-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AzsYnH3GP3D8Fq54m1mVha5xQxDi+kDe0f1xrNNoZw431IXXnvXfRZ13uShSN8Pg fipmrgp/DgtfCf0nJBJthg== 0001035704-00-000008.txt : 20000202 0001035704-00-000008.hdr.sgml : 20000202 ACCESSION NUMBER: 0001035704-00-000008 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 23 FILED AS OF DATE: 20000110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALDERA SYSTEMS INC CENTRAL INDEX KEY: 0001102542 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 870617393 STATE OF INCORPORATION: UT FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-94351 FILM NUMBER: 504911 BUSINESS ADDRESS: STREET 1: 240 WEST CENTER STREET CITY: OREM STATE: UT ZIP: 84057 BUSINESS PHONE: 8017654999 S-1 1 REGISTRATION STATEMENT FOR CALDERA SYSTEMS, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 10, 2000. REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------- CALDERA SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7372 87-0617393 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
------------------------- 240 WEST CENTER STREET OREM, UT 84057 TELEPHONE: (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 SYSTEMS, INC. 240 WEST CENTER STREET OREM, UT 84057 TELEPHONE: (801) 765-4999 FACSIMILE: (801) 765-1313 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF AGENT FOR SERVICE) ------------------------- COPIES TO: RICHARD R. PLUMRIDGE, ESQ. KENNETH L. GUERNSEY, ESQ. JOHN E. HAYES III, ESQ. JAMIE E. CHUNG, ESQ. BRUCE E. CUNNINGHAM, ESQ. STEVE R. DAETZ, ESQ. TROY M. KELLER, ESQ. ERIN A. SAWYER, ESQ. BROBECK, PHLEGER & HARRISON LLP COOLEY GODWARD LLP 370 INTERLOCKEN BOULEVARD, SUITE 500 ONE MARITIME PLAZA, 20TH FLOOR BROOMFIELD, CO 80021 SAN FRANCISCO, CA 94111-3580 (303) 410-2000 (415) 693-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] ------------------------- CALCULATION OF REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------- Common stock, par value $0.001 per share.................... $57,500,000 $15,180 - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o). ------------------------- 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 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, JANUARY 10, 2000 [LOGO] SHARES COMMON STOCK Caldera Systems, Inc. is offering shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We have applied for quotation of our common stock on the Nasdaq National Market under the symbol "CALD." We anticipate that the initial public offering price will be between $ and $ per share. ------------------------- INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. -------------------------
PER SHARE TOTAL --------- ----------- Public Offering Price....................................... $ $ Underwriting Discounts and Commissions...................... $ $ Proceeds to Caldera Systems, Inc............................ $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Caldera Systems, Inc. has granted the underwriters a 30-day option to purchase up to an additional shares of common stock to cover over-allotments. ------------------------- ROBERTSON STEPHENS BEAR, STEARNS & CO. INC. WIT CAPITAL CORPORATION FIRST SECURITY VAN KASPER The date of this prospectus is , 2000. 3 [Art to be depicted on the inside front cover shows a man holding the Caldera logo as business people move around him. Text on the page reads "Linux for eBusiness Solutions -- Caldera."] 4 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. IN THIS PROSPECTUS, "CALDERA SYSTEMS," "WE," "US" AND "OUR" REFER TO CALDERA SYSTEMS, INC., A DELAWARE CORPORATION. UNTIL , ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 1 Risk Factors................................................ 5 Special Note Regarding Forward-Looking Statements........... 20 Use of Proceeds............................................. 20 Dividend Policy............................................. 20 Capitalization.............................................. 21 Dilution.................................................... 23 Selected Financial Data..................................... 24 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 26 Business.................................................... 34 Management.................................................. 48 Certain Transactions........................................ 54 Principal Stockholders...................................... 57 Description of Capital Stock................................ 58 Shares Eligible for Future Sale............................. 61 Underwriting................................................ 63 Legal Matters............................................... 65 Experts..................................................... 65 Where You Can Find Additional Information................... 66 Index to Financial Statements............................... F-1
------------------------- We have license rights to "CALDERA(R)" and "CALDERA SYSTEMS(TM)", a pending trademark application. This prospectus also contains trademarks and trade names of other companies. i 5 PROSPECTUS SUMMARY You should read this summary together with the entire prospectus, including the more detailed information in this prospectus, including risk factors, regarding our company and the common stock being sold in this offering. OUR BUSINESS Caldera Systems, Inc. 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. We employ commercial software development practices in producing our Linux products by assembling open source code so that it is logically arranged and then rigorously testing for quality and performance. Our use of this process, known as self-hosting, is unique in the Linux community and gives our products a high level of stability and reliability. During 1999 our OpenLinux technology received many awards and recognitions including Internetweek's "Best of the Best," 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 complement our product offerings with value-added services. We offer a comprehensive, distribution-neutral education and training for Linux. A student who has successfully completed our courses will be proficient with the leading distributions, or versions, of Linux. Other services that we offer include technical support to assist end users during installation and operation of our products, consulting and custom development, optimization and certification for specific hardware platforms and documentation on Linux usage. We have an effective distribution channel through electronic solution providers, which enables us to easily reach business users. We define electronic solution providers to include distributors, value-added resellers, or VARs, original equipment manufacturers, or OEMs, Internet service providers, or ISPs, and any partner that offers value-added solutions for eBusiness. We provide electronic solution providers with the products, third-party applications, education, training and tools to effectively facilitate or offer a Linux solution for eBusiness. We primarily distribute our products and services through this indirect distribution channel model. Our customers include AST Computers, Cendant, First International Computers, Frank Kasper & Associates, Gates/Arrow, IBM, Ingram Micro, MediaGold, MTI Technology Corporation, Navarre Corporation, Support Net and Tech Data. MARKET OPPORTUNITY 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. The Internet has also enabled and accelerated a trend towards distributed software applications. This has led to a rise of thin appliance servers, or specialized servers. Dataquest projects that the worldwide market for thin appliance servers will grow from approximately $2.2 billion in 1999 to approximately $16.0 billion by 2003. In addition, low cost Internet access devices, such as personal digital assistants and television set-top boxes, are emerging to allow more users the ability to participate in eBusiness. This new eBusiness computing environment requires an operating system that can accommodate its accelerated evolution. Linux, with its comprehensive Internet functionality, flexibility and customizability, high scalability, stability, interoperability with multiple systems and networks and multi-appliance capability is an optimal operating system for eBusiness. International Data Corporation projects the total market for Linux shipments will increase at a compound annual growth rate of 25% from 1999 to 2003. Also, Dataquest has predicted that Linux thin servers will account for approximately $3.8 billion in server appliance revenues by 2003. However, historically, business users have lacked a Linux solution that is specifically tailored for eBusiness. We seek to fulfill this need with our solution for eBusiness. 1 6 OUR STRATEGY Our goal is to become the leading provider of Linux for eBusiness. Key elements of our strategy to achieve this goal include: - providing Linux software for specialized servers and Internet access devices, which are becoming key components in the new eBusiness environment; - remaining committed to our research and development effort and staying abreast of the fast changing eBusiness environment; - increasing our channel presence in Linux, which has given us a head start in accessing the business community with our Linux products; - leveraging our technology, marketing and distribution partners to facilitate faster growth; - facilitating the adoption of Linux for eBusiness through education and training; - establishing our Web site as the one-stop center for eBusiness; and - expanding our international presence to take advantage of growing market opportunities. CORPORATE INFORMATION We began operations in 1994 as Caldera, Inc. In July 1996, Caldera, Inc. acquired an additional business line 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 and, effective September 1, 1998, 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. Caldera Systems, Inc. was incorporated in Utah in August 1998. We intend to reincorporate in Delaware prior to the closing of this offering. Our principal offices are located at 240 West Center Street, Orem, Utah 84057. Our telephone number at this location is (801) 765-4999. Our Web site address is www.calderasystems.com. The information on our Web site does not constitute part of this prospectus. 2 7 THE OFFERING Common stock offered by Caldera Systems......... shares Common stock to be outstanding after this offering........................................ shares Use of proceeds................................. To provide for general corporate purposes, including sales and marketing activities, product development and support, and hiring of additional personnel and potentially for acquisitions or investments. See "Use of Proceeds." Nasdaq National Market symbol................... CALD The outstanding share information is based on our shares outstanding as of January , 2000. This information excludes shares of common stock issuable upon the exercise of stock options outstanding as of January , 2000, with a weighted average exercise price of $ per share. Unless otherwise indicated, all information contained in this prospectus: - gives effect to the conversion of all outstanding convertible preferred stock into common stock upon the closing of this offering; - assumes our reincorporation in Delaware prior to the closing of this offering; and - assumes the underwriters' over-allotment option is not exercised. 3 8 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables summarize the financial data for our business. The summary financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included elsewhere in this prospectus.
YEAR ENDED OCTOBER 31, ------------------------------------------------------- 1995 1996 1997 1998 1999 ----------- ----------- ------- ------- ------- (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenue........................................ $ -- $ 1,108 $ 1,117 $ 1,057 $ 3,050 Cost of revenue................................ -- 880 1,142 2,398 2,926 Gross margin (deficit)......................... -- 228 (25) (1,341) 124 Loss from operations........................... (1,359) (2,649) (7,578) (6,853) (9,103) Net loss....................................... (1,350) (2,757) (8,148) (7,963) (9,367) Basic and diluted net loss per common share.... $ (0.11) $ (0.23) $ (0.68) $ (0.66) $ (0.67) Basic and diluted weighted average common shares outstanding........................... 12,033 12,033 12,033 12,033 13,882 Basic and diluted pro forma net loss per common share (unaudited)............................ $ (0.51) Basic and diluted pro forma weighted average common shares outstanding (unaudited)........ 18,458
AS OF OCTOBER 31, 1999 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------ ----------- ----------- (UNAUDITED) (UNAUDITED) BALANCE SHEET DATA: Cash........................................................ $ 122 $27,622 $ Working capital............................................. 678 28,178 Total assets................................................ 3,714 45,665 Long-term liabilities....................................... 6 6 Total stockholders' equity.................................. 1,516 43,467
- ------------------------- The pro forma amounts reflect: - our issuance in December 1999 of 106,356 shares of our common stock in exchange for 159 shares or approximately 2 percent of the outstanding common stock of Troll Tech AS, a strategic technology partner of ours; - our sale in December 1999 and January 2000 of 5,000,000 shares of Series B convertible preferred stock for net proceeds of approximately $29.5 million and our recording of a beneficial conversion feature valued at $10.0 million based on the difference between the conversion price and the estimated fair market value of our common stock at the time of the sale; - our purchase in January 2000 of 592,592 shares of common stock or approximately 4 percent of the outstanding common and preferred stock of Evergreen Internet, Inc., a strategic technology partner of ours, for $2.0 million and our issuance to Evergreen Internet, Inc. of 200,000 shares of our common stock; - our issuance in January 2000 of 1,250,000 shares of our common stock in exchange for 3,238,437 shares or approximately 17 percent of the outstanding common stock of Lineo, Inc., a strategic technology partner of ours; and - the conversion of our Series A convertible preferred stock and Series B convertible preferred stock into our common stock upon the closing of this offering. Pro forma as adjusted amounts reflect the pro forma adjustments as well as the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. 4 9 RISK FACTORS An investment in our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with our financial statements and related notes and the other information contained in this prospectus, before you decide to buy our common stock. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In this case, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock. RISKS RELATED TO OUR OPERATIONS WE HAVE A LIMITED OPERATING HISTORY SO IT WILL BE DIFFICULT FOR YOU TO EVALUATE AN INVESTMENT IN OUR COMPANY. Although we began operations in 1994, during the past 12 months we have substantially revised our business plan to focus on Linux for eBusiness, made additions to our product line and hired a significant number of new employees, including key members of our management team. Consequently we have only a limited relevant operating history for you to evaluate an investment in our company. As a company in a new and rapidly evolving industry, we face risks and uncertainties relating to our ability to successfully implement our strategy. You must consider the risks, expenses and uncertainties that a company like ours, operating with an unproven business model, faces in a new and rapidly evolving market such as the market for Linux software. These risks include our ability to: - spur demand for Linux in the business community; - broaden awareness of the Caldera Systems brand; - maintain our current, and develop new, strategic relationships with technology partners and solution providers; - attract, integrate and retain qualified management personnel; - attract, integrate and retain qualified personnel for the expansion of our sales, professional services, engineering, marketing and customer support organizations; - continue to develop and upgrade product offerings tailored for business; - respond effectively to competitive pressures; and - generate revenues from the sale of our software products, services, education programs and training. If we cannot address these risks and uncertainties or are unable to execute our strategy, we may not be successful, which would significantly reduce the value of your investment. WE HAVE NOT BEEN PROFITABLE AND WE EXPECT OUR LOSSES TO CONTINUE. We have never been profitable. If our revenues decline or grow at a slower rate than we anticipate, or if our spending levels exceed our expectations or cannot be adjusted to reflect slower revenue growth, we may not generate sufficient revenues to achieve or sustain profitability or generate positive cash flow. In this case, the value of your investment could be reduced. For the fiscal year ended October 31, 1999, we incurred a net loss of approximately $9.4 million. As of October 31, 1999, we incurred total net losses of approximately $29.6 million since inception of our business in 1994. We expect to continue to incur losses because we anticipate incurring significant expenses in connection with developing our products, hiring and training employees, expanding our market reach and building awareness of our brand. We forecast our future expense levels based on our operating plans and our estimates of future revenues. We may find it necessary to accelerate expenditures relating to product development and support and our sales and marketing efforts beyond our current expectations or otherwise increase our financial commitment to creating and maintaining brand awareness among potential customers. 