and sign and mail it in the enclosed return envelope as soon as possible, so that your shares may be represented at your meeting. If you sign and send in your proxy and do not indicate how you want to vote, your proxy will be counted as a vote in favor of the combination. You may instead choose to attend your meeting and vote your shares in person. v 14 Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED IN MY SIGNED PROXY CARD? A: You may change your vote at any time before the vote takes place at the Caldera annual meeting or SCO special meeting, respectively. To change your vote, you may either submit a later dated proxy card or send a written notice stating that you would like to revoke your proxy. In addition, you may attend the annual or special meeting and vote in person. However, if you elect to vote in person at the Caldera annual meeting or SCO special meeting, respectively, and your shares are held by a broker, bank or other nominee, you must bring to the annual meeting or the special meeting a legal proxy from the broker, banker or other nominee authorizing you to vote the shares. Q: IF MY SHARES OF STOCK ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY SHARES FOR ME? A: Your broker will vote your shares only if you provide instructions on how to vote. Without instructions, your shares will not be voted. You should instruct your broker to vote your shares, following the directions provided by your broker. See pages 34 and 38. Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW? A: No. Neither Caldera stockholders nor SCO shareholders will exchange their stock certificates. Q: WHERE CAN I FIND MORE INFORMATION ABOUT CALDERA AND SCO? A: Both Caldera and SCO file reports, proxy and information statements and other information with the Securities and Exchange Commission. You may read and copy this information at the SEC's public reference facilities. Please call the SEC at 1-800-SEC-0330 for information about these facilities. This information is also available at the Internet site the SEC maintains at www.sec.gov. See "Where You Can Find More Information" beginning on page 33 of this document. Q: WHOM AT CALDERA OR SCO SHOULD I CONTACT IF I HAVE ANY QUESTIONS ABOUT THE COMBINATION? A: You should contact either Kathy Allred of Caldera by telephone at 801-765-4999 or by e-mail at kallred@caldera.com, or Lynn Schroeder of SCO by telephone at 831-427-7399 or by e-mail at lynnsc@sco.com, with any questions about the combination. vi 15 SUMMARY For your convenience, we have summarized here information that is contained elsewhere in this document. It highlights selected information and does not contain all of the information that is important to you. To understand the transactions more fully and for a more complete description of the legal terms of these transactions, you should carefully read this document and the documents to which we have referred. See "Where You Can Find More Information" and "SCO is Incorporating its SEC Filings in this Document by Reference" on pages 33 and 32. We have included page references parenthetically to direct you to a more complete description of the topics in this summary. THE COMPANIES CALDERA SYSTEMS, INC. AND CALDERA INTERNATIONAL, INC. 240 West Center Street Orem, Utah 84057 (801) 765-4999
Caldera develops and markets business solutions based on the Linux operating system, or Linux-based solutions, including eDesktop and eServer products, technical training, certification and support. Caldera's OpenLearning Providers offer distribution-neutral Linux training and certification based on Linux Professional Institute (LPI) certification standards. Caldera Systems supports the open source community and is an advocate of Linux Standard Base (LSB) and LPI. New Caldera was formed to facilitate the proposed combination. New Caldera has not engaged in any business and will not engage in business until the combination has been completed. New Caldera currently has no assets or liabilities and no outstanding capital stock. THE SANTA CRUZ OPERATION, INC. 425 Encinal Street Santa Cruz, California 95061 (831) 425-7222 SCO provides server-based software for networked business computing. SCO also provides server operating systems based on UNIX technology, or UNIX server operating systems, and network computing software that enables clients of all kinds -- including, personal computers, graphical terminals, network computers, and other devices -- to have webtop access to business-critical applications running on servers of all kinds. THE COMBINATION Caldera, New Caldera and SCO have entered into a reorganization agreement that provides for the following transactions: - New Caldera will purchase the server and professional services groups from SCO for a purchase price of 16 million shares of New Caldera common stock (representing approximately 25.3% of New Caldera on a fully diluted basis), $23 million in cash (of which $7 million was advanced to SCO on January 26, 2001) and a non-interest bearing promissory note in the amount of $8 million that will be paid in quarterly installments of $2 million beginning the fifth quarter after the combination is completed. In addition, if the OpenServer line of business of the server and professional services groups generates revenues in excess of specified thresholds during the three-year period following the completion of the combination, SCO will have earn-out rights entitling it to receive 45% of these excess revenues. SCO employees who join New Caldera will receive options to purchase approximately 1.8 million shares of New Caldera (representing approximately 2.8% of New Caldera on a fully diluted basis). There will be no adjustment to the purchase price for 1 16 changes in the market price of Caldera's common stock. The New Caldera shares issued to SCO will be held as an asset of SCO. SCO has no current intention to distribute New Caldera stock directly to SCO shareholders. The server and professional services groups operate as a provider of server software and related support for networked business computing, and are a leading provider of UNIX server operating systems through their UnixWare and OpenServer product lines. For a further description of the business, products and technology of the server and professional services groups, see "Business of Server and Professional Services Groups" on page 129. - Caldera will merge with a subsidiary of New Caldera and as a result will become a wholly-owned subsidiary of New Caldera. Stockholders of Caldera will become stockholders of New Caldera following the merger, and each share of Caldera common stock will be exchanged for one share of New Caldera common stock. We urge you to read carefully the reorganization agreement. The reorganization agreement is attached as Appendix A to this joint proxy statement/prospectus. In conjunction with the signing of the reorganization agreement, Caldera and The Canopy Group, Inc., the majority stockholder of Caldera, agreed to loan to SCO $7 million and up to $18 million, respectively. These loan agreements were finalized and entered into in January 2001 and the loan amounts were funded on January 26, 2001. If the combination is completed, Caldera's advance to SCO will be forgiven and will be treated by New Caldera and SCO as part of the cash portion of the consideration to SCO for the server and professional services groups. Caldera has also reimbursed SCO for $1.5 million of transition costs relating to the retention of various employees of SCO who will become employees of New Caldera. VOTE REQUIRED Approval of the combination and reorganization agreement requires the affirmative vote of holders of a majority of the outstanding shares of Caldera common stock and the affirmative vote of holders of a majority of the outstanding shares of SCO common stock. CALDERA RECOMMENDATION TO STOCKHOLDERS The Caldera board of directors voted unanimously to approve the reorganization agreement and the combination. The Caldera board of directors believes that the combination is advisable and in the best interest of Caldera's stockholders and recommends that you vote FOR the proposal to approve the reorganization agreement and the combination. SCO RECOMMENDATION TO SHAREHOLDERS The SCO board of directors voted unanimously to approve and adopt the reorganization agreement and the combination. The SCO board of directors believes that the combination is advisable and in the best interest of the SCO shareholders and recommends that you vote FOR the proposal to approve and adopt the reorganization agreement and the combination. NO SOLICITATION BY SCO (SEE PAGE 72) Subject to the applicable fiduciary duties to its shareholders, the SCO board of directors have agreed that neither it, SCO nor any of SCO's subsidiaries will do any of the following: - solicit, initiate or encourage the submission of any alternative proposal; - engage in discussions or negotiations concerning, or provide any non-public information to a third party regarding an alternative proposal; - take any other action intended, designed or reasonably likely to facilitate any inquiries or the making of any proposal that constitutes or would reasonably be expected to lead to any alternative proposal; 2 17 - enter into any letter of intent, agreement in principle or similar agreement with respect to any alternative transactions; or - make or authorize any statement, recommendation or solicitation in support of any alternative transactions. SCO has also agreed to cause each of its officers, directors, employees, financial advisors, representatives and agents not to take any of these actions. TERMINATION OF THE REORGANIZATION AGREEMENT (SEE PAGE 75) Caldera and SCO can mutually agree to terminate the reorganization agreement without completing the transaction, and either Caldera or SCO can terminate the reorganization agreement if: - the other party materially breaches any representation, warranty, covenant or agreement in the reorganization agreement and fails to cure the breach within 30 days of receiving notice of the breach; - the transactions contemplated by the reorganization agreement are not completed on or before May 31, 2001; - Caldera stockholders or SCO shareholders do not approve the reorganization agreement and the transactions contemplated by the reorganization agreement; - if a final and non-appealable permanent injunction or other court order restrains or prohibits the transactions contemplated by the reorganization agreement; or - the board of the other party modifies or withdraws its approval or recommendation of the combination. In addition, Caldera may terminate the reorganization agreement if the board of SCO recommends any SCO alternative proposal. TERMINATION FEES AND EXPENSE SCO must pay Caldera a termination fee equal to approximately $4.0 million if the reorganization agreement is terminated and the SCO board has changed its recommendation. SCO will also pay a termination fee if: - SCO shareholders do not approve the combination after an alternative proposal has been disclosed and not withdrawn; or - SCO has violated its non-solicitation obligations; and - within 6 months an agreement is entered into for an alternative proposal or within 12 months an alternative proposal is consummated. Caldera must pay SCO the termination fee if the reorganization agreement is terminated because the Caldera board has changed its recommendation. OPINIONS OF FINANCIAL ADVISORS (SEE PAGES 47 AND 53) In deciding to approve the combination, our boards of directors considered the opinions of each of our financial advisors. Caldera received an opinion from its financial advisor, Broadview International, LLC, that as of February 5, 2001, the consideration to be paid for the server and professional services groups was fair to Caldera from a financial point of view. Caldera has agreed to pay Broadview fees totaling approximately $1.4 million. Caldera has paid $300,000 in August 2000 and an additional $300,000 in February 2001. The remainder of the fee is contingent upon consummation of the combination. Broadview and Caldera believe that these fees are customary in transactions of this nature. 3 18 SCO received an opinion from its financial advisor, Chase H&Q, that as of February 8, 2001 the consideration to be received by SCO from New Caldera was fair to SCO from a financial point of view. SCO has agreed to pay Chase H&Q fees totaling approximately $2.1 million. SCO has paid a $25,000 agreement fee and a $750,000 retainer. The remainder of the fee is contingent upon consummation of the combination. SCO and Chase H&Q believe that these fees are customary in transactions of this nature. WE ENCOURAGE YOU TO READ THESE OPINIONS CAREFULLY. THEY ARE ATTACHED AS APPENDICES B AND C. INTERESTS OF PERSONS IN THE COMBINATION (SEE PAGE 66) Certain persons and entities have interests in the combination which may differ from yours because of their status as a director, nominee for director or executive officer of Caldera, SCO or New Caldera. For instance: - Certain officers of SCO, including David McCrabb, will become executive officers of New Caldera; - SCO will provide change-of-control benefits to its current executive officers; - SCO will have the right to nominate 2 directors of the New Caldera board; - Two individuals to be determined by SCO and approved by Caldera will be directors of New Caldera; - SCO has granted additional "stay-put" options to certain executive officers to encourage those individuals to remain with SCO following the combination; and - Each person who becomes an executive officer or key employee of New Caldera will sign an employment agreement with New Caldera that provides for terms of employment and severance benefits, among other things. As of February 1, 2001, directors and executive officers of Caldera and their affiliates as a group beneficially owned approximately 75.1% of the outstanding shares of Caldera common stock. As of February 1, 2001, directors and executive officers of SCO and their affiliates as a group beneficially owned approximately 16.33% of the outstanding shares of SCO common stock. The approval and adoption of the combination requires the affirmative vote of a majority of the holders of the outstanding common stock of each of Caldera and SCO. DISSENTERS' OR APPRAISAL RIGHTS (SEE PAGES 36 AND 39) The Caldera stockholders do not have dissenters' or appraisal rights in connection with the combination. If holders of 5% or more of the outstanding shares of SCO common stock entitled to vote at the SCO special meeting vote against the reorganization agreement and comply with certain other procedures specified in Chapter 13 of the California Corporations Code, SCO shareholders of record who take such actions will be entitled to exercise dissenters' rights. In accordance with the provisions of the California Corporations Code, dissenting SCO shareholders will have the right to be paid in cash the fair market value of their shares of SCO common stock, determined as of the day before the first announcement of the combination, and excluding any appreciation or depreciation as a result of the combination. A copy of Chapter 13 of the California Corporations Code is attached to this document as Appendix O. ACCOUNTING TREATMENT OF THE COMBINATION (SEE PAGE 62) Caldera expects the combination will be accounted for as a purchase, which means that New Caldera will incur substantial non-cash charges to earnings of approximately $5.3 million per quarter over the next three years and approximately $3.5 million per quarter for the subsequent two years related to the amortization of goodwill and other intangible assets. 4 19 SCO expects to recognize a gain on the combination equivalent to approximately 71.3% of the difference between the total consideration received and the carrying amount of the server and professional services groups net assets being sold plus the total cash consideration and discounted value of the promissory note to be issued to SCO. This gain is estimated to be approximately $60.7 million before tax. After the combination closes, SCO will report approximately 28.7% of the operations of New Caldera under the equity method of accounting, after certain adjustments, in its financial statements. OWNERSHIP OF NEW CALDERA FOLLOWING THE COMBINATION The following table illustrates the approximate percentage ownership of New Caldera if the combination is completed. The percentages reflect the estimated ownership of all common stock, assuming the exercise of all stock options of New Caldera, and are calculated based on Caldera and SCO shares outstanding as of February 1, 2001.
APPROXIMATE NUMBER OF SHARES PERCENTAGE OF OF NEW CALDERA NEW CALDERA -------------------- ------------- Caldera stockholders and option holders 45.5 million shares 71.9% SCO 16.0 million shares 25.3% SCO employees joining New Caldera 1.8 million shares 2.8%
DIRECTORS AND EXECUTIVE OFFICERS OF NEW CALDERA FOLLOWING THE COMBINATION (SEE PAGE 134) If we complete the combination, the board of directors of New Caldera will initially consist of all of the current board members of Caldera, excluding John R. Egan who has announced that he will not seek re-election as a director of Caldera, as well as two individuals to be determined by SCO and approved by Caldera. The executive officers of New Caldera will consist of all of the current executive officers of Caldera, as well as David McCrabb. LISTING OF NEW CALDERA COMMON STOCK (SEE PAGE 61) We expect that the shares of New Caldera common stock to be issued in connection with the combination will be approved for listing on the Nasdaq National Market, subject to official notice of issuance. The trading symbol for the New Caldera common stock will be "CALD," the symbol currently used for Caldera. CONDITIONS TO COMPLETION OF THE COMBINATION (SEE PAGE 70) The respective obligations of the parties to complete the combination are subject to approval of the reorganization agreement and combination by Caldera's stockholders and SCO's shareholders, as well as the prior satisfaction or waiver (if permitted by applicable law) of conditions specified in the reorganization agreement. The following conditions, among others, must be satisfied or waived before the combination can be completed: - the combination shall have been approved and adopted by both the Caldera stockholders and the SCO shareholders; - the board of directors of New Caldera shall have appointed Mr. Michels and an individual to be determined by SCO and approved by Caldera to the board of directors of New Caldera; - the relevant parties shall have entered into the stockholder agreement, the escrow agreement, the security agreement, and the voting agreements; - the New Caldera common stock to be issued in the combination shall have been approved for quotation on the Nasdaq National Market, subject to notice of issuance; 5 20 - the representations and warranties of the other party contained in the reorganization agreement shall be accurate except for representations and warranties that address matters as of a particular date and where the breaches have not resulted in a material adverse effect; - the parties shall have materially complied with the covenants contained in the reorganization agreement; and - each of Caldera and SCO shall have received an opinion of their counsel as to the tax consequences of the combination. MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE COMBINATION (SEE PAGE 61) The combination has been structured as a tax-free transaction described in Section 351 of the Internal Revenue Code and, as to Caldera, a "reorganization" under Section 368 of the Internal Revenue Code for United States federal income tax purposes. If the combination qualifies as a tax-free transaction and, as to Caldera, as a "reorganization" under Section 368 of the Internal Revenue Code, neither Caldera's stockholders generally nor SCO will recognize gain or loss for United States federal income tax purposes in the combination, except with respect to cash and other non-stock consideration received by SCO in the combination. It is a condition to the completion of the combination that each of Caldera and SCO receive an opinion of their counsel as to the tax consequences of the combination. MARKET PRICES OF THE COMMON STOCK OF CALDERA AND SCO
CALDERA SCO ------- ----- August 1, 2000 closing price -- the last trading day before the announcement of the proposed combination.............. $6.937 $3.25 March 22, 2001 closing price -- the last practical trading day before the printing of this document.................. $ 1.50 $1.25
6 21 SUMMARY OF THE EMPLOYEE STOCK OPTION ASSUMPTION AND REPLACEMENT OFFER Employees of the server and professional services groups who become employees of New Caldera have the opportunity to either (i) have their SCO stock options cancelled and replaced with options to purchase shares of New Caldera common stock at an exercise price equal to the fair market value of New Caldera common stock immediately after the closing or (ii) have their SCO options assumed by New Caldera for shares of New Caldera common stock at an exercise price equal to twice the exercise price of the SCO stock options. Regardless of the alternative chosen, the number of shares of New Caldera common stock issuable upon the exercise of any given SCO option will be one half of the number of shares of SCO common stock subject to the option immediately prior to the effective time. Please see "The Employee Stock Option Alternatives" on page 80. SCO's stock option plan will continue to govern the option grants of employees of SCO who do not become employees of New Caldera and remain with SCO. If you become an employee of New Caldera and do not choose to have your SCO options assumed or replaced, your options will terminate 90 days after the closing of the combination pursuant to SCO's stock option plan. OUR REASONS FOR THE EMPLOYEE STOCK OPTION ASSUMPTION AND REPLACEMENT OFFER Caldera and SCO negotiated the employee stock option assumption and replacement offer to provide the server and professional services groups' employees similar equity incentives to those possessed by other New Caldera option holders and to allow them to participate in the success of New Caldera. Caldera and SCO agreed to halve the number of shares underlying each outstanding SCO option based on the fact that at the time the reorganization agreement was signed Caldera's common stock was trading at approximately twice the per share price of SCO's common stock. The replacement alternative is designed to incent the server and professional services groups employees holding options for SCO common stock at an exercise price equal to more than half of the New Caldera trading price at closing. Based on the current trading price of Caldera common stock and the exercise prices of outstanding SCO options, New Caldera believes the replacement alternative will be the desirable alternative for most of the former SCO employees. However, New Caldera is nevertheless offering the assumption alternative in recognition of the fact that some SCO employees have outstanding options with low exercise prices, which may make the assumption option desirable. The assumption alternative is designed to incent the server and professional services groups' employees holding options for SCO common stock at an exercise price equal to less than half of the New Caldera trading price at the closing. Under the assumption alternative, the exercise price per share of the New Caldera options will be twice that of the SCO options because, as noted above, Caldera's common stock was trading at a price per share twice that of SCO's common stock at the time the reorganization agreement was signed. A former SCO employee who chooses the assumption alternative will incur the same aggregate exercise price (number of shares times exercise price per share) in exercising options to purchase New Caldera common stock as he or she would have incurred in exercising SCO options; in this way, the assumption alternative preserves the benefit of the employee's low exercise price, relative to the replacement alternative. Since the time of signing the reorganization agreement, the trading price of Caldera common stock has fluctuated widely. Consequently, former SCO shareholders choosing between the replacement alternative and the assumption alternative should obtain updated market price information before choosing an alternative. 7 22 ASSUMPTION OFFER To illustrate the effect of choosing the assumption alternative for a specific option grant, assume our combination closes on April 1, 2001 and, at that point, an employee had a SCO option to purchase 100 shares which was granted on April 1, 1999 when SCO's common stock was at $5.4375 per share, and which was vested as to 50 shares on April 1, 2001. The employee would receive the following: - an option to purchase 50 shares of New Caldera common stock, which is vested as to 25 shares, and - the exercise price of the option would be $10.875. REPLACEMENT OFFER To illustrate the effect of choosing the replacement option for a specific option grant, assume again our combination closes on April 1, 2001 and at that point an employee had a SCO option to purchase 100 shares which was granted on April 1, 1999 when SCO's common stock was at $5.4375 per share, and which was vested as to 50 shares on April 1, 2001. The employee would receive the following: - an option to purchase 50 shares of New Caldera common stock, which is vested as to 25 shares, and - the exercise price would be the fair market value of New Caldera common stock on April 1, 2001. PROCEDURES TO ELECT ASSUMPTION OR REPLACEMENT (SEE PAGE 82) Employees of the server and professional services groups who hold SCO stock options should send the enclosed notice of election, by mail postmarked on or before April 23, 2001, to: The Santa Cruz Operation, Inc. 425 Encinal Street Santa Cruz, California 95061 Attn: Steve Sabbath IF YOU ARE OFFERED AND ACCEPT EMPLOYMENT WITH NEW CALDERA AND DO NOT COMPLETE APPENDIX N, THE NOTICE OF ELECTION TO ASSUME OR REPLACE OPTIONS, THE UNVESTED PORTION OF YOUR SCO STOCK OPTIONS WILL BE CANCELED AS OF THE DATE THE COMBINATION IS COMPLETED. YOU WILL HAVE ONLY 90 DAYS AFTER THE COMBINATION IS COMPLETED TO EXERCISE THE VESTED PORTION OF YOUR SCO OPTIONS. THE TAX STATUS OF SCO OPTIONS WILL DEPEND ON THE ALTERNATIVE CHOSEN BY AN EMPLOYEE (SEE PAGE 62) There will be no immediate tax consequences from either alternative. Under the replacement alternative, the new option granted to an employee will be an incentive stock option to the maximum extent permissible under the federal tax laws. Under the assumption alternative, if an employee had an incentive stock option while at SCO, an employee may have a non-qualified option after the assumption. VESTING SCHEDULE OF OPTIONS (SEE PAGE 69) Under either the assumption or replacement alternative, your vesting schedule will not be changed. 8 23 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following tables present summary historical financial data for Caldera, SCO and the server and professional services groups and summary pro forma combined financial data for Caldera and SCO. The summary pro forma combined financial data of New Caldera includes the combined results of operations and financial data of Caldera and the server and professional services groups and the summary pro forma financial data of SCO excludes the server and professional services groups. The historical financial data has been derived from financial statements and related notes of Caldera, SCO and the server and professional services groups. Caldera and the server and professional services groups' financial statements are included elsewhere in this joint proxy statement/prospectus and SCO's financial statements are incorporated by reference in this joint proxy statement/prospectus. You should read the following summary financial data together with "Caldera Management's Discussion and Analysis of Financial Condition and Results of Operations," "Server and Professional Services Groups Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes included elsewhere in this joint proxy statement/prospectus. SUMMARY HISTORICAL FINANCIAL DATA OF CALDERA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED YEAR ENDED OCTOBER 31, JANUARY 31, ---------------------------------------------------- ------------------- 1996 1997 1998 1999 2000 2000 2001 ----------- ------- ------- ------- -------- -------- -------- (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenue.............................. $ 1,108 $ 1,117 $ 1,057 $ 3,050 $ 4,274 $ 553 $ 1,054 Gross margin (deficit)............... 228 (25) (1,341) 124 253 3 (123) Loss from operations................. (2,649) (7,578) (6,853) (9,103) (31,999) (5,614) (10,196) Net loss............................. (2,757) (8,148) (7,963) (9,367) (26,923) (5,513) (9,843) Net loss attributable to common stockholders....................... (2,757) (8,148) (7,963) (9,367) (39,176) (15,513) (9,843) Basic and diluted net loss attributable to common stockholders per share.......................... $ (0.17) $ (0.51) $ (0.50) $ (0.51) $ (1.19) $ (0.63) $ (0.25) Basic and diluted weighted average common shares outstanding.......... 16,000 16,000 16,000 18,458 32,922 24,780 39,588
OCTOBER 31, ------------------------------------------------------- JANUARY 31, 1996 1997 1998 1999 2000 2001 ----------- ----------- ------- ------ -------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents.................. $ 207 $ 398 $ 76 $ 122 $ 36,560 $28,359 Working capital (deficit).................. (122) 1,313 290 678 88,680 82,051 Total assets............................... 1,639 3,915 16,353 3,714 107,518 96,640 Long-term liabilities, net of current portion.................................. -- -- -- 6 -- -- Predecessor's equity in carved-out operations............................... 576 2,319 -- -- -- -- Total stockholders' equity................. -- -- 708 1,516 102,215 91,077
9 24 SUMMARY HISTORICAL FINANCIAL DATA OF SCO (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ---------------------------------------------------- ------------------------- 1996 1997 1998 1999 2000 1999 2000 -------- -------- -------- -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net revenues..................... $207,890 $193,660 $171,900 $223,624 $148,923 $53,653 $26,455 Gross margin..................... 153,488 138,345 124,804 173,846 107,127 41,821 19,374 Operating income (loss).......... (23,581) (16,594) (13,593) 16,373 (51,233) 2,108 (7,656) Net income (loss)................ (22,414) (15,170) (14,665) 16,858 (56,953) 2,875 (7,897) Net income (loss) per share -- basic................. $ (0.62) $ (0.41) $ (0.41) $ 0.49 $ (1.59) $ 0.08 $ (0.20) Net income (loss) per share -- diluted........................ $ (0.62) $ (0.41) $ (0.41) $ 0.46 $ (1.59) $ 0.07 $ (0.20) Shares used in per share calculation -- basic........... 36,179 36,628 35,817 34,232 35,720 34,713 39,443 Shares used in per share calculation -- diluted......... 36,179 36,628 35,817 36,402 35,720 41,258 39,443
SEPTEMBER 30, --------------------------------------------------- DECEMBER 31, 1996 1997 1998 1999 2000 2000 -------- -------- -------- -------- ------- ------------ (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents and short-term investments............................... $ 54,831 $ 51,711 $ 51,076 $ 62,844 $26,446 $13,109 Working capital............................. 61,935 46,164 32,221 44,813 16,654 8,961 Total assets................................ 166,807 146,665 131,189 139,284 82,202 63,206 Long-term liabilities, net of current portion................................... 9,332 9,545 12,027 11,094 5,462 5,488 Shareholders' equity........................ 101,581 81,462 60,135 70,338 31,202 20,101
SUMMARY HISTORICAL FINANCIAL DATA OF THE SERVER AND PROFESSIONAL SERVICES GROUPS (IN THOUSANDS)
THREE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ---------------------------------------------------------- ------------------------- 1996 1997 1998 1999 2000 1999 2000 ----------- ----------- -------- -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net revenues................. $190,989 $181,915 $162,720 $214,083 $139,632 $50,780 $23,887 Gross margin................. 139,809 128,815 118,239 165,558 98,221 38,976 16,845 Net income (loss)............ (20,640) (8,508) (12,576) 19,867 (41,075) 2,072 (1,795)
SEPTEMBER 30, ------------------------------------------------------------- DECEMBER 31, 1996 1997 1998 1999 2000 2000 ----------- ----------- ----------- -------- -------- ------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents............. $ -- $ -- $ 3,517 $ 2,223 $ 511 $ 69 Working capital deficit............... (7,295) (6,775) (14,651) (14,261) (13,292) (7,933) Total assets.......................... 102,995 84,553 73,355 70,117 40,051 36,052 Long-term liabilities, net of current portion............................. 6,540 5,787 7,703 7,031 2,020 2,036 Divisional surplus (deficit) and accumulated other comprehensive loss................................ 42,743 24,298 9,161 8,932 (2,201) 1,206
10 25 UNAUDITED SUMMARY PRO FORMA COMBINED FINANCIAL DATA OF NEW CALDERA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following table presents summary pro forma combined financial data for Caldera and the server and professional services groups and should be read in conjunction with the introduction to pro forma condensed combined financial information, pro forma condensed combined financial statements and related notes included elsewhere in this joint proxy statement/prospectus. This information has been derived from each company's respective financial statements and notes, which are included elsewhere in this joint proxy statement/prospectus. The summary pro forma combined financial data below presents New Caldera's statement of operations data on a pro forma basis to reflect the proposed combination of Caldera and the server and professional service groups as though the transaction had occurred on November 1, 1999 and presents balance sheet data on a pro forma basis as though the transaction occurred on January 31, 2001. You should not rely on the summary pro forma combined financial data as an indication of the results of operations or financial position that would have been achieved if the combination had taken place earlier or as an indication of the results of operations or financial position of New Caldera after completion of the combination.
YEAR THREE MONTHS ENDED ENDED OCTOBER 31, JANUARY 31, 2000 2001 ----------- ------------ PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA: Revenue..................................................... $ 143,525 $ 24,941 Gross margin................................................ 98,474 16,512 Amortization of intangibles................................. 21,008 5,252 Loss from operations........................................ (84,683) (17,486) Net loss.................................................... (88,835) (17,943) Net loss attributable to common stockholders................ (101,088) (17,943) Basic and diluted net loss attributable to common stockholders per share.................................... $ (2.07) $ (0.32) Basic and diluted weighted average common shares outstanding............................................... 48,922 55,588
JANUARY 31, 2001 ----------- PRO FORMA COMBINED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 9,328 Working capital............................................. 52,943 Goodwill and other intangibles.............................. 95,340 Total assets................................................ 178,255 Long-term liabilities, net of current portion............... 14,466 Total stockholders' equity.................................. 149,444
11 26 UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA OF SCO (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following table presents unaudited summary pro forma combined financial data for SCO after completion of the reorganization and should be read in conjunction with the introduction to pro forma condensed financial information, pro forma condensed consolidated financial statements of SCO and related notes included elsewhere in this joint proxy statement/prospectus. This information has been derived from SCO and the server and professional services groups' respective financial statements and notes, which are included elsewhere in this joint proxy statement/prospectus or incorporated by reference herein. The unaudited summary pro forma financial data below presents SCO's statement of operations data on a pro forma basis to reflect the proposed sale of the server and professional service groups as though the transaction had occurred on October 1, 1999 and presents balance sheet data on a pro forma basis as though the transaction occurred on December 31, 2000. You should not rely on the summary pro forma financial data as an indication of the results of operations or financial position that would have been achieved if the reorganization had taken place earlier or as an indication of the results of operations or financial position of SCO after completion of the reorganization.
THREE MONTHS YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, 2000 2000 ------------- ------------ PRO FORMA STATEMENT OF OPERATIONS DATA: Net revenues................................................ $ 9,291 $ 2,568 Gross margin................................................ 8,906 2,529 Operating loss.............................................. (18,659) (6,516) Net loss.................................................... (44,629) (5,964) Basic and diluted net loss per share........................ $ (1.25) $ (0.15) Shares used in basic and diluted net loss per share calculation............................................... 35,720 39,433
DECEMBER 31, 2000 ----------------- PRO FORMA BALANCE SHEET DATA: Cash and cash equivalents................................... $ 44,177 Working capital............................................. 14,891 Equity investment in New Caldera............................ 23,293 Total assets................................................ 110,807 Long-term liabilities, net of current portion............... 3,452 Total stockholders' equity.................................. 47,205
12 27 COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA FOR CALDERA The information below reflects the historical net loss and book value per share of Caldera stock in comparison with the pro forma combined net loss and book value per share of New Caldera after giving effect to the proposed combination of Caldera and the server and professional services groups as though such combination had occurred at November 1, 1999 using the purchase method of accounting for business combinations. The pro forma combined book value per share is computed by dividing pro forma combined stockholders' equity by the pro forma combined number of shares outstanding as of January 31, 2001. You should read the tables below in conjunction with the respective financial statements and related notes of Caldera and the server and professional services groups and the pro forma condensed combined financial statements and related notes included elsewhere in this joint proxy statement/prospectus. CALDERA
YEAR ENDED THREE MONTHS ENDED OCTOBER 31, 2000 JANUARY 31, 2001 ---------------- ------------------ HISTORICAL PER SHARE DATA: Basic and diluted net loss per common share............... $(1.19) $(0.25) Book value per share at period end........................ $ 2.59 $ 2.30
PRO FORMA COMBINED
YEAR ENDED THREE MONTHS ENDED OCTOBER 31, 2000 JANUARY 31, 2001 ---------------- ------------------ PRO FORMA COMBINED PER SHARE DATA: Basic and diluted net loss per common share............... $(2.07) $(0.32) Book value per share at period end........................ $ 2.69
13 28 COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA FOR SCO The information below reflects the historical net loss and book value per share of SCO stock in comparison with the pro forma net loss and book value per share of SCO after giving effect to the proposed combination of Caldera and the server and professional services groups as though such combination had occurred at October 1, 1999 using the purchase method of accounting for business combinations. The pro forma book value per share is computed by dividing pro forma stockholders' equity by the pro forma number of shares outstanding as of December 31, 2000. You should read the tables below in conjunction with the respective financial statements and related notes of SCO and the server and professional services groups and the pro forma condensed financial statements and related notes included elsewhere in this joint proxy statement/prospectus. SCO
YEAR ENDED THREE MONTHS ENDED SEPTEMBER 30, 2000 DECEMBER 31, 2000 ------------------ ------------------ HISTORICAL PER SHARE DATA: Basic and diluted net loss per share.................... $(1.59) $(0.20) Book value per share at period end...................... $ 0.79 $ 0.51
PRO FORMA
YEAR ENDED THREE MONTHS ENDED SEPTEMBER 30, 2000 DECEMBER 31, 2000 ------------------ ------------------ PRO FORMA PER SHARE DATA: Basic and diluted net loss per share.................... $(1.25) $(0.15) Book value per share at period end...................... $ 1.20
14 29 MARKET PRICE INFORMATION CALDERA MARKET PRICE INFORMATION Caldera 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 FISCAL 2001 Quarter ended January 31, 2001.............................. 4.88 1.84 Quarter ending April 30, 2001 (through March 6, 2001)....... 3.56 1.97
As of March 5, 2001, Caldera had 324 stockholders of record. SCO MARKET PRICE INFORMATION SCO common stock has traded on the Nasdaq National Market under symbol "SCOC" since May 1993. The table below sets forth the range of high and low closing prices of SCO common stock as reported on the Nasdaq National Market for the periods indicated.
SCO COMMON STOCK ----------------- HIGH LOW ------ ------ FISCAL 1999 Quarter ended December 31, 1998............................. $ 5.59 $ 3.25 Quarter ended March 31, 1999................................ 5.88 4.00 Quarter ended June 30, 1999................................. 7.06 5.38 Quarter ended September 30, 1999............................ 14.13 6.44 FISCAL 2000 Quarter ended December 31, 1999............................. 34.65 11.25 Quarter ended March 31, 2000................................ 31.25 9.39 Quarter ended June 30, 2000................................. 8.95 4.39 Quarter ended September 30, 2000............................ 6.13 2.78 FISCAL 2001 Quarter ended December 31, 2000............................. 4.25 1.06 Quarter ending March 31, 2001 (through March 6, 2001)....... 2.84 1.31
As of March 8, 2001, SCO had 365 shareholders of record. 15 30 RECENT CLOSING PRICES The following table sets forth the closing prices per share of Caldera common stock and SCO common stock as reported on the Nasdaq National Market on August 1, 2000, the last full trading day prior to the public announcement that Caldera and SCO had entered into the reorganization agreement, and on March 22, 2001, the last full trading day for which closing prices were available at the time of the printing of this joint proxy statement/prospectus.
CALDERA SCO DATE COMMON STOCK COMMON STOCK ---- ------------ ------------ August 1, 2000.............................................. $6.937 $3.25 March 22, 2001.............................................. $ 1.50 $1.25
DIVIDENDS Caldera has never declared or paid cash dividends on Caldera common stock. Caldera currently intends to retain earnings, if any, to support its growth strategy and does not anticipate paying cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Caldera board of directors after taking into account various factors, including Caldera's financial condition, operating results, current and anticipated cash needs and plans for expansion. SCO has never paid cash dividends on its capital stock and does not intend to pay any cash dividends on its common stock in the foreseeable future. SCO currently intends to retain earnings, if any, to support its operations. Payment of future dividends, if any, will be at the discretion of SCO's board of directors. 16 31 RISK FACTORS In evaluating the proposals to be voted on at your meeting please carefully consider the information presented throughout this document, and in particular the following risk factors. Some of these risk factors relate directly to the combination described in this document, while others relate to the businesses of New Caldera, Caldera and the server and professional services groups. RISKS RELATING TO THE COMBINATION New Caldera might fail to successfully integrate the businesses of Caldera and the server and professional services groups Product line integration will be difficult. If New Caldera completes the combination of the server and professional services groups with Caldera's Linux business, which is not assured, New Caldera will need to integrate two independent businesses. One key issue will be the integration of Caldera's Linux product offerings and SCO's UnixWare. This product line integration will involve consolidation of products with duplicative functionality, coordination of research and development activities, and convergence of the technologies supporting the various products. Other business integration issues could arise. Other problems inherent in integrating the businesses of Caldera and the server and professional services groups include: - maintaining brand recognition for key products of the server business, such as UnixWare and OpenServer, while migrating customer identification of the brands to New Caldera; - resolving channel conflicts that may arise between third party distributor and electronic solution provider channels of Caldera and the channels of the server business; - coordinating, integrating and streamlining geographically dispersed operations; and - coping with customers' uncertainty about continued support for duplicative New Caldera products. Management and employee integration issues could arise. Potential management and employee integration problems include: - resolving differences between the corporate cultures of Caldera and the server and professional services groups; - employee turnover; and - integrating the management teams of both companies successfully. The integration will be expensive. In addition, management's focus on the combination is likely to interrupt the current business activities of Caldera and the server and professional services groups. Any of these risks could harm New Caldera's revenue and results of operations. Operational issues could arise. Potential operational integration problems include conflict between each of Caldera's and SCO's: - management information systems; - telephone systems; and - customer data. Certain individuals have interests that are different from or in addition to yours, which could influence them to support the combination Members of the boards of directors and management of Caldera and SCO, and certain officers of SCO, will receive benefits from the combination in addition to those which you will receive. Because of 17 32 these benefits, these persons may be influenced to vote in favor of or to recommend the combination. These interests include: - the current executive officers and directors of Caldera, excluding John R. Egan who has announced he will not be seeking re-election as a director of Caldera, will become executive officers and directors of New Caldera; - David McCrabb is an executive officer of SCO and will become an executive officer of New Caldera; - each of the SCO executive officers and employees of the server and professional services groups who will become executive officers of New Caldera, and other key employees of the server and professional services groups, will sign employment agreements with New Caldera that provide for terms of employment and severance benefits, among other things; - SCO will provide change-of-control benefits to its current executive officers; - SCO has granted additional "stay-put" options to certain executive officers to encourage those individuals to remain with SCO following the combination; and - SCO will have the right to nominate two members of the New Caldera board of directors, who will initially be two individuals to be named by SCO and approved by Caldera. New Caldera will incur significant accounting charges in connection with the combination that will impact its operating results immediately and in the future The significant costs of integration associated with the combination increases the risk that New Caldera will not realize the anticipated benefits. Because New Caldera will account for the combination as a purchase, it expects to incur a non-cash charge of approximately $1.6 million at the date of the combination, related to the write-off of in-process research and development. New Caldera also will record goodwill and other intangible assets of approximately $90.8 million. This amount will be amortized over periods ranging from three to five years, and will result in charges to operations of approximately $5.3 million per quarter for the first three years and approximately $3.5 million per quarter for the subsequent two years. Please see "Unaudited Pro Forma Condensed Combined Financial Information" on page P-1. Because the Nasdaq National Market is likely to experience extreme price and volume fluctuations, particularly with respect to the stock of internet companies such as New Caldera, the price of New Caldera's stock may decline even if New Caldera's business is doing well The market price of New Caldera's common stock could fluctuate significantly as a result of: - New Caldera's susceptibility to quarterly variations in operating results, which may cause it to fail to meet analysts' or investors' expectations; - earnings and other announcements by, and changes in analyst and investor evaluations of, internet firms and New Caldera; - announcements or implementation by New Caldera or its competitors of technological innovations or new products or services; and - trading volume of New Caldera common stock. The securities of many companies have experienced significant price and volume fluctuations in recent years, often unrelated to the companies' operating performance. Specifically, market prices for securities of technology companies have sometimes reached elevated levels. These levels may not be sustainable and may not bear any relationship to the operating performances of these companies. For example, on March 21, 2000, Caldera's stock closed at a high of $29.44 per share, but has since declined significantly. As of March 6, 2001, it closed at $2.03 per share. Similarly, the stock price of SCO closed at $34.63 per share on December 27, 1999. However, as of March 6, 2001, it closed at $1.34 per share. 18 33 Because the number of shares to be received in the combination by SCO is fixed, the market value of the consideration could fluctuate as a result of changes in the market price of Caldera's common stock There will be no adjustment to the merger consideration received by SCO for changes in the market price of Caldera's common stock, and neither SCO nor Caldera will be permitted to terminate the reorganization agreement solely because of changes in the market price of Caldera common stock. Accordingly, the market value of the consideration to be paid to SCO for the assets of its server and professional services groups will fluctuate depending upon the market value of the Caldera common stock at the time of completion of the combination. At $3.3125, the closing price per share of Caldera common stock on February 9, 2001, the day the third amendment to the reorganization agreement was signed, the aggregate consideration to be paid to SCO, not including any future payments SCO may be entitled to receive from its earn-out rights, would be valued at approximately $84 million. Based on $1.50, the closing price per share of Caldera common stock on March 22, 2001, the last full trading day for which closing prices were available at the time of printing of this joint proxy statement/prospectus, the aggregate consideration would be valued at approximately $55 million. Such fluctuations may continue until the closing of the combination. To the extent that SCO continues to hold shares of New Caldera common stock following the combination, its market value will continue to fluctuate with the stock price of New Caldera's common stock. RISKS RELATING TO NEW CALDERA AFTER THE COMBINATION New Caldera may not be profitable or achieve positive cash flow; if New Caldera does not achieve and sustain profitability and positive cash flow, New Caldera's financial condition would be adversely affected and its stock price could suffer Caldera has not been profitable. The server and professional services groups have not been profitable and their revenue has been declining. If New Caldera's revenue declines or grows at a slower rate than anticipated or if New Caldera is unable to efficiently reduce operating expenses, New Caldera may not achieve or sustain profitability or generate positive cash flow. In this case, the value of an investment in New Caldera could be reduced and New Caldera could be required to seek additional funding sooner than currently anticipated. Based on a pro forma analysis, the combination will result in a material increase in the losses incurred by, and in a material decrease in the working capital available to, New Caldera as compared with Caldera. For the fiscal year ended October 31, 2000 and the three months ended January 31, 2001, Caldera incurred net losses attributable to common stockholders of approximately $39.2 million and $9.8 million, respectively. As of January 31, 2001, Caldera had incurred total net losses of $66.3 million since its inception in 1994. For the fiscal year ended September 30, 2000 and the three months ended December 31, 2000, the server and professional services groups incurred net losses of approximately $41.1 million and $1.8 million, respectively. On a pro forma basis, the combined operations of Caldera and the server and professional services groups would have incurred net losses attributable to common stockholders of approximately $101.1 million for the fiscal year ended October 31, 2000 and $17.9 million for the three months ended January 31, 2001. In connection with the acquisition of the server and professional services groups, New Caldera anticipates additional working capital requirements to fund the acquired operations. On a pro forma basis, the combined operations of Caldera and the server and professional services groups would have working capital of approximately $52.9 million as of January 31, 2001, a decrease of $29.2 million from Caldera's working capital on a historical basis of $82.1 million as of such date. During the year ended September 30, 2000 and the three months ended December 31, 2000, the server and professional services groups used approximately $24.9 million and $4.9 million, respectively, in cash for operating activities. Although New Caldera hopes to reduce employee headcount and generate other cost reductions and efficiencies from the acquisition to minimize the negative impact on working capital, it may not be successful in attaining such cost reductions and efficiencies. Additionally, New Caldera will not acquire certain working capital accounts such as cash, accounts payable or the majority of accounts receivable. As a result, New Caldera 19 34 will be required to provide all working capital for the initial 30 to 60 days of operations from its cash reserves. Caldera believes that its current cash and cash equivalents and short-term investments will be sufficient to meet capital expenditures and working capital requirements for at least the next twelve months. However, after the combination, New Caldera may need to raise additional funds to carry out its business plan. Additional funding may not be available in amounts or on terms acceptable to New Caldera. If sufficient funds are not available or are not available on acceptable terms, New Caldera may be unable to carry out its business plan and achieve profitability and positive cash flow. Because New Caldera's product and service offerings, which will include both Unix and Linux products and services, may not be accepted, New Caldera may not be successful New Caldera will face risks and uncertainties relating to its ability to successfully implement its strategy. New Caldera's business model is based on an expectation that it can create and develop demand for product and service offerings, which will include both UNIX and Linux products and services. There is no current market for business solutions combining both Linux and UNIX-based products and services. At present Microsoft and other non-Linux operating systems are favored by the business community. In order for New Caldera's product offering to be accepted New Caldera must: - broaden awareness of the New Caldera brand; - maintain its current, and develop new, strategic relationships with technology partners and solution providers; - continue to develop and upgrade product offerings tailored for business; and - respond effectively to competitive pressures. If New Caldera is unable to execute its strategy, New Caldera may not be successful. In addition, New Caldera's business model will be subject to many of the same risks currently facing Caldera's business model, which relies on a combination of open source software and proprietary technology. While the UNIX products of the server group to be acquired by New Caldera do not contain open source software components, the Linux products will continue to do so. For further discussion of risks associated with Caldera's business model, see "-- Risks of Caldera" beginning on page 23. New Caldera will have a workforce approximately four times the size of the Caldera workforce. The management of New Caldera will face many difficulties in managing a larger company In deciding whether to approve and adopt the reorganization agreement and the combination, you should bear in mind that the larger combined company will create new challenges for Caldera's existing management. If New Caldera fails to meet these challenges, the value of an investment in New Caldera may decline. After the combination, New Caldera will have a workforce approximately four times the size of the Caldera workforce prior to the combination. Key personnel have little experience managing this type of growth. This growth is likely to strain New Caldera's management control systems and resources, including decision support, accounting and management information systems. New Caldera will need to continue to improve its financial and management controls and its reporting systems and procedures to manage its employees and to obtain additional facilities. If New Caldera does not succeed in these efforts, it could reduce New Caldera's revenue and the value of an investment. If New Caldera is unable to retain key personnel in an intensely competitive environment, its operations could be adversely affected As a result of the combination, New Caldera will need to retain the personnel of both Caldera and the server and professional services groups. Competition for qualified professionals in the software industry is intense, and New Caldera may be unable to retain sufficient professionals to operate the combined 20 35 business. Departures of existing personnel could be disruptive to its business and can result in the departure of other employees. The loss or departure of any of New Caldera's officers or key employees could harm New Caldera's ability to implement its business plan and could lower its revenue. New Caldera's future success depends to a significant extent on the continued service and coordination of its management team, particularly Ransom H. Love, New Caldera's Chief Executive Officer. New Caldera does not maintain key person insurance for any member of its management team. Even though New Caldera intends to enter into employment agreements with key management personnel, these agreements cannot prevent the departure of those employees. New Caldera will operate in a highly competitive market and faces significant competition from a variety of current and potential sources, including Red Hat and Sun Microsystems; Many of New Caldera's current and potential competitors will have greater financial and technical resources; Thus, New Caldera may fail to compete effectively in its market In considering whether to approve this combination, Caldera stockholders and SCO shareholders should bear in mind that New Caldera will have new competitors. New Caldera's principal competitors include: - Microsoft; - Cygnus Solutions; - VA Linux; - Wind River Systems; - Sun Microsystems; - Corel; - MacMillan; - Red Hat; - SuSE; - AT&T; - Compaq; - Hewlett-Packard; - IBM; - Novell; and - Unisys. Many of New Caldera's competitors have substantially greater financial and technical resources, more extensive marketing and distribution capabilities; larger development staffs and more widely recognized brands and products. 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 New Caldera depends for the distribution of its 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. New Caldera's foreign-based operations and sales create special problems, including the imposition of governmental controls and fluctuations in currency exchanges, that could hurt its results Caldera's revenue from foreign sources as a percentage of total revenue materially increased from 7% in fiscal 1999 to 30% in fiscal 2000, with the greatest increase occurring from sales in the Asia Pacific 21 36 region. A key component of Caldera's growth strategy has been to expand Caldera's presence in foreign markets. However, it is costly to establish international facilities and operations, promote Caldera's brand internationally, and develop localized products and support. Revenue from international activities may not offset the expense of establishing and maintaining these foreign operations. In addition, Caldera may not be successful in marketing and distributing its products because Caldera has little experience in these markets. As a result of the purchase of the server and professional services groups from SCO, New Caldera will have significantly more foreign operations than Caldera currently has, including development facilities, sales personnel and customer support operations, in Europe, Latin America and Southeast Asia. These foreign operations are subject to certain inherent risks, including: - potential loss of developed technology through piracy, misappropriation, or more lenient laws regarding intellectual property protection; - imposition of governmental controls, including trade restrictions; - fluctuations in currency exchange rates and economic instability; - longer payment cycles for sales in foreign countries; - difficulties in staffing and managing the foreign operations; - seasonal reductions in business activity in the summer months in Europe and other countries; and - political unrest, particularly in areas in which New Caldera will have facilities. In addition, operating expenses will be denominated in local currency, creating risk of foreign currency translation gains and losses that could harm New Caldera's financial results. If New Caldera generates profits or losses in foreign countries, its effective income tax rate could also be increased. In Latin America and Southeast Asia in particular, several countries have suffered and may be especially susceptible to recessions and economic instability which may lead to increased governmental ownership or regulation of the economy, higher interest rates, increased barriers to entry such as higher tariffs and taxes, and reduced demand for goods manufactured in the United States. New Caldera's business plan contemplates additional acquisitions, which may divert management's attention and present difficulties with respect to integrating operations and employees of these acquisitions New Caldera expects to pursue other acquisitions in the future. New Caldera cannot predict whether it will be successful in pursuing any acquisition opportunities or what the consequences of any acquisitions would be. Acquisitions involve a number of special risks and challenges, including: - management's attention may be diverted, particularly in the case of multiple concurrent acquisitions; - New Caldera must integrate the target's operations and employees with its existing business; - New Caldera may have difficulty incorporating technology into its existing product lines; - key employees may leave; and - New Caldera may have difficulty presenting a unified corporate image. New Caldera does not have experience in integrating the operations of acquired companies. In addition, if consideration for future acquisitions includes equity in New Caldera such acquisitions will have a dilutive effect on existing New Caldera stockholders. 22 37 Caldera and SCO could each be harmed if the combination is not completed Caldera and SCO have each expended substantial management time and incurred costs in negotiating the combination. These costs will not be recouped if the combination is not completed. If the combination is not completed, Caldera and SCO will continue to operate as independent entities, despite customers' and employees' expectations. Each of our reputations and relationships with customers could be damaged if Caldera and SCO fail to complete the combination. If Caldera or SCO does not complete the combination, in certain circumstances, SCO or Caldera may be required to pay a significant breakup fee to the other party. In addition, on January 26, 2001, Caldera advanced to SCO $7 million in the form of a promissory note that matures either on the closing of the combination or on the date of termination of the reorganization agreement. If the combination is not completed, SCO would have an outstanding debt obligation to Caldera that might be difficult to repay, and Caldera would hold an investment that may be difficult to collect. New Caldera will be dependent upon certain strategic relationships with its technology partners and the loss of any of these relationships could adversely affect its business prospects New Caldera will depend on alliances with technology partners such as Citrix Systems, Fujitsu, IBM, Intel, Novell, Compaq and Sun Microsystems. These relationships encompass product integration, two-way technology transfers, joint marketing to electronic service providers and revenue-generating initiatives in areas such as product bundles, training and education and third-level technical support, relating to modification of the operating system code, for its partners. New Caldera expects that these relationships will create opportunities for its products and services in business markets in which it otherwise might not have access. If New Caldera is unable to maintain these relationships, it will not be able to develop and deploy its products in certain segments of the business community and its product development and sales will not grow. In addition, existing strategic relationships of Caldera and SCO with technology partners do not, and any future strategic relationships may not, afford New Caldera any exclusive marketing development or distribution rights. As a result, the companies with which New Caldera will have strategic alliances are free to pursue alternative technologies and to develop alternative products and services in addition to or in lieu of New Caldera's products and services, either on their own or in collaboration with others, including competitors of New Caldera. Moreover, New Caldera cannot guarantee that the companies with which Caldera and SCO have strategic relationships will market New Caldera's products effectively or continue to devote the resources necessary to provide it with effective sales, marketing and technical support, or that these partners will not choose to open source products into which Caldera and SCO have invested significant time and resources, thereby reducing the value of New Caldera's rights in these products. Raymond J. Noorda will be able to exert significant control over New Caldera, and his interests may differ from those of other stockholders After the combination, Raymond J. Noorda will have beneficial ownership of approximately 50.0% of New Caldera's outstanding common stock. As a result, Mr. Noorda could exercise significant control and determine the outcome of actions that require stockholder approval. For example, Mr. Noorda could delay or prevent a transaction in which stockholders might receive a premium over the prevailing market price for their shares and control changes in management. RISKS OF CALDERA Caldera is a new company with a limited operating history, which may make it difficult for you to assess the risks related to its business Although Caldera began operations in 1994, during the past 24 months Caldera has substantially revised its business plan to focus on Linux for eBusiness, or business conducted over the internet, made 23 38 additions to its product line and hired a significant number of new employees, including key members of its management team. In January 2000, Caldera released its server product, eServer. Its historical sales have been primarily from its 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, Caldera faces risks and uncertainties relating to its ability to successfully implement its strategy. You must consider the risks, expenses and uncertainties facing a company like Caldera, operating with an unproven business model, faces in a new and rapidly evolving market such as the market for Linux software. These risks also include Caldera's ability to: - broaden awareness of the Caldera Systems brand; - maintain its 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 its 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 programs and training. If Caldera cannot address these risks and uncertainties or is unable to execute its strategy, Caldera may not be successful. You should not rely on Caldera's quarterly operating results as an indication of its future results because they are subject to significant fluctuations; Fluctuations in Caldera's operating results or the failure of its operating results to meet the expectations of public market analysts and investors may negatively impact Caldera's stock price Caldera's quarterly operating results have varied in the past and Caldera expects them to fluctuate significantly in the future due to a variety of factors that could affect revenue or expenses in any particular quarter. Historically, Caldera has experienced substantial fluctuations in its software and related products revenue from period to period relating to the introduction of new products and new versions of its existing products. For example, revenue from software and related products for the three-month period ended April 30, 1999 was approximately $482,000 and increased to approximately $1.0 million during the three-month period ended July 31, 1999. Software and related products revenue decreased to approximately $775,000 during the three-month period ended October 31, 1999, further decreased to approximately $395,000 during the three-month period ended January 31, 2000 and then increased to approximately $1.1 million for the three-month period ended April 30, 2000. Software and related products revenue then decreased to approximately $631,000 during the three-month period ended July 31, 2000, increased to approximately $845,000 for the three-month period ended October 31, 2000 and most recently has decreased to approximately $452,000 during the three-month period ended January 31, 2001. In addition, Caldera anticipates that product revenue for the three-month period that will end April 30, 2001 may be significantly lower than product revenue compared to the prior three-month period. These quarterly revenue fluctuations were primarily due to the fluctuation of sales of Caldera's OpenLinux products, and these fluctuations in revenue can be expected to continue as a result of fluctuating sales of all of Caldera's products, including its new product offerings. Upon announcement of an expected release date for a new product or upgrade, Caldera often experiences a significant decrease in sales of its 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 channel. Fluctuations in quarterly operating results could cause Caldera's stock price to decline. 24 39 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 tour during the October 31, 2000 quarter, but did hold the Linux training program tour during the first quarter of fiscal 2001. Caldera expects that quarterly services revenue for the duration of fiscal 2001 will be lower than services revenue generated in the first quarter of fiscal 2001. The trend of increased services revenue experienced in fiscal 2000 and in the first quarter of 2001 is not expected to continue throughout fiscal 2001 as Caldera believes that future Linux training program tours will not be offered. Caldera has also increased personnel to promote its services offerings. You should not rely on quarter-to-quarter comparisons of Caldera's 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 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; - 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 anticipated growth and expansion. As a result of the factors listed above and elsewhere, it is possible that in some future periods Caldera's results of operations may be below the expectations of public market analysts and investors. This could cause Caldera's stock price to decline. In addition, Caldera plans to increase its operating expenses to expand its 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 Caldera is unable to quickly reduce its spending in response, Caldera's operating results would be lower than expected and Caldera's stock price may fall. Caldera's business model, which relies on a combination of open source software and proprietary technology, is unproven Caldera's business model incorporates as integral elements of its product offerings both commercial products and open source software. Caldera knows 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 its product offerings, Caldera faces many of the same risks that other open source companies 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 Caldera may run counter to the perception of Linux as an open source model and alienate the Linux community. Negative reaction, if widely shared by its customers, developers or the open source community, could harm Caldera's reputation, diminish its brand and decrease its revenue. Caldera's business will fail if it is unable to successfully implement its business model. Caldera's business model also depends upon incorporating contributions from the open source community into products that it open sources. The viability of Caldera's 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 25 40 resources for their development. If the open source community does not embrace products that Caldera views as integral to providing eBusiness solutions, Caldera will be required to devote significant resources to develop these products on its own. The sales cycle for Caldera's products is long and Caldera may incur substantial non-recoverable expenses; Caldera devotes 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 Caldera's sales cycle, outside the retail channel is typically complex and lengthy, lasting from three to nine months. These direct sales also represent Caldera's largest orders. Therefore, Caldera's revenue for a period is likely to be affected by the timing of larger orders, which makes the related revenue difficult to predict. Caldera's 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 Caldera's products have relatively short life cycles, Caldera must develop and introduce new products to sustain its level of sales Caldera's software products have a limited life cycle and it is difficult to estimate when they will become obsolete. If Caldera does not develop and introduce new products before its existing products have completed their life cycles, Caldera would not be able to sustain its level of sales. In addition, to succeed, many customers must adopt Caldera's new products early in the product's life cycle. Therefore, if Caldera does not attract sufficient customers early in a product's life, it may not realize the amount of revenue that Caldera anticipated for the product. Caldera cannot be sure that it will continue to be successful in marketing its key products. Caldera relies on independent developers in the open source community, such as Linus Torvalds, in order to release upgrades of its Linux-based products Many of the components of Caldera's 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 Caldera's 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 Caldera, and none of these individuals is 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 Caldera's products on a timely basis, or at all, Caldera's ability to enhance its product offerings will suffer. As a consequence, Caldera will be forced to rely to a greater extent on its own development efforts or license commercial software products as replacements, which would increase its expenses and delay enhancements to its products. For example, in the past, Caldera has 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. 26 41 Caldera's reliance on independent third parties who develop most of the software included in its Linux products could result in delays or unreliable products and damage to Caldera's reputation Caldera's products consist of many different software components and applications, most of which are developed by independent third parties over whom Caldera has limited or no control. While Caldera uses rigid engineering standards in testing the products or applications that Caldera integrates in its products, Caldera cannot guarantee that it has selected or will select in the future the most reliable components available in the market or that it will successfully integrate the many components of its products. In addition, if any of these third-party products are not reliable or available, Caldera may have to develop them internally, which would significantly increase its development expenses and delay the time to market. Caldera's customers could be dissatisfied if any of these products fail to work as designed or if adequate support is not provided, which could damage its reputation and lead to potential litigation. If the market for Linux business solutions does not grow as Caldera anticipates, Caldera may not be able to continue its business plan and grow its business Caldera's strategy for marketing Linux solutions to businesses depends in part upon its 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. Caldera is also relying on electronic solution providers making these technologies available on Linux and on Linux then becoming a desirable operating system under these circumstances. Caldera also plans to market its Linux products for use on these specialized servers and internet access devices, which Caldera believes 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 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 Caldera's may not materialize. Caldera could be prevented from selling or developing its products if the GNU general public license and similar licenses under which its products are developed and licensed are not enforceable The Linux kernel and certain other components of Caldera's 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. Caldera knows 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 27 42 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 Caldera from selling or developing its products, unless Caldera is able to negotiate a license to use the software or replace the affected portions. These licenses could be expensive, which could impair Caldera's ability to price its products competitively. Caldera is vulnerable to claims that its products infringe third-party intellectual property rights, particularly because its products are comprised of many distinct software components developed by thousands of independent parties Caldera may be exposed to future litigation based on claims that its products infringe the intellectual property rights of others. This risk is exacerbated by the fact that most of the code in its products is developed by independent parties over whom Caldera exercises no supervision or control and who, themselves, might not have the same financial resources as Caldera to pay damages to a successful litigant. Claims of infringement could require Caldera to re-engineer its products or seek to obtain licenses from third parties in order to continue offering its products. In addition, an adverse legal decision affecting Caldera's intellectual property, or the use of significant resources to defend against this type of claim, could place a significant strain on Caldera's financial resources and harm its reputation. Failure to protect Caldera's intellectual property rights adequately would result in significant harm to its business While much of the code for Caldera's products is open source, its success depends significantly on Caldera's ability to protect its trademarks, trade secrets and certain proprietary technology contained in its products. Caldera relies on a combination of copyright and trademark laws, and on trade secrets and confidentiality provisions and other contractual provisions to protect its proprietary rights. These measures afford only limited protection. Some trademarks that have been registered in the United States have been licensed to Caldera, and Caldera has other trademark applications pending in the United States. Effective trademark protection may not be available in every country in which Caldera intends to offer its products and services. Caldera's means of protecting its proprietary rights in the United States or abroad may not be adequate and competitors may independently develop similar technologies. Caldera's future success will depend in part on its ability to protect its proprietary rights. Despite Caldera's efforts to protect its proprietary rights and technologies, unauthorized parties may attempt to copy aspects of Caldera's products or to obtain and use trade secrets or other information that Caldera regards as proprietary. Legal proceedings to enforce Caldera's 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 Caldera's business. In addition, the laws of some foreign countries do not protect its proprietary rights as fully as do the laws of the United States. If Caldera does not enforce and protect Caldera's intellectual property, its business may suffer substantial harm. Caldera may face potential liability for material published or made available on its web site and other sites linked to it Caldera 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 its 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. Caldera could also be sued for the content that is accessible from its 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. Caldera's insurance does not specifically provide for coverage of these types of claims and therefore may not adequately protect it against these types of claims. In addition, Caldera could incur significant costs in investigating and defending such claims, even if Caldera ultimately is not liable. If any of these events occur, its revenues and the value of your investment could be materially adversely affected. 28 43 Caldera must achieve rapid market penetration of its 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 Caldera to successfully market its products on a wide scale, Caldera must rapidly achieve market penetration. For example, if Caldera is unable to demonstrate the viability of its products through rapid growth: - software developers will be less likely to develop applications for its products; - Caldera will be unable to achieve economies of scale; - Caldera will be less able to negotiate favorable terms with distributors and other partners; and - customers will be less likely to devote resources to purchasing and implementing its products if they are not seen as an industry standard. Caldera may lack the economic and managerial resources necessary to promote this growth. Also, the fact that Caldera relies almost entirely on the success of a few principal products affects its ability to penetrate diversified markets. In addition, while Caldera believes its 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 its ability to take advantage of market opportunities on a timely basis. To achieve the type of broad recognition necessary to succeed, Caldera will need to expend significant financial and management resources; There is no guarantee that these expenditures will enable Caldera to receive the recognition necessary to its success Caldera believes that broad recognition and a favorable audience perception of the Caldera brand will be essential to its success. If Caldera's brand does not achieve broad recognition as the leading provider of Linux solutions for eBusiness, our success will be limited. Caldera intends to build brand recognition through advertising its products and services. During the fiscal year ended October 31, 1999, Caldera spent approximately $1.2 million for advertising. During the fiscal year ended October 31, 2000, Caldera spent approximately $1.5 million for advertising, and during the quarter ended January 31, 2001 Caldera spent approximately $907,000 for advertising. Caldera expects to increase its advertising expenses in future periods as Caldera builds the Caldera brand and awareness of Caldera's products and services. In addition, Caldera provides education and training to build brand recognition, which may not be successful if Caldera is unable to generate wide-acceptance of these services. Caldera may lack the resources necessary to accomplish these initiatives. Even if the resources are available, Caldera cannot be certain that its brand enhancement strategy will deliver the brand recognition and favorable audience perception that Caldera seeks. If Caldera's strategy is unsuccessful, these expenses may never be recovered and Caldera may be unable to increase future revenues. Even if Caldera achieves greater recognition of its brand, competitors with greater resources or a more recognizable brand could reduce its market share of the emerging Linux market, as well as the broader market for the provision of eBusiness solutions. Caldera's strategy to provide solutions for eBusiness depends upon its 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 its 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, Caldera's 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, Caldera must provide products that meet the needs of solution providers and their eBusiness customers. In January 2000, Caldera released its server product, OpenLinux eServer. In January 2000, Caldera released Volution, its second eBusiness product. These new products, which are Caldera's primary eBusiness products, may not be adopted by solution providers and their customers for any number of reasons, including lack of customer awareness of Caldera and its products, malfunction of the products and failure to meet needs of eBusiness. If Caldera's eBusiness products are not successful, Caldera will fail to execute its strategy and its sales may not grow. 29 44 Because software programs frequently contain errors or defects, Caldera could lose significant revenue if its software programs do not perform as expected Software programs frequently contain errors or defects, especially when first introduced or when new versions are released. Caldera could, in the future, lose revenue as a result of errors or defects in its software products. Caldera cannot assure you that errors will not be found in new products or releases. Although Caldera has both product liability and errors and omissions insurance, Caldera might incur losses in excess of the dollar limits or beyond the scope of coverage of its policies. While Caldera tests its products prior to release, the fact that most of the components of its software offerings are developed by independent parties over whom Caldera exercises no supervision or control makes 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 its reputation or increased service costs. Caldera's current and potential customers may find it difficult to hire and train qualified employees to handle installation and implementation of its products, which could negatively affect sales of its 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 Caldera's distribution partners may lack the resources to hire or train such qualified personnel to install and implement Caldera's products, which could lead to dissatisfaction with Caldera's products among end users and deter potential end users from purchasing Caldera's product. The growth of Caldera's business will be diminished if the internet is not accepted as a medium for commerce and business networking applications An important part of Caldera's business strategy is to develop and market its products for the support of secure business networks hosted on the internet. In addition, Caldera plans to sell its products and provide a significant amount of technical support and education via its web site. If the internet is not accepted as a medium for commerce and business networking applications, demand for its products and services will be diminished. For example, many companies whose business model was to conduct commerce over the internet went out of business in 2000 and the first quarter of 2001, in many cases due to a failure to generate anticipated revenues and an inability to raise additional capital to fund operations. 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. Future sales of Caldera's common stock may negatively affect its stock price The market price of Caldera's common stock could decline as a result of sales of a large number of shares of Caldera common stock in the market in the future, or the perception that such sales could occur. Caldera has 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 Caldera to sell equity securities in the future at a time and at a price that it deems appropriate. The shares of Caldera common 30 45 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, including the shares issued to SCO in the combination. 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. RISKS RELATING TO SCO AFTER THE COMBINATION Following the combination, the shares of New Caldera stock will become a significant asset of SCO's, the value of which may not be reflected, in whole or in part, in SCO's trading price Because SCO has no current intention of distributing the shares of New Caldera common stock that it receives as a result of the combination directly to its shareholders, SCO shareholders who do not otherwise own shares of New Caldera may not directly benefit from the combination. Additionally, the resale of SCO's shares of New Caldera common stock will be subject to certain restrictions including minimum trading volume requirements for New Caldera common stock. Therefore, the market value of SCO common stock following the combination, may not, in whole or in part reflect the value of New Caldera common stock held by SCO. Conversely, by virtue of SCO's ownership of New Caldera common stock following the combination, the value of SCO common stock may decline as much as a potential decline in the trading price of New Caldera or disproportionately so. Therefore, a shareholder of SCO should study the risks that pertain specifically to Caldera and New Caldera in addition to the risks that SCO faces. The proposed sale by SCO of the server and professional services groups, which traditionally comprise a large percentage of SCO's revenues, may result in significant harm to SCO's business Historically, revenues generated by the server business and professional services have been a significant portion of SCO's total revenues. The sale of the server and professional services groups, while also significantly reducing headcount and operating expenses, will lead to a dramatic decline in SCO's revenues. For the year ended September 30, 2000, revenues generated by these two divisions were 93.8% of SCO's total revenues. For fiscal years 1999 and 1998, revenues generated by these 2 divisions were 95.7% and 94.7% of total revenues, respectively. Subsequent to the asset sale, Tarantella, Inc., as SCO will then be called, will derive revenue from sales of its Tarantella products, including the CID products. Tarantella, Inc. may never generate combined revenues equal to those revenues previously generated by the assets sold to Caldera. Pursuant to the terms of the reorganization agreement, if the OpenServer line of business of the server and professional services groups generates revenues in excess of specified thresholds during the three-year period following the completion of the combination, SCO will have earn-out rights entitling it to receive 45% of these excess revenues. Since SCO will no longer control the operations and future business direction of its OpenServer line of business, it is not possible to determine if the specified thresholds can or will be met. Consequently, SCO may never receive any portion of the earn-out rights. Certain of SCO's revenue sources have declined dramatically during fiscal year 2000 and will likely continue to decline SCO experienced declines in its CID products during fiscal 2000. In fiscal 1999, CID revenues were $7.8 million; for the first 9 months of 2000, CID revenues were only $3.9 million. CID (client integration devices) products are legacy products, which were the precursor to the new Tarantella technology. The CID product line has not been emphasized by SCO and revenues have, therefore, been declining as anticipated. However, it is possible that CID product sales will decline more quickly than expected and that the Company will, therefore, realize lower revenue, which yields relatively high profit margins, than anticipated. Furthermore, while the Tarantella product line may offset some of the decline, there can be no assurance that the increase in Tarantella revenues will compensate for such declines. 31 46 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements under "Summary," "Risk Factors," "Caldera Management's Discussion and Analysis of Financial Condition and Results of Operations," "Server and Professional Services Groups Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business of Caldera," "Business of New Caldera" and elsewhere in this joint proxy statement/prospectus constitute forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "might," "could," "will," "should," "expect," "plan," "intend," "project," "forecast," "anticipate," "believe," "estimate," "predict," "foreseeable," "potential," "continue" or the negative of these terms or other comparable terminology. The forward-looking statements contained in this prospectus involve known and unknown risks, uncertainties, and other factors that may cause our or our industry's actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These factors include, among others, those listed under "Risk Factors" and elsewhere in this prospectus. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. SCO IS INCORPORATING ITS SEC FILINGS IN THIS DOCUMENT BY REFERENCE The SEC allows SCO to "incorporate by reference" information into this joint proxy statement/prospectus, which means that SCO can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is deemed to be part of this joint proxy statement/prospectus, except for any information superseded by information in this joint proxy statement/prospectus. This joint proxy statement/prospectus incorporates by reference the documents set forth below that SCO has previously filed with the SEC. These documents contain important information about SCO and its finances that you should read.
SCO SEC FILINGS PERIOD --------------- ------ Quarterly Report on Form 10-Q.......................... Three months ended December 31, 2000 Annual Report on Form 10-K/A........................... Fiscal year ended September 30, 2000 Registration Statement on Form 8-A/A................... Filed on March 3, 1999 Registration Statement on Form 8-A..................... Filed on April 1, 1993
SCO is also incorporating by reference additional documents that SCO may file with the SEC between the date of this joint proxy statement/prospectus and the date of the special meeting of SCO shareholders. Documents incorporated by reference are available from SCO without charge, excluding all exhibits unless SCO has specifically incorporated by reference an exhibit in this joint proxy statement/prospectus. Shareholders may obtain documents incorporated by reference in this joint proxy statement/prospectus from SCO by requesting them in writing or by telephone at the following address: THE SANTA CRUZ OPERATION, INC. ATTENTION: LYNN SCHROEDER 425 ENCINAL STREET SANTA CRUZ, CALIFORNIA 95061 TELEPHONE: (831) 425-7222 If you would like to request documents from SCO, please do so by April 27, 2001, to receive them before the SCO special meeting. You should rely only on the information contained or incorporated by reference in this joint proxy statement/prospectus to vote on the reorganization agreement and the combination Caldera and SCO have not authorized anyone to provide you with information that is different from what is contained in this joint proxy statement/prospectus. This joint proxy statement/prospectus is dated March 26, 2001. You should not assume that the information contained in this joint proxy statement/prospectus is accurate as of any date other than March 26, 2001, and the mailing of the joint proxy statement/prospectus to Caldera stockholders and SCO shareholders should not create any implication to the contrary. 32 47 WHERE YOU CAN FIND MORE INFORMATION Caldera and SCO each file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any reports, statements or other information Caldera or SCO file at the SEC's public reference rooms at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the SEC's regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of these materials may also be obtained from the SEC at prescribed rates by writing to the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington D.C. 20549. Our filings are also available to the public from commercial document retrieval services and at the web site maintained by the SEC at http://www.sec.gov. New Caldera has filed a registration statement on Form S-4 with respect to the common stock to be issued to holders of Caldera common stock. This document constitutes the prospectus of New Caldera that is filed as part of the registration statement. Other parts of the registration statement are omitted from this document in accordance with the rules and regulations of the SEC. Copies of the registration statement, including exhibits, may be inspected, without charge, at the offices of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies may be obtained from the SEC at prescribed rates. You should rely only on the information contained in this document to vote on the proposals. We have not authorized anyone to provide you with information that is different from what is contained in this document. Caldera has supplied all information contained in this document relating to Caldera and New Caldera. SCO has supplied all information relating to the server and professional services groups. 33 48 THE CALDERA ANNUAL MEETING This joint proxy statement/prospectus is furnished in connection with the solicitation of proxies from holders of Caldera Systems, Inc. common stock by the Caldera Systems, Inc. board of directors for use at the annual meeting of Caldera Systems, Inc. stockholders. WHEN AND WHERE THE MEETING WILL BE HELD We will hold an annual meeting of Caldera Systems, Inc. stockholders at Caldera's offices at 240 West Center Street, Orem, Utah on April 27, 2001 at 10:00 a.m., Mountain time, to consider and vote on the proposals set forth below. WHAT WILL BE VOTED UPON At the Caldera meeting, you will be asked to approve the following proposals: - To combine Caldera with the server and professional services groups of The Santa Cruz Operation, Inc. In connection with the combination, SCO will receive 16 million shares of Caldera International, Inc. common stock (representing approximately 25.3% of Caldera International on a fully diluted basis), $23 million in cash (of which $7 million was advanced to SCO on January 26, 2001) and a non-interest bearing promissory note in the amount of $8 million that will be paid in quarterly installments of $2 million beginning the fifth quarter after the combination is completed. SCO employees who join Caldera International will receive options to purchase approximately 1.8 million shares of common stock of Caldera International (representing approximately 2.8% of Caldera International on a fully diluted basis). In the combination, Caldera will become a subsidiary of a new parent company, which we call New Caldera, and SCO will contribute to New Caldera the assets of its server and professional services groups. - To elect six (6) directors to serve for one-year terms ending in the year 2002 or until successors are duly elected and qualified. - To amend our 1999 Omnibus Stock Incentive Plan to increase the number of shares reserved for issuance from 4,105,238 to 10,905,238 and to provide for an automated director option grant program. - To amend our 2000 Employee Stock Purchase Plan to increase the number of shares reserved for issuance from 500,000 to 2,000,000. - To amend our Certificate of Incorporation to increase the authorized number of shares of common stock from 75,000,000 to 175,000,000. - To ratify the appointment of Arthur Andersen LLP as Caldera's independent auditors for the fiscal year ending October 31, 2001. - To transact such other business as may properly come before the annual meeting or any adjournment or postponement thereof. OTHER MATTERS Caldera knows of no other matters that will be presented for consideration at the annual meeting. If any other matters properly come before the annual meeting, it is the intention of the persons named in the enclosed form of Proxy to vote the shares they represent as the board of directors may recommend. Discretionary authority with respect to such other matters is granted by the execution of the enclosed Proxy. 34 49 ONLY STOCKHOLDERS ON MARCH 5, 2001 WILL BE ENTITLED TO VOTE You will be entitled to vote at the Caldera meeting only if you are a holder of record of shares of Caldera common stock at the close of business on March 5, 2001, the Caldera record date. On that date, there were 39,693,805 shares of Caldera common stock outstanding and entitled to vote. These shares were held of record by approximately 324 stockholders. No shares of Caldera's preferred stock were outstanding. Each Caldera stockholder is entitled to one vote for each share of Caldera common stock held on the Caldera record date for each matter to be acted upon in the Caldera meeting. Stockholders may not cumulate votes in the election of directors. VOTES REQUIRED TO APPROVE THE PROPOSALS The approval and adoption of each of the proposals described above, except as to the election of directors which requires a plurality of the votes cast, will require the affirmative vote of a majority of the Caldera stockholders as follows:
REQUIRES THE AFFIRMATIVE PROPOSAL VOTE OF A MAJORITY OF THE: -------- ------------------------------------ The combination Outstanding common stock The amendments to the Caldera Stock Outstanding common stock in person Incentive Plan and Employee Stock or represented in proxy at the Purchase Plan meeting entitled to vote The amendment to the Caldera Outstanding common stock certificate of incorporation Appointment of auditors Outstanding common stock in person or represented in proxy at the meeting entitled to vote
SHARES HELD BY DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES On February 1, 2001, directors and executive officers of Caldera and their affiliates as a group held 29.8 million shares of Caldera common stock, or approximately 75.1% of the outstanding shares of Caldera common stock. The Canopy Group, Inc. and MTI Technology Corporation, affiliates of Caldera, have executed voting agreements with SCO, under which they have agreed to vote all of their shares in favor of the combination. VOTES NEEDED FOR A QUORUM The required quorum for the transaction of business at the meeting is a majority of the shares of Caldera common stock outstanding on the Caldera record date. EFFECT OF ABSTENTIONS AND BROKER NON-VOTES Abstentions and broker non-votes will be included in determining the number of shares present and voting at the meeting. Abstentions will have the same effect as votes against all of the proposals. For the proposals relating to the combination and the amendment to the Caldera certificate of incorporation, broker non-votes will have the same effect as votes cast against the proposals. For each of the proposals relating to the Caldera equity incentive plans and appointment of auditors, broker non-votes will have no effect. 35 50 CALDERA WILL PAY THE EXPENSES OF PROXY SOLICITATION Caldera will bear the entire cost of solicitation, including the preparation, assembly, printing and mailing of this joint proxy statement/prospectus, the Proxy and any additional solicitation materials furnished to its stockholders. Copies of solicitation materials will be furnished to brokerage houses, fiduciaries and custodians holding shares in their names that are beneficially owned by others so that they may forward this solicitation material to such beneficial owners. In addition, Caldera may reimburse such persons for their costs in forwarding the solicitation materials to such beneficial owners. The original solicitation of proxies by mail may be supplemented by a solicitation by telephone, telegram or other means by directors, officers or employees of Caldera. No additional compensation will be paid to these individuals for any such services. Except as described above, Caldera does not presently intend to solicit proxies other than by mail. Following the original mailing of the proxies and other soliciting materials, Caldera will request brokers, custodians, nominees and other record holders of Caldera common stock to forward copies of the proxy and other soliciting materials to persons for whom they hold shares of Caldera common stock and to request authority for the exercise of proxies. In these cases, Caldera, upon the request of the record holders, will reimburse the holders for their reasonable expenses. HOW PROXIES WILL BE VOTED All properly executed proxies received by Caldera prior to the vote at the meeting that are not revoked will be voted at the meeting according to the instructions indicated on the proxies. If no direction is indicated, they will be voted to approve the election of the directors proposed by the Board, unless the authority to vote for the election of such directors is withheld, and to approve each of the other proposals. HOW YOU CAN REVOKE YOUR PROXY A Caldera stockholder who has given a proxy may revoke it at any time before it is exercised at the meeting, by: - delivering to the Secretary of Caldera by any means, including facsimile, a written notice, bearing a date later than the date of the proxy, stating that the proxy is revoked; - signing and so delivering a proxy relating to the same shares and bearing a later date prior to the vote at the meeting; or - attending the meeting and voting in person, although attendance at the meeting will not, by itself, revoke a proxy. Please note, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the meeting, you must bring to the Caldera meeting a letter from the broker, bank or other nominee confirming your ownership of the shares. YOU DO NOT HAVE DISSENTERS' OR APPRAISAL RIGHTS You are not entitled to dissenters' rights or appraisal rights with respect to any proposals to be considered at the Caldera meeting. 36 51 YOU MUST ACT BY A SPECIFIED DATE TO PRESENT A STOCKHOLDER PROPOSAL AT THE NEXT CALDERA ANNUAL MEETING Stockholders are entitled to present proposals for action at a forthcoming annual meeting if they comply with the requirements of the proxy rules established by the Securities and Exchange Commission. In order for submitted proposals by New Caldera stockholders to be considered for inclusion in the proxy statement for the next annual meeting of New Caldera stockholders if the combination is approved, the proposals must be received a reasonable time prior to the printing and mailing by New Caldera of its proxy materials for such meeting. If the combination is not approved, November 26, 2001 will be the deadline for the submission of proposals for the next Caldera annual meeting. If a stockholder intends to submit a proposal at the next annual meeting of New Caldera stockholders which is not eligible for inclusion in the proxy statement relating to that meeting, the stockholder must give notice to New Caldera in accordance with the requirements set forth in the Securities Exchange Act no later than a reasonable time prior to the mailing by New Caldera of its proxy materials for such meeting. If the combination is not approved, February 8, 2002 will be the deadline for giving notice to Caldera of the intent to submit a proposal at the next Caldera annual meeting. If a stockholder fails to comply with this notice provision, the proxy holders will be allowed to use their discretionary voting authority when and if the proposal is raised at that meeting, or the annual meeting of New Caldera stockholders if the combination is approved. 37 52 THE SCO MEETING WHEN AND WHERE THE MEETING WILL BE HELD A special meeting of the shareholders of SCO will be held at 10:00 a.m., local time, on May 4, 2001, at 425 Encinal Street, Santa Cruz, California. WHAT WILL BE VOTED UPON At the SCO meeting, you will be asked to approve the following proposals: - To approve and adopt the agreement and plan of reorganization, dated August 1, 2000 and amended on September 13, 2000, December 12, 2000 and February 9, 2001, by and among The Santa Cruz Operation, Inc., Caldera Systems, Inc., and Caldera International, Inc. - To approve an amendment to SCO's articles of incorporation to change our corporate name to "Tarantella, Inc." - To transact such other business as may properly come before the special meeting or any adjournment or postponement thereof. RECORD DATE AND OUTSTANDING SHARES SCO's board of directors has fixed the close of business on March 8, 2001 as the record date for the special meeting. You will be entitled to vote at the SCO special meeting only if you are a holder of record of shares of SCO common stock at the close of business on the SCO record date. On that date, there were 39,875,042 shares of SCO common stock outstanding and entitled to vote. These shares were held of record by approximately 365 shareholders. SCO has been informed that there are in excess of 20,000 beneficial owners. VOTING RIGHTS AND VOTES REQUIRED TO APPROVE THE PROPOSALS Each SCO shareholder is entitled to one vote for each share of SCO common stock held on the SCO record date for each matter to be acted upon in the SCO meeting. The approval and adoption of each proposal by the SCO shareholders described above will require the affirmative vote of a majority of the outstanding common stock. SHARES HELD BY DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES As of February 1, 2001, directors and executive officers of SCO and their affiliates as a group beneficially owned approximately 16.33% of the outstanding shares of SCO common stock. Doug Michels, Chief Executive Officer and President of SCO, has executed a voting agreement with Caldera, under which he has agreed to vote all of his shares in favor of approving and adopting the reorganization agreement. QUORUM, ABSTENTIONS AND BROKER NON-VOTES The required quorum for the transaction of business at the meeting is a majority of the shares of SCO common stock issued and outstanding on the SCO record date. Abstentions will be included in determining the number of shares present and voting at the meeting and will have the same effect as votes against all of the proposals. While there is no definitive statutory or case law authority in California as to the proper treatment of abstentions in the counting of votes with respect to a proposal, SCO believes that abstentions should be counted for purposes of determining both (i) the presence or absence of a quorum for the transaction of business and (ii) the total number of votes cast with respect to the proposal. In the absence of controlling 38 53 precedent to the contrary, we intend to treat abstentions in this manner. Accordingly, abstentions will have the same effect as a vote against the proposal. Broker non-votes, shares held by brokers that are present but not voted because the brokers were prohibited from exercising discretionary authority ("broker non-votes"), will be counted for purposes of determining the presence or absence of a quorum for the transaction of business, but will not be counted for purposes of determining the number of votes cast with respect to the proposal. SOLICITATION OF PROXIES SCO will pay the expenses of soliciting proxies to be voted at the meeting. Following the original mailing of the proxies and other soliciting materials, SCO and its agents also may solicit proxies by mail, telephone, telegraph, e-mail or in person. SCO has retained a proxy solicitation firm, Morrow & Company, Inc., to aid it in the solicitation process. SCO will pay that firm a fee equal to approximately $8,500. Following the original mailing of the proxies and other soliciting materials, SCO will request brokers, custodians, nominees and other record holders of SCO common stock to forward copies of the proxy and other soliciting materials to persons for whom they hold shares of SCO common stock and to request authority for the exercise of proxies. In these cases, SCO, upon the request of the record holders, will reimburse the holders for their reasonable expenses. Proxies may also be solicited by certain of SCO's directors, officers and regular employees, without additional compensation, personally, by telephone or by e-mail. HOW PROXIES WILL BE VOTED All properly executed proxies received by SCO prior to the vote at the meeting that are not revoked will be voted at the meeting according to the instructions indicated on the proxies. If no direction is indicated, they will be voted to approve each of the proposals. HOW YOU CAN REVOKE YOUR PROXY A SCO shareholder who has given a proxy may revoke it at any time before it is exercised at the meeting, by: - delivering to the Secretary of SCO by any means, including facsimile, a written notice, bearing a date later than the date of the proxy, stating that the proxy is revoked; - signing and so delivering a proxy relating to the same shares and bearing a later date prior to the vote at the meeting; or - attending the meeting and voting in person, although attendance at the meeting will not, by itself, revoke a proxy. Please note, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the meeting, you must bring to the SCO meeting a letter from the broker, bank or other nominee confirming your ownership of the shares. DISSENTERS' RIGHTS If the reorganization agreement is approved by SCO shareholders, SCO shareholders who elect to dissent from the approval and who follow the procedural requirements of Chapter 13 of the California Corporations Code may, under certain circumstances, be entitled to receive cash for their SCO common stock at their fair market value. A copy of Chapter 13 of the California Corporations Code is attached to this document as Appendix O. 39 54 DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSAL SCO shareholders are entitled to present proposals for action at a forthcoming meeting if they comply with the requirements of the proxy rules established by the Securities and Exchange Commission. In order for submitted proposals by shareholders to be considered for inclusion in the proxy statement for the next annual meeting of shareholders, the proposals must be received in a reasonable time before SCO begins to print and mail its proxy materials. Proposals of SCO shareholders that are intended to be presented for consideration at SCO's 2001 annual meeting of shareholders must have been received by SCO no later than September 23, 2000 in order that they may be considered for inclusion in the proxy statement and form of proxy relating to that meeting. If a shareholder intends to submit a proposal at the 2001 annual meeting of shareholders that is not eligible for inclusion in the proxy statement and proxy, the shareholder must have given notice to SCO in accordance with the requirements set forth in the Securities Exchange Act no later than December 7, 2000. If a shareholder fails to comply with this notice provision, the proxy holders will be allowed to use their discretionary voting authority when and if the proposal is raised at that meeting. 40 55 THE COMBINATION This section of the joint proxy statement/prospectus describes aspects of the proposed combination that we consider important. While we believe that the subscription covers the material terms of the combination and related transactions, this summary may not contain all the information that is important to Caldera stockholders and SCO shareholders. Stockholders and shareholders should read the reorganization agreement and the other documents we refer to carefully for a more complete understanding of the combination. BACKGROUND OF THE COMBINATION The Linux and Unix industries are highly competitive. Since each company's inception, Caldera and SCO have continually evaluated strategic relationships of various forms with various third parties in their efforts to enhance their market position and grow their businesses in an increasingly competitive environment. Over time, representatives of Caldera and SCO became familiar with each others' products through informal contacts at industry trade shows and through interaction with various industry participants. On March 23 and 24, 2000, Ransom Love, President and Chief Executive Officer of Caldera, met with Doug Michels, President and Chief Executive Officer of SCO, to discuss a possible transaction between the two companies. On April 21, 2000, Messrs. Love and Michels met again regarding pursuing a relationship between Caldera and SCO. On May 10, 2000, officers of Caldera met with Broadview International LLC to discuss risks and opportunities concerning a potential transaction with SCO. On May 15, 2000, SCO entered into a financial advisory services agreement with Chase H&Q. On May 18, 2000, Caldera and SCO entered into a mutual non-disclosure agreement allowing for the exchange of non-public information. On May 23, 2000, officers of Caldera and representatives of Broadview met with officers of SCO and representatives of Chase H&Q to discuss potential structure and synergies of a transaction. On June 5, 2000, representatives of Caldera and Broadview met with representatives of SCO and Chase H&Q to discuss how the business plans of the two companies might integrate and to develop cost and revenue models for the possible new entity. On June 6, 2000, Caldera retained Broadview International LLC to act as its financial advisor in connection with a possible transaction between Caldera and SCO and signed an engagement letter. On June 7, 2000, Caldera and Broadview proposed an acquisition to SCO and Chase H&Q of SCO's open server business in return for a percentage ownership in the combined company, with a portion of future operating income from the open server business to go to SCO. Over the course of the following week, officers of SCO and Caldera exchanged proposals for a potential transaction. On June 13, 2000, the parties reached a tentative agreement in principle as to the structure of the transaction. On June 14, 2000, the board of directors of SCO met to discuss the proposed combination with Caldera. The SCO board authorized its officers to conduct due diligence, and to continue discussions and negotiations regarding the potential combination. On June 16 and 19, 2000, the board of directors of Caldera met in person and telephonically to discuss the proposed combination with SCO. The board of Caldera authorized officers of Caldera to conduct due diligence, continue discussions concerning the terms of the combination and negotiate the terms of the reorganization agreement. On June 23, 2000, representatives of Broadview and Chase H&Q met to discuss possible no-shop language for both companies during the negotiation process. 41 56 On June 25, 2000, Caldera and SCO entered into a letter agreement concerning restrictions on public announcements by either party and restrictions on negotiations by SCO with third parties regarding transactions relating to SCO's server division through July 26, 2000. On June 28, 2000, counsel to Caldera distributed the first draft of the reorganization agreement. Representatives of Caldera and SCO met to discuss the Asian and Latin American components of SCO's current business strategy. On June 29, 2000, officers of Caldera reviewed with officers of SCO business and financial information in connection with SCO's due diligence. During July 2000, additional meetings and telephone conferences took place between the marketing, communications and human resources teams from Caldera and SCO for the purpose of due diligence and planning logistics of public and internal announcements in the event the parties reached agreement on the material terms of the proposed combination. The companies also discussed providing information regarding the combination of employees and customers if they reached an agreement regarding the contribution of SCO's server business to the combined company. On July 14, 2000, after conducting due diligence, Caldera proposed to re-structure certain terms of the proposed transaction. SCO rejected this proposal and sent a letter to Caldera purporting to unilaterally terminate the restrictions on negotiations by SCO contained in the June 26, 2000 letter agreement. On July 19, 2000 and again on July 21, 2000, the SCO board met to discuss the direction of the company and the proposed combination in light of recent events involving Caldera and SCO, and instructed management to report back with any further developments. On July 23, 2000, officers of the two companies discussed renewing negotiations concerning the proposed combination. On July 25, 2000, Mr. Love met with Mr. Michels in Santa Cruz, California and discussed the terms of and implementation of the combination. During this discussion, Mr. Michels suggested that Caldera and The Canopy Group, one of Caldera's major stockholders, loan up to an aggregate of $25 million to SCO for purposes of helping SCO pay restructuring and operating costs that would arise between signing of the reorganization agreement and the closing of the combination. On July 26, 2000, SCO management briefed the SCO board on the latest discussions with Caldera. The SCO board authorized the officers to continue negotiating the terms of the reorganization agreement and any ancillary agreements related to the combination. From July 25, 2000 through July 28, 2000, officers of and counsel for the two companies met in Palo Alto, California and Santa Cruz, California to negotiate and finalize the terms of the reorganization agreement, the voting agreements and related forms of agreements to be entered into at the closing of the combination. During these discussions, the companies also discussed the purchase by the combined company of the professional services division of SCO. Officers of the two companies settled on including the assets of the professional services division with the other assets of SCO to be sold to the combined entity pursuant to the reorganization agreement, in return for increasing the purchase price by $7 million in cash. However, as a condition to SCO entering into the reorganization agreement on these terms, SCO would require that a loan of $7 million would be provided to SCO by Caldera at the time of signing the reorganization agreement. This loan would be unsecured, but if not paid before the maturity date, it would convert into shares of common stock of SCO at up to a 20% discount from the fair market value of SCO's shares at that time. On July 31, 2000, the board of directors of each of Caldera and SCO met to consider the proposed combination and the related transactions. The boards reviewed, among other things, the background of the proposed combination, strategic alternatives, financial and valuation analyses of the transaction, and the terms of the combination. During the meetings, the boards of Caldera and SCO each received an oral financial fairness opinion from their respective financial advisors, which was subsequently confirmed in writing. After extensive discussion and consideration, the board of directors of SCO approved the terms of 42 57 the combination and authorized its officers to complete the terms of the reorganization agreement and the ancillary agreements. The board of directors of Caldera, however, expressed concern in lending $7 million unsecured to SCO, and instructed the officers to negotiate with SCO concerning receiving adequate security for the loan amount. On August 1, 2000, the officers of the two companies discussed the terms of a binding memorandum of understanding whereby Caldera would commit to providing a secured loan to SCO in the amount of $7 million, so long as The Canopy Group also executed a binding memorandum of understanding in which it would commit to provide a secured loan to SCO in the amount of $18 million. The board of directors of each of Caldera and SCO then reconvened to discuss the revised terms of the loan financings. After extensive discussion and consideration, the boards of each company approved the terms of the combination and revised loan financing and authorized its officers to complete the terms of the reorganization agreement and the ancillary agreements, including the binding memorandum of understanding between SCO and Caldera. Each company then executed and delivered the reorganization agreement. Voting agreements between The Canopy Group and MTI Technology Corporation and SCO and between Doug Michels and Caldera were simultaneously executed, as were the binding memorandums of understanding concerning the loan financing. On August 2, 2000, the companies announced the entering into the reorganization agreement by the issuance of a joint press release. On September 13, 2000 and, December 12, 2000, Caldera and SCO entered into amendments to the reorganization agreement to provide for adjustments to the treatment of employee options, amend certain exhibits and provide for the sharing of some of the transition costs of SCO. From November 17 through January 18, 2001, Caldera and The Canopy Group negotiated the final terms and conditions of the secured loans to SCO. On February 9, 2001, Caldera and SCO entered into a third amendment to the reorganization agreement to provide for the addition of the OpenServer line of business to the assets to be acquired by New Caldera, to change the purchase price to be paid to SCO and to extend the date after which either party may terminate the reorganization agreement without being required to pay a termination fee. REASONS FOR THE COMBINATION The SCO board and the Caldera board unanimously recommend that the shareholders and the stockholders of their respective companies vote "FOR" the approval and adoption of the combination for the reasons set forth below. Joint reasons for the combination We have identified a number of potential mutual benefits of the combination that we believe will contribute to the success of New Caldera. These potential benefits include: - The operating system software industry in which we both compete is extremely competitive. We recognized that substantial technical, financial and other resources are necessary to compete with these larger, more diversified operating system software companies. The combination may allow each of us, through our participation in New Caldera, to achieve greater scale and greater presence in the operating systems software industry. We believe New Caldera will have a stronger position from which to compete more effectively against larger software companies. Our combined experience, financial resources, size, complementary product offerings and the complementary scope of distribution channels may allow New Caldera to respond more quickly and effectively to technological change, increased competition and customer demands in an industry experiencing rapid innovation and change; 43 58 - The combined research and development and technology resources resulting from the combination may allow us to compete more effectively by developing more advanced products in a shorter time period than either of us could develop independently. Because achieving a rapid rate of technical innovation in the operating system software industry is critical, increasing our technical personnel may permit us to respond more quickly and effectively to changes and to anticipate the advancements in our industry more readily; - The product portfolios of Caldera and SCO's server business are complementary. Products and technologies developed for SCO's UNIX platform can be ported for use with Caldera's Linux product offerings and would create the opportunity for us to create and deliver a broader range of solutions for eBusiness; - We anticipate that we will benefit from the combined original equipment manufacturer and strategic alliance partner relationships of Caldera and the server and professional services groups, which include many industry leaders, including Compaq, Hewlett-Packard, IBM and Sun Microsystems, among others; - The server and professional services groups' direct sales, value added-reseller and original equipment manufacturer channels complement Caldera's retail distribution capability, giving us the opportunity to access a broader range of key management sales channels and market segments; - The combination of the server and professional services groups and Caldera's Linux business will give us the opportunity to benefit from economies of scale generated by our greater critical mass when addressing the eBusiness solution needs of large global businesses; and - The global development infrastructure allows not only worldwide development cycles but the UNIX and Linux engineers can take advantage of synergies in their respective expertises. In addition to the joint reasons discussed above, the board of directors of each company also considered separate reasons for approving the combination, which are summarized below. Caldera's reasons for the combination The Caldera board of directors believes that the following are additional reasons for stockholders of Caldera to vote "FOR" approval and adoption of the combination: - The server and professional services groups have a comprehensive, international, multi-tiered distribution channel, including several joint venture, value added resellers and original equipment manufacturers. These could provide New Caldera with significant additional opportunities to market its Linux offerings domestically and internationally; - The server and professional services groups have an extensive international infrastructure that could accelerate New Caldera's ability to market Linux technologies in foreign markets; - The server and professional services groups own and have rights to several technologies that, if ported for use on a Linux platform, could significantly expand Caldera's Linux product offerings; and - New Caldera would have significantly higher revenue than Caldera. New Caldera's pro forma net revenue was $143.5 million for fiscal 2000. We believe these revenue streams could provide greater flexibility for purposes of financing operations of New Caldera. In the course of its deliberations, the Caldera board of directors reviewed with Caldera's management a number of factors relevant to the combination. 44 59 In particular, it considered, among other things: - The proposed terms of the combination, including the terms of the stockholder agreement, the voting agreements, the promissory note and related security agreement, the convertible note and related security agreements, the proposed employment agreements and other ancillary agreements; - The likelihood of realizing superior benefits through alternative business strategies, including internal growth and development; - The likelihood of leveraging current distribution channels of the server and professional services groups to increase sales opportunities for Caldera's Linux products; - Information concerning Caldera's and the server and professional services groups' respective businesses, historical financial performances, operations and products, including the due diligence reports from Caldera's management and legal, accounting and financial advisers; - The possibility of synergies from combining the Caldera and the server and professional services groups product lines; - An analysis of the relative value that the server and professional services groups might contribute to the future business and prospects of New Caldera; - The financial analysis presented by its financial advisor and the opinion that its financial advisor delivered that as of the date of such opinion and based upon the limitations set forth therein, the consideration to be paid for the server and professional services groups was fair from a financial point of view to Caldera. See "-- Opinions of Financial Advisors" on pages 47 and 53; and - The likelihood of increasing profitability of the server and professional services groups through reducing costs. The Caldera board of directors also considered certain risks that could arise in connection with the combination, including: - The difficulties of successfully integrating such a large company into Caldera, managing geographically dispersed operations and the risk that employees of the server and professional services groups may not stay with New Caldera; - The material adverse effect the combination would have on New Caldera's operating losses and working capital; - The effect on Caldera's business of declining revenue streams from the server and professional services groups; - The risk that synergies and cost savings anticipated by the combination would not be achieved; - The potential disruption of Caldera's business that might result from employee and customer uncertainty and lack of focus following announcement of the combination or the integration of the operations of Caldera and the server and professional services groups; - The risks of product integration due to overlapping products and technology; - The possibility that the combination might not close; - The substantial accounting charges to be incurred due to the combination related to the write-off of in-process research and development and the substantial amount of intangible assets that would have to be amortized as a result of the combination being accounted for as a purchase; - The risk that redundancy in staffing and infrastructure could reduce efficiency and increase costs; - The risk that the other benefits sought to be achieved by the combination will not be achieved; and - The other risks described under "Risk Factors" on page 17. 45 60 In the view of the Caldera board, these risks were not sufficient either individually or in the aggregate to outweigh the advantages of the combination. Specifically, with respect to the material increase in losses that will be incurred by New Caldera if the combination occurs, the Caldera board felt that the long-term benefits of the combination would outweigh this negative consequence. In view of the wide variety of factors, both positive and negative, considered by the Caldera board, the Caldera board did not find it practical to and did not quantify or otherwise assign relative weights to the specific factors considered. For the reasons discussed above, Caldera's board of directors has unanimously approved the reorganization agreement and the combination and has determined that the combination is advisable and in the best interests of Caldera and its stockholders and unanimously recommends that Caldera stockholders vote "FOR" approval of the reorganization agreement and the combination. SCO's reasons for the combination At meetings held on July 31, 2000 and February 8, 2001, the SCO board of directors concluded that the combination was in the best interests of SCO and its shareholders and determined to recommend that the shareholders approve and adopt the reorganization agreement and approve the combination. In its evaluation of the reorganization, the SCO board of directors identified several potential benefits of the combination, the most important of which included the board's belief that the combination would: - combine SCO, the world's leader in UNIX server operating systems, with Caldera, a leader in the rapidly growing open source movement and a leading provider of Linux for eBusiness resulting in the very best range of products for both companies' existing customers and channel partners; - enable SCO to monetize its server and professional services groups and receive publicly traded New Caldera common stock and immediate cash to fund the Tarantella business; and - permit SCO's management to focus on the Tarantella business. SCO's board of directors consulted with senior management, as well as its legal counsel, independent accountants and financial advisors, in reaching its decision to approve the combination. In its evaluation of the combination, the SCO board reviewed several factors, including, but not limited to, the following: - SCO management's view of the financial condition, results of operations and business of SCO and Caldera before and after giving effect to the combination and SCO's determination of the combination's effect on shareholder value; - historical information concerning SCO's and Caldera's business, financial performance and condition, operations, technology and management, including reports concerning results of operations during the most recent fiscal period filed with the Securities and Exchange Commission; - the consideration to be received by SCO in the combination in light of comparable transactions; - the current and prospective industry environment for SCO's products and services; - current financial market conditions and historical market prices, volatility and trading information for Caldera and SCO; - the opinion of Chase H&Q that, as of the date of its opinion and based upon and subject to the assumptions made, matters considered and limits of the review undertaken by Chase H&Q, the consideration to be received in connection with the combination was fair from a financial point of view to SCO; - the belief that the terms of the reorganization agreement are reasonable; - the potential impact of the combination on SCO's customers, channel partners and employees; - discussions with its management, legal and financial advisors as to the results of the due diligence investigation of Caldera; and 46 61 - the expectation that the combination will be a tax-free exchange, except with respect to cash and other non-stock consideration received by SCO for United States federal income tax purposes. The SCO board also identified and considered a number of potentially negative factors in its deliberations concerning the combination including the following: - the risk that the potential benefits of the combination may not be realized; - uncertain prospects for the Linux market; - the difficulty and risk associated with the integration of management and organizational structures; - the effect of the public announcement and consummation of the combination on Caldera's and SCO's existing customers and channel partners; - limited visibility into the near and long-term financial performance of New Caldera; - the possibility that the combination may not be consummated; and - other applicable risks described in this joint proxy statement/prospectus under "Risk Factors" beginning on page 17. The SCO board concluded that on balance the potential benefits of the combination outweighed the potential risks. This discussion of the information and factors considered by the board is not meant to be exhaustive. Given the complexity and the number of factors considered, the SCO board did not attempt to quantify or otherwise assign relative weight to specific factors. OPINIONS OF FINANCIAL ADVISORS Opinion of Caldera's Financial Advisor Pursuant to a letter agreement dated as of June 6, 2000, Broadview was engaged to act as financial advisor to the Caldera board and to render an opinion to the Caldera board regarding the fairness of the exchange ratio of one share of new Caldera common stock issued per share of Caldera stock in the merger of Caldera with New Caldera which is part of the combination, from a financial point of view, to Caldera stockholders. The Caldera board selected Broadview to act as financial advisor based on Broadview's reputation and experience in the information technology, communication and media sector. At the meeting of the Caldera board on February 5, 2001, Broadview delivered its written opinion that, as of February 5, 2001, based upon and subject to the various factors and assumptions, the exchange ratio was fair, from a financial point of view, to Caldera stockholders. BROADVIEW'S OPINION, WHICH DESCRIBES THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY BROADVIEW, IS ATTACHED AS APPENDIX B TO THIS DOCUMENT. CALDERA STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE BROADVIEW OPINION CAREFULLY. THE BROADVIEW OPINION IS DIRECTED TO THE CALDERA BOARD AND ADDRESSES ONLY THE FAIRNESS OF THE CONSIDERATION PAID TO SCO FOR THE SERVER AND PROFESSIONAL SERVICES GROUPS. THE BROADVIEW OPINION DOES NOT ADDRESS ANY OTHER ASPECT OF THE TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF CALDERA COMMON STOCK AS TO HOW TO VOTE AT THE CALDERA ANNUAL MEETING. THE SUMMARY OF THE BROADVIEW OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS, ALTHOUGH MATERIALLY COMPLETE, IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. In arriving at its opinion, Broadview, among other things: - reviewed the terms of a draft of the reorganization agreement, as amended, furnished to them by Caldera's legal counsel on February 3, 2001 and the terms of a draft Registration Statement on Form S-4, dated December 18, 2000, furnished to them by Caldera's legal counsel on January 29, 2001. For the purposes of this opinion, Broadview assumed, with Caldera's permission, that the reorganization agreement and the amendments to the reorganization agreement furnished to them are identical in all material respects to the reorganization agreement and amendments that were 47 62 executed, except that Broadview has assumed with Caldera's permission that the server and professional services groups (as defined in the reorganization agreement) includes, among other things, the professional services business of SCO and its subsidiaries; - reviewed the balance sheet relating to the server and professional services groups as of September 30, 2000 from the draft Form S-4 provided to them by Caldera's legal counsel and assumed, with Caldera management permission, that there are no substantial changes to the balance sheet liabilities as a result of the inclusion of the OpenServer Business in the definition of the server and professional services groups as part of the third amendment; - reviewed annual financial projections through October 31, 2002 for New Caldera assuming completion of the combination prepared and provided to them by Caldera management; - reviewed certain internal financial and operating information concerning the server and professional services groups (without giving effect to the combination), including income statement projections through September 30, 2002 jointly prepared and provided to them by Caldera and SCO managements; - participated in discussions with SCO management concerning the operations, business strategy, financial performance and prospects for the server and professional services groups; - discussed with SCO management its view of the strategic rationale for the combination; - compared certain aspects of the financial performance of the server and professional services groups with public companies Broadview deemed comparable; - analyzed available information, both public and private, concerning other mergers and acquisitions they believed to be comparable in whole or in part to the combination; - reviewed Caldera's Form 10-K, including the audited financial statements of Caldera for its fiscal years ended October 31, 1998, 1999, and 2000 included therein, and Caldera's financial press release dated December 6, 2000 for the period ended October 31, 2000, including the unaudited financial statements included therein; - reviewed certain internal financial and operating information concerning Caldera (without giving effect to the combination), including quarterly projections through October 31, 2002, relating to Caldera, prepared and furnished to them by Caldera management; - participated in discussions with Caldera management concerning the operations, business strategy, current financial performance and prospects for Caldera; - discussed with Caldera management its view of the strategic rationale for the combination; - reviewed the recent reported closing prices and trading activity for Caldera Common Stock; - compared certain aspects of the financial performance of Caldera with public companies they deemed comparable; - reviewed recent equity research analyst reports covering Caldera; - analyzed the anticipated effect of the combination on the future financial performance of New Caldera; - participated in discussions related to the combination with Caldera, SCO and their respective advisors; and - conducted other financial studies, analyses and investigations as they deemed appropriate for purposes of this opinion. In rendering our opinion, Broadview relied, without independent verification, on the accuracy and completeness of all the financial and other information (including without limitation the representations and warranties contained in the reorganization agreement) that was publicly available or furnished to us by 48 63 Caldera or SCO. With respect to the financial projections examined by Broadview, they have assumed that they were reasonably prepared and reflected the best available estimates and good faith judgments of (i) management of Caldera as to the future performance of Caldera and New Caldera and (ii) management of Caldera and SCO as to the future performance of the server and professional services groups. The following is a brief summary of some of the sources of information and valuation methodologies used by Broadview in rendering Broadview's opinion. These analyses were orally presented to the Caldera board at its meeting on February 5, 2001 and delivered with the opinion on February 5, 2001. This summary includes the financial analyses used by Broadview and deemed to be material, but does not purport to be a complete description of analyses performed by Broadview in arriving at its opinion. Broadview did not explicitly assign any relative weights to the various factors of analyses considered. This summary of financial analyses includes information presented in tabular format. In order to fully understand the financial analyses used by Broadview, the tables must be read together with the text of each summary. The tables alone do no constitute a complete description of the financial analyses. Broadview did not make or obtain any independent appraisal or valuation of any of the server and professional services groups' assets. Broadview's opinion is based on market, economic, financial and other conditions as they existed and could be evaluated as of February 4, 2001 and any change in such conditions since that date would require a reevaluation of Broadview's opinion. The Broadview opinion did not express any opinion as to the price at which Caldera or New Caldera common stock will trade at any time. Public Company Comparable Analysis. Broadview considered ratios of market capitalization, adjusted for cash and debt when necessary, to selected historical and projected operating results in order to derive multiples placed on a company in a particular market segment. In order to perform this analysis, Broadview compared financial information of the server and professional services groups with publicly available information for the companies competing in the North American software and related services industry with revenues for the last twelve months between $50 million to $500 million and negative projected annual revenue growth for the period ending September 30, 2001. The server and professional services groups Comparable Index consists of the following companies: AVT Corporation; answerthink, inc.; Brooktrout Inc.; BTG, Inc.; and Viant Corporation. For this analysis, as well as other analyses, Broadview examined publicly available information, as well as a range of estimates based on securities research analyst reports. The following table presents, as of February 2, 2001, the median total market capitalization (defined as equity market capitalization plus total debt minus cash and cash equivalents) as multiples of selected operating metrics and the range of those multiples for the server and professional services groups Comparable Index:
MEDIAN RANGE OF MULTIPLE MULTIPLES -------- ----------- Total market capitalization/revenue for the last 12 months.................................................... .53x 0.12x-0.98x Total market capitalization/Projected 9/30/01 revenue....... .60x 0.14x-0.99x
The following table presents, as of February 2, 2001, the median implied values and the range of implied values of the server and professional services groups, calculated by using the multiples shown above and the appropriate server and professional services groups operating metric (in thousands):
IMPLIED MEDIAN RANGE OF VALUE IMPLIED VALUES ------- ---------------- Total market capitalization/revenue for the last 12 months.................................................. $62,743 $13,845-$115,922 Total market capitalization/Projected 9/30/01 revenue..... 52,639 11,932- 86,976
49 64 Broadview compared the implied values to the proposed transaction value of $85 million, derived based on the closing price of Caldera common stock of $3.38 on February 2, 2001 multiplied by 16 million New Caldera shares plus $23 million in cash, plus $8 million in debt and noted that the proposed transaction value was within the range. No company utilized in the public company comparables analysis as a comparison is identical to the server and professional services groups. In evaluating the comparables, Broadview made numerous assumptions with respect to software and services industry performance and general economic conditions, many of which are beyond the control of Caldera. Mathematical analysis, such as determining the median, average, or range, is not in itself a meaningful method of using comparable company data. Transaction Comparables Analysis. Broadview considered ratios of equity purchase price, adjusted for the seller's cash and debt when appropriate, to selected historical operating results in order to indicate valuation multiples that strategic and financial acquirers have been willing to pay for companies in a particular market segment. In order to perform this analysis, Broadview reviewed a number of transactions that they considered similar to the combination. Broadview selected these transactions by choosing transactions from January 1, 2000 through February 4, 2001 involving sellers in the systems management software industry, with trailing revenues greater than $10 million and less than $200 million. Broadview used multiples derived from the median of the multiples calculated for the transactions used in valuing the server and professional services groups. For this analysis, as well as other analyses, Broadview examined publicly available information, as well as information from Broadview's proprietary database of published and confidential merger and acquisition transactions in the information technology, communication and media industries. These transactions consisted of the acquisition of: - Ganymede Software Inc. by Mission Critical Software, Inc.; - Architel Systems Corporation by Nortel Networks Corporation; - AXENT Technologies, Inc. by Symantec Corporation; - Vinca Corporation by Legato Systems, Inc.; - Softworks, Inc. by EMC Corporation; - Confidential by Confidential; - Simware Inc. by NetManage, Inc.; - Interlink Computer Sciences, Inc. by Sterling Software, Inc.; - Sterling Commerce, Inc. (Managed Systems Division -- formerly Xcellenet, Inc.) by Francisco Partners, LP; and - Wall Data Inc. by NetManage, Inc. The following table presents, as of February 4, 2001, the median Adjusted Price (defined as equity price plus total debt minus cash and cash equivalents) as a multiple of the seller's revenue in the last reported twelve months prior to acquisition for the transactions listed above and the range of those multiples:
MEDIAN RANGE OF MULTIPLE MULTIPLES -------- -------------- Adjusted Price/revenue for the last reported 12 months.... 3.11x 0.32x-0.16.35x
The following table presents, as of February 4, 2001, the median implied value and the range of implied values of the server and professional services groups, calculated by multiplying the multiples shown 50 65 above by the appropriate server and professional services groups operating metric for the twelve months ended October 31, 2000 (in thousands):
IMPLIED MEDIAN RANGE OF VALUE IMPLIED VALUES -------- ------------------ Adjusted Price/revenue for the 12 months ended October 31, 2000................................................... $434,235 $44,335-$2,283,003
Broadview compared the implied values to the proposed transaction value of $85 million, derived based on the closing price of Caldera common stock of $3.38 on February 2, 2001 multiplied by 16 million New Caldera shares plus $23 million in cash plus $8 million in debt, and noted that the proposed transaction value was within the range. No transaction utilized as a comparable in the transaction comparables analysis is identical to the combination. In evaluating the comparables, Broadview made numerous assumptions with respect to the software and services industry's performance and general economic conditions, many of which are beyond the control of Caldera or SCO. Mathematical analysis, such as determining the average, median, or range, is not in itself a meaningful method of using comparable transaction data. Relative Contribution Analysis. Broadview examined the relative contribution of the server and professional services groups to Caldera for a number of historical and projected operating metrics. In this analysis, projected figures are derived from selected equity analyst reports covering Caldera and Caldera and SCO management estimates for the server and professional services groups. The following reflect the relative contribution of the Group Business and Caldera for each operating metrics:
GROUP BUSINESS CALDERA -------- ------- TTM Revenue................................................. 97.0% 3.0% Projected 9/30/01 Revenue................................... 92.5% 7.5% Projected 9/30/02 Revenue................................... 87.2% 12.8%
Given the Caldera ratio as defined in the reorganization agreement, the results of the relative contribution analysis by themselves are supportive of Broadview's opinion. Relative Ownership Analysis. A relative ownership analysis measures each of the merging companies' relative equity ownership and relative entity ownership (entity ownership compares the relative entity values of the combining companies; entity value equals equity value minus cash and cash equivalents plus total debt). At the Caldera ratio defined in the reorganization agreement, the implied equity ownership is 74.1% for Caldera and 25.9% for the server and professional services groups, while the implied entity ownership is 63.9% for Caldera and 36.1% for the server and professional services groups. Given the Caldera ratio as defined in the reorganization agreement, the results of the relative ownership analysis by themselves are supportive of Broadview's opinion. Caldera Stock Performance Analysis. Broadview compared the recent stock performance of Caldera with that of the S&P500 and NASDAQ Composites and the Caldera Comparable Index. The Caldera Comparable Index is comprised of public companies that Broadview deemed comparable to Caldera. Broadview selected five public companies in the operating system and application infrastructure industry. The operating system and application infrastructure public companies consist of: Be Incorporated; Microware Systems Corp.; Red Hat, Inc.; VA Linux Systems, Inc.; and Wind River Systems, Inc. 51 66 Based on this analysis and the evaluation of Caldera equity analysis discussed below, Broadview was able to assess the public market valuation of the Caldera common stock as compared to the selected comparables. Broadview found Caldera common stock performance to be consistent with that of its public company comparables. Evaluation of Caldera Equity. Broadview compared financial information of Caldera with publicly available information for companies comprising the Caldera Comparable Index. For this analysis, as well as other analyses, Broadview examined publicly available information, as well as a range of estimates based on securities research analyst reports. Based on this analysis and the Caldera stock performance analysis discussed above, Broadview was able to assess the public market valuation of the Caldera common stock as compared to the selected comparables. Broadview found Caldera valuation statistics to be within the range of valuation statistics of its public company comparables. Pro Forma Combination Analysis. Broadview calculated the pro forma impact of the combination on the combined entity's projected earnings per share for Caldera's fiscal year ending October 31, 2001, and fiscal year ending October 31, 2002, taking into consideration various financial effects which will result from consummation of the combination. This analysis relies upon certain financial and operating assumptions provided by equity research analysts and publicly available data about Caldera and Caldera and SCO management estimates for the server and professional services groups. Broadview examined a purchase scenario under the assumption that no opportunities for cost savings or revenue enhancements exist. This analysis enabled Broadview to confirm that the pro forma purchase model indicates earnings per share accretion excluding acquisition expenses, purchased R&D write-off, goodwill, and foregone interest, for the fiscal year ending October 31, 2001 and earnings per share dilution excluding acquisition expenses, purchased R&D write-off, goodwill, and foregone interest, for the fiscal year ending October 31, 2002. Broadview also examined several scenarios that assume opportunities for cost savings or revenue enhancements, including one scenario using management's internal projections. This analysis enabled Broadview to confirm that the pro forma purchase model indicates earnings per share accretion excluding acquisition expenses, purchased R&D write-off, goodwill, and foregone interest, for the fiscal year ending October 31, 2001 and earnings per share accretion excluding acquisition expenses, purchased R&D write-off, goodwill, and foregone interest, for the fiscal year ending October 31, 2002. Consideration of the Discounted Cash Flow Methodology. While discounted cash flow is a commonly used valuation methodology, Broadview did not employ such an analysis for the purposes of this opinion. Discounted cash flow analysis is most appropriate for companies that exhibit relatively steady or somewhat predictable streams of future cash flow. For a business such as the server and professional services groups, a preponderance of the value in a valuation based on discounted cash flow will be in the terminal value of the entity, which is extremely sensitive to assumptions about the sustainable long-term growth rate of the company. Given the uncertainty in estimating both the future cash flows and a sustainable long-term growth rate for Caldera, Broadview considered a discounted cash flow analysis inappropriate for valuing the server and professional services groups. In connection with the review of the combination by the Caldera board, Broadview performed a variety of financial and comparative analyses. The summary set forth above does not purport to be a complete description of the analyses performed by Broadview in connection with the combination. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. In arriving at its opinion, Broadview considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor considered by it. Furthermore, Broadview believes that selecting any portion of its analyses, without considering all analyses, would create an incomplete view of the process underlying its opinion. In performing its analyses, Broadview made numerous assumptions with respect to industry performance and general business and economic conditions and other matters, many of which are beyond the control of Caldera or SCO. The analyses performed by Broadview are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. The Caldera Ratio pursuant to the reorganization agreement and other terms of the 52 67 agreement were determined through arm's length negotiations between Caldera and SCO, and were approved by the Caldera board. Broadview provided advice to the Caldera board during such negotiations; however, Broadview did not recommend any specific consideration to the Caldera board or that any specific consideration constituted the only appropriate consideration for the combination. In addition, Broadview's opinion and presentation to the Caldera board was one of many factors taken into consideration by the Caldera board in making its decision to approve the combination. Consequently, the Broadview analyses as described above should not be viewed as determinative of the opinion of the Caldera board with respect to the value of the server and professional services groups or of whether the Caldera board would have been willing to agree to a different consideration. Upon completion of the combination, Caldera will be obligated to pay Broadview a transaction fee of approximately $1.4 million. The monthly retainer fees and the fairness opinion fees will be credited against the transaction fee payable by Caldera upon completion of the combination. In addition, Caldera has agreed to reimburse Broadview for its reasonable expenses, including fees and expenses of its counsel, and to indemnify Broadview and its affiliates against certain liabilities and expenses related to their engagement, including liabilities under the federal securities laws. The terms of the fee arrangement with Broadview, which Caldera and Broadview believe are customary in transactions of this nature, were negotiated at arm's length between Caldera and Broadview, and the Caldera board was aware of the nature of the fee arrangement, including the fact that a significant portion of the fees payable to Broadview is contingent upon completion of the combination. Opinion of SCO's Financial Advisor SCO engaged Chase H&Q, a division of Chase Securities Inc., to act as the exclusive financial advisor to SCO in connection with the proposed merger. The SCO board of directors selected Chase H&Q to act as its exclusive financial advisor based on Chase H&Q's qualifications, expertise and reputation, as well as Chase H&Q's historic investment banking relationship and familiarity with SCO. Chase H&Q delivered its oral opinion on February 8, 2001, subsequently confirmed in writing, to the SCO board of directors that, as of such date, based upon and subject to the assumptions made, matters considered and limits of the review undertaken by Chase H&Q, the consideration to be received by SCO in connection with the combination was fair from a financial point of view, to the shareholders of SCO. THE FULL TEXT OF THE OPINION DELIVERED BY CHASE H&Q TO THE SCO BOARD OF DIRECTORS, DATED FEBRUARY 8, 2001, WHICH SETS FORTH THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY CHASE H&Q IN RENDERING ITS OPINION, IS ATTACHED AS ANNEX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. THE CHASE H&Q OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SCO SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE MERGER AGREEMENT OR ANY OTHER MATTER. THE SUMMARY OF THE CHASE H&Q OPINION SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION ATTACHED HERETO AS ANNEX C. SCO SHAREHOLDERS ARE URGED TO READ THE OPINION CAREFULLY IN ITS ENTIRETY. In reviewing the combination, and in arriving at its opinion, Chase H&Q, among other things reviewed: (i) the reorganization agreement, as amended; (ii) the publicly available consolidated financial statements of Caldera for recent years and interim periods to date and certain other relevant financial and operating data of Caldera (including its capital structure) made available to us from published sources; (iii) certain publicly available projected financial and operating information relating to Caldera; 53 68 (iv) publicly available terms of certain transactions involving companies Chase H&Q determined to be comparable to Caldera and the consideration received by such companies in such transactions; (v) the internal unaudited financial statements of the Contributed Companies for recent years and interim periods to date and certain other relevant financial data of the Contributed Companies made available to us from the internal records of SCO; (vi) certain internal projected financial and operating information relating to the Contributed Companies prepared by the senior management of SCO; (vii) certain internal projected financial and operating information relating to Caldera prepared by the senior management of Caldera; (viii) certain internal projections of potential synergies relating to the combination prepared by the senior management of Caldera; (ix) the recent reported prices and trading activity for the common stock of Caldera; (x) compared the recent reported prices and trading activity for the common stock of Caldera and certain financial information for Caldera and the Contributed Companies with similar information for certain other companies engaged in businesses we consider comparable; (xi) the terms of other business combinations that we deemed relevant; and (xii) reviewed such other financial studies and analyses and considered such other information as we deemed appropriate for the purposes of our opinion. Chase H&Q did not assume responsibility for independent verification of, and did not independently verify, any of the information concerning the Contributed Companies or Caldera considered in connection with its review of the combination, including without limitation any financial information, forecasts or projections, considered in connection with the rendering of its opinion. Accordingly, for purposes of its opinion, Chase H&Q assumed and relied upon the accuracy and completeness of all such information. In connection with its opinion, Chase H&Q did not prepare or obtain any independent valuation or appraisal of any of the assets or liabilities of the Contributed Companies or Caldera, and it did not conduct a physical inspection of the properties and facilities of the Contributed Companies or Caldera. With respect to the financial forecasts and projections relating to the Contributed Companies and Caldera, prepared by the respective managements of SCO and Caldera, Chase H&Q assumed that they reflected the best currently available estimates and judgments of the expected future financial performance of the Contributed Companies and Caldera and Chase H&Q expressed no view as to the reasonableness of such forecasts and projections or the assumptions on which such forecasts or projections were based. For the purposes of its opinion, Chase H&Q also assumed that none of the Company, the Contributed Companies nor Caldera was a party to any pending transactions, including without limitation external recapitalizations or material merger or acquisition discussions, other than the proposed merger and transactions in the ordinary course of conducting their respective businesses. SCO advised Chase H&Q, and for purposes of its opinion Chase H&Q assumed, that (i) the combination will qualify as a tax-free reorganization for New Caldera and Caldera under the Internal Revenue Service Code of 1986, or the code, (ii) the contribution will qualify as a nonrecognition transfer for SCO and New Caldera under the code, except with respect to cash and other non-stock consideration received by SCO, and (iii) the combination would be treated as a purchase for financial accounting purposes. In performing its analyses, Chase H&Q used financial forecasts and projections prepared by SCO management for the Contributed Companies and financial forecasts and projections prepared by Caldera management for Caldera which are based on numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of SCO, Caldera or Chase H&Q. The analyses performed by Chase H&Q and summarized below are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. Because such analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of SCO, Caldera or their respective 54 69 advisors, neither SCO, Chase H&Q nor any other person assumes responsibility if future results or actual values are materially different from the results of analyses based on forecasts or assumptions. Additionally, analyses relating to the values of businesses do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be acquired or bought or sold either at the time of such analyses or at any time in the future. Chase H&Q's opinion is necessarily based upon market, economic, financial and other conditions as they existed and could be evaluated as of the date of the opinion and any subsequent change in such conditions would require a reevaluation of such opinion. Although subsequent developments may affect its opinion, Chase H&Q has assumed no obligation to update, revise or reaffirm it. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to summary description. The summary of Chase H&Q's analyses set forth below summarizes the material analyses presented to the SCO board of directors but is not a complete description of the presentation by Chase H&Q to the SCO board of directors or the analysis performed by Chase H&Q in connection with preparing its opinion. In arriving at its opinion, Chase H&Q did not attribute any particular weight to any analyses or factors considered by it, but rather made subjective, qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Chase H&Q believes that its analyses and the summary set forth below must be considered as a whole and that selecting portions of its analyses, without considering all analyses, or of considering the following summary without considering all factors and analyses, could create an incomplete view of the processes underlying the analyses set forth in the Chase H&Q presentation to the SCO board of directors and Chase H&Q's opinion. The terms of the combination were determined through negotiations between SCO and Caldera, the terms of the combination were approved by the SCO board of directors and the decision to enter into the combination and related transactions was solely that of the SCO board of directors. As described above, the opinion of Chase H&Q and its presentation to the SCO board of directors were only one of a number of factors taken into consideration by the SCO board of directors in making its determination to approve the combination. The following is a brief summary of the material financial analyses performed by Chase H&Q in connection with providing its opinion to the SCO board of directors on February 8, 2000. The summary includes information presented in tabular format. You should read these tables together with the text of each summary, because the tables alone are not a complete description of the financial analysis. Comparable Publicly Traded Companies Analysis. This analysis reviews a business' operating performance and outlook relative to a group of peer companies to determine an implied value. Using publicly available research analysts' estimates, Chase H&Q compared, among other things, the enterprise values and revenues for calendar year 2000 and projected calendar year 2001 for the server and professional services groups to corresponding measures for certain publicly traded companies that Chase H&Q considered comparable. The companies that Chase H&Q considered comparable to the server group were: - NEON Systems, Inc. - Informix Corp. - Progress Software Corp. - Sapiens International Corp. - Persistence Software, Inc. The companies that Chase H&Q considered comparable to the professional services group were: - Agency.com Inc. - AnswerThink Inc. 55 70 - Complete Business Solutions, Inc. - Inforte Corp. - Luminant Worldwide Corp. - marchFirst, Inc. - Scient Corp. - Syntel, Inc. Chase H&Q determined enterprise value to revenue multiples for these companies. Enterprise value is defined as the share price multiplied by the diluted shares outstanding plus debt and minority interest less cash. Applying ranges of such multiples for the comparable companies of the server group to calendar year 2000 and projected calendar year 2001 revenues of the server group resulted in an enterprise value range for the server group. Applying ranges of such multiples for the comparable companies of the professional services group to calendar year 2000 and projected calendar year 2001 revenues of the professional services group resulted in an enterprise value range for the professional services group. By combining these two values, Chase H&Q was able to derive a value for the Contributed Companies. SCO Server Business
IMPLIED SELECTED ENTERPRISE VALUE MULTIPLE RANGE ($ IN MILLIONS) -------------- ---------------- LOW HIGH LOW HIGH ----- ----- ------ ------ 2000 Revenues.......................................... 0.35x 1.60x $ 38 $175 2001E Revenues......................................... 0.25 1.35 21 115 ---- ---- Selected Valuation Range of Server Group............... $ 25 $120
Professional Services Group
IMPLIED SELECTED ENTERPRISE VALUE MULTIPLE RANGE ($ IN MILLIONS) -------------- ---------------- LOW HIGH LOW HIGH ----- ----- ----- ------ 2000 Revenues.......................................... 0.25x 0.70x $ 1 $ 3 2001E Revenues......................................... 0.25 0.65 1 3 --- ---- Selected Valuation Range of Professional Services Group................................................ $ 1 $ 3 Implied Valuation for the Contributed Companies........ $26 $123
Chase H&Q compared these results to the combination value of $82 million, derived based on the closing price of Caldera common stock of $3.56 on February 7, 2001 multiplied by 16.0 million New Caldera shares plus $23 million of cash, plus an $8 million non-interest bearing note with an estimated value of $6 million (discounted back utilizing a mid-point of the discount rate of 20%), plus a three year cash earn-out of 45% of the revenues from OpenServer in excess of quarterly revenue targets with an estimated value of $0, less the Caldera portion of "commit" transactions with an estimated value of $4 million. Precedent Transactions Analysis. This analysis provides a valuation range based on financial information of selected companies that have been recently acquired and are in similar industries as the businesses being evaluated. Using publicly available research analysts' estimates, Chase H&Q compared the combination with ten selected mergers and acquisitions transactions involving companies in the 56 71 software and professional services industries. The acquirors and targets in the transactions that Chase H&Q deemed comparable to the proposed combination were: Precedent Transactions -- Server Group - Software AG/SAGA Systems, Inc. - Compuware Corporation/Viasoft, Inc. - Sterling Software Inc./Interlink Computer Sciences, Inc. - Cadence Design Systems Inc./OrCAD, Inc. - Ardent Software Inc./Prism Solutions, Inc. Precedent Transactions -- Professional Services Group - Silverline Technologies Ltd./SeraNova, Inc. - NCR Corporation/4Front Technologies, Inc. - Computer Sciences Corp./Policy Management Systems Corp. - FutureLink Corp./Charon Systems Inc. - Metamor Worldwide, Inc./GE Capital Consulting In examining these transactions, Chase H&Q analyzed, among other things, the multiples of transaction values, defined as the offer price per share multiplied by the diluted shares outstanding plus debt and minority interest less cash for the most recent balance sheet prior to the announcement of the transaction, to (1) revenues of the target for the last four fiscal quarters preceding the public announcement of the transaction and (2) projected revenues of the target for the calendar year following the public announcement of the transaction. All multiples for the selected transactions were based on public information available at the time of public announcement, and Chase H&Q's analysis did not take into account different market and other conditions during the two-year period during which the selected transactions occurred. Chase H&Q determined enterprise value to revenue multiples for these companies. Applying ranges of such multiples for the precedent transactions of the server group to calendar year 2000 and projected calendar year 2001 revenues of the server group allowed Chase H&Q to determine an enterprise value range for the server group. Applying ranges of such multiples for the precedent transactions of the professional services group to calendar year 2000 and projected calendar year 2001 revenues of the professional services group allowed Chase H&Q to determine an enterprise value range for the professional services group. By combining these two values, Chase H&Q was able to derive a value for the Contributed Companies. Server Group
IMPLIED ENTERPRISE SELECTED VALUE MULTIPLE RANGE ($ IN MILLIONS) -------------- --------------- LOW HIGH LOW HIGH ----- ----- ----- ------ 2000 Revenues......................................... 0.80x 1.55x $88 $170 2001E Revenues........................................ 0.70 1.50 60 128 --- ---- Selected Valuation Range of Server Group.............. $60 $130
57 72 Professional Services Group
IMPLIED SELECTED ENTERPRISE VALUE MULTIPLE RANGE ($ IN MILLIONS) -------------- ---------------- LOW HIGH LOW HIGH ----- ----- ----- ------ 2000 Revenues.......................................... 1.10x 1.45x $ 4 $ 6 2001E Revenues......................................... 0.60 1.25 3 5 --- ---- Selected Valuation Range of Professional Services Group................................................ $ 3 $ 6 Implied Valuation for the Contributed Companies........ $63 $136
Chase H&Q compared these results to the combination value of $82 million, derived based on the closing price of Caldera common stock of $3.56 on February 7, 2001 multiplied by 16.0 million New Caldera shares plus $23 million of cash, plus an $8 million non-interest bearing note with an estimated value of $6 million (discounted back utilizing a mid-point of the discount rate of 20%), plus a three year cash earn-out of 45% of the revenues from OpenServer in excess of quarterly revenue targets with an estimated value of $0, less the Caldera portion of "commit" transactions with an estimated value of $4 million. Chase H&Q observed that no company used in the above analyses is identical to SCO and the circumstances surrounding each of the companies are inherently different. Accordingly, an analysis of the results of the foregoing is not mathematical; rather it involves complex, qualitative considerations and judgments, reflected in Chase H&Q's opinion, concerning differences in the financial and operating characteristics of the compared companies and other factors that could affect the public trading values of the comparable companies and Caldera. Discounted Cash Flow Analysis. This analysis calculates a theoretical value based on the present value of the future cash flow from the Contributed Companies. Chase H&Q performed discounted cash flow analyses of the server and professional services groups based upon certain forecast and projection information provided to Chase H&Q by the management of SCO for the years ending September 30, 2001 through 2003. Utilizing such information, Chase H&Q calculated a range of values based upon the discounted present value of the sum of the projected stream of unlevered free cash flows, defined as EBITDA less taxes less the change in working capital less capital expenditures, to the server and professional services groups from September 30, 2001 through September 30, 2003 and the projected terminal value of the server and professional services groups at September 30, 2003 based upon a range of trailing twelve months revenue multiples applied to trailing twelve month revenues in 2003. Chase H&Q calculated a range of enterprise values of the server group as of December 31, 2000 based on discount rates of 14.0%, 15.0% and 16.0% and on 2003 trailing twelve months revenue terminal multiples of 0.4x, 1.0x and 1.6x. The analysis resulted in an implied enterprise value for the server group. Chase H&Q calculated a range of enterprise values of the professional services group as of December 31, 2000 based on discount rates of 14.0%, 15.0% and 16.0% and on 2003 trailing twelve months terminal multiples of 0.25x, 0.50x and 0.75x. The analysis resulted in an implied enterprise value for the professional services group. By combining these two values, Chase H&Q was able to derive a value for the Contributed Companies. The following table summarizes the analysis:
IMPLIED ENTERPRISE VALUE ($ IN MILLIONS) ----------------- LOW HIGH ----- ------ Selected Valuation Range of Server Group..................................................... $ 8 $46 Selected Valuation Range of Professional Services Group.............................................. $(3) (2) --- --- Implied Valuation for the Contributed Companies............. $ 5 $45