5 10 YOU SHOULD NOT RELY ON OUR QUARTERLY OPERATING RESULTS AS AN INDICATION OF OUR FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. FLUCTUATIONS IN OUR OPERATING RESULTS OR THE FAILURE OF OUR OPERATING RESULTS TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS MAY NEGATIVELY IMPACT OUR STOCK PRICE. Our quarterly operating results have varied in the past and we expect them to fluctuate significantly in the future due to a variety of factors that could affect our revenues or our expenses in any particular quarter. For example, historically, we have experienced substantial fluctuations in our revenues from period to period relating to the introduction of new products and new versions of our existing products. Upon our announcement of an expected release date for a new product or upgrade, we often experience a significant decrease in sales of our existing products. Additionally, we often experience the strongest sales for a new product during the first 30 days after its introduction as we fill advance orders from our distribution channel. Fluctuations in our quarterly operating results could cause our stock price to decline. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. Factors that may affect our quarterly results include: - the interest level of electronic solution providers in recommending our Linux business solutions to end users; - the introduction, development, timing, competitive pricing and market acceptance of our products and services and those of our competitors; - changes in general economic conditions, such as recessions, that could affect capital expenditures and recruiting efforts in the software industry in general and in the Linux environment in particular; - the magnitude and timing of marketing initiatives; - changing business attitudes toward Linux as a viable operating system alternative to other competing systems; - the maintenance and development of our strategic relationships with technology partners and solution providers; - the attraction, retention and training of key personnel; and - our ability to manage our anticipated growth and expansion. As a result of the factors listed above and elsewhere in this "Risk Factors" section of the prospectus, it is possible that in some future periods our results of operations may be below the expectations of public market analysts and investors. This could cause our stock price to decline. In addition, we plan to significantly increase our operating expenses to expand our sales and marketing, administration, consulting and training, maintenance and technical support and research and development groups. If revenues fall below our expectations in any quarter and we are unable to quickly reduce our spending in response, our operating results would be lower than expected and our stock price may fall. WE RELY ON OUR INDIRECT SALES CHANNEL FOR DISTRIBUTION OF OUR PRODUCTS, AND ANY DISRUPTION OF OUR CHANNEL AT ANY LEVEL COULD ADVERSELY AFFECT THE SALES OF OUR PRODUCTS. We have a two-tiered distribution channel through which the majority of our sales occur. As of November 1, 1999, we had approximately 35 distributors worldwide who purchased directly from us. These distributors in turn sell to approximately 4,000 retail outlets in the United States and approximately 900 equivalent sites internationally. These relationships allow us to offer our products and services to a much larger customer base than we would otherwise be able through our direct sales and marketing efforts. Some electronic solution providers also purchase eBusiness solutions through our distributors, and we anticipate they will continue to do so as we expand our product offerings for eBusiness. Because we usually do not sell directly to electronic solution providers, we cannot control the relationships through which they purchase our products. In turn we do not control the presentation of our products by electronic solution providers to end users. Therefore, our distribution channel could be affected by disruptions in the 6 11 relationships between our distributors and electronic solution providers or between electronic solution providers and end users. Also, distributors and electronic solution providers may choose not to emphasize use of our products to their customers. Any of these occurrences could diminish the effectiveness of our distribution channel and lead to decreased sales. In particular, we are highly dependent on our relationships with our distribution partners, such as Frank Kasper & Associates, Ingram Micro, Navarre Corporation and Tech Data, domestically, and MediaGold in Europe, for the distribution of our products. Sales through distributors together accounted for approximately 73% of our total revenue for the fiscal year ended October 31, 1999. We plan to continue to develop relationships with new distributors to introduce product and service offerings into new markets, including into foreign countries. If any of these distribution partners do not provide opportunities for growth or become closed to us, or if we are unable to create new distribution channels for new markets, we will be required to seek alternative channels of distribution for our products and services. We may be unable to do so, in which case our business would suffer. WE ARE HIGHLY DEPENDENT UPON OUR STRATEGIC RELATIONSHIPS WITH OUR TECHNOLOGY PARTNERS AND THE LOSS OF ANY OF THESE RELATIONSHIPS COULD ADVERSELY AFFECT OUR BUSINESS PROSPECTS. We depend on our alliances with our technology partners such as Citrix Systems, Evergreen Internet, Novell and Sun Microsystems. These relationships encompass product integration, two-way technology transfers, channel partnerships and revenue-generating initiatives in areas such as product bundles, training and education and third level technical support for our partners. We expect that these relationships will create opportunities for our products and services in business markets in which we otherwise might not have access. If we are unable to maintain these relationships, we will not be able to develop and deploy our products in certain segments of the business community and our product development and sales will not grow. In addition, our existing strategic relationships with technology partners do not, and any future strategic relationships may not, afford us any exclusive marketing development or distribution rights. As a result, the companies with which we have strategic alliances are free to pursue alternative technologies and to develop alternative products and services in addition to or in lieu of our products and services, either on their own or in collaboration with others, including our competitors. Moreover, we cannot guarantee that the companies with which we have strategic relationships will market our products effectively or continue to devote the resources necessary to provide us with effective sales, marketing and technical support, or that our partners will not choose to open source products into which we have invested significant time and resources, thereby reducing the value of our rights in these products. In particular we rely on our relationship with Evergreen Internet from whom we license the rights to significant components of our eBuilder product. Evergreen Internet has the right to terminate our license if eBuilder has not been made available for shipping by June 30, 2000, and may also terminate our license at any time after January 1, 2003. If Evergreen Internet terminates our license or fails to provide necessary support for our development and marketing efforts, including providing necessary upgrades to eBuilder, we may be unable to provide products integral to our eBusiness solutions. RISKS RELATING TO LINUX AND OUR OPEN SOURCE SOFTWARE WE RELY ON INDEPENDENT DEVELOPERS IN THE OPEN SOURCE COMMUNITY, SUCH AS LINUS TORVALDS, IN ORDER TO RELEASE UPGRADES OF OUR LINUX-BASED PRODUCTS. Many of the components of our software products, including the Linux kernel, the core of the Linux operating system, are developed by independent developers in the open source community and are available for inclusion in our products without cost. Linus Torvalds, the original developer of the Linux kernel, and a small group of independent engineers are primarily responsible for the development and evolution of the Linux kernel. Neither Mr. Torvalds nor any significant contributor to the Linux kernel is 7 12 an employee of ours. If these independent developers and others in the open source community do not further develop the Linux kernel and other open source software included in our products on a timely basis, or at all, our ability to enhance our product offerings will suffer. As a consequence, we will be forced to rely to a greater extent on our own development efforts or license commercial software products as replacements, which would increase our expenses and delay enhancements to our products. For example, in the past we have sometimes been unable to upgrade all open source components of a product in connection with a proposed release because enhancements had not yet been made by these independent developers. Any failure on the part of the kernel developers to further develop and enhance the kernel could also stifle the development of additional Linux applications. OUR BUSINESS MODEL, WHICH RELIES ON A COMBINATION OF OPEN SOURCE SOFTWARE AND PROPRIETARY TECHNOLOGY IS UNPROVEN. Our business model incorporates as integral elements of our product offerings both commercial products and open source software. We know of no company that has built a profitable business based in whole or in part on open source software. By incorporating open source components in our product offerings, we face many of the same risks that other open source 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 we may run counter to the perception of Linux as an open source model and alienate the Linux community. For example, our business model has been criticized by some members of the open source software community on various Web-based forums, including online articles, electronic bulletin boards and online chat rooms. Others have asserted that we are trying to dominate the market for Linux operating systems much like other companies have been able to dominate traditional software markets. Our critics argue that our business model, if successful, would fragment the Linux community, resulting in a less cohesive and cooperative development process. Negative reaction such as this, if widely shared by our customers, developers or the open source community, could harm our reputation, diminish our brand and decrease our revenue. Our business will fail if we are unable to successfully implement our business model. Our business model also depends upon incorporating contributions from the open source community into products that we open source. The viability of our product offerings depends in large measure upon the efforts of the open source community in enhancing products and making them compatible for use across multiple software and hardware platforms. There are no guarantees that these products will be embraced by the open source community such that programmers will contribute sufficient resources for their development. If the open source community does not embrace products that we view as integral to providing eBusiness solutions, we will be required to devote significant resources to develop these products on our own. OUR RELIANCE ON INDEPENDENT THIRD PARTIES WHO DEVELOP MOST OF THE SOFTWARE INCLUDED IN OUR PRODUCTS COULD RESULT IN DELAYS OR UNRELIABLE PRODUCTS AND DAMAGE TO OUR REPUTATION. Our products consist of many different software components and applications, most of which are developed by independent third parties over whom we have limited or no control. While we use rigid engineering standards in testing the products or applications that we integrate in our products, we cannot guarantee that we have selected or will select in the future the most reliable components available in the market or that we will successfully integrate the many components of our products. In addition, if any of these third-party products are not reliable or available, we may have to develop them ourselves, which would significantly increase our development expenses and delay our time to market. Our customers could be dissatisfied if any of these products fail to work as designed or if adequate support is not provided, which could damage our reputation and lead to potential litigation. 8 13 BUSINESSES MAY NOT ADOPT OUR LINUX PRODUCTS DUE TO THE SCARCITY OF SOFTWARE APPLICATIONS FOR LINUX OPERATING SYSTEMS AND THE LACK OF LINUX STANDARDS FOR THESE APPLICATIONS. Businesses will not adopt our Linux products if sufficient Linux applications are not available to meet their needs. For example, widely-used software products such as Microsoft Office, Intuit Quicken, Adobe and others have not been developed for use with Linux operating systems, such as OpenLinux. In addition, no standards for compatibility among the several versions of Linux currently in the market have been widely adopted. Many software developers will be unlikely to develop products for Linux if they will not be compatible with the majority of Linux versions. If these developers decide not to develop applications that meet the needs of eBusiness, demand for our products and services may decline or fail to grow. THE MARKET FOR LINUX BUSINESS SOLUTIONS MAY NOT GROW AS WE ANTICIPATE. Our strategy for marketing Linux solutions to businesses depends in part upon our belief that many businesses will follow a trend away from the use of networked computers linked by centralized servers and move toward the use of distributed applications through thin appliance servers, or specialized servers, Internet access devices and application service providers. We also are relying on electronic solution providers making these technologies available on Linux and on Linux then becoming a desirable operating system under these circumstances. We also plan to market our Linux products for use on these specialized servers and Internet access devices, which we believe will become widely used for eBusiness. However, if businesses 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 ours may not materialize. RISKS RELATED TO LEGAL UNCERTAINTY WE COULD BE PREVENTED FROM SELLING OR DEVELOPING OUR PRODUCTS IF THE GNU GENERAL PUBLIC LICENSE AND SIMILAR LICENSES UNDER WHICH OUR PRODUCTS ARE DEVELOPED AND LICENSED ARE NOT ENFORCEABLE. The Linux kernel and certain other components of our products have been developed and licensed under the GNU General Public License and similar licenses. These licenses state that any program licensed under them may be liberally copied, used, modified and distributed freely, so long as all modifications are also freely made available and licensed under the same conditions. We know of no instance in which a party has challenged the validity of these licenses or in which these licenses have been interpreted in a legal proceeding. To date, all compliance with these licenses has been voluntary. It is possible that a court would hold one or more of these licenses to be unenforceable in the event that someone were to file a claim asserting proprietary rights in a program developed and distributed under 9 14 them. Any ruling by a court that these licenses are not enforceable, or that Linux operating systems, or significant portions of them, may not be liberally copied, modified or distributed freely, would have the effect of preventing us from selling or developing our products, unless we are able to negotiate a license to use the software or replace the affected portions. These licenses could be expensive, which could impair our ability to competitively price our products. WE ARE VULNERABLE TO CLAIMS THAT OUR PRODUCTS INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS, PARTICULARLY BECAUSE OUR PRODUCTS ARE COMPRISED OF MANY DISTINCT SOFTWARE COMPONENTS DEVELOPED BY THOUSANDS OF INDEPENDENT PARTIES. We may be exposed to future litigation based on claims that our products infringe the intellectual property rights of others. This risk is exacerbated by the fact that most of the code in our products is developed by independent parties over whom we exercise no supervision or control and who, themselves, might not have the same financial resources as us to pay damages to a successful litigant. Claims of infringement could require us to re-engineer our products or seek to obtain licenses from third parties in order to continue offering our products. In addition, an adverse legal decision affecting our intellectual property, or the use of significant resources to defend against this type of claim, could place a significant strain on our financial resources and harm our reputation. FAILURE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS WOULD RESULT IN SIGNIFICANT HARM TO OUR BUSINESS. While much of the code for our products is open source, our success depends significantly on our ability to protect our trademarks, trade secrets and certain proprietary technology contained in our products. We rely on a combination of copyright and trademark laws, and on trade secrets and confidentiality provisions and other contractual provisions to protect our proprietary rights. These measures afford only limited protection. Some trademarks that have been registered in the United States have been licensed to us, and we have other trademark applications pending in the United States. Effective trademark protection may not be available in every country in which we intend to offer our products and services. Our means of protecting our proprietary rights in the United States or abroad may not be adequate and competitors may independently develop similar technologies. Our future success will depend in part on our ability to protect our proprietary rights. Despite our efforts to protect our proprietary rights and technologies unauthorized parties may attempt to copy aspects of our products or to obtain and use trade secrets or other information that we regard as proprietary. Legal proceedings to enforce our intellectual property rights could be burdensome and expensive and could involve a high degree of uncertainty. These legal proceedings may also divert management's attention from growing our business. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. If we do not enforce and protect our intellectual property, our business may suffer substantial harm. BECAUSE WE DO NOT OWN THE LINUX TRADEMARK, WE MAY BE PROHIBITED FROM USING IT IN CONNECTION WITH OUR PRODUCTS, WHICH COULD DAMAGE OUR BRAND AWARENESS. We use the term, Linux, as part of the name of several of our products, including OpenLinux. We also use Linux in our advertising and marketing materials and in our product documentation and for other commercial uses. However, we have no ownership of or contractual right to use the Linux trademark. In September 1999, our trademark applications in the United States for "OpenLinux(TM)" and "Linux for Business(TM)" were rejected. If the "Linux" trademark is invalidated through a legal action, or if we are prohibited from using it, our reputation and brand awareness could suffer. Also, because we do not control the use of this trademark, use by others could lead to confusion about the source, quality, reputation and dependability of Linux in general, which could negatively affect the market for Linux products. WE MAY BE LIABLE AS A RESULT OF INFORMATION RETRIEVED FROM OR TRANSMITTED OVER THE INTERNET. We may be sued for defamation, civil rights infringement, negligence, copyright or trademark infringement, personal injury, product liability or other legal claims relating to information that is 10 15 published or made available on our Web site and the other sites linked to it. These types of claims have been brought, sometimes successfully, against providers of online services in the past. We could also be sued for the content that is accessible from our Web site and through links to other Internet sites or through content and materials that may be posted by members in chat rooms or on bulletin boards. Our insurance does not specifically provide for coverage of these types of claims and therefore may not adequately protect us against these types of claims. In addition, we could incur significant costs in investigating and defending such claims, even if we ultimately are not liable. If any of these events occur, our revenues and the value of your investment could be materially adversely affected. OTHER RISKS RELATING TO OUR BUSINESS WE MUST ACHIEVE RAPID MARKET PENETRATION OF OUR PRODUCTS IN ORDER TO COMPETE SUCCESSFULLY. Because the Linux and eBusiness markets are new and emerging, companies that are early in providing products and solutions for these markets will have an advantage in building awareness and consumer loyalty. Therefore, in order for us to successfully market our products on a wide-scale basis, we must rapidly achieve market penetration. For example, if we are unable to demonstrate the viability of our products through rapid growth: - software developers will be less likely to develop applications for our products; - we will be unable to achieve economies of scale; - we will be less able to negotiate favorable terms with distributors and other partners; and - customers will be less likely to devote resources to purchasing and implementing our products if they are not seen as an industry standard. We may lack the economic and managerial resources necessary to promote this growth. Also, the fact that we rely almost entirely on the success of a few principal products affects our ability to penetrate diversified markets. In addition, while we believe our process of self-hosting results in superior products, it requires time and resources that may delay new product releases and upgrades. These delays could affect our ability to take advantage of market opportunities on a timely basis. OUR BRAND MAY NOT ACHIEVE THE BROAD RECOGNITION NECESSARY TO SUCCEED. We believe that broad recognition and a favorable audience perception of the Caldera Systems brand will be essential to our success. If our brand does not achieve broad recognition as the leading provider of Linux solutions for eBusiness, our success will be limited. We intend to build brand recognition through advertising our products and services and by marketing www.calderasystems.com as a premier online resource for eBusiness solutions. During the fiscal year ended October 31, 1999, we spent approximately $1.2 million for advertising. We expect to significantly increase our advertising expenses in future periods as we build the Caldera Systems brand and awareness of our products and services. We may lack the resources necessary to accomplish these initiatives. Even if the resources are available, we cannot be certain that our brand enhancement strategy will deliver the brand recognition and favorable audience perception that we seek. If our strategy is unsuccessful, these expenses may never be recovered and we may be unable to increase future revenues. Even if we achieve greater recognition of our brand, competitors with greater resources or a more recognizable brand could reduce our market share of the emerging Linux market, as well as the broader market for the provision of eBusiness solutions. OUR STRATEGY TO PROVIDE SOLUTIONS FOR EBUSINESS DEPENDS UPON OUR ABILITY TO SUCCESSFULLY INTRODUCE PRODUCTS TAILORED FOR EBUSINESS. To date practically all of our sales revenue has come from retail sales of OpenLinux, which is designed to assist the first-time Linux user who may be familiar with a Windows, desktop environment. However, our business model is targeted toward using Linux solutions to facilitate eBusiness. In order for 11 16 our strategy of providing Linux solutions for eBusiness to be successful, we must provide products that meet the needs of solution providers and their eBusiness customers. We recently developed our server product, OpenLinux eServer, and plan to release our eBusiness framework product, eBuilder, in the first half of 2000. These new products, which are our primary eBusiness products, may not be adopted by solution providers and their customers for any number of reasons, including lack of customer awareness of our company and our products, malfunction of the products and failure to meet needs of eBusiness. If our eBusiness products are not successful, we will fail to execute our strategy and our sales may not grow. WE MAY NOT BE SUCCESSFUL IN DEVELOPING AND MARKETING OUR EDUCATION AND TRAINING SERVICES, IN WHICH CASE OUR REVENUE AND BRAND AWARENESS COULD SUFFER. We depend upon our education and training services as a source of revenue and to broaden awareness of Linux and our products. Our ability to successfully develop and market our Linux courses could be adversely affected if we do not: - develop and maintain relationships with our Authorized Linux Education Centers; - develop a sufficient variety of course selections; - adequately update the content of our courses; - competitively price our course offerings; and - translate and localize our courses for use internationally. In order to accomplish these objectives, we plan to significantly increase investment of resources for the expansion of our education and training services. If we are unsuccessful in developing and marketing our Linux courses, we may be unable to recoup our investments in these services. THE NETWORK SOLUTIONS AND OPERATING SYSTEMS INDUSTRIES ARE INTENSELY COMPETITIVE AND WE MAY BE UNABLE TO COMPETE EFFECTIVELY WITH PROVIDERS OF SOLUTIONS FOR MODULAR COMPUTING, PROVIDERS OF LINUX OPERATING SYSTEMS AND OTHER MORE ESTABLISHED OPERATING SYSTEMS. We face direct competition in the area of software for specialized servers or Internet access devices from Berkeley Software Design, Inc., Microsoft and a joint venture involving Compaq and The Santa Cruz Operation. Cygnus Solutions, VA Linux and Wind River provide similar solutions embedded into their hardware offerings. 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. We also compete with other providers of Linux operating systems, particularly, Corel, MacMillan, Red Hat, SuSE and TurboLinux. Many of these competitors, such as Red Hat, have more established customer bases and stronger brand names than we do. Also, due to the open source nature of Linux, anyone can freely download Linux and many Linux applications and modify and re-distribute them with few restrictions. For example, solution providers upon whom we depend for the distribution of our eBusiness products could instead create their own Linux solutions to provide to their customers. Also, established companies and other institutions could easily produce competing versions of Linux. In particular, distributors of UNIX operating systems could leverage their existing service organizations, due to the fact that Linux and UNIX operating systems share many common features. Also, Cygnus Solutions and Sun Microsystems have indicated an interest in creating Linux operating systems and related products. These companies have more significant resources, stronger brand awareness and larger customer bases than we do and could quickly achieve significant market share. We compete with providers of other, more established operating systems. AT&T, Compaq, Hewlett-Packard, IBM, Microsoft, Novell, Olivetti, Sun Microsystems, The Santa Cruz Operation and Unisys are each providers of competing operating systems, which, in most cases, are more established among business users. 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 12 17 manufacturers with which we have agreements. Many of these companies have larger and more experienced service organizations than we do. OUR COMPETITIVE POSITION COULD DECLINE IF WE ARE UNABLE TO ACQUIRE BUSINESSES OR TECHNOLOGIES THAT ARE STRATEGIC FOR OUR SUCCESS OR IF WE FAIL TO SUCCESSFULLY INTEGRATE ANY ACQUISITIONS WITH OUR CURRENT BUSINESS. If appropriate opportunities arise, we intend to acquire businesses, technologies, services or products that we believe are strategic for our success. The market for eBusiness solutions such as Linux products is new and is rapidly evolving and our competitive position could decline if we are unable to identify and acquire businesses or technologies that are strategic for our success in this market. We do not have any present agreement or understanding relating to any material acquisition or investment. We have not made a significant acquisition or investment to date. If we acquire businesses, products, services or technologies, we could have difficulty in assimilating them into our operations. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition, effecting acquisitions could require us to use a significant amount of cash. Furthermore, we may have to issue equity or equity-linked securities to pay for future acquisitions, and any of these issuances could be dilutive to existing and future stockholders. In addition, acquisitions and investments may have negative effects on our reported results of operations due to acquisition-related charges and amortization of acquired technology and other intangibles. Any of these acquisition-related risks or costs could harm our business, financial condition and operating results. OUR SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY MANAGE GROWTH. We have recently experienced a period of rapid growth. In order to execute our business plan, we must continue to grow significantly. We had 28 employees when we began operations as a separate legal entity in September 1998. As of December 31, 1999, the number had increased to 108. We expect that the number of our employees will continue to increase for the foreseeable future. Our planned growth entails risk. If we do not expand our operations in an efficient manner, our expenses could grow disproportionately to revenues or our revenues could decline or grow more slowly than expected, either of which could negatively affect the value of your investment. Our current and anticipated future growth, combined with the requirements we will face as a public company, will place a significant strain on our management, systems and resources. Our key personnel have limited experience managing this type of growth. We also need to improve our financial and managerial controls and reporting systems and procedures and to continue to expand and maintain close coordination among our technical, accounting, finance and sales and marketing organizations. If we do not succeed in these efforts, it could reduce our revenues and the value of your investment. IF WE DO NOT SUCCESSFULLY IMPLEMENT OUR INTERNATIONAL EXPANSION, OUR BUSINESS MAY NOT GROW AS ANTICIPATED AND SUBSTANTIAL RESOURCES MAY BE DRAINED. A key component of our growth strategy is to expand our presence in foreign markets. It will be costly to establish international facilities and operations, promote our 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, we may not be successful in marketing and distributing our products because we have little experience in these markets. Some of the factors that may impact our ability to initiate and maintain successful operations in foreign markets include: - hiring and successful supervision of employees in foreign jurisdictions; - language and cultural differences; 13 18 - the inability to find necessary partners for the successful distribution of our products in foreign jurisdictions; - varying technology standards and capabilities; - compliance with foreign laws with which we are not familiar; - issues relating to uncertainties of laws and enforcement relating to the protection of intellectual property; - differences in reliability of telecommunications infrastructure and Internet access; - export controls that may prevent us from shipping our products into and from some markets; - potentially adverse tax consequences; - restrictions against repatriation of earnings from our foreign operations; - unexpected changes in trading policies, regulatory requirements and exchange rates; and - general political and economic trends. If we are unable to profitably operate in foreign markets, our business may not grow as anticipated, substantial resources could be drained and our stock price could suffer. WE COULD LOSE REVENUES AS A RESULT OF SOFTWARE ERRORS OR DEFECTS. Software programs frequently contain errors or defects, especially when first introduced or when new versions are released. We could, in the future, lose revenue as a result of errors or defects in our software products. We cannot assure you that errors will not be found in new products or releases. While we test our products prior to release, the fact that most of the components of our software offerings are developed by independent parties over whom we exercise no supervision or control 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 our reputation or increased service costs. OUR CURRENT AND POTENTIAL CUSTOMERS MAY FIND IT DIFFICULT TO HIRE AND TRAIN QUALIFIED EMPLOYEES TO HANDLE INSTALLATION AND IMPLEMENTATION OF OUR PRODUCTS, WHICH COULD NEGATIVELY AFFECT SALES OF OUR PRODUCTS TO NEW CUSTOMERS AND LEAD TO DISSATISFACTION AMONG CURRENT CUSTOMERS. There are limited numbers of individuals that are trained and qualified to manage Linux systems, including OpenLinux and our other products. End users and our distribution partners may lack the resources to hire or train such qualified personnel to install and implement our products, which could lead to dissatisfaction with our product among end users and deter potential end users from purchasing our product. DUE TO THE COMPETITIVE LABOR MARKETS, WE MAY NOT BE ABLE TO RECRUIT AND RETAIN SUFFICIENT QUALIFIED PROFESSIONALS NECESSARY FOR OUR GROWTH. In order to grow as we anticipate, we need to hire significant numbers of professionals to develop and market our products and provide technical support, education and training and other services to our customers. Competition for qualified professionals in the software industry is intense, and we may be unable to recruit and retain sufficient professionals to grow as we anticipate. In addition, because we are not located in a major metropolitan area, many potential candidates may be unwilling to relocate to our headquarters in Orem, Utah. OUR MANAGEMENT TEAM IS NOT COMPLETE AND HAS ONLY RECENTLY BEGUN WORKING TOGETHER. Our business is highly dependent on our ability to acquire necessary members of our management team and on our management team's ability to work together effectively. Several members of our 14 19 management, including our Chief Financial Officer and our Vice President of Sales, have been employed by us for a relatively short period of time. These individuals have not previously worked together as a management team and have had only limited experience managing a rapidly growing company on either a public or private basis. We are also searching for a Chief Technical Officer and a Chief Operating Officer. Our failure to find qualified individuals to fill these positions and the failure of our management team to work together effectively could negatively offset efficient decision-making, product development, sales and marketing efforts and the management of our financial and other resources, which would negatively impact our operating results. LOSS