Chase H&Q compared these results to the combination value of $82 million, derived based on the closing price of Caldera common stock of $3.56 on February 7, 2001 multiplied by 16.0 million New Caldera shares plus $23 million of cash, plus an $8 million non-interest bearing note with an estimated 58 73 value of $6 million (discounted back utilizing a mid-point of the discount rate of 20%), plus a three year cash earn-out of 45% of the revenues from OpenServer in excess of quarterly revenue targets with an estimated value of $0, less the Caldera portion of "commit" transactions with an estimated value of $4 million. Other Analysis. Chase H&Q also performed, among other analyses, a strategic buyer EPS break-even analysis. This analysis calculates a theoretical value which determines the maximum cash purchase price an acquirer could pay for the Combined Companies without causing EPS dilution in calendar year 2001. This analysis assumes pre-tax synergy values of $0, $5 million, and $10 million using pre-tax borrowing rates of 7.0%, 8.0%, and 9.0%. This analysis also assumes purchase accounting, with goodwill amortized over a 5 year period, and a transaction closing of 6/30/01. The following table summarizes the analysis:
IMPLIED ENTERPRISE VALUE ($ IN MILLIONS) ----------------- LOW HIGH ----- ------ Selected Valuation Range of Server and Professional Services Groups.................................................... $11 $56 Implied Valuation for the Contributed Companies............. $11 $56
The foregoing description of Chase H&Q's opinion is qualified in its entirety by reference to the full text of such opinion that is attached as Annex C to this joint proxy statement/prospectus. Chase H&Q, as part of its investment banking services, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, strategic transactions, corporate restructurings, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. Chase H&Q has previously provided investment banking and other financial advisory services to SCO and has received fees for rendering these services. Pursuant to an engagement letter with Chase H&Q, SCO has agreed to pay Chase H&Q a retainer fee of $25,000 (creditable towards the transaction fee), plus a transaction fee of the greater of $1.0 million or 1% of the consideration payable upon closing of the combination, plus a fairness opinion fee of $750,000 for the first fairness opinion, plus a fairness opinion fee of $375,000 for the second fairness opinion (creditable towards the transaction fee). SCO also agreed to reimburse Chase H&Q for its reasonable out-of-pocket expenses and to indemnify Chase H&Q against certain liabilities, including liabilities under the federal securities laws or otherwise relating to or arising out of Chase H&Q's engagement as financial advisor. Other than the above listed fees, SCO has not paid or incurred any fees to Chase H&Q during the most recent two years. STRUCTURE OF THE COMBINATION The Caldera merger A wholly owned subsidiary of New Caldera will merge with and into Caldera, Caldera will survive the merger and become a wholly owned subsidiary of New Caldera. Caldera stockholders will become stockholders of New Caldera. The contribution of the server and professional services groups SCO will contribute the capital stock of the contributed companies, and SCO and some of its subsidiaries will contribute to New Caldera the contributed assets. The contributed assets and the contributed companies will be owned by New Caldera. "Contributed companies" means The Santa Cruz Operation Limited, The Santa Cruz Operation (France) SARL, The Santa Cruz Operation (Deutschland) GmbH, The Santa Cruz Operation (Italia) Srl, The Santa Cruz Operation Pty. Limited, SCO Canada, CO, The Santa Cruz Operation de Mexico, S.De R.L. De C. V., The Santa Cruz Operation (Asia) Ltd, SCO Foreign Sales Corporation, SCO, 59 74 Kabushiki Kaisha, The Santa Cruz Operation Latin America, Inc., Nihon SCO Limited, SCO do Brazil Limitada, SCO Software (China) Company, Ltd., and Unix System Technologies China Company, Ltd. (USTC). "Contributed assets" means, subject to exceptions, (1) the assets listed on certain schedules to the reorganization agreement, (2) intellectual property rights material to the products of the server and professional services groups, (3) assets used in the server and professional services groups and (4) certain accounts receivable of the server and professional services groups. "Contributing companies" means SCO and certain other subsidiaries of SCO. As a result of the transfer to New Caldera of the capital stock of the contributed companies, New Caldera will own all of the outstanding equity capital of the contributed companies, each of which will remain liable for their existing liabilities. In addition, New Caldera will not acquire the majority of the accounts receivable nor will it assume certain accounts payables and other liabilities of the server and professional services groups. New Caldera shall assume, however, the following liabilities relating to the server and professional services groups business: - all liabilities of the contributing companies under all contracts contributed as part of the contributed assets; - all liabilities of the contributing companies that are included in a closing group account for the server and professional services groups as of the closing date; and - identified tax liabilities including those taxes attributable to the operations of the contributed companies after the closing date. Except for the liabilities of the contributed companies and their subsidiaries, which will remain the sole responsibility of the applicable contributed company, and the assumed liabilities described above, New Caldera will not assume or otherwise have any obligation for any liabilities of SCO. SCO has agreed to take all actions reasonably necessary to fully transfer to New Caldera the capital stock of the contributed companies and the contributed assets held by them or their subsidiaries and any contributed contracts to which they are a party. RESTRICTIONS ON RESALE OF NEW CALDERA COMMON STOCK The shares of New Caldera common stock to be issued in the combination will have been registered under the Securities Act. These shares will be freely transferable without restriction, except for shares received by SCO or by any person who is an "affiliate" of either of us. Shares held by these affiliates may be resold by them only in transactions permitted by the resale provisions of Rule 145 or Rule 144 in the case of persons who become affiliates of New Caldera. Persons who may be deemed to be affiliates of Caldera, SCO or New Caldera generally include individuals or entities that control, are controlled by, or are under common control with, that party and may include certain officers and directors of such party as well as principal stockholders of that party. Pursuant to the reorganization agreement, SCO shall be able to distribute its shares of New Caldera common stock to its shareholders six (6) months from the closing date; provided, however, that SCO cannot sell more than 25% of its shares of New Caldera in a six (6) month period. New Caldera and SCO will enter into a stockholder agreement. This agreement provides that, so long as SCO owns 10% of the outstanding stock of New Caldera, it may not sell shares of New Caldera common stock to any person or group holding five percent (5%) or more of New Caldera common stock without the consent of New Caldera. 60 75 RESALE OF SHARES ISSUED UNDER THE CALDERA OPTION PLANS New Caldera will be required to file with the Securities and Exchange Commission a registration statement for the shares of New Caldera common stock issuable upon exercise of the New Caldera stock options issued in the exchange offer no later than the 10th day after the closing of the combination. NASDAQ LISTING We expect that the New Caldera common stock will be traded on the Nasdaq National Market under the symbol "CALD." It is a condition to the closing of the combination that the shares of New Caldera common stock to be issued to SCO be approved for listing on the Nasdaq National Market, subject to official notice of issuance. MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE COMBINATION The following discussions set forth the material federal income tax consequences relevant to the exchange of shares of Caldera common stock for New Caldera common stock pursuant to the combination that are generally applicable to holders of Caldera common stock, and the material federal income tax consequences relevant to SCO's exchange of assets for New Caldera common stock. These discussions are based on currently existing provisions of the Internal Revenue Code (the "Code"), existing and proposed treasury regulations thereunder and current administrative rulings and court decisions, all of which are subject to change. Any such change, which may or may not be retroactive, could alter the tax consequences to Caldera stockholders and to SCO as described herein. The Caldera stockholders should be aware that these discussions do not deal with all federal income tax considerations that may be relevant to particular Caldera stockholders in light of their particular circumstances. For example, different rules may apply to dealers in securities, persons subject to the alternative minimum tax provisions of the Code, foreign persons, persons who do not hold their Caldera common stock as capital assets, or persons who acquired their shares in connection with stock option or stock purchase plans or in other compensatory transactions. In addition, the following discussions do not address the tax consequences of the combination under foreign, state or local tax laws, the tax consequences of transactions effectuated prior or subsequent to, or concurrently with, the combination (whether or not any such transactions are undertaken in connection with the combination), including without limitation any transaction in which shares of Caldera common stock are acquired or shares of New Caldera common stock are disposed of, or the tax consequences of the assumption by New Caldera of Caldera or SCO options or warrants. Accordingly, CALDERA STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE COMBINATION, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES. Material Federal Income Tax Consequences of the Combination to the Caldera Stockholders Brobeck, Phleger & Harrison LLP, counsel to Caldera and New Caldera, is of the opinion that the following are the material federal income tax consequences relevant to the exchange of shares of Caldera common stock pursuant to the combination that are generally applicable to holders of Caldera common stock. As to Caldera and its stockholders, the combination is intended to constitute an exchange described in Section 351 of the Code as well as a "reorganization" within the meaning of Section 368 of the Code. Provided that the combination does so qualify as either an exchange under Section 351 or a 61 76 "reorganization," then, subject to the limitations and qualifications referred to herein, the combination will generally result in the following federal income tax consequences to the Caldera stockholders: - No gain or loss will be recognized by holders of Caldera common stock solely upon their receipt of New Caldera common stock in exchange for Caldera common stock in the combination; - The aggregate tax basis of the New Caldera common stock received by Caldera stockholders in the combination will be the same as the aggregate tax basis of the Caldera common stock surrendered in exchange therefor; and - The holding period of the New Caldera common stock received by each Caldera stockholder in the combination will include the period for which the Caldera common stock surrendered in exchange therefor was considered to be held, provided that the Caldera common stock so surrendered is held as a capital asset at the time of the combination. Material Federal Income Tax Consequences of the Combination to SCO Wilson, Sonsini Goodrich & Rosati, Professional Corporation, counsel to SCO, is of the opinion that the following are the material federal income tax consequences relevant to SCO's exchange of assets for New Caldera common stock, cash and other non-stock consideration. As to SCO, the combination is intended to constitute an exchange within the meaning of Section 351 of the Code. Provided that the combination does so qualify, then, subject to the limitations and qualifications referred to herein, the combination will result in the following federal income tax consequences to SCO: - SCO will recognize gain with respect to the cash and other non-stock consideration, if any, received by SCO in partial consideration for SCO's contribution of assets to New Caldera. For purposes of determining the amount of gain recognized by SCO, the non-stock consideration received by SCO from New Caldera will be allocated among the assets contributed by SCO to New Caldera in proportion to their relative fair market values. SCO will not recognize any loss for federal income tax purposes with respect to any contributed asset; - No gain or loss will be recognized by SCO upon SCO's receipt of New Caldera common stock in exchange for assets contributed by SCO to New Caldera; and - The aggregate tax basis of the New Caldera common stock received by SCO in the combination will be the same as the aggregate tax basis of the assets surrendered in exchange therefor increased by the amount of gain recognized and decreased by the amount of cash and other non-stock consideration received and by liabilities assumed. The parties are not requesting and will not request a ruling from the IRS in connection with the combination. The consummation of the combination is conditioned on the receipt by Caldera of a tax opinion from Brobeck, Phleger & Harrison LLP that the combination will constitute a "reorganization" described in Section 368 of the Code and the receipt by SCO of an opinion from Wilson Sonsini Goodrich & Rosati, Professional Corporation, to the effect that the combination will constitute a transaction described in Section 351 of the Code. Caldera stockholders and SCO shareholders should be aware that the tax opinions do not bind the IRS and the IRS is therefore not precluded from successfully asserting a contrary opinion. The tax opinions referred to above will be subject to certain assumptions and qualifications, including but not limited to the truth and accuracy of certain representations to be made by New Caldera, Caldera, SCO and certain Caldera stockholders. A successful IRS challenge to tax treatment of the combination would result in Caldera stockholders and SCO recognizing taxable gain or loss with respect to each share of common stock of Caldera surrendered or with respect to the assets contributed by SCO to New Caldera, respectively, equal to the difference between the stockholder's or SCO's basis in such share or assets, respectively and the fair market value, as of the effective time, of the New Caldera common stock received in exchange therefor. In such event, a stockholder's or SCO's aggregate basis in the New Caldera common stock so received 62 77 would equal its fair market value, and the stockholder's or SCO's holding period for such stock would begin the day after the combination. ACCOUNTING TREATMENT Accounting treatment by New Caldera The combination will be accounted for under the purchase method of accounting. The purchase price of the contributed assets, or the aggregate merger consideration, including direct costs of the combination, will be allocated to the assets acquired, including in-process research and development, and liabilities assumed based upon their estimated fair values. The excess purchase consideration will be allocated to goodwill. After the combination, the results of New Caldera's operations will include the results of operations of Caldera and the server and professional services groups. The combination and the resulting conversion of Caldera common stock into New Caldera common stock will be treated as a reorganization with no change in the recorded amount of Caldera's assets and liabilities. The financial statements of Caldera will become the financial statements of New Caldera upon the closing of the combination. Accounting treatment by SCO The combination will be accounted for as a proportional sale of the net assets of the server and professional services groups. As SCO will retain a 28.7% interest (based on New Caldera's outstanding shares as of February 1, 2001) SCO will record a gain equal to 71.3% of the fair value of the New Caldera stock plus cash consideration and the present value of the promissory note received by SCO less 71.3% of SCO's basis in the net assets of the server and professional services groups and expenses. Subsequent to the combination, SCO will include in its financial results its share of the net income or loss of New Caldera based upon the percentage of outstanding shares of New Caldera owned by SCO adjusted for the difference in the carrying amount of SCO's investment in New Caldera and its proportional share of the net income or loss of New Caldera. The SCO unaudited pro forma condensed consolidated financials statements beginning on page P-12 are based upon certain assumptions. The ultimate gain to be recognized by SCO is dependent upon the same factors described above for New Caldera and the price of New Caldera stock on the closing date of the transaction. As a result of these factors, the actual gain and related difference between SCO's investment in New Caldera and its proportional share of New Caldera's net assets may differ materially from the amounts assumed in the SCO unaudited pro forma condensed consolidated financials statements. GOVERNMENTAL AND REGULATORY APPROVALS The combination may not be completed until notifications have been given and certain information has been furnished to the Federal Trade Commission and the Antitrust Division of the United States Justice Department and specified waiting period requirements under the Hart-Scott-Rodino Antitrust Improvements Act, or the HSR Act, have been satisfied. All required filings under the HSR Act have been made and the waiting periods for the filings have expired. The FTC and the Antitrust Division frequently scrutinize the legality under the antitrust laws of the transactions such as the combination. Despite the expiration of the waiting periods under the HSR Act, at any time before or after the completion of the combination, the Federal Trade Commission, the antitrust division, state attorneys general or others could take action under antitrust laws. These actions could include seeking to enjoin the combination, seeking to cause the divestiture of significant assets of Caldera or SCO or seeking to impose conditions on New Caldera with respect to the business operations of the combined companies. If a challenge is made, we may not prevail or we may be required to terminate the reorganization agreement, to divest assets, to license proprietary technology to third parties or accept conditions in order to complete the combination. 63 78 DISSENTERS' OR APPRAISAL RIGHTS Caldera stockholders are not entitled to dissenters' or appraisal rights with respect to the combination. If holders of 5% or more of the outstanding shares of SCO common stock entitled to vote at the SCO special meeting vote against the reorganization agreement and comply with certain other procedures specified in Chapter 13 of the California Corporations Code, SCO shareholders of record who take such actions will be entitled to exercise dissenters' rights. In accordance with the provisions of Chapter 13 of the California Corporations Code, dissenting SCO shareholders will have the right to be paid in cash the fair market value of their shares of SCO common stock, determined as of the day before the first announcement of the combination, and excluding any appreciation or depreciation as a result of the combination. In order to exercise dissenters' rights, dissenting SCO shareholders must comply with the procedural requirements of Chapter 13 of the California Corporations Code, a description of which is included here and the full text of which is attached to this document as Appendix O and is incorporated by reference to this discussion. SCO shareholders wishing to exercise dissenters' rights are advised to read Chapter 13 of the California Corporations Code carefully. The failure of a dissenting SCO shareholder to timely and properly comply with such procedures will result in the termination or waiver of such rights. DISSENTERS' RIGHTS CANNOT BE VALIDLY EXERCISED BY PERSONS OTHER THAN SHAREHOLDERS OF RECORD REGARDLESS OF THE BENEFICIAL OWNERSHIP OF THE SHARES. Persons who are beneficial owners of shares held of record by another person, such as brokers, banks or nominees, should instruct the record holder to follow the procedures outlined below if they wish to dissent from the combination with respect to any or all of their shares. Dissenting SCO shareholders must submit a written demand to SCO that it purchase for cash some or all of their shares. The demand must: - contain the number and class of the shares held of record by the shareholder which the shareholder demands that SCO purchase; and - contain a statement of what such shareholder claims to be the fair market value of those shares as of the day before the announcement of the proposed combination of short-form combination. That statement of fair market value will constitute an offer by the dissenting SCO shareholder to sell such shares at that price. The demand must be received by SCO or its transfer agent not later than the date of the special meeting to vote upon the combination, or May 4, 2001 in the present instance. All written demands for purchase of SCO shares should be sent or delivered to The Santa Cruz Operation, Inc. at 425 Encinal Street, Santa Cruz, California 94043, Attention: Steven Sabbath. SUCH DEMAND WILL NOT BE EFFECTIVE UNLESS IT IS RECEIVED NO LATER THAN THE DATE OF THE SCO SPECIAL MEETING. If SCO shareholders have a right to require SCO to purchase their shares for cash under the dissenters' rights provisions of the California Corporations Code, SCO will mail to each such shareholder a notice of approval of the combination within ten days after the date of shareholder approval, stating the price determined by it to represent the "fair market value" of the dissenting shares, and a brief description of the procedure to be followed if the shareholder desires to exercise such dissenters' rights. The statement of price will constitute an offer to purchase any dissenting shares at that price. To perfect their dissenters' rights, shareholders of record must: - make written demand for the purchase of their dissenting shares upon SCO on or before the date of the SCO special meeting; - vote their shares against adoption and approval of the reorganization agreement; and 64 79 - within 30 days after the mailing to shareholders by SCO of the notice of approval of the principal terms of the combination, submit the certificate(s) representing their dissenting shares to SCO or its transfer agent for notation thereon that they represent dissenting shares. The notice of approval of the combination will specify the date by which the submission of certificates for endorsement must be made and a submission made after that date will not be effective for any purpose. Failure to follow any of these procedures may result in the loss of statutory dissenters' rights. If a dissenting SCO shareholder and SCO agree that shares are dissenting shares and agree upon the price of the shares, SCO, upon surrender of the certificates, will make payment of that amount (plus interest thereon at the legal rate on judgments from the date of such agreement) within 30 days after such agreement. Any agreement between dissenting SCO shareholders and SCO fixing the "fair market value" of any dissenting shares must be filed with the Secretary of SCO. If SCO denies that the shares are dissenting shares, or SCO and a dissenting shareholder fail to agree upon the "fair market value" of the shares, the dissenting SCO shareholder may, within six months after the date on which notice of approval of the combination was mailed to the shareholder, but not thereafter, file a complaint in the Superior Court of the proper county. A dissenting SCO shareholder must bring such an action within six months after the date on which the notice of approval of the reorganization agreement was mailed to the shareholder, whether or not SCO responds within such time to the shareholder's written demand that SCO purchase for cash shares voted against the reorganization agreement. If such a complaint is timely filed, the court shall determine whether the shares constitute dissenting shares, and may either determine or appoint an appraiser to determine the fair market value of the shares. If the court finds the report of the appraiser reasonable, the court may confirm the report. The fair market value of the shares will be determined excluding any appreciation or depreciation in consequence of the combination, and will be awarded to the dissenting SCO shareholder, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair market value. The costs of the action may be determined by the court and taxed upon the parties as the court deems equitable, but SCO shall pay such costs if the fair market value of the shares as determined by the court exceeds the price offered pursuant to its notice of approval. 65 80 INTERESTS OF PERSONS IN THE COMBINATION In considering the recommendations of the boards of directors of Caldera and SCO with respect to the reorganization agreement, stockholders of Caldera and shareholders of SCO should be aware that certain executive officers and directors have some interests in the combination that may be different from or in addition to, the interests of stockholders of Caldera and shareholders of SCO generally. The boards of directors were each aware of these interests and considered them, among other matters, in making its recommendations. These interests are described below. Employment with Caldera. Each of Caldera's executive officers will have positions with New Caldera, and each of the current directors of Caldera, excluding John R. Egan who has announced that he will not seek re-election as a director of Caldera, will become directors of New Caldera. All of the Caldera executive officers and David McCrabb, Senior Vice President and President, SCO Server Division, will become executive officers of New Caldera. Further, these individuals will execute employment agreements with New Caldera that will provide for terms of employment and severance benefits, among other things. See "Agreements Related to the Combination -- Employment Agreements." SCO Change of Control Agreements. SCO's board of directors has resolved to amend the change of control agreements with certain executive officers of SCO, including those executive officers who will become executive officers of New Caldera. The amended agreements will provide for: - the full vesting on all outstanding options issued prior to August 1, 2000 to each executive officer; - an extension of the option term through January 31, 2002 on options issued to those individuals who will become executive officers of New Caldera; - an extension of the option term through January 31, 2002, in the case of options held by those executive officers staying with SCO, if such individuals are involuntarily terminated or terminated by mutual consent; and - a cash payment payable in one year from the date of the closing of the combination, provided that such executive officer has not voluntarily terminated his employment with SCO or New Caldera, as the case may be, equal to: that individual's current annual salary and 100% of such individual's target bonus, together with 8.5% interest from the date of the closing of the combination. Accordingly, the following individuals will receive vesting acceleration on all outstanding options granted prior to August 1, 2000, and potential acceleration and cash payments as follows: - Doug Michels, President and Chief Executive Officer -- $601,836; - Randall Bresee, Senior Vice President and Chief Financial Officer -- $334,180; - Michael Orr, Senior Vice President and President of Tarantella Division -- $390,193; - Steven M. Sabbath, Senior Vice President, Law and Corporate Affairs, and Secretary, -- $350,923; - Geoff Seabrook, Senior Vice President, Corporate Development -- $267,873; - David McCrabb, Senior Vice President and President, Server Software Division -- $398,224; - Jack Moyer, Senior Vice President, Human Resources -- $320,658; and - James Wilt, Senior Vice President and Vice President, Professional Services Division -- $353,855. SCO Stay Home Options. On August 1, 2000, the compensation committee of the SCO board granted options to purchase SCO common stock to certain executive officers to encourage those individuals to remain with SCO following the combination. All options shall vest over four years, which may accelerate in the event of another change of control, and are exercisable at $3.125 per share, the price 66 81 at the close of trading on July 31, 2000. The following individuals received grants of options to purchase shares of SCO common stock in the following amounts: - Randy Bresee -- 150,000 shares - Doug Michels -- 175,000 shares - Mike Orr -- 175,000 shares - Steve Sabbath -- 50,000 shares - Geoff Seabrook -- 50,000 shares Stockholder Agreement. New Caldera and SCO will enter into a stockholder agreement at the time of the closing of the combination. This agreement will give SCO the right to have up to two directors become members of New Caldera's board at the closing of the combination. These nominees to the board of directors of New Caldera will initially be individuals to be named by SCO and approved by Caldera. Voting Agreements. The Canopy Group, Inc. and MTI Technology Corporation have entered into voting agreements with SCO by which they have agreed to vote in favor of the combination. Together, these stockholders hold approximately 72% of the outstanding shares of Caldera. Doug Michels has entered into a voting agreement with Caldera by which he has agreed to vote in favor of the combination. Mr. Michels beneficially owns approximately 10% of the outstanding shares of SCO as of February 1, 2001. THE REORGANIZATION AGREEMENT This section describes the reorganization agreement. A copy of the reorganization agreement is attached as Appendix A to this joint proxy statement/prospectus. The summary is materially complete, but you should read the full and complete text of the reorganization agreement as it may contain information that is important to you. CLOSING The closing of the combination will take place as soon as practicable after the Caldera annual stockholder meeting and SCO special shareholder meeting and no later than the third business day after all conditions to closing under the reorganization agreement are satisfied or waived. The merger of a wholly-owned subsidiary of New Caldera with and into Caldera will become effective upon the filing of a certificate of merger in the offices of the Secretary of State of the State of Delaware. WHAT CALDERA SECURITY HOLDERS WILL RECEIVE Shares of Common Stock. Each share of common stock of Caldera that is issued and outstanding will be automatically converted into one share of New Caldera common stock. As of February 1, 2001 there were 39,684,082 shares of Caldera common stock outstanding. Stock options. Each outstanding option to purchase shares of Caldera common stock will be automatically assumed and converted into an option to purchase an equivalent number of shares of New Caldera common stock. The exercise price per share will remain unchanged. As of February 1, 2001 there were options to purchase 5,848,708 shares of Caldera common stock outstanding. Employee stock purchase plan rights. Each of the outstanding rights to purchase shares of Caldera common stock under the Caldera Employee Stock Purchase Plan will be assumed and converted into a right to purchase the same number of shares of New Caldera common stock on the next purchase date under the Caldera stock purchase plan following the effective time. The purchase price per share will be determined in accordance with the stock purchase plan. 67 82 CALDERA STOCKHOLDERS WILL NOT NEED TO SURRENDER SHARE CERTIFICATES Holders of Caldera common stock will not need to surrender their stock certificates. After the effective time, their stock certificates will be deemed to represent an equivalent number of shares of New Caldera common stock. WHAT SCO WILL RECEIVE FOR CONTRIBUTING THE SERVER AND PROFESSIONAL SERVICES GROUPS TO NEW CALDERA At the closing of the combination, SCO will receive the amounts and kinds of consideration described below. There will be no adjustments in the consideration for changes in the market price of Caldera's common stock. - SCO will receive 16 million shares of New Caldera common stock (representing approximately 25.3% of New Caldera on a fully diluted basis). - New Caldera will pay SCO $23 million in cash (of which $7 million was advanced to SCO on January 26, 2001). - New Caldera will issue to SCO a non-interest bearing promissory note in the principal amount of $8 million, secured by the assets of the OpenServer line of business, that will be paid in quarterly installments of $2 million beginning the fifth quarter after the combination is completed. - If the OpenServer line of business of the server and professional services groups generates revenues in excess of specified thresholds during the three-year period following the completion of the combination, SCO will have earn-out rights entitling it to receive 45% of these excess revenues. SCO's earn-out rights discussed above will be payable on the 45th day following the completion of the fourth, eighth and twelfth full Caldera quarters following the completion of the combination. On each of these dates, Caldera will pay to SCO an amount equal to 45% of the total OpenServer revenues for the prior four Caldera quarters that exceed the cumulative threshold amounts for the same prior four quarters. The chart below sets forth the threshold amounts for each of the twelve Caldera quarters following the completion of the combination. SCO REVENUE EARNOUT THRESHOLDS FOR OPENSERVER BUSINESS (IN THOUSANDS)
QUARTER 1(A) QUARTER 2 QUARTER 3 QUARTER 4 TOTAL ------------ ---------- ---------- ---------- ------- Revenue Earnout Thresholds.............. $10,500 $10,000 $9,500 $8,500 $38,500
QUARTER 5 QUARTER 6 QUARTER 7 QUARTER 8 TOTAL ------------ ---------- ---------- ---------- ------- Revenue Earnout Thresholds.............. $ 7,500 $ 6,500 $5,000 $3,500 $22,500
QUARTER 9 QUARTER 10 QUARTER 11 QUARTER 12 TOTAL ------------ ---------- ---------- ---------- ------- Revenue Earnout Thresholds.............. $ 3,000 $ 2,500 $2,000 $1,500 $ 9,000
--------------- (A) This quarter represents the first full Caldera quarter after the completion of the combination. For example, if the combination is completed prior to April 30, 2001, this quarter will be the three months of May, June and July; if the combination is completed after April 30, 2001, then this quarter will be the three months of August, September and October. Based on the closing price of Caldera's common stock on February 9, 2001, the date the third amendment to the reorganization agreement was entered into, the aggregate value of the approximate 16 million shares of New Caldera, the $23 million cash and the $8 million promissory note to be paid for the server and professional services groups would have been approximately $84 million. In negotiating this 68 83 purchase price, the parties discussed not only Caldera's and SCO's stock prices, but also the relative values of the revenue streams, products and services, opportunities for growth and other contributions that were to be provided by each party to the combined entity. For a more detailed description of the various factors considered by the boards of SCO and Caldera, please see "The Combination -- Reasons for the Combination" beginning on page 43. The New Caldera stock that SCO receives as a result of the combination will be held as an asset of SCO. SCO has no current intention of distributing New Caldera stock directly to SCO shareholders, in part because the shares will serve as security for the $18 million line of credit to SCO from The Canopy Group, the majority stockholder of Caldera. STOCK OPTION AND BENEFIT PLANS AND RELATED SECURITIES Caldera options The term, exercisability, vesting schedule, status as an "incentive stock option" under section 422 of the Internal Revenue Code, if applicable, and all other terms and conditions of the Caldera options assumed by New Caldera will be unchanged. SCO options New Caldera has agreed to assume or exchange the outstanding options of those SCO employees who will become New Caldera employees, with the exception of David McCrabb, Jack Moyer and Jim Wilt. Each option to purchase shares of SCO common stock shall be converted into a New Caldera option to purchase half the number of shares of New Caldera common stock. Under the assumption, the exercise price of the New Caldera option will be twice the exercise price per share of such SCO option. Under the exchange, the exercise price of the New Caldera option will be the fair market value of New Caldera common stock immediately prior to the closing of the combination. Under either the replacement or the exchange, all New Caldera options granted will be vested as to the same percentage of underlying shares of New Caldera as the related SCO options were vested in underlying shares of SCO; the New Caldera options will continue to vest in accordance with the original vesting schedules of the related SCO options. A vote for the combination will be deemed to constitute approval of the issuance of New Caldera options in exchange for the assumed SCO options. Caldera stock plans In addition, the Caldera stock incentive and stock purchase plans, as proposed to be amended, will be assumed and continued by New Caldera. See Proposals Three and Four under "Proposals to be Voted Upon by Caldera Stockholders at the Caldera Annual Meeting" on page 165. A vote for the combination will be deemed to constitute approval of the assumption and continuation of the Caldera plans as proposed to be amended. Employee benefit plans New Caldera has agreed to use reasonable efforts to provide the Caldera benefit arrangements and Caldera employee plans to the employees of SCO who become New Caldera employees. To the extent that New Caldera does not have any such plan or arrangement in effect in a jurisdiction where there are transferring employees, New Caldera has agreed to adopt plans providing comparable benefits to the plans for the transferring employees. New Caldera has agreed to provide all transferring employees with the opportunity to participate in any employee stock option or other incentive compensation plan of New Caldera on substantially the same terms and conditions as are available to similarly situated employees of Caldera or New Caldera. Prior to the effective time, Caldera, New Caldera and SCO will mutually agree upon an integration plan which will include, among other things, provisions relating to compensation and other equity incentives for employees. 69 84 New Caldera has agreed to take all steps necessary to cause each of the benefit arrangements and employee plans of Caldera to waive any waiting period or other requirement for duration of employment with New Caldera which would prevent a transferring employee who is otherwise eligible to participate in the plan from participating in the plan immediately following the effective time. New Caldera has also agreed to pro rate any portion of a premium or deductible with respect to a plan for any transferring employee for any plan year that commenced prior to the effective time. New Caldera has also agreed to take all steps necessary to cause each employee plan to recognize each transferring employee's length of service under comparable employee benefit plans maintained by SCO. Therefore, for purposes of eligibility, participation, vesting and benefit accrual, the transferring employee will be treated as if employed by New Caldera for such period. DISTRIBUTION AND REGISTRATION OF SHARES SCO has agreed not to distribute to its shareholders any of its shares of New Caldera for six months after the closing date. SCO has further agreed not to distribute to its shareholders more than 25% of its New Caldera shares during any six (6) month period. Caldera has agreed to file a registration statement to facilitate any such distribution of New Caldera shares to the SCO shareholders. CONDITIONS TO THE COMBINATION The obligations of SCO and the other contributing companies, on the one hand, and of New Caldera and Caldera, on the other, to effect the combination are subject to a number of conditions, including: - the combination shall have been approved and adopted by both the Caldera stockholders and the SCO shareholders; - the board of directors of New Caldera shall have appointed two individuals to the board of directors of New Caldera to be named by SCO and approved by Caldera; - the relevant parties shall have entered into the stockholder agreement, the escrow agreement, the security agreement, and the voting agreements; - the New Caldera common stock to be issued in the combination shall have been approved for quotation on the Nasdaq National Market, subject to notice of issuance; - the representations and warranties of each party contained in the reorganization agreement shall be accurate except where the breaches have not resulted in a material adverse effect; - each party shall have materially complied with the covenants contained in the reorganization agreement; - each of Caldera and SCO shall have received an opinion of their counsel as to the tax consequences of the combination; and - any applicable waiting periods of anti-trust requirements shall have expired or been terminated and no order preventing the consummation of the combination, shall have been issued by any federal or state court or governmental agency. Any of the conditions to the obligations of one party may be waived by such party. REPRESENTATIONS AND WARRANTIES The reorganization agreement contains customary representations and warranties of the parties. These representations and warranties relate to, among other things, the parties' organizations, capital structures, authority to enter into the transaction, filings with securities regulatory authorities, absence of material litigation, the accuracy of information supplied for this document and other matters. SCO has made 70 85 additional representations and warranties including representations relating to absence of defaults under material contracts, intellectual property rights, title to, condition and sufficiency of the contributed companies and the contributed assets. COVENANTS Covenants by both parties The reorganization agreement contains mutual covenants, including: - the negotiation of a mutually acceptable arrangement between SCO and New Caldera and, if required, the other parties to the agreement, with respect to the contracts that govern products or assets relating to both the server and professional services groups and the Tarentella business of SCO; - the notification to the other party of: - any event reasonably likely to render any of their representations or warranties untrue or inaccurate in any material respect; - any event reasonably likely to have a material adverse effect on either Caldera or the server and professional services groups; and - any material breach by them of any covenant or agreement contained in the reorganization agreement; - carrying on and preserving its business in the ordinary and usual course consistent with past practice; - obtaining consents required in connection with the material contracts; - providing reasonable access to information, including without limitation, any and all information related to taxes; and - cooperation on tax matters, including the preparation and defense of tax returns. In addition, each party has agreed that it will not, without the prior consent of the other: - borrow any money except for amounts which are not material; - cause any of the contributed assets to become subject to any non-permitted liens or encumbrance; - dispose of any of the assets except in the ordinary course of business, consistent with past practice; - declare or pay any cash or stock dividend or other distribution in respect of capital stock; - amend the certificate of incorporation or bylaws of Caldera or of any of the contributed companies; - implement any layoffs or reductions in force; and - fail to pay or withhold any material tax when due to be paid or withheld. Caldera and New Caldera covenants Caldera and New Caldera have agreed to: - qualify the New Caldera options to be granted upon cancellation of the SCO options pursuant to the reorganization agreement under state securities or "blue sky" laws; - have New Caldera adopt the Caldera employee plans, and have New Caldera use reasonable efforts to provide the Caldera employee plans to the transferring employees as provided to Caldera employees who are similarly situated; 71 86 - reimburse SCO for any pre-paid commissions and pre-paid royalties relating to certain receivables to be collected by Caldera after the closing; - maintain the indemnification, limitations of liability and directors' and officers' insurance for Caldera executive officers and directors; and - maintain indemnification and insurance for directors, officers, employees and agents of the contributed companies and SCO involved in the server or professional services groups and who become employees, officers or directors of New Caldera or Caldera. SCO covenants SCO has agreed to: - ensure that all intellectual property rights and intangible assets required for the productions, development, marketing and support of the products of the server and professional service groups have been transferred to New Caldera; - informally encourage some of their key employees to enter into employment agreements with New Caldera; - take action under the SCO stock option plans to prevent accelerated vesting of stock options as a result of the combination; and - maintain directors' and officers' liability insurance covering acts on or before the effective time of employees who become New Caldera employees. In addition, SCO and the contributed companies and subsidiaries have agreed that they will not, without the prior consent of Caldera, where it would cause a material adverse effect: - grant any exclusive license to any of the intellectual property rights relating to the server or professional services groups or grant any other license to those rights except in the ordinary course of business; - materially amend or terminate any of its material contracts; - cause any of the contributed companies to make any loans or grant any guarantees, except loans in the ordinary course of business or advances that are not material in amount; or - cause any member of the contributed companies to merge, consolidate or reorganize with or acquire any entity that is not a member of the contributed companies subject to certain exceptions. RESTRICTIONS ON SOLICITING ALTERNATIVE PROPOSALS Obligations of SCO and related parties SCO and the contributing companies have agreed that they will not directly or indirectly: - solicit, initiate or encourage the submission of any SCO alternative proposal described below; - engage in discussions or negotiations regarding any SCO alternative proposal; - take any other action intended, designed or reasonably likely to facilitate any inquiries or the making of any proposal that constitutes or would reasonably be expected to lead to, any SCO alternative proposal; - enter into any letter of intent, acquisition agreement or other similar agreement with any person with respect to any SCO alternative proposal; or - make or authorize any statement, recommendation or solicitation in support of any SCO alternative proposal. 72 87 "SCO alternative proposal" means any inquiry, proposal or offer relating to any direct or indirect (a) acquisition, purchase, sale or other disposition of any of the server or professional services groups' assets other than in the ordinary course and disposal of worn or obsolete items consistent with past practice, (b) acquisition, purchase, sale or other disposition of any of the voting securities of any contributed company, or (c) merger, consolidation, sale of any of the assets, liquidation, or similar transaction involving any contributed company. SCO may, in response to an unsolicited SCO alternative proposal, participate in discussions or negotiations with, furnish information to a third party, make a recommendation in support of the proposal, or accept the proposal, subject to the following: - the third party has made a bona fide written proposal to the SCO board which identifies a price or range of values to be paid for the outstanding securities or assets of SCO; - after consultation with investment bankers of nationally recognized reputation, the SCO board determines that the transaction is financially more favorable to the shareholders of SCO than the combination; - the SCO board determines, after consultation with investment bankers of nationally recognized reputation, that the third party is financially capable of consummating the SCO alternative proposal; - the SCO board determines, after consultation with outside legal counsel, that failure to take such action would be inconsistent with the director's fiduciary duties; - SCO has notified Caldera in writing of the SCO alternative proposal, including its principal financial and other material terms and conditions, including the identity of the person making the proposal; and - SCO must advise Caldera of any request for non-public information which it reasonably believes would lead to any SCO alternative proposal. INDEMNIFICATION General indemnification SCO has agreed to indemnify New Caldera and Caldera against: - all liabilities relating to the server and professional services groups not expressly assumed by Caldera or New Caldera, and all liabilities whatsoever relating to the business retained by SCO; - any claim by any contributing company asserting that the transfer of the capital stock of the contributed companies and the contributed stock and assets to New Caldera constitutes a fraudulent conveyance, fraudulent transfer or a preference under any applicable foreign, state or federal law; - any breach by any contributing company of its representations and covenants relating to fraudulent conveyances or any liabilities related to non-compliance with bulk transfer laws in connection with the combination; - any liability relating to SCO's Tarantella business; - any material liability omitted from the financial statements of the server and professional services groups that was required by generally accepted accounting principles to be included or reflected in the financial statements; - any claims brought by an SCO employee relating to such employment with or termination by SCO prior to the closing; 73 88 - any breach of representation in the reorganization agreement; or - any unforeseen tax liability, as described below. This indemnification is triggered only when the aggregate of those liabilities exceed $1.0 million at which time, SCO shall be required to pay the entire amount of the loss. However, in no event shall the amount of indemnification exceed the value of 1.6 million shares of New Caldera common stock on a fully diluted basis, based on the average closing price of Caldera common stock for the five days prior to the closing, except: - losses relating to intellectual property which shall not exceed the value of 8 million shares of New Caldera common stock on a fully diluted basis; and - there are no limits on intentional fraud or misrepresentation. Time limits for bringing indemnification claims Claims for indemnification may generally be brought at any time prior to the first anniversary of the closing of the combination. ESCROW An escrow consisting of 1.6 million shares of the New Caldera common stock to be issued to SCO shall be available for one year after the closing to compensate Caldera and New Caldera for the indemnification obligations of SCO. TAX INDEMNIFICATION SCO shall also indemnify New Caldera with respect to certain tax matters, including for any tax: - of SCO or any member of the affiliated group of corporations of which SCO is a member which is not related to the server and professional services groups or to any contributed company; - relating to the income, business, assets, property or operations of the server and professional services groups or of any contributed company to the extent that the liability for tax is not disclosed to Caldera, and is either (a) in respect of any taxable period that ends prior to the closing or in respect of any taxable period that includes, but does not end on, the closing, the portion of that period ending on the closing, or (b) with respect to an excess loss account in the stock of any contributed company or from a deferred intercompany transaction other than among the contributed companies entered into prior to the closing and is triggered as a result of any contributed company ceasing to be affiliated with SCO; - under Subpart F of the Internal Revenue Code attributable to transactions by SCO; or - as the result of a breach of representation or warranty, covenant or agreement by SCO. New Caldera must indemnify SCO and its affiliates with respect to certain tax matters including for: - any tax relating to the income, business, assets, property or operations of the server and professional services groups or any of the contributed companies in respect of all taxable periods beginning after the closing, or, in the case of any taxable period that includes but does not end on the closing, the portion of that period commencing on the day following the closing; - to the extent a liability for tax is reflected in the financial statements for the server and professional services groups or previously disclosed to New Caldera; 74 89 - under Subpart F of the Internal Revenue Code attributable to transactions by New Caldera or Caldera after the closing; and - as the result of a breach of representation or warranty, covenant or agreement by New Caldera or Caldera. TAXES SCO and Caldera shall share equally all sales, use, stamp and other taxes on the combination, except that Caldera shall not pay more than $300,000. TERMINATION OF THE REORGANIZATION AGREEMENT The reorganization agreement may be terminated by: - mutual written agreement of SCO and Caldera; - any party, if there has been a material breach by the other of any representation, warranty, the covenant or agreement set forth in the reorganization agreement, and the breach is not corrected within 30 days after notice; - any party, if the combination is not completed on or before May 31, 2001 for any reason, other than any wrongful action or as a result of a breach of the reorganization agreement or related agreement by the terminating party; - by any party, if a permanent injunction or other order by any federal or state court restraining or prohibiting the combination shall have become final and non-appealable; - by any party, if the stockholders of Caldera or the shareholders of SCO do not approve the combination unless the failure to obtain approval was caused by any breach by Caldera or SCO, as the case may be, of the reorganization agreement or any related agreement in which case the breaching party cannot terminate it; - by Caldera, if (a) the board of directors of SCO withdraws or modifies in an adverse manner its approval or recommendation of the combination, or (b) the board of directors of SCO recommends or approves any SCO alternative proposal; - by SCO, if the board of directors of Caldera withdraws or modifies in an adverse manner its approval or recommendation of the combination; or - by any party at any time prior to the SCO shareholder approval, if the SCO board recommends or accepts a SCO alternative proposal, unless it violates the non-solicitation obligations described under "-- Restrictions on Soliciting Alternative Proposals" on page 72. TERMINATION FEES SCO will pay Caldera a termination fee equal to approximately $4 million if the reorganization agreement is terminated and the SCO board has changed its recommendation. Caldera will pay SCO the termination fee if the reorganization agreement is terminated and the Caldera board has changed its recommendation. SCO will pay Caldera the termination fee if: - the SCO shareholders do not approve the combination after a Caldera alternative proposal has been publicly disclosed and not withdrawn and prior to the rejection; or - SCO has violated its non-solicitation obligations; and - within 6 months an agreement is entered into for an alternative proposal or within 12 months an alternative proposal is consummated. 75 90 EXPENSES OF THE COMBINATION Each party will bear its own fees and expenses incurred with respect to the negotiation, preparation and performance of the reorganization agreement and the related transactions. Caldera reimbursed SCO for $1.5 million of transition costs incurred by SCO from August 2000 through December 2000. These costs related to the retention of various employees of SCO who will become employees of New Caldera. SURVIVAL OF REPRESENTATIONS AND WARRANTIES All representations, warranties and covenants of the parties contained in the reorganization agreement will remain operative for a period of two years after effective time or any earlier termination of the reorganization agreement, except for covenants and other provisions that by their express terms survive for a longer period. AMENDMENT AND WAIVER OF THE REORGANIZATION AGREEMENT Any term or provision of the reorganization agreement may at any time be amended or waived in a writing signed by all of the parties. After approval by a party's stockholders, no amendment will be made which by law requires the further approval of a party's stockholders without obtaining the further approval. SCO BUNDLED PRODUCTS Several SCO technology products traditionally bundled into OpenServer and UnixWare7 are not being acquired by Caldera from SCO in the combination. Pursuant to the terms of the reorganization agreement, SCO will grant to Caldera a royalty free license to use, modify and sublicense the current versions of SCO's Xdesktop and Panaroma products as part of OpenServer. In addition, Caldera has agreed to remove or disable SCO's Webtop, Vision FS and Term Lite products from UnixWare7 and OpenServer within 60 days from the consummation of the combination. During this 60-day grace period, Caldera will receive a non-exclusive, royalty-free license to use and sublicense Webtop, Vision FS and Term Lite, as bundled with UnixWare7 and OpenServer. Following the expiration of the grace period, Caldera will pay to SCO standard royalty fees whenever it sells Vision FS, Tarantella Express or Webtop, whether on a stand-alone basis or bundled with OpenServer and UnixWare. AGREEMENTS RELATED TO THE COMBINATION VOTING AGREEMENTS Voting agreements with SCO The Canopy Group, Inc. and MTI Technology Corporation have entered into a voting agreement with SCO. Together these stockholders hold approximately 67% of the outstanding shares of Caldera common stock. Doug Michels has entered into a voting agreement with Caldera. Mr. Michels holds approximately 10% of the outstanding shares of SCO common stock. Voting agreement terms Under the voting agreements, each of these stockholders has agreed that they will vote their shares in favor of the adoption of the reorganization agreement and approval of the combination. They have also agreed to vote against any dissolution or liquidation, any amendment to their respective governing documents which would prevent or impede the combination. Mr. Michels has also agreed to vote against a SCO alternative proposal. These stockholders have also delivered irrevocable proxies with respect to matters covered by the voting agreements. In addition, subject to exceptions, these stockholders have agreed not to sell, transfer, 76 91 dispose of or encumber any shares held by them until the effective time or the valid termination of the reorganization agreement. These stockholders have also agreed that they shall not, directly or indirectly: - solicit or initiate discussions or engage in negotiations regarding any alternative proposal; - furnish any nonpublic information regarding their respective companies to any person in connection with respect to or likely to facilitate inquiries which could result in an acquisition proposal; - enter into any letter of intent or other similar document relating to any alternative proposal; or - make or authorize any statement or recommendation in support of any alternative proposal. STOCKHOLDER AGREEMENT Nomination rights Caldera, New Caldera and SCO will enter into a stockholder agreement which will provide that so long as SCO continues to own at least 10% and not more than 19.9% of the outstanding shares of New Caldera common stock, SCO shall be entitled to name one nominee to the New Caldera board. So long as SCO continues to own at least 20% of the outstanding shares of New Caldera common stock, SCO shall be entitled to name two nominees to the New Caldera board. So long as SCO owns at least 10% of the outstanding shares of New Caldera, the New Caldera board shall not be increased to a number greater than nine. Each nominee must be reasonably acceptable to New Caldera. New Caldera is also obligated to use its best efforts to cause the New Caldera board to unanimously recommend to its stockholders to vote in favor of the SCO nominees and to cause the shares for which New Caldera's management holds proxies to be voted in favor of the SCO nominees. In addition, the Canopy Group, Inc. and MTI Technology Corporation agree to vote in favor of the SCO nominees. Limits on resales So long as SCO owns at least 5% of New Caldera's outstanding common stock, they may sell their New Caldera shares only in accordance with the limitations of Rule 144 of the Securities Act. SCO also agrees not to sell New Caldera securities constituting 5% or more of the outstanding New Caldera securities to any one person or group. Voting provisions So long as SCO owns at least 10% of the outstanding stock of New Caldera, SCO agrees to vote all of its shares of New Caldera common stock in favor of the New Caldera nominees for election to the New Caldera board of directors. So long as SCO owns at least 10% of the outstanding common stock of New Caldera, they shall vote all shares of New Caldera common stock owned by them in accordance with the recommendation of the New Caldera board. SCO may, however, vote its shares in its sole discretion in the following specific matters: - a proposal involving the right to vote and participate pro rata with other common stockholders in any distribution to the holders of New Caldera common stock; - a recapitalization in which New Caldera common stock is converted or exchanged for a security having substantially different rights than New Caldera common stock; - a transaction involving a conflict of interest between any member of the board and New Caldera board; - actions brought by a stockholder of New Caldera; or - any amendment to the bylaws of New Caldera. 77 92 These voting provisions do not apply to any proposals for any recapitalization or combination accomplished in connection with any merger, acquisition, consolidation or combination, any transaction of a type contemplated by Section 351 of the Internal Revenue Code or any other similar transaction where (a) New Caldera is acquired by a third party, (b) there has been a "change of control" so that the stockholders of New Caldera prior to a transaction own, in the aggregate, less than a majority of the outstanding stock of New Caldera or the acquiring entity after the transaction, (c) New Caldera acquires another entity, or (d) New Caldera acquires all or substantially all of the assets of another entity. They also may not exercise dissenter's or appraisal rights for any event described in clauses (a) through (d) of the preceding paragraph that has been approved by the New Caldera board of directors. Standstill provisions Until the fifth anniversary of the combination, SCO will not, without New Caldera's prior written consent: - acquire, or enter into discussions, negotiations, arrangements or understandings with any third party to acquire beneficial ownership of any New Caldera voting securities if SCO would then beneficially own and/or have the right to acquire more than the percentage of New Caldera common stock held by it immediately after the closing of the combination, which we refer to as the standstill percentage; - make, or in any way participate in, any solicitation of proxies with respect to the voting of any voting securities of New Caldera; or - seek, either alone or in concert with others, to control the New Caldera board or the policies of New Caldera. The limitations described above shall be suspended upon the earlier to occur of: - the date that a third party not affiliated with SCO commences a tender or exchange offer, that is not withdrawn or terminated, and that would result in a person or group beneficially owning in the aggregate more than 50.0% of the total voting power of New Caldera. If any tender or exchange offer is withdrawn or terminated, the standstill limitation will be reinstated; - the public announcement by New Caldera that it has entered into any agreement with respect to a merger, consolidation, combination or similar transaction involving New Caldera in which all the stockholders of New Caldera collectively will own less than 50.0% of the outstanding voting stock of the surviving or acquiring entity immediately after the transaction. The standstill limitation will be reinstated if the transaction is terminated prior to being completed; or - the sale or disposition of substantially all of New Caldera's assets. If SCO acquires shares that cause it to own a percentage of New Caldera's outstanding stock that is greater than the standstill percentage, it will not be obliged to dispose of any New Caldera voting stock to the extent the increased shares were acquired as a result of a recapitalization of New Caldera or a repurchase or exchange of securities by New Caldera or any other action taken by New Caldera or its affiliates. EMPLOYMENT AGREEMENTS The employees of SCO who will become executive officers or are otherwise considered key employees of New Caldera will enter into employment agreements with New Caldera. These agreements will provide for employment of one or two years and severance benefits, among other things. To identify those persons who are expected to become executive officers of New Caldera and enter into executive employment agreements, please refer to "Management of Caldera and New Caldera" on page 134. 78 93 SECURED PROMISSORY NOTE AND SECURITY AGREEMENT Under the terms of the secured promissory note, New Caldera will pay to SCO the aggregate amount of $8 million in four quarterly installments beginning the fifth quarter after the closing of the combination. New Caldera may reduce the principal amount payable under the note by an amount equal to any advance purchase orders assigned to New Caldera at the closing of the combination that are not collected on within one year's time, plus 50% of New Caldera's external costs in collecting on these advance purchase orders. New Caldera's obligations under the secured promissory note are secured by the assets of the OpenServer line of business pursuant to a security agreement to be entered into between New Caldera and SCO at the time of closing of the combination. LOAN AGREEMENTS In conjunction with the signing of the reorganization agreement, Caldera and The Canopy Group, Inc., the majority stockholder of Caldera, agreed to loan SCO $7 million and $18 million, respectively, on or before the closing of the combination. If the combination is completed, Caldera's loan to SCO will be forgiven and will be treated by Caldera and SCO as part of the cash portion of the consideration to SCO for the server and professional services groups. The loan is secured by a senior first priority security interest in all of SCO's assets. The interest rate is 10% per annum, and the principal plus interest of the note matures on the closing of the combination or the date of termination of the reorganization agreement. If payment of all amounts due under the note are not made on or before the maturity date, Caldera has the option to convert all of the outstanding principal plus unpaid interest accrued on that date into common stock of SCO at a price per share of $2.44, the closing price of SCO's common stock on January 26, 2001, the date Caldera funded the $7 million to SCO. Under the terms of The Canopy Group's line of credit agreement with SCO, The Canopy Group agreed to loan up to $18 million to SCO. The line of credit is secured by a junior first priority security interest in all of SCO's assets (other than shares of New Caldera common stock issued to SCO in the combination), subordinate only to the senior first priority security interest of Caldera. In connection with entering into the loan agreement, The Canopy Group received a warrant to purchase 1,440,000 shares of SCO's common stock at a price of $1.5625 per share, the closing price of SCO's common stock on January 8, 2001, the date the loan agreement was entered into. If SCO borrows more than $9 million under the line of credit, The Canopy Group will be entitled to additional warrants to purchase shares of SCO common stock at such price per share. The number of shares that may be purchased under these additional warrants shall equal the product of the amounts exceeding $9 million multiplied by 0.25, divided by $1.5625, up to an aggregate of 1,440,000 additional shares. The interest rate on outstanding loan amounts is 10% per annum, and all outstanding principal and interest matures on December 31, 2001. At any time prior to the maturity date, The Canopy Group may elect to convert the outstanding principal and accrued interest into shares of common stock of SCO at a price per share of $1.5625, the closing price of SCO's common stock on January 8, 2001, subject to the limitation that total ownership may not exceed 19% of SCO common stock when combined with shares held by Caldera. 79 94 THE EMPLOYEE STOCK OPTION ALTERNATIVES GENERAL At the effective time of the combination, each outstanding option to purchase shares of SCO common stock under SCO's stock option plan may be either assumed or replaced on a grant by grant basis by New Caldera at the discretion of each employee, subject to the terms and conditions set forth in this section. A condition to New Caldera assuming or replacing an outstanding option is that the optionee become employed with New Caldera or its subsidiaries. However, any such employment relationship will be governed by the terms of an employment "offer letter" and will only be on an "at will" basis, to the extent permissible under applicable laws. SCO's stock option plan will continue to govern the option grants of employees of SCO who do not become employees of New Caldera and remain with SCO. If you become an employee of New Caldera and do not choose to have your SCO options assumed or replaced, your options will terminate 90 days after the closing of the combination pursuant to SCO's stock option plan. OUR REASONS FOR THE EMPLOYEE STOCK OPTION ASSUMPTION AND REPLACEMENT OFFER Caldera and SCO negotiated the employee stock option assumption and replacement offer to provide the server and professional services groups' employees similar equity incentives to those possessed by other New Caldera option holders and to allow them to participate in the success of New Caldera. Caldera and SCO agreed to halve the number of shares underlying each outstanding SCO option based on the fact that at the time the reorganization agreement was signed Caldera's common stock was trading at approximately twice the per share price of SCO's common stock. The replacement alternative is designed to incent the server and professional services groups' employees holding options for SCO common stock at an exercise price equal to more than half of the New Caldera trading price at closing. Based on the current trading price of Caldera common stock and the exercise prices of outstanding SCO options, New Caldera believes the replacement alternative will be the desirable alternative for most of the former SCO employees. However, New Caldera is still offering the assumption alternative in recognition that some SCO employees have outstanding options with low exercise prices which may make the assumption option desirable. The assumption alternative is designed to incent the server and professional services groups' employees holding options for SCO common stock at an exercise price equal to less than half of the New Caldera trading price at the closing of the combination. Under the assumption alternative, the exercise price per share of the New Caldera options will be twice that of the SCO options because, as noted above, Caldera's common stock was trading at a price per share twice that of SCO's common stock at the time the reorganization agreement was signed. A former SCO employee who chooses the assumption alternative will incur the same aggregate exercise price (number of shares times exercise price per share) in exercising options to purchase New Caldera common stock as he or she would have incurred in exercising SCO options; in this way, the assumption alternative preserves the benefit of the employee's low exercise price, relative to the replacement alternative. Since the time of signing the reorganization agreement, the trading price of Caldera common stock has fluctuated widely. Consequently, former SCO shareholders choosing between the replacement and the assumption alternative should obtain updated market price information before choosing an alternative. ASSUMPTION ALTERNATIVE Under the assumption alternative, each SCO stock option will continue to have its original terms (including the vesting schedule and termination provisions), and be subject to the conditions that were applicable to the option immediately prior to the effective time, except that: - each SCO stock option will become exercisable for shares of New Caldera common stock; - the number of shares of New Caldera common stock issuable upon the exercise of any given SCO option will be determined by multiplying the number of shares of SCO common stock underlying 80 95 the option immediately prior the effective time by 0.5 and rounding down to the nearest whole share; - the per share exercise price of any given option will be determined by dividing the exercise price of the option immediately prior to the effective time by 0.5 and rounding up to the nearest whole cent; and - the option for shares of New Caldera may not qualify as an incentive stock option even though the SCO option may have qualified. To illustrate the effect of choosing the assumption alternative for a specific option grant, assume our combination closes on April 1, 2001 and, at that point, an employee had a SCO option to purchase 100 shares which was granted on April 1, 1999 when SCO's common stock was at $5.4375 per share, and which was vested as to 50 shares on April 1, 2001. The employee would receive the following: - an option to purchase 50 shares of New Caldera common stock, which is vested as to 25 shares; and - the exercise price of the option would be $10.875. The assumption alternative is intended to provide an equity incentive to SCO employees who were granted SCO options with an exercise price that is currently in-the-money, or below the fair market value of SCO common stock. This alternative allows these employees to retain the economic value of their SCO options. REPLACEMENT ALTERNATIVE Under the replacement alternative, each SCO stock option will be treated as follows: - each SCO stock option will be cancelled and replaced with a new option exercisable for shares of New Caldera common stock; - the number of shares of New Caldera common stock issuable upon the exercise of the replacement option will be determined by multiplying the number of shares of SCO common stock underlying the cancelled SCO option immediately prior to the effective time by 0.5 and rounding down to the nearest whole share; - the per share exercise price of any given option will be the fair market value of New Caldera common stock immediately after the effective time; and - the New Caldera option granted will be vested as to the same percentage of underlying shares of New Caldera as the related SCO option was vested in underlying shares of SCO; the New Caldera option will continue to vest in accordance with the original vesting schedule of the related SCO option. To illustrate the effect of choosing the replacement option for a specific option grant, assume again our combination closes on April 1, 2001 and at that point an employee had a SCO option to purchase 100 shares which was granted on April 1, 1999 when SCO's common stock was at $5.4375 per share, and which was vested as to 50 shares on April 1, 2001. The employee would receive the following: - an option to purchase 50 shares of New Caldera common stock, which is vested as to 25 shares; and - the exercise price would be the fair market value of New Caldera common stock on April 1, 2001. The replacement alternative is intended to provide an equity incentive to SCO employees who were granted SCO options with an exercise price that is currently out-of-the-money, or above the fair market value of SCO common stock. This alternative will allow these employees to receive an option that is set at current fair market value. 81 96 PROCEDURE FOR ELECTING OPTION ALTERNATIVE If you tender to New Caldera your SCO options and New Caldera accepts them, assuming the other conditions of the employee stock option assumption and replacement offer described in this section are met, you will have entered into a binding agreement with New Caldera upon the terms and subject to the conditions set forth in this section and in the accompanying notice of election to assume or replace options in Appendix N. You must send a properly completed and duly executed notice of election to SCO at the address under "-- SCO is Acting as Exchange Agent" on page 83 on or prior to the expiration date to participate in this assumption and exchange offer. THE METHOD OF DELIVERY OF NOTICES OF ELECTION AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF THE DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED IN ALL CASES. SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. New Caldera expressly reserves the right, at any time or from time to time, to extend the period of time during which this assumption and replacement offer is open either to all offerees as a group, and delay acceptance of any election, by mailing written notice of the extension to the relevant holders as described below. During any extension, all SCO options previously tendered will remain subject to the assumption and replacement offer. NO NOTICES OF ELECTION SHOULD BE SENT TO CALDERA All questions as to the validity, form, eligibility, including time of receipt and acceptance of the notice of election will be determined by New Caldera and SCO in their sole discretion. This determination will be final and binding. New Caldera reserves the absolute right to reject any notice of election not properly delivered. New Caldera also reserves the absolute right in its sole discretion to waive any defects or irregularities or conditions of the employee stock option assumption and replacement offer either before or after the expiration date, including the right to waive the ineligibility of any holder who seeks to tender SCO option agreements in this assumption or replacement offer. The interpretation of the terms and conditions of the assumption and replacement offer as to any particular SCO option either before or after the expiration date, including the notice of election and the related instructions, by New Caldera shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of SCO options for assumption or replacement must be cured within a reasonable period of time that New Caldera shall determine. Neither New Caldera, SCO nor any other person shall be under any duty to give notification of any defect or irregularity with respect to any tender of SCO option for assumption or replacement, or shall any of them incur any liability for failure to give any notification. CONSEQUENCES OF FAILURE TO ELECT AN ALTERNATIVE If you are a server and professional services groups' employee and you accept an offer of employment made by New Caldera, you will automatically become an employee of New Caldera on the closing date of the combination and are entitled to participate in the employee stock option assumption and replacement offer subject to the terms and conditions set forth in this section and the notice of election. If you are a server and professional services groups' employee and your notice of election is not post-marked by the expiration date of the assumption and replacement offer period or if you do not submit a notice of election, your SCO options will terminate according to the terms of the SCO stock plan. This means that: - the unvested portion of your SCO options will terminate as of the closing date of the combination; - you will have 90 days from the completion of the combination to exercise the vested portion of your SCO options; and - any vested options that you do not exercise will be cancelled on the 31st day after the closing of the combination. These consequences will occur because you will no longer be an employee of SCO and will not be eligible to participate in its plans. 82 97 RESALES OF OPTION SHARES The assumed or replacement options as well as the shares of New Caldera common stock issuable upon exercise of the assumed or replacement options will continue to be subject to restrictions on transfers. In general, the options are not transferable and the shares of New Caldera common stock issuable upon their exercise may not be offered or sold unless registered under the Securities Act. New Caldera anticipates that it will register under the Securities Act the New Caldera common stock issuable under each assumed or replacement option shortly after the employee stock option assumption and replacement offer is completed. NO GUARANTEE OF EMPLOYMENT A condition to your receiving a New Caldera option in this assumption and replacement offer is that you become employed by New Caldera or its subsidiaries. The tender of a SCO option is not a guarantee that you will be employed or will continue to be employed by New Caldera or any of its subsidiaries. Any employment relationship that is created in the future will be governed by the terms of an employment "offer letter" and will only be on an "at will" basis. ACCEPTANCE OF OPTIONS FOR EXCHANGE AND DELIVERY OF NEW CALDERA OPTIONS New Caldera will accept, promptly after the expiration date, all SCO options properly tendered for cancellation under the notice of election and will exchange New Caldera options for the cancelled SCO options promptly after: - you deliver a properly completed and duly executed notice of election; - the closing of the combination; and - the commencement of your employment with New Caldera or one of its subsidiaries. The same conditions must also be satisfied if you elect to have your SCO options assumed by New Caldera. CANCELLATION OF SCO OPTIONS Upon the acceptance by New Caldera of your election to have your SCO options cancelled and replaced, the SCO options subject to that election will be cancelled and may no longer by exercised. SCO IS ACTING AS EXCHANGE AGENT SCO is acting as the agent for the assumption and replacement offer. All executed notices of election should be sent via mail, post-marked prior to the expiration date to SCO at the address set forth below or sent via facsimile to the number set forth below. We recommend that you use registered mail, return receipt requested. Questions and requests for assistance, requests for additional copies of this document or of the notice of election should be directed to SCO, addressed as follows: By mail or by hand: The Santa Cruz Operation, Inc. 425 Encinal Street Santa Cruz, California 95061 Attn: Steve Brown DELIVERY OF THE NOTICE OF ELECTION TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF THE NOTICE OF ELECTION. 83 98 SELECTED FINANCIAL DATA OF CALDERA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following tables present portions of Caldera's financial statements. You should read the selected financial data set forth below in conjunction with Caldera's financial statements and the related notes included elsewhere in this joint proxy statement/prospectus and in conjunction with "Caldera Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this joint proxy statement/prospectus. The selected statement of operations data for the years ended October 31, 1998, 1999 and 2000 and the selected balance sheet data as of October 31, 1999 and 2000 are derived from, and are qualified by reference to, the audited financial statements and related notes appearing elsewhere in this joint proxy statement/prospectus. The selected statement of operations data for the years ended October 31, 1996 and 1997 and the selected balance sheet data as of October 31, 1996, 1997 and 1998 are derived from audited and unaudited financial statements not appearing in this joint proxy statement/prospectus. The selected statement of operations data for Caldera as of January 31, 2001 and for the three months ended January 31, 2000 and 2001, have been derived from unaudited financial statements appearing elsewhere in this joint proxy statement/prospectus. Caldera began operations in 1994 as Caldera, Inc., a Utah corporation (the "Predecessor"). In July 1996, the Predecessor acquired an additional business line 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 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 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, Caldera's consolidated financial statements in this joint proxy statement/prospectus 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.
THREE MONTHS ENDED YEAR ENDED OCTOBER 31, JANUARY 31, ---------------------------------------------------- ------------------- 1996 1997 1998 1999 2000 2000 2001 ----------- ------- ------- ------- -------- -------- -------- (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenue: Software and related products................... $ 1,108 $ 1,117 $ 1,057 $ 2,773 $ 2,993 $ 395 $ 452 Services..................... -- -- -- 277 1,281 158 602 ------- ------- ------- ------- -------- -------- -------- Total revenue.............. 1,108 1,117 1,057 3,050 4,274 553 1,054 ------- ------- ------- ------- -------- -------- -------- Cost of revenue: Software and related products................... 880 1,142 1,017 2,388 2,063 295 227 Services..................... -- -- -- 538 1,958 255 950 Write-off of prepaid royalties.................. -- -- 1,381 -- -- -- -- ------- ------- ------- ------- -------- -------- -------- Total cost of revenue...... 880 1,142 2,398 2,926 4,021 550 1,177 ------- ------- ------- ------- -------- -------- -------- Gross margin (deficit)......... 228 (25) (1,341) 124 253 3 (123) ------- ------- ------- ------- -------- -------- -------- Operating expenses: Sales and marketing.......... 1,339 4,620 2,224 4,768 14,754 2,031 5,520 Research and development..... 826 2,136 1,489 2,302 4,954 965 1,869 General and administrative... 712 797 1,799 1,748 6,430 1,078 1,748
84 99
THREE MONTHS ENDED YEAR ENDED OCTOBER 31, JANUARY 31, ---------------------------------------------------- ------------------- 1996 1997 1998 1999 2000 2000 2001 ----------- ------- ------- ------- -------- -------- -------- (UNAUDITED) (UNAUDITED) SCO cost-sharing arrangement................ $ -- $ -- $ -- $ -- $ 898 $ -- $ 602 Non-cash compensation*....... -- -- -- 409 5,216 1,543 334 ------- ------- ------- ------- -------- -------- -------- Total operating expenses... 2,877 7,553 5,512 9,227 32,252 5,617 10,073 ------- ------- ------- ------- -------- -------- -------- Loss from operations........... (2,649) (7,578) (6,853) (9,103) (31,999) (5,614) (10,196) ------- ------- ------- ------- -------- -------- -------- Equity in loss of affiliate.... -- -- -- -- (387) -- (648) Other income (expense): Interest expense............. (133) (593) (1,081) (226) -- -- -- Interest income.............. -- -- -- 2 3,238 113 1,008 Gain on sale of assets to Ebiz, Inc.................. -- -- -- -- 2,306 -- -- Other income (expense)....... 25 23 5 (5) -- -- 20 ------- ------- ------- ------- -------- -------- -------- Other income (expense), net.... (108) (570) (1,076) (229) 5,544 113 1,028 ------- ------- ------- ------- -------- -------- -------- Loss before income taxes....... (2,757) (8,148) (7,929) (9,332) (26,842) (5,501) (9,816) Provision for income taxes..... -- -- (34) (35) (81) (12) (27) ------- ------- ------- ------- -------- -------- -------- Net loss....................... $(2,757) $(8,148) $(7,963) $(9,367) $(26,923) $ (5,513) $ (9,843) ======= ======= ======= ======= ======== ======== ======== Preferred stock dividends...... $ -- $ -- $ -- $ -- $(12,253) $(10,000) $ -- ======= ======= ======= ======= ======== ======== ======== Net loss attributable to common stockholders................. $(2,757) $(8,148) $(7,963) $(9,367) $(39,176) $(15,513) $ (9,843) ======= ======= ======= ======= ======== ======== ======== Basic and diluted net loss per common share................. $ (0.17) $ (0.51) $ (0.50) $ (0.51) $ (1.19) $ (0.63) $ (0.25) ======= ======= ======= ======= ======== ======== ======== Basic and diluted weighted average common shares outstanding.................. 16,000 16,000 16,000 18,458 32,922 24,780 39,588 ======= ======= ======= ======= ======== ======== ========
AS OF OCTOBER 31, AS OF ------------------------------------------------------- JANUARY 31, 1996 1997 1998 1999 2000 2001 ----------- ----------- ------- ------ -------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents............. $ 207 $ 398 $ 76 $ 122 $ 36,560 $28,359 Working capital (deficit)............. (122) 1,313 290 678 88,680 82,051 Total assets.......................... 1,639 3,915 16,353 3,714 107,518 96,640 Long-term liabilities................. -- -- -- 6 -- -- Predecessor's equity in carved-out operations.......................... 576 2,319 -- -- -- -- Total stockholders' equity............ -- -- 708 1,516 102,215 91,077
THREE MONTHS YEAR ENDED ENDED OCTOBER 31, JANUARY 31, ------------ ------------ 1999 2000 2000 2001 ---- ---- ---- ---- (UNAUDITED) (*)Non-cash compensation has been excluded from the following operating expenses: Sales and marketing................................... $177 $1,970 $487 $140 Research and development.............................. 103 1,146 364 133 General and administrative............................ 129 2,100 692 61
85 100 CALDERA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with Caldera's Consolidated Financial Statements and Notes thereto, included elsewhere in this joint proxy statement/prospectus. This discussion 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 joint proxy statement/prospectus. 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 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 in this joint proxy statement/ prospectus 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 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 combination, the majority of Caldera's revenue will continue to be derived from sales of eDesktop and eServer products. Subsequent to the closing of the combination, the majority of Caldera's revenues will be derived from sales of combined products resulting from the integration of Caldera's Linux products with the Unix server products and related applications that Caldera would acquire in conjunction with the acquisition of the server and professional services businesses. Related product sales are comprised of shipments of incomplete box units or documentation materials that customers request from time to time. 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 and system integrators, as well as directly to the end user using its internal sales and marketing force. Over time, Caldera's business model has evolved such that Caldera now sells primarily through its two-tier distribution channels. Caldera began offering Linux training, support and consulting services during fiscal 1999. Caldera markets its software and related products primarily in North America, Europe, Asia and Australia. Revenue from customers outside the United States was $56,000 in fiscal 1998, $203,000 in fiscal 1999, $1.3 million in fiscal 2000 and approximately $342,000 in the quarter ended January 31, 2001. 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. 86 101 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. Prior to November 1, 2000, sales to resellers for which payment was considered to be substantially contingent on the reseller's success in distributing individual units of the product or sales to resellers with which Caldera did not have historical experience were accounted for as consignments and the revenue was recognized once sell-through verification was received and payments from customers became due. Prior to October 31, 1999, Caldera did not have any consignment arrangements. During the year ended October 31, 2000, approximately 22% of product revenue was derived on a sell-through basis. Effective November 1, 2000, Caldera began to defer revenue recognition for products sold through the distribution channel until the products have been sold through the channel to the end user. The effect of this change was not material as of November 1, 2000, nor would it have been material to the net losses as presented in the accompanying statements of operations for the years ended October 31, 1998, 1999 and 2000. 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 are 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 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. Since inception, Caldera has incurred substantial research and development costs and has invested heavily in the expansion of its sales, marketing 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 January 31, 2001, had incurred total net losses of approximately $66.3 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 1999 and 2000, Caldera recorded deferred compensation of $3.1 million and $6.8 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 $409,000 of deferred compensation in fiscal 1999, $5.2 million in fiscal 2000 and $334,000 during the quarter ended January 31, 2001. 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. 87 102 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 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. 88 103 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 royalties and tuition 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. Also included are the costs associated with outside contractors. 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. 89 104 The following table sets forth certain statement of operations data as a percentage of total revenue for the years indicated:
THREE MONTHS YEAR ENDED OCTOBER 31, ENDED JANUARY 31, -------------------------- ------------------ 1998 1999 2000 2000 2001 ------ ------ ------ -------- ------ Revenue: Software and related products............... 100.0% 90.9% 70.0% 71.4% 42.9% Services.................................... -- 9.1 30.0 28.6 57.1 ------ ------ ------ -------- ------ Total revenue............................ 100.0 100.0 100.0 100.0 100.0 ------ ------ ------ -------- ------ Cost of Revenue: Software and related products............... 96.2 78.3 48.3 53.3 21.5 Services.................................... -- 17.6 45.8 46.1 90.2 Other....................................... 130.7 -- -- -- -- ------ ------ ------ -------- ------ Total cost of revenue.................... 226.9 95.9 94.1 99.4 111.7 ------ ------ ------ -------- ------ Gross (deficit) margin........................ (126.9) 4.1 5.9 0.6 (11.7) ------ ------ ------ -------- ------ Operating Expenses: Sales and marketing (exclusive of non-cash compensation)............................ 210.4 156.3 345.2 367.1 523.9 Research and development (exclusive of non-cash compensation)................... 140.8 75.5 115.9 174.4 177.4 General and administrative (exclusive of non-cash compensation)................... 170.2 57.3 150.4 195.0 165.9 Other....................................... -- 13.4 143.0 278.8 88.8 ------ ------ ------ -------- ------ Total operating expenses................. 521.4 302.5 754.5 1,015.3 956.0 ------ ------ ------ -------- ------ Loss from operations.......................... (648.3) (298.4) (748.6) (1,014.7) (967.7) Equity in loss of affiliate................... -- -- (9.1) -- (61.4) Other (expense) income, net................... (101.8) (7.5) 129.7 20.4 97.5 ------ ------ ------ -------- ------ Loss before income taxes...................... (750.1) (305.9) (628.0) (994.3) (931.6) Provision for income taxes.................... (3.2) (1.1) (1.9) (2.3) (2.6) ------ ------ ------ -------- ------ Net loss...................................... (753.3) (307.0) (629.9) (996.6) (934.2) ====== ====== ====== ======== ====== Dividends related to convertible preferred stock....................................... -- -- (286.7) (1,807.7) -- ====== ====== ====== ======== ====== Net loss attributable to common stockholders................................ (753.3)% (307.0)% (916.6)% (2,804.3)% (934.2)% ====== ====== ====== ======== ======
FISCAL YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000 Revenue Revenue was $1.1 million for fiscal 1998, $3.1 million for fiscal 1999 and $4.3 million for fiscal 2000. During fiscal 1998, all revenue was derived from our software and related products offerings. During fiscal 1999, approximately 91 percent of our revenue was generated from the sale of software and related products. During fiscal 2000, approximately 70 percent of our revenue was generated from the sale of software and related products. Although 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 5 percent in fiscal 1998, 7 percent in fiscal 1999 and 30 percent in fiscal 2000. 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 $1.1 million in fiscal 1998, $2.8 million in fiscal 1999 and $3.0 million in fiscal 2000, representing an increase of $1.7 million, or 162 percent, from fiscal 1998 to fiscal 1999 and a $221,000, or 8 percent, increase from fiscal 1999 to fiscal 2000. The increase in software and related products revenue from fiscal 1998 to fiscal 1999 was a result of management's expansion of sales and marketing efforts, as well as the increased market awareness of the 90 105 Linux operating system. The increase in software and related products revenue from fiscal 1999 to fiscal 2000 was due to improved sales and marketing strategies. Sales to customers in international locations also generated increased software and related products revenue in fiscal 2000 over the prior period. Services. Services revenue was $0 in fiscal 1998, $277,000 in fiscal 1999 and $1.3 million in fiscal 2000, 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 $1.0 million in fiscal 1998, $2.4 million in fiscal 1999 and $2.1 million in fiscal 2000, representing an increase of $1.4 million, or 135 percent, from fiscal 1998 to fiscal 1999 and a decrease of $326,000, or 14 percent, from fiscal 1999 to fiscal 2000. On a percentage basis of related revenue, cost of software and related products revenue was 96 percent in fiscal 1998, 86 percent in fiscal 1999 and 67 percent in fiscal 2000. 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. The decrease in the cost of software and related products revenue percentage from fiscal 1999 to fiscal 2000 was due to increased efficiencies in the production and fulfillment process as well as from reduced charges for obsolete inventory. 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. 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 due to changes in product packaging. The Company has continued to sell OpenLinux 2.3 since the introduction of OpenLinux eDesktop 2.4. None of the reserved inventory will be scrapped, abandoned or disposed of until sales of OpenLinux 2.3 are terminated. Cost of Services Revenue. Cost of services revenue was $0 in fiscal 1998, $538,000 in fiscal 1999 and $2.0 million in fiscal 2000, 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 electronic Linux marketplace program. As a percentage of services revenue, cost of services was 194 percent of services revenue in fiscal 1999 and 153 percent of services revenue in fiscal 2000. The marginal improvement from fiscal 1999 to fiscal 2000 was due to increased revenue from services activities. The deficit achieved on services revenue is materially different from the margins on 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, New 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 91 106 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 $2.2 million in fiscal 1998, $4.8 million in fiscal 1999 and $14.8 million in fiscal 2000, representing an increase of $2.5 million, or 114 percent, from fiscal 1998 to fiscal 1999 and an increase of $10.0 million, or 209 percent, from fiscal 1999 to fiscal 2000. Sales and marketing expenses represented 210 percent of total revenue in fiscal 1998, 156 percent of total revenue in fiscal 1999 and 345 percent of total revenue in fiscal 2000. 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. Sales and marketing expenses are expected to continue to increase in the future, and upon consummation of the server software and professional services groups acquisition in an effort to increase awareness of Linux, Unix and combined products and related offerings. Research and Development. Research and development expenses were $1.5 million in fiscal 1998, $2.3 million in fiscal 1999 and $5.0 million in fiscal 2000, representing an increase of $813,000, or 55 percent, from fiscal 1998 to fiscal 1999 and an increase of $2.7 million, or 115 percent, from fiscal 1999 to fiscal 2000. Research and development costs represented 141 percent of total revenue in fiscal 1998, 76 percent of total revenue in fiscal 1999 and 116 percent of total revenue in fiscal 2000. The increase in research and development expenses from fiscal 1998 to fiscal 1999 and from fiscal 1999 to fiscal 2000 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 $1.8 million in fiscal 1998, $1.7 million in fiscal 1999, and $6.4 million in fiscal 2000, representing a decrease of $51,000, or 3 percent, from fiscal 1998 to fiscal 1999 and an increase of $4.7 million, or 268 percent, from fiscal 1999 to fiscal 2000. General and administrative expense represented 170 percent of total revenue in fiscal 1998, 57 percent of total revenue in fiscal 1999 and 150 percent of total revenue in fiscal 2000. 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. 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, administration, legal, human resources and information systems consistent with our growth in headcount and overall business. Other increases in general and administrative expenses were for increased professional services and facilities costs. 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 through December 2000. Accordingly, as of October 31, 2000, Caldera has accrued $898,026. Caldera will record the remaining 92 107 $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 1999 and fiscal 2000, Caldera recorded deferred compensation of $3.1 million and $6.8 million, respectively. During fiscal 1999 and fiscal 2000, Caldera amortized $409,000 and $5.2 million, 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 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 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 $(1.1) million in fiscal 1998, $(228,000) in fiscal 1999 and $5.5 million in fiscal 2000. The decrease in 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. 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, interest earned on the proceeds from the initial public offering and a gain recognized on the sale of the electronic Linux marketplace assets. Income Taxes For fiscal years 1998, 1999 and 2000, Caldera's German subsidiary, Caldera Deutschland, GmbH, incurred income tax expense of $34,000, $35,000 and $81,000, 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 net 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. 93 108 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, Caldera 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 Caldera'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. THREE-MONTH PERIODS ENDED JANUARY 31, 2000 AND 2001 Revenue Our revenue was $553,000 for the three-month period ended January 31, 2000 and $1.1 million for the three-month period ended January 31, 2001. During the three-month period ended January 31, 2000, approximately 71 percent of our revenue was generated from the sale of software and related products. During the three-month period ended January 31, 2001, approximately 43 percent of our revenue was generated from the sale of software and related products. Revenue from international customers was approximately 29 percent of total revenue for the three-month period ended January 31, 2000 and approximately 32 percent of total revenue for the three-month period ended January 31, 2001. Software and Related Products. Our software and related products revenue was $395,000 for the three-month period ended January 31, 2000 and $452,000 for the three-month period ended January 31, 2001, an increase of $57,000, or 15%. The increase during the three-month period ended January 31, 2001 is primarily attributed to the release of Caldera Volution, our second eBusiness product that was released late in January 2001. During the three-month period ended January 31, 2001 revenue from corporate and OEM customers exceeded our revenue from retail sales as Caldera has continued to focus on corporate and OEM accounts while competition and pricing pressures have continued to weaken retail sales. Services. Our services revenue was $158,000 for the three-month period ended January 31, 2000 and $601,000 for the three-month period ended January 31, 2001, an increase of $443,000, or 280%. The increase in services revenue over the same three-month period of the prior year was primarily attributed to our increased education and training-related offerings as well as from promotional fees received from our Linux training program tour. Caldera expects that quarterly services revenue for the duration of fiscal 2001 will be lower than services revenue generated in the first quarter of fiscal 2001. The trend of increased services revenue experienced in fiscal 2000 and in the first quarter of 2001 is not expected to continue throughout fiscal 2001 as Caldera believes that future Linux training program tours will not be offered. Cost of Revenue Cost of Software and Related Products Revenue. Our cost of software and related products revenue was $295,000 for the three-month period ended January 31, 2000 and $227,000 for the three-month period ended January 31, 2001, a decrease of $68,000, or 23%. Cost of software and related products revenue as a percentage of software and related products revenue was 75% for the three-month period ended January 31, 2000 and 50% for the three-month period ended January 31, 2001. The decrease as a percentage of software and related products revenue is attributed to the release of Caldera Volution and our focus on corporate and OEM accounts which have a higher gross margin percentage. In addition, we recorded an inventory reserve of approximately $43,000 during the three-month period ended January 31, 2000. Cost of Services Revenue. Our cost of services revenue was $255,000 for the three-month period ended January 31, 2000 and $950,000 for the three-month period ended January 31, 2001, an increase of $695,000, or 272%. The increase in cost of services revenue was due in part to additional employees and 94 109 other internal costs to increase our support offerings as well as for costs related to our Linux training program. Cost of services revenue as a percentage of services revenue was 161% for the three-month period ended January 31, 2000 and 158% for the three-month period ended January 31, 2001. Operating Expenses Sales and Marketing. Our sales and marketing expenses were $2.0 million for the three-month period ended January 31, 2000 and $5.5 million for the three-month period ended January 31, 2001, an increase of $3.5 million, or 172%. The increase was primarily attributed to additional marketing expenses in anticipation of our acquisition of the server software and professional services groups of SCO, marketing expenses related to the launch and release of Caldera Volution, attendance at two major Linux tradeshows and increased personnel costs. Research and Development. Our research and development expenses were $1.0 million for the three-month period ended January 31, 2000 and $1.9 million for the three-month period ended January 31, 2001, an increase of $904,000, or 94%. The increase in research and development expenses was primarily attributed to payroll costs and related benefits for additional employees for software development and quality assurance as our research and development staff increased from 36 as of January 31, 2000 to 62 as of January 31, 2001. General and Administrative. Our general and administrative expenses were $1.1 million for the three-month period ended January 31, 2000 and $1.7 million for the three-month period ended January 31, 2001, an increase of $669,000, or 62%. The increase in expenses was mainly attributed to increased salaries and benefits for additional general and administrative employees and increased facilities and related costs consistent with our growth in personnel and overall business. 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, Caldera and SCO agreed that Caldera would reimburse SCO for certain employee payroll and related costs. Caldera agreed to reimburse SCO for costs related to certain 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 combination. 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 through December 2000. Accordingly, as of October 31, 2000, Caldera accrued $898,026. Caldera recorded the remaining $601,974 during the three-month period ended January 31, 2001. Caldera made the $1.5 million payment to SCO on January 26, 2001. Non-cash Compensation. In connection with stock options granted to employees, we amortized $1.5 million of deferred compensation during the three-month period ended January 31, 2000 and we amortized approximately $334,000 of deferred compensation during the three-month period ended January 31, 2001. Equity in Loss of Affiliate Through January 5, 2001, Caldera accounted for its investment in Ebiz Enterprises, Inc. ("Ebiz") using the equity method of accounting. Under the equity method, Caldera recognized its portion of the net income or net loss of Ebiz in its consolidated statement of operations. For the three months ended January 31, 2001, Caldera recognized approximately $431,000 in its statement of operations that represented its portion of Ebiz's net loss for the period from October 31, 2000 through January 5, 2001. Additionally, because Ebiz had a stockholders' deficit at the time of Caldera's investment, Caldera was 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 three months ended January 31, 2001, Caldera recognized approximately $217,000 of amortization in connection with its investment in Ebiz. 95 110 During the three-month period ended January 31, 2001, Caldera's ownership interest in Ebiz was 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. Subsequent to January 5, 2001, Caldera has accounted for its investment as an available-for-sale security in accordance with SFAS 115. Under SFAS 115, Caldera carries its investment at fair market value using quoted trading prices. As of January 31, 2001, Caldera had an unrecognized loss of approximately $2.3 million as a component of other comprehensive loss. Other Income (Expense), net Other income (expense), net consists primarily of interest income received on cash and cash equivalents. Interest income was $113,000 during the three-month period ended January 31, 2000 and $1.0 million during the three-month period ended January 31, 2001. The increase is related to higher cash balances during the period ended January 31, 2001. Provision for Income Taxes For the three-month periods ended January 31, 2000 and 2001, our subsidiary, Caldera Deutschland, GmbH, incurred income tax expense of $13,000 and $27,000, respectively. 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 joint proxy statement/prospectus. 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 --------------------------------------------------------------------------------------------- APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, 1999 1999 1999 2000 2000 2000 2000 2001 --------- -------- -------- -------- --------- -------- ----------- ----------- (IN THOUSANDS) Revenue: Software and related products........ $ 482 $ 1,008 $ 775 $ 395 $ 1,123 $ 631 $ 845 $ 452 Services........... 62 87 98 158 238 557 327 602 ------- ------- ------- -------- ------- ------- ------- -------- Total revenue... 544 1,095 873 553 1,361 1,188 1,172 1,054 ======= ======= ======= ======== ======= ======= ======= ======== Gross margin (deficit).......... 139 117 (397) 3 279 (43) 14 (123) Operating loss....... (1,725) (2,097) (4,469) (5,614) (7,726) (8,808) (9,851) (10,196) Net loss............. (1,753) (2,157) (4,465) (5,513) (6,992) (7,531) (6,887) (9,843) Net loss to common stockholders....... (1,753) (2,157) (4,465) (15,513) (9,245) (7,531) (6,887) (9,843) Basic and diluted net loss per common share.............. $ (0.11) $ (0.13) $ (0.17) $ (0.63) $ (0.32) $ (0.19) $ (0.18) $ (0.25) Weighted average basic and diluted common shares 16,000 16,232 25,518 24,780 28,602 39,037 39,176 39,588
96 111 FLUCTUATIONS IN QUARTERLY RESULTS Historically, Caldera has experienced substantial fluctuations in revenues 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 revenues 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. Software and related products revenue increased during the quarter ended October 31, 2000 from the prior quarter even though a new product release was not made. Most recently, software and related product revenue decreased during the quarter ended January 31, 2001. In addition, Caldera anticipates that product revenue for the quarter that will end April 30, 2001 may be significantly lower than product revenue compared to the prior quarter. 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 tour during the October 31, 2000 quarter, but did hold the Linux training program tour during the first quarter of fiscal 2001. Caldera expects that quarterly services revenue for the duration of fiscal 2001 will be lower than services revenue generated in the first quarter of fiscal 2001. The trend of increased services revenue experienced in fiscal 2000 and in the first quarter of 2001 is not expected to continue throughout fiscal 2001 as Caldera believes that future Linux training program tours will not be offered. 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; - 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. 97 112 As a result of the factors listed above and elsewhere in the "Risk Factors" section of this joint proxy statement/prospectus, 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. ACQUISITION OF THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS The acquisition of the server and professional services groups is expected to significantly increase the net revenue and operating expenses of New Caldera for the next twelve months and future periods. Pro forma combined net revenue and operating expenses were $143.5 million and $183.2 million, respectively, for the year ended October 31, 2000 as compared to $4.3 million and $32.3 million, respectively, for Caldera. Pro forma combined net revenue and operating expenses of New Caldera were $24.9 million and $34.0 million, respectively, for the three months ended January 31, 2001, compared to $1.1 million and $10.1 million, respectively, for Caldera. Upon consummation of the combination, New Caldera is expected to have over 700 employees as compared to Caldera's 192 employees as of January 31, 2001. The results of operations for New Caldera for fiscal 2001 and future periods will also include non-cash charges for the amortization of goodwill and other intangibles of approximately $5.3 million per quarter for the first three years and $3.5 million per quarter for the next two years. In connection with the acquisition of the server and professional services groups, New Caldera anticipates additional working capital requirements to fund the acquired operations. During the year ended September 30, 2000 and the three months ended December 31, 2000, the server and professional services groups used approximately $24.9 million and $4.9 million, respectively, in cash for operating activities. Although New Caldera hopes to reduce employee headcount and generate other cost reductions and efficiencies from the acquisition to minimize the negative impact on working capital, it may not be successful in attaining such cost reductions and efficiencies. Additionally, New Caldera will not acquire certain working capital accounts such as cash, accounts payable or the majority of accounts receivable. As a result, New Caldera will be required to provide all working capital for the initial 30 to 60 days of operations. However, management believes that New Caldera has sufficient available working capital to meet its operating needs for at least the next 12 months. 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 January 31, 2001, we had cash and cash equivalents and available-for-sale securities of $78.7 million and working capital of $82.1 million. Decreases in cash and cash equivalents and working capital from October 31, 2000 were the result of cash used in operations of approximately $7.2 million, a cost-sharing payment to SCO of $1.5 million and an advance of $7.0 million to SCO as part of the consideration for the server and professional services groups. Our net cash used in operations during the three-month period ended January 31, 2001 was $7.2 million. Cash used in operations was primarily attributed to the net loss of $9.8 million. The net loss was partially offset by non-cash charges for the amortization of deferred compensation, depreciation and amortization and equity in loss of affiliate. 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 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 98 113 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. During the three-month period ended January 31, 2001, cash used in investing activities was $1.4 million. The primary uses of cash during the three-month period ended January 31, 2001 were for a $7.0 million payment made to SCO as part of the consideration for the combination as well as costs paid for capital expenditures and acquisition costs partially offset by the net proceeds received from the purchase and sale of available-for-sale securities. We anticipate that we will experience an increase in the level of our capital expenditures, lease commitments and investment activities as we grow our operations. 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 common stock and paid $1.4 million for property and equipment. Capital expenditures totaled $587,000 in 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 SCO server software and professional services groups. Our financing activities provided approximately $250,000 during the three-month period ended January 31, 2001 as a result of the exercise of vested stock options. 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 (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 $7 million to SCO in the form of a 10% interest-bearing 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 New Caldera and SCO as a portion of the cash 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. Upon completion of the combination, Caldera will pay SCO $23 million (of which $7 million was advanced as described above on January 26, 2001) and issue a non-interest bearing promissory note for 99 114 $8 million that will be paid in quarterly installments of $2 million beginning in the fifth quarter after the combination is completed. As of January 31, 2001, Caldera had no outstanding debt obligations. Caldera's accounts receivable balance decreased from $1.5 million as of October 31, 2000 to $840,000 as of January 31, 2001, a decrease of $705,000. The decrease in accounts receivable relates to collections of customer balances as well as an increase in Caldera's reserve for sales returns. The allowance for doubtful accounts decreased from $312,000 as of October 31, 2000 to $225,000 as of January 31, 2001, a decrease of $87,000. As a percentage of total accounts receivable, the allowance increased slightly from 17 percent as of October 31, 2000 to 21 percent as of January 31, 2001, as Caldera increased its general provision for uncollectable accounts as a result of concerns related to certain past due accounts. On September 15, 2000, Caldera sold to Ebiz Enterprises, Inc. 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 approximately $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% 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 short-term investments 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. Additionally, Caldera may use cash more rapidly to provide working capital for the SCO server software and professional services groups following the consummation of the acquisition. 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, became effective for Caldera beginning November 1, 2000. The adoption of this statement did not 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. Caldera adopted SAB 101 during the quarter ended January 31, 2000. The adoption of SAB 101, did not have a material impact on Caldera's results of operations, financial position or liquidity. QUALITATIVE AND QUANTITATIVE 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 100 115 could be affected by changes in foreign currency exchange rates or weak economic conditions in foreign markets. Because all of the Caldera's revenues are currently denominated in U.S. dollars, a strengthening of the dollar could make its Linux products less competitive in foreign markets. Caldera's German subsidiary, Caldera Deutschland, GmbH, performs research and development activities for us. This subsidiary is currently Caldera's only foreign subsidiary. 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 January 31, 2001, the assets of Caldera Deutschland were approximately $953,000. 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. FOREIGN CURRENCY RISK New Caldera intends generally to maintain the foreign offices and operations of the server and professional services groups that are in place at the closing of the combination. As a result of the acquisition of the server and professional services groups, substantial portions of New Caldera's revenue will be derived from sales to customers outside the United States. A substantial portion of this international revenue will be denominated in U.S. dollars. However, a substantial portion of the operating expenses related to the foreign-based sales will be denominated in foreign currencies and therefore operating results will be affected by changes in the U.S. dollar exchange rate in relation to foreign currencies such as the U.K. pound sterling and the Euro, among others. If the U.S. dollar weakens compared to the U.K. pound sterling and the Euro, then operating expenses of foreign operations will be higher when translated back into U.S. dollars and may require additional funds to meet these obligations. New Caldera's revenue can also be affected by general economic conditions in the United States, Europe and other international markets. Historically, the server and professional services groups' operating strategy and pricing take into account changes in exchange rates over time. However, New Caldera's results of operations may be significantly affected in the short term by fluctuations in foreign currency exchange rates. New 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 have been required to ensure that their financial and other software systems are capable of processing transactions and properly handling these currencies, including the Euro. The server and professional services groups have done a preliminary assessment of the impact that the EMU formation is having and will continue to have on both its internal systems and the products it sells and has commenced appropriate actions. New 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 New 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 affected by fluctuations in the U.S. dollar-Euro exchange rates because the level of activity denominated in Euros has not been significant. However, 101 116 New Caldera will have more significant sales in the EMU. If the Euro continues to weaken against the U.S. dollar, New Caldera's sales may be adversely impacted because customers may require additional funds to settle revenue transactions denominated in U.S. dollars or New Caldera may be required to lower prices of its products in countries using the Euro in order to maintain consistent and competitive pricing in foreign locations. Historically, the server and professional services groups have entered into forward foreign exchange contracts to hedge foreign currency exposure for underlying assets, liabilities and other obligations. All forward contracts entered into by the server and professional services groups are components of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated currency exposure, not for speculation or trading purposes. New Caldera expects to continue to hedge against the impact of foreign currency fluctuations through the use of forward foreign exchange contracts. There can be no assurance that Caldera will not experience fluctuations in operating results or financial position as a result of these hedging activities. 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 January 31, 2001, available-for-sale securities included money market instruments, tax-exempt municipal funds, notes, and bonds, US government security backed instruments and our investment in Ebiz Enterprises, Inc. Caldera does not borrow money for short-term investment purposes. 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% and Caldera is not able to exercise significant influence over operations. Caldera's only investment to date in a public company is in Ebiz Enterprises, Inc., 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. 102 117 SELECTED FINANCIAL DATA OF THE SANTA CRUZ OPERATION, INC. (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following selected historical financial information of The Santa Cruz Operation, Inc. ("SCO") as of September 30, 1999 and 2000 and for each of the three years in the period ended September 30, 2000 has been derived from audited historical consolidated financial statements and should be read in conjunction with such financial statements and the notes incorporated herein by reference. Historical statement of operations data for periods prior to October 1, 1997 and balance sheet data prior to September 30, 1999, for SCO, are derived from financial statements not incorporated herein by reference. The selected historical financial information of SCO as of December 31, 2000 and for the three months ended December 31, 1999 and 2000 has been derived from unaudited financial statements of SCO, which are incorporated herein by reference. In the opinion of management, the unaudited financial statements include all adjustments, consisting of normal recurring adjustments, which SCO considers necessary for a fair presentation of the results of operations for these periods. The results for the three months ended December 31, 2000 are not necessarily indicative of the results to be expected for the entire year.
THREE MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31, ---------------------------------------------------- ------------------------- STATEMENT OF OPERATIONS DATA: 1996 1997 1998 1999 2000 1999 2000 ----------------------------- -------- -------- -------- -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) Net revenues.............. $207,890 $193,660 $171,900 $223,624 $148,923 $53,653 $26,455 Gross margin.............. 153,488 138,345 124,804 173,846 107,127 41,821 19,374 Operating income (loss)... (23,581) (16,594) (13,593) 16,373 (51,233) 2,108 (7,656) Net income (loss)......... (22,414) (15,170) (14,665) 16,858 (56,953) 2,875 (7,897) Net income (loss) per share -- basic....... $ (0.62) $ (0.41) $ (0.41) $ 0.49 $ (1.59) $ 0.08 $ (0.20) Net income (loss) per share -- diluted..... $ (0.62) $ (0.41) $ (0.41) $ 0.46 $ (1.59) $ 0.07 $ (0.20) Shares used in per share calculation -- basic... 36,179 36,628 35,817 34,232 35,720 34,713 39,443 Shares used in per share calculation -- diluted.............. 36,179 36,628 35,817 36,402 35,720 41,258 39,443
SEPTEMBER 30, --------------------------------------------------- DECEMBER 31, BALANCE SHEET DATA: 1996 1997 1998 1999 2000 2000 ------------------- -------- -------- -------- -------- ------- ------------ (UNAUDITED) Cash and cash equivalents and short-term investments.......... $ 54,831 $ 51,711 $ 51,076 $ 62,844 $26,446 $13,109 Working capital........ 61,935 46,164 32,221 44,813 16,654 8,961 Total assets........... 166,807 146,665 131,189 139,284 82,202 63,206 Long-term liabilities, net of current portion.............. 9,332 9,545 12,027 11,094 5,462 5,488 Shareholders' equity... 101,581 81,462 60,135 70,338 31,202 20,101
103 118 SELECTED FINANCIAL DATA OF THE SERVER AND PROFESSIONAL SERVICES GROUPS (IN THOUSANDS) The following selected historical financial data for the server and professional services groups as of September 30, 1999 and 2000 and for each of the three years in the period ended September 30, 2000 are derived from, and qualified by reference to, the audited carve out financial statements and related notes appearing elsewhere in this joint proxy statement/prospectus. The selected statement of operations data for the three months ended December 31, 1999 and 2000 and the balance sheet data as of December 31, 2000 are derived from unaudited carve out financial statements included elsewhere in this joint proxy statement/prospectus. In the opinion of management, the selected financial data for the three months ended December 31, 1999 and 2000 has been prepared on the same basis as the audited carve out financial statements and includes all adjusting entries, consisting only of normal recurring adjustments, necessary for a fair presentation of the server and professional services groups financial position and results of operations for such periods. For purposes of presenting the financial statements of the server and professional services groups, the related operations have been segregated or "carved-out" from the historical financial statements of SCO. Accordingly, the financial statements of the server and professional services groups included in this joint proxy statement/prospectus and the selected financial data present the financial condition and results of operations as if the server and professional services groups 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 the server and professional services groups existed as a separate legal entity and any historical results are not necessarily indicative of results that may be expected for any future period.
THREE MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER, 31, ------------------------------------------------------------- ------------------------- STATEMENT OF OPERATIONS DATA: 1996 1997 1998 1999 2000 1999 2000 ----------------------------- ----------- ----------- ----------- -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Net revenues.............. $190,989 $181,915 $162,720 $214,083 $139,632 $50,780 $23,887 Gross margin.............. 139,809 128,815 118,239 165,558 98,221 38,976 16,845 Net income (loss)......... (20,640) (8,508) (12,576) 19,867 (41,075) 2,072 (1,795)
SEPTEMBER 30, ------------------------------------------------------------- DECEMBER 31, BALANCE SHEET DATA: 1996 1997 1998 1999 2000 2000 ------------------- ----------- ----------- ----------- -------- -------- ------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Cash and cash equivalents......... $ -- $ -- $ 3,517 $ 2,223 $ 511 $ 69 Working capital deficit............. (7,295) (6,775) (14,651) (14,261) (13,292) (7,933) Total assets.......... 102,995 84,553 73,355 70,117 40,051 36,052 Long-term liabilities, net of current portion............. 6,540 5,787 7,703 7,031 2,020 2,036 Divisional surplus (deficit) and accumulated other comprehensive loss................ 42,743 24,298 9,161 8,932 (2,201) 1,206 -------- -------- --------- -------- -------- -------
104 119 SERVER AND PROFESSIONAL SERVICES GROUPS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2000 and for the three months ended December 31, 1999 and 2000 should be read in conjunction with the sections of the server and professional services groups' unaudited financial statements and related notes included elsewhere in this joint proxy statement/prospectus. In addition, the portion of this Management's Discussion and Analysis of Financial Condition and Results of Operations as of September 30, 2000 and for the years ended September 30, 1998, 1999 and 2000 should be read in conjunction with the sections of the server and professional services groups' audited financial statements and related notes included elsewhere in this joint proxy statement/prospectus. OVERVIEW On August 2, 2000, SCO announced that it had reached an agreement with Caldera under which Caldera would purchase for stock and cash SCO's server and professional services groups. The plan of reorganization was subsequently amended on September 13, 2000, December 17, 2000 and February 9, 2001. Under the terms of the reorganization agreement, as amended, Caldera has agreed to purchase the SCO server and professional services groups (the "Groups"), including its employees, products, technology rights and channel resources. In exchange SCO will receive 16 million shares of Caldera common stock, $23 million in cash and a promissory note for $8 million. This promissory note will be payable in 4 equal quarterly installments beginning the fifth quarter after the combination is completed. SCO will retain its Tarantella Division. In addition, if the OpenServer line of business of the server and professional services groups generates revenues in excess of specified thresholds during the three-year period following the completion of the combination, SCO will have earn-out rights entitling it to receive 45% of these excess revenues. The server and professional services groups operate as a global leader in server software for networked business computing, and the world's leading provider of UNIX(R) server operating systems. The server and professional services groups sell and support their products through a worldwide network of more than 15,000 distributors, resellers, system integrators and OEMs. The mission of the server and professional services groups is to create, market and support the server software that system builders choose for networked business computing. SCO believes that server-based network computing, which is based on Internet and web technologies, enables businesses to dramatically improve their customer information flow and business transaction efficiencies. Companies that adopt a server-based network computing model can understand their customers better, reach wider potential markets, bring products to market faster and improve their overall customer satisfaction levels. With server-based computing and products and services of the server and professional services groups, IT professionals can immediately leverage their existing investments, deploy applications faster and dramatically cut the cost of systems administration and management. In addition to historical information contained herein, this discussion and analysis contains forward-looking statements. These statements involve risks and uncertainties and can be identified by the use of forward-looking terminology such as "estimates," "projects," "anticipates," "plans," "future," "may," "will," "should," "predicts," "potential," "continue," "expects," "intends," "believes," and similar expressions. Examples of forward-looking statements include those relating to financial risk management activities and the adequacy of financial resources for operations. These and other forward-looking statements are only estimates and predictions. While SCO believes that the expectations reflected in the forward-looking statements are reasonable, the Groups' actual results could differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's expectations only as of the date hereof. SCO undertakes no obligation to publicly release the results of any 105 120 revision to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. RESULTS OF OPERATIONS NET REVENUES The net revenues of the server and professional services groups are derived from software licenses and fees for services, which include engineering services, consulting, custom engineering, support and training. Product license revenues are recognized upon shipment, provided a signed contract exists, the fee is fixed and determinable, collection is probable and returns can be reasonably estimated. An estimate for product returns is made upon recognition of revenue from customers having return rights. For sales through distributors we do not have the data to reasonably estimate returns and therefore recognize revenue when this right elapses, which occurs upon a sale by the distributor. Net revenues for the three months ended December 31, 2000 decreased to $23.9 million from $50.8 million in the same period in fiscal 2000. Net revenues for fiscal 2000 decreased to $139.6 million compared to $214.1 million in the same period in fiscal 1999. The fiscal 2001 decline in net revenue performance was worldwide across all geographies and is attributable to fewer large project deals, as well as other market factors. The Groups were directly impacted by the reduction in information technology ("IT") investments by companies for application server software and service initiatives. Further, the Groups are experiencing the impact of being involved in a protracted transaction involving the sale of the Groups. The fiscal 2000 decline in revenue performance is attributable to customer delays and a slower than expected recovery of the customer channel from the impact of Year 2000. Net revenues for fiscal 1999 increased by 32% from $162.7 million in fiscal 1998. The stronger revenue performance in fiscal 1999 was across all geographies and is attributable to several factors including the ease of electronic licensing, increased customer contacts as a result of added sales resources and Y2K upgrade sales. For the three months ended December 31, 2000 and 1999 and for the fiscal years ended September 30, 2000, 1999 and 1998, no single customer accounted for greater than 10% of the net revenues of the server and professional services groups. License Revenues. License revenues for the three months ended December 31, 2000 were $20.5 million compared to $46.7 million for the same period of fiscal 2000. License revenues were $124.9 million for fiscal 2000 compared to $199.3 million for the same period of fiscal 1999. The decline in fiscal 2001 is attributed to delays in large project deals as well as the impact of being involved in a protracted transaction involving the sale of the Groups. The fiscal 2000 decrease resulted from customer delays due to Year 2000 issues and a slower than expected recovery of the customer channel from the impact of Y2K. License revenue for fiscal 1999 increased by 34% compared to $148.3 million in fiscal 1998. The fiscal 1999 revenue performance is due to strong revenue in all geographies, growing electronic licensing sales, Y2K upgrade sales, and increased customer contacts due to higher sales resources. Service Revenues. Services revenues for the three month period ended December 31, 2000 were $3.3 million compared to $4.1 million in fiscal 2000. Service revenues were $14.7 million in fiscal 2000 compared with $14.8 million in fiscal 1999 and $14.4 million in fiscal 1998. The fiscal 2001 decline of $0.8 million was primarily due to customer delays in implementing services. Service revenues represented 14% of total revenue for the first three months of fiscal 2001 compared to 8% of total revenues in the same three month period of fiscal 2000. Service revenues represented 11% of total revenue for fiscal 2000, 7% for fiscal 1999 and 9% for fiscal 1998. COST OF REVENUES The server and professional services groups' overall cost of revenues as a percentage of net revenues can be affected by mix changes in net revenue contribution between product families, geographic regions and channels of distribution, since both price and cost characteristics associated with these revenue streams can vary greatly. The server and professional services groups can also experience fluctuations in gross 106 121 margin as net revenues increase or decrease since certain costs of revenues including technology, service, product assembly and distribution act as fixed costs within certain volume ranges. Cost of License Revenues. Cost of license revenues includes royalties paid to certain software vendors, amortization of acquired technologies, product packaging, documentation and all costs associated with the acquisition of components, assembling of finished products, warehousing and shipping. Cost of license revenues decreased to $3.7 million in the three months ending December 31, 2000 from $6.9 million in the same period of fiscal 2000. Cost of license revenues as a percentage of license revenues increased to 18% for the three month period ending December 31, 2000 from 15% in the same period of fiscal 2000. Cost of license revenues was $22.9 million in fiscal 2000, a decline of 24% when compared to the cost of license revenues of $30.0 million in fiscal 1999. Cost of license revenues as a percentage of license revenues increased to 18% for fiscal 2000 compared to 15% for fiscal 1999. Cost of license revenues was $27.7 million, or 19% of license revenues, in fiscal 1998. The declining cost of license revenues is primarily due to lower sales. The fiscal 2001 and 2000 cost of revenues includes increases as a result of the impact of fixed costs over lower unit sales volume. These fixed costs include technology and overhead costs. This impact is offset by declining material costs resulting from the continuing growth of e-commerce business. The fiscal 1999 percentage decrease resulted from reduced royalty rates and reduced technology costs together with the impact of stable fixed costs over higher unit sales volume. In addition, material costs declined as a result of increasing e-commerce trade. Cost of Service Revenues. Cost of service revenues includes documentation, consulting and personnel related expenses associated with providing such services. Cost of service revenues for the three months ended December 31, 2000 decreased by 31% to $3.4 million compared to $4.9 million in the same period of fiscal 2000. Cost of service revenues was $18.5 million for fiscal 2000 as compared to $18.6 million for fiscal 1999 and $16.8 million for fiscal 1998. The fiscal 2001 decline is primarily a result of reduced staffing levels in both the support and professional services organizations due to realignments of these organizations. The fiscal 1999 increase was a result of increased staffing levels in the professional services area as part of an effort by SCO to improve visibility to customers. RESEARCH AND DEVELOPMENT SCO invests in research and development both for new products and to provide continuing enhancements to current products of the server and professional services groups. Research and developments expenses were $4.8 million in the three months ending December 31, 2000, a decrease of 48% when compared to $9.3 million in the same period of fiscal 2000. Research and development expenses decreased 10% to $33.9 million for fiscal 2000 from $37.6 million in the same period of fiscal 1999, which in turn was a decrease of 1% from fiscal 1998 spending of $38.1 million. The decreased spending in both fiscal 2001 and fiscal 2000 is primarily the result of lower labor costs driven by lower headcount as a result of a planned reduction in force and attrition. In fiscal 2000 this decline was partially offset by an increase in spending associated with accelerating development of Unixware 7. Research and development expenses represented 20% of net revenues for the first quarter of fiscal 2001 and 18% in the same quarter of fiscal 2000. Research and development expenses represented 24%, 18% and 23% of net revenues for fiscal 2000, 1999 and 1998, respectively. SALES AND MARKETING Sales and marketing expenses decreased 57% to $10.3 million in the first quarter of fiscal 2001 from $23.8 million for the comparable quarter of the prior year. Sales and marketing expenses represented 43% of net revenues in the first quarter of fiscal 2001 and 47% in the same period of fiscal 2000. Sales and marketing expenses decreased to $73.2 million, or 52% of net revenues, in fiscal 2000 as compared to $92.3 million, or 43% of net revenues, for the same period of fiscal 1999. Sales and marketing expenses were $75.7 million, or 47% of net revenues, in fiscal 1998. The decline in spending in the first quarter of fiscal 2001 is due to lower labor costs as a result of a planned reduction in force and attrition, combined with reductions in sales program costs that vary directly with revenue, including cooperative advertising. The fiscal 2000 decline in spending was due to a decline in sales program costs that vary directly with 107 122 revenue, including commissions and cooperative advertising. This decline was partially offset by an increase in sales and marketing programs for Unixware products during the year. The fiscal 1999 increase was principally due to an increase in the size of our direct sales force and commissions as well as sales program costs that vary with increased sales. GENERAL AND ADMINISTRATIVE General and administrative expenses decreased by 7% for the first quarter of fiscal 2001 to $2.8 million, or 12% on net revenues, compared to $3.1 million, or 6% of net revenues, in the same quarter of fiscal 2000. For fiscal 2000, general and administrative expenses increased 16% to $13.7 million, or 10% of net revenues, compared to $11.9 million, or 6% of net revenues, in fiscal 1999. Fiscal 1998 general and administrative expenses were $13.0 million, or 8% of net revenues. The fiscal 2000 increase in general and administrative expenses is primarily driven by the transfer of certain staff from other functions due to the divisionalization of SCO. The fiscal 1999 decline was due to the movement of certain staff from other functions. RESTRUCTURING CHARGES Non-recurring charges of $9.9 million were incurred in fiscal 2000 that related to worldwide restructurings undertaken in the second and fourth quarters of fiscal 2000, representing 7% of total net revenues for the fiscal year. The restructuring charges included $6.6 million of severance and benefits, $1.9 million of facilities charges, $0.7 million of technology charges and $0.7 million of fixed asset disposals. SECOND QUARTER RESTRUCTURING PLAN During the second quarter of fiscal 2000, SCO announced and completed a restructuring plan, which resulted in a one-time charge of $5.9 million. SCO restructured its business operations into three independent divisions, each with a separate management team and dedicated development, marketing and sales organizations -- the Server Software Division, the Tarantella Division and the Professional Services Division. SCO believes this reorganization, which was effective April 1, 2000, has created independent focused teams that can pursue revenue in their respective markets. SCO believes that as a result of creating these independent, focused organizations they will be better able to control and measure the success of these businesses. The charge included a reduction in personnel of 70 employees, write-offs of certain acquired technologies, write-offs of certain fixed assets, and elimination of non-essential facilities. Of the $5.9 million charge, $4.6 million related to cash expenditures and $1.3 million related to non-cash charges. The restructuring charge related to cash expenditures included $3.6 million for severance costs and $1.0 million for facilities costs. SCO anticipates that all of the payments, with the exception of the facility lease payment, will be made by the end of fiscal 2001. Included in the non-cash charges were technology write-offs of $0.7 million relating to technology associated with the Unixware 7 product. This technology had previously been capitalized as it had alternative future use. However, in conjunction with the restructuring, certain personnel associated with product development of Unixware 7 were terminated and plans for future development related to this technology were terminated. As a result the technology had no other use and was written off. The disposal of fixed assets was comprised of computer equipment that will no longer be in use due to the reduction in development personnel. The computer equipment was taken out of service and disposed of during the third and fourth quarters of fiscal 2000. The timing of the fixed asset disposals directly corresponds to the time of employee terminations. The write-offs of the computer equipment occurred at the time that the equipment was no longer in use and taken out of service. Depreciation, where applicable, continued on these assets until disposal. The computer equipment was scrapped or sold to the terminated employees. Proceeds from the sale of these assets were not significant. Additionally, the disposal of fixed assets includes write-offs of leasehold improvements relating to the abandonment of certain leased space at SCO's Watford, United Kingdom facility. All fixed asset disposals were related to the server division. Included in the facilities charge are amounts relating to the abandonment of certain leased space at SCO's Watford, United Kingdom facility. The space is being 108 123 reconfigured in preparation for subletting. The restructuring provision includes the estimated costs associated with the reconfiguring and the rent associated with the unoccupied space prior to sublet. The facility closure affected the server group. The Groups expect to recognize total annual savings of $9.4 million from this reorganization beginning in the next fiscal year. The Groups believe they will be better able to control costs and measure the success of their businesses as a result of this reorganization. The second quarter restructuring charges affected the server and the professional services groups. The professional services group had $0.1 million of severance costs accrued for the restructuring. The balance of the second quarter restructuring charge of $5.8 million related to the server group. The majority of the reduction in force was in product development for the server group. As of September 30, 2000, a total of 70 positions were eliminated including 66 in the server group and 4 in the professional services group. SCO recorded an adjustment to the fiscal 2000 second quarter restructuring provision of $0.9 million in severance costs in the fourth quarter of fiscal 2000. The severance costs were adjusted to reflect changes to the estimated expenses as actual payments were made. FOURTH QUARTER RESTRUCTURING PLAN In the fourth quarter of fiscal 2000, in connection with management's plan to reduce operating expenses, SCO announced a further restructuring plan, which resulted in a one-time charge to the groups of $4.9 million. SCO believes this plan will bring the Groups' operating expenses to a level that is sustainable based on the Groups' revenues. The restructuring included the elimination of various regional offices in the United States, United Kingdom, Latin America and Asia Pacific. The charge included a reduction in personnel of 163 employees of the server and professional services groups, write-offs of certain fixed assets and the elimination of nonessential facilities. The restructuring charges affect the server group as well as corporate general and administrative areas. Of the $4.9 million charge, $4.7 million related to cash expenditures and $0.2 related to non-cash charges. The restructuring charge related to cash expenditures included $3.9 million for severance costs and $0.8 million for facilities costs. The severance charges include elimination of 75 positions in the U.S., 59 positions in the United Kingdom, 16 positions in Europe, 9 positions in Latin America and 4 position in the Asia Pacific region. The United States regional facilities and the Watford, United Kingdom leases have been or will be vacated and restored, and subsequently sub-let or terminated by the second quarter of 2001. The remaining international offices are expected to be vacated immediately. The majority of the facility closures relate to the server group. A minor portion of the facility closures relate to the corporate division of SCO and is comprised primarily of the finance and general and administrative functions of SCO's United Kingdom subsidiary. The Groups anticipate that all of the payments, with the exception of the facility lease payment, will be made by the end of fiscal 2001. The fixed assets being disposed are made up of computer equipment that will no longer be in use due to the reduction in personnel. The computer equipment will be taken out of service and disposed. Depreciation, where applicable, will continue on these assets until disposal. These assets will be scrapped or sold to the terminated employees. Any gain realized on the sale of these assets will be recorded as other income in the statement of operations. The disposal of fixed assets affects both the server group and the corporate division of SCO. As of December 31, 2000 a total of 163 positions have been eliminated: 91 positions in the server group and 72 in the corporate division of SCO. The corporate division of SCO is allocated to the Groups for segment reporting purposes. The Groups expect to recognize total annual savings of $12.7 million from this cost saving measure beginning in the next fiscal year. The Groups believe this will bring their operating expenses to a level that is sustainable based on the Groups' revenues. INCOME TAXES In the quarters ended December 31, 1999 and 2000, fiscal 2000, 1999 and 1998, SCO's effective income tax rates were 24% and (52)%, (25)%, 15% and (39)%, respectively. The tax provision for the three months ended December 31, 2000 and 1999 reflects foreign taxes payable. The fiscal 2000 tax 109 124 reflects the recognition of a valuation allowance against deferred tax assets of $7.8 million and foreign income taxes of $0.5 million. The fiscal 1999 tax provision primarily reflects foreign income taxes, while the fiscal 1998 tax provision reflects losses and expenses without tax benefit for which a valuation allowance has been established. For an analysis of income taxes, see Note 11 of Notes to Consolidated Carve Out Financial Statements. SEGMENT INFORMATION SCO began reviewing its performance on the basis of its three divisions during the third quarter of fiscal 2000. Prior year financial information has been reclassified for comparison purposes and is disclosed in Note 13. SERVER DIVISION Net revenues for the server division for the first quarter of fiscal 2001 decreased 54% to $23.0 million from $49.5 million in the same period of fiscal 2000. Net revenues for the server division were $135.4 million in fiscal 2000, a decrease of 36% when compared to the fiscal 1999 revenues of $211.0 million. In fiscal 1999, net revenues increased by 34% from $157.2 million in fiscal 1998. The decline in revenue performance in the first quarter of fiscal 2001 was worldwide across all geographies and is attributable to fewer large project deals, as well as other market factors, including the impact of being involved in a protracted transaction involving the sale of the division. The fiscal 2000 decline in revenue performance can be attributed to delays in large project deals and customer delays due to Year 2000 issues. The slower than expected recovery of the customer channel from the impact of Year 2000 also impacted the fiscal 2000 revenues for the server division. The fiscal 2000 decline was seen across most geographies worldwide. The increase in revenue performance in fiscal 1999 as compared to fiscal 1998 was attributed to Y2K upgrade sales, increased customer contracts as a result of added sales resources and the ease of electronic licensing. The fiscal 1999 increase was in all geographies. Gross margin for the server division for the three months ending December 31, 2000 declined 57% to $17.0 million compared to $39.5 million for the same period of fiscal 2000. Gross margin for the server division declined 40% to $100.1 million for fiscal 2000 from $168.1 million in fiscal 1999. The fiscal 1999 gross margin for the server division increased 43% compared to the fiscal 1998 gross margin of $117.6 million. The decline in gross margin in fiscal 2001 is mainly attributable to lower sales. The fiscal 2000 decline in gross margin is largely due to the lower revenues and stable fixed costs including technology and overhead costs. In fiscal 2001, 2000 and 1999, material costs declined as a result of increasing e-commerce trade. Additionally, the positive gross margin growth in fiscal 1999 can be attributed to the impact of stable fixed costs over higher unit sales volumes. The operating loss for the three months ending December 31, 2000 for the server division was $0.2 million, a decline of $3.8 million from the operating income of $3.6 million in the same period of fiscal 2000. The server division's operating loss for fiscal 2000 was $28.2 million, a decline of $55.7 million from the operating income of $27.5 million in fiscal 1999. In fiscal 1998, the server division's operating loss was $8.1 million. The fiscal 2001 loss is primarily due to the reduced revenue levels in fiscal 2001. This was partially offset by lower operating expenses which declined year over year due to lower labor costs caused by a planned reduction in force and higher than normal attrition combined with reductions in sales program costs that vary directly with revenue, including cooperative advertising. The fiscal 2000 loss is a result of reduced revenue levels in fiscal 2000. PROFESSIONAL SERVICES DIVISION Net revenues for the professional services division for the first quarter of fiscal 2001 declined to $0.9 million compared to $1.3 million for the same period in fiscal 2000. Net revenues for the professional services division were $4.2 million in fiscal 2000, an increase of 34% compared to net revenues of $3.1 million in fiscal 1999. Fiscal 1998 net revenues were $5.5 million for the professional services division. The fiscal 2001 decrease can be attributed to customer delays in scheduling services. The fiscal year 2000 110 125 growth in professional services revenue can be attributed to the dedicated professional services organization created in fiscal 2000. Gross loss for the professional services division was $0.1 million for the three months ended December 31, 2000 compared with a loss of $0.5 million for the same period of fiscal 2000, an improvement of 80%. Gross loss for the professional services division was $1.9 million in fiscal 2000 compared with a loss of $2.5 million in fiscal 1999. The gross margin for the professional services division was $0.6 million in fiscal 1998. The reduction in gross loss in fiscal 2001 is directly attributable to improved control of operating expenses. Additionally, the fiscal 2001 numbers include the transfer of certain staff to general and administrative functions as a result of the creation of SCO's divisions. The reduction in gross loss as a percentage of revenue in fiscal 2000 can be attributed to the relatively constant costs spread over improved revenues. The fiscal 1999 decline is due to the decreased fiscal 1999 revenues. The operating loss for the professional services division for the first quarter of fiscal 2001 was $0.9 million, compared to the operating loss of $0.8 million in the same period of fiscal 2000. Operating loss for the professional services division was $4.4 million for fiscal year 2000, compared with $3.7 million in fiscal 1999 and $0.5 million in fiscal 1998. The relatively stable loss in fiscal 2001 reflects improved spending controls offset by lower revenues during the first quarter of the year. The creation of the professional services organization in fiscal 2000 increased the operating expenses of the division for the fiscal year. While the revenue also increased, it did not proportionally offset the increased expenses in fiscal 2000. FACTORS THAT MAY AFFECT FUTURE RESULTS The future operating results of the server and professional services groups may be affected by various uncertain trends and factors which are beyond its control. These include adverse changes in general economic conditions and rapid or unexpected changes in the technologies affecting its products. The process of developing new high technology products is complex and uncertain and requires accurate anticipation of customer needs and technological trends. The industry has become increasingly competitive and, accordingly, the server and professional services groups results may also be harmed by the actions of existing or future competitors, including the development of new technologies, the introduction of new products, and the reduction of prices by such competitors to gain or retain market share. The server and professional services groups' results of operations could be adversely affected if it were required to lower its prices significantly. The server and professional services groups participate in a highly dynamic industry and future results could be subject to significant volatility, particularly on a quarterly basis. The server and professional services groups' revenues and operating results may be unpredictable due to shipment patterns. The server and professional services groups operate with little backlog of orders because its products are generally shipped as orders are received. In general, a substantial portion of the revenues of the server and professional services groups have been booked and shipped in the third month of the quarter, with a concentration of these revenues in the latter half of that third month. In addition, the timing of closing of large license contracts and the release of new products and product upgrades increase the risk of quarter to quarter fluctuations and the uncertainty of quarterly operating results. Staffing and operating expense levels of the server and professional services groups are based on an operating plan and are relatively fixed throughout the quarter. As a result, if revenues are not realized in the quarter as expected, the expected operating results and cash balances of the server and professional services groups could be harmed, and such effect could be substantial and could result in an operating loss and depletion of the cash balances of the server and professional services groups. The server and professional groups experience seasonality of revenues for both the European and the U.S. federal government markets. European revenues during the quarter ending June 30 are historically lower or relatively flat compared to the prior quarter. This reflects a reduction of customer purchases in anticipation of reduced selling activity during the summer months. Sales to the U.S. federal government generally increase during the quarter ending September 30. This seasonal increase is primarily attributable 111 126 to increased purchasing activity by the U.S. federal government prior to the close of its fiscal year. Additionally, net revenues for the first quarter of the fiscal year are typically lower or relatively flat compared to net revenues of the prior quarter. The overall cost of revenues may be affected by changes in the mix of net revenue contribution between licenses and services, product families, geographical regions and channels of distribution, as the costs associated with these revenues may have substantially different characteristics. The server and professional services groups may also experience a change in margin as net revenues increase or decrease since technology costs, service costs and production costs are fixed within certain volume ranges. As of September 30, 1999 the Groups carried a partial valuation allowance against gross deferred tax assets to reduce such assets to the amount that was deemed, more likely than not, to be recoverable prior to expiration. The Groups considered, amongst other factors, the historical profitability, prior to one off charges, of the Groups, projections for future profits and the ability of the Groups to use deferred tax assets against these future profits prior to expiration of these assets, the ability of the Groups' foreign subsidiaries to utilize their deferred tax assets, and the tax effects of one time charges. As at September 30, 2000 and December 31, 2000 the Groups reassessed the recoverability of its net deferred tax assets. This analysis was based on revised earnings projections, the substantial net operating losses incurred during fiscal 2000 and the quarter ended December 31, 2000 and the effects of the restructurings undertaken during the fiscal 2000 upon the group's tax structure. As a result of this analysis management determined that it was more likely than not that the net deferred tax asset recorded as of September 30, 1999 would not be recoverable against future earnings prior to expiration. Accordingly, the groups have established a full valuation allowance against gross deferred tax assets as of September 30, 2000. This resulted in a charge of $7.8 million to the statement of operations during the year ended September 30, 2000. Substantial portions of the revenues of the server and professional services groups are derived from sales to customers outside the United States. A substantial portion of the international revenues of SCO's United Kingdom subsidiary are denominated in U.S. dollars, and operating results can vary with changes in the U.S. dollar exchange rate to the United Kingdom pound sterling. The revenues of the server and professional services groups may be affected by general economic conditions in the United States, Europe and other international markets. The server and professional services groups' operating strategy and pricing take into account changes in exchange rates over time. However, the results of operations of the server and professional services groups may be significantly affected in the short term by fluctuations in foreign currency exchange rates. The policy of the server and professional services groups is to amortize purchased software and technology licenses using the straight-line method over the remaining estimated economic life of the product, or on the ratio of current revenues to total projected product revenues, whichever is greater. Due to competitive pressures, it is reasonably possible that those estimates of anticipated future gross revenues, the remaining estimated economic life of the product, or both will be reduced significantly in the near future. As a result, the carrying amount of the server and professional services groups' purchased software and technology licenses may be reduced materially in the near future and, therefore, could create an adverse impact on the server and professional services groups' future reported earnings. SCO 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. Through December 31, 2001, business in the EMU member states will be 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. SCO has done a preliminary assessment of the impact the EMU formation will have on both its internal systems and the products of the server and professional services groups and has commenced appropriate actions. SCO has not yet 112 127 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 harm the server and professional services groups' business, operating results and financial condition. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents as of December 31, 2000, September 30, 2000 and 1999 were $69,000, $511,000 and $2.2 million, respectively. Historically, SCO has managed cash and cash equivalents on a centralized basis. Cash receipts associated with the server and professional services groups' business except for amounts arising from specific research and development funding contracts have been transferred to SCO on a daily basis and SCO has funded the server and professional services groups' disbursements. Net cash provided by (used for) operations during the three months ended December 31, 2000 and the years ended September 30, 2000, 1999 and 1998 was $(4.9) million, $(24.9) million, $28.7 million and $12.5 million respectively. Cash provided by (used for)operations during each of these periods resulted primarily from net losses of $1.8 million and $41.1 million, net income of $19.9 million and net loss of $12.6 million offset by depreciation and amortization of $2.1 million, $12.3 million, $11.3 million and $13.2 million, respectively. Net changes in operating assets and liabilities resulted in a net usage of cash of $5.1 million, $3.5 million and $2.5 million during the three months ended December 31, 2000 and the years ended September 30, 2000 and 1999, respectively, and cash generated of $11.7 million during the year ended September 30, 1998. Cash used in investing activities during the three months ended December 31, 2000 and the years ended September 30, 1999 and 1998 was $0.3 million, $4.5 million, $6.8 million and 3.1 million, respectively. Cash used in investing activities was represented by investment in fixed assets and the purchase of software and technology licenses for use with our products. Cash provided by (used for) financing activities was $4.7 million, $27.4 million, $(23.3) million and $(5.4) million during the three months ended December 31, 2000 and the years ended September 30, 2000, 1999 and 1998, respectively. This came from advances from (to) SCO totaling $5.2 million, $30.3 million, $(19.6) million and $(2.9) million offset by payments made under capital leases. The server and professional services groups have been and will continue to be dependent upon funding from SCO in order to finance losses incurred in operations. Management expects to require additional funding from SCO during the year ended September 30, 2001 and has received a commitment from them to continue funding until that date. There can be no assurance that SCO will provide additional funding after this date. In the event that SCO is unwilling to provide additional funding there can be no assurance that alternative funding will be available on acceptable terms or at all. SCO has incurred losses from operations of approximately $7.9 million during the first quarter of fiscal 2001 and $57.0 million during fiscal 2000 and revenues have declined from $53.7 million for the first quarter of fiscal 2000 to $26.5 million for the same quarter of fiscal 2001. Revenues declined from $223.6 million for the year ended September 30, 1999 to $148.9 million for the year ended September 30, 2000 and SCO has an accumulated deficit as of December 31, 2000. These factors have caused SCO's management to evaluate SCO's liquidity and to establish plans to reduce costs, and increase revenues and improve margins. SCO has recently announced cost reduction plans in order to reduce operating expenses to levels consistent with current revenues and is investigating financing alternatives. There can be no assurance that such cost reduction measures will be adequate or such financing will be available, if at all, on terms acceptable to SCO. Under the financing commitment with The Canopy Group, SCO entered into a Loan Agreement and a Secured Convertible Promissory Note effective January 8, 2001 for borrowings up to $18.0 million. Drawings on this financing agreement are repayable on December 31, 2001 and bear interest at a rate per annum of 10%. Drawings are collateralized by SCO's tangible and intangible assets and are convertible into common stock at the option of the lender at the closing price of SCO common stock on the date of issuance subject to certain limitations. The unconverted principal is repayable in cash. Further, Caldera 113 128 Systems, Inc., has agreed to loan $7.0 million to SCO in the form of a short-term note repayable at the completion of the combination. RECENT ACCOUNTING PRONOUNCEMENTS In November, 2000, the Emerging Issue Task Force ("EITF") issued EITF Abstract No. 00-19 (EITF 00-19), Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock. EITF 00-19 applies to all freestanding derivative financial instruments that are indexed to, and potentially settled in, a company's own stock and discusses the classification and measurement of these financial instruments. It provides that an entity recognizes all freestanding derivative financial instruments as equity or as either assets or liabilities, and measure those instruments at fair value. The guidance is effective for all new contracts and contract modifications entered into after September 20, 2000. For contracts that exist on September 20, 2000, EITF 00-19 should be applied on June 30, 2001, based on the contract terms then in place. Management is in the process of evaluating the effect this guidance will have on its financial statements. In March 2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation -- an interpretation of APB Opinion No. 25. FIN 44 clarifies the application of Opinion 25 for (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. The groups adopted FIN 44 effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. The adoption of FIN 44 did not have a material effect on the financial position or results of operations of the server and professional services groups. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financials filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Groups must adopt SAB 101 by the fourth quarter of fiscal 2001. Management believes that the implementation of SAB 101 will not have a material effect on the financial position or results of operations of the server and professional services groups. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments -- Deferral of the Effective Date of SFAS Statement No. 133 and in June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments -- an amendment of FAS 133, Accounting for Derivative instruments and Hedging Activities. As a result of SFAS No. 137, SFAS No. 133 and SFAS No. 138 will be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The adoption of these standards did not have a material impact on their financial position and results of operations. 114 129 BUSINESS OF CALDERA 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 areas for the fiscal years 1998, 1999 and 2000 is presented in Note 14, "Segment Information" of the Notes to our Consolidated Financial Statements, included in this joint proxy statement/prospectus. 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 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 115 130 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; - 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 116 131 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. 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. 117 132 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 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 us and third parties. 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 118 133 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:
OPEN SOURCE COMPONENTS FUNCTION ---------------------- -------- 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 --------------------- -------- 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 Suite of office applications version)