OF ANY OF OUR KEY MANAGEMENT PERSONNEL COULD NEGATIVELY IMPACT OUR BUSINESS. The loss or departure of any of our officers or key employees could harm our ability to implement our business plan and could lower our revenues. Our future success depends to a significant extent on the continued service and coordination of our management team, particularly Ransom H. Love, our President and Chief Executive Officer. We do not maintain key person insurance for any member of our management team. WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING NECESSARY TO EXECUTE OUR BUSINESS STRATEGY. We currently believe that the net proceeds from this offering, together with our current cash and cash equivalents, will be sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. However, we may need to raise additional funds to support more rapid expansion, respond to competitive pressures, acquire complementary businesses or technologies or respond to unanticipated requirements. We cannot assure you that additional funding will be available to us in amounts or on terms acceptable to us. If sufficient funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of acquisition opportunities, develop or enhance our services or products, or otherwise respond to competitive pressures would be significantly limited. IF WE FAIL TO MANAGE TECHNOLOGICAL CHANGE EFFECTIVELY, DEMAND FOR OUR PRODUCTS AND SERVICES WILL SUFFER. The market for eBusiness solutions is in an early stage of development and is characterized by rapidly changing technology, evolving industry standards, frequent new service and product introductions and changes in customer demands. Our future success will depend to a substantial degree on our ability to offer products and services that incorporate leading technology and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. You should be aware that: - our technology or systems may become obsolete upon the introduction of alternative technologies; - the technological life cycles of our products have been historically short and are difficult to accurately estimate; - we may not have sufficient resources to develop or acquire new technologies or to introduce new services capable of competing with future technologies or service offerings; and - the price of the products and services we provide may decline as rapidly as, or more rapidly than, the cost of any competitive alternatives. We may not be able to effectively respond to the technological requirements of the changing market for eBusiness solutions. To the extent we determine that new technologies and equipment are required to remain competitive, the development, acquisition and implementation of those technologies and equipment are likely to continue to require significant capital investment by us. We may not have sufficient capital for this purpose in the future, and even if it is available, investments in new technologies may not result in commercially viable technological processes and there may not be commercial applications for those technologies. If we do not develop and introduce new products and services and achieve market acceptance in a timely manner, demand for our products and services will drop and our business will suffer. 15 20 YEAR 2000 COMPLIANCE ISSUES PRESENT TECHNOLOGICAL RISKS, COULD CAUSE DISRUPTION TO OUR BUSINESS AND COULD HARM SALES OF OUR PRODUCTS. Concern over, and problems associated with, the impact of the occurrence of the Year 2000 on our software products, internal systems, customers, suppliers and the overall software industry could affect our future operating results in several ways. Errors or defects that affect the operation of our software could result in: - delay or loss of revenue; - cancellation of customer contracts; - diversion of development resources; - damage to our reputation; - increased service and warranty costs; and - litigation costs. We engaged an affiliated third party to test our OpenLinux 2.2/2.3 product. This testing was completed in the third quarter of 1999 and did not result in any findings of Year 2000 problems that were not remedied or documented. We are continuing to evaluate the Year 2000 compliance of our products currently under development. Some of our customers are still using older discontinued products of ours which have not been tested for Y2K readiness. We may be required to support and correct any failed systems as a result of any problems that may arise in connection with these older products. Also, we bundle third-party applications and software components with our products. It is possible that some of our customers may experience difficulties related to third-party software which may affect the performance of our products and may lead to adverse results such as additional support calls or return of products thus diverting resources from pursuing our business strategy which could materially adversely affect our business. In addition, we rely on third parties such as suppliers of energy and other utilities, financial institutions, transportation providers, communications vendors, including value added network vendors and other significant vendors. We have received Year 2000 readiness statements from some but not all of these third-party suppliers. The failure of any of these third parties to achieve Year 2000 compliance could have a material impact on our business, operating results and financial condition. To date, Year 2000 problems have had a minimal effect on our business. However, we may not have identified and remediated all significant Year 2000 problems. Further remediation efforts may involve significant time and expense, and unremediated problems may have a material adverse effect on our business. Also, we sell our products to companies in a variety of industries, each of which is experiencing different Year 2000 issues. Customer difficulties with Year 2000 issues might require us to devote additional resources to resolve underlying problems. Finally, although we have not been made a party to any litigation or arbitration proceeding to date involving our products or services and related to Year 2000 compliance issues, we may in the future be required to defend our products or services in such proceedings, or to negotiate resolutions of claims based on Year 2000 issues. The costs of defending and resolving Year 2000-related disputes, regardless of the merits of such disputes, and any liability for Year 2000-related damages, including consequential damages, would negatively affect our business, results of operations, financial condition and liquidity, perhaps materially. RISKS RELATED TO OUR INTERNET STRATEGY IF WE FAIL TO PROMOTE AND ENHANCE OUR WEB SITE EFFECTIVELY, BROAD MARKET ACCEPTANCE OF OUR PRODUCTS AND SERVICES COULD BE IMPAIRED. Our strategy for promoting and enhancing the www.calderasystems.com Web site is critical to the development of a Linux community of education, support and software applications providers. This community is in turn critical for broad market acceptance of our products and services. Our success in 16 21 promoting and enhancing our Web site will depend on our ability to provide high quality content, features and functionality. If we fail to promote our Web site successfully or if visitors to our Web site do not perceive our services to be useful, current or of high quality, market acceptance of our products and services could be significantly impaired. THE GROWTH OF OUR BUSINESS WILL BE DIMINISHED IF THE INTERNET IS NOT ACCEPTED AS A MEDIUM FOR COMMERCE AND BUSINESS NETWORKING APPLICATIONS. An important part of our business strategy is to develop and market our products for the support of secure business networks hosted on the Internet. In addition, we plan to sell our products and provide a significant amount of technical support and education via our Web site. If the Internet is not accepted as a medium for commerce and business networking applications, demand for our products and services will be diminished. A number of factors may inhibit Internet usage, including: - inadequate network infrastructure; - lack of knowledge and training on Internet use and benefits; - consumer concerns for Internet privacy and security; - lack of availability of cost-effective, high-speed service; - 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. A DISASTER OR MALFUNCTION THAT DISABLES OUR COMPUTER SYSTEMS COULD HARM OUR WEB SITE AND NEGATIVELY AFFECT OUR BRAND. The continuing and uninterrupted performance of our computer systems is critical to our success. Our customers and other members of the eBusiness community who access our Web site for technical support, news, educational resources and business solutions, may become dissatisfied by any systems disruption or failure that interrupts our ability to provide our services and content to them. Substantial or repeated system disruptions or failures would reduce our ability to provide adequate customer service and undermine our reputation in the eBusiness community. Substantially all of our communications hardware and computer hardware operations are located in our facilities in Orem, Utah. Our Web site is hosted in Salt Lake City, Utah. Fire, earthquakes, power loss, telecommunications failures, break-ins and similar events could negatively affect the operation of our Web site. Computer viruses, electronic break-ins or other similar disruptive problems could also harm our Web site. Our Web site in the past has experienced, and could experience in the future, slower response times or other problems for a variety of reasons, including delays or malfunctions as a result of third-party distributors on which we rely. Any of these occurrences and any resulting dissatisfaction among our customers and members of the eBusiness community could negatively affect the Caldera Systems brand image. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems. We do not presently have a formal disaster recovery plan. RISKS RELATED TO THIS OFFERING A SINGLE STOCKHOLDER WILL BE ABLE TO EXERT SIGNIFICANT CONTROL ON CALDERA SYSTEMS, INC. After this offering, Raymond J. Noorda will have indirect ownership of approximately % of our outstanding common stock. As a result, Mr. Noorda will be able to determine the outcome of actions that 17 22 require stockholder approval. For example, Mr. Noorda could elect all of our directors, 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. FUTURE SALES OF OUR COMMON STOCK AFTER THIS OFFERING MAY NEGATIVELY AFFECT OUR STOCK PRICE. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market following the offering, or the perception that such sales could occur. Following this offering, we will have a large number of shares of common stock outstanding and available for resale beginning at various points in time in the future. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. The shares of our common stock currently outstanding will become eligible for sale without registration pursuant to Rule 144 under the Securities Act, subject to certain conditions of Rule 144. Certain holders of our common stock also have certain demand and piggyback registration rights enabling them to register their shares under the Securities Act for sale. In connection with this offering, our senior officers and directors and certain of our common and preferred stockholders and option holders, who hold or will hold a total of shares of common stock after the offering, have agreed, subject to certain exceptions, not to sell their shares for 180 days after the date of this prospectus without the consent of the underwriters. CERTAIN PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF CALDERA SYSTEMS, INC. MORE DIFFICULT, WHICH COULD LOWER THE MARKET PRICE OF THE COMMON STOCK. Our corporate documents and Section 203 of the Delaware General Corporation Law could discourage, delay or prevent a third party or a significant stockholder from acquiring control of Caldera Systems, Inc. In addition, provisions of our certificate of incorporation may have the effect of discouraging, delaying or preventing a merger, tender offer or proxy contest involving Caldera Systems, Inc. Any of these anti-takeover provisions could lower the market price of the common stock and could deprive our stockholders of the opportunity to receive a premium for their common stock that they might otherwise receive from the sale of Caldera Systems, Inc. THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK, OUR STOCK PRICE MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS AND ANY VOLATILITY IN OUR STOCK PRICE COULD RESULT IN CLAIMS AGAINST US. Prior to this offering, investors could not buy or sell our common stock publicly. An active public market for our common stock may not develop or be sustained after the offering. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters. The market price of our common stock may decline below the initial public offering price after this offering. Fluctuations in market price and volume are particularly common among securities of Internet-related and other technology companies. The market price of our common stock may fluctuate significantly in response to the following factors, some of which are beyond our control: - variations in quarterly operating results; - changes in market valuations of Internet-related and other technology companies; - our or our competitors' announcements of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; - failure to complete significant advertising and merchandise sales; - additions or departures of key personnel; - active "day" trading in our stock; - future sales of common stock; and - changes in financial estimates by securities analysts. 18 23 In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their common stock. In the future, we may be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources. WE MAY SPEND THE NET PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH YOU MAY NOT AGREE. The net proceeds of this offering are not allocated for specific uses. Our management will have broad discretion to spend the net proceeds of this offering in ways with which investors may not agree. The failure of our management to apply these funds effectively could result in unfavorable returns, which could cause the price of our common stock to decline. YOU WILL INCUR SUBSTANTIAL AND IMMEDIATE DILUTION. You will incur substantial and immediate dilution in the net tangible book value of $ per share, assuming an initial public offering price of $ per share. Net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of common stock then outstanding. To the extent that currently outstanding options are exercised or converted, there will be further dilution in your shares. See "Dilution." 19 24 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus constitute forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "might," "could," "will," "should," "expect," "plan," "intend," "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. USE OF PROCEEDS We estimate that we will receive net proceeds from the sale of the shares of common stock in this offering of $ million, assuming an initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses. If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds will be $ million. We intend to use the net proceeds of this offering for general corporate purposes, including sales and marketing activities, product development and support, and hiring of additional personnel. We may also use a portion of net proceeds to acquire or invest in complementary businesses, technologies, services or products, although we have no present agreement or understanding with respect to any material acquisition or investment. We have not determined the amount of net proceeds to be used specifically for each of the foregoing purposes. Accordingly, our management will have broad discretion to spend flexibly in applying the net proceeds of this offering. Pending their use, we intend to invest the net proceeds of this offering in interest-bearing securities. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain any future earnings for the expansion and operation of our business. 20 25 CAPITALIZATION The following table sets forth our capitalization as of October 31, 1999: - on an actual basis; - on a pro forma basis to reflect: - our issuance in December 1999 of 106,356 shares of our common stock in exchange for 159 shares or approximately 2 percent of the outstanding common stock of Troll Tech AS, a strategic technology partner of ours; - our sale in December 1999 and January 2000 of 5,000,000 shares of Series B convertible preferred stock for net proceeds of approximately $29.5 million and our recording of a beneficial conversion feature valued at $10.0 million based on the difference between the conversion price and the estimated fair market value of our common stock at the time of the sale; - our purchase in January 2000 of 592,592 shares of common stock or approximately 4 percent of the outstanding common and preferred stock of Evergreen Internet, Inc., a strategic technology partner of ours, for $2.0 million and our issuance to Evergreen Internet, Inc. of 200,000 shares of our common stock; - our issuance in January 2000 of 1,250,000 shares of our common stock in exchange for 3,238,437 shares or approximately 17 percent of the outstanding common stock of Lineo, Inc., a strategic technology partner of ours; and - the conversion of our Series A convertible preferred stock and Series B convertible preferred stock into our common stock upon closing of this offering. - on a pro forma as adjusted basis to reflect the pro forma adjustments, as well as the sale of shares of common stock by us in this offering at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and offering expenses payable by us.