119 134 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:
COMPONENTS FUNCTION ---------- -------- 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 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 120 135 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 which 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; - 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 RECOGNITIONS 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); - a 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); 121 136 - The Linux Show's Best Distribution of Millennium (December 1999); - Linux Journal's Product of the Year award at Comdex (November 1999); - a 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
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. 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. Furthermore, 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. 122 137 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. 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. 123 138 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. Companies currently offering software solutions for specialized servers include Berkeley Software Design, Microsoft and a joint venture involving SCO and Compaq. Cygnus Solutions, 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 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. 124 139 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; - 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. Additionally, although the Linux and Unix operating systems have in the past been competing products, the server and professional services groups will provide us with an international and domestic, multi-tiered distribution channel, and an extensive international infrastructure that could accelerate our ability to market Linux technologies in foreign markets. We believe that these additional distribution opportunities will provide us with additional markets to offer Linux domestically and internationally. We believe that these opportunities will prevent the potential competitive effects of offering both Linux and Unix from being material to us. 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 125 140 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 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 January 31, 2001, we employed an in-house engineering staff of 62 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, our application for registration of the trademark "OpenLinux(TM)" has been approved by the European Community Trade Marks Office. 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 tradename 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 126 141 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 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 which 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 more stringent consumer protection laws, 127 142 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 January 31, 2001, we had a total of 192 employees. Of the total employees, 62 were in software engineering, 62 in sales and marketing, 16 in customer service and technical support, 13 in operations and 39 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. FACILITIES Our principal executive office is currently located in Orem, Utah where we lease approximately 45,531 square feet of office space. Our annual rental expense under the lease is approximately $664,080. We also occupy an additional office facility in Orem, Utah, under a lease that costs $8,990 per month and occupy 5,544 square feet of warehouse space in Orem, Utah, under an 18 month lease that costs approximately $32,000 per year. Our German subsidiary occupies 3,375 square feet in Erlangen, Germany under a five-year renewable lease for approximately $4,880 per month. This lease expires September 1, 2004, and additional space is available under similar terms. We believe that our existing facilities are adequate for our current requirements and that additional space can be obtained on commercially reasonable terms to meet our future requirements. LEGAL PROCEEDINGS We are not a party to any material legal proceedings. 128 143 BUSINESS OF SERVER AND PROFESSIONAL SERVICES GROUPS OVERVIEW The server and professional services groups operate as a global leader in server software for networked business computing, and the world's leading provider of UNIX server operating systems. The business of the server group originated over 20 years ago at AT&T and focuses on developing and marketing proprietary UNIX server software that runs on standard Intel hardware systems. The server group supplies the system software for approximately 37% of all UNIX servers for all hardware platforms. The professional services group complements the server group and provides professional services to implement and maintain UNIX system software products. THE SERVER AND PROFESSIONAL SERVICES SOLUTION The server and professional services groups' mission is to create, market and support the server software that system builders choose for networked business computing. The server and professional services groups believe that server-based network computing enables businesses to improve their customer information flow and business transaction efficiencies. Key elements of the Group's strategy are: - Leverage large global installed base; - Effective distribution channel; - Focussed product offerings; and - Leverage professional services to complement server product line. The server and professional services groups believe that companies that adopt a server-based network computing model can understand their customers better, reach wider potential markets, bring products to market faster and improve their overall customer satisfaction levels. With server-based computing and products and services, IT professionals can immediately leverage their existing investments, deploy applications faster and dramatically cut the cost of the systems administration and management. The server products are used by enterprises of all sizes. These enterprises and their characteristic usage of server products are divided into the following market segments: - Small to Medium Enterprise -- Processing which is confined to one or a few small servers, typically in a single physical location per small or medium sized enterprise; - Replicated Site -- Processing which is replicated onto many small servers within a large enterprise, typically located across hundreds or thousands of physical sites in a given enterprise; and - Large Enterprise -- Processing which is shared across one or a few medium to large sized servers (or clusters of servers) for use by many people across an entire large enterprise and/or between many people across several enterprises. The Server Group's Large Installed Base The server group has a large installed base of over 2 million licensees worldwide, which include small to medium enterprises, replicated sites, and large enterprises. Small to medium enterprises provide the server and professional services groups with many opportunities to gain a major market share in vertical market places such as pharmacies, lumber merchants or building access control systems. Replicated sites produce recurring revenue stream from upgrades and incremental systems deployment. Once the initial contract is awarded, there are also incremental opportunities to add new systems to augment capabilities of the user's network, including e-business applications and other new product features. Since the sites are dispersed and there is a need for high reliability with low operator invention, these customers are less inclined to change the system basis. 129 144 SCO operating systems have also been in-built into many products such as voice mail systems, telephone switches and badge or ticket readers. A characteristic of this market is very slow adoption of alternative technologies. Once development of a product is complete, the systems will often have a marketing life of many years. These in-built systems continue to provide a regular source of revenue and potential for new solutions with existing customers. Examples of these systems include: - Private telephone exchanges from Siemens and Lucent; - Voice mail systems from Lucent; - Voice response systems from Wildfire; - Cable television controllers from Scientific Atlanta; and - Automobile testers from BMW. When SCO acquired the UNIX business from Novell in December, 1995, it also assumed the legacy of many systems installed over the years by companies such as Unisys, ICL, Olivetti, NCR and Siemens. Many of these systems were upgraded during the year 2000 conversion process to SCO Server products and have now transitioned to become server group customers. The group believes these customers will continue to provide steady streams of revenue for many years. SERVER PRODUCTS The server group is a vendor of UNIX operating systems for Intel-based computers and serverware, networking software, development tools, and utilities to be used with SCO UNIX operating systems. Server products are primarily used on computers, which support the integration of information, communication and processing from more than one person. These products are used as a system software environment for the support of application software, whether the applications are processed on a single computer, within a cluster of computers, or across a network of computers. UnixWare 7 The UnixWare 7 operating system is designed to support distributed network computing on Intel processor-based servers. Running on the new generation of "enterprise-class" Intel processors, UnixWare 7 delivers power, value and versatility to businesses of all sizes, permitting companies to simplify and increase business operations and better understand customers' needs. SCO OpenServer The SCO OpenServer system is one of today's leading UNIX server operating system for Intel processor-based platforms. Businesses use SCO OpenServer systems to simplify and speed business operations, better understand and respond to their customers' needs, and achieve a competitive advantage. SCO OpenServer systems are exceptional at running multi-user, transaction-based DBMS and business applications, communications gateways, mail and messaging servers in both host and client/server environments. SCO OpenServer Release 5 combines minicomputer-level reliability and availability with the Intel platform's exceptional price/performance, value and flexibility. Unlike other advanced operating systems, SCO OpenServer Systems revolutionize business productivity without obsoleting existing business critical systems, applications or data. Designed expressly for business critical computing, SCO OpenServer systems deliver what today's organizations are seeking -- exceptional value and price/performance, extensive networking with existing LANs and WANs, easy integration with Windows desktops, built-in Internet access and services, simplified administration and management, and outstanding scalability for long-term growth. 130 145 SCO OpenServer Operating Systems SCO OpenServer Enterprise System -- In addition to the critical business applications, SCO OpenServer Enterprise System reliably provides a variety of network services including file and print services for both UNIX(R) and Windows systems, E-mail services, web services, Internet connectivity, and calendar services. SCO OpenServer Host System -- The SCO OpenServer Host System is an excellent platform for delivering highly reliable, non-networked multi-user solutions. SCO OpenServer Development System -- The SCO OpenServer Development System is comprised of a core set of development tools that can be easily augmented with over 200 third-party products to create the most robust and efficient development environment. SCO OpenServer Desktop System -- The Desktop System excels at running client-side, transaction-based applications, accessing databases and networked information, and providing file/resource sharing and communications across a range of peer, server and host environments. PROFESSIONAL SERVICES The Group primarily offers the following services: - Consulting. These services include assessment services to help a customer understand and identify its needs and strengths prior to the use of the Server products, and assisting customers in developing complete solutions for their needs. - Custom software development. These services typically involve customizing the products sold to a customer to support a customer's proprietary system or configuration. - Optimization. These services typically involve configuring a customer's system and the products sold to the customer to reach an optimal operating efficiency for the customer's system as a whole. - Technical support. Customers seeking technical support from the group may enter into service agreements that best suit their needs. These service agreement plans are designed to give customers the ability to receive direct support from our teams at pre-determined pricing and service levels. CUSTOMERS The server group's largest customers purchase their products through indirect channels. Typical customers include: Agriculture Bank -- China KFC Abbey National Bank Kmart BMW Lufthansa CVS Pep Boys Daimler-Chrysler Pizza Hut French Telecom Polish Police
Many of the professional services projects have been with world class companies such as the Nasdaq, Kmart and Italian Telecom. None of the server or professional services groups customers accounts for more than 10% of the groups' revenues for any fiscal period. SALES, MARKETING AND DISTRIBUTION The server group sells to small and medium enterprise purchasers through a worldwide network of more than 15,000 distributors, resellers, system integrators and OEMs. The server group sells to replicated site and large enterprise purchasers through a collaboration between the group's own field sales and system engineering staff and the corresponding staffs of OEMs, large value added resellers, or system integrators. 131 146 The sales channel is global. In addition to the North American and Western European countries, the server group also operates in Eastern Europe, India and China. The management and support of the channel partners is a key core competence for the server group. The group makes investments in channel education, information dissemination and lead generation. The server group also sells to OEMs and has a strong working relationship with a number of the major Intel system builders such as IBM, Compaq, ICL/Fujitsu, Siemens and Unisys. Each of these OEMs has their own channels of distribution. The server group has developed programs that allow the OEMs to work with the server group to mutually support both distribution channels. The professional services group sells to customers through a combination of referral sales from the server group and dedicated direct sales effort. Server marketing supports the sales activity of both the direct SCO sales team and the sales forces of our channel partners. Activities include product introductions, promotions, training and distribution of product information, as well as direct programs that focus on branding, solutions, advertising, tradeshows, press releases, and marketing literature. Marketing activities are often collaborative efforts with OEMs, independent hardware vendors, independent software vendors, distributors, value added resellers, system integrators, education centers and support centers. COMPETITION Throughout its long existence the server group has always had many fierce competitors. These have included AT&T, Novell, SUN Solaris, Interactive systems and of course Microsoft. Most recently, the two major competitive alternatives to SCO's UNIX products have been Microsoft NT and Linux. While SCO believes that the server group's products retain a competitive advantage in a number of targeted application areas, both of these competitors are restricting the overall market available to SCO products, including some markets where SCO has been successful in the past. ENGINEERING AND DEVELOPMENT The server group has invested and will continue to invest in the development of new products and new features for existing products. The development team includes the successors to the original Bell Labs team that originally developed UNIX over 25 years ago. The development process is modeled to standard, commercial software engineering practices. These practices are applied to both documentation and procedures. As result, products can be offered on several operating platforms without significant additional efforts and with relatively quick adaptation times for new technologies. While most products and features are developed in-house, some modules, and base technologies are licensed from third parties and integrated into the final products. The professional services group maintains strict standards of quality and procedures by employing industry "best practices." The development teams seek to deliver their services as modules or productized services that are easily replicated for different customers in different applications. As of December 12, 2000, the development team consists primarily of 108 employees, located in Murray Hill, New Jersey and Santa Cruz, California. INTELLECTUAL PROPERTY The success of the server group largely depends on the ability to protect trademarks, trade secrets, and certain proprietary technology. To accomplish this, the group relies on a combination of trademark and copyright laws and trade secrets. Both the server and professional services groups also require their employees and consultants to sign confidentiality and nondisclosure agreements. SCO also owns the trademark rights to "OPENSERVER" and "UNIXWARE" in the United States and other jurisdictions. On or around May 23, 2000, SCO was made aware that X/Open (the owner of the UNIX trademark) filed a cancellation action against SCO's UnixWare trademark registration in Japan. On July 4, 2000, SCO, through its trademark counsel in Japan, Tani & Abe, submitted arguments to the Japanese Patent Office in response to the cancellation. On October 10, 2000, the Japanese Patent Office rendered its decision that SCO's UnixWare trademark registration should be maintained. On or 132 147 around May 23, 2000, SCO was made aware that a joint opposition action had been filed by X/Open (the owner of the UNIX trademark) and Novell against our European Community Trademark Application. The parties requested and received an extension to the cooling off period, which was extended to November 17, 2000. X/Open has been granted the opportunity to submit further facts, evidence or arguments in support of the opposition on or before January 17, 2001. SCO must submit, through its trademark counsel in the UK, Clifford Chance, its observations in reply on or before March 17, 2001, which period may be extended to ensure that SCO has at least two full months to respond to any new material submitted by X/Open. The parties requested and received an additional extension to the cooling off period, which was extended to March 17, 2001. Despite efforts to protect trademark rights, unauthorized third parties have in the past attempted and in the future may attempt to misappropriate these trademark rights. There is no certainty that the continued misappropriation of the trademarks can be prevented or enforced. The laws of some foreign countries do not protect these trademark rights to the same extent as do the laws of the United States. In addition, policing unauthorized use of these trademark rights is difficult, expensive and time consuming. The loss of any material trademark could have a material negative impact on the server and professional services groups' business, operating results and financial condition. The server and professional services groups do not believe that their products infringe the rights of other third parties. However, these products are comprised of many distinct software components, developed by many independent parties, and therefore third parties in the past asserted, and may in the future assert infringement claims against us which may result in costly litigation or require the groups to obtain a license to third party intellectual property rights. There can be no assurance that such licenses can be obtained on reasonable terms or at all, which could have a material negative impact on the server and professional services groups' business, operating results and financial condition. EMPLOYEES As of December 12, 2000, the server group had a total of 464 employees and the professional services group had a total of 40 employees. Of these totals, 108 were in software, 170 in sales and marketing, 97 in customer service, and 129 in operation, administrative and other positions. From time to time, the groups also employ independent contractors to complement and support the groups' efforts. The employees are not represented by any labor union and are not subject to a collective bargaining agreement, and there has never been any work stoppage. The server and professional services groups believe that relations with employees are good. FACILITIES The server and professional services groups are presently headquartered with SCO in Santa Cruz, California, where SCO leases administrative, sales and marketing, product development and distribution facilities. SCO leases additional facilities for administration, sales and marketing and product development in Murray Hill, New Jersey and Watford, England. The leases for SCO's facilities expire at various dates through 2020. SCO has renewal options, at fair market value, under many of these leases and believes that in any event additional or alternative space adequate to serve the server and professional services groups' foreseeable needs would be available on commercially reasonable terms. SCO's field operations occupy leased facilities in 12 locations in the United States. In addition, SCO's subsidiaries and sales and representative offices in France, Germany, Italy, Spain, Sweden, Denmark, Singapore, Australia, China, India, Canada, Brazil and Mexico lease space for their operations. Worldwide, SCO leases property in 38 locations consisting of an aggregate of approximately 370,000 square feet. SCO believes that these facilities are adequate for its needs and the needs of the server and professional services groups in the foreseeable future. LEGAL PROCEEDINGS The server and professional services groups are not a party to any material proceedings. 133 148 BUSINESS OF NEW CALDERA New Caldera has not conducted any business activities to date and will not engage in any business activities until the combination has been completed. New Caldera currently has no assets or liabilities and no outstanding capital stock. New Caldera will be the parent company of Caldera and will directly own the server and professional services groups. The business of New Caldera will be substantially similar to the business currently conducted by Caldera and the server and professional services groups, as described herein. However, it is anticipated that New Caldera will seek to integrate product lines from Caldera and the server and professional services groups to create and market new business solutions. MANAGEMENT OF CALDERA AND NEW CALDERA EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The following table presents information as of March 15, 2001 regarding persons who are current executive officers, directors and key employees of Caldera and persons who are expected to serve as executive officers, directors and key employees of New Caldera:
NAME AGE POSITION ---- --- -------- Ransom H. Love(1).................... 41 Chief Executive Officer, Director Robert K. Bench(1)................... 51 Chief Financial Officer Drew A. Spencer(1)................... 38 Chief Technology Officer Benoy Tamang(1)...................... 35 Vice President, Strategic Development David McCrabb, Jr. .................. 52 President and Chief Operating Officer Richard Rife(1)(4)................... 47 General Counsel and Corporate Secretary Ralph J. Yarro III(1)(3)............. 36 Chairman of the Board of Directors and Director Steve Cakebread(2)................... 49 Director John R. Egan(1)(2)(3)(5)............. 43 Director Edward E. Iacobucci(1)(2)............ 46 Director Raymond J. Noorda(1)................. 76 Director Thomas P. Raimondi, Jr.(1)(3)........ 43 Director
--------------- (1) current executive officer, director or key employee of Caldera (2) current member of Caldera's audit committee, and expected to be member of New Caldera's audit committee (3) current member of Caldera's compensation committee, and expected to be member of New Caldera's compensation committee (4) Mr. Rife has announced his plan to resign from Caldera effective April 2, 2001. J. Harrison Colter will replace Mr. Rife as General Counsel and Corporate Secretary at such time. (5) Mr. Egan has announced that he will not seek re-election to the Caldera Board of Directors and he therefore will not serve as a director of New Caldera or as a member of New Caldera's compensation or audit committees. Ransom H. Love has served as Caldera's President, Chief Executive Officer, and member of Caldera's board of directors since August 1998. Prior to that date, Mr. Love was a founder and served as Vice President of Marketing and Sales, Vice President of Business Development and General Manager of the OpenLinux division for Caldera, Inc., from January 1995 to September 1998. Prior to Caldera, Inc., Mr. Love held senior marketing positions at Novell and Sanyo Icon. Mr. Love has been in various management positions in sales, marketing, support, testing and education in the computer industry since 1982. He holds a BA in international relations and a MBA from Brigham Young University. 134 149 Robert K. Bench has served as Caldera's Chief Financial Officer and Principal Financial and Accounting Officer since November 15, 2000. From April 1991 through April 1996, he was Chief Financial Officer for CerProbe Corporation, and from April 1996 to May 1999, he was Vice President, Chief Financial Officer and a director for Sento Corporation. From January 1999 through April 2000, Mr. Bench was Vice President and Chief Financial Officer for WebMiles.com Corp., and from January 2000 through January 2001, he was Vice President and a director for Envirofoam Technologies, Inc. Mr. Bench holds a BS in accounting from Utah State University. Drew A. Spencer has served as Caldera's Chief Technology Officer since April 2000 and served as its Vice President of Development from December 1998 to April 2000. Prior to joining Caldera, Mr. Spencer spent ten years with Novell, Inc. in a variety of senior technical and management positions, including engineering consultant and was a member of the Corporate Architecture Team. He holds a BS degree in computer science from Westminster College. Benoy Tamang has served as Caldera's Vice President of Business Development since April 2000 and served as its Vice President of Marketing from December 1998 to April 2000. From January 1996 through August 1998, Mr. Tamang was General Manager of Viewpoint Datalabs, a three dimensional software imaging company, where he coordinated domestic and international sales. Previously, he served as Sales Director and Program Manager at Novell, Inc. from March 1993 through August 1996. Mr. Tamang holds a BS in computer information systems from Brigham Young University -- Hawaii and an MBA from the Marriott School of Management at Brigham Young University. David McCrabb, upon the closing of the combination, will become President and Chief Operating Officer of New Caldera. Mr. McCrabb has served as Executive Vice President, Worldwide Sales and Field Operations of SCO since April 1998. Between January 1995 and June 1997, he served as Vice President, Marketing and Channel Sales of SCO, then as Senior Vice President, Market Planning of SCO between July 1997 and April 1998. Prior to joining SCO, Mr. McCrabb served as Vice President and General Manager for Applied Digital Data Systems, a wholly owned subsidiary of NCR, since February 1994. From November 1989 to February 1992, he served as Vice President, Sales and Marketing for Primary Access Corporation. Richard C. Rife has served as Caldera's Chief Legal Officer and Corporate Secretary since June 2000. Prior to joining Caldera, he spent 12 years with Novell, Inc. in a variety of positions, including most recently Vice President, Deputy General Counsel, and Corporate Secretary. Before joining Novell, Mr. Rife practiced international business law in Korea for five years. Mr. Rife has B.A. and J.D. degrees from Brigham Young University and is licensed to practice law before the State and Federal courts of Utah and Nevada. Ralph J. Yarro III has served as a member of Caldera's board of directors since August 1998. Mr. Yarro has served as the President and Chief Executive Officer of The Canopy Group, Inc. since April 1995. Prior to joining The Canopy Group, Inc., he served as a graphic artist for the Noorda Family Trust. Mr. Yarro holds a BA from Brigham Young University. John R. Egan has served as a member of Caldera's board of directors since January 2000. He currently serves as a Managing Partner of Egan-Managed Capital, Venture Capital, a position he has held since September 1998. Mr. Egan has been with EMC Corporation, a provider of storage-related hardware, software and service products, serving in various positions, since April 1983. He is a director of EMC Corporation and holds a BS from Boston College. Edward E. Iacobucci has served as a member of Caldera's board of directors since January 2000. In 1989, Mr. Iacobucci co-founded Citrix Systems, Inc., a supplier of products and technologies that enable enterprise-wide deployment of software applications, and held the positions of Chief Technical Officer and Vice President of Strategy and Technology. In September 1991, he also became Chairman of the Board of Citrix. Mr. Iacobucci holds a BS from the Georgia Institute of Technology. Steve Cakebread has served as a member of Caldera's board of directors since July 2000. He is currently Senior Vice President and Chief Financial Officer of Autodesk, Inc. since 1997. Autodesk, Inc. is 135 150 a provider of two-dimensional and three-dimensional products used across industries and in the home for architectural design, mechanical design, spatial data management and mapping, animation, and visual applications. Prior to joining Autodesk, he was Vice President of Finance with Silicon Graphics, Inc., a provider of computing and visualization solutions, from 1993 to 1997. Mr. Cakebread holds a BS from the University of California at Berkeley and an MBA from Indiana University. Raymond J. Noorda has served as a member of Caldera's board of directors since August 1998. Mr. Noorda currently serves as chairman of the board of directors of MTI Technology Corporation and The Canopy Group, Inc. Mr. Noorda previously served as President, Chief Executive Officer and Chairman of Novell, Inc. from 1983 to 1994 and has served as a trustee of the Noorda Family Trust since 1994. He holds a BS in electrical engineering from the University of Utah. Thomas P. Raimondi, Jr. has served as a member of Caldera's board of directors since September 1999. He has been with MTI Technology Corporation since 1987, serving as President and Chief Executive Officer since December 1999, as Chief Operating Officer from April 1998 to December 1999, as Senior Vice President and General Manager from January 1996 to April 1998 and as Vice President of Marketing from 1991 to 1996. Mr. Raimondi holds a BS in communications from the University of Maryland. J. Harrison Colter will commence service as Caldera's General Counsel and Secretary upon the effective date of Richard Rife's resignation from such positions. Mr. Colter has been serving as Associate General Counsel of Novell, Inc. since 1994. Between 1983 and 1994, Mr. Colter practiced intellectual property protection and litigation law, most recently at Baker and McKenzie in Los Angeles, California. Mr. Colter received a B.A. in 1980 and a J.D. in 1983 from Brigham Young University and is admitted to practice law in the states of California, Texas, Arizona and Utah and before the U.S. Patent office. COMPOSITION OF THE BOARD The board of directors of Caldera currently consists of seven directors. The board of directors of New Caldera will have eight directors, consisting of Caldera's current directors, excluding John R. Egan who has announced that he will not seek re-election as a director of Caldera, as well as two directors to be named by SCO and approved by Caldera. Directors will be elected by stockholders at each annual meeting of stockholders to serve until the next annual meeting of stockholders or until their successors are duly elected and qualified. There are no family relationships among any of Caldera's directors, officers or key employees or any of New Caldera's expected directors, officers or key employees. BOARD COMMITTEES The board of directors of Caldera has and New Caldera will have the following committees. The compensation committee of the board of directors will recommend, review and oversee the salaries, benefits and stock option plans for our employees, consultants, directors and other individuals compensated by us. The compensation committee will also administer our compensation plans. The members of the compensation committee of Caldera are currently Messrs. Egan, Raimondi and Yarro, none of whom are employees of Caldera. The members of the compensation committee of New Caldera will be Messrs. Raimondi and Yarro and one additional director, none of whom will be employees of New Caldera. The audit committee of the board of directors will review, act on and report to the board of directors with respect to various auditing and accounting matters, including the recommendation of our auditors, the scope of the annual audits, fees to be paid to the auditors, the performance of our independent auditors and our accounting practices. The members of the audit committee of Caldera are currently Messrs. Cakebread, Iacobucci and Egan, none of whom are employees of Caldera. The members of the audit committee of New Caldera will be Messrs. Cakebread and Iacobucci and one additional director, none of whom will be employees of New Caldera. 136 151 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of Caldera's compensation committee or the anticipated members of New Caldera's compensation committee has at any time been one of Caldera's officers or employees. None of the executive officers of Caldera or the anticipated executive officers of New Caldera currently serves or in the past year has served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on Caldera's board or compensation committee. Prior to the creation of Caldera's compensation committee, all compensation decisions were made by Caldera's full board. Mr. Love did not participate in discussions by Caldera's board with respect to his compensation. DIRECTOR COMPENSATION New Caldera's directors will not receive cash compensation for their services as directors, although members will be reimbursed for expenses in connection with attendance at board and committee meetings. In December 1999, the Caldera board of directors granted an option to Thomas P. Raimondi, Jr., to purchase 100,000 shares of Caldera's common stock at an exercise price $6.00 per share, which vest over a two-year period. In August 1999, the Caldera board granted options to Ralph J. Yarro III to purchase 100,000 shares of Caldera's common stock, which vest over a four-year period, and in December 1999, the Caldera board granted Mr. Yarro options to purchase 50,000 shares of Caldera's common stock, which vest over a two-year period, at a combined average exercise price of $2.67 per share. In March 2000, the Caldera board granted options to purchase 100,000 shares of Caldera's common stock to each of John R. Egan, and Edward Iacobucci at an exercise price of $7.00 per share. In each case, these options vest over a two year period. In August, 2000, the Caldera board granted options to Steve Cakebread to purchase 79,167 shares of its common stock, which vest over a two year period at an exercise price of $6.937. New Caldera may grant its non-employee directors additional options in the future. CALDERA EXECUTIVE SEVERANCE AGREEMENTS During July and August 2000, Caldera entered into a number of executive severance agreements with several members of senior management, including each of its executive officers. The agreements provide for certain benefits upon a change of control, followed by termination or effective termination of employment with Caldera. Change of control is defined as: (1) any person or entity who becomes the beneficial owner of 51% or more of common stock, (2) sale of substantially all of Caldera's assets, (3) approval of a merger or consolidation in which at least 50% of the voting securities are acquired, and (4) certain changes in the composition of Caldera's board of directors. Specific provisions for senior vice presidents and executive officers include but are not limited to the following: salary and bonus payments equal to 150% of then current annual base salary and 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 then current annual base salary and bonuses, 12 months of accelerated vesting on outstanding stock options and continuation insurance benefits for a period of six months. EMPLOYMENT AGREEMENTS SCO has agreed to encourage the following management employees to enter into employment agreements with New Caldera: David McCrabb; and certain vice presidents and director level employees of the server and professional services groups. Terms of the agreements Under the proposed terms of the employment agreements, these management employees will be paid a base salary consistent with their current base salary. A bonus plan comparable to their current bonus plan will be put in place. These employment agreements would provide for a term of 1-2 years. In addition, each employment agreement would provide that at the end of its term, the employee would continue on an at-will basis. 137 152 Severance provisions Generally, if New Caldera were to terminate one of these employment agreements without cause, the affected employee would be entitled to severance pay ranging from 75% - 150% of base salary and accelerated vesting ranging from 9 months to 18 months. The employee would not be entitled to receive severance benefits if the employee's employment terminates by reason of employee's voluntary resignation, if New Caldera terminated the employee's employment after the last day of the employment term or if the termination were for cause. Noncompetition provisions The employment agreements would also provide that the employees may not compete with New Caldera for the duration of the severance period, which ranges from 9 - 18 months after termination of employment. Severance payments would cease upon the employee accepting employment or other position with a direct competitor of New Caldera. EXECUTIVE COMPENSATION OF NEW CALDERA It is anticipated that those employees of SCO who become executive officers of New Caldera will be compensated generally in accordance with the proposed terms of the employment agreements described above. For employees of Caldera that become executive officers of New Caldera, New Caldera will assume the terms of the senior executive severance agreements and will rely on its compensation committee to recommend any increase in the form and amount of compensation to be paid above their current compensation levels at Caldera. It is anticipated that when the compensation committee meets to determine compensation, the committee will generally adhere to compensation policies which reflect the belief that: - New Caldera must attract and retain individuals of outstanding ability and motivate and reward them for sustained performance; - a portion of an executive's compensation should be at risk based upon that executive's and New Caldera's performance; and - levels of compensation should generally be in line with that offered by comparable corporations. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION It is the duty of the compensation committee to review and determine the salaries and bonuses of executive officers of Caldera, including the Chief Executive Officer, and to establish the general compensation policies for such individuals. The compensation committee also has the sole and exclusive authority to make discretionary option grants to Caldera's executive officers under the 1999 Omnibus Stock Incentive Plan. The compensation committee believes that the compensation programs for Caldera's executive officers should reflect Caldera's performance and the value created for Caldera's stockholders. In addition, the compensation programs should support the short-term and long-term strategic goals and values of Caldera and should reward individual contribution to Caldera's success. Caldera is engaged in a very competitive industry, and Caldera's success depends upon its ability to attract and retain qualified executives through the competitive compensation packages it offers to such individuals. General Compensation Policy. The compensation committee's policy is to provide Caldera's executive officers with compensation opportunities which are based upon their personal performance, the financial performance of Caldera and their contribution to that performance and which are competitive enough to attract and retain highly skilled individuals. Each executive officer's compensation package is 138 153 comprised of three elements: (i) base salary that is competitive with the market and reflects individual performance, (ii) quarterly "Management by Objective" performance awards payable in cash and tied to performance of agreed-upon objectives, management of the relevant department budget and the overall financial performance of Caldera, and (iii) long-term stock-based incentive awards designed to strengthen the mutuality of interests between the executive officers and Caldera's stockholders. As an officer's level of responsibility increases, a greater proportion of his or her total compensation will be dependent upon Caldera's financial performance and stock price appreciation rather than base salary. Factors. The principal factors that were taken into account in establishing each executive officer's compensation package for the 2000 fiscal year are described below. However, the compensation committee may in its discretion apply entirely different factors, such as different measures of financial performance, for future fiscal years. Base Salary. The base salary levels for the executive officers were established for the 2000 fiscal year on the basis of the following factors: personal performance, the estimated salary levels in effect for similar positions at a select group of companies within and outside Caldera's industry with which Caldera competes for executive talent, and internal comparability considerations. The compensation committee made its decision as to the appropriate market level of base salary for each executive officer on the basis of its understanding of the salary levels in effect for similar positions at those companies with which Caldera competes for executive talent. Base salaries will be reviewed on an annual basis, and adjustments will be made in accordance with the factors indicated above. Quarterly "Management by Objective" Compensation. Each executive officer may also earn a quarterly "Management by Objective" incentive bonus on the basis of (i) performance of objectives agreed-upon by the executive officer and the Chief Executive Officer prior to the start of each quarter, (ii) managing his or her department within the established budget and (iii) achievement by Caldera of certain financial milestones approved by the board of directors and executive management. Equity Incentive. Equity incentives are provided primarily through stock option grants under the 1999 Omnibus Stock Incentive Plan. The grants are designed to align the interests of each executive officer with those of the stockholders and provide each individual with a significant incentive to manage Caldera from the perspective of an owner with an equity stake in the business. Each grant allows the individual to acquire shares of Caldera's Common Stock at a fixed price per share (the market price of the grant date) over a specified period of time (up to 10 years). The shares subject to each option generally vest in installments over a 48-month period, contingent upon the executive officer's continued employment with Caldera. Accordingly, the option will provide a return to the executive officer only if the executive officer remains employed by Caldera during the applicable vesting period, and then only if the market price of the underlying shares appreciates over the option term. The number of shares subject to each option grant will be set at a level intended to create a meaningful opportunity for stock ownership based on the officer's current position with Caldera, the base salary associated with the position, the size of comparable awards made to individuals in similar positions within the industry, the individual's potential for increased responsibility and promotion over the option term, and the individual's personal performance in recent periods. The compensation committee will also take into account the executive officer's existing holdings of Caldera's Common Stock and the number of vested and unvested options held by that individual in order to maintain an appropriate level of equity incentive. However, the compensation committee does not intend to adhere to any specific guidelines as to the relative option holdings of Caldera's executive officers. CEO Compensation. In setting the total compensation payable to Caldera's Chief Executive Officer for the 2000 fiscal year, the compensation committee sought to make that compensation competitive, while at the same time assuming that a significant percentage of compensation was tied to Caldera's performance and stock price. During fiscal year 2000, the base salary paid to Ransom H. Love was approximately $142,600. There were no quarterly "Management by Objective" targets established for Mr. Love during that period. 139 154 Mr. Love was granted 379,752 shares under Caldera's 1999 Omnibus Stock Incentive Plan during that period. Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the Internal Revenue Code disallows a tax deduction to publicly held companies for compensation paid to certain of their executive officers, to the extent that compensation exceeds $1 million per covered officer in any fiscal year. The limitation applies only to compensation which is not considered to be performance-based. Non-performance based compensation paid to Caldera's executive officers for the 2000 fiscal year did not exceed the $1 million limit per officer, and the compensation committee does not anticipate that the non- performance based compensation to be paid to Caldera's executive officers for fiscal 2001 will exceed that limit. Caldera's 1999 Omnibus Stock Incentive Plan has been structured so that any compensation deemed paid in connection with the exercise of option grants made under that plan with an exercise price equal to the fair market value of the options shares on the grant date will qualify as performance-based compensation which will not be subject to the $1 million limitation. Because it is unlikely that the cash compensation payable to any of Caldera's executive officers in the foreseeable future will approach the $1 million limit, the compensation committee has decided at this time not to take any action to limit or restructure the elements of cash compensation payable to Caldera's executive officers. The compensation committee will reconsider this decision should the individual cash compensation of any executive officer ever approach the $1 million level. It is the opinion of the compensation committee that the executive compensation policies and plans provide the necessary total remuneration program to properly align Caldera's performance and the interest of Caldera's stockholders through the use of competitive and equitable executive compensation in a balanced and reasonable manner, for both the short and long-term. Submitted by: Ralph J. Yarro III John R. Egan Thomas P. Raimondi, Jr. Members of the Compensation Committee HISTORICAL COMPENSATION OF CALDERA For information concerning the compensation historically paid to the executive officers of SCO and who will serve as executive officers or directors of New Caldera, see "SCO is Incorporating its SEC Filings in this Document by Reference" on page 32. Information concerning compensation historically paid to the executive officers and directors of Caldera who will serve as executive officers or directors of New Caldera is set forth below. 140 155 The following table presents compensation information for Caldera's most recent fiscal year, ended October 31, 2000, paid or accrued by Caldera's Chief Executive Officer and each of its other executive officers whose salary and bonus for fiscal 2000 was more than $100,000. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL ------------ COMPENSATION(1) SECURITIES ----------------- UNDERLYING NAME SALARY BONUS OPTIONS ---- -------- ----- ------------ Ransom H. Love.............................. 2000 $142,596 -- 879,752 Chief Executive Officer 1999 106,077 -- Alan J. Hansen.............................. 2000 126,756 -- 167,813 Chief Financial Officer(2) 1999 -- -- Benoy Tamang................................ 2000 122,673 -- 162,813 Senior Vice President, Strategic Development 1999 -- -- Drew A. Spencer............................. 2000 121,846 -- 165,313 Chief Technology Officer 1999 105,333 -- Royce Bybee................................. 2000 111,912 -- 44,625 Senior Vice President, Sales and Marketing(3) 1999 -- --
--------------- (1) The column for "Other Annual Compensation" has been omitted because there is no compensation required to be reported in that column. The aggregate amount of perquisites and other personal benefits provided to each executive officer listed above is less than the lesser of $50,000 and 10% of his total annual salary and bonus. (2) Mr. Hansen resigned as Chief Financial Officer effective November 15, 2000. (3) Mr. Bybee resigned as Senior Vice President, Sales and Marketing on November 1, 2000. OPTION GRANTS IN LAST FISCAL YEAR The following table presents the grants of stock options under Caldera's 1999 Omnibus Stock Incentive Plan during fiscal 2000, to each of Caldera's executive officers named in the Summary Compensation Table. All option grants under the 1999 Omnibus Stock Incentive Plan are nonqualified stock options. Options expire ten years from the date of grant. The exercise price of each option granted is equal to the fair market value of Caldera's common stock, as determined by Caldera's board on the date of grant. In fiscal 2000, Caldera granted to its employees options to purchase a total of 4,451,020 shares of Caldera's common stock. Potential realizable values are computed by - Multiplying the number of shares of common stock subject to a given option by the exercise price per share, - Assuming that the aggregate option exercise price derived from that calculation compounds at the annual 5% or 10% rates shown in the table for the entire 10 year term of the option, and - Subtracting from that result the aggregate option exercise price. The 5% and 10% assumed annual rates of stock price appreciation are required by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future common stock prices. 141 156
PERCENT NUMBER OF OF TOTAL POTENTIAL REALIZABLE VALUE AT ASSUMED SECURITIES OPTIONS EXERCISE ANNUAL RATES OF STOCK PRICE UNDERLYING GRANTED TO PRICE PER APPRECIATE FOR OPTION TERM OPTIONS EMPLOYEES IN SHARE EXPIRATION ------------------------------------- GRANTED FISCAL YEAR ($/ SHARE) DATE 0% 5% 10% ---------- ------------ ---------- ---------- --------- ----------- ----------- Ransom H. Love........ 200,000 8.53% $6.00 12/19/2009 $400,000 $1,406,231 $2,949,988 179,752 $6.00 01/03/2010 359,504 1,263,865 2,651,331 Alan J. Hansen........ 100,000 3.77% $1.13 11/22/2009 487,500 864,837 1,443,745 67,813 $6.00 12/19/2009 135,626 476,804 1,00,238 Benoy Tamang.......... 67,813 1.52% $6.00 12/19/2009 135,626 476,804 1,000,238 Drew A. Spencer....... 67,813 1.52% $6.00 12/19/2009 135,626 476,804 1,000,238 Royce Bybee........... 25,430 0.67% $6.00 12/19/2009 50,860 178,802 375,091 4,196 $9.50 05/18/2010 -- 25,069 63,530
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED OCTOBER 31, 2000 AND YEAR-END OPTION VALUES The following table presents the number of shares of common stock subject to vested and unvested stock options held as of October 31, 2000 by each of Caldera's executive officers named in the Summary Compensation Table. Also presented are values of "in-the-money" options, which represent the positive difference between the exercise price of each outstanding stock option and the price per share of Caldera's common stock on October 31, 2000.
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS SHARES ACQUIRED VALUE AT OCTOBER 31, 2000 AT OCTOBER 31, 2000 ON EXERCISE REALIZED -------------------- --------------------- NAME (#) ($) VESTED UNVESTED VESTED UNVESTED ---- --------------- -------- -------- --------- --------- --------- Ransom H. Love.............. 60,000 $264,359 577,680 302,072 $949,735 $300,265 Alan J. Hansen.............. -- -- -- 167,813 -- 237,500 Benoy Tamang................ 5,000 22,030 71,914 90,899 102,083 135,417 Drew A. Spencer............. 2,500 11,015 84,901 80,412 123,955 119,795 Royce Bybee................. 22,500 97,354 44,625 -- 35,623 --
1998 STOCK OPTION PLAN The 1998 Stock Option Plan was adopted by Caldera's board of directors on December 29, 1998 and subsequently approved by the stockholders. The plan became effective upon its adoption by the board and has been amended on various occasions as Caldera has grown and changed. The 1998 Stock Option Plan was superseded by the 1999 Omnibus Stock Incentive Plan, and no additional options may be granted under the 1998 Stock Option Plan (upon the expiration of previously granted options or otherwise). 5,000,000 shares of common stock were authorized for issuance under the 1998 Stock Option Plan. Options to purchase 3,252,088 shares of common stock were granted under the 1998 Stock Option Plan of which 813,800 options have been exercised or cancelled and 2,438,288 of which remain outstanding. Under the 1998 Stock Option Plan, Caldera may grant eligible individuals in Caldera's employ or service (including officers, non-employee board members and consultants) non-qualified options to purchase shares of Caldera's common stock. The 1998 Stock Option Plan is administered by Caldera's compensation committee. The compensation committee determines which eligible individuals are to receive options under the 1999 Omnibus Stock Incentive Plan, the time or times when each option is to be granted, the number of shares subject to each option, the exercise price of each option and the vesting schedule and the other terms to be in effect for each option. The exercise price for the options granted under the 1998 Stock Option Plan may be less than the fair market value of a share of common stock on the date of grant, payment is immediately due and payable upon exercise of an option and must be paid in cash or with a check made payable to Caldera. 142 157 In the event that Caldera is acquired, whether by merger or asset sale, each outstanding option granted under the 1998 Stock Option Plan that has vested may, at Caldera's discretion, be cashed out, be converted to options of the acquiring entity, be assumed by the acquiring entity, or otherwise disposed of in the manner provided in any stockholder-approved agreement or plan governing such transaction. In addition, in the absence of any governing provisions in any stockholder-approved agreement or plan governing such transaction, Caldera may, on a case-by-case basis, require any vested, exercisable options to be cashed out and terminated in exchange for a lump sum cash payment, shares of the acquiring entity or a combination thereof equal in value to the fair market value of the option. In the event Caldera is acquired, whether by merger or asset sale, each outstanding option granted under the 1998 Stock Option Plan that has not vested shall terminate as of the effective date of such transaction, unless otherwise provided in the stockholder-approved agreement or plan governing such transaction or by the compensation committee in its sole discretion on a case-by-case basis. If options are assumed by the purchasing or successor corporation, each option assumed will be adjusted to apply to the number and class of securities which would have been issuable to the option holder had the option been exercised immediately prior to the merger or asset sale. Following such merger or asset sale, appropriate adjustments will also be made to the number and class of securities available for issuance under the 1998 Stock Option Plan and the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. The board may amend or modify the 1998 Stock Option Plan at any time, subject to any stockholder approval required by governing laws and exchange regulations. The 1998 Stock Option Plan will terminate no later than December 29, 2008. 1999 OMNIBUS STOCK INCENTIVE PLAN The 1999 Omnibus Stock Incentive Plan (the "1999 Plan") is intended to serve as the successor equity incentive program to Caldera's 1998 Stock Option Plan. The 1999 Plan became effective upon its adoption by the board of directors and stockholders on December 1, 1999. It was amended by the board on March 10, 2000 to increase by 500,000 the number of shares authorized for issuance under the 1999 Plan. This amendment was approved by the stockholders of Caldera in March 2000. It was again amended by the board of directors on July 14, 2000 in order to make the following changes: - to permit the grant of non-qualified options with an exercise price below fair market value, - to permit the exercise of non-qualified options up to 120 days after termination of service, - to permit exercise of an option up to 30 days after termination of service for cause, - in connection with a sale, change of control or liquidation of Caldera, to permit Caldera or the acquiring entity to cash out, convert to options of the acquiring entity, or assume any vested options granted under the 1999 Plan, - in connection with a sale, change of control or liquidation of Caldera, to provide that non-vested options shall terminate unless otherwise provided in the governing agreements or determined by the committee, and - to permit Caldera to grant shares of restricted stock and phantom stock that vest without regard to the satisfaction of pre-established performance goals. This amendment was approved by the board on July 14, 2000 and became effective at the time of such approval. In addition, the board has approved amendments that will effect the following changes: (i) increase the maximum number of shares of common stock authorized for issuance over the term of the 1999 Plan by an additional 6,800,000 shares to 10,905,238 shares, (ii) establish an automatic share increase feature 143 158 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, (iii) add a formula awards program pursuant to which directors of Caldera 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 shareholders meeting during each even numbered calendar year. These amendments are the subject of Proposal Three. Please see page 170. The 1999 Plan presently authorizes the grant of incentive awards with respect to 4,105,238 shares of common stock (subject to increase if the amendments included in Proposal Three are approved by the stockholders). 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. Persons eligible to receive awards under the 1999 Plan include all employees and directors of Caldera and its subsidiaries and such other persons whom the committee determines are expected to make a contribution to Caldera. No one participant in the 1999 Plan may receive option grants or any other awards for more than 200,000 shares in the aggregate in any tax year of Caldera Systems, except for grants of options for a total of 379,752 shares to Mr. Love authorized by our board of directors in December 1999 and January 2000. The 1999 Plan is administered by Caldera's compensation committee. The compensation 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 Caldera's common stock valued at fair market value on the exercise date or by having Caldera retain sufficient shares of its 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. The 1999 Plan also permits grant of the following: - tandem stock appreciation rights, which provide the holders with the election to surrender his or her options for a cash appreciation distribution from Caldera equal to the fair market value of the vested shares subject to the surrendered option less the aggregate exercise price payable for such shares; - stand-alone stock appreciation rights, which entitle the holder to receive a cash payment from Caldera equal to the fair market value of the vested shares subject to the right less the base price for such right; - phantom stock awards, which entitle the holder to receive in cash the fair market value of a specified number of shares of our common stock on the vesting date; - restricted stock awards, which involves the grant of shares of common stock that are subject to restrictions on transferability during a vesting period and are forfeited if certain conditions are not met; and - stock bonus awards, which involve outright grant of shares of common stock without condition. In the event that Caldera is acquired (whether by merger, liquidation or asset sale) or there is a change in who controls Caldera (effected through an acquisition of 50% or more of Caldera's voting stock or by specified change in the composition of Caldera's board), the incentive awards granted under the 1999 Plan are treated as follows: - each option and stock appreciation right that has vested may, at Caldera's discretion, be cashed out, be converted to options of the acquiring entity, be assumed by the acquiring entity, or otherwise disposed of in the manner provided in any shareholder-approved agreement or plan governing such 144 159 transaction. In addition, in the absence of any governing provisions in any stockholder-approved agreement or plan governing such transaction, Caldera may, on a case-by-case basis, require any vested, exercisable options to be cashed out and terminated in exchange for a lump sum cash payment, shares of the acquiring entity or a combination thereof equal in value to the fair market value of the option; - each outstanding option and stock appreciation right granted under the 1999 Plan that has not vested shall terminate as of the effective date of such transaction, unless otherwise provided in the stockholder-approved agreement or plan governing such transaction or by the compensation committee in its sole discretion on a case-by-case basis; - each outstanding phantom stock award that has not vested prior to the date of a change of control shall immediately expire; - all restrictions on vested shares of restricted stock shall immediately lapse, and all unvested shares of restricted stock shall immediately be canceled; and - each outstanding stock bonus shall not be affected. The board may amend or modify the 1999 Plan at any time, subject to stockholder approval if required by governing exchange regulations or if necessary to satisfy applicable provisions of governing tax laws. 2000 EMPLOYEE STOCK PURCHASE PLAN The 2000 Employee Stock Purchase Plan was adopted by Caldera's board of directors on February 15, 2000 and was approved by its stockholders on March 1, 2000. The plan became effective on March 20, 2000. The plan is designed to allow eligible employees of Caldera Systems, Inc. and its participating subsidiaries to purchase shares of its common stock, at semi-annual intervals, through their periodic payroll deductions. A total of 500,000 shares of Caldera's common stock has been reserved for issuance under the plan. In connection with the combination, the board has approved an increase by 1.5 million in the number of shares authorized for issuance under the plan. This increase is being submitted to the stockholders for approval pursuant to Proposal Four. Please see page 185. 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 one semi-annual purchase date. The plan will have a series of successive offering periods, each with a maximum duration of 24 months. However, the initial offering period began on March 20, 2000 and will end on the last business day in April 2002. The next offering period will begin on the first business day in May 1, 2002, and subsequent offering periods will be set by Caldera's 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 Caldera'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. On October 31, 2000, 61,807 shares of common stock were purchased at a price of $2.94. 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 145 160 each semi-annual purchase date (the last business day in April and October 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. 146 161 CERTAIN TRANSACTIONS OF CALDERA AND NEW CALDERA Other than the transactions described below, since October 31, 1998 there has not been, nor is there currently proposed, any transaction or series of similar transactions to which Caldera was or will be a party: - in which the amount exceeds $60,000; and - in which any director, executive officer, holder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest. RELATIONSHIP WITH CALDERA, INC., A UTAH CORPORATION Caldera began operations in 1994 as a business unit comprising substantially all of the operations of Caldera, Inc., a Utah corporation. In July 1996, through an asset purchase, Caldera, Inc. acquired an additional business unit which was not engaged in developing and marketing Linux software. Caldera, Inc. subsequently made the strategic determination to separate its two business lines into separate entities. Therefore, pursuant to an Asset Purchase and Sale Agreement dated as of September 1, 1998, as amended, by and between Caldera, Inc. and Caldera Systems, Inc., Caldera, Inc. sold to Caldera Systems certain assets of its Linux software business unit for $19.9 million, $15.0 million of which was paid in the form of a cash payment in fiscal year 1999, $36,174 of which was in the form of assumption of liabilities and $4.9 million of which was in the form of forgiveness of a note receivable from Caldera, Inc. Caldera, Inc. was dissolved in January 2000. On September 1, 1998, we entered into a sublease with Caldera, Inc. for office space in Orem, Utah. The sublease provided for annual rent of approximately $150,000 and was terminated pursuant to its terms on August 31, 2000. Ralph J. Yarro III, chairman of Caldera's board of directors, and Raymond J. Noorda, one of Caldera's directors, were directors of Caldera, Inc. Prior to its dissolution in January 2000, Caldera, Inc. was majority-owned by The Canopy Group, Inc. which holds more than 5% of our common stock. The Noorda Family Trust, of which Mr. Noorda and his spouse are co-trustees, is the controlling stockholder of The Canopy Group, Inc. RELATIONSHIP WITH THE CANOPY GROUP, INC. The Canopy Group, formerly NFT Ventures, is a venture capital company that invests primarily in start-up high technology companies that encourage the adoption, deployment and promotion of Linux. The Canopy Group currently holds equity interests in companies in the fields of data storage and protection, Linux operating systems, data satellites, clustering, universal voice messaging, Java and eCommerce. Effective August 31, 1998, Caldera sold 16,000,000 shares of its common stock to The Canopy Group, Inc. for an aggregate purchase price of $21.0 million. Of this amount, $16.0 million was paid in cash ($519,000 in fiscal year 1998 and $15.5 million -- non-interest bearing -- in fiscal year 1999), and $4.9 million was in the form of a note receivable from Caldera, Inc., which The Canopy Group transferred to us. Effective September 1, 1998, Caldera entered into a convertible promissory note with The Canopy Group. The note, which was secured by all of Caldera's assets, was due on December 31, 1999. The note accrued interest at the prime rate, less 1/2%, and was convertible into our common stock at $1.00 per share. A total of $4.8 million was advanced under the note. The principal balance, along with approximately $455,000 of accrued interest was converted into 5,273,974 shares of our common stock on August 19, 1999. Under a secured promissory note dated as of December 29, 1999, Caldera borrowed $300,000 from The Canopy Group. The note bears interest of 9.5% per annum and was payable upon demand or on January 14, 2000. Caldera paid the note in full on January 5, 2000. 147 162 The Canopy Group holds more than 5% of Caldera's common stock. Mr. Noorda, one of Caldera's directors, and his spouse are co-trustees of the Noorda Family Trust, which is the controlling stockholder of The Canopy Group. Until June 2000, Caldera utilized a 401(k) plan sponsored by The Canopy Group for its employees, under which it made matching contributions from January 1, 2000 through June 2000. In June 2000, Caldera adopted its own 401(k) plan. 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 the quarter ended April 30, 2000. The option agreement allowed Mr. Yarro to purchase shares of Caldera's 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. During May through October 2000, we subleased office space to Canopy on a month-to-month basis. The rent payments to Caldera from Canopy were approximately $5,100 per month. RELATIONSHIP WITH MTI TECHNOLOGY CORPORATION Effective July 27, 1999, Caldera sold 5,333,333 shares of its common stock to MTI Technology Corporation for an aggregate purchase price of $6.0 million. Of this amount, $3.0 million was paid at closing, $1.5 million was due at January 1, 2000, and $1.5 million was due in July 2000. The $1.5 million due at January 1, 2000, was paid on November 15, 1999 in return for a waiver by Caldera of accrued and future interest on the unpaid portions of the purchase price. Caldera believes that the waiver of interest in consideration for the acceleration of payment was not more favorable to MTI than the terms Caldera would have been able to negotiate with an unrelated party. The remaining $1.5 million was paid in full in August 2000. On August 12, 1999, Caldera entered into a Distribution and License Agreement with MTI Technology Corporation. Under this agreement, MTI Technology Corporation includes as available for sale in its price book all of Caldera's products, technology or services that are commercially available for sale, and Caldera sells or licenses, as applicable, to MTI Technology Corporation, and allow MTI Technology Corporation to sell, re-sell, license, reproduce, use, distribute, sublicense, have made and prepare derivative works of all of Caldera's products, technology, or services that are commercially available. This agreement is terminable by either party on 90 days prior written notice. Caldera uses a computer system provided by MTI Technology Corporation without charge. The computer system is valued at $105,000. MTI Technology Corporation owns more than 5% of Caldera's common stock. The Canopy Group, Inc. holds more than 45% of the outstanding common stock of MTI Technology Corporation. The Noorda Family Trust, of which Mr. Noorda and his spouse are co-trustees, is the controlling stockholder of The Canopy Group. Mr. Noorda is one of Caldera's directors and is chairman of the board of directors of MTI Technology Corporation. Thomas P. Raimondi, Jr., one of our directors, is president and chief executive officer of MTI Technology Corporation. RELATIONSHIP WITH LINEO, INC. In January 2000, we exchanged with Lineo, Inc. 1,250,000 shares of our common stock in return for 3,238,437 shares of common stock of Lineo. On May 11, 2000, The Canopy Group transferred 1,761,563 additional shares of Lineo's common stock held by The Canopy Group to us in the form of a capital contribution. On August 31, 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 of common stock of Lineo, Inc, respectively, to Metrowerks Holdings at $7.50 per share. 148 163 The sale closed upon the receipt of certain required regulatory approvals and the completion of other closing conditions. In conjunction with the sale of the common stock of the common stock of Lineo, Caldera also entered into a stockholder agreement among The Canopy Group, Lineo Inc. and certain other stockholders of Lineo, which provide for right of first refusal for the benefit of Metrowerks Holdings with request to Lineo shares held by Caldera and the other Lineo stockholders party to the agreement. Caldera has also agreed to indemnify Metrowerks Holdings for any damage sustained by Metrowerks Holdings as a result of breaches by Caldera under the stock purchase and sale agreement and the stockholder agreement or for breaches by Lineo under a warrant agreement between Lineo and Metrowerks Holdings. Caldera's indemnification obligation is limited to the amount of proceeds received by Caldera in its sale to Metrowerks Holdings. Lineo distributes copies of our OpenLinux products to certain of its customers. Lineo is majority-owned by The Canopy Group, Inc. The Noorda Family Trust, of which Mr. Noorda and his spouse are co-trustees, is the controlling stockholder of The Canopy Group, Inc. Mr. Noorda, John R. Egan and Ralph T. Yarro III, each of whom is one of Caldera's directors, are directors of Lineo, Inc. RELATIONSHIP WITH THE SANTA CRUZ OPERATION On February 1, 2000, Caldera and SCO entered into a Strategic Business Agreement. The Agreement provides for a number of joint marketing activities between the parties, including, but not limited to, the following: (i) participation together in industry shows, (ii) cross recruit and cross match channel partners for SCO's Tarantella product line and Caldera's OpenLinux e-Server, (iii) cross-reference each others websites and product solutions and (iv) discussion of Caldera's channel initiatives. Additionally, Caldera agreed to provide ten copies of OpenLinux to SCO for its internal use and SCO agrees to provide three copies of SCO's Tarantella Express product. Caldera and SCO also agreed to cooperate and work together to port Tarantella Express products to Caldera's OpenLinux, eServer and eDesktop. The term of the agreement is for one year with automatic renewals for additional one year periods unless the agreement is terminated. On February 28, 2000, Caldera entered into an agreement for Linux professional services with SCO, pursuant to which SCO is to provide customer support and other related services to customers of Caldera from time to time for specified fees. This agreement is currently being performed by SCO's professional services group, and will be extinguished upon the closing of the combination, at which time New Caldera would become the owner of the professional services group. On June 27, 2000, Caldera and SCO entered into an OEM Distribution Agreement. Under the terms of the agreement, Caldera is granted a non-exclusive, non-transferable, worldwide license certain of SCO's products, including enhancements and improvements, for distribution and sale to end users and specified resellers. Caldera pays current list price, less 42% for all SCO products under the agreement. The term of the agreement is for one year with automatic renewals for additional one year periods unless the agreement is terminated. Caldera had sales to SCO totalling $331,500 during the year ended October 31, 2000. PREFERRED STOCK TRANSACTIONS Effective December 30, 1999, Caldera entered into a Conversion Agreement with The Canopy Group and MTI Technology Corporation. Under this agreement, Caldera issued and exchanged 5,273,974 shares of its Series A convertible preferred stock for 5,273,974 shares of our common stock held by The Canopy Group. Caldera also issued and exchanged 1,322,172 shares of its Series A convertible preferred stock for 1,322,172 shares of its common stock held by MTI Technology Corporation. From December 31, 1999 through January 10, 2000, we issued an aggregate of 5,000,000 shares of our Series B convertible preferred stock at a purchase price of $6.00 per share to various investors including Chicago Venture Partners, Citrix Systems, Inc., Egan Managed-Capital, Novell, Inc., Sun Microsystems and The Santa Cruz Operation, Inc. All aspects of the Series B private placement were 149 164 completed as of January 10, 2000. The Series A convertible preferred stock and the Series B convertible preferred stock converted automatically into Caldera's common stock at the closing of Caldera's initial public offering in March 2000. In connection with the Series B financing, the holders of the Series A convertible preferred stock and the holders of the Series B convertible preferred stock also entered into a second amended and restated investors rights agreement with Caldera, under which: - Caldera is obligated to provide certain registration rights with respect to shares of our capital stock held by the other parties to this agreement. See, "Description of Caldera and New Caldera Capital Stock -- Registration Rights." - Caldera granted the other parties a right of first offer with respect to any future issuance and sale of shares of our capital stock other than shares of our common stock to be issued publicly. This right terminated upon the closing of Caldera's initial public offering in March 2000. INDEMNIFICATION AGREEMENTS Caldera has entered into indemnification agreements with each of its executive officers and directors. 150 165 PRINCIPAL STOCKHOLDERS OF NEW CALDERA The following table presents information as to the beneficial ownership of New Caldera's common stock if the combination had occurred on February 1, 2001 by: - Each beneficial owner of more than 5% of New Caldera's common stock; - Each of New Caldera's directors; - Certain executive officers; and - All directors and executive officers of New Caldera as a group. Beneficial ownership is determined under the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Unless indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of common stock subject to options that are currently exercisable or exercisable within 60 days of February 1, 2001 are deemed to be outstanding and to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
NUMBER OF SHARES PERCENT OF SHARES NAME AND ADDRESS BENEFICIALLY OWNED BENEFICIALLY OWNED ---------------- ------------------ ------------------ The Canopy Group, Inc. ..................................... 21,273,974(1) 38.2% MTI Technology Corporation.................................. 5,333,333(2) 9.6 The Santa Cruz Operation.................................... 16,000,000(3) 28.7 Ransom H. Love.............................................. 656,481(4) 1.2 Robert K. Bench............................................. --(5) * Drew A. Spencer............................................. 102,383(6) * Benoy Tamang................................................ 89,394(7) * Ralph J. Yarro, III......................................... 27,954,881(8) 50.2 Steve Cakebread............................................. --(9) * John R. Egan................................................ 883,333(10) 1.6 Edward E. Iacobucci......................................... 50,000(11) * Doug Michels................................................ 16,000,000(12) 28.7 Raymond J. Noorda........................................... 27,857,307(13) 50.0 Thomas P. Raimondi, Jr. .................................... 5,383,333(14) 9.7 All directors and executive officers as a group............. 45,785,772(15) 82.2
--------------- * Less than 1% (1) The address for The Canopy Group, Inc. is 333 South 520 West, Suite 300, Lindon, Utah 84042. (2) The address for MTI Technology Corp. is 4905 East La Palma Avenue, Anaheim, California 92807. (3) The address for The Santa Cruz Operation is 425 Encinal Street, Santa Cruz, California 95061. (4) Consists of options to purchase 656,481 shares of common stock. (5) Does not include options to purchase 200,000 shares of common stock granted to Mr. Bench in December, 2000. (6) Consists of options to purchase 102,383 shares of common stock. (7) Consists of options to purchase 89,394 shares of common stock. (8) Includes options to purchase 96,874 shares of common stock, 700 shares of common stock, 21,273,974 shares of common stock held by The Canopy Group, Inc., 5,333,333 shares of common stock held by MTI Technology Corporation, and 1,250,000 shares held by Lineo, Inc. Mr. Yarro is the President and Chief Executive Officer of The Canopy Group, Inc. Mr. Yarro disclaims beneficial 151 166 ownership of the shares held by The Canopy Group, MTI Technology Corporation and Lineo, Inc., except to the extent of his pecuniary interest therein. (9) Does not include options to purchase 79,167 shares of common stock granted to Mr. Cakebread in August, 2000. (10) Consists of 833,333 shares of common stock held by Egan-Managed Capital, L.P. and options to purchase 50,000 shares of common stock. Mr. Egan is a managing partner of Egan-Managed Capital, L.P. Mr. Egan disclaims beneficial ownership of the shares held by Egan-Managed Capital, L.P., except to the extent of his pecuniary interest therein. (11) Consists of options to purchase 50,000 shares of common stock. (12) Consists of 16,327,323 shares of common stock held by The Santa Cruz Operation. Mr. Michels is president and chief executive officer of The Santa Cruz Operation. Mr. Michels disclaims his beneficial ownership of the shares held by The Santa Cruz Operation. (13) Includes 21,273,974 shares of common stock held by The Canopy Group, Inc., 5,333,333 shares of common stock held by MTI Technology Corporation and 1,250,000 shares held by Lineo, Inc. Mr. Noorda is chairman of the boards of directors of The Canopy Group, Inc. and MTI Technology Corporation, and is a director of Lineo, Inc. Additionally, the Noorda Family Trust, of which Mr. Noorda and his spouse serve as co-trustees is the controlling stockholder of The Canopy Group, Inc. The Canopy Group, Inc. holds more than 45% of the outstanding common stock of MTI Technology Corporation. Lineo, Inc. is majority-owned by The Canopy Group. By virtue of his holding corporate offices, his stock ownership and his service as co-trustee, all as described above, Mr. Noorda may be deemed to control The Canopy Group, Inc., MTI Technology Corporation and Lineo, Inc., and Mr. Noorda may be deemed to possess indirect beneficial ownership of the common stock held by The Canopy Group, Inc., MTI Technology Corporation and Lineo, Inc. Mr. Noorda disclaims beneficial ownership of the shares held by The Canopy Group, Inc., MTI Technology Corporation and Lineo, Inc., except to the extent of his pecuniary interest therein. The address for Mr. Noorda is c/o MTI Technology Corporation, 4905 East La Palma Avenue, Anaheim, California 92807. (14) Includes options to purchase 50,000 shares of common stock and 5,333,333 shares of common stock held by MTI Technology Corporation. Mr. Raimondi is the President and Chief Executive Officer of MTI Technology Corporation and by virtue of his corporate office may be deemed to control MTI Technology Corporation and may be deemed to possess indirect beneficial ownership of the common stock held by MTI Technology Corporation. Mr. Raimondi disclaims beneficial ownership of the shares held by MTI Technology Corporation, except to the extent of his pecuniary interest therein. (15) See notes 4 through 14, as applicable. 152 167 PRINCIPAL STOCKHOLDERS OF CALDERA The following table presents information as to the beneficial ownership of Caldera's common stock as of February 1, 2001 by: - Each stockholder known by Caldera to be the beneficial owner of more than 5% of Caldera's common stock; - Each of Caldera's directors; - Each executive officer listed in Caldera's summary compensation table; and - All directors and executive officers of Caldera as a group. Beneficial ownership is determined under the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Unless indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of common stock subject to options that are currently exercisable or exercisable within 60 days of February 1, 2001 are deemed to be outstanding and to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
NUMBER OF SHARES PERCENT OF SHARES NAME AND ADDRESS BENEFICIALLY OWNED BENEFICIALLY OWNED ---------------- ------------------ ------------------ The Canopy Group, Inc. ..................................... 21,273,974(1) 53.6% MTI Technology Corporation.................................. 5,333,333(2) 13.4 Ransom H. Love.............................................. 656,481(3) 1.6 Robert K. Bench............................................. --(4) * Drew A. Spencer............................................. 102,383(5) * Benoy Tamang................................................ 89,394(6) * Ralph J. Yarro, III......................................... 27,954,881(7) 70.4 Steve Cakebread............................................. --(8) * John R. Egan................................................ 883,333(9) 2.2 Edward E. Iacobucci......................................... 50,000(10) * Raymond J. Noorda........................................... 27,857,307(11) 70.2 Thomas P. Raimondi, Jr. .................................... 5,383,333(12) 13.6 All directors and executive officers as a group............. 29,785,772(13) 75.1
--------------- * Less than 1% (1) The address for The Canopy Group, Inc. is 333 South 520 West, Suite 300, Lindon, Utah 84042. (2) The address for MTI Technology Corp. is 4905 East La Palma Avenue, Anaheim, California 92807. (3) Consists of options to purchase 656,481 shares of common stock. (4) Does not include options to purchase 200,000 shares of common stock granted to Mr. Bench in December, 2000. (5) Consists of options to purchase 102,383 shares of common stock. (6) Consists of options to purchase 89,394 shares of common stock. (7) Consists of options to purchase 96,874 shares of common stock, 700 shares of common stock, 21,273,974 shares of common stock held by The Canopy Group, 5,333,333 shares of common stock held by MTI Technology Corporation, and 1,250,000 shares of common stock held by Lineo, Inc. Mr. Yarro is the President and Chief Executive Officer of The Canopy Group, Inc. Mr. Yarro disclaims beneficial ownership of the shares held by The Canopy Group, MTI Technology Corporation and Lineo, Inc., except to the extent of his pecuniary interest therein. 153 168 (8) Does not include options to purchase 79,167 shares of common stock granted to Mr. Cakebread in August, 2000. (9) Consists of 833,333 shares of common stock held by Egan-Managed Capital, L.P. and options to purchase 50,000 shares of common stock. Mr. Egan is a managing partner of Egan-Managed Capital, L.P. Mr. Egan disclaims beneficial ownership of the shares held by Egan-Managed Capital, L.P., except to the extent of his pecuniary interest therein. (10) Consists of options to purchase 50,000 shares of common stock. (11) Includes 21,273,974 shares of common stock held by The Canopy Group, Inc., 5,333,333 shares of common stock held by MTI Technology Corporation and 1,250,000 shares held by Lineo, Inc. Mr. Noorda is chairman of the boards of directors of The Canopy Group, Inc. and MTI Technology Corporation, and is a director of Lineo, Inc. Additionally, the Noorda Family Trust, of which Mr. Noorda and his spouse serve as co-trustees is the controlling stockholder of The Canopy Group, Inc. The Canopy Group, Inc. holds more than 45% of the outstanding common stock of MTI Technology Corporation. Lineo, Inc. is majority-owned by The Canopy Group. By virtue of his holding corporate offices, his stock ownership and his service as co-trustee, all as described above, Mr. Noorda may be deemed to control The Canopy Group, Inc., MTI Technology Corporation and Lineo, Inc., and Mr. Noorda may be deemed to possess indirect beneficial ownership of the common stock held by The Canopy Group, Inc., MTI Technology Corporation and Lineo, Inc. Mr. Noorda disclaims beneficial ownership of the shares held by The Canopy Group, Inc., MTI Technology Corporation and Lineo, Inc., except to the extent of his pecuniary interest therein. The address for Mr. Noorda is c/o MTI Technology Corporation, 4905 East La Palma Avenue, Anaheim, California 92807. (12) Includes options to purchase 50,000 shares of common stock and 5,333,333 shares of common stock held by MTI Technology Corporation. Mr. Raimondi is the President and Chief Executive Officer of MTI Technology Corporation and by virtue of his corporate office may be deemed to control MTI Technology Corporation and may be deemed to possess indirect beneficial ownership of the common stock held by MTI Technology Corporation. Mr. Raimondi disclaims beneficial ownership of the shares held by MTI Technology Corporation, except to the extent of his pecuniary interest therein. (13) See notes 3 through 12, as applicable. 154 169 PRINCIPAL SHAREHOLDERS OF SCO The following table sets forth certain information with respect to the beneficial ownership of SCO's common stock as of February 1, 2001, by: - each person known by SCO to beneficially own more than five percent of SCO's outstanding common stock; - each of SCO's directors; - each of the four most highly compensated executive officers in fiscal 2000 besides SCO's chief executive officer; and - all of SCO's executive officers and directors as a group. Unless otherwise indicated, the address for each shareholder on this table is c/o The Santa Cruz Operation, Inc., 425 Encinal Street, Santa Cruz, California 95061-1900. Except as otherwise noted, and subject to applicable community property laws, to the best of our knowledge, the persons named in this table have sole voting and investing power for all of the shares of common stock held by them.
FIVE PERCENT SHAREHOLDERS, COMMON STOCK PERCENT OWNERSHIP DIRECTORS AND CERTAIN EXECUTIVE OFFICERS BENEFICIALLY OWNED OF COMMON STOCK(1) ---------------------------------------- ------------------ ------------------ Douglas L. Michels(2).............................. 4,218,543 10.44% Alok Mohan(3)...................................... 682,332 1.68% Robert M. McClure(4)............................... 142,082 * Gilbert P. Williamson(5)........................... 136,750 * R. Duff Thompson(5)................................ 30,250 * Ninian Eadie(5).................................... 107,250 * Ronald Lachman(6).................................. 159,250 * James Wilt(7)...................................... 495,062 1.23% Jack Moyer(8)...................................... 107,387 * Steven M. Sabbath(9)............................... 173,099 * Michael Orr(5)..................................... 87,500 * All directors and executive officers as a group (15 persons)(10)..................................... 6,981,498 16.33%
--------------- * Represents less than one percent. (1) Based on 39,875,042 shares of common stock outstanding as of February 1, 2001. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of February 1, 2001 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of each other person. (2) Includes 512,776 shares of common stock issuable pursuant to options exercisable within 60 days of February 1, 2001. (3) Includes 622,497 shares of common stock issuable pursuant to options exercisable within 60 days of February 1, 2001. (4) Includes 138,750 shares of common stock issuable pursuant to options exercisable within 60 days of February 1, 2001. (5) Represents shares of common stock issuable pursuant to options exercisable within 60 days of February 1, 2001. (6) Includes 87,250 shares of common stock issuable pursuant to options exercisable within 60 days of February 1, 2001. 155 170 (7) Includes 283,386 shares of common stock issuable pursuant to options exercisable within 60 days of February 1, 2001. (8) Includes 88,748 shares of common stock issuable pursuant to options exercisable within 60 days of February 1, 2001. (9) Includes 152,874 shares of common stock issuable pursuant to options exercisable within 60 days of February 1, 2001. (10) Includes 2,870,779 shares of common stock issuable pursuant to options exercisable within 60 days of February 1, 2001. 156 171 DESCRIPTION OF CALDERA AND NEW CALDERA CAPITAL STOCK GENERAL The following summary includes all of the material provisions of Caldera and New Caldera's capital stock. Except where otherwise indicated, they are identical. However, you should read the New Caldera amended and restated certificate of incorporation attached as Appendix D and the New Caldera amended and restated bylaws attached as Appendix E. The authorized capital stock of Caldera consists of 100,000,000 shares, of which 75,000,000 are common stock, par value $0.001 per share, and 25,000,000 are preferred stock, par value $0.001 per share. If Proposal Five included in this joint proxy statement/prospectus is approved by the stockholders, the authorized capital stock of Caldera and New Caldera will consist of 200,000,000 shares, of which 175,000,000 will be common stock, par value $0.001 per share, and 25,000,000 will be preferred stock, par value $0.001 per share. Please see page 191. Based on the shares of Caldera common stock outstanding on October 31, 2000, immediately following the combination, there will be outstanding approximately 55.7 million shares of New Caldera common stock. COMMON STOCK Dividend Rights. Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as the board of New Caldera may from time to time determine. Voting Rights. Each common stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors are not provided for in New Caldera's certificate of incorporation, which means that the holders of a majority of the shares voted will be able to elect all of the directors then standing for election. No Preemptive or Similar Rights. New Caldera's common stock is not entitled to preemptive rights and is not subject to conversion or redemption. Right to Receive Liquidation Distributions. Upon a liquidation, dissolution, or winding up of New Caldera, the assets legally available for distribution to New Caldera's stockholders are distributable ratably among the holders of New Caldera's common stock and any participating preferred stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding preferred stock and payment of other claims of creditors. PREFERRED STOCK Upon the closing of the combination, there will be no shares of preferred stock outstanding. The board of directors of New Caldera will be authorized, without further stockholder approval, to issue from time to time up to an aggregate of 25,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designation of series. See "-- Delaware Anti-Takeover Law and Charter Provisions" and "-- Charter and Bylaws." REGISTRATION RIGHTS Pursuant to a second amended and restated investors rights agreement, dated January 7, 2000, which Caldera Systems entered into with holders of 11,596,146 shares of its common stock (assuming conversion of all outstanding shares of preferred stock), the holders of these shares will be entitled to certain registration rights regarding the same number of shares of New Caldera to be owned by them upon the 157 172 closing of the combination. The registration rights provide that if New Caldera proposes to register any securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, they are entitled to notice of the registration and are entitled to include shares of their common stock in the registration. This right is subject to conditions and limitations, including the right of the underwriters in an offering to limit the number of shares included in the registration. Beginning on September 20, 2000, the holders of at least 22% of these shares may also require New Caldera to file up to two registration statements under the Securities Act at its expense with respect to their shares of common stock. New Caldera is required to use its best efforts to effect these registrations, subject to conditions and limitations. Furthermore, the holders of these shares may require New Caldera to file additional registration statements on Form S-3, subject to conditions and limitations. These rights terminate on the earlier of March 20, 2003, or when a holder is able to sell all its shares pursuant to Rule 144 under the Securities Act in any 90-day period. Pursuant to the reorganization agreement, New Caldera has agreed to register shares of New Caldera held by SCO for distribution to SCO's shareholders. See "The Reorganization Agreement -- Distribution and Registration of Shares." DELAWARE ANTI-TAKEOVER LAW AND CHARTER PROVISIONS The provisions of the Delaware General Corporation Law, New Caldera's amended and restated certificate of incorporation and its amended and restated bylaws described below may have the effect of delaying, deferring, or discouraging another person from acquiring control of New Caldera. New Caldera is subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. This section prevents Delaware corporations from engaging, under limited circumstances, in a business combination, which includes a merger or sale of more than 10% of the corporation's assets, with any interested stockholder, which is a stockholder who owns 15% or more of the corporation's outstanding voting stock, as well as affiliates and associates of stockholders, for three years following the date that the stockholder became an interested stockholder unless: - the transaction is approved by the board of directors before the date the interested stockholder attained that status; - upon the closing of the transaction that resulted in the stockholder becoming an interested stockholder, the stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or - on or after the date the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. A Delaware corporation may opt out of this provision with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from a stockholders' amendment approved by at least a majority of the outstanding voting shares. However, New Caldera has not opted out of this provision. This provision of the Delaware General Corporation Law could prohibit or delay mergers or other takeover or change-in-control attempts and may discourage attempts to acquire New Caldera. CHARTER AND BYLAWS Charter New Caldera's amended and restated certificate of incorporation provides that all stockholder actions must be effected at a duly-called annual or special meeting and not by a consent in writing. New Caldera's amended and restated certificate of incorporation also requires the approval of its board of directors to adopt, amend or repeal its bylaws. In addition, New Caldera's amended and restated certificate of incorporation permits the stockholders to adopt, amend or repeal its bylaws only upon the affirmative vote 158 173 of the holders of at least two-thirds of the voting power of all then outstanding shares of stock entitled to vote. Directors are removable for cause only by stockholders holding a majority of the then-outstanding shares of stock entitled to vote. Vacancies on the board of directors resulting from death, resignation, removal or other reason may be filled by a majority of the directors then in office, even if less than a quorum. Vacancies from newly created directorships must be filled by a majority of the directors then in office. Lastly, the provisions in the certificate of incorporation described above and other provisions pertaining to the limitation of liability and indemnification of directors may be amended or repealed only with the affirmative vote of the holders of at least two-thirds of the voting power of all then outstanding shares of stock entitled to vote. These provisions may have the effect of deterring hostile takeovers or delaying changes in the control or management of New Caldera, which could have an adverse effect on the market price of its common stock. Bylaws New Caldera's amended and restated bylaws also contain many of the provisions in its certificate of incorporation described above. Its bylaws will not permit stockholders to call a special meeting. In addition, New Caldera's amended and restated bylaws establish an advance notice procedure for matters to be brought before an annual or special meeting of its stockholders, including the election of directors. Business permitted to be conducted at any annual meeting or special meeting of stockholders is limited to business properly brought before the meeting. New Caldera's amended and restated bylaws also provide that it will indemnify officers and directors against losses that they may incur in investigations and legal proceedings resulting from their services to New Caldera, which may include services in connection with takeover defense measures. These provisions may have the effect of preventing changes in New Caldera's management. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY New Caldera's amended and restated certificate of incorporation limits the liability of directors to the fullest extent permitted by the Delaware General Corporation Law. In addition, New Caldera's amended and restated certificate of incorporation and bylaws provide that it will indemnify its directors and officers to the fullest extent permitted by the Delaware General Corporation Law. New Caldera will enter into separate indemnification agreements with its directors and executive officers that provide them indemnification protection if its certificate of incorporation is subsequently amended. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for New Caldera's common stock will be American Securities Transfer and Trust, Inc. 159 174 COMPARISON OF RIGHTS OF HOLDERS OF SCO COMMON STOCK AND NEW CALDERA COMMON STOCK The following is a summary of certain differences between the rights of holders of SCO common stock and holders of New Caldera common stock. While we believe that this summary covers the material differences, it may not contain all of the information that is important to holders of SCO common stock. In order to more completely understand the differences between the rights of holders of SCO common stock and holders of New Caldera common stock, SCO shareholders should carefully read all of the original documents and statutes referenced in this summary. The rights of holders of SCO common stock with respect to such stock are governed by the articles of incorporation and bylaws of SCO, each as currently in effect, and the Corporation Code of the State of California. The shares of New Caldera common stock that will be acquired by SCO and the options to purchase shares of New Caldera common stock that will be acquired by certain SCO option holders as a result of the combination will have rights that are governed by the amended and restated certificate of incorporation and amended and restated bylaws of New Caldera, each as in effect as of the effective time of the combination, and the General Corporation Law of the State of Delaware. APPLICABLE STATE CORPORATE LAW SCO is incorporated under the laws of the State of California and is governed by the Corporation Code of the State of California. New Caldera is incorporated under the laws of the State of Delaware and is governed by the General Corporation Law of the State of Delaware. As a result of this difference in governing law, the shares of New Caldera common stock that will be acquired by SCO and the options to purchase shares of New Caldera common stock that will be acquired by SCO option holders as a result of the combination may have statutory rights different than those associated with shares of SCO common stock. Important differences between the Corporation Code of the State of California and the General Corporation Law of the State of Delaware include, but are not limited to, the following: - Delaware law allows a corporation to limit directors' liability and indemnify directors against claims to a greater extent than is permitted under California law. - Delaware law allows a corporation to take more extensive anti-takeover measures than are permitted under California law, including allowing a Delaware corporation to eliminate special stockholder meetings and to elect a classified board of directors. - Delaware law includes a specific anti-takeover statute that prevents certain business combinations not approved by the incumbent board. California law has no analogous statute. In addition, Delaware law and California law differ in their treatment of appraisal rights, the payment of dividends, and shareholder voting related to business combinations and combinations. As a Delaware corporation, New Caldera is subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware. Under certain circumstances, the provisions of Section 203 may make the consummation of various business transactions by "interested stockholders," as defined in Section 203, with New Caldera more difficult for a three-year period following the time that a stockholder becomes an "interested stockholder." A corporation may waive the protective provisions of Section 203 in its certificate of incorporation or bylaws, but New Caldera has not currently done so. CERTIFICATES OF INCORPORATION AND BYLAWS Authorized and Outstanding Capital Stock SCO has two classes of authorized capital stock, designated "common stock" and "preferred stock." SCO is authorized to issue 100,000,000 shares of common stock and, as of February 1, 2001, there were 36,121,982 shares of common stock outstanding. SCO is authorized to issue 20,000,000 shares of preferred stock, with such rights, preferences and designations that the board of directors of SCO may determine. Currently there are no outstanding shares of SCO preferred stock. 160 175 New Caldera will have two classes of authorized capital stock, designated "common stock" and "preferred stock," each with a par value of $0.001 per share. If Proposal Five described in this joint proxy statement/prospectus is approved, New Caldera will be authorized to issue 175,000,000 shares of common stock. New Caldera will be authorized to issue 25,000,000 shares of preferred stock, with such rights, preferences and designations that the board of directors of New Caldera may determine. There are currently no outstanding shares of New Caldera preferred stock. Voting Rights Except with respect to the election of directors, holders of SCO common stock are entitled to one vote on all matters submitted to SCO shareholders for their approval for each share of common stock held. Under certain circumstances, holders of SCO common stock are entitled to cumulate votes for the election of directors. Where votes are cumulated for the election of directors, each holder of SCO common stock is entitled to that number of votes which is equal to the total number of shares of SCO common stock held, multiplied by the number of directors being elected. The cumulative number of votes allotted to each SCO shareholder using this formula may be allocated by such shareholder in any manner, including for a single director, or for two or more directors, at the discretion of such SCO shareholder. Under SCO's bylaws, all matters submitted to the shareholders (including the election of directors) must be approved by a majority of the votes cast in a meeting where a quorum is present. Holders of New Caldera common stock are also entitled to one vote on all matters submitted to New Caldera stockholders for their approval for each share held. However, holders of New Caldera common stock are not entitled to cumulate votes for the election of directors. Pursuant to New Caldera's amended and restated bylaws, all matters submitted to the stockholders (including the election of directors) must be approved by a majority of the votes cast in a meeting where a quorum is present. BOARD OF DIRECTORS Board Size The bylaws of SCO currently provide that the board of directors of SCO may consist of between seven and twelve directors, and the exact number of directors has been fixed at nine by resolution of SCO's board. Pursuant to SCO's bylaws, the permissible range of size of SCO's board of directors may only be changed by an amendment to the bylaws approved by the shareholders, but the board may unilaterally fix the size of the board at any level within the permissible range. SCO's articles of incorporation do not place any restrictions on the size of SCO's board of directors. Pursuant to New Caldera's amended and restated certificate of incorporation, New Caldera's board of directors may consist of between five and fifteen directors, as designated in the bylaws. Within the range permitted by the certificate of incorporation, the size of New Caldera's board of directors may be changed by resolution of the board. Pursuant to the reorganization agreement and the stockholders agreement, the size of the New Caldera board will be fixed at eight. Board Classification Neither the board of directors of SCO nor the board of directors of New Caldera is classified. Board Vacancies SCO's bylaws provide that any vacancy on SCO's board of directors may be filled by the remaining members of the board of directors (even if less than a quorum), or the sole remaining director, except that any vacancies created by removal of a director by vote of the shareholders or court order may only be filled by a vote of the shareholders. In addition, the shareholders may fill any vacancies not filled by the directors. SCO's bylaws provide that a vacancy in the board of directors can result from the death, resignation or removal of a director, a further increase in the size of the board of directors, or a failure of the shareholders to elect enough directors to fill the board. 161 176 New Caldera's amended and restated certificate of incorporation provides that any vacancy on New Caldera's board of directors, whether from the death, resignation or removal of a director or an increase in the size of the board of directors, may be filled in a meeting where a quorum exists by a majority of the directors then in office, even if less than a quorum, or the sole remaining directors. Removal of Directors SCO's articles of incorporation and bylaws make no special provisions for the removal of directors. Under the Corporation Code of the State of California, any member of SCO's board of directors, or the entire board of directors, may be removed with or without cause by the holders of a majority of the outstanding shares of SCO capital stock entitled to vote generally for the election of directors. Notwithstanding the foregoing, if less than the entire board of directors is removed, no director may be removed if the votes cast against his or her removal would be sufficient to elect such director if voted cumulatively. The removal of New Caldera's directors is governed by the General Corporation Law of the State of Delaware, which provides that any member of SCO's board of directors, or the entire board of directors, may be removed with or without cause by the holders of a majority of the outstanding shares of SCO capital stock entitled to vote generally for the election of directors. Shareholder/Stockholder Action by Written Consent Pursuant to SCO's bylaws, shareholders may take formal action at a meeting of shareholders duly called and held in accordance with the bylaws and applicable law or pursuant to a written consent. Where shareholders take action by written consent, such written consent is effective only if signed by shareholders holding at least the number of shares of capital stock that would be required to authorize or take such action at a meeting of shareholders at which all shares of capital stock entitled to vote on such action were present and voted, except that in the case of election of directors, a written consent is effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors. Pursuant to New Caldera's amended and restated bylaws, stockholders may only take formal action at a duly called stockholder meeting held in accordance with the bylaws and applicable law. New Caldera's amended and restated bylaws do not permit stockholders to take action by written consent. Ability to Call Special Meetings Pursuant to SCO's bylaws, a special meeting of SCO shareholders may be called by the board of directors of SCO, the chairman of the board of directors, SCO's president, or the holders of at least 10% of the outstanding shares of SCO capital stock entitled to vote at the meeting. If any person or group of persons other than the board of directors, chairman, or president desires to call a special meeting of SCO shareholders, the person or group must give the chairman, president, vice-president, or secretary of SCO a written notice stating the general nature of the business proposed to be transacted. Such written notice must be delivered not less than 35 nor more than 60 days before the date of the proposed special meeting. SCO's bylaws provide that no business other than that specified in the notice may be transacted at a special meeting. Pursuant to New Caldera's amended and restated bylaws, a special meeting of New Caldera stockholders may be called only by the chairman of the board or by a majority of the board. The amended and restated bylaws of New Caldera further provide that the only business that may be conducted at a special meeting of New Caldera stockholders is such business as is set forth in the notice of the special meeting. Advance Notice Provisions for Shareholder/Stockholder Nominations and Proposals SCO's bylaws impose no additional notice requirements for shareholder nominations and proposals beyond those generally necessary for annual and special meetings. 162 177 New Caldera's amended and restated bylaws provide that stockholder proposals (and nominations of directors) will not be considered at any annual meeting of New Caldera stockholders unless timely made. Stockholder proposals (and nominations of directors) are timely made only if delivered to the New Caldera's principal executive offices at least 120 days prior to the date of the meeting. Both stockholder proposals and stockholder nominations of directors must include certain information specified in the amended and restated bylaws. Amendment of Articles/Certificate of Incorporation And Bylaws SCO's articles of incorporation may be amended in accordance with the applicable provisions the Corporation Code of the State of California, which generally require the affirmative vote of the holders of a majority of outstanding capital stock entitled to vote. SCO's bylaws may be amended by a majority of the outstanding capital stock entitled to vote or by action of the board of directors (except that the board may not amend the bylaws to change the number or permissible range of numbers of authorized directors). New Caldera has reserved the right to amend, alter, change or repeal any provision of its amended and restated certificate of incorporation in accordance with the applicable provisions of the General Corporation Law of the State of Delaware, which generally require the affirmative vote of the holders of a majority of outstanding capital stock entitled to vote to approve an amendment to a certificate of incorporation. New Caldera's amended and restated certificate of incorporation further requires the affirmative vote of two-thirds the outstanding voting stock to amend, alter, change or repeal the provisions of the certificate of incorporation regarding directors, stockholder meetings, limitations of directors' liability, indemnification, amendment of the bylaws, or amendment of the certificate of incorporation. Pursuant to New Caldera's amended and restated certificate of incorporation and amended and restated bylaws, New Caldera's amended and restated bylaws may be altered, amended, or repealed by a majority vote of the board of directors taken at any regular meeting or at a special meeting where notice of the proposed alteration, amendment, or repeal is given. New Caldera's amended and restated bylaws may also be altered, amended, or repealed by a vote of 66 2/3% of the outstanding voting stock. Limitation of Liability of Directors SCO's articles of incorporation provide that the personal liability of SCO's directors to SCO and its shareholders for monetary damages arising out of a breach of the directors' fiduciary duties has been expressly eliminated to the fullest extent permitted by the Corporation Code of the State of California. Currently, the Corporation Code of the State of California permits a corporation to include a provision in its articles of incorporation or bylaws enabling the corporation to limit or eliminate the personal liability of its directors to the corporation for damages arising out of a breach of the directors' fiduciary duties, subject to certain limitations. The limitation of liability permitted by California law does not apply to actions brought directly by shareholders (such as a shareholder class action lawsuit) or to liabilities resulting from "acts or omissions that show a reckless disregard for the director's duty to the corporation or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the corporation or its shareholders" or "acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the corporation or its shareholders." New Caldera's amended and restated certificate of incorporation provides that the personal liability of New Caldera's directors to New Caldera and its stockholders for monetary damages arising out of a breach of the directors' fiduciary duties has been expressly eliminated to the fullest extent permitted by the General Corporation Law of the State of Delaware. In addition, New Caldera's amended and restated certificate of incorporation provides that if the General Corporation Law of the State of Delaware is amended to authorize the further elimination or limitation of the liability of a director, then the liability of New Caldera's directors will be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware as so amended. Currently, the General Corporation Law of the State of Delaware permits a corporation to include a provision in its certificate of incorporation or bylaws 163 178 enabling the corporation to limit or eliminate the personal liability of its directors to the corporation or its stockholders for damages arising out of a breach of the directors' fiduciary duties, subject to certain limitations. While these provisions provide the directors of SCO and New Caldera with protection against awards for monetary damages arising out of a breach of fiduciary duties, they do not eliminate the duty itself. Accordingly, these provisions will have no effect on the availability of equitable remedies such as an injunction or rescission based upon a director's breach of his or her fiduciary duties. Indemnification of Directors and Officers SCO's bylaws require SCO to indemnify any person who is or was a director or officer of SCO (or any predecessor of SCO) for any expenses, judgments and fines actually incurred and amounts paid in settlement in connection with any third party action, suit or other proceeding (other than a suit by or in the right of SCO) to the fullest extent permitted by the Corporation Code of the State of California. To the extent that SCO is required to indemnify a person for expenses in accordance with the foregoing, SCO's bylaws require SCO to advance such expenses to a person entitled to indemnification during a proceeding if such person provides SCO with an undertaking to repay such expenses if it is ultimately determined that such person is not entitled to indemnification under SCO's bylaws. The indemnification provisions of SCO's bylaws are not exclusive of any other rights that a person may have under any bylaws, agreements between SCO and such person, or vote of SCO shareholders or disinterested directors or otherwise. The Corporation Code of the State of California permits a corporation to indemnify its directors, officers, employees and agents for any liability arising out of an action or threatened action, other than an action by or in the right of the corporation, to which such person is a party due to his or her service as a director, officer, employee or agent, provided that such person acted in good faith and in a manner he or she reasonably believed to be in the best interests of the corporation, and with respect to any criminal action, which he or she had no reason to believe was unlawful. The Corporation Code of the State of California permits a corporation to indemnify its directors, officers, employees and agents for any expenses actually and reasonably occurred in connection with the defense or settlement of an action threatened action by or in the right of the corporation to which such person is a party due to his or her service as a director, officer, employee or agent, provided that such person acted in good faith and in a manner he or she reasonably believed to be in the best interests of the corporation, except that there may be no such indemnification if the person is found liable to the corporation unless, in such a case, the court determines that such person is entitled to indemnification. New Caldera's amended and restated bylaws require New Caldera to indemnify any person who is or was a director or officer of New Caldera (or any predecessor of New Caldera) for any expenses, liabilities and losses reasonably incurred in connection with any action, suit or proceeding to the fullest extent permitted by the General Corporation Law of the State of Delaware. To the extent that New Caldera is required to indemnify a person for expenses in accordance with the foregoing, New Caldera is also required to advance expenses during a proceeding if the person provides New Caldera with an undertaking to repay such expenses if it is ultimately determined that such person is not entitled to indemnification under New Caldera's amended and restated bylaws. Notwithstanding the foregoing, New Caldera is not required to advance expenses to any person against whom New Caldera brings a claim alleging that such person willfully misappropriated corporate assets, disclosed confidential information, or willfully and in bad faith breached such person's duty to New Caldera or its stockholders. The General Corporation Law of the State of Delaware permits a corporation to indemnify its directors, officers, employees and agents for any liability arising out of an action or threatened action, other than an action by or in the right of the corporation, to which such person is a party due to his or her service as a director, officer, employee or agent, provided that such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, and with respect to any criminal action, which he or she had no reason to believe was unlawful. The General Corporation Law of the State of Delaware permits a corporation to indemnify its directors, officers, 164 179 employees and agents for any liability arising out of an action or threatened action by or in the right of the corporation to which such person is a party due to his or her service as a director, officer, employee or agent, provided that such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, except that there may be no such indemnification if the person is found liable to the corporation unless, in such a case, the court determines that such person is entitled to indemnification. 165 180 PROPOSALS TO BE VOTED UPON BY CALDERA STOCKHOLDERS AT THE CALDERA ANNUAL MEETING At the Caldera annual meeting of stockholders, Caldera's stockholders will be asked to consider the following proposals: 1. Combination of Caldera with the server and professional services groups of The Santa Cruz Operation, Inc. In connection with the combination, SCO will receive 16 million shares of Caldera International, Inc. common stock (representing approximately 25.3% of Caldera International on a fully diluted basis), $23 million in cash (of which $7 million was advanced to SCO on January 26, 2001) and a non-interest bearing promissory note in the amount of $8 million that will paid in quarterly installments of $2 million beginning the fifth quarter after the combination is completed. SCO employees who join Caldera International will receive options to purchase approximately 1.8 million shares of common stock of Caldera International (representing approximately 2.8% of Caldera International on a fully diluted basis). In the combination, Caldera will become a subsidiary of a new parent company, which we will call New Caldera, and SCO will contribute to New Caldera the assets of its server and professional services groups. 2. Election of six (6) directors to serve for one year terms ending in the year 2002 or until successors are duly elected and qualified. 3. Amendments to the Caldera 1999 Omnibus Stock Incentive Plan to increase the number of shares reserved for issuance from 4,105,238 to 10,905,238 and to provide for an automated director option grant program. 4. Amendments to Caldera's 2000 Employee Stock Purchase Plan to increase the number of share reserved for issuance from 500,000 to 2,000,000. 5. Amendment to the Caldera Certificate of Incorporation increasing the number of authorized shares of common stock of Caldera from 75,000,000 to 175,000,000. 6. Ratification of the appointment of Arthur Andersen LLP as Caldera's independent auditors for the fiscal year ending October 31, 2001. None of the proposals is contingent upon the passage of any other proposal. 166 181 PROPOSAL ONE: APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF REORGANIZATION Caldera's board of directors adopted a resolution approving the Agreement and Plan of Reorganization on August 1, 2000. The reorganization agreement must be approved by the affirmative vote, in person or by proxy, of at least a majority of the votes properly cast at the Caldera annual meeting. The combination contemplated by the reorganization agreement cannot be completed unless Caldera stockholders approve and adopt the reorganization agreement. See "The Combination" and "The Reorganization Agreement." RECOMMENDATION OF THE BOARD OF DIRECTORS The board of directors recommends that the stockholders of Caldera vote FOR the approval and adoption of the reorganization agreement. 167 182 PROPOSAL TWO: ELECTION OF DIRECTORS At the annual meeting, six directors are to be elected to serve until the next annual meeting of stockholders or until a successor for such director is elected and qualified, or until the death, resignation, or removal of such director. It is intended that the proxies will be voted for the six nominees named below for election to Caldera's board of directors unless authority to vote for any such nominee is withheld. There are six nominees, each of whom is currently a director of Caldera. Each person nominated for election has agreed to serve if elected, and the board of directors has no reason to believe that any nominee will be unavailable or will decline to serve. In the event, however, that any nominee is unable or declines to serve as a director at the time of the annual meeting, the proxies will be voted for any nominee who is designated by the current board of directors to fill the vacancy. Unless otherwise instructed, the proxy holders will vote the proxies received by them "FOR" the nominees named below. The six candidates receiving the highest number of the affirmative votes of the shares entitled to vote at the annual meeting will be elected directors of Caldera. If Proposal Two is approved by the stockholders of Caldera and the combination closes, the six candidates receiving the highest number of the affirmative votes to the shares entitled to vote at the annual meeting will become directors of New Caldera, and two individuals to be determined by SCO and approved by Caldera will also become directors of New Caldera. The names of the nominees, their ages as of March 15, 2001, and certain other information about each nominee are set forth below.
NAME POSITION(S) WITH THE COMPANY AGE DIRECTOR SINCE ---- ---------------------------- --- -------------- Ransom H. Love............... Chief Executive Officer, Director 41 1998 Ralph J. Yarro III........... Chairman of the Board of Directors and Director 36 1998 Steve Cakebread.............. Director 49 2000 Edward E. Iacobucci.......... Director 46 2000 Raymond J. Noorda............ Director 76 1998 Thomas P. Raimondi, Jr. ..... Director 43 1999
For biographical summaries of these nominees, see "Management of Caldera and New Caldera." John R. Egan, who currently serves as a member of Caldera's board of directors, has announced that he will resign from the board prior to the annual meeting, at which point the size of the board will be reduced by one member. Following the annual meeting, New Caldera will undertake to identify a new independent board member, who will also become a member of the audit committee. MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS During the period from November 1, 1999 through October 31, 2000, or the last fiscal year, Caldera's board of directors met 20 times and no director attended fewer than 75% of the aggregate number of meetings of Caldera's board of directors and meetings of the committees of the Caldera board of directors on which he or she serves. Caldera's board of directors has an audit committee and a compensation committee. The compensation committee of the board of directors, which held 8 meetings during the last fiscal year, recommends, reviews, and oversees the salaries, benefits and stock option plans for Caldera's employees, consultants, directors and other individuals compensated by Caldera. The compensation committee also administers Caldera's compensation plans. The members of the compensation committee are Messrs. Raimondi, Yarro and John R. Egan, all of whom are non-employee directors of Caldera. Mr. Egan is not running for re-election as a director. The audit committee of the board of directors, which held 3 meetings during the last fiscal year, reviews, acts and reports to the board of directors with respect to various auditing and accounting matters, including the recommendation of Caldera's auditors, the scope of the annual audits, fees to be paid to the auditors, the performance of Caldera's independent auditors and Caldera's accounting practices. The members of the audit committee are Messrs. Cakebread, Iacobucci and John R. Egan, all of whom are non-employee directors of Caldera. Mr. Egan is not running for re-election as a director. 168 183 DIRECTOR COMPENSATION See "Management of Caldera and New Caldera -- Director Compensation." RECOMMENDATION OF THE BOARD OF DIRECTORS The board of directors unanimously recommends that the stockholders of Caldera vote FOR the election of all of the nominees listed above. 169 184 PROPOSAL THREE: APPROVAL OF AMENDMENTS TO THE STOCK INCENTIVE PLAN Caldera's stockholders are being asked to approve a series of amendments to Caldera's 1999 Omnibus Stock Incentive Plan (the "1999 Plan") that will effect the following changes: (i) increase the maximum number of shares of common stock authorized for issuance over the term of the 1999 Plan by an additional 6,800,000 shares to 10,905,238 shares, (ii) 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, (iii) add a formula awards program pursuant to which directors of Caldera 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 shareholders meeting during each even numbered calendar year. The proposed amendments are set forth in this section and attached hereto as Appendices G, H, I, J and K. The purpose of the proposed share increase and automatic annual share increase feature is to assure that a sufficient reserve of common stock is available under the 1999 Plan to attract and retain the services of individuals essential to Caldera's long-term growth and success. The purpose of establishing the director formula awards program is to provide directors an inducement for continued service on the board of directors of Caldera. The 1999 Plan became effective on December 1, 1999, subject to the requisite approval of the stockholders of Caldera, which was received on December 1, 1999. The 1999 Plan was amended on March 10, 2000 to increase the number of shares of common stock subject to the 1999 Plan and then again on July 14, 2000 to increase the number of shares subject to the 1999 Plan, add the formula award program, and make various other changes to the provisions governing awards granted under the 1999 Plan. Unless earlier terminated by the board of directors, the right to grant incentive awards under the 1999 Plan will terminate on December 1, 2009. Incentive awards outstanding when the 1999 Plan terminates will remain in effect according to their terms and the provisions of the 1999 Plan. The following is a summary of the principal features of the 1999 Plan, including the amendments which will become effective upon stockholder approval of this Proposal Three, together with the applicable tax and accounting implications for Caldera and the participants. However, the summary does not purport to be a complete description of all the provisions of the 1999 Plan. Any stockholder of Caldera who wishes to obtain a copy of the actual plan document may do so upon written request to Caldera's Chief Financial Officer at its principal executive office located at 240 West Center Street Orem, Utah 84057. The telephone number of such office is (801) 765-4999. You should note that, if the proposed transactions with New Caldera and SCO are approved and consummated, New Caldera will assume the 1999 Plan, and all incentive awards granted under the 1999 Plan will apply to shares of common stock of New Caldera. All references in the following summary to "Caldera" should be read to include all successors in interest to Caldera, including, if the proposed transactions are consummated, New Caldera. GENERAL The 1999 Plan is intended to promote the interests of Caldera and its stockholders by providing directors, officers, employees and other persons, including outside consultants, who are expected to make a long-term contribution to the success of Caldera with appropriate incentives and rewards to encourage them to enter into and continue in the employ of Caldera and to acquire a proprietary interest in the long-term success of Caldera, thereby aligning their interests more closely to the interests of Caldera's stockholders. In addition to the 1999 Plan, Caldera has previously adopted the 1998 Stock Option Plan pursuant to which the Caldera has granted options to purchase 3,252,088 shares of common stock, of which 813,800 options have been exercised or cancelled and 2,438,288 options remain outstanding. Upon approval of the 170 185 1999 Plan, the 1998 Stock Option Plan was terminated. Accordingly, although previously granted options remain outstanding and subject to the terms of the 1998 Stock Option Plan, Caldera may not grant any new options (upon the expiration of previously granted options or otherwise) under the 1998 Stock Option Plan. SHARES COVERED BY THE 1999 PLAN The 1999 Plan presently authorizes the grant of incentive awards with respect to an aggregate of 4,105,238 shares of common stock. If the stockholders approve this Proposal Three, the number of shares authorized for incentive awards under the 1999 Plan will increase to 10,905,238, and such number will automatically increase, as of November 1 of each year beginning in 2000, by 3% of the total number of shares of common stock outstanding on the previous October 31st. Notwithstanding a greater increase in the number of shares subject to the 1999 Plan, the number of shares that may be issued upon the exercise of incentive stock options under the 1999 Plan shall in no event exceed 10,905,238 shares, increased by 100,000 shares on November 1 of each year between 2000 and 2008. Shares issued pursuant to the 1999 Plan may be authorized and unissued shares, treasury shares or shares acquired by Caldera for purposes of the 1999 Plan. Generally, shares subject to an incentive award that remain unissued upon expiration, cancellation, surrender, exchange, or termination of the incentive award will be available for other incentive awards under the 1999 Plan. CHANGES IN CAPITALIZATION In the event that the committee appointed by the board of directors to administer the 1999 Plan (the "Committee") determines that any dividend or other distribution, stock split, reverse stock split, recapitalization, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, or other similar corporate transaction or event affects the common stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of participants under the 1999 Plan, then the Committee will make such equitable changes or adjustments as it deems necessary to the aggregate number of shares available under the 1999 Plan, the number and kinds of shares that may thereafter be used for any incentive award, and the number of shares subject to and exercise price, grant price, or purchase price of each outstanding award. ADMINISTRATION The 1999 Plan is administered by the Committee, which consists of two or more persons appointed (and removable) by the board of directors in its discretion, each of whom must be an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code the ("Code") and a "nonemployee director" within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act 1934, as amended. The Committee is authorized, among other things, to do the following: - to construe, interpret and implement the provisions of the 1999 Plan; - to select the persons to whom incentive awards will be granted; - to determine when incentive awards will be granted; - to determine the terms and conditions of such incentive awards; - to establish the performance criteria under which incentive awards will be granted; - to determine when and under what circumstances an incentive award can be settled, canceled, forfeited, exchanged, or surrendered; - to make rules with respect to the 1999 Plan; 171 186 - to determine the terms and provisions of award agreements, which are required to accompany and evidence any incentive award under the 1999 Plan (the terms of which are accepted by any Participant through the act of accepting the incentive award); and - to make all other determinations deemed necessary or advisable for the administration of the 1999 Plan. The 1999 Plan provides that no member of the Committee shall be liable for any action, omission or determination relating to the 1999 Plan and that Caldera shall indemnify and hold harmless each member of the Committee and each other director or employee of Caldera to whom any duty or power relating to the administration or interpretation of the 1999 Plan has been delegated against any cost, expense or liability arising out of any action, omission or determination relating to the 1999 Plan, if, in either case, such action, omission or determination was taken or made by such member, director or employee in good faith and in a manner such member, director or employee reasonably believed to be in or not opposed to the best interests of Caldera. ELIGIBILITY The persons who are eligible to receive awards pursuant to the 1999 Plan include all employees and directors of Caldera and its subsidiaries and such other persons, including outside consultants, whom the Committee determines are expected to make a contribution to Caldera. The Committee may grant incentive awards to any, all or none of such eligible persons at any time, from time to time, during the term of the 1999 Plan. "Participants" in the 1999 Plan are persons who both are eligible to receive an incentive award pursuant to the 1999 Plan and to whom an incentive award is granted pursuant to the 1999 Plan, and, upon his or her death, his or her successors, heirs, executors and administrators, as the case may be. VALUATION The fair market value per share of common stock on any relevant date under the 1999 Plan will be the closing selling price per share or that date on the Nasdaq National Market. On March 22, 2001, the closing selling price of Caldera common stock was $1.50. INCENTIVE AWARDS UNDER THE 1999 PLAN Awards under the 1999 Plan may be made in the form of (i) incentive stock options, (ii) non-qualified stock options, (iii) tandem or stand-alone stock appreciation rights, (iv) restricted stock, (v) phantom stock and (vi) stock bonuses. Each award granted under the 1999 Plan (except an unconditional stock bonus) shall be evidenced by an award agreement containing such provisions as the Committee shall deem desirable. STOCK OPTIONS General. The Committee determines, and sets forth in the applicable award agreement, whether an option is an incentive stock option or a non-qualified stock option, the vesting schedule of each option, and the expiration date of each option; provided, however, no incentive stock option may be exercisable more than 10 years after the date of grant. The purchase price per share payable upon the exercise of an option is established by the Committee. With respect to non-qualified stock options, the Option Exercise Price may be less than the fair market value of a share of our common stock on the date such option is granted. With respect to incentive stock options, the Option Exercise Price may not be less than the fair market value of a share of common stock on the date the option is granted. During the period our common stock is traded on the Nasdaq National Market, the fair market value of a share of common stock is the closing sales price of a share of our common stock on such market on the most recent trading day on which there was a sale of our common stock on such market. The closing sales price of a share of our common stock on October 31, 2000 was $3.50. Unless the applicable award agreement provides otherwise, an option 172 187 becomes cumulatively exercisable as to 25% of the shares covered thereby on each of the first, second, third and fourth anniversaries of the date of grant. Only individuals who are employees of Caldera or any subsidiary of Caldera as of the date of the grant are eligible to receive incentive stock options. Exercise of Options. An option may be exercised by delivering notice to Caldera's Secretary no later than one business day in advance of the effective date of the proposed exercise. Subject to the terms of the award agreement, payment for shares of common stock purchased upon the exercise of an option shall be made on the effective date of such exercise by one or a combination of the following means: - in cash, by certified check, bank cashier's check or wire transfer; - subject to any restrictions imposed by applicable securities laws, by delivering a properly executed exercise notice to Caldera together with a copy of irrevocable instructions to a broker to deliver promptly to Caldera the amount of sale or loan proceeds to pay the full amount of the purchase price; - by delivering shares of common stock owned by the Participant with appropriate stock powers; - by electing to have Caldera retain shares of common stock which would otherwise be issued on the exercise of the option; or - any combination of the foregoing forms, as approved by the Committee. The options granted under the 1999 Plan to date do not permit exercise by delivery of common stock owned by the Participant or by electing to have Caldera retain shares of common stock that would otherwise be issued on exercise. Certain Limitations on Incentive Stock Options. The total number of shares of common stock subject to incentive awards awarded to any employee during any tax year of Caldera shall not exceed 200,000 shares of common stock. To the extent that the aggregate fair market value of shares of common stock with respect to which incentive stock options are exercisable for the first time by a Participant during any calendar year under the 1999 Plan and any other stock option plan of Caldera (or any subsidiary of Caldera) exceed $100,000, such options are treated as non-qualified stock options. Fair market value in this context refers to the fair market value of the common stock subject to the option on the date on which each such incentive stock option is granted. In addition, the 1999 Plan prevents the issuance of any incentive stock options to an individual if, at the time of such proposed grant, the individual owns stock that represents more than ten percent (10%) of the total combined voting power of all classes of stock of Caldera. This limitation does not apply if the Option Exercise Price per share of the proposed incentive stock option is at least one hundred ten percent (110%) of the fair market value of a share of common stock at the time such proposed incentive stock option is granted and it is not exercisable after five years from the date of grant. Termination of Employment. In the event that the employment or service as a director of a Participant with Caldera or a subsidiary of Caldera is terminated by the employee or by Caldera for cause, unless the applicable award agreement provides otherwise, (i) options granted to such Participant, to the extent that they are exercisable at the time of such termination, remain exercisable until the date that is 30 after such termination, on which date they shall expire, and (ii) options granted to such Participant, to the extent that they were not exercisable at the time of such termination, expire at the close of business on the date of such termination. No option shall be exercisable after the expiration of its original term. In the event that the employment or service as a director of a Participant with Caldera or a subsidiary of Caldera is terminated by Caldera in connection with a reduction in force or by Caldera for any other reason other than death, disability or cause, unless the applicable award agreement provides otherwise, (i) options granted to such Participant, to the extent that they are exercisable at the time of such termination, remain exercisable until the date that is 90 days (120 days in the case of a non-qualified option) after such termination, on which date they shall expire, and (ii) options granted to such 173 188 Participant, to the extent that they were not exercisable at the time of such termination, expire at the close of business on the date of such termination. No option shall be exercisable after the expiration of its original term. In the event that the employment of a Participant with Caldera or a subsidiary of Caldera is terminated by reason of death or disability of the Participant, unless the applicable award agreement provides otherwise, (i) options granted to such Participant, to the extent that they are exercisable at the time of such termination, remain exercisable until the date that is one year after such termination, on which date they shall expire, and (ii) options granted to such Participant, to the extent that they were not exercisable at the time of such termination, expire at the close of business on the date of such termination. No option shall be exercisable after the expiration of its original term. Effect of a Change in Control. Under the 1999 Plan, a "Change in Control" includes the following: - acquisition by any person (with certain exceptions), directly or indirectly, of fifty percent (50%) or more of the combined voting power of Caldera's then outstanding securities; - during a period of not more than two consecutive years following the adoption of the 1999 Plan, individuals who at the beginning of such period constitute the board and any new director (with certain exemptions) whose election by the board or nomination for election was approved by 2/3 of the directors then still in office who were either directors when the 1999 Plan was adopted or approved as provided herein cease to constitute a majority of the board of directors; - Caldera's stockholders approve and Caldera consummates a merger or consolidation, except for such a merger or consolidation after which the stockholders prior to such merger or consolidation retain more than fifty percent (50%) of the combined voting power of the corporation surviving the merger and except for a merger or consolidation effected to implement a recapitalization of Caldera in which no person acquired more than fifty percent (50%) of the combined voting power of Caldera's then outstanding securities; and - Caldera's stockholders approve a plan of complete liquidation of Caldera or an agreement for the sale or disposition by Caldera of all or substantially all of Caldera's assets. Upon the occurrence of a Change in Control, each outstanding option granted under the 1999 Plan that has vested may be, at Caldera's discretion, (i) cashed out, (ii) converted to options of the acquiring entity, (iii) assumed by the acquiring entity, or (iv) or otherwise disposed of in the manner provided in any shareholder-approved agreement or plan governing such Change in Control. In the absence of any governing provisions in any stockholder-approved agreement or plan governing such Change in Control, the Committee may, on a case-by-case basis, require any vested, exercisable options that remain outstanding following a Change in Control to be cashed out and terminated in exchange for a lump sum cash payment, shares of the acquiring entity or a combination thereof equal in value to the fair market value of the option. In the event of a Change in Control , each outstanding option granted under the 1999 Plan that has not vested shall terminate, unless (i) otherwise provided in the stockholder-approved agreement or plan governing such Change in Control, or (ii) the Committee in its sole discretion on a case-by-case basis elects in writing to waive termination. TANDEM STOCK APPRECIATION RIGHTS General. The Committee may grant, in connection with any option granted under the 1999 Plan, tandem stock appreciation rights ("SARs") relating to a number of shares of common stock less than or equal to the number of shares of common stock subject to the related option. The exercise of a tandem SAR with respect to any number of shares of common stock, which occurs through notice to Caldera's Secretary no less than one business day in advance of the effective date of the proposed exercise, entitles the Participant to a cash payment, for each such share, equal to the excess of (i) the fair market value of 174 189 a share of common stock on the exercise date over (ii) the Option Exercise Price per share of the related option. Term and Exercisability. A tandem SAR is exercisable (i) only if and to the extent that its related option is exercisable and (ii) only if at the time of such exercise, the fair market value of a share of common stock exceeds the Option Exercise Price per share of the related option. The exercise of a tandem SAR with respect to a number of shares of common stock causes the immediate and automatic cancellation of its related option with respect to an equal number of shares. The exercise of an option, or the cancellation, termination or expiration of an option with respect to a number of shares of common stock generally causes the automatic and immediate cancellation of any related tandem SARs. Such tandem SARs are canceled in the order in which they became exercisable. The 1999 Plan allows partial exercise of tandem SAR rights, provided that no such partial exercise is for less than a number of shares having an aggregate Option Exercise Price of less than $1,000. STAND-ALONE STOCK APPRECIATION RIGHTS The Committee may also grant stand-alone SARs independently of any option granted under the 1999 Plan. The exercise of a stand-alone SAR with respect to any number of shares of common stock entitles the Participant to a cash payment, for each such share, equal to the excess of (i) the fair market value of a share of common stock on the exercise date over (ii) the "Reference Value" per share of the stand-alone SAR. The "Reference Value" is the greater of the fair market value per share on the date of grant or the Reference Value set by the Committee. Unless the applicable award agreement provides otherwise, a stand-alone SAR becomes cumulatively exercisable as to 25% of the shares covered thereby on each of the first, second, third and fourth anniversaries of the date of grant. The Committee determines the expiration date of each stand-alone SAR. The termination of a Participant's employment with Caldera or the occurrence of an event that constitutes a Change in Control has the same effect on a stand-alone SAR as on an option. The 1999 Plan allows for the partial exercise of any stand-alone SAR, provided that no partial exercise shall be for an aggregate Reference Value of less than $1,000. RESTRICTED STOCK General. The Committee may grant restricted shares of common stock to such persons, in such amounts, and subject to such terms and conditions as the Committee determines in its discretion. The Committee establishes vesting dates for restricted stock, and, if awards of restricted stock are intended to be "performance based compensation" for Section 162(m) of the Code, awards of restricted stock must be contingent on the attainment by Caldera or a subsidiary of Caldera of one or more pre-established performance goals (the "Performance Goals") established by the Committee. The Performance Goals are based on the attainment by Caldera (and/or its subsidiaries, if applicable) of any one or more of the following criteria: - a specified percentage return on total stockholder equity of Caldera; - a specified percentage increase in earnings per share of common stock; - a specified percentage increase in net income of Caldera; and/or - a specified percentage increase in profit before taxation of Caldera. The Committee in its discretion may require that any dividends paid on shares of restricted stock be held in escrow until all restrictions on such shares have lapsed. Performance goals are measured according to generally accepted accounting principles and must be certified as being achieved by the Committee. Restrictions on Transfer Prior to Vesting. When shares of restricted stock are initially granted, the certificates representing such shares bear a legend stating that the transferability of such shares is subject to the 1999 Plan and the governing award agreement, and, unless the Committee determines otherwise, such certificates are retained by Caldera, along with stock powers for the benefit of Caldera relating to 175 190 such shares. Prior to the vesting of a share of restricted stock, no transfer of a Participant's rights with respect to such share, whether voluntary or involuntary, by operation of law or otherwise, is permitted. Immediately upon any attempt to transfer such rights, such share, and all of the rights related thereto, will be forfeited by the Participant. Upon the vesting of a share of restricted stock pursuant to the terms of the applicable award agreement, such restrictions on transfer lapse, and Caldera is required to issue a certificate without restrictive legend (other than any legend that may be required by law). The Committee may impose at the time of granting any restricted stock any vesting conditions that it, in its absolute discretion, deems appropriate. Effect of Termination of Employment or Removal from Board. Upon the termination of a Participant's employment or service with Caldera or any subsidiary of Caldera for any reason other than cause, any and all non-vested shares of restricted stock are immediately forfeited by the Participant and transferred to Caldera, unless the applicable restricted stock agreement provides otherwise or, in its sole discretion, the Committee gives notice to the Participant within thirty (30) days of the termination that the Participant shall continue to be the owner of the restricted stock. If shares of restricted stock are so forfeited, Caldera also has the right to require the return of all dividends paid on such shares, whether by termination of any escrow arrangement under which such dividends are held or otherwise. In the event of the termination of a Participant's employment for cause, all shares of restricted stock granted to such Participant that have not vested as of the date of such termination shall immediately be returned to Caldera, together with any dividends paid on such shares. Effect of Change in Control. Upon the occurrence of an event that constitutes a Change in Control, all restrictions on outstanding vested shares of restricted stock immediately lapse and all outstanding shares of restricted stock that have not vested as of the date the Change in Control occurs immediately expire and are cancelled. PHANTOM STOCK General. The Committee may grant shares of phantom stock to such persons, in such amounts, and subject to such vesting terms and conditions as the Committee determines in its discretion. If the vesting requirements specified by the Committee are met, the grantee of phantom stock will receive, within thirty (30) days of the day such phantom stock vests, a cash payment equal to the sum of (i) the fair market value of the shares of common stock on the date on which such share of phantom stock vests and (ii) the aggregate amount of cash dividends paid with respect to a share of common stock during the period commencing on the date on which the share of phantom stock was granted and terminating on the date on which such share vests. If awards of phantom stock granted to Executive Officers of Caldera are intended to be "performance based compensation" for Section 162(m) of the Code, the vesting of such awards of phantom stock must be contingent on the attainment by Caldera or a subsidiary of Caldera of any one or more of the Performance Goals noted above in the discussion of restricted stock awards. Attainment of performance goals will be measured based upon generally accepted accounting principles and must be certified by the Committee as having been achieved. Termination of Employment. Except as provided in the applicable award agreement, shares of phantom stock that have not vested, together with any dividends credited on such shares, will be forfeited upon the Participant's termination of employment for any reason other than cause. Termination for cause results in the immediate forfeiture of all shares of phantom stock granted to the terminated Participant, together with any dividends credited on such shares. Effect of Change in Control. Upon the occurrence of an event that constitutes a Change in Control, all outstanding shares of phantom stock that have not yet vested prior to the date constituting the Change in Control shall immediately expire and be cancelled. 176 191 STOCK BONUS The Committee may grant bonuses comprised of shares of common stock free of restrictions to such persons, in such amounts, as the Committee determines in its discretion. AMENDMENT OR TERMINATION OF THE 1999 PLAN The board may suspend, revise, terminate or amend the 1999 Plan at any time; provided, however, that shareholder approval must be obtained if and to the extent that the Board deems it appropriate to satisfy Section 162(m) of the Code, Section 422 of the Code or the rules of any stock exchange on which the common stock is listed. No action under the 1999 Plan may, without the consent of the Participant, reduce the Participant's rights under any outstanding award. TRANSFERABILITY OF AWARDS DURING PARTICIPANT'S LIFETIME/FORFEITURE FOR FAILURE TO COMPLY During a Participant's lifetime, the Committee may permit or prohibit, in its discretion, the transfer, assignment or other encumbrance of an outstanding option or outstanding shares of restricted stock unless such option is an incentive stock option. To the extent the Committee and respective participant desire that incentive stock options shall remain incentive stock options, incentive stock options are nontransferable except upon death. Subject to any conditions the Committee imposes, options granted under the 1999 Plan may be transferred to an immediate family member, if notice of such transfer is received in exchange for such transfer to Caldera and no consideration is given for the transfer. Rights with respect to other incentive awards granted under the 1999 Plan may not be transferred, assigned or pledged. Failure by a Participant (or beneficiary or transferee) to comply with any of the terms and conditions of the 1999 Plan or the applicable award agreement, unless such failure is remedied by such Participant (or beneficiary or transferee) within ten (10) days after notice of such failure by the Committee, is grounds for the cancellation and forfeiture of the respective incentive award, in whole or in part, as the Committee, in its absolute discretion, may determine. PROPOSED DIRECTORS FORMULA AWARD PROGRAM If this Proposal Three is approved by the stockholders, the 1999 Plan will be amended to establish a program providing for the automatic grant of options to directors of Caldera at specified times. If approved by the stockholders of Caldera, the proposed formula awards program will have the following features: GENERAL PROVISIONS OF PROPOSED FORMULA AWARD PROGRAM. - Grant in 2002 Calendar Year. Each director who is elected to serve or continues to serve as a director of Caldera following the date of the regularly scheduled annual meeting of stockholders during the 2002 calendar year will automatically be granted an option to purchase 100,000 shares of common stock at an Option Exercise Price equal to the fair market value of a share of common stock on the date of such annual meeting. - Grant in Subsequent Even-Number Calendar Years. Each director who is elected to serve or continues to serve as a director of Caldera following the date of the regularly scheduled annual meeting during each even-numbered calendar year beginning with 2004 will automatically be granted an option to purchase 100,000 shares of common stock at an Option Exercise Price equal to the fair market value of a share of common stock on the date of such annual meeting. - Grant to Directors First Elected Between Even-Numbered Calendar Years. Each director who is first elected or appointed to serve as a director other than at an annual meeting of stockholders in an even-number calendar year will automatically be granted, upon the commencement of such service, an option to purchase a number of shares of common stock equal to the product of (i) a fraction, the numerator of which is the number of full calendar months between the date of such 177 192 election or appointment and March 1 of the next even-numbered calendar year, and the denominator of which is 24, multiplied by (ii) 100,000. Such options shall have an Option Exercise Price equal to the fair market value of a share of common stock on the date of grant. - Top-Up Grant For Certain Directors. Each director whose existing options are all scheduled to vest prior to March 1, 2002 will automatically be granted, on the date all such options vest, an option to purchase a number of shares of common stock equal to the product of (i) a fraction, the numerator of which is the number of full calendar months between the date all such options vest and March 1, 2002, and the denominator of which is 24, multiplied by (ii) 100,000. Such options shall have an Option Exercise Price equal to the fair market value of a share of common stock on the date of grant. All options granted under the director formula awards program will vest 50% on the first anniversary of the date of grant and 50% on the second anniversary of the date of grant. Limitations on Options Granted. No option may be granted pursuant to the formula awards program on a date when the number of shares of common stock authorized for issuance pursuant to the 1999 Plan is less than the sum of (i) all shares of common stock issued under the 1999 Plan, (ii) all shares of common stock subject to outstanding options, and (iii) all options that would, but for the effect of this limitation, be granted on that date. Other Provisions. Options granted under the formula awards program are otherwise generally subject to the same terms and conditions as other options granted under the 1999 Plan. WITHHOLDING TAXES Whenever cash is to be paid pursuant to an award, Caldera has the right to deduct therefrom an amount sufficient to satisfy any federal, state and local withholding tax requirements related thereto. Whenever shares of common stock are to be delivered pursuant to an award, Caldera has the right to require the Participant to remit to Caldera in cash an amount sufficient to satisfy any federal, state and local withholding tax requirements related thereto. With the approval of the Committee, a Participant may satisfy the foregoing requirement by electing to have Caldera withhold from delivery shares of common stock having a fair market value equal to the amount of tax to be withheld. COMPLIANCE WITH TAX LAWS The 1999 Plan is intended to provide performance-based compensation and thereby avoid the limitations of Section 162(m) of the Code. Section 162(m) denies a deduction by an employer for certain compensation in excess of $1 million per year paid by a publicly-traded corporation to the following individuals who are employed at the end of the employer's taxable year ("Covered Employees"): the chief executive officer and the four most highly compensated executive officers (other than the chief executive officer), for whom compensation disclosure is required under the proxy rules. Certain compensation, including compensation based on the attainment of performance goals, is excluded from this deduction limit if certain requirements are met. Among the requirements for compensation to qualify for "performance based" exception to Section 162(m) of the Code is that the material terms pursuant to which the compensation is to be paid be disclosed to and approved by the shareholders in a separate vote prior to the payment. Accordingly, because the 1999 Plan has been approved by the shareholders of Caldera and the Committee intends to administer the 1999 Plan so that the other conditions of Section 162(m) of the Code relating to performance-based compensation are satisfied, compensation paid to Covered Employees pursuant to the 1999 Plan will not be subject to the deduction limit of Section 162(m). FEDERAL INCOME TAX CONSEQUENCES The following discussion is a brief summary of the principal United States Federal income tax consequences relating to incentive awards under the 1999 Plan. This discussion is based on currently existing provisions of the Code, existing and proposed Treasury Regulations promulgated thereunder and 178 193 current administrative rulings and court decisions, all of which are subject to change. Any such change, which may or may not be retroactive, could alter the tax consequences to stockholders described herein. Stockholders should be aware that this discussion does not deal with all United States Federal income tax considerations that may be relevant to an individual stockholder granted incentive awards pursuant to the 1999 Plan. ACCORDINGLY, STOCKHOLDERS AND INCENTIVE AWARD RECIPIENTS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES RELATING TO INCENTIVE AWARDS UNDER THE 1999 PLAN. Non-Qualified Stock Options. An optionee will not recognize any taxable income upon the grant of a non-qualified stock option. Caldera will not be entitled to a tax deduction with respect to the grant of a non-qualified stock option. Upon exercise of a non-qualified stock option, the excess of the fair market value of the common stock on the exercise date over the Option Exercise Price will be taxable as compensation income to the optionee and will be subject to applicable withholding taxes. Caldera will generally be entitled to a tax deduction at such time in the amount of such compensation income. The optionee's tax basis for the common stock received pursuant to the exercise of a non-qualified stock option will equal the sum of the compensation income recognized and the exercise price. In the event of a sale of common stock received upon the exercise of a non-qualified stock option, any appreciation or depreciation after the exercise date generally will be taxed as capital gain or loss and will be long-term capital gain or loss if the holding period for such common stock is more than one year. The exercise of a non-qualified stock option through the delivery of previously acquired stock will generally be treated as a non-taxable, like-kind exchange as to the number of shares surrendered and the identical number of shares received under the option. That number of shares will take the same basis and, for capital gains purposes, the same holding period as the shares that are given up. The value of the shares received upon such an exchange that are in excess of the number given up will be includible as ordinary income to the participant at the time of the exercise. The excess shares will have a new holding period for capital gain purposes and a basis equal to the value of such shares determined at the time of exercise. Neither the Participant nor the transferee will realize taxable income at the time of a non-arm's-length transfer of a non-qualified stock option as a gift. Upon the subsequent exercise of the option by the transferee, the Participant will realize ordinary income in an amount equal to the excess of the fair market value of the shares on the date of exercise over the option price. Upon a subsequent disposition of the shares by the transferee, the transferee will generally realize short-term or long-term capital gain or loss, with the basis for computing such gain or loss equal to the fair market value of the stock at the time of exercise. If a Participant makes a gift of an option, and surrenders all dominion and control of the option, the gift should be complete for Federal gift tax purposes at the time of transfer and should be valued at that time (or, if later, at the time the option becomes vested). For gift and estate tax purposes, the gift of an option would generally cause the option (and the stock acquired by exercise) to be excluded from the participant's estate. Special rules may apply if the participant makes a gift of an award to a charity or to a "living trust" under which the participant retains the right to revoke the trust or substantially alter its terms. Incentive Stock Options. An optionee generally will not recognize any taxable income at the time of grant or timely exercise of an incentive stock option for regular U.S. Federal income tax purposes, and Caldera will not be entitled to a tax deduction with respect to such grant or exercise. Exercise of an incentive stock option may, however, give rise to taxable compensation income subject to applicable withholding taxes, and a tax deduction to Caldera, if the optionee subsequently engages in a "disqualifying disposition," as described below. Additionally, the spread between the fair-market value of shares obtained upon exercise of an incentive stock option and the exercise price is an adjustment to alternative minimum taxable income and may result in the option holder having to pay federal alternative minimum tax for the year of exercise. A sale or exchange by an optionee of shares acquired through the exercise of an incentive stock option more than one year after the transfer of the shares to such optionee and more than two years after the date of grant of the incentive stock option will result in any difference between the net sale proceeds 179 194 and the exercise price paid being treated a long-term capital gain (or loss) to the optionee. If such sale or exchange (including inter vivos gifts) takes place within two years after the date of grant of the incentive stock option or within one year from the date of transfer of the incentive stock option shares to the optionee, such sale or exchange will generally constitute a "disqualifying disposition" of such shares. A disqualifying disposition that will have the following results: any excess of (i) the lesser of (a) the fair market value of the shares at the time of exercise of the incentive stock option and (b) the amount realized on such disqualifying disposition of the shares over (ii) the Option Exercise Price of such shares, will be ordinary income to the optionee, subject to applicable reporting requirements, and Caldera will be entitled to a tax deduction in the amount of such income. Any further gain generally will qualify as capital gain and will not result in any deduction by Caldera. The exercise of an incentive stock option through the exchange of previously acquired common stock will generally be treated in the same manner as such an exchange would be treated in connection with the exercise of a non-qualified stock option; that is, as a non-taxable, like-kind exchange as to the number of shares given up and the identical number of shares received under the option. That number of shares will take the same basis and, for capital gain purposes, the same holding period as the shares that are given up. However, such holding period will not be credited for purposes of the one-year holding period required for the new shares to receive incentive stock option treatment. Shares received in excess of the number of shares given up will have a new holding period and will have a basis of zero or, if any cash was paid as part of the exercise price, the excess shares received will have a basis equal to the amount of the cash. If a disqualifying disposition (a disposition before the end of the applicable holding period) occurs with respect to any of the shares received from the exchange, it will be treated as a disqualifying disposition of the shares with the lowest basis. If the exercise price of an incentive stock option is paid with shares of stock of Caldera acquired through a prior exercise of an incentive stock option, gain will be realized on the shares given up (and will be taxed as ordinary income) if those shares have not been held for the minimum incentive stock option holding period (two years form the date of grant and one year from the date of transfer), but the exchange will not affect the tax treatment, as described in the immediately preceding paragraph, of the shares received. Restricted Stock. A grantee of restricted stock will not recognize any income upon the receipt of restricted stock unless the holder elects under Section 83(b) of the Code within thirty days of such receipt, to recognize ordinary income in an amount equal to the fair market value of the restricted stock at the time of receipt. If the election is made, the holder will not be allowed a deduction for amounts subsequently required to be returned to Caldera. Any Section 83(b) election must be filed with the IRS within the applicable 30-day period. If the Section 83(b) election is not made, the holder will generally recognize ordinary income, on the date that the restrictions to which the restricted stock are subject are removed, in an amount equal to the fair market value of such shares on such date, less any amount paid for the shares. At that time the holder will recognize ordinary income, subject to applicable reporting and withholding requirements, and Caldera generally will be entitled to a deduction in the same amount. Generally, upon a sale or other disposition of restricted stock with respect to which the holder has recognized ordinary income (i.e., a Section 83(b) election was previously made or the restrictions were previously removed), the holder will recognize capital gain or loss in an amount equal to the difference between the amount realized on such sale or other disposition and the holder's basis in such shares. Such gain or loss will be long-term capital gain or loss if the holding period for such shares is more than one year. Other Incentive Awards. The grant of a stock appreciation right or phantom stock award will not result in taxable income to the grantee or in a tax deduction for Caldera. Upon the settlement of such a right or award, the grantee will recognize ordinary income equal to the aggregate value of the payment received, subject to applicable reporting and withholding requirements, and Caldera generally will be entitled to a tax deduction in the same amount. A stock bonus generally will result in compensation 180 195 income for the grantee and a tax deduction for Caldera, equal to the fair market value of the shares of common stock granted. Withholding of Taxes. Pursuant to the 1999 Plan, Caldera may deduct, from any payment or distribution of shares thereunder, the amount of any tax required by law to be withheld with respect to such payment, or may require the Participant to pay such amount to Caldera prior to, and as a condition of, making such payment or distribution. Subject to rules and limitations established by the Committee, a participant may elect to satisfy the withholding required, in whole or in part, either by having Caldera withhold shares of common stock from any payment under the plan or by the Participant delivering shares of common stock to Caldera. Any election must be made in writing on or before the date when the amount of taxes to be withheld is determined. The portion of the withholding that is so satisfied will be determined using the fair market value of the common stock on the date when the amount of taxes to be withheld is determined. The use of shares of common stock to satisfy any withholding requirement will be treated, for federal income tax purposes, as a sale of such shares for an amount equal to the fair market value of the stock on the date when the amount of taxes to be withheld is determined. If previously-owned shares of common stock are delivered by a Participant to satisfy a withholding requirement, the disposition of such shares would result in the recognition of gain or loss by the participant for tax purposes, depending on whether the basis in the delivered shares is less than or greater than the fair market value of the shares at the time of disposition. Change in Control. Any acceleration of the vesting or payment of awards under the 1999 Plan in the event of a change in control in Caldera may cause part or all of the consideration involved to be treated as an "excess parachute payment" under the Internal Revenue Code, which may subject the participant to a 20% excise tax and which may not be deductible by Caldera. VALUE OF BENEFITS TO CERTAIN PERSONS If this Proposal Three is approved by the stockholders, and the directors formula award program is adopted, any current or future director of Caldera that is elected to serve or continues to serve as a director of Caldera following the date of the regularly scheduled annual meeting of stockholders during the 2002 calendar year and each even number thereafter will, subject to the availability of a sufficient number of shares under the 1999 Plan, be granted an option to purchase 100,000 shares of common stock at an Option Exercise Price equal to the fair market value of a share of common stock on the date of such annual meeting. In addition, under the top-up provisions of the director formula award plan, five of the current non-employee directors of Caldera will receive an aggregate of options to acquire 195,833 shares (Steve Cakebread, 79,167; Ralph J. Yarro III, 75,000; Thomas P. Raimondi, Jr., 25,000; John R. Egan, 8,333; and Edward E. Iacobucci, 8,333) prior to March 1, 2002. Additional directors appointed to the board of Caldera or New Caldera prior to March 1, 2002 will be entitled to receive options to acquire a pro rata portion of 100,000 shares determined by multiplying 100,000 by a fraction, the numerator of which is the number of full calendar months between the date of appointment and March 1, 2002 and the denominator of which is 24. On completion of the combination, New Caldera anticipates granting options to the following individuals: Drew A. Spencer, options to acquire 2,000 shares, the current executive officers of Caldera as a group, including Mr. Spencer, options to acquire 6,000 shares, and all other employees, including current officers who are not executive officers as a group, options to acquire 208,300 shares. All of the foregoing options have, or will have on grant, an exercise price equal to the fair market value of a share of common stock on the date of grant. Except as set forth above, Caldera is unable to determine the amount of benefits that may be received in the future by participants under the 1999 Plan if the proposed amendments are approved, as the receipt of incentive awards under the 1999 Plan is generally subject to the discretion of the Committee. 181 196 STOCK AWARDS The table below shows, as to each of Caldera's executive officers named in the Summary Compensation Table of the Management of Caldera and New Caldera section of this joint proxy statement/prospectus and the various indicated individuals and groups, the number of shares of common stock subject to options granted under the 1999 Plan between December 1, 1999, the effective date of the 1999 Plan and October 31, 2000, together with the weighted average exercise price per share. OPTION TRANSACTIONS(1)