AS OF OCTOBER 31, 1999 ------------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Current portion of long-term debt.................... $ 3,698 $ 3,698 $ 3,698 ============ ============ ============ Long-term lease obligations, less current portion.... $ 5,762 $ 5,762 $ 5,762 ------------ ------------ ------------ Shareholders' Equity: Preferred stock, $0.001 par value; 25,000,000 shares authorized (actual, pro forma and pro forma as adjusted) -- Series A convertible preferred stock, 6,596,146 shares designated, 6,596,146 shares outstanding (actual), no shares outstanding (pro forma and pro forma as adjusted)......... 6,596 -- -- Series B convertible preferred stock, 5,000,000 shares designated, no shares outstanding (actual, pro forma and pro forma as adjusted)..................................... -- -- -- Common stock, $0.001 par value; 75,000,000 shares authorized, 20,011,183 shares outstanding (actual), 33,163,685 shares outstanding (pro forma), and shares outstanding (pro forma as adjusted).............................. 20,011 33,163
21 26
AS OF OCTOBER 31, 1999 ------------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Additional paid-in capital........................... 16,160,312 68,104,604 Stock subscription receivable...................... (1,500,000) (1,500,000) (1,500,000) Deferred compensation.............................. (2,734,934) (2,734,934) (2,734,934) Accumulated comprehensive loss..................... (4,365) (4,365) (4,365) Accumulated deficit................................ (10,431,590) (20,431,590) (20,431,590) ------------ ------------ ------------ Total Stockholders' equity.................... 1,516,030 43,466,878 ------------ ------------ ------------ TOTAL CAPITALIZATION.......................... $ 1,521,792 $ 43,472,640 ============ ============ ============
- ------------------------- Note: The information in this table does not include the following: - 2,964,240 shares of common stock issuable upon exercise of outstanding options as of October 31, 1999 with a weighted average price of $1.04 per share, of which options to purchase 752,206 were exercisable at that date; and - 2,035,738 shares of common stock reserved for issuance under our 1998 Stock Option Plan as of October 31, 1999. On December 1, 1999, the Company adopted the 1999 Omnibus Stock Incentive Plan as a successor equity incentive program to the 1998 plan. The 1999 plan provided for an additional 1,700,000 shares of common stock to be reserved for issuance. Subsequent to October 31, 1999, the Company has granted 2,369,388 additional options to purchase shares of common stock with a weighted average price of $5.66 per share. You should read this table together with our financial statements and the related notes, "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Management -- Director Compensation," "Management -- Employee Benefit Plans" and "Description of Capital Stock" included elsewhere in this prospectus. 22 27 DILUTION Our pro forma net tangible book value as of October 31, 1999 was approximately $43.4 million, or $1.31 per share of common stock. Pro forma net tangible book value per share is determined by dividing the amount of our pro forma tangible assets less total liabilities by the pro forma number of shares of common stock outstanding at that date. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to the issuance and sale of the shares of common stock offered by us at an assumed initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the estimated net proceeds from this offering, our pro forma as adjusted net tangible book value as of October 31, 1999 would have been $ million or $ per share. This represents an immediate increase in pro forma net tangible book value to our existing stockholders of $ per share and an immediate dilution to purchasers in this offering of $ per share. If the initial public offering price is higher or lower, the dilution to purchasers in this offering will be greater or less, respectively. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ Pro forma net tangible book value per share at October 31, 1999................................................... $1.31 Increase in pro forma net tangible book value per share attributable to this offering.......................... ----- Pro forma as adjusted net tangible book value per share after this offering Dilution per share to new investors......................... $ ======
Assuming the exercise in full of the underwriters' over-allotment option, our pro forma as adjusted net tangible book value at October 31, 1999 would have been approximately $ per share, representing an immediate increase in pro forma net tangible book value of $ per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $ per share to purchasers in this offering. The following table summarizes, on a pro forma basis as of October 31, 1999, the differences between the number of shares of common stock purchased from us, the aggregate cash consideration paid to us and the average price per share paid by existing stockholders and new investors purchasing shares of common stock in this offering. The calculation below is based on an assumed initial public offering price of $ per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:
SHARES PURCHASED TOTAL CONSIDERATION -------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders.................. 33,163,685 % $68,137,767 % $2.05 New investors.......................... ---------- ----- ----------- ------ Total........................ 100.0% $100.0% ========== ===== =========== ======
This discussion and table assumes no exercise of any stock options outstanding as of October 31, 1999. As of October 31, 1999, there were options outstanding to purchase a total of 2,964,240 shares of common stock with a weighted average exercise price of $1.04 per share. Subsequent to October 31, 1999 the Company granted 2,369,388 additional options to purchase shares of common stock with a weighted average price of $5.66 per share. To the extent that any of these options are exercised, there will be further dilution to new investors. Please see "Capitalization." 23 28 SELECTED FINANCIAL DATA The tables that follow present portions of our financial statements and are not complete. You should read the selected financial data set forth below in conjunction with our financial statements and the related notes included elsewhere in this prospectus and in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. The selected statement of operations data for the years ended October 31, 1997, 1998 and 1999 and the selected balance sheet data as of October 31, 1998 and 1999 are derived from, and are qualified by reference to, the audited financial statements and related notes appearing elsewhere in this prospectus. The selected statement of operations data for the years ended October 31, 1995 and 1996 and the selected balance sheet data as of October 31, 1995, 1996 and 1997 are derived from unaudited financial statements not appearing in this prospectus. We began operations in 1994 as Caldera, Inc. In July 1996, Caldera, Inc. acquired an additional business line 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 and, effective September 1, 1998, 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 our financial statements we have segregated or "carved-out" the operations related to the Linux business from the historical financial statements of Caldera, Inc. Accordingly, our consolidated financial statements in this prospectus and the selected financial data present our financial condition and results of operations as if Caldera Systems, Inc. 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 Systems, Inc. existed as a separate legal entity and any historical results are not necessarily indicative of results that may be expected for any future period. 24 29
YEAR ENDED OCTOBER 31, ----------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- ------- ------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue: Software and related products.................. $ -- $ 1,108 $ 1,117 $ 1,057 $ 2,773 Services....................................... -- -- -- -- 277 ------- ------- ------- ------- ------- Total revenue............................... -- 1,108 1,117 1,057 3,050 ------- ------- ------- ------- ------- Cost of revenue: Software and related products.................. -- 880 1,142 1,017 2,388 Services....................................... -- -- -- -- 538 Write-off of prepaid royalties................. -- -- -- 1,381 -- ------- ------- ------- ------- ------- Total cost of revenue....................... -- 880 1,142 2,398 2,926 ------- ------- ------- ------- ------- Gross margin (deficit)........................... -- 228 (25) (1,341) 124 ------- ------- ------- ------- ------- Operating expenses: Sales and marketing............................ 179 1,339 4,620 2,224 4,768 Research and development....................... 507 826 2,136 1,489 2,302 General and administrative..................... 673 712 797 1,799 1,748 Amortization of deferred compensation.......... -- -- -- -- 409 ------- ------- ------- ------- ------- Total operating expenses.................... 1,359 2,877 7,553 5,512 9,227 ------- ------- ------- ------- ------- Loss from operations............................. (1,359) (2,649) (7,578) (6,853) (9,103) ------- ------- ------- ------- ------- Other income (expense): Interest expense............................... (1) (133) (593) (1,081) (226) Other income (expense)......................... 10 25 23 5 (3) ------- ------- ------- ------- ------- Other income (expense), net................. 9 (108) (570) (1,076) (229) ------- ------- ------- ------- ------- Loss before income taxes......................... (1,350) (2,757) (8,148) (7,929) (9,332) Provision for income taxes....................... -- -- -- (34) (35) ------- ------- ------- ------- ------- Net loss......................................... $(1,350) $(2,757) $(8,148) $(7,963) $(9,367) ======= ======= ======= ======= ======= Basic and diluted net loss per common share...... $ (0.11) $ (0.23) $ (0.68) $ (0.66) $ (0.67) ======= ======= ======= ======= ======= Basic and diluted weighted average common shares outstanding.................................... 12,033 12,033 12,033 12,033 13,882 ======= ======= ======= ======= ======= Basic and diluted pro forma net loss per common share (unaudited).............................. $ (0.51) ======= Basic and diluted pro forma weighted average common shares outstanding (unaudited).......... 18,458 =======
AS OF OCTOBER 31, ------------------------------------------------------- 1995 1996 1997 1998 1999 ----------- ----------- ----------- ---- ------ (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS) BALANCE SHEET DATA: Cash........................................... $ 33 $ 207 $ 398 $ 76 $ 122 Working capital (deficit)...................... (32) (122) 1,157 (28) 678 Total assets................................... 407 1,639 3,915 872 3,714 Long-term liabilities.......................... -- -- -- -- 6 Caldera, Inc.'s equity in carved-out operations................................... 104 576 2,163 -- -- Total stockholders' equity..................... -- -- -- 391 1,516
25 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto, included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" and elsewhere in this prospectus. OVERVIEW Caldera Systems, Inc. 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 our OpenLinux technology received many awards and recognitions, including Internetweek's "Best of the Best," The Linux Show's "Best Distribution of Millennium," Linux Journal's Product of the Year award at Comdex and Network Computer'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, Frank Kasper & Associates, Gates/Arrow, IBM, Ingram Micro, MediaGold, MTI Technology Corporation, Navarre Corporation, Support Net and Tech Data. We began operations in 1994 as Caldera, Inc. 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 and, effective September 1, 1998, 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 our financial statements we have segregated or carved-out the operations related to the Linux business from the historical financial statements of Caldera, Inc. Accordingly, our consolidated financial statements in this prospectus and the following discussion present our financial condition and results of operations as if Caldera Systems, Inc. had existed as a separate legal entity for all periods presented. Substantially all of our revenues since fiscal 1996 have been derived from sales of Linux products and related services. We expect that for the foreseeable future the majority of our revenues will continue to be derived from our OpenLinux product line, while revenues from our service offerings including training, customer support, and consulting will increase as a percentage of revenue. Historically, we have experienced substantial fluctuations in our revenues from period to period relating to the introduction of new products and new versions of our existing products. Upon our announcement of an expected release date for new products or upgrades we often experience a significant decrease in sales of our existing products. Additionally, we often experience the strongest sales for a new product during the first 30 days after its introduction as we fill advance orders from our distribution channels. We began shipping our 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 our internal sales and marketing force. Over time, our business model has evolved such that we now sell primarily through our two-tier distribution channels. We began offering Linux training during fiscal 1999. 26 31 We market our software and related products primarily in North America, Europe, Asia and Australia. Revenues from customers outside the United States were $0 in fiscal 1997, $56,000 in fiscal 1998 and $203,000 in fiscal 1999. We recognize revenues in accordance with the American Institute of Certified Public Accountants, or AICPA, Statement of Position 97-2. Software and related product revenue is recognized upon delivery of the product if collection is probable. We provide certain telephone and e-mail technical support services at no additional charge. The cost of providing the post-contract support services are not significant; accordingly, we accrue the estimated costs of providing the services at the time of revenue recognition. 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. Further implementation guidelines relating to SOP 97-2 and related modifications may result in unanticipated changes in our revenue recognition practices and such changes could affect our future revenues and earnings. Maintenance revenues are recognized ratably over the contract term, typically one year. Revenues from training and consulting services are recognized as such services are performed. Since inception, we have incurred substantial research and development costs and have invested heavily in the expansion of our sales, marketing and professional services organizations to support our long-term growth strategy. As a result of these investments, we have incurred net losses in each fiscal year since inception and, as of October 31, 1999, had incurred total net losses of approximately $29.6 million since inception. We anticipate that our operating expenses will increase substantially for the foreseeable future as we increase the number of people and programs in sales and marketing, product development and professional services. Accordingly, we expect to incur net losses for the foreseeable future. In connection with the grant of stock options to employees during fiscal 1999, we recorded deferred compensation of $3.1 million 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 shareholders' equity and is amortized over the vesting period of the applicable options. We expensed $409,000 of deferred compensation during fiscal 1999. Based on the option grant activity through October 31, 1999, we expect to amortize deferred compensation of $1.4 million in fiscal 2000, $743,000 in fiscal 2001, $396,000 in fiscal 2002 and $162,000 in fiscal 2003. In December 1999 and January 2000, we sold 5.0 million shares of Series B convertible preferred stock at $6.00 per share, resulting in net proceeds of approximately $29.5 million. Each share of Series B convertible preferred stock is 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, we will record a preferred stock dividend in the amount of $10.0 million thereby increasing the net loss applicable to common stockholders. Additionally, in December 1999 and January 2000 we 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 in exchange for 106,356 shares of common stock. These investments will be accounted for under the cost method of accounting. Software and related products revenue is comprised of revenue from the sale of software and other products such as manuals. 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 our costs for production, packaging, fulfillment and shipment of our product offerings. Additionally, royalties paid to third-parties for inclusion of their software products in our product offering are included in these costs. Cost of services revenue represents the employee and related infrastructure costs necessary to provide training, consulting and customer support. 27 32 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 composed 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. We plan to significantly increase our expenditures for sales and marketing, research and development and general and administrative expenses in fiscal 2000. RESULTS OF OPERATIONS The following table sets forth certain statement of operations data as a percentage of total revenues for the years indicated:
YEARS ENDED OCTOBER 31, -------------------------- 1997 1998 1999 ------ ------ ------ Revenue: Software and related products............................. 100.0% 100.0% 90.9% Services.................................................. -- -- 9.1 ------ ------ ------ Total revenue..................................... 100.0 100.0 100.0 ------ ------ ------ Cost of Revenue: Software and related products.......................... 102.3 96.2 78.3 Services............................................... -- -- 17.6 Other.................................................. -- 130.7 -- ------ ------ ------ Total cost of revenue............................. 102.3 226.9 95.9 ------ ------ ------ Gross margin (deficit)...................................... (2.3) (126.9) 4.1 ------ ------ ------ Operating Expenses: Sales and marketing....................................... 413.6 210.4 156.3 Research and development.................................. 191.3 140.8 75.5 General and administrative................................ 71.3 170.2 57.3 Other..................................................... -- -- 13.4 ------ ------ ------ Total operating expenses............................... 676.2 521.4 302.5 ------ ------ ------ Loss from operations........................................ (678.5) (648.3) (298.4) Other expense, net.......................................... (51.1) (101.8) (7.5) ------ ------ ------ Loss before income taxes.................................... (729.6) (750.1) (305.9) Provision for income taxes.................................. -- (3.2) (1.1) ------ ------ ------ Net loss.................................................... (729.6)% (753.3)% (307.0)% ====== ====== ======