OPTIONS GRANTED WEIGHTED AVERAGE (NUMBER EXERCISE PRICE OF NAME OF SHARES) GRANTED OPTIONS ---- ----------- ----------------- Ransom H. Love, President and Chief Executive Officer....... 379,752 $6.00 Alan J. Hansen, Chief Financial Officer(2).................. 67,813 $6.00 Benoy Tamang, Sr. Vice President, Strategic Development..... 67,813 $6.00 Drew A. Spencer, Chief Technology Officer................... 67,813 $6.00 Royce Bybee, Sr. Vice President, Sales and Marketing........ 77,813 $6.75 All current executive officers as a group (6 persons)....... 743,504 $6.39 All current non-employee directors as a group (5 persons)... 529,167 $5.57 All employees, including current officers who are not executive officers, as a group............................ 3,030,642 $6.96
--------------- (1) To date, no restricted stock, phantom stock, stock bonus or stock appreciation right awards have been granted under the 1999 Plan. (2) Resigned as Chief Financial Officer of Caldera on November 15, 2000. As of October 31, 2000, options covering 3,415,954 shares of common stock were outstanding under the 1999 Plan, 7,152,902 shares remained available for future option grant or direct issuance (assuming stockholder approval of the increase which forms part of this proposal), and 13,882 shares have been issued pursuant to the exercise of outstanding options under the 1999 Plan. DEDUCTIBILITY OF EXECUTIVE COMPENSATION Caldera anticipates that any compensation deemed paid by it in connection with the disqualifying disposition of incentive stock option shares or the exercise of non-statutory options granted with exercise prices equal to the fair market value of the shares on the grant date will qualify as performance-based compensation for purposes of Section 162(m) of the Code and will not have to be taken into account for purposes of the $1 million limitation per covered individual on the deductibility of the compensation paid to certain executive officers of Caldera. Accordingly, all compensation deemed paid under the 1999 Plan will remain deductible by Caldera without limitation under Section 162(m) of the Code. ACCOUNTING TREATMENT Option grants or stock issuances with exercise or issue prices less than the fair market value of the shares on the grant or issue date will result in a direct compensation expense to Caldera's earnings equal to the difference between the exercise or issue price and the fair market value of the shares on the grant or issue date. Such expense will be recognized by Caldera over the period that the option shares or issued shares are to vest. Option grants or stock issuances at 100% or more of fair market value will not result in any direct charge to Caldera's earnings. However, the fair value of those options is required to be disclosed in the notes to Caldera's financial statements, and Caldera must also disclose, in pro-forma statements to 182 197 Caldera's financial statements, the impact those options would have upon Caldera's reported earnings were the value of those options at the time of grant treated as compensation expense. Whether or not granted at a discount, the number of outstanding options may be a factor in determining Caldera's earnings per share on a fully-diluted basis. SAR or Tandem SAR grants will result in compensation expense to Caldera's earnings. While an SAR is outstanding, the ultimate amount of compensation inherent in the right is indeterminate. Accounting Principles Board Opinion No. 25 and FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, require interim calculations of the amount of compensation inherent in the SAR (variable plan accounting). Under variable plan accounting, compensation expense can fluctuate significantly from period to period based upon the fluctuations in the fair market value of the underlying securities. The measurement of the expense in the financial statements is made at the end of each reporting period based on the increase in the fair market value since the date of grant or award multiplied by the total number of shares or rights outstanding, regardless of exercisable status of the rights. Such expense will generally be recognized by Caldera at the end of each fiscal quarter. Restricted stock awards are accounted for in a manner similar to the granting of non-qualified stock option unless the award contains some type of performance criteria. Compensation cost is generally measured under restricted stock plans as the difference between the grant price of the restricted stock and the fair market value of the unrestricted stock at the grant date. This cost is recognized ratably over the period that ends when all risks of forfeiture have passed. Restricted stock may be forfeited (or repurchased by the employer at the employee's original purchase price) if the employee terminates prior to the lapsing of restrictions. When restricted stock is forfeited, compensation cost previously recognized is reversed. Any unrecognized compensation is treated as part of the purchased treasury stock. To the extent the compensation originally measured exceeds the market value of the treasury stock acquired, the excess is charged to paid-in capital. If restricted stock awards combine performance criteria, measurement of the ultimate compensation to be recognized occurs at the date the performance criteria are met. This type of award is classified as a variable plan and interim estimates of compensation are required based on a combination of the then-fair market value of the stock as of the end of the reporting period and the extent or degree of compliance with the performance criteria. Grants of shares of phantom stock are accounted for similar to SAR grants as discussed above. Bonuses of stock are recorded as compensation at the fair market value of the granted shares at the date of the bonus. Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation, requires that all equity instruments transferred to non-employees in exchange for goods and services be measured at fair value and recorded as an expense in the financial statements. As a result, an option to purchase common stock at an exercise price equal to the fair market value on the date of the grant to a non-employee consultant would require Caldera to record compensation based on the fair value of the option as calculated by a valuation methodology such as the Black-Scholes option pricing model; whereas, the same option granted at the current fair market value to an employee does not require the recording of such compensation in the financial statements. As a result, Caldera may incur non-cash charges related to the value of stock awards should it grant them to non-employee consultants or contractors. Should one or more optionees be granted stock appreciation rights which have no conditions upon exercisability other than a service or employment requirement, then such rights will result in compensation expense to Caldera's earnings. STOCKHOLDER APPROVAL The affirmative vote of a majority of the outstanding voting shares of Caldera present or represented and entitled to vote at the annual meeting is required for approval of the amendments to the 1999 Plan. Should such stockholder approval not be obtained, then the 6,800,000 share increase to the share reserve 183 198 will not be implemented, and any stock options granted on the basis of the 6,800,000 share increase to the 1999 Plan will immediately terminate without becoming exercisable for the shares of common stock subject to those options, and no additional options will be granted on the basis of such share increase. The automatic annual share increase feature pursuant to which the number of shares available for issuance under the 1999 Plan will automatically increase on November 1 of each calendar year by an amount equal to 3% of the total number of shares outstanding on the previous October 31st will also not be implemented should such stockholder approval not be obtained. In addition, the director formula awards program, pursuant to which directors are automatically granted options to purchase common stock at periodic intervals, will not become part of the 1999 Plan if stockholder approval is not obtained. The 1999 Plan will, however, continue to remain in effect, and award grants may continue to be made pursuant to the provisions of the 1999 Plan in effect prior to the amendments summarized in this Proposal No. Three, until the available reserve of common stock as last approved by the stockholders has been issued pursuant to award grants made under the 1999 Plan. RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors recommends that the stockholders of Caldera vote FOR the amendments to the 1999 Plan. 184 199 PROPOSAL FOUR: APPROVAL OF AMENDMENTS TO THE EMPLOYEE STOCK PURCHASE PLAN Caldera's stockholders are being asked to approve an amendment to Caldera's 2000 Employee Stock Purchase Plan (the "Purchase Plan") which will increase the maximum number of shares of common stock authorized for issuance over the term of the Purchase Plan by an additional 1.5 million shares to 2.0 million shares. The purpose of the amendment is to ensure that Caldera or if the combination is consummated, New Caldera will continue to have a sufficient reserve of common stock available under the Purchase Plan to provide eligible employees of Caldera (or New Caldera) and its participating affiliates with the opportunity to acquire a proprietary interest in Caldera (or New Caldera) through participation in a payroll-deduction based employee stock purchase plan under Section 423 of the Internal Revenue Code (the "Code") immediately after the combination. The Purchase Plan was originally adopted by the board of directors on February 15, 2000 and approved by Caldera's stockholders on March 1, 2000. The Purchase Plan became effective on March 20, 2000 in connection with the initial public offering of Caldera's common stock. The following is a summary of the principal features of the Purchase Plan, as amended. The summary, however, does not purport to be a complete description of all the provisions of the Purchase Plan. Any stockholder who wishes to obtain a copy of the actual plan document may do so by written request to Caldera's Chief Financial Officer at Caldera's executive offices in Orem, Utah. ADMINISTRATION The Purchase Plan is currently administered by the compensation committee of the board of directors. Such committee, as Plan Administrator, has full authority to adopt administrative rules and procedures and to interpret the provisions of the Purchase Plan. All costs and expenses incurred in plan administration are paid by Caldera without charge to participants. SECURITIES SUBJECT TO THE PURCHASE PLAN Two million shares of common stock have been reserved for issuance over the ten (10)-year term of the Purchase Plan. Such share reserve includes the 1.5 million-share increase for which stockholder approval is sought under this Proposal No. Four. In addition, the share reserve will increase automatically on the first trading day of January each calendar year beginning with the calendar year 2001 by an amount equal to one percent (1%) of the total number of shares of common stock outstanding on the last trading day of December of the immediately preceding calendar year, but in no event will any such annual increase exceed 750,000 shares. The shares may be made available from authorized but unissued shares of Caldera's common stock or from shares of common stock repurchased by Caldera, including shares repurchased on the open market. As of October 31, 2000, 61,087 shares of common stock had been issued under the Purchase Plan, and 1,938,913 shares were available for future issuance, assuming approval of this Proposal No. Four. OFFERING PERIODS AND PURCHASE RIGHTS Shares of common stock will be offered under the Purchase Plan through a series of successive offering periods, each with a maximum duration of twenty-four (24) months. The first offering period began on March 20, 2000, in connection with the initial public offering of the Common Stock, and will end on the last business day in April 2002. The next offering period will begin on the first business day in May 2002 and will end on the last business day of April 2004. Subsequent offering periods will begin as designated by the Plan Administrator. At the time the participant joins the offering period, he or she will be granted a purchase right to acquire shares of common stock at semi-annual intervals over the remainder of that offering period. The 185 200 purchase dates will occur on the last business day in October and April each year, and all payroll deductions collected from the participant for the period ending with each such semi-annual purchase date will automatically be applied to the purchase of common stock. Should the fair market value per share of common stock on any purchase date within the twenty-four (24) month offering period be less than the fair market value per share of common stock on the start date of that offering period, then that offering period will terminate immediately after the purchase of shares of common stock on such purchase date. A new offering period will commence on the next business day following that purchase date, and all participants in the terminated offering period will be automatically enrolled in that new offering period. The new offering period will have a duration of twenty-four (24) months, unless a shorter duration is established by the Plan Administrator within five (5) business days following the start date of that offering period. ELIGIBILITY AND PARTICIPATION Any individual who is employed on a basis under which he or she is expected to work for more than 20 hours per week for more than five (5) months per calendar year in the employ of Caldera or any participating parent or subsidiary corporation (including any corporation which subsequently becomes such at any time during the term of the Purchase Plan) will be eligible to participate in the Purchase Plan. An individual who is an eligible employee on the start date of any offering period may join that offering period at that time or on any subsequent semi-annual entry date (the first business day in May or November each year) within that offering period. An individual who first becomes an eligible employee after such start date may join the offering period on any semi-annual entry date within that offering period on which he or she is an eligible employee. As of October 31, 2000, Caldera estimates that approximately 178 employees, including 6 executive officers, were eligible to participate in the Purchase Plan. PURCHASE PRICE The purchase price of the common stock acquired on each semi-annual purchase date will be equal to 85% of the lower of (i) the fair market value per share of common stock on the participant's entry date into the offering period or (ii) the fair market value on the semi-annual purchase date. The fair market value of the common stock on any relevant date under the Purchase Plan will be deemed to be equal to the closing selling price per share on such date on the Nasdaq National Market. However, the fair market value of the common stock on the start date of the initial offering period was deemed to be equal to the $14.00 price per share at which the common stock was sold in the initial public offering. On October 31, 2000, the closing selling price per share of common stock on the Nasdaq National Market was $3.50 per share. PAYROLL DEDUCTIONS AND STOCK PURCHASES Each participant may authorize periodic payroll deductions in any multiple of 1% (up to a maximum of 10%) of his or her cash earnings each offering period. Cash earnings include the participant's regular base salary plus all overtime payments, bonuses, profit-sharing distributions and other incentive-type payments. The accumulated payroll deductions of each participant will automatically be applied on each semi-annual purchase date (the last business day in October and April of each year) to the purchase of whole shares of common stock at the purchase price in effect for the participant for that purchase date. The first purchase date under the Purchase Plan will occur on October 31, 2000. 186 201 SPECIAL LIMITATIONS The Purchase Plan imposes certain limitations upon a participant's right to acquire common stock, including the following: - Purchase rights may not be granted to any individual who owns stock (including stock purchasable under any outstanding purchase rights) possessing 5% or more of the total combined voting power or value of all classes of stock of Caldera or any of its affiliates. - Purchase rights granted to a participant may not permit such individual to purchase more than $25,000 worth of common stock (valued at the time each purchase right is granted) for each calendar year those purchase rights are outstanding at any time. - No participant may purchase more than 750 shares of common stock on any semi-annual purchase date. - The aggregate shares of common stock purchased on any semi-annual purchase date may not exceed 125,000 shares. The Plan Administrator will have the discretionary authority, exercisable prior to the start of any offering period, to increase or decrease the limitations to be in effect for the number of shares purchasable per participant and in total by all participants on each purchase date within that offering period. TERMINATION OF PURCHASE RIGHTS The participant may withdraw from the Purchase Plan at any time, and his or her accumulated payroll deductions will, at the participant's election, either be refunded immediately or applied to the purchase of common stock on the next semi-annual purchase date. The participant's purchase right will immediately terminate upon his or her cessation of employment or loss of eligible employee status. Any payroll deductions which the participant may have made for the semi-annual period in which such cessation of employment or loss of eligibility occurs will be refunded and will not be applied to the purchase of common stock. STOCKHOLDER RIGHTS No participant will have any stockholder rights with respect to the shares covered by his or her purchase rights until the shares are actually purchased on the participant's behalf. No adjustment will be made for dividends, distributions or other rights for which the record date is prior to the date of such purchase. ASSIGNABILITY No purchase rights will be assignable or transferable by the participant, and the purchase rights will be exercisable only by the participant. CHANGES IN CAPITALIZATION In the event that any change is made to Caldera's outstanding common stock (whether by reason of any recapitalization, stock dividend, stock split, exchange or combination of shares or other change in corporate structure effected without Caldera's receipt of consideration), appropriate adjustments will be made to (i) the class and maximum number of securities issuable over the term of the Purchase Plan, (ii) the class and maximum number of securities by which the share reserve is to increase automatically each year, (iii) the class and maximum number of securities purchasable in total by all participants on any one purchase date, (iv) the class and maximum number of securities purchasable per participant on any one semi-annual purchase date and (v) the class and number of securities and the price per share in effect under each outstanding purchase right. 187 202 CHANGE IN CONTROL In the event Caldera is acquired by merger or asset sale, all outstanding purchase rights will automatically be exercised immediately prior to the effective date of such acquisition. The purchase price will be equal to 85% of the lower of (i) the fair market value per share of common stock on the participant's entry date into the offering period in which such acquisition occurs or (ii) the fair market value per share of common stock immediately prior to the effective date of such acquisition. The limitation on the maximum number of shares purchasable in total by all participants on any one purchase date will not be in effect for the purchase date attributable to such change in control. SHARE PRO-RATION Should the total number of shares of common stock to be purchased pursuant to outstanding purchase rights on any particular date exceed the number of shares at the time available for issuance under the Purchase Plan, then the Plan Administrator will make a pro-rata allocation of the available shares on a uniform and nondiscriminatory basis, and the payroll deductions of each participant, to the extent in excess of the aggregate purchase price payable for the common stock allocated to such individual, will be refunded. AMENDMENT AND TERMINATION The Purchase Plan will terminate upon the earliest of (i) the last business day in April 2010, (ii) the date on which all shares available for issuance thereunder are sold pursuant to exercised purchase rights or (iii) the date on which all purchase rights are exercised in connection with a change in control of the Company. The board may at any time alter, suspend or discontinue the Purchase Plan. However, the board may not, without stockholder approval, (i) increase the number of shares issuable under the Purchase Plan or the maximum number of shares purchasable per participant on any one semi-annual purchase date, except in connection with certain changes in Caldera's capital structure, (ii) alter the purchase price formula so as to reduce the purchase price or (iii) modify the requirements for eligibility to participate in the Purchase Plan. FEDERAL TAX CONSEQUENCES The Purchase Plan is intended to be an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code. Under a plan which so qualifies, no taxable income will be recognized by a participant, and no deductions will be allowable to Caldera, upon either the grant or the exercise of the purchase rights. Taxable income will not be recognized until there is a sale or other disposition of the shares acquired under the Purchase Plan or in the event the participant should die while still owning the purchased shares. If the participant sells or otherwise disposes of the purchased shares within two (2) years after his or her entry date into the offering period in which such shares were acquired or within one (1) year after the semi-annual purchase date on which those shares were actually acquired, then the participant will recognize ordinary income in the year of sale or disposition equal to the amount by which the fair market value of the shares on the purchase date exceeded the purchase price paid for those shares, and Caldera will be entitled to an income tax deduction, for the taxable year in which such disposition occurs, equal in amount to such excess. If the participant sells or disposes of the purchased shares more than two (2) years after his or her entry date into the offering period in which the shares were acquired and more than one (1) year after the semi-annual purchase date of those shares, then the participant will recognize ordinary income in the year of sale or disposition equal to the lower of (i) the amount by which the fair market value of the shares on the sale or disposition date exceeded the purchase price paid for those shares or (ii) fifteen percent (15%) of the fair market value of the shares on the participant's entry date into that offering period. Any 188 203 additional gain upon the disposition will be taxed as a long-term capital gain. Caldera will not be entitled to an income tax deduction with respect to such disposition. If the participant still owns the purchased shares at the time of death, his or her estate will recognize ordinary income in the year of death equal to the lower of (i) the amount by which the fair market value of the shares on the date of death exceeds the purchase price or (ii) fifteen percent (15%) of the fair market value of the shares on his or her entry date into the offering period in which those shares were acquired. ACCOUNTING TREATMENT The issuance of common stock under the Purchase Plan will not result in a direct compensation expense chargeable against Caldera's reported earnings. However, Caldera must disclose, in pro-forma statements to Caldera's financial statements, the impact the purchase rights granted under the Purchase Plan would have upon Caldera's reported earnings were the fair value of those purchase rights treated as compensation expense. STOCK ISSUANCES The table below shows, as to each of Caldera's executive officers named in the Summary Compensation Table included in the "Management of Caldera and New Caldera" section of this joint proxy statement/prospectus and the various indicated groups, the number of shares of common stock purchased under the Purchase Plan between March 20, 2000 and October 31, 2000, the most recent purchase date, together with the weighted average purchase price paid per share. PURCHASE PLAN TRANSACTIONS
NUMBER OF WEIGHTED AVERAGE NAME PURCHASED SHARES PURCHASE PRICE ---- ---------------- ---------------- Ransom H. Love, Director, Chief Executive Officer........... 750 $2.98 Alan J. Hansen, Chief Financial Officer(1).................. 0 $ -- Drew Spencer, Chief Technology Officer...................... 0 $ -- Benoy Tamang, Vice President, Strategic Development......... 750 $2.98 Royce Bybee, Senior Vice President, Sales and Marketing..... 0 $ -- All current executive officers as a group (6 persons)....... 1,500 $2.98 All employees, including current officers who are not executive officers, as a group............................ 60,307 $2.98
--------------- (1) Resigned as Chief Financial Officer of Caldera on November 15, 2000. NEW PLAN BENEFITS No purchase rights have been granted, and no shares of common stock have been issued, on the basis of the 1.5 million share increases for which stockholder approval is sought. STOCKHOLDER APPROVAL The affirmative vote of a majority of the outstanding voting shares of Caldera present or represented and entitled to vote at the 2000 annual meeting is required for approval of the 1.5 million-share increase to the Purchase Plan. Should such stockholder approval not be obtained, then the 1.5 million-share increase will not be implemented, and any purchase rights granted on the basis of the 1.5 million-share increase to the Purchase Plan will immediately terminate. No additional purchase rights will be granted on the basis 189 204 of such share increase, and the Purchase Plan will terminate once the existing share reserve has been issued. RECOMMENDATION OF THE BOARD OF DIRECTORS The board of directors believes that the amendment to the Purchase Plan is necessary in order to continue to provide equity incentives to attract and retain the services of high quality employees including through acquisitions. For this reason, the board of directors recommends that the stockholders of Caldera vote FOR the amendment to the Purchase Plan. 190 205 PROPOSAL FIVE: AMENDMENTS TO CALDERA'S CERTIFICATE OF INCORPORATION The present capital structure of Caldera authorizes 75,000,000 shares of common stock and 25,000,000 shares of preferred stock each having a par value of $0.001 per share. The board of directors believes this capital structure is inadequate for the present and future needs of Caldera. Therefore, the board of directors has unanimously approved the amendment and restatement of Caldera's Restated Certificate of Incorporation to increase the authorized number of shares of common stock from 75,000,000 shares to 175,000,000 shares. The board believes this capital structure more appropriately reflects the present and future needs of Caldera and recommends such amendment and restatement to Caldera's stockholders for adoption. The undesignated preferred stock may be issued from time to time in one or more series with such rights, preferences and privileges as may be determined by the board of directors. On October 31, 2000, 39,444,457 shares of common stock were outstanding and no shares of preferred stock were outstanding. PURPOSE OF AUTHORIZING ADDITIONAL COMMON STOCK Authorizing an additional 100,000,000 shares of common stock would give the board of directors the express authority, without further action of the stockholders, to issue such common stock from time to time as the board of directors deems necessary. The board of directors believes it is necessary to have the ability to issue such additional shares of common stock for general corporate purposes. Potential users of the additional authorized shares may include acquisition transactions, equity financings, stock dividends or distributions, issuance of options pursuant to Caldera's 1999 Omnibus Stock Incentive Plan and issuances of common stock pursuant to Caldera's Employee Stock Purchase Plan without further action by the stockholders, unless such action were specifically required by applicable law or rules of any stock exchange on which Caldera's securities may then be listed. The proposed increase in the authorized number of shares of common stock could have a number of effects on Caldera's stockholders depending upon the exact nature and circumstances of any actual issuances of authorized but unissued shares. The increase could have an anti-takeover effect, in that additional shares could be issued (within the limits imposed by applicable law) in one or more transactions that could make a change in control or takeover of Caldera more difficult. For example, additional shares could be issued by Caldera so as to dilute the stock ownership or voting rights of persons seeking to obtain control of Caldera. Similarly, the issuance of additional shares of certain persons allied with Caldera's management could have the effect of making it more difficult to remove Caldera's current management by diluting the stock ownership or voting rights of persons seeking to cause such removal. In addition, an issuance of additional shares by Caldera could have an effect on the potential realizable value of a stockholders' investment. In the absence of a proportionate increase in Caldera's earnings and book value, an increase in the aggregate number of outstanding shares of Caldera caused by the issuance of the additional shares would dilute the earnings per share and book value per share of all outstanding shares of Caldera's common stock. If such factors were reflected in the price per share of common stock, the potential realizable value of a stockholder's investment could be adversely affected. The common stock carries no preemptive rights to purchase additional shares. The proposed amendment and restatement of Caldera's Restated Certificate of Incorporation was approved by unanimous written consent of the directors of Caldera in August 2000. STOCKHOLDER APPROVAL The affirmative vote of a majority of Caldera's outstanding voting shares is required for approval of the amendment and restatement of Caldera's Restated Certificate of Incorporation authorizing 100,000,000 additional shares of common stock. RECOMMENDATION OF THE BOARD OF DIRECTORS The board of directors recommends that the stockholders of Caldera vote FOR the amendment and restatement of Caldera's Restated Certificate of Incorporation authorizing 100,000,000 additional shares of common stock. 191 206 PROPOSAL SIX: RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS Caldera is asking the stockholders to ratify the selection of Arthur Andersen LLP as Caldera's independent public accountants for the fiscal year ending October 31, 2001. The affirmative vote of the holders of a majority of the shares represented and voting at the annual meeting will be required to ratify the selection of Arthur Andersen LLP. In the event the stockholders fail to ratify the appointment, the audit committee of the board of directors will consider it as a direction to select other auditors for the subsequent year. Even if the selection is ratified, the board of directors in its discretion may direct the appointment of a different independent accounting firm at any time during the year if the board of directors determines that such change would be in the best interest of Caldera and its stockholders. Arthur Andersen LLP has audited the Caldera's financial statements for fiscal year 2000. Its representatives are expected to be present at the annual meeting, will have the opportunity to make a statement if they desire to do so, and will be available to respond to appropriate questions. AUDIT FEES The aggregate fees for professional services rendered by Arthur Andersen LLP in connection with its audit of Caldera's consolidated financial statements and reviews of the consolidated financial statements included in Caldera's quarterly reports on Form 10-Q for the 2000 fiscal year was approximately $92,000. FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES Arthur Andersen did not provide to Caldera any services related to financial systems design and implementation in the 2000 fiscal year. ALL OTHER FEES In addition to performing the audit of Caldera's consolidated financial statements, Arthur Andersen LLP provided various other services to Caldera during the 2000 fiscal year. The aggregate fees for these other services was approximately $748,000. "All other services" includes services rendered to Caldera primarily related to the following: (i) Caldera's initial public offering, (ii) acquisition due diligence reviews, integration services and registration statement work, (iii) tax planning and preparation of tax returns of Caldera, and (iv) evaluating the effects of various accounting issues and changes in professional standards. RECOMMENDATION OF THE BOARD OF DIRECTORS The board of directors recommends that the stockholders of Caldera vote FOR the proposal to ratify the selection of Arthur Andersen LLP to serve as Caldera's independent public accountants for the fiscal year ending October 31, 2001. AUDIT COMMITTEE REPORT The audit committee, which currently consists of directors Cakebread, Iacobucci and Egan, is responsible for, among other things: - reviewing Caldera's annual financial statements and other relevant financial reports, - reviewing the internal financial reports prepared by management, - recommending engagement of Caldera's independent accountants, - approving the services performed by such accountants, 192 207 - consulting with such accountants and reviewing with them the results of their audit, and - reviewing and evaluating Caldera's systems of internal controls and the audit and financial reporting process. The audit committee has adopted a written charter, which is attached to this joint proxy statement/prospectus as Appendix P. Each member of our audit committee is "independent" as defined under Rule 4200(a)(15) of the National Association of Securities Dealers' listing standards. The audit committee has reviewed and discussed Caldera's audited consolidated financial statements with its management and has discussed with Caldera's independent public accountants the matters to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees). The audit committee has received the written disclosures and the letter from Caldera's independent public accountants required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committee). The audit committee has also considered whether the provision of non-audit services provided by Arthur Andersen LLP to Caldera is compatible with maintaining their independence and has discussed with the auditors such auditors' independence. Based on its review, the audit committee recommended to the board of directors that the audited financial statements for Caldera's fiscal year ended October 31, 2000 be included in Caldera's Annual Report on Form 10-K for Caldera's fiscal year ended October 31, 2000. Submitted by: Steve Cakebread (Chair) Edward E. Iacobucci John R. Egan Members of the Audit Committee STOCK PERFORMANCE GRAPH The following graph shows a comparison of cumulative total stockholder return on Caldera's common stock, based on the market price of our common stock, assuming reinvestment of dividends, with the cumulative total return on the Nasdaq Stock Market (U.S.) Index as reported by Media General Financial Services and the MG Group Index for internet software and services as reported by Media General Financial Services, for the period beginning March 21, 2000, the day our common stock began trading, through October 31, 2000. 193 208 COMPARISON OF CUMULATIVE TOTAL RETURN [PERFORMANCE GRAPH]
-------------------------------------------------------------------------------------------- 3/21/00 4/30/00 7/31/00 10/31/00 -------------------------------------------------------------------------------------------- Caldera Systems, Inc. 100.00 44.16 23.94 11.89 MG Group Index 100.00 70.11 57.24 44.01 Nasdaq Stock Market (U.S.) Index 100.00 84.19 82.17 73.50
(1) The graph assumes that $100 was invested in Caldera on March 21, 2000 in Caldera's common stock and in each index, and that all dividends were reinvested. No cash dividends have been declared on Caldera's common stock. (2) Stockholder returns over the indicated period should not be considered indicative of future stockholder returns. Notwithstanding anything to the contrary set forth in any of Caldera's previous filings made under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate future filings made by Caldera under those statutes, neither the preceding Stock Performance Graph nor the Compensation Committee Report is to be incorporated by reference into any such prior filings, nor shall such graph or report be incorporated by reference into any future filings made by Caldera under those statutes. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires Caldera's directors, executive officers and persons who own more than 10% of Caldera's common stock, or the reporting persons, to file with the Securities and Exchange Commission, or the SEC, initial reports of ownership and changes in ownership of Caldera's common stock. Reporting persons are required by SEC regulations to furnish Caldera with copies of all Section 16(a) reports they file. To Caldera's knowledge, based solely on its review of the copies of such reports received or written representations from certain reporting persons that no other reports were required. Caldera believes that during its fiscal year ended June 30, 2000, all reporting persons complied with all applicable filing requirements, with the exception of one late Form 4 filing by Mr. Bybee. 194 209 FORM 10-K Caldera filed an Annual Report on Form 10-K with the Securities and Exchange Commission on January 29, 2001. Stockholders may obtain a copy of this report, without charge, by writing to Kathy Allred at Caldera's principal executive offices located at 240 West Center Street, Orem, Utah 84057. 195 210 PROPOSALS TO BE VOTED UPON BY SCO SHAREHOLDERS AT THE SCO SPECIAL MEETING At the SCO special meeting of shareholders, SCO's shareholders will be asked to consider the following proposals: 1. To approve and adopt the agreement and plan of reorganization, dated August 1, 2000 and amended on September 13, 2000, December 12, 2000 and February 9, 2001, by and among The Santa Cruz Operation, Inc., Caldera Systems, Inc., and Caldera International, Inc. 2. To approve an amendment to SCO's articles of incorporation to change SCO's corporate name to "Tarantella, Inc." PROPOSAL ONE: APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF REORGANIZATION SCO's board of directors adopted resolutions approving the reorganization agreement on August 1, 2000. The reorganization agreement must be approved by the affirmative vote, in person or by proxy, of at least a majority of the votes properly cast at the SCO special meeting. The combination contemplated by the reorganization agreement cannot be completed unless SCO shareholders approve and adopt the reorganization agreement. See "The Combination" and "The Reorganization Agreement." RECOMMENDATION OF THE BOARD OF DIRECTORS The board of directors recommends that the shareholders of SCO vote FOR the approval and adoption of the reorganization agreement. PROPOSAL TWO: APPROVAL OF AN AMENDMENT TO THE SCO ARTICLES OF INCORPORATION TO CHANGE SCO'S CORPORATE NAME TO "TARANTELLA, INC." At the SCO special meeting, SCO's shareholders will also be asked to approve a proposed amendment to SCO's articles of incorporation, that if approved, will change SCO's corporate name to "Tarantella, Inc." SCO seeks this change in the corporate name because, as a result of the combination contemplated by the reorganization agreement, New Caldera will acquire the SCO brand and logo. Though SCO will retain usage rights in the SCO brand and logo, SCO's focus will shift to the Tarantella business. Tarantella is software that allows centralized deployment and management of server-based applications. Tarantella is designed for information technology professionals who need to provide users with instant access to applications and services, and provides centralized management of application access. The SCO board of directors believes that the proposed name change is in its best interest because the proposed new corporate name reflects SCO's principal line of business after the completion of the combination. The SCO board of directors believes that, notwithstanding the goodwill associated with the SCO name, it is necessary to change the corporate name in order to connect the image of the company among the investment community and among our customers and potential customers to our products and services and in order to avoid confusion with SCO's historical business. 196 211 SCO's board of directors has unanimously adopted a resolution declaring it advisable to amend SCO's articles of incorporation to change the corporate name. SCO's board of directors further directed that the proposed name change be submitted for consideration by shareholders at the special meeting. As amended, Article I of the articles of incorporation would read in its entirety as follows: "Article I The name of the corporation is Tarantella, Inc." In the event the proposed name change is approved by shareholders, SCO will thereafter file a certificate of amendment to its articles of incorporation with the Secretary of State of the State of California, amending Article I, which will become effective on the date such filing is accepted by the Secretary of State. The SCO board of directors, however, reserves the right not to file the certificate of amendment even if the proposed name change is approved by the shareholders in the event the shareholders do not approve and adopt the reorganization agreement or the reorganization agreement is otherwise terminated. RECOMMENDATION OF THE BOARD OF DIRECTORS The board of directors recommends that the shareholders of SCO vote FOR the approval of the amendment of SCO's articles of incorporation. 197 212 LEGAL MATTERS Certain legal matters in connection with the combination will be passed upon by Brobeck, Phleger & Harrison LLP on behalf of Caldera and New Caldera, and by Wilson Sonsini Goodrich & Rosati, Professional Corporation, on behalf of SCO. EXPERTS The financial statements and schedule of Caldera and the financial statements of Ebiz Enterprises, Inc. included in this joint proxy statement/prospectus to the extent and for the periods indicated in their reports have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The consolidated financial statements of The Santa Cruz Operation, Inc. and subsidiaries incorporated in this joint proxy statement/prospectus by reference to the Annual Report on Form 10-K/A of the Santa Cruz Operation, Inc. for the year ended September 30, 2000 have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of The SCO Server and Professional Services Groups as of September 30, 2000 and 1999 and for each of the three years in the period ended September 30, 2000 included in this joint proxy statement/prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. Representatives of Arthur Andersen LLP are expected to be present at the Caldera annual meeting, will have the opportunity to make a statement at the Caldera annual meeting if they desire to do so and are expected to be available to respond to appropriate questions. Representatives of PricewaterhouseCoopers LLP are expected to be present at the SCO special meeting, will have the opportunity to make a statement at the SCO special meeting if they desire to do so and are expected to be available to respond to appropriate questions. 198 213 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION On August 1, 2000 and as amended on September 13, 2000, December 12, 2000 and February 9, 2001, Caldera Systems, Inc. ("Caldera"), Caldera International, Inc. ("New Caldera"), and The Santa Cruz Operation, Inc. ("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 of approximately 71.9% 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, as elected by the option holders, 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 options in exchange for one New Caldera option basis representing in the aggregate a fully diluted equity interest of approximately 2.8% in New Caldera; (iv) SCO will receive 16,000,000 shares of New Caldera Common Stock representing in the aggregate a fully diluted equity interest of approximately 25.3% in New Caldera; (v) New Caldera will pay to SCO $23 million in cash, of which $7 million was advanced to SCO in January, 2001 under a promissory note arrangement bearing interest at 10 percent; (vi) New Caldera will issue to SCO a non-interest bearing, secured promissory note in the amount of $8 million that will be payable in quarterly installments of $2 million beginning on the first day of the fifth fiscal quarter following the closing; and (vii) SCO shall be entitled to receive from New Caldera earn-out provisions during the three-year period following the closing representing 45% of the amount by which OpenServer revenues exceed certain threshold amounts. In conjunction with the Reorganization Agreement, The Canopy Group, Inc., a major stockholder of Caldera has agreed to loan $18 million to SCO. If the Reorganization is not completed, SCO will be obligated to repay the $7 million advance to Caldera. Assets of SCO will secure each of these loans. The SCO server and professional services groups operate as a provider of server software for networked business computing. The solutions delivered by the groups are UNIX(R) based server operating systems. The groups' products enable business and government organizations of all sizes to integrate technologies and products from different vendors to create cost-effective, powerful, networked information systems that perform highly complex, mission-critical business functions. Products are sold via the groups' direct sales force or through indirect channel partners, which include some of the leading distribution companies in the United States, Europe and the rest of the world. Caldera is acquiring the rights, associated technology and assigned license arrangements for the UnixWare products, OpenServer products and other server software products. The unaudited pro forma condensed combined balance sheet of New Caldera gives effect to the Reorganization as if it had been completed as of January 31, 2001. The unaudited pro forma condensed combined balance sheet of New Caldera combines the historical balance sheet of Caldera as of January 31, 2001 and the historical balance sheet of the server and professional services groups as of December 31, 2000. The unaudited pro forma condensed combined statements of operations of New Caldera give effect to the Reorganization as if it had occurred on November 1, 1999. The unaudited pro forma condensed combined statement of operations for the year ended October 31, 2000 combines the historical statement of operations of Caldera for the year ended October 31, 2000 and the historical statement of operations for the server and professional services groups for the year ended September 30, 2000. The unaudited pro forma condensed combined statement of operations for the three months ended P-1 214 January 31, 2001 combines the historical statement of operations of Caldera for the three months ended January 31, 2001 and the historical statement of operations for the server and professional groups for the three months ended December 31, 2000. New Caldera does not currently have any assets, liabilities or outstanding capital stock, nor has it had any activity in its statement of operations. As a result, no historical information for New Caldera has been included in the pro forma financial statements. The acquisition of the server and professional services groups will be accounted for using the purchase method of accounting. Under this method, the total purchase price, including fees and expenses, will be allocated to the tangible and identifiable intangible assets acquired and the liabilities assumed based upon their respective fair values as of the effective date of the acquisition. New Caldera has estimated the fair value of the assets acquired and liabilities assumed. The remaining purchase price over the tangible and identifiable intangible assets will be allocated to goodwill. Since the acquisition has not yet been completed, the actual consideration cannot yet be determined. For the purpose of the pro forma combined financial information included herein, the number of options to purchase shares of New Caldera common stock to be issued in the acquisition has been estimated based upon the number of SCO's options to purchase common shares outstanding at January 31, 2001. The actual number of New Caldera options to purchase common shares to be issued will be based on the actual options outstanding as of the completion of the Reorganization. Additionally, the actual allocation of the amount of such consideration may differ from that reflected in these unaudited pro forma condensed combined financial statements after final valuations and other procedures have been completed. The fair value of the in-process research and development will be recorded as an expense in the period in which the acquisition is completed. The valuation of the in-process research and development was determined using the income approach method, which includes an analysis of the markets, cash flows and risks associated with achieving such cash flows. The amount allocated to the in-process research and development represents the estimated purchased in-process technology for projects that have not yet reached technological feasibility and have no alternative future use. Based on preliminary assessments, the value of these projects was determined by estimating the costs to develop the purchased in-process technology into commercially viable products; estimating the resulting net cash flows from the sale of the products resulting from completion of the projects reduced by the portion of the revenue attributable to core technology; and discounting the net cash flows back to their present value. The unaudited pro forma condensed consolidated balance sheet of SCO gives effect to the reorganization as if it had been completed as of December 31, 2000. The unaudited pro forma condensed consolidated statements of operations of SCO for the year ended September 30, 2000 and the three months ended December 31, 2000 give effect to the reorganization discussed as if it had occurred on October 1, 1999. SCO will treat this transaction as a disposal of its server and professional services groups and record a gain upon completion of the transaction. On an ongoing basis it will account for its investment in New Caldera using the equity method of accounting. The unaudited pro forma condensed combined financial statements included in this joint proxy statement/prospectus are presented for illustrative purposes only. Such information is not necessarily indicative of the operating results or financial position that would have taken place if the Reorganization had been completed at the beginning of the earliest period presented, nor is it indicative of the results that may be expected for future periods. The pro forma adjustments are based upon information and assumptions available at the time of the filing of this joint proxy statement/prospectus. The pro forma information should be read in conjunction with the accompanying notes thereto and with the historical financial statements and related notes of Caldera, as well as the historical financial statements and related notes of SCO and the server and professional services groups included elsewhere in this joint proxy statement/prospectus. P-2 215 CALDERA SYSTEMS, INC. AND THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF JANUARY 31, 2001 (IN THOUSANDS)
HISTORICAL ------------------------------------------ SCO SERVER AND PROFESSIONAL SERVICES PRO FORMA PRO FORMA CALDERA GROUPS ADJUSTMENTS COMBINED ------------------ --------------------- ----------- --------- (JANUARY 31, 2001) (DECEMBER 31, 2000) ASSETS Current assets: Cash and cash equivalents...................... $ 28,359 $ 69 $(16,000)(a) (3,100)(b) $ 9,328 Available-for-sale securities.................. 50,294 -- 50,294 Accounts receivable, net....................... 840 19,456 (13,751)(c) 6,545 Note Receivable from The Santa Cruz Operation.................................... 7,000 -- (7,000)(a) -- Other current assets........................... 1,121 5,352 (5,352)(c) 1,121 -------- ------- -------- -------- Total current assets..................... 87,614 24,877 (45,203) 67,288 Property and equipment, net...................... 1,550 6,020 7,570 Investments in non-marketable securities......... 5,179 -- 5,179 Goodwill and other intangible assets, net........ -- 4,574 90,766(d) 95,340 Other assets..................................... 2,297 581 2,878 -------- ------- -------- -------- Total assets............................. $ 96,640 $36,052 $ 45,563 $178,255 ======== ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................... $ 2,603 $ 2,935 $ (2,935)(c) $ 2,603 Income and other taxes payable................. 73 2,177 (1,957)(c) 293 Accrued liabilities............................ 2,478 22,355 (19,636)(c) 500(e) 5,697 Deferred revenue............................... 409 5,343 5,752 -------- ------- -------- -------- Total current liabilities................ 5,563 32,810 (24,028) 14,345 -------- ------- -------- -------- Deferred tax liabilities......................... -- -- 5,443(f) 5,443 -------- ------- -------- -------- Other long-term liabilities...................... -- 2,036 6,987(a) 9,023 -------- ------- -------- -------- Stockholders' equity: Common stock................................... 40 -- 16(a) 56 Additional paid-in capital..................... 155,308 -- 59,951(a) 215,259 Deferred compensation.......................... (2,790) -- (2,790) Accumulated comprehensive loss................. (1,579) -- (1,579) Accumulated deficit............................ (59,902) -- (1,600)(g) (61,502) Divisional surplus............................. -- 1,206 (1,206)(h) -- -------- ------- -------- -------- Total stockholders' equity............... 91,077 1,206 57,161 149,444 -------- ------- -------- -------- Total liabilities and stockholders' equity................................. $ 96,640 $36,052 $ 45,563 $178,255 ======== ======= ======== ========
P-3 216 CALDERA SYSTEMS, INC. AND THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL --------------------------------------- SCO SERVER AND PROFESSIONAL PRO FORMA PRO FORMA CALDERA SERVICES GROUPS ADJUSTMENTS COMBINED ----------------- ------------------- ----------- --------- (YEAR ENDED (YEAR ENDED OCTOBER 31, 2000) SEPTEMBER 30, 2000) Revenue............................................. $ 4,274 $139,632 $ (381)(i) $ 143,525 Cost of revenue..................................... 4,021 41,411 (381)(i) 45,051 -------- -------- -------- --------- Gross margin...................................... 253 98,221 98,474 -------- -------- -------- --------- Operating expenses: Sales and marketing............................... 14,754 73,223 87,977 Research and development.......................... 4,954 33,942 38,896 General and administrative........................ 6,430 13,748 20,178 SCO cost-sharing arrangement...................... 898 -- (898)(j) -- Non-cash compensation*............................ 5,216 -- 5,216 Amortization of goodwill and other intangibles.... -- -- 21,008(k) 21,008 Restructuring charge.............................. -- 9,882 9,882 -------- -------- -------- --------- Total operating expenses................... 32,252 130,795 20,110 183,157 -------- -------- -------- --------- Loss from operations................................ (31,999) (32,574) (20,110) (84,683) -------- -------- -------- --------- Equity in loss of affiliate......................... (387) -- (387) -------- -------- -------- --------- Other income (expense), net......................... 5,544 (283) (727)(l) 4,534 -------- -------- -------- --------- Loss before income taxes............................ (26,842) (32,857) (20,837) (80,536) Provision for income taxes.......................... (81) (8,218) (8,299) -------- -------- -------- --------- Net loss............................................ $(26,923) $(41,075) $(20,837) $ (88,835) ======== ======== ======== ========= Preferred stock dividends........................... $(12,253) $ -- $ (12,253) ======== ======== ========= Net loss attributable to common stockholders........ $(39,176) $(41,075) $(20,837) $(101,088) ======== ======== ======== ========= Basic and diluted net loss per common share......... $ (1.19) $ (2.07) ======== ========= Basic and diluted weighted average shares outstanding....................................... 32,922 16,000(m) 48,922 ======== ======== =========
--------------- * Non-cash compensation has been excluded from the following expenses: Sales and marketing............................. $ 1,970 -- $ 1,970 Research and development........................ 1,146 -- 1,146 General and administrative...................... 2,100 -- 2,100
P-4 217 CALDERA SYSTEMS, INC. AND THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2001 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL ------------------------------------------ SCO SERVER AND PROFESSIONAL PRO FORMA PRO FORMA CALDERA SERVICES GROUPS ADJUSTMENTS COMBINED ------------------- ------------------- ----------- --------- (THREE MONTHS ENDED (THREE MONTHS ENDED JANUARY 31, 2001) DECEMBER 31, 2000) Revenue........................ $ 1,054 $23,887 $ 24,941 Cost of revenue................ 1,177 7,042 210(j) 8,429 -------- ------- ------- -------- Gross margin (deficit)....... (123) 16,845 (210) 16,512 -------- ------- ------- -------- Operating expenses: Sales and marketing.......... 5,520 10,308 585(j) 16,413 Research and development..... 1,869 4,836 330(j) 7,035 General and administrative... 1,748 2,841 375(j) 4,964 SCO cost-sharing arrangement............... 602 -- (602)(j) -- Non-cash compensation*....... 334 -- 334 Amortization of goodwill and other intangibles......... -- -- 5,252(k) 5,252 -------- ------- ------- -------- Total operating expenses........... 10,073 17,985 5,940 33,998 -------- ------- ------- -------- Loss from operations........... (10,196) (1,140) (6,150) (17,486) Equity in loss of affiliate.... (647) -- (647) -------- ------- ------- -------- Other income (expense), net.... 1,027 (39) (155)(l) 833 -------- ------- ------- -------- Loss before income taxes....... (9,816) (1,179) (6,305) (17,300) Provision for income taxes..... (27) (616) -- (643) -------- ------- ------- -------- Net loss attributed to common stockholders................. $ (9,843) $(1,795) $(6,305) $(17,943) ======== ======= ======= ======== Basic and diluted net loss per common share................. $ (0.25) $ (0.32) ======== ======== Basic and diluted weighted average shares outstanding... 39,588 16,000(m) 55,588 ======== ======= ========
--------------- *Non-cash compensation has been excluded from the following expenses: Sales and marketing............ $ 140 -- $ 140 Research and development....... 133 -- 133 General and administrative..... 61 -- 61
P-5 218 CALDERA SYSTEMS, INC. AND THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The pro forma condensed combined financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations; however, management believes that the disclosures are adequate to make the information presented not misleading. 2. REORGANIZATION For purposes of computing the estimated purchase price, the value of the common stock was determined by taking the closing price of Caldera's common stock as quoted on NASDAQ for the two days before, the day of and the two days following the signing of the third amendment to the Reorganization Agreement. The estimated consideration to be exchanged in the Reorganization is based on preliminary estimates and is subject to certain adjustments. The following table sets forth the estimated consideration to be exchanged for the SCO server and professional services groups, including estimated direct expenses to be paid in connection with the Reorganization (dollars in thousands, except per share amounts). Estimated consideration: Fair value of Caldera common stock (16,000,000 shares at $3.47 per share)....................................... $55,520 Fair value of options to purchase 1,758,569 shares of common stock to be issued in exchange for 3,517,138 outstanding SCO options................................ 4,447 Cash...................................................... 23,000 Note payable (discounted at 10 percent)................... 6,987 Estimated direct expenses................................. 3,100 ------- Total............................................. $93,054 =======
For purposes of computing the estimated fair value of the New Caldera stock options to be issued to SCO employees, the Black-Scholes option pricing model was used with the following assumptions: fair value of Caldera's stock of $3.47 as described above, expected life of 2 1/2 years, risk free interest rate of 5 percent, expected dividend yield of 0 percent, and volatility of 134 percent. The option holders of SCO may elect to transfer their options to purchase SCO common stock into options to purchase New Caldera common stock through either a replacement or an assumption alternative. As of January 31, 2001, there were 3,517,138 outstanding SCO options with exercise prices ranging from $1.28 to $32.00 per share and a weighted average exercise price of $7.29 per share. As of March 9, 2001, Caldera's stock price was $1.88 per share. If Caldera's stock price on the date of the Reorganization does not increase to a price higher than $1.88 per share, then none of the outstanding SCO options would result in a more favorable exercise price to the holders of the options upon conversion to Caldera options under the assumption alternative versus the replacement alternative. For purposes of the pro forma presentation, management of Caldera believes it is highly unlikely that Caldera's stock price will rise to a level in order for option holders to benefit in any material amount under the assumption model and therefore has assumed that all options to be issued to SCO option holders will be done under the replacement alternative. If Caldera's market price were to increase to a price of $6.00 per share, only 31,025 options would receive a favorable exercise price and therefore be more likely to elect the assumption alternative rather than the replacement alternative. To the extent that New Caldera assumes unvested options with intrinsic value, New Caldera will be required to record prepaid compensation for the intrinsic value and amortize it over the future vesting period. Based on the present P-6 219 CALDERA SYSTEMS, INC. AND THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) assumptions from Caldera's current market price, Caldera will not be required to record any material amount of prepaid compensation for unvested shares. The following table sets forth the allocation of the consideration to the tangible and intangible assets acquired and liabilities assumed. Purchase price allocation: Tangible assets acquired net of liabilities assumed....... $ 2,057 Accrual for shut-down of non-essential facilities and related costs.......................................... (500) Deferred income taxes associated with non-deductible intangible assets...................................... (5,443) Intangible assets acquired: Acquired intangible assets of SCO...................... 4,574 Distribution/reseller channel.......................... 26,200 Assembled workforce.................................... 20,000 Existing technology (consisting primarily of UnixWare and OpenServer)....................................... 6,200 Acquired in-process research and development........... 1,600 Trade name and trademarks.............................. 1,400 Distribution agreement................................. 1,400 Goodwill............................................... 35,566 ------- Total............................................. $93,054 =======
The value allocated to in-process research and development will be charged to expense upon consummation of the acquisition. The write-off was necessary because the acquired in-process research and development had not yet reached technological feasibility and had no future alternative uses. Management believes that the acquired in-process research and development will be successfully developed; however, these technologies may not achieve commercial viability. Current engineering efforts are focused on developing the UnixWare v8.0 and Messaging Server products. Developing and enhancing these products are time-consuming, costly, and complex. There is a risk that this development will not be competitive with other products using alternative technologies that offer comparable functionality. The UnixWare product is expected to deliver purpose-built operating system configurations designed to power departmental databases, application servers, intranet servers, mail and messaging servers and environments specifically tailored to run telecommunications and other embedded environments. Version 8.0 of UnixWare will contain a large proportion of new code in comparison to previous revisions to support new hardware specifications and business structures. SCO expects the development cycle for UnixWare v8.0 to continue for another four to five months after the anticipated closing of this transaction, with an expected completion date in the third quarter of calendar year 2001. SCO has invested approximately 76 man months of effort (or $770,000) in the project and anticipates 122 man months of effort (or $1,233,000) to complete UnixWare v8.0. UnixWare v8.0 is estimated to be approximately 38% complete. The Messaging Server product is an entirely new development which provides messaging functionality on top of SCO's UnixWare products. SCO expects the development cycle for the Messaging Server product to continue for another two months after the anticipated closing date of this transaction, with an expected completion date at the end of the second quarter of calendar year 2001. SCO has invested approximately 36 man months effort (or $366,000) in the project and anticipates 12 man months effort P-7 220 CALDERA SYSTEMS, INC. AND THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (or $121,000) to complete Messaging Server. Messaging Server is estimated to be approximately 75% complete. The valuation of the in-process research and development included, but was not limited to, an analysis of the market for the acquired products and technologies, the completion costs for the projects, the expected cash flows attributed to the projects and the risks associated with achieving such cash flows. The assumptions used in valuing the in-process research and development were based upon assumptions management believes to be reasonable, but which are inherently uncertain and unpredictable. For these reasons, actual results may vary from the estimated results. The value assigned to in-process research and development was determined by estimating the resulting net cash flows from the project when completed and discounting the net cash flows to their present value. The cash flows have been discounted at a rate of return of 20%, which has been risk adjusted based on a weighted average cost of capital of 14.5%. The project's percentage of completion of 38% for UnixWare and 75% for Messaging Server have also been applied to the cash flows to recognize the portion of the development completed. Application of this approach results in an estimated value of the UnixWare v8.0 and Messaging Server products of approximately $1,600,000. New Caldera will not acquire certain assets nor assume certain liabilities pursuant to the Reorganization Agreement. The excluded assets and liabilities included in the December 31, 2000 historical carved-out balance sheet of the server and professional services groups were as follows: Receivables................................................. $ 13,751 Other current assets........................................ 5,352 Accounts payable............................................ (2,935) Income taxes payable........................................ (1,957) Accrued liabilities......................................... (19,636) -------- Net liabilities of the server and professional services groups not assumed by New Caldera......................... $ (5,425) ========
In connection with the Reorganization, SCO has agreed to pay three executive officers who will become executive officers of New Caldera cash bonuses amounting to $1,073,000 in aggregate if they have not voluntarily terminated their employment with SCO or New Caldera for one year following the closing of the Reorganization. Although these obligations will be settled by SCO, Caldera will recognize expense in its financial statements for these amounts over the one-year period since the services performed will benefit New Caldera. The expense for these payments has not been included in the accompanying pro forma condensed combined statements of operations as it represents a non-recurring charge directly related to the acquisition. 3. PRO FORMA COMBINED NET LOSS PER COMMON SHARE The pro forma combined net loss per common share is based on the weighted average number of common shares of Caldera and the shares to be issued to SCO for the year ended October 31, 2000 and the three months ended January 31, 2001. The dilutive effect of common share equivalents has not been included since the pro forma combined condensed statements of operations reflect net losses for the year ended October 31, 2000 and the three months ended January 31, 2001. P-8 221 CALDERA SYSTEMS, INC. AND THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The pro forma combined basic and diluted net loss per common share for the year ended October 31, 2000 and the three months ended January 31, 2001 was determined as follows (in thousands):
OCTOBER 31, JANUARY 31, 2000 2001 ----------- ----------- Caldera basic and diluted shares............................ 32,922 39,588 Shares to be issued to SCO.................................. 16,000 16,000 ------ ------ Pro forma combined basic and diluted shares used for net loss per share............................................ 48,922 55,588 ====== ======
4. EARN-OUT PROVISION In connection with the Reorganization, SCO shall be entitled to receive earn-out payments from New Caldera representing 45% of the amount by which OpenServer revenues exceed certain threshold amounts during the three-year period following the closing. Any earn-out amounts will be payable on the 45th day following the completion of the fourth, eighth and twelfth full Caldera quarters following the completion of the combination. On each of these dates, Caldera will pay to SCO an amount equal to 45% of the total OpenServer revenues for the prior four Caldera quarters that exceed the cumulative threshold amounts for the same prior four quarters. The chart below sets forth the threshold amounts for each of the twelve Caldera quarters following the completion of the combination. SCO REVENUE EARNOUT THRESHOLDS FOR OPENSERVER BUSINESS (IN THOUSANDS)
QUARTER 1(A) QUARTER 2 QUARTER 3 QUARTER 4 TOTAL ------------ ---------- ---------- ---------- ------- Revenue Earnout Thresholds.............. $10,500 $10,000 $9,500 $8,500 $38,500
QUARTER 5 QUARTER 6 QUARTER 7 QUARTER 8 TOTAL ------------ ---------- ---------- ---------- ------- Revenue Earnout Thresholds.............. $ 7,500 $ 6,500 $5,000 $3,500 $22,500
QUARTER 9 QUARTER 10 QUARTER 11 QUARTER 12 TOTAL ------------ ---------- ---------- ---------- ------- Revenue Earnout Thresholds.............. $ 3,000 $ 2,500 $2,000 $1,500 $ 9,000