FISCAL YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999 Revenue Our revenue was $1.1 million for fiscal 1997, $1.1 million for fiscal 1998 and $3.1 million for fiscal 1999. During fiscal 1997 and fiscal 1998, all of our revenue was derived from our software and related products offerings. 28 33 Software and Related Products. Our software and related products revenue was $1.1 million in fiscal 1997, $1.1 million in fiscal 1998, and $2.8 million in fiscal 1999, representing a decrease of $60,000, or 5%, from fiscal 1997 to fiscal 1998 and a $1.7 million, or 162%, increase from fiscal 1998 to fiscal 1999. The slight decrease in our software and related products revenue from fiscal 1997 to fiscal 1998 was due to a reduction of capital for sales and marketing activities and a diversion of limited resources allocated to our business because of growth of non-related product lines associated with Caldera, Inc. The increase in software and related product revenue from fiscal 1998 to fiscal 1999 was a result of management's expansion of our marketing efforts, as well as the increased market awareness of the Linux operating system. Services. We began to realize service revenue in fiscal 1999. This revenue was $277,000 or 9% of our total revenue in fiscal 1999. Service revenue was mostly derived from sales of training-related offerings and tuition fees. Cost of Revenue Cost of Software and Related Products Revenue. Our cost of software and related products revenue was $1.1 million in fiscal 1997, $1.0 million in fiscal 1998 and $2.4 million in fiscal 1999, representing a $125,000, or 11%, decrease from fiscal 1997 to fiscal 1998 and a $1.4 million, or 135%, increase from fiscal 1998 to fiscal 1999. On a percentage basis of related revenue, cost of software and related products revenue was 102% in fiscal 1997, 96% in fiscal 1998 and 86% of fiscal 1999. The decrease in the cost of revenues percentage from fiscal 1997 to fiscal 1998 and 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. These improvements in fiscal 1999 were partially offset by an increase in inventory obsolescence. The negative gross margin incurred in fiscal 1997 was due to the payment of significant royalties. During fiscal 1997, our product incorporated substantial amounts of proprietary software which has since been eliminated or open sourced. Cost of Services Revenue. We began to realize services revenue in fiscal 1999. Cost of services revenue was $538,000, or 194%, of related revenue during fiscal 1999. The negative margin incurred during fiscal 1999 is due to our hiring of employees and building additional infrastructure in anticipation of future training and support revenues. Write-off of Prepaid Royalties. During fiscal 1996 and 1997, we entered into royalty agreements with a supplier pursuant to which we prepaid royalties of approximately $2.1 million. During fiscal 1998, we asserted that the supplier breached the terms of the royalty agreements and we determined that the remaining prepaid royalties, in the amount of $1.4 million, were impaired and accordingly we wrote off the remaining balance. Operating Expenses Sales and Marketing. Sales and marketing expenses were $4.6 million in fiscal 1997, $2.2 million in fiscal 1998 and $4.8 million in fiscal 1999, representing a decrease of $2.4 million, or 52%, from fiscal 1997 to fiscal 1998 and an increase of $2.5 million, or 114%, from fiscal 1998 to fiscal 1999. Sales and marketing expenses represented 414% of our total revenues in fiscal 1997, 210% of our total revenues in fiscal 1998 and 156% of our total revenues in fiscal 1999. The decrease in amounts expended from fiscal 1997 to fiscal 1998 was due to the reduction in the resources devoted to the Linux business, prior to our reorganization. During fiscal 1999, we expanded our sales and marketing efforts. Research and Development. Research and development expenses were $2.1 million in fiscal 1997, $1.5 million in fiscal 1998 and $2.3 million in fiscal 1999, representing a decrease of $647,000, or 30%, from fiscal 1997 to fiscal 1998 and an increase of $813,000, or 55%, from fiscal 1998 to fiscal 1999. Research and development costs represented 191% of our total revenue in fiscal 1997, 141% of our total 29 34 revenue in fiscal 1998 and 76% of our total revenue in fiscal 1999. The decrease from fiscal 1997 to fiscal 1998 was primarily related to a reduction of capital for research and development activities and a diversion of limited resources allocated to our business because of growth of non-related product lines associated with Caldera, Inc. The increase in research and development expenses from fiscal 1998 to fiscal 1999 was due to an increased investment in the number of software developers, quality assurance personnel and outside contractors to support our product development and testing activities including the development of training courses and technical support offerings. General and Administrative. General and administrative expenses were $797,000 in fiscal 1997, $1.8 million in fiscal 1998, and $1.7 million in fiscal 1999, representing an increase of $1.0 million, or 126%, from fiscal 1997 to fiscal 1998 and a decrease of $51,000, or 3%, from fiscal 1998 to fiscal 1999. General and administrative costs represented 71% of our total revenue in fiscal 1997, 170% of our total revenue in fiscal 1998 and 57% of our total revenue in fiscal 1999. The increase from fiscal 1997 to fiscal 1998 was primarily the result of the significant fees associated with our reorganization in 1998. The increase also reflects the employment of additional administrative, executive, and finance personnel during most of fiscal 1998. General and administrative expenses remained fairly constant from fiscal 1998 to fiscal 1999 as the nonrecurrence of the costs of reorganization was more than offset by the increase in personnel in 1999. Amortization of Deferred Compensation. In connection with the granting of stock options to employees during fiscal 1999, we recorded deferred compensation of $3.1 million. During fiscal 1999, we amortized $409,000 of deferred compensation. We did not record any deferred compensation or amortization during fiscal 1997 and 1998 as no stock options were granted in those years. Other Income (Expense), net Other income (expense), net, which consists principally of interest expense, was $570,000 in fiscal 1997, $1.1 million in fiscal 1998, and $228,000 in fiscal 1999, representing an increase of $506,000, or 89%, from fiscal 1997 to fiscal 1998 and a decrease of $847,000, or 79%, from fiscal 1998 to fiscal 1999. The increase between fiscal 1997 and fiscal 1998 resulted from additional borrowings to fund operating losses. During fiscal 1999, these borrowings were effectively converted to common stock in connection with our incorporation. After our incorporation in fiscal 1998, we entered into a secured convertible promissory note arrangement with our major stockholder. We borrowed amounts during the last portion of fiscal 1998 and during fiscal 1999 under this agreement. These borrowings were converted into common stock through the exercise of the conversion feature in August 1999. Income Taxes For fiscal years 1998 and 1999 our German subsidiary, Caldera Deutschland GmbH, incurred income tax expense of $34,000 and $35,000, respectively. As of October 31, 1999, we had net operating loss carryforwards for federal and state income tax reporting purposes of approximately $10.6 million that expire at various dates from 2018 to 2019. The Internal Revenue Code contains provisions that likely could reduce or limit the availability and utilization of our net operating loss carryforwards. For example, limitations are imposed on the utilization of net operating loss carryforwards if certain ownership changes have taken place or will take place. We had deferred tax assets, including our net operating loss carryforwards and other temporary differences between book and tax deductions, totaling approximately $11.1 million as of October 31, 1999. A valuation allowance in the amount of $11.1 million has been recorded as of October 31, 1999 as a result of uncertainties regarding the realizability of the deferred tax asset balance. LIQUIDITY AND CAPITAL RESOURCES Since our establishment as a separate legal entity in August 1998, we have funded our operations primarily through loans from our major stockholder and through sales of our common and preferred stock. 30 35 As of October 31, 1999, we had cash of $122,000 and working capital of $678,000. Net cash used in operating activities was $8.8 million in fiscal 1997, $5.1 million in fiscal 1998 and $7.6 million in fiscal 1999. Cash used in operating activities was primarily attributed to the net loss of $8.1 million in fiscal 1997, net loss of $8.0 million in fiscal 1998 and net loss of $9.4 million in fiscal 1999 offset by non-cash expenses and changes in working capital. Our investing activities have consisted of purchases of property and equipment and certain intangible assets. Capital expenditures totaled $306,000 in fiscal 1997, $170,000 in fiscal 1997, and $587,000 in fiscal 1999. Additionally, we invested $80,000 in certain intangible technology during fiscal 1999. Historically, the acquisition of property and equipment has been primarily through cash purchases. In the future, we anticipate that we will finance such acquisitions through capital lease arrangements. We anticipate that we will experience an increase in our capital expenditures and lease commitments consistent with our anticipated growth in operations, infrastructure and personnel. Our financing activities provided $9.3 million in fiscal 1997, $4.9 million in fiscal 1998 and $8.3 million in fiscal 1999. In fiscal 1997, cash provided by financing activities consisted of $9.3 million received in borrowings from The Canopy Group, Inc. In fiscal 1998, cash provided by financing activities consisted primarily of $4.4 million additional borrowings from The Canopy Group, Inc. and $519,000 in equity funding received from The Canopy Group, Inc. upon our incorporation. During fiscal 1999, cash provided by financing activities consisted primarily of $15.5 million of equity funding received from The Canopy Group, Inc. and $3.0 million of equity funding from MTI Technology Corporation. Additionally, we received $4.8 million from The Canopy Group, Inc. under a secured convertible promissory note agreement. These proceeds plus accrued interest were converted to equity during fiscal 1999. Approximately $15.0 million was paid to our predecessor during fiscal 1999 in connection with the reorganization of our predecessor and our own incorporation. As of October 31, 1999, we had only one debt arrangement for approximately $9,500. As of that date, we had no other bank or other borrowing arrangements in place. We believe that our current cash on hand, after receiving approximately $29.5 million of net proceeds from the sale of preferred stock in December 1999 and January 2000, together with the proceeds from this offering will be sufficient to meet our capital expenditures and working capital requirements for at least the next twelve months. However, we 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. We cannot assure you that additional funding will be available to us in amounts or on terms acceptable to us. If sufficient funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of acquisition opportunities, develop or enhance our services or products, or otherwise respond to competitive pressures would be significantly limited. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants, or AICPA, issued Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", or SOP 98-1. SOP 98-1 requires entities to capitalize certain costs related to internal-use software once certain criteria have been met. We adopted SOP 98-1 in fiscal 1999. The adoption of SOP 98-1 did not have a material impact on our results of operations, financial position or liquidity. 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 is effective for financial statements issued for all fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, FASB delayed the effective date of SFAS 133 for one year, to apply to fiscal quarters of all years 31 36 beginning after June 15, 2000. We do not expect this statement to have a material impact on our results of operations, financial position or liquidity. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Our 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, our financial results could be affected by changes in foreign currency exchange rates or weak economic conditions in foreign markets. Because all of our revenues are currently denominated in U.S. dollars, a strengthening of the dollar could make our Linux products less competitive in foreign markets. YEAR 2000 COMPLIANCE Background. Many currently installed computer systems and software and devices with embedded technology are coded to two digits for time sensitive dating purposes. Beginning with the year 2000, these date code fields will need to be coded to four digits in order to distinguish between twentieth century and twenty-first century dates. For example, computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This error could result in system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. As a result, many companies' software and computer systems may need to be upgraded or replaced to comply with such "Year 2000" requirements. Our business is dependent on the operation of numerous systems that could potentially be affected by Year 2000-related problems. Those systems include, among others: - software products sold to customers; - hardware and software systems used by us to deliver products and services to customers, including our proprietary software systems as well as software supplied by third parties; - hardware and software systems used internally by us in the management of our business; - communications networks such as the Internet and private intranets; - internal systems of our customers and suppliers; and - non-information technology systems and services, such as energy and utility suppliers, telephone systems and building systems, and financial institutions and transportation providers. State of Readiness. In October 1998, we created a team to oversee the audit and resolution of potential Year 2000 problems. Since that time, we have evaluated the readiness of our systems and products for Year 2000 compliance. Products. We engaged an affiliated third party to test our OpenLinux 2.2/2.3 product. This testing was completed in the third quarter of 1999 and did not result in any findings of Year 2000 problems that were not remedied or documented. We are continuing to evaluate the Year 2000 compliance of our products currently under development. Some of our customers are still using older discontinued products of ours which have not been tested for Year 2000 readiness. While we have not been informed of any problems or failures relating to these products, if problems arise concerning these systems, we will recommend that these customers upgrade to a more recent and supported version. We may be required to support and correct any failed systems as a result of any problems that may arise in connection with these older products. 32 37 We bundle third-party applications and software components with our products. We have tested some of these products and have researched the suppliers. To date, we know of no problems with these products nor have we had to correct any deficiencies. Most of these products are open source and therefore if unforeseen problems do arise, we have the ability to rapidly provide corrections and support to customers. We do not intend to expend resources to seek out and correct additional problems before they arise. Accordingly, it is possible that some of our customers may experience difficulties related to third-party software which may affect the performance of our products and may lead to adverse results such as additional support calls or return of products. This could divert resources from the pursuit of our business strategy which could materially adversely affect our business. Internal Systems. We replaced the hardware servicing our internal office network systems in the third quarter of 1999. These hardware systems have their respective companies' statements of compliance, and we have independently tested these systems for Year 2000 readiness. We have also substantially completed inventorying, assessing and testing our major non-IT systems, and have implemented any remedial actions to the extent deemed appropriate. No problems in these systems have surfaced to date, and we do not expect any to occur. We have also tested and verified compliance on our external servers which host our Web site and other Internet services. Material Third-Party Relationships. We rely on third parties such as suppliers of energy and other utilities, financial institutions, transportation providers, communications vendors, including value added network vendors and other significant customers. We have received Year 2000 readiness statements from some but not all of these third-party suppliers. The failure of any of these third parties to achieve Year 2000 compliance could have a material impact on our business, operating results and financial condition. Costs. To date, we have incurred approximately $600,000 in costs to improve our IT systems, certify products, and prepare for Year 2000 readiness efforts. We are not tracking internal costs such as payroll costs for our information systems group for our Year 2000 review activities. We expect that any additional costs for Year 2000 compliance of internal systems to be minimal. We have not estimated costs to support customers in post-Year 2000 efforts. Contingency Plans. All of our critical systems are powered through compliant uninterruptible power supply systems and/or backup generators in the event of Year 2000 or other power related outages. We have not otherwise developed contingency plans with respect to our products or internal systems. To date, Year 2000 problems have had a minimal effect on our business. However, we may not have identified and remediated all significant Year 2000 problems. Further remediation efforts may involve significant time and expense, and unremediated problems may have a material adverse effect on our business. Also, we sell our products to companies in a variety of industries, each of which is experiencing different Year 2000 issues. Customer difficulties with Year 2000 issues might require us to devote additional resources to resolve underlying problems. Finally, although we have not been made a party to any litigation or arbitration proceeding to date involving our products or services and related to Year 2000 compliance issues, we may in the future be required to defend our products or services in such proceedings, or to negotiate resolutions of claims based on Year 2000 issues. The costs of defending and resolving Year 2000-related disputes, regardless of the merits of such disputes, and any liability for Year 2000-related damages, including consequential damages, would negatively affect our business, results of operations, financial condition and liquidity, perhaps materially. 33 38 BUSINESS OVERVIEW Caldera Systems, Inc. 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 our OpenLinux technology received many awards and recognitions, including Internetweek's "Best of the Best," 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, Frank Kasper & Associates, Gates/Arrow, IBM, Ingram Micro, MediaGold, MTI Technology Corporation, Navarre Corporation, Support Net and Tech Data. INDUSTRY BACKGROUND The Internet has emerged as the fastest growing global communications medium, enabling millions to connect to a world wide network to conduct business and share information electronically. According to International Data Corporation, or IDC, the overall number of Internet users will grow from approximately 159 million in 1998 to approximately 510 million by 2003. As Internet usage becomes more pervasive, many companies worldwide are devising new ways to leverage this network to conduct business over the Internet, or eBusiness. eBusiness is more than just the purchasing transaction associated with buying an item on the Internet. It involves all the necessary communications and transactions between suppliers, partners and customers to conduct business. IDC projects that commerce conducted over the Internet will grow from approximately $50 billion in 1998 to approximately $1.3 trillion by 2003. 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. Nonetheless, 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. Dataquest projects that the worldwide market for thin appliance servers will grow from approximately $2.2 billion in 1999 to approximately $16 billion by 2003. 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 34 39 eBusiness software applications that are emerging. Having separate servers for each application improves performance and increases stability, while decreasing overall operating and maintenance costs. In addition, the proliferation of information on the Internet has driven the need to customize information for individual use. As a result, manufacturers have developed ways to separate the visual elements of a standard PC program from its computing functions, allowing most of the computing function to be performed remotely. This has facilitated the creation of alternative Internet access devices for individuals, such as personal digital assistants, Internet-capable cellular telephones and television set-top boxes. These Internet access devices are far less costly than personal computers and allow more users access to the Internet and the ability to participate in eBusiness. Internet devices are becoming popular worldwide as a way of getting businesses and consumers connected to the new eBusiness economy. The trend towards distributed software applications and specialized servers and the proliferation of Internet access devices have increased companies' ability to conduct eBusiness and consumers' access to eBusiness. The dynamic and fast changing nature of eBusiness requires an operating system, the software that enables a computer and its various components to interact, that can change with the accelerated evolution of eBusiness. The ideal 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 ideal 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 optimal operating system 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. In fact, IDC has projected that the total market for Linux shipments will increase at a compound annual growth rate of 25% from 1999 through 2003. Also, Dataquest has predicted that Linux thin appliance servers will account for approximately $3.8 billion in server appliance revenues by 2003. 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; 35 40 - the lack of technical knowledge and support; - difficulty in management and deployment; and - the limited number of applications available for use on Linux. Historically, business users have lacked a Linux solution that suits their needs. For Linux to fully support eBusiness, a solution must consist not only of advanced technology but also should be enhanced and tailored for business. This solution must promote the benefits of Linux for eBusiness and provide the proper education and training to facilitate adoption. Proper distribution channels are required to facilitate access to the business user. The Linux for eBusiness solution must be able to accommodate business applications and be able to interoperate properly with the diverse environment of internal corporate information systems and the Internet. It must have the flexibility to be maintained centrally or managed remotely. Finally, a solution must adhere and conform to commercial standards to incorporate the latest technological advancement and ensure wide acceptance. CALDERA SYSTEMS SOLUTION We 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 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 any partner, ranging from independent local technical specialists to large system integrator organizations, that offers 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 36 41 enhancements include Web administration applications, the Caldera Systems open administration system, and an easy-to-use Linux installation wizard. We also offer our products in multiple language versions. Complementary value-added services. In order for businesses to implement our product offerings, we provide a wide range of valuable services. We believe that our service offerings provide significant benefits for eBusiness. These service offerings include: - Technical Support -- Our technical support provides assistance during installation and operation of OpenLinux; - Consulting and Custom Development -- Our consultants have extensive technological and business knowledge, which allows us to assist our partners 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 Authorized Linux Education Centers, or ALECs, around the world. Business community catalyst and open source advocate. 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. CALDERA SYSTEMS STRATEGY Our goal is to become the leading provider of Linux solutions for eBusiness. Key elements of our strategy to achieve our goal include: Providing Linux software for specialized servers and Internet access devices. By providing focused Linux business solutions that simplify systems management, increasing interoperability and improving ease of use, we have the goal of becoming the number one provider of Linux eBusiness products. We are a leader in applying commercial development practices to Linux, resulting in Linux products that can be more easily deployed and managed. We intend to facilitate the proliferation of highly customized, 37 42 integrated Linux business solutions by offering both a Linux client and server product and further optimization and certification services to solution providers and end users. In addition, during the first half of 2000 we plan to release eBuilder, an open standards, component-based eBusiness framework, written in Java for the Linux environment. eBuilder is designed to provide businesses with the ability to incorporate existing software applications, file directories and databases into workable eBusiness solutions, such as Web storefronts. Remaining committed to research and development. We are committed to continuing our research and development efforts to enhance our products to be efficient and effective platforms for delivering eBusiness solutions. Our primary focus will be to design and implement the software that will allow organizations to install and manage these Linux systems in a flexible and cost effective manner. We will contribute time and technology to various industry initiatives to expand the range of computing hardware on which our products can be offered. Additionally, we will support and seek to influence technology standards that will expand the scope in which our products can be sold and deployed. We are committed to the open source model for software development and will work to contribute much of our efforts to the open source development community. We will continually seek out new innovative solutions to address the needs of our customers and the evolution of the marketplace. Increasing our channel presence in Linux. We believe that the best way to reach the business user is through solution providers. Solution providers will be invaluable in providing turnkey solutions and local support for specialized servers. We plan to enhance our product and service offerings to solution providers by introducing new products for eBusiness, increasing the reach of our education and training services and expanding resources for solution providers on our Web site. Leveraging partners for growth. We believe that in order for us to accelerate our growth, we must enlist the help of partners to promote our brand, proliferate our products and provide us with valuable feedback. Through our partner programs, we plan to provide our partners with appropriate knowledge, tools and certifications to effectively implement our solutions for eBusiness. This will increase awareness of Caldera Systems and our extended network of partners, thus increasing the end user's confidence in us and Linux as a viable business platform. We intend to expand our partner programs for: - developers; - independent software vendors, or ISVs; - original equipment manufacturers; - hardware vendors; - system integrators; - value-added resellers; - distributors; - retailers; - education providers (ALECs); and - Web partners. Facilitating the adoption of Linux for eBusiness through education and training. In addition to simply selling educational products, our strategy is to educate our partners on how to deploy, manage and administer Linux solutions. As these partners train other users, we expect increased sales referrals. We plan to expand our ALEC channel through industry partnerships to help establish market share. In addition, we plan to expand our educational offerings through Web-based classroom training, academic textbooks and training materials, and to develop additional courses to maintain our leadership in Linux educational products. Finally, we plan to expand our partnerships to include universities, course developers, communities and other institutions who may offer opportunities to increase exposure of Linux. 38 43 Establishing our Web site as the one-stop center for eBusiness. We intend to continue to enhance our Web site to provide a one-stop center for eBusiness. We expect that this will attract Linux business users, particularly those from small to medium businesses, as well as the business users who contemplate using Linux but lack the confidence that there will be sufficient education, products and support. We plan to expand our Web site as an electronic channel for our solution providers by providing information, sales and service leads. Expanding our international presence. We currently have distribution channel representation in 47 countries to take advantage of what we believe will be high international demand for Linux business solutions. We plan to continue to penetrate the international market by recruiting local distributors and solution providers in each region, leveraging their access to the surrounding community, and by reaching partners to proliferate our brand and products. These partners will begin to generate momentum for our products and services as the international markets become educated about our solutions. Local partners will also be able to add value and customize our products and Web site to meet local language and regulatory requirements. As our international penetration continues, we plan to expand our support resources to overcome time zone and language barriers as we are now doing in Germany and Japan. PRODUCTS We develop, market and support Linux products and solutions specifically designed to meet the complex needs of eBusiness. According to PC Data, during the period from January 1, 1999 through October 31, 1999, Caldera Systems 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 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 2.3 We first released our principal product, OpenLinux, a Linux operating system, in 1995. We began shipping the latest release, OpenLinux 2.3, in September 1999. OpenLinux 2.3 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 2.3 is currently available for the Intel and Sun SPARC platforms. According to Ziff-Davis, in laboratory tests, OpenLinux was 50% faster than any other Linux product in Web server performance and 200% faster than Windows NT at file and print services. We believe that these performance results are largely due to our self-hosting approach. 39 44 The suggested retail price for packaged OpenLinux 2.3 is $49.95. Examples of some of the key components of OpenLinux 2.3 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 - --------------------------------------------------------------------------------------------- BRU-PE Backup and Restore Utility - --------------------------------------------------------------------------------------------- PartitionMagic Hard-drive partitioning - --------------------------------------------------------------------------------------------- BootMagic Boot-up manager - --------------------------------------------------------------------------------------------- Applixware 4.4.2 office suite (trial Suite of office applications version) - ---------------------------------------------------------------------------------------------
OpenLinux 2.3, in the next release, will be renamed OpenLinux Desktop to reflect its emphasis for desktop. 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 will be generally available in the first quarter of 2000. eBuilder We plan to release our eBusiness framework, eBuilder, in the first half of 2000. eBuilder is one of the first fully open standards, component-based eBusiness frameworks written in Java for the Linux environment. eBuilder can be used to develop ecommerce components, packages and processes. These packages and processes can be re-used in multiple client environments. eBuilder utilizes Java to introduce plug-and-play capability into an environment for a business' existing software applications, file directories and databases. eBuilder is Java and CORBA compliant, utilizes XML for data encapsulation and is Enterprise Java Bean compliant. The eBuilder framework, coupled with eServer, will provide solution providers the ability to transform traditional products and services into integral components of a comprehensive eBusiness solution, allowing them to provide new eBusiness services to their existing customers without requiring them to totally replace their existing business solutions. 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 40 45 by the Linux Professional Institute, an independent organization. We provide the most comprehensive distribution-neutral training program for Linux. We provide Linux training through our training center in Orem, Utah and through 24 ALECs located in the United States and abroad. ALECs are independent centers that we have authorized to provide courses that we have developed. Currently, we offer eight separate courses relating to Linux training and network administration, which are categorized by their educational objective. The three categories of courses we provide allow multiple educational tracks, including: - Linux certification; - system administration; and - Linux developer training. The suggested retail price for our non-developer courses is $1,995. Developer courses have a suggested retail price of $2,250. 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. Fees for this service start at $10,000. - Assessment services relating to the proposed migration of a client's software for use with Linux. Fees for this service start at $3,000. - 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 email 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 email 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: - Internetweek's "Best of the Best" award for best software for 1999 (December 1999); - The Linux Show's "Best Distribution of Millennium" (December 1999); - Linux Journal's Product of the Year award at Comdex (November 1999); - listing in PC Magazine's Top 100 Technology Companies That Are Changing the World (October 1999); 41 46 - Linuxworld Editor's Choice Award: Best Client and Distribution (August 1999); and - Network Computing's Well-Connected Award for Best Networked Operating System (May 1999). CUSTOMERS We sell our products primarily through indirect channels. Our customers include: AST Computers MediaGold Cendant MTI Technology Corporation First International Computers Navarre Corporation Frank Kasper & Associates Support Net Gates/Arrow Tech Data IBM Ingram Micro