--------------- (A)This quarter represents the first full Caldera quarter after the completion of the combination. For example, if the combination is completed prior to April 30, 2001, this quarter will be the three months of May, June and July; if the combination is completed after April 30, 2001, then this quarter will be the three months of August, September and October. Any amounts to be paid under the earn-out provision will be accounted for as contingent consideration and recorded as additional purchase price at the date the amount becomes determinable. The additional cost will be allocated to goodwill and will be amortized over the remaining life of the goodwill. Management does not expect the amounts, if any, to be paid under the earn-out provision will be significant because the earn-out thresholds were established considering the declining revenue that has been experienced in OpenServer revenues and management's expectation that OpenServer revenues will continue to decline in future periods. No earn-out payments are reflected in the accompanying pro forma statements. P-9 222 CALDERA SYSTEMS, INC. AND THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) If the earn-out provision for the first four quarters following the combination would have been in effect for the year ended October 31, 2000, Caldera would have paid a royalty to SCO of approximately $10.9 million. As discussed above, the payment would be recorded as additional purchase price and would be amortized over the remaining life of the goodwill. The quarterly amortization would amount to $681,000. Accordingly, the pro forma net loss and net loss per share would not change for the year ended October 31, 2000; however the pro forma net loss for the three months ended January 31, 2001 would have increased by $681,000, or $0.02 per share, to $18,624,000, or $0.34 per share. 5. ROYALTY AGREEMENTS Several SCO products traditionally bundled with OpenServer and UnixWare are not being acquired by Caldera from SCO. Pursuant to the terms of the Reorganization Agreement, SCO will grant to Caldera a royalty-free license to use, modify and sublicense SCO's Xdesktop and Panorama products as part of all current versions of OpenServer and UnixWare. In addition, Caldera has 60 days from the consummation of the combination to remove or disable SCO's Webtop, Vision FS and Term Lite products from future UnixWare and OpenServer versions. Caldera has received from SCO a non-exclusive, royalty-free license to use and sublicense Webtop, Vision FS and Term Lite, as bundled in existing versions of OpenServer and UnixWare during the 60-day grace period. None of the non-acquired bundled products is critical to the functionality of the OpenServer and UnixWare products and Caldera plans to replace the non-acquired SCO products with other open source products or Caldera developed products. At the conclusion of the 60-day grace period, Caldera may incur a royalty if a customer elects to include a bundled version of Webtop or Vision FS in the current versions of OpenServer and UnixWare. In these situations, the customers electing to purchase either Webtop or Vision FS will be billed an additional amount for the bundled products. In addition, Caldera believes that all necessary modifications for future versions of OpenServer and UnixWare will be completed within the 60-day grace period and that future royalties, if any, to be paid to SCO as a result of these royalty agreements will be minimal. As a result, no pro forma adjustments are necessary in connection with the royalty agreements. 6. PRO FORMA ADJUSTMENTS The pro forma condensed combined financial statements give effect to the following pro forma adjustments in connection with the Reorganization: PRO FORMA CONDENSED COMBINED BALANCE SHEET (a) To reflect the estimated consideration to be exchanged as summarized in Note 2 including the issuance of common stock and options to purchase common stock amounting to $59,967,000 and the $23,000,000 cash payment, and the non-interest bearing note payable of $8,000,000, which has been discounted to its net present value of $6,987,000 using a discount rate of 10%. Under the Reorganization, Caldera advanced $7,000,000 of the cash payment to SCO in January, 2001 prior to closing under a loan arrangement. (b) To reflect the $3,100,000 of estimated direct expenses related to the Reorganization including legal, accounting, printing and investment banking fees. (c) To remove the net liabilities of the SCO server and professional services groups of $5,425,000 (see Note 2) which will not be assumed by New Caldera pursuant to the Reorganization Agreement. (d) To reflect the identifiable intangible assets and goodwill amounting to $90,766,000 as summarized in Note 2. P-10 223 CALDERA SYSTEMS, INC. AND THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (e) To reflect an accrual of $500,000 for estimated shut-down of non-essential facilities and related costs. Certain facilities have been identified by management of New Caldera that will be closed following consummation of the Reorganization. The accrual for shut-down and related costs has not been included in the accompanying pro forma condensed combined statement of operations as it represents a non-recurring charge directly related to the acquisition. (f) To record a deferred tax liability related to book-to-tax basis differences of acquired identifiable intangible assets using an estimated effective tax rate of 37.5 percent. (g) To reflect the impact of the write-off of acquired in-process research and development. The in-process research and development charge has not been included in the accompanying pro forma condensed combined statement of operations as it represents a non-recurring charge directly related to the acquisition. (h) To record the elimination of the divisional surplus of the SCO server and professional services groups. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (i) To eliminate services provided by the SCO server and professional services groups to Caldera and licensed products sold by Caldera to the server and professional services groups. There were no services provided by the SCO server and professional services groups to Caldera during the periods included in the pro forma statement of operations for the three months ended January 31, 2001. (j) Caldera agreed to reimburse SCO for $1.5 million of transition costs to be incurred by SCO in connection with the retention of various SCO employes who will become employees of New Caldera. This adjustment for the year ended December 31, 2000 eliminates the portion of the expenses included in both Caldera's and the SCO server and professional services groups' historical financial statements. This adjustment for the three months ended January 31, 2001 eliminates the portion of the expenses recorded by Caldera during the three months ended January 31, 2001 and reverses the entry recorded by the SCO server and professional services group during the three months ended December 31, 2000 to reflect the reimbursement by decreasing the respective expenses. (k) To reflect the amortization of intangible assets and goodwill related to the acquisition calculated using the straight-line method and estimated useful lives of five years for the distribution/ reseller channel, existing technology, distribution agreement and goodwill and three years for the assembled workforce and trade name and trademarks. (l) To reflect the interest expense associated with the accretion of the $8 million note payable to SCO. (m) To reflect the additional shares of common stock to be issued as discussed in Note 3. P-11 224 THE SANTA CRUZ OPERATION, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2000 (IN THOUSANDS)
LESS SERVER AND THE SANTA CRUZ PROFESSIONAL PRO FORMA OPERATION, INC. SERVICES GROUPS ADJUSTMENTS PRO FORMA --------------- --------------- ----------- --------- ASSETS Current assets: Cash and cash equivalents................... $ 10,009 $ 69 $23,000(a) $ 44,177 (3,745)(a) 18,000(c) (3,018)(d) Short-term investments...................... 3,100 3,100 Receivables, net............................ 22,155 19,456 13,751(b) 16,450 Available-for-sale equity securities........ 5,313 5,313 Other current assets........................ 6,001 5,352 5,352(b) 6,001 --------- ------- ------- -------- Total current assets................. 46,578 24,877 53,340 75,041 Note receivable............................... 7,020(a) 7,020 Property and equipment, net................... 7,906 6,020 1,886 Purchased software and technology licenses, net......................................... 5,030 4,574 456 Equity investment in New Caldera.............. 23,293(a) 23,293 Other assets.................................. 3,692 581 -- 3,111 --------- ------- ------- -------- Total assets......................... $ 63,206 $36,052 $83,653 $110,807 ========= ======= ======= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable...................... $ 4,205 $ 2,935 $ 2,935(b) $ 4,205 Short term debt............................. 18,000(c) 13,640 (4,360)(c) Income taxes payable........................ 2,178 2,178 17,176(a) 19,133 1,957(b) Accrued restructuring charges............... 2,903 2,585 2,585(b) 2,903 Accrued expenses and other current liabilities............................... 22,157 19,770 17,051(b) 19,438 Deferred revenues........................... 6,174 5,343 831 --------- ------- ------- -------- Total current liabilities............ 37,617 32,810 55,343 60,150 --------- ------- ------- -------- Long-term lease obligations................... 346 296 50 Long-term deferred revenues................... 1,626 1,594 32 Other long-term liabilities................... 3,516 146 3,370 --------- ------- ------- -------- Total long-term liabilities.......... 5,488 2,036 3,452 --------- ------- ------- -------- Shareholders' equity: Common stock................................ 118,947 97(d) 123,404 4,360(c) Accumulated comprehensive income (loss)..... 2,275 (756) 3,031 Accumulated deficit......................... (101,121) 25,762(a) (79,230) 1,206(a) (3,018)(d) (97)(d) Divisional surplus.......................... 1,962 --------- ------- ------- -------- Total shareholders' equity........... 20,101 1,206 28,310 47,205 --------- ------- ------- -------- Total liabilities and stockholders' equity............................. $ 63,206 $36,052 $83,653 $110,807 ========= ======= ======= ========
See accompanying notes to the unaudited pro forma condensed consolidated financial statements. P-12 225 THE SANTA CRUZ OPERATION, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LESS SERVER AND THE SANTA CRUZ PROFESSIONAL PRO FORMA OPERATION, INC. SERVICES GROUPS ADJUSTMENTS PRO FORMA --------------- ---------------- ----------- --------- Net revenues................................ $148,923 $139,632 $ $ 9,291 Cost of revenues............................ 41,796 41,411 -- 385 -------- -------- -------- -------- Gross margin.............................. 107,127 98,221 -- 8,906 -------- -------- -------- -------- Operating expenses: Research and development.................. 39,673 33,942 5,731 Sales and marketing....................... 89,313 73,223 16,090 General and administrative................ 18,691 13,748 -- 4,943 Restructuring charges..................... 10,683 9,882 -- 801 -------- -------- -------- -------- Total operating expenses.......... 158,360 130,795 27,565 -------- -------- -------- -------- Operating loss.............................. (51,233) (32,574) (18,659) Equity interest in results of New Caldera... -- -- (23,293)(e) (23,293) Other income (expense), net................. 2,498 (283) (6,160)(c) (2,677) 702(f) -------- -------- -------- -------- Loss before income taxes.................... (48,735) (32,857) (28,751) (44,629) Provision for income taxes.................. 8,218 8,218 -------- -------- -------- -------- Net loss.................................... $(56,953) $(41,075) $(28,751) $(44,629) ======== ======== ======== ======== Basic and diluted net loss per share........ $ (1.59) $ (1.25) -------- -------- Shares used in basic and diluted net loss per share calculation..................... 35,720 35,720 ======== ========
See accompanying notes to the unaudited pro forma condensed consolidated financial statements. P-13 226 THE SANTA CRUZ OPERATION, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LESS SERVER AND PROFESSIONAL THE SANTA CRUZ SERVICES PRO FORMA OPERATION, INC. GROUPS ADJUSTMENTS PRO FORMA --------------- --------------- ----------- --------- Net revenues............................. $26,455 $23,887 $ -- $ 2,568 Cost of revenues......................... 7,081 7,042 -- 39 ------- ------- ------- ------- Gross margin........................... 19,374 16,845 -- 2,529 ------- ------- ------- ------- Operating expenses: Research and development............... 6,432 4,836 -- 1,596 Sales and marketing.................... 16,331 10,308 -- 6,023 General and administrative............. 4,267 2,841 -- 1,426 ------- ------- ------- ------- Total operating expenses....... 27,030 17,985 -- 9,045 ------- ------- ------- ------- Operating loss........................... (7,656) (1,140) -- (6,516) Equity interest in the results of New Caldera................................ -- -- --(e) Other income (expense), net.............. 375 (39) 138(f) 552 ------- ------- ------- ------- Loss before income taxes................. (7,281) (1,179) 138 (5,964) Provision for income taxes............... 616 616 -- -- ------- ------- ------- ------- Net loss................................. $(7,897) $(1,795) $ 138 $(5,964) ======= ======= ======= ======= Basic and diluted net loss per share... $ (0.20) $ (0.15) ======= ======= Shares used in basic and diluted net loss per share calculation.......... 39,433 39,433 ======= =======
See accompanying notes to unaudited pro forma condensed consolidated financial statements. P-14 227 THE SANTA CRUZ OPERATION, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The unaudited pro forma condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations; however, we believe that the disclosures are adequate to make the information presented not misleading. On August 1, 2000 Caldera Systems Inc. ("Caldera"), Caldera International, Inc. ("New Caldera") and The Santa Cruz Operation, Inc. ("SCO") entered into an Agreement and Plan of Reorganization (the "Reorganization"). This agreement was subsequently amended on September 13, 2000, December 12, 2000 and February 9, 2001. Under the terms of the Reorganization, as amended, SCO will contribute the capital stock of certain companies as well as certain assets collectively representing the server and professional services group. In exchange, SCO will receive 16 million shares of New Caldera common stock together with $23 million in cash and an $8 million non-interest bearing note paid in quarterly installments of $2 million per quarter beginning in the fifth quarter after the closing of the transaction. SCO will treat this transaction as a disposal of its server and professional services groups and record a gain upon completion of the transaction. On an ongoing basis it will account for its investment in New Caldera using the equity method of accounting. (See Note 2 for a further explanation of the effects). The unaudited pro forma condensed consolidated balance sheet of SCO gives effect to the Reorganization as if it had been completed as of December 31, 2000. The unaudited pro forma condensed consolidated statements of operations of SCO for the year ended September 30, 2000 and the three month period ended December 31, 2000 give effect to the Reorganization as if it had occurred on October 1, 1999. 2. REORGANIZATION The accompanying pro forma statements reflect the contribution of SCO's server and professional services groups to New Caldera in exchange for the issuance of 16 million shares of New Caldera common stock, representing an approximate 28.7% interest in New Caldera on an outstanding shares basis and an approximate 25.3% interest on a fully diluted basis, plus $23 million in cash and an $8 million non-interest bearing note receivable. SCO currently holds approximately 42,000 shares of Caldera's Stock. As SCO will retain a 28.7% interest in New Caldera, including the server and professional services groups, after the Reorganization it will not recognize a gain on 100% of the contribution of the server and professional services groups. SCO will record a gain calculated at 71.3% of the fair value of the New Caldera stock received less 71.3% of SCO's basis in the assets of the server and professional services groups plus net cash consideration and the fair value of the note receivable at the date of closing as follows (dollars in thousands except per share amounts): Estimated Consideration: Adjusted fair value of New Caldera common stock (16 million at $1.875 per share times 71.3%)............... $21,390 Cash consideration.......................................... 23,000 Note receivable discounted to present value at 10% per annum..................................................... 7,020 Estimated expenses.......................................... (3,745) ------- 47,665 71.3% of net assets of server and professional services groups to be sold......................................... (4,728) ------- Estimated pretax gain....................................... $42,937 =======
P-15 228 THE SANTA CRUZ OPERATION, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The gain calculation assumes a fair value for New Caldera Stock of $1.875. The actual gain recognized will depend on the fair value for New Caldera Stock on the closing date of the transaction; for purposes of the pro forma statements the closing price of New Caldera Stock on March 9, 2001 has been utilized as an estimate of fair value for New Caldera Stock at the closing date of the transaction. The actual fair value on the day of closing and the resulting gain on sale of The Server and Professional Services Groups could be materially different. Every $1 increase (decrease) in per share value of New Caldera stock would result in an increase (decrease) in the gain by approximately $11,318,000. Subsequent to the completion of the Reorganization SCO's operating results will include 28.7% of the operating results of New Caldera, adjusted to amortize identified intangible assets acquired and goodwill. The estimated basis of SCO's investment in New Caldera is calculated as follows (dollars in thousands): Adjusted fair value of New Caldera common stock............. $21,390 Portion of investment in New Caldera with no step up in basis..................................................... 1,903 ------- Basis of investment......................................... 23,293 SCO's share in New Caldera's tangible and identifiable intangible assets, less liabilities after completion of the reorganization........................................ 34,060 ------- Excess of net assets acquired over the value of the investment................................................ $10,767 =======
The following table sets forth the allocation of the basis of investment to the tangible and intangible assets acquired and liabilities assumed (dollars in thousands). Purchase price allocation: Current assets............................................ $19,312 Non-current assets........................................ 12,250 Current liabilities....................................... (4,117) Long term liabilities..................................... (4,152) ------- $23,293 =======
To record the investment at the carrying value, non-current assets have been proportionately reduced as follows:
SHARE IN FAIR VALUE OF AMOUNT IDENTIFIABLE ALLOCATED TO ASSETS PROPORTIONATE NON-CURRENT ACQUIRED REDUCTION ASSETS --------------- ------------- ------------ Property and equipment, net...................... 2,173 1,017 1,156 Investment in non-marketable securities.......... 1,486 695 791 Intangible assets, net........................... 18,533 8,670 9,863 Other assets..................................... 825 385 440 ------- ------- ------- Total.................................. 23,017 10,767 12,250 ======= ======= =======
P-16 229 THE SANTA CRUZ OPERATION, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The purchase price allocated to intangible assets is detailed as follows: Distribution/reseller channel............................... $4,002 Assembled workforce......................................... 3,788 Existing technology......................................... 947 Tradename and trademarks.................................... 214 Other....................................................... 912 ------ Total............................................. $9,863 ======
The excess of SCO's share in net assets acquired over the basis of investment as allocated to long-term assets is amortized over the assets' expected useful life as follows:
AMOUNT AMORTIZATION ANNUAL ALLOCATED LIFE AMORTIZATION --------- ------------ ------------ Property and equipment, net........................ $ 1,017 3 years $ 339 Investment in marketable securities................ 695 -- -- Intangible assets Distribution/reseller channel.................... 3,518 3 years 703 Assembled workforce.............................. 3,330 3 years 1,110 Technology (mainly UnixWare)..................... 832 5 years 166 Trade name and trademarks........................ 188 3 years 63 Other............................................ 802 5 years 160 ------- ------ 8,670 2,202 Other assets....................................... 385 3 years 129 ------- ------ Total.................................... $10,767 $2,670 ======= ======
After completion of the Reorganization, SCO will account for 28.7% of New Caldera's net income, adjusted for the effects of the allocation of the purchase price to non-current assets. These effects will be calculated based on the estimated remaining useful live of the underlying assets and will result in a reduction of the New Caldera losses recognized in SCO's financial statements of $668 per quarter. The calculations are estimated based on the gain assumptions discussed herein and based on New Caldera's unaudited pro-forma condensed consolidated balance sheet as of December 31, 2000. The actual amounts recorded will be calculated based on the balance sheet of Caldera after closing of the transaction and could be materially different to the amounts above. 3. BENEFITS TO BE PROVIDED TO SCO EXECUTIVES On July 31, 2000 the Board of Directors approved the following option benefits to be provided to five Executive Officers who will remain employed with SCO after the Reorganization: a. The full acceleration of vesting provisions of options to purchase approximately 918,000 shares of common stock. b. An extension of the term of these 918,000 options and a further 608,000 options which were fully vested and unexercised as of July 31, 2000 until January 31, 2002, in the event that any of these five officers is involuntarily terminated or terminated by mutual agreement. Their benefits are contingent upon the approval and completion of the Reorganization. P-17 230 THE SANTA CRUZ OPERATION, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) These options were granted at exercise prices ranging from $2.56 to $16.31 and were granted with original terms of 5 and 10 years between December 1993 and April 2000. The weighted average exercise price of these options is $6.15. Under the guidance given in FASB Interpretation No. ("FIN") 44 "Accounting for Certain Transactions involving Stock Compensation" SCO remeasured these options as of the date that the Board of Directors approved these modifications. For the options accelerated in a. above, SCO measured the intrinsic value of the award at the date of the modification and will record any intrinsic value over and above that recorded on the original grant date as compensation if, absent the acceleration, the award would have been forfeited. SCO's estimate of the compensation expense to be recorded in respect of options, which would have been forfeited, will be based on historical retention rates and the remaining vesting period on each of these options. SCO has estimated that based on an actual stock price of $3.47 at the time of the modification was made the total excess intrinsic value of the options accelerated would be approximately $92,000. SCO estimates that each of the Executive Officers will remain employed with SCO for the remaining part of the original vesting period and as a result has estimated that there will be no shares which should have been forfeited. This is based on the average remaining vesting period of approximately 2 years and the average period of employment of each of the Executive Officers of 10 years. As a result no compensation expense is expected to be recorded. However, this estimate could change based on the number of Executive Officers whose employment is terminated prior to the date that the options would have been forfeited under the original terms of the option grants. Such changes could be material to the results of operations of SCO. For the 608,000 options discussed in b. above the Board of Directors also measured the intrinsic value of these options as of the date the modification was made. Compensation expense, equivalent to the excess of the intrinsic value of these options at the date of the modification over the intrinsic value recorded on the original issuance will be recorded as compensation expense in the event that any of these Executive Officers is involuntarily terminated or is terminated by mutual consent prior to January 31, 2002. SCO has estimated that based on the stock price at the date of modification of $3.47 the total excess intrinsic value of these options would be approximately $71,000. SCO expects that these Executive Officers will remain employed by SCO until after January 2002 and as a result has estimated that the charge to be recorded is zero. This is based on the factors discussed above. However in the event that one of the five Executive Officers is involuntarily terminated or is terminated by mutual consent prior to January 31, 2002, SCO will record a charge as discussed above. Such charge could be material to the results of operations of SCO. In addition to the option modifications discussed above the Board of Directors approved the following modifications to options held by three Executive Officers who will be employed by New Caldera after consummation of the Reorganization: a. Full acceleration of vesting of options to purchase approximately 799,000 shares of SCO common stock. b. The term of the approximately 799,000 options in a. above together with the term of further options to purchase approximately 527,000 shares will be extended to January 31, 2002. The modifications are also contingent upon the completion of the Reorganization. P-18 231 THE SANTA CRUZ OPERATION, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The total number of options subject to modification was approximately 1,326,000. These options had original contractual terms of 10 years, were issued at dates between December 1991 and September 1999 at exercise prices ranging between $1.50 and $9.25. The weighted average exercise price of the outstanding options is $5.35. As a result of these modifications the original contractual term of options to purchase 5,100 shares at an exercise price of $1.50 will be extended. As of the date of modification SCO measured the intrinsic value of these options and upon consummation of the Reorganization will record a compensation expense equivalent to the excess of this intrinsic value over the original intrinsic value recorded. SCO estimated that, based on the stock price of $3.47 as of the date the modifications were made, this compensation expense will be approximately $97,000. As such a pro forma adjustment has been recorded to reflect the estimated expense, which SCO expects to record upon consummation of the Reorganization. In addition the Board of Directors approved cash payments on the earlier of (a) one year, provided that such executive officer has not voluntarily terminated his employment with SCO or New Caldera, or (b) immediately upon an involuntary termination or a termination by mutual consent, equal to that individual's current annual salary plus 100% of his target bonus. SCO expects to record a charge of approximately $1,073,000 to operations over one year in connection with the expected cash payments to be made to the executives remaining with SCO and approximately $1,945,000 in respect of payments to be made to the three executives who will be transferred to New Caldera as part of the Reorganization. These charges will be recorded to operations over the service period which will commence on the date of consummation of the Reorganization and last for a period of one year from this date. The accompanying unaudited pro forma condensed consolidated financial statements include adjustments for the expenses to be recorded in respect of the option amendment and the bonus payments which are expected to be made by SCO. 4. LOAN AGREEMENT WITH THE CANOPY GROUP In connection with the Reorganization, SCO entered into a Loan Agreement and a Secured Convertible Promissory Note as of January 8, 2001, with The Canopy Group ("Lender") under which SCO can borrow up to $18 million. Drawings on this line of credit are repayable on December 31, 2001 and bear interest at a rate per annum of 10%. Drawings on the line of credit are immediately convertible into common stock at the option of the Lender at the closing price of SCO common stock on the closing date which was $1.5625 per share. The unconverted principal is repayable in cash. Drawings on the line of credit are collateralized by SCO's tangible and intangible assets. The number of shares that may be converted under the secured convertible promissory note is limited so that the aggregate of shares converted together with shares acquired under the warrants described below may not exceed 19% of the total outstanding shares of SCO's common stock. In connection with the loan agreement, SCO issued warrants to purchase 1,440,000 shares of common stock at an exercise price of $1.5625, the closing price on the date of issuance on January 8, 2001. SCO is obligated to issue additional warrants to purchase shares of SCO common stock at an exercise price of $1.5625 to the extent advances on the line of credit exceed $9 million. The number of shares that may be purchased under these additional warrants equals the product of the amounts advanced in excess of $9 million multiplied by 0.25 and divided by the exercise price of $1.5625. The term of the warrants is two years. For purposes of the accompanying pro forma condensed consolidated financial statements, a P-19 232 THE SANTA CRUZ OPERATION, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) maximum drawing on the line of credit has been assumed. The total number of warrant shares to be issued by SCO under this assumption therefore amounts to 2,880,000. The proceeds under the promissory note have been allocated based on the relative fair values of the loan and the warrants. The fair value of the loan equals its face amount as it bears a 10% market rate of interest. The fair value of the warrants has been calculated using the Black-Scholes option pricing model with the following assumptions: contractual term of two years, a risk free interest rate of 4.72%, a dividend yield of 0% and a volatility of 102%. The fair value of the warrants under these assumptions amounts to approximately $2,480,000. Based on the relative fair values of the warrants and the debt SCO has allocated approximately $2,180,000 to the warrants. This amount has been expensed as interest expense in the pro forma condensed consolidated statement of operations and has been recorded as debt discount in the pro forma condensed consolidated balance sheet. Assuming all warrants are exercised, and based on the number of shares outstanding at December 31, 2000, a maximum of 4,615,000 shares could be converted under the promissory note, resulting in a conversion of approximately $7,211,000 of the principal and a remaining required cash repayment of $10,789,000. SCO has recorded a beneficial conversion feature of $2,180,000 resulting from the difference between the accounting conversion of $5,031,000 and the actual value of the conversion of $7,211,000 as a debt discount in the pro forma condensed consolidated balance sheet and as additional interest expense in the pro forma condensed consolidated statement of operations. 5. EARN-OUT PROVISION In connection with the Reorganization, SCO will be entitled to receive earn-out payments from New Caldera representing 45% of the amount by which OpenServer revenues exceed certain thresholds during the three-year period following the closing. Any earn-out amounts will be payable to SCO on the 45th day following the completion of the fourth, eighth and twelfth full New Caldera quarter following the completion of the combination. No earn-out payments are reflected in the accompanying pro forma statements as such earn-out is contingent on future sales of OpenServer products. Any amounts payable to SCO under the earn-out provision will be recorded as other income. If the earn-out provision for the first four quarters following the combination would have been in effect for the year ended September 30, 2000, and the three month period ended December 31, 2000, SCO would have received a royalty of approximately $10.9 million during the three month period ended December 31, 2000, calculated based on sales of OpenServer products during four New Caldera quarters. Accordingly, the pro forma net loss and net loss per share would not change for the year ended September 30, 2000. Assuming an effective tax rate of 40% the pro forma net loss for the three month period ended December 31, 2000 would have decreased by approximately $6,540,000 to result in pro forma net income of $576,000 and a basic and diluted net income per share of $0.02. 6. PRO FORMA ADJUSTMENTS The unaudited pro forma condensed consolidated financial statements give effect to the following pro forma adjustments in connection with the Reorganization: (a) To reflect the gain and related taxation payable on the sale of the assets and liabilities of the server and professional services groups and the recognition of the pro rata gain in connection with this transaction (see Note 2). Taxation payable on the gain has been estimated at 40%. P-20 233 THE SANTA CRUZ OPERATION, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The equity investment in New Caldera is calculated as follows: (in thousands, except per share amounts) Market value of Caldera shares (16 million shares at a fair value of $1.875 per share)............................... $30,000 ======= Value of net assets sold (71.3% of above amount)........... 21,390 Net assets over which significant interest is retained..... 1,903 ------- Equity investment in New Caldera........................... $23,293 =======
(b) To reflect the assets and liabilities of the server and professional services groups which will not be assumed pursuant to the Reorganization. (c) To reflect the $18 million loan to be received from The Canopy Group and related interest expenses as discussed in Note 4 for the year ended September 30, 2000. The related interest expenses comprise the following: 10% interest payable on principal........................... $1,800 Debt discount related to warrants........................... 2,180 Beneficial conversion feature recognized as interest expense................................................... 2,180 ------ Total interest expense...................................... $6,160 ======
No interest expense was recorded for the three month period ended December 31, 2000 as the loan is repayable within one year. (d) To reflect the recognition of expenses related to the option modifications and bonus payments discussed in Note 3. (e) To reflect SCO's equity share of New Caldera's pro forma combined results of operations for the respective periods. SCO's equity share in New Caldera's pro forma combined results for the year ended September 30, 2000 has been calculated as follows: New Caldera's pro forma net loss......................... $(101,088) Less: amortization of goodwill relating to the acquisition of SCO included in above net loss.......... 7,113 --------- (93,077) --------- SCO's 28.7% equity interest thereof...................... (26,713) Add: amortization of Caldera's existing assembled workforce acquired..................................... (459) Add: amortization of the excess of net assets acquired over purchase price.................................... 2,670 --------- Net loss from equity investment in New Caldera attributable to SCO.................................... $ (24,502) Limited to the carrying value of the investment.......... (23,293) =========
P-21 234 THE SANTA CRUZ OPERATION, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The losses attributable to SCO exceed the carrying value of the investment and SCO has no ongoing obligation to fund New Caldera's losses. Therefore, SCO will discontinue applying the equity-method once the investment is reduced to zero. SCO has not recognized an equity share in New Caldera's pro forma combined results for the three month period ended December 31, 2000 because the basis of the investment in New Caldera has been reduced to zero and no ongoing obligation exists by SCO to fund New Caldera's losses. (f) To record interest income relating to the note receivable of $8 million. P-22 235 INDEX TO FINANCIAL STATEMENTS
PAGE ---- CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY Report of Independent Public Accountants.................... F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statements of Operations and Comprehensive Loss...................................................... F-4 Consolidated Statements of Stockholders' Equity............. F-5 Consolidated Statements of Cash Flows....................... F-6 Notes to Consolidated Financial Statements.................. F-8 THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS Report of Independent Accountants........................... F-34 Consolidated Carve Out Balance Sheets....................... F-35 Consolidated Carve Out Statements of Operations and Comprehensive Loss........................................ F-36 Consolidated Statements of Divisional Surplus (Deficit) and Accumulated Other Comprehensive Loss...................... F-37 Consolidated Carve Out Statements of Cash Flows............. F-38 Notes to Consolidated Carve Out Financial Statements........ F-39 EBIZ ENTERPRISES, INC. Report of Independent Public Accountants.................... F-55 Balance Sheets.............................................. F-56 Statements of Operations.................................... F-57 Statements of Stockholders' Equity.......................... F-58 Statements of Cash Flows.................................... F-59 Notes to Financial Statements............................... F-60
F-1 236 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, 1999 and 2000, 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, 1999 and 2000, 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. ARTHUR ANDERSEN LLP Salt Lake City, Utah December 5, 2000 (except with respect to the Reorganization Agreement discussed in Note 1, as to which the date is February 9, 2001) F-2 237 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
OCTOBER 31, --------------------------- JANUARY 31, 1999 2000 2001 ------------ ------------ ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 121,989 $ 36,560,267 $ 28,358,943 Available-for-sale securities............................. -- 54,179,307 50,294,010 Accounts receivable, net of allowance for doubtful accounts of $90,000, $312,300 and $224,700, respectively............................................ 670,043 1,544,526 839,650 Note receivable from The Santa Cruz Operation............. -- -- 7,000,000 Stock subscription receivable............................. 1,500,000 -- -- Other receivables......................................... 375,000 -- -- Inventories............................................... 169,409 389,438 381,969 Other current assets...................................... 33,524 1,310,173 738,811 ------------ ------------ ------------ Total current assets.................................... 2,869,965 93,983,711 87,613,383 ------------ ------------ ------------ PROPERTY AND EQUIPMENT: Computer equipment........................................ 609,665 1,321,806 1,399,861 Furniture and fixtures.................................... 675,181 1,097,048 1,180,060 Leasehold improvements.................................... 86,973 342,015 343,374 ------------ ------------ ------------ 1,371,819 2,760,869 2,923,295 Less accumulated depreciation and amortization............ (652,399) (1,171,549) (1,372,943) ------------ ------------ ------------ Net property and equipment.............................. 719,420 1,589,320 1,550,352 ------------ ------------ ------------ INVESTMENTS IN NON-MARKETABLE SECURITIES: Affiliate................................................. -- 1,179,704 1,179,704 Non-affiliates............................................ -- 3,999,497 3,999,497 ------------ ------------ ------------ -- 5,179,201 5,179,201 ------------ ------------ ------------ EQUITY INVESTMENT IN AFFILIATE.............................. -- 4,957,325 -- ------------ ------------ ------------ OTHER ASSETS, net........................................... 124,430 1,808,746 2,297,009 ------------ ------------ ------------ Total assets............................................ $ 3,713,815 $107,518,303 $ 96,639,945 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 1,309,255 $ 2,414,359 $ 2,602,530 Payable to The Santa Cruz Operation....................... -- 898,026 -- Accrued liabilities....................................... 792,057 1,664,818 2,551,129 Deferred revenue.......................................... 38,080 326,330 408,866 Current portion of long-term debt......................... 3,698 -- -- Related party payables.................................... 48,933 -- -- ------------ ------------ ------------ Total current liabilities............................... 2,192,023 5,303,533 5,562,525 ------------ ------------ ------------ 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, 26,607,329, 39,444,457 and 39,684,082 shares outstanding, respectively............................... 26,607 39,444 39,684 Additional paid-in capital................................ 16,160,312 155,649,244 155,307,844 Stock subscription receivable............................. (1,500,000) -- -- Deferred compensation..................................... (2,734,934) (3,714,720) (2,789,786) Accumulated comprehensive income (loss)................... (4,365) 299,456 (1,578,683) Accumulated deficit....................................... (10,431,590) (50,058,654) (59,901,639) ------------ ------------ ------------ Total stockholders' equity.............................. 1,516,030 102,214,770 91,077,420 ------------ ------------ ------------ Total liabilities and stockholders' equity.............. $ 3,713,815 $107,518,303 $ 96,639,945 ============ ============ ============
See accompanying notes to consolidated financial statements. F-3 238 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
THREE MONTHS ENDED YEAR ENDED OCTOBER 31, JANUARY 31, ------------------------------------------ ---------------------------- 1998 1999 2000 2000 2001 ----------- ----------- ------------ ------------ ------------ (UNAUDITED) REVENUE: Software and related products.......... $ 1,057,088 $ 2,772,878 $ 2,993,489 $ 394,840 $ 452,356 Services............................... -- 277,429 1,280,834 158,359 601,304 ----------- ----------- ------------ ------------ ------------ Total revenue........................ 1,057,088 3,050,307 4,274,323 553,199 1,053,660 ----------- ----------- ------------ ------------ ------------ COST OF REVENUE: Software and related products.......... 1,016,682 2,388,601 2,062,724 294,802 226,503 Services............................... -- 537,877 1,958,612 255,284 950,331 Write-off of prepaid royalties......... 1,381,695 -- -- -- -- ----------- ----------- ------------ ------------ ------------ Total cost of revenue................ 2,398,377 2,926,478 4,021,336 550,086 1,176,834 ----------- ----------- ------------ ------------ ------------ GROSS MARGIN (DEFICIT)................... (1,341,289) 123,829 252,987 3,113 (123,174) ----------- ----------- ------------ ------------ ------------ OPERATING EXPENSES: Sales and marketing (exclusive of non-cash compensation of $0, $177,050, $1,969,903, $487,132, and $140,120 respectively)............... 2,223,814 4,767,508 14,753,756 2,030,556 5,520,108 Research and development (exclusive of non-cash compensation of $0, $103,070, $1,146,490, $363,959, and $133,074 respectively)............... 1,489,041 2,302,302 4,954,354 964,740 1,869,177 General and administrative (exclusive of non-cash compensation of $0, $129,176, $2,099,623, $691,776, and $60,630 respectively)................ 1,798,872 1,748,087 6,429,874 1,078,510 1,747,820 SCO cost-sharing arrangement........... -- -- 898,026 -- 601,974 Non-cash compensation.................. -- 409,296 5,216,016 1,542,867 333,824 ----------- ----------- ------------ ------------ ------------ Total operating expenses............. 5,511,727 9,227,193 32,252,026 5,616,673 10,072,903 ----------- ----------- ------------ ------------ ------------ LOSS FROM OPERATIONS..................... (6,853,016) (9,103,364) (31,999,039) (5,613,560) (10,196,077) ----------- ----------- ------------ ------------ ------------ EQUITY IN LOSS OF AFFILIATE.............. -- -- (386,995) -- (647,689) ----------- ----------- ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense....................... (1,081,179) (225,657) -- -- -- Interest income........................ -- 2,512 3,237,798 113,374 1,007,819 Gain on sale of assets to Ebiz, Inc. ................................ -- -- 2,306,357 -- -- Other income (expense)................. 4,838 (5,304) (478) (547) 19,662 ----------- ----------- ------------ ------------ ------------ Other income (expense), net.......... (1,076,341) (228,449) 5,543,677 112,827 1,027,481 ----------- ----------- ------------ ------------ ------------ LOSS BEFORE INCOME TAXES................. (7,929,357) (9,331,813) (26,842,357) (5,500,733) (9,816,285) PROVISION FOR INCOME TAXES............... (33,780) (34,775) (81,141) (12,650) (26,700) ----------- ----------- ------------ ------------ ------------ NET LOSS................................. $(7,963,137) $(9,366,588) $(26,923,498) $ (5,513,383) $ (9,842,985) =========== =========== ============ ============ ============ DIVIDENDS RELATED TO CONVERTIBLE PREFERRED STOCK........................ $ -- $ -- $(12,252,717) $(10,000,000) $ -- =========== =========== ============ ============ ============ NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS........................... $(7,963,137) $(9,366,588) $(39,176,215) $(15,513,383) $ (9,842,985) =========== =========== ============ ============ ============ BASIC AND DILUTED NET LOSS PER COMMON SHARE.................................. $ (0.50) $ (0.51) $ (1.19) $ (0.63) $ (0.25) =========== =========== ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................ 16,000,000 18,457,543 32,922,135 24,779,808 39,588,452 =========== =========== ============ ============ ============ OTHER COMPREHENSIVE LOSS: Net loss attributable to common stockholders......................... $(7,963,137) $(9,366,588) $(39,176,215) $(15,513,383) $ (9,842,985) Unrealized gain (loss) on available-for-sale securities........ -- -- 356,419 -- (1,865,030) Foreign currency translation adjustments.......................... 3,991 (8,356) (52,598) (15,766) (13,109) ----------- ----------- ------------ ------------ ------------ COMPREHENSIVE LOSS....................... $(7,959,146) $(9,374,944) $(38,872,394) $(15,529,149) $(11,721,124) =========== =========== ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 239 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK ---------------------- -------------------- PAID-IN SUBSCRIPTION DEFERRED SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION ----------- -------- ---------- ------- ------------ ------------- ------------ 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. through August 31, 1998....................... -- -- -- -- -- -- -- Incorporation of Caldera Systems, Inc. and issuance of common shares to majority stockholder 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 (1,500,000) -- 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 -- (3,144,230) Amortization of deferred compensation................... -- -- -- -- -- -- 409,296 Net loss........................ -- -- -- -- -- -- -- ----------- -------- ---------- ------- ------------ ----------- ----------- Balance, October 31, 1999....... -- -- 26,607,329 26,607 16,160,312 (1,500,000) (2,734,934) 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 to $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 carryover 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, net............................ -- -- 5,750,000 5,750 71,776,111 -- -- Reclassification of stock subscription receivable due to subsequent receipt of cash........................... -- -- -- -- -- 1,500,000 -- Deferred compensation related to stock option grants............ -- -- -- -- 5,370,605 -- (5,370,605) Amortization of deferred compensation................... -- -- -- -- -- -- 4,390,819 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 $ -- $(3,714,720) Amortization of deferred compensation (unaudited)....... -- -- -- -- -- -- 333,824 Removal of deferred compensation related to option grants for terminated employees (unaudited).................... -- -- -- -- (591,110) -- 591,110 Issuance of common shares upon exercise of stock options at prices ranging from $1.00- $4.00 per share (unaudited).... -- -- 239,625 240 249,710 -- -- Cumulative translation adjustment (unaudited)......... -- -- -- -- -- -- -- Unrealized loss on available-for-sale securities (unaudited).................... -- -- -- -- -- -- -- Net loss (unaudited)............ -- -- -- -- -- -- -- ----------- -------- ---------- ------- ------------ ----------- ----------- Balance, January 31, 2001 (unaudited).................... $ -- $ -- 39,684,082 $39,684 $155,307,844 $ -- $(2,789,786) =========== ======== ========== ======= ============ =========== =========== CALDERA, INC.'S ACCUMULATED EQUITY IN COMPREHENSIVE LICENSE ACCUMULATED CARVED-OUT INCOME (LOSS) FEE 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. through August 31, 1998....................... -- -- -- (6,898,135) Incorporation of Caldera Systems, Inc. and issuance of common shares to majority stockholder 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..................... 3,991 -- -- -- Net loss for the period subsequent to incorporation.... -- -- (1,065,002) -- ----------- --------- ------------ ----------- Balance, October 31, 1998....... 3,991 -- (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..................... (8,356) -- -- -- Deferred compensation related to stock option grants............ -- -- -- -- Amortization of deferred compensation................... -- -- -- -- Net loss........................ -- -- (9,366,588) -- ----------- --------- ------------ ----------- Balance, October 31, 1999....... (4,365) -- (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 to $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 (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 carryover 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, net............................ -- -- -- -- 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..................... (52,598) -- -- -- Unrealized gain on available-for-sale securities..................... 356,419 -- -- -- Net loss........................ -- -- (26,923,498) -- ----------- --------- ------------ ----------- Balance October 31, 2000........ $ 299,456 $ -- $(50,058,654) $ -- Amortization of deferred compensation (unaudited)....... -- -- -- -- Removal of deferred compensation related to option grants for terminated employees (unaudited).................... -- -- -- -- Issuance of common shares upon exercise of stock options at prices ranging from $1.00- $4.00 per share (unaudited).... -- -- -- -- Cumulative translation adjustment (unaudited)......... (13,109) -- -- -- Unrealized loss on available-for-sale securities (unaudited).................... (1,865,030) -- -- -- Net loss (unaudited)............ -- -- (9,842,985) -- ----------- --------- ------------ ----------- Balance, January 31, 2001 (unaudited).................... $(1,578,683) $ -- $(59,901,639) $ -- =========== ========= ============ ===========
See accompanying notes to consolidated financial statements. F-5 240 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
THREE MONTHS ENDED YEAR ENDED OCTOBER 31, JANUARY 31, ------------------------------------------ ------------------------- 1998 1999 2000 2000 2001 ----------- ------------ ------------- ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss......................................... $(7,963,137) $ (9,366,588) $ (26,923,498) $(5,513,383) $(9,842,985) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.................. 132,221 288,797 579,552 93,071 201,394 Non-cash compensation.......................... -- 409,296 5,216,016 1,542,867 333,824 Equity in loss of affiliate.................... -- -- 386,995 -- 647,689 Gain on sale of assets to Ebiz, Inc. .......... -- -- (2,306,357) -- -- Issuance of common stock for services.......... -- -- 134,664 134,664 -- Accrued interest converted to equity........... 1,082,260 254,910 -- -- -- Changes in operating assets and liabilities: Accounts receivable, net..................... 134,075 (518,497) (874,483) (153,296) 704,876 Other receivables............................ -- (375,000) 375,000 375,000 -- Inventories.................................. 281,936 (119,663) (220,029) 54,994 7,469 Other current assets......................... 1,617,138 143,081 (1,276,649) (68,719) 571,362 Other assets................................. 625,712 (10,097) 10,356 4,454 (38,427) Accounts payable............................. (908,994) 1,044,050 1,056,171 31,072 188,171 Accrued liabilities.......................... (105,496) 625,109 827,761 274,363 886,311 Payable to The Santa Cruz Operation.......... -- -- 898,026 -- (898,026) Deferred revenue............................. -- 38,080 288,250 105,455 82,536 ----------- ------------ ------------- ----------- ----------- Net cash used in operating activities...... (5,104,285) (7,586,522) (21,783,225) (3,119,458) (7,155,806) ----------- ------------ ------------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash payment to Caldera, Inc. in asset acquisition.................................... -- (14,963,826) -- -- -- Purchase of property and equipment............... (169,764) (587,375) (1,443,416) (154,958) (162,426) Purchase of other long-lived assets.............. -- (80,000) -- -- -- Purchase of available-for-sale securities........ -- -- (101,989,203) -- (8,128,152) Sale of available-for-sale securities............ -- -- 48,188,287 -- 14,368,676 Deferred acquisition costs....................... -- -- (1,731,672) -- (449,836) Loan to The Santa Cruz Operation................. -- -- -- -- (7,000,000) Sale of Lineo, Inc. common stock................. -- -- 15,000,000 -- -- Acquisition of equity investment in affiliate.... -- -- (3,000,000) -- -- Acquisition of investment in non-marketable security....................................... -- -- (2,000,000) (2,000,000) -- ----------- ------------ ------------- ----------- ----------- Net cash used in investing activities...... (169,764) (15,631,201) (46,976,004) (2,154,958) (1,371,738) ----------- ------------ ------------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings from majority stockholder under convertible promissory note.................... -- 4,819,000 -- -- -- Borrowings from majority stockholder............. -- -- 300,000 300,000 -- Repayment of borrowings from majority stockholder.................................... -- -- (300,000) (300,000) -- Proceeds from long-term debt..................... -- 11,486 -- -- -- Repayments of long-term debt..................... -- (2,026) (9,460) (9,460) -- Borrowings from majority stockholder prior to reorganization................................. 4,429,065 -- -- -- -- Proceeds from common shares upon incorporation... 519,000 15,481,000 -- -- -- Proceeds from sale of common stock, net.......... -- 2,963,000 74,781,861 758,743 -- Proceeds from sale of Series B convertible preferred stock, net........................... -- -- 29,790,674 29,790,674 -- Proceeds from sale of common stock through ESP program........................................ -- -- 183,876 -- -- Proceeds from exercise of common stock options... -- 22 532,125 41,143 249,950 ----------- ------------ ------------- ----------- ----------- Net cash provided by financing activities............................... 4,948,065 23,272,482 105,279,076 30,581,100 249,950 ----------- ------------ ------------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... (325,984) 54,759 36,519,847 25,306,684 (8,277,594) EFFECT OF FOREIGN EXCHANGE RATES ON CASH........... 3,991 (8,356) (81,569) (15,766) 76,270 CASH AND CASH EQUIVALENTS, beginning of period..... 397,579 75,586 121,989 121,989 36,560,267 ----------- ------------ ------------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of period........... $ 75,586 $ 121,989 $ 36,560,267 $25,412,907 $28,358,943 =========== ============ ============= =========== ===========
See accompanying notes to consolidated financial statements. F-6 241 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED YEAR ENDED OCTOBER 31, JANUARY 31, -------------------------------------- ------------------------- 1998 1999 2000 2000 2001 ----------- ---------- ----------- ----------- ----------- (UNAUDITED) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes................. $ -- $ -- $ 41,031 $ -- $ 4,223 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 license fee for non-marketable securities................ $ -- $ -- $ 1,999,497 $ 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 $ 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 11,596,546 shares of common stock.................................... $ -- $ -- $ 11,596 $ -- $ -- Dividends related to Series B convertible preferred stock.......................... $ -- $ -- $12,252,717 $10,000,000 $ -- Issuance of common shares in exchange for investment in Lineo, Inc. ............... $ -- $ -- $10,000,000 $10,000,000 $ -- Distribution to majority stockholder for fair value of shares issued in excess of the carry over basis of the investment in Lineo, Inc............................... $ -- $ -- $(9,999,999) $(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) $ -- $ -- Reclassification and write-down of equity method investment in marketable security................................. $ -- $ -- $ -- $ -- $ 2,309,636
See accompanying notes to consolidated financial statements. F-7 242 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES 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, 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 which 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. 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 F-8 243 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, December 12, 2000 and February 9, 2001, Caldera Systems, Inc. ("Caldera"), Caldera International, Inc. ("New Caldera"), and The Santa Cruz Operation, Inc. ("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 of approximately 71.9% 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, as elected by the option holders, 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 options in exchange for one New Caldera option basis representing in the aggregate a fully diluted equity interest of approximately 2.8% in New Caldera; (iv) SCO will receive 16,000,000 shares of New Caldera Common Stock representing in the aggregate a fully diluted equity interest of approximately 25.3% in New Caldera; (v) New Caldera will pay to SCO $23 million in cash, of which $7 million was advanced to SCO on January 26, 2001 under a promissory note arrangement bearing interest at 10 percent; (vi) New Caldera will issue to SCO a non-interest bearing, secured promissory note in the amount of $8 million that will be payable in quarterly installments of $2 million beginning on the first day of the fifth fiscal quarter following the closing; and (vii) SCO shall be entitled to receive from New Caldera earn-out provisions during the three-year period following the closing representing 45% of the amount by which OpenServer revenues exceed certain threshold amounts. If the Reorganization is not completed, SCO will be obligated to repay the $7 million advance to Caldera. Caldera's $7 million advance is secured by a first priority 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. In conjunction with the Reorganization Agreement, The Canopy Group, Inc., a major stockholder of Caldera has agreed to loan up to $18 million to SCO. 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 UNAUDITED INTERIM FINANCIAL STATEMENTS The unaudited interim financial statements as of January 31 2001 and for the three months ended January 31, 2000 and 2001 have been prepared on the same basis as the audited financial statements and, F-9 244 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) in the opinion of management, reflect all normal recurring adjustments necessary to present fairly the financial information set forth therein in accordance with generally accepted accounting principles. All financial statement disclosures related to the interim financial statements are unaudited. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of 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 their wholly owned subsidiaries 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 equity securities and 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 and January 31, 2001, equity securities totaled $0 and $2.0 million, respectively, debt securities with maturity dates less than one year totaled approximately $38.2 million and $15.7 million, respectively, and investments with maturity dates ranging from one year to two years totaled approximately $16.0 million and $32.6 million, respectively. F-10 245 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1999 and 2000 and January 31, 2001, inventories consisted of raw materials of approximately $79,400, $201,800 and $219,300, respectively, and finished goods of approximately $90,000, $187,600 and $162,700, 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. 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, 1998, 1999 and 2000 and the three months ended January 31, 2001. 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 F-11 246 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 and January 31, 2001, the Company does not consider any of its long-lived assets to be impaired. ACCRUED LIABILITIES As of October 31, 1999 and 2000 and January 31, 2001, accrued liabilities consisted of the following:
OCTOBER 31, --------------------- JANUARY 31, 1999 2000 2001 -------- ---------- ----------- Accrued vacation.................................. $ 98,425 $ 319,863 $ 366,895 Accrued sales returns and other allowances........ 169,000 363,928 10,750 Accrued accounting, legal and annual report fees............................................ -- 205,000 195,000 Accrued payroll and related costs................. 45,284 200,887 1,002,289 Post contract support............................. 50,000 145,000 145,000 Accrued marketing development funds............... 172,900 119,993 236,111 Foreign income taxes payable...................... 30,139 78,808 72,834 Other accrued liabilities......................... 226,309 231,339 522,250 -------- ---------- ---------- Total accrued liabilities............... $792,057 $1,664,818 $2,551,129 ======== ========== ==========
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 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. Prior to November 1, 2000, sales to resellers for which payment was considered to be substantially contingent on the reseller's success in distributing individual units of the product or sales to resellers with which Caldera did not have historical experience were accounted for as consignments and the revenue was recognized once sell-through verification was received and payments from customers became due. Prior to October 31, 1999, Caldera did not have any consignment arrangements. During the year ended October 31, 2000, approximately 22 percent of product revenue was derived on a sell-through basis. Effective November 1, 2000, the Company began to defer revenue recognition for products sold through the distribution channel until the products have been sold through the channel to the end user. The effect of this change was not material as of November 1, 2000, nor would it have been material to the net losses as presented in the accompanying statements of operations for the years ended October 31, 1998, 1999 and 2000. 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 are not significant; accordingly, the Company accrues the estimated costs of providing the services at the time of revenue recognition. Revenues from the extended support agreements are deferred and recognized over the period of the contract or as the services are provided. F-12 247 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) If other significant post-delivery vendor obligations exist or if a product is subject to customer acceptance, revenues are deferred until no significant obligations remain or acceptance has occurred. To date, the Company has not shipped any software 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. Services revenue is recognized as the services are performed. 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 $967,700, $1,228,600, $1,508,200 and $907,000 for the years ended October 31, 1998, 1999 and 2000 and the three months ended January 31, 2001, 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, 1999 and 2000 and January 31, 2001, the Company recorded an accrual of $172,900, $120,000 and $236,100, 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 F-13 248 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 receivable. As of October 31, 1999, three distributors accounted for approximately 71 percent of the gross accounts receivable balance. As of October 31, 2000, four distributors accounted for approximately 35 percent of the gross accounts receivable balance. As of October 31, 1999 and 2000 and January 31, 2001, the allowance for bad debts was $90,000, $312,300 and $224,700, 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, as amended, became effective for the Company beginning November 1, 2000. The adoption of this statement did not 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 adopted SAB 101 during the quarter ended January 31, 2001. The adoption of SAB 101, did not have a material impact on the Company's results of operations, financial position or liquidity. 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 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 F-14 249 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 preferred stock for periods during which they were outstanding. For the years ended October 31, 1999 and 2000, 1,241,390 and 6,326,247 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. As of January 31, 2000, there were 6,596,146 and 5,000,000 shares of Series A and Series B convertible preferred stock outstanding, respectively, and there were 5,472,649 and 5,848,708 outstanding options to purchase common shares as of January 31, 2000 and 2001, respectively, that were not included in the computation of diluted net loss per common share as their effect would have been anti-dilutive, thereby decreasing the net loss per common share. 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 effected 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 their over allotment option for an additional 750,000 shares of 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 and January 31, 2001, 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; F-15 250 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (iv) the Company agreed to acquire 370,370 shares of common stock of Evergreen for $2,000,000 and Evergreen agreed to transfer 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. 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 and January 31, 2001 consolidated balance sheets. STOCK EXCHANGE AGREEMENT WITH LINEO In January 2000, the Company and 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 agreed to purchase 3,238,437 shares of common stock of Lineo (approximately 17 percent of Lineo's outstanding voting stock) in exchange for 1,250,000 shares of the Company's common stock. Because Lineo was also majority owned by Canopy, the investment in Lineo was 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 $150,000 would be associated with the 17% 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). F-16 251 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 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 which 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 price received from Metrowerks 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 and January 31, 2000 consolidated balance sheets. 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 agreed to acquire 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 and January 31, 2001 consolidated balance sheets. (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 F-17 252 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) additional shares of Ebiz common stock, depending upon the amount of gross revenue generated by the ELM Business 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 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 accounted for its interest in Ebiz using the equity method of accounting due to its ability to exercise influence on Ebiz. Under the equity method, Caldera recognized 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 amortized 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 allocated this difference to goodwill and was amortized 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 was included in the caption Equity Investment in Affiliate in the accompanying October 31, 2000 consolidated balance sheet. DILUTION OF EBIZ OWNERSHIP On January 5, 2001, Caldera's ownership interest in Ebiz was 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 now accounts for the investment as an available-for-sale security in accordance with SFAS 115. Under SFAS 115, Caldera carries its investment at fair market value using quoted trading prices and records 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. Ebiz' common stock is currently traded on the Over-the-Counter Bulletin Board. As of January 31, 2001, Management believes that the 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 its original investment has not been permanently impaired. (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 F-18 253 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 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 the 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 F-19 254 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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 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 AND RELATED AGREEMENTS 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 F-20 255 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 piggy-back 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 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 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 totalling $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 F-21 256 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 have been reflected as current assets and contra-equity in the accompanying consolidated balance sheets as of October 31, 1999 and October 31, 2000, respectively. 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 F-22 257 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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 terminations, 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 F-23 258 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 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, 1999 and 2000 and the three months ended January 31, 2001, is as follows:
WEIGHTED AVERAGE 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 Granted................................. 507,500 2.00 - 2.97 2.10 Exercised............................... (239,625) 1.00 - 4.00 1.04 Forfeited............................... (595,909) 1.00 - 9.50 4.62 --------- Balance January 31, 2001................ 5,848,708 $1.00 - $14.75 $4.40 =========
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, 1999 and 2000 is as follows:
WEIGHTED AVERAGE WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED EXERCISE PRICE 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 =========
F-24 259 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A summary of the options outstanding and options exercisable under the Company's stock option plans at October 31, 2000 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------- ------------------------------ WEIGHTED AVERAGE WEIGHTED WEIGHTED OPTIONS CONTRACTUAL AVERAGE OPTIONS AVERAGE EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE 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 ========= =========
STOCK-BASED COMPENSATION The Company accounts for its stock options issued to directors, officers and employees under APB 25 and related interpretations. Under APB 25, compensation expense is recognized if an option's exercise price on the measurement date is below the intrinsic fair value of the Company's common stock. During the year ended October 31, 1999, 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. During the three months ended January 31, 2001, the Company recorded $333,824 in non-cash compensation expense. As a result of an option agreement between Canopy and Ralph J. Yarro III, which was subsequently rescinded, the Company recorded 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 No. 123, "Accounting for Stock-Based Compensation" requires pro forma information regarding net loss as if the Company had accounted for its stock options granted under the fair value 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, 1999 and 2000: risk-free interest rates of 5.5 and 6.1 percent, respectively; expected dividend yield of 0 percent; volatility of 0 and 132 percent, respectively; and expected exercise lives of five and four years, respectively. For purposes of the pro forma disclosure, the estimated fair market value of the stock options F-25 260 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1999 and 2000:
1999 2000 ----------- ------------ Net loss attributable to common stockholders, as reported..................................... $(9,366,588) $(39,176,215) Net loss attributable to common stockholders, pro forma.................................... (9,773,906) (43,291,164) Per share: Net loss attributable to common stockholders, as reported..................................... $ (0.51) $ (1.19) Net loss attributable to common stockholders, pro forma.................................... (0.53) (1.31)
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 has 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, 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. F-26 261 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. (9) INCOME TAXES As described in Note 1, 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 Linux software business to Caldera has 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 period from the reorganization (September 1, 1998) through October 31, 1998 and for the years ended October 31, 1999 and 2000:
1998 1999 2000 ----------- ----------- ------------ Domestic U.S. operations....................... $(1,070,632) $(9,401,363) $(26,980,396) Operations of foreign subsidiary, Caldera GmbH......................................... 11,260 69,550 138,039 ----------- ----------- ------------ Total........................................ $(1,059,372) $(9,331,813) $(26,842,357) =========== =========== ============
The components of the provision for income taxes for the period from the reorganization (September 1, 1998) through October 31, 1998 and for the years ended October 31, 1999 and 2000 are as follows:
1998 1999 2000 --------- ----------- ----------- Current: U.S. Federal................................. $ -- $ -- $ -- U.S. State................................... -- -- -- Non-U.S. .................................... 33,780 34,775 81,141 --------- ----------- ----------- 33,780 34,775 81,141 --------- ----------- ----------- Deferred: U.S. Federal ................................ (368,163) (3,022,242) (3,976,810) U.S. State .................................. (53,436) (293,335) (385,985) Change in valuation allowance................ 421,599 3,315,577 4,362,795 --------- ----------- ----------- -- -- -- --------- ----------- ----------- Total provision for income taxes.......... $ 33,780 $ 34,775 $ 81,141 ========= =========== ===========
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 F-27 262 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1999 and 2000 are as follows:
1999 2000 ------------ ------------ Deferred income tax assets: Net operating loss carryforwards $ 3,967,242 $ 8,029,416 Tax basis in excess of book basis related to assets acquired by Caldera from Predecessor 6,599,942 6,122,838 Book to tax basis difference in equity investee -- 393,769 Reserves and accrued expenses 268,510 606,389 Book depreciation in excess of tax 62,570 114,002 Foreign tax credit 46,617 101,793 ------------ ------------ Total deferred income tax assets 10,944,881 15,368,207 Deferred tax liability -- tax on foreign earnings (51,142) (111,673) Valuation allowance (10,893,739) (15,256,534) ------------ ------------ Net deferred income tax assets $ -- $ -- ============ ============
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 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:
1998 1999 2000 ----- ----- ----- Benefit at statutory rate................................... (34.0%) (34.0%) (34.0%) Non-deductible items........................................ 0.1% 0.1% 21.2% State income taxes, net of federal effect................... (3.3%) (3.3%) (3.3%) Foreign income taxes........................................ 0.6% (0.1%) 0.1% Increase in valuation allowance............................. 39.8% 37.7% 16.3% ----- ----- ----- Total provision for income taxes.......................... 3.2% 0.4% 0.3% ===== ===== =====
(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 position, liquidity or results of operations. F-28 263 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 2000. 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 recorded the remaining $601,974 during the first quarter of fiscal 2001. The full payment was made to SCO during Caldera's first quarter of fiscal 2001. 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 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. F-29 264 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 $19,200, $144,700 and $474,000 for the years ended October 31, 1998, 1999 and 2000, 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 also 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 $19,200, $161,200 and $722,000 for the years ended October 31, 1998, 1999 and 2000. 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 shares of common stock, and USE has committed to pay $100,000 to the Company. Based on the F-30 265 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 or 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 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. (11) RELATED PARTY TRANSACTIONS As of October 31, 2000 and January 31, 2001, 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 F-31 266 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1998, 1999 and 2000, transactions with these related parties were as follows:
1998 1999 2000 ------- -------- -------- Revenue............................................. $ -- $ -- $ 46,600 ======= ======== ======== Rent (see Note 10).................................. $19,200 $144,700 $ 94,200 Training, testing and other......................... -- 48,200 82,600 Insurance........................................... 13,200 13,800 6,700 ------- -------- -------- Total expenses.................................... $32,400 $206,700 $183,500 ======= ======== ========
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 which 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. Sales to Lineo amounted to $1,700 and $34,300 during the years ended October 31, 1999 and 2000, respectively. MTI 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. Sales to MTI amounted to $2,985 and $31,350 during the years ended October 31, 1999 and 2000, 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 to partially match employee contributions to the F-32 267 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) plan, up to predetermined limits. During the year ended October 31, 2000, the Company contributed approximately $145,000 to the plan for matching contributions. (13) SIGNIFICANT CUSTOMERS During the year ended October 31, 1998, the Company had sales to one customer that accounted for approximately 11 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, 2000, the Company had sales to one customer that accounted for approximately 19 percent of total revenue. No other customer accounted for more than ten percent of total revenue during the years ended October 31, 1998, 1999 and 2000. (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 a company's chief operating decision makers in deciding how to allocate resources and in assessing performance. It also requires segment disclosures about products and services as well as geographic areas. The Company has determined that it did not have any separately reportable operating segments as of October 31, 1998, 1999 and 2000. 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, 1998, 1999 and 2000 and the three months ended January 31, 2000 and 2001, is as follows:
THREE MONTHS ENDED YEAR ENDED OCTOBER 31, JANUARY 31, ------------------------------------ --------------------- 1998 1999 2000 2000 2001 ---------- ---------- ---------- -------- ---------- Revenue: United States............. $1,000,943 $2,847,789 $2,982,275 $390,710 $ 711,384 Asia pacific.............. -- 91,133 705,701 41,923 284,184 Europe.................... 33,687 81,007 366,682 94,325 40,537 Other countries........... 22,458 30,378 219,665 26,241 17,555 ---------- ---------- ---------- -------- ---------- Total revenue........... $1,057,088 $3,050,307 $4,274,323 $553,199 $1,053,660 ========== ========== ========== ======== ==========
Long-lived assets by location consists of the following as of October 31, 1999 and 2000:
1999 2000 -------- ---------- Long lived assets: United States............................................... $673,002 $1,494,582 Europe...................................................... 46,418 94,738 -------- ---------- Total long-lived assets................................... $719,420 $1,589,320 ======== ==========
F-33 268 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of The Santa Cruz Operation, Inc.: In our opinion, the accompanying consolidated carve out balance sheets and the related consolidated carve out statements of operations, of divisional surplus (deficit) and accumulated other comprehensive loss and of cash flows present fairly, in all material respects, the financial position of the SCO Server and Professional Services Groups at September 30, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the management of the SCO Server and Professional Services Groups; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to these consolidated financial statements, the SCO Server and Professional Services Groups are dependent upon financing from The Santa Cruz Operation, Inc. ("SCO"). There can be no assurance that SCO will provide such funding beyond September 30, 2001. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP San Jose, California February 9, 2001 F-34 269 THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS CONSOLIDATED CARVE OUT BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 1999 2000 2000 ------------- ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............................ $ 2,223 $ 511 $ 69 Receivables, net..................................... 30,851 22,711 19,456 Deferred tax assets.................................. 1,202 -- -- Other current assets................................. 5,617 3,718 5,352 ------- ------- ------- Total current assets......................... 39,893 26,940 24,877 ------- ------- ------- Property and equipment, net.......................... 10,560 7,093 6,020 Purchased software and technology licenses, net...... 9,690 5,282 4,574 Long-term deferred tax assets........................ 6,623 -- -- Other assets......................................... 3,351 736 581 ------- ------- ------- Total assets................................. $70,117 $40,051 $36,052