Navarre Corporation and Frank Kasper & Associates each accounted for more than 10% of our revenue in fiscal 1999. 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, Evergreen Internet, Corel, IBM, 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 agreed to pay Sun Microsystems $1.3 million in the first quarter of 2000 for a license term of 18 months. This term may be extended for up to an additional two years, either through a lump sum payment of an additional $2.3 million prior to March 24, 2000, or through yearly payments of $1.5 million by June 2001 and $1.8 million by June 2002. The licenses for EmbeddedJava and PersonalJava have initial terms of three years, which may be renewed yearly thereafter, and for which we have agreed to pay royalties for sales of products based on these technologies. Also, in January 2000, we entered into license agreements with Evergreen Internet, Inc., pursuant to which we licensed rights to bundle their ECential software products with components of OpenLinux to create eBuilder. These ECential products comprise significant components of eBuilder. Under the agreement, both we and Evergreen Internet may market and distribute eBuilder. This license is exclusive with respect to use on the Linux platform for a one-year period beginning on the date eBuilder is first distributed, and is terminable by either party after January 6, 2003. However, if eBuilder is not available for commercial distribution by June 30, 2000, either party may terminate the license agreement. 42 47 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; - The Trillian 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 is to distribute our products and services through our indirect distribution channel model. The majority of our revenue comes from distributors. As of November 1, 1999, we had approximately 35 distributors worldwide who purchase directly from us. These distributors in turn sell to approximately 4,000 retail outlets in the United States and approximately 900 equivalent sites internationally. On a worldwide level, we utilize over 700 VARs to promote technology and service integration of our products and solutions to their end-user business customers. For the fiscal year ended October 31, 1999, our distributor channel represented 73% of the current business and includes distributors such as Frank Kasper & Associates, Ingram Micro, Navarre Corporation and Tech Data, domestically, and MediaGold in Europe. 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 revenues are 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 43 48 public relations and press relations extensively to communicate the progress we are making in the business arena. In particular, our marketing strategy consists of: - branding "Linux for eBusiness" through public relations announcements and advertising; - announcing technology and solution awards; - creating an effective Partner program to generate brand awareness and promote our products; and - increasing public awareness through speaking engagements at strategic tradeshows and conferences worldwide and participating in technology forums. Our Web site, www.calderasystems.com, is focused on strengthening our Linux for eBusiness strategy. In addition to allowing visitors to download free software, our Web team is expanding our current Web strategy of branding, direct sales through our online store and linking customers to channel partners. Through our Web site, we plan to join together ISVs, hardware partners, customers, channel players, developers, ISPs and other Linux players who want to connect for business reasons and to generate royalties based on introductions, advertising and transactions. COMPETITION The market for eBusiness solutions is emerging rapidly and is therefore intensely competitive, characterized by rapidly changing technology and evolving standards. We expect competition to increase both from existing competitors and new market entrants. We face direct competition in the area of specialized servers and Internet devices 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 or Internet access devices include Berkeley Software Design, Microsoft and a joint venture involving The Santa Cruz Operation and Compaq. Cygnus Solutions, VA Linux and Wind River provide similar solutions embedded into their hardware offerings. 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. 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. 44 49 We also compete for service revenue with a number of companies that provide technical support and other professional services to users of Linux operating systems, including some original equipment manufacturers with which we have agreements. Many of these companies have larger and more experienced service organizations than we do. We also may face competition on this front from companies with larger customer bases and greater financial resources and name recognition, such as Corel, Cygnus Solutions and Sun Microsystems, which have indicated interest in the Linux operating systems market. Based upon these market factors, we believe that the most significant criteria affecting the competitive landscape for our products include: - networking capability; - distribution strength; - market perception of vendor; - education and training; - ease of customization; - commercial development process; - product performance, functionality and price; - education and training; - ease of use; - breadth of hardware compatibility; - quality of support and customer services; - strength of relationships in the open source community; and - availability of user applications. We believe that we compete favorably with many of our competitors in a number of respects, including product performance, functionality and price, networking capability and breadth of hardware compatibility. To solidify and improve our competitive ability, our near term strategy is to strengthen our existing strategic relationships and enter into new ones in an effort to enhance our name recognition, expand our distribution capabilities and attract more attention to the open source movement, which in turn should create additional incentives for software developers to write more applications for OpenLinux. SOFTWARE ENGINEERING AND DEVELOPMENT We have invested and will continue to invest in the development of innovative new product features and technologies in response to the evolving market for Linux solutions and input from key customers. We seek to deliver consistently strong Linux products targeted at specific usage as opposed to the more traditional one-size-fits-all Linux distribution in which the customer may be required to re-build the kernel to attain the proper configuration. This product segmentation of eServer and eDesktop allows us to tailor the delivery of the product to work optimally as installed off the CD, yet continue to provide customization, one of the essential values of Linux. One of our key strategies has been to focus on identifying and removing the traditional barriers for mass deployment of UNIX-style 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 1998, successfully paved the way for a much broader base of users to experience Linux with a much lower learning curve. Going forward, we intend to continue to apply this philosophy as we work toward addressing the broader issues of system configuration management and administration, specifically as it pertains to the deployment of eServer-based information appliances and eDesktop platforms. Our latest component of this architecture, the LUI (Linux Unattended Install) was developed 45 50 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 December 31, 1999, we employed an in-house engineering staff of 31 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 have licensed the registered trademark "CALDERA(R)" and also have license rights relating to "CALDERA SYSTEMS(TM)", a pending trademark application. We plan to respond to the rejection in September 1999 of our trademark applications in the United States for "OpenLinux(TM)" and "Linux for Business(TM)". Despite our efforts to protect our trademark rights, unauthorized third parties have in the past attempted and in the future may attempt to misappropriate our trademark rights. We cannot be certain that we will succeed in preventing the continued misappropriation of our 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 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 46 51 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. EMPLOYEES As of December 31, 1999, we had a total of 108 employees. Of the total employees, 31 were in software engineering, 30 in sales and marketing, 20 in customer service and technical support, 7 in operations, 11 in finance and administration and 9 assigned to development of our electronic channel. 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 sublease approximately 10,600 square feet under a lease that will expire in August 2000. Our annual rental expense under the lease is approximately $145,000. We also occupy 8,300 square feet of additional office space in Orem, Utah, under a lease that costs $10,000 per month, and 5,544 square feet of warehouse space in Orem, Utah, under an 18 month lease that costs approximately $32,000 per year. In May 2000, we plan to consolidate our two Orem office facilities into one in a new building in Orem, Utah, which is currently under construction. We expect that our lease terms in that facility will be comparable to those which we have currently. 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. 47 52 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The following table presents information regarding our executive officers, directors and key employees as of December 31, 1999:
NAME AGE POSITION ---- --- -------- Ransom H. Love............................. 40 Chief Executive Officer, President and Director Alan J. Hansen............................. 36 Chief Financial Officer and Secretary Drew A. Spencer............................ 38 Vice President, Development Royce D. Bybee............................. 43 Vice President, Sales Benoy Tamang............................... 35 Vice President, Marketing R. Dean Taylor............................. 37 Vice President, Electronics Channel John Thomas................................ 38 Vice President, Support Services Walter D. Hammond.......................... 37 Vice President, Operations and Information Systems Ralph J. Yarro III......................... 35 Chairman of the Board of Directors Raymond J. Noorda.......................... 75 Director Thomas P. Raimondi, Jr..................... 42 Director
Ransom H. Love has served as our President, Chief Executive Officer, and member of our 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 an MBA from Brigham Young University. Alan J. Hansen has served as our Chief Financial Officer since November 1999. From March 1996 through September 1997, he was Controller for PowerQuest Corporation, and from September 1997 through November 1999, he was Vice President of Finance for PowerQuest. From December 1994 through March 1996, Mr. Hansen was self-employed as a public accountant. Mr. Hansen also spent more than eight years working in the finance and securities industries, including more than four years as controller with an investment management firm in the San Francisco Bay area. Mr. Hansen holds a BS in accounting and an MBA from California State University at Hayward. Drew A. Spencer has served as our Vice President of Development since December 1998. 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 has a BS degree in computer science from Westminster College. Royce D. Bybee has served as our Vice President of Sales since August 1999. From November 1998 to August 1999 he served as Vice President of Sales and Marketing at Word Place, Inc. From December 1995 to June 1998, he was Senior Vice President of Sales and Marketing, Vice President of Marketing and Director of Channel Retail Sales for PowerQuest Corporation. From December 1994 to December 1995 he was a sales agent for Osmond Real Estate. From February 1989 to March 1994 he served as Regional Manager and Product Marketing Director at WordPerfect Corporation. Mr. Bybee holds a BS in finance from Brigham Young University. Benoy Tamang has served as our Vice President of Marketing since December 1998. From January 1996 through August 1998, Mr. Tamang was General Manager of Viewpoint Datalabs, 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 48 53 information systems from Brigham Young University -- Hawaii and an MBA from the Marriott School of Management at Brigham Young University. R. Dean Taylor has served as our Vice President, Electronic Channel since November 1999. He was employed in the channel sales department of Caldera, Inc. from June 1995 through November 1999. From May 1995 through November 1995, he also worked in channel marketing for The Canopy Group, Inc., and from November 1994 through May 1995, he worked in channel marketing for Novell, Inc. Mr. Taylor is the co-author of the book Teach Yourself StarOffice for Linux in 24 Hours. He holds a BS degree from Brigham Young University. John Thomas has served as our Vice President of Support Services since November 1999. From April 1999 to November 1999, he was our Director of Customer Support. From July 1994 until April 1999, Mr. Thomas served as Vice President of Operations for Viewpoint DataLabs. Walter D. Hammond has served as our Vice President of Operations and Information Systems since May 1999. From December 1996 to April 1999, Mr. Hammond was Director of Operations at Caldera, Inc. and then Caldera Systems, Inc. Prior to joining Caldera, Inc. Mr. Hammond served as Senior Account Manager of Banta Global Services from February 1994 to December 1996. Mr. Hammond holds a BA in communications from Brigham Young University and an MBA from Utah State University. Ralph J. Yarro III has served as a member of our 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. Raymond J. Noorda has served as a member of our 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. Prior to joining Novell, Inc. Mr. Noorda served as Chief Executive Officer of Boschert, Inc. and System Industries, Inc. He holds a BS in electrical engineering from the University of Utah. Thomas P. Raimondi, Jr. has served as a member of our 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 July 1998 to December 1999, as Senior Vice President and General Manager from January 1996 to July 1998 and as Vice President of Marketing from 1987 to December 1995. Mr. Raimondi holds a BS in communications from the University of Maryland. COMPOSITION OF THE BOARD We currently have four directors. Directors are elected by stockholders at each annual meeting of shareholders 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 our directors, officers or key employees. Under a voting agreement, entered into in December 1999, certain of our stockholders agreed to increase the board to nine directors, and for the board members to be designated pursuant to the terms of that agreement. These rights to designate members under the voting agreement terminate upon the closing of this offering. See "Certain Transactions -- Preferred Stock Transactions." BOARD COMMITTEES The compensation committee of the board of directors recommends, reviews and oversees the salaries, benefits and stock option plans for our employees, consultants, directors and other individuals compensated by us. The compensation committee also administers our compensation plans. 49 54 The audit committee of the board of directors reviews, acts on and reports 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. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the compensation committee has at any time been one of our officers or employees. None of our executive officers 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 our board or compensation committee. Prior to the creation of our compensation committee, all compensation decisions were made by our full board. Mr. Love did not participate in discussions by our board with respect to his compensation. DIRECTOR COMPENSATION Our directors do not receive cash compensation for their services as directors, although members are reimbursed for expenses in connection with attendance at board and compensation meetings. In December 1999, the board granted an option to Thomas P. Raimondi, Jr., to purchase 100,000 shares of our common stock at an exercise price $6.00 per share. In August 1999, the board granted options to Ralph J. Yarro III to purchase 100,000 shares of our common stock, and in December 1999, the board granted Mr. Yarro options to purchase 50,000 shares of our common stock, at a combined average exercise price of $2.67 per share. These options vest monthly over a two-year period. We may grant our non-employee directors additional options in the future. EMPLOYMENT AGREEMENTS We have not entered into employment agreements with any of our executive officers. EXECUTIVE COMPENSATION The following table presents compensation information for our most recent fiscal year, ended October 31, 1999, paid or accrued by our Chief Executive Officer and each of our other executive officers whose salary and bonus for fiscal 1999 was more than $100,000. SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION AWARDS COMPENSATION(1) --------------------- ----------------- SECURITIES UNDERLYING NAME SALARY BONUS OPTIONS ---- -------- ----- --------------------- Ransom H. Love......................................... $106,077 -- 560,000 Drew A. Spencer........................................ $105,333 -- 100,000
- ------------------------- (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 $50,000 and 10% of his total annual salary and bonus. OPTION GRANTS IN LAST FISCAL YEAR The following table presents the grants of stock options under our 1998 Stock Option Plan during fiscal 1999, ended October 31, 1999, to each of our executive officers named in the Summary Compensation Table. 50 55 All option grants under the 1998 Stock Option Plan are nonqualified stock options. Options expire ten years from the date of grant. The exercise price of each option granted is equal to the fair market value of our common stock, as determined by our board on the date of grant. In fiscal 1999, we granted to our employees options to purchase a total of 3,106,566 shares of our common stock. Potential realizable values are computed by - Multiplying the number of shares of common stock subject to a given option by the exercise price per share, - Assuming that the aggregate option exercise price derived from that calculation compounds at the annual 5% or 10% rates shown in the table for the entire 10 year term of the option, and - Subtracting from that result the aggregate option exercise price. The 5% and 10% assumed annual rates of stock price appreciation are required by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future common stock prices.
INDIVIDUAL GRANTS -------------------------------------------------- PERCENT OF POTENTIAL REALIZABLE VALUE AT NUMBER OF TOTAL ASSUMED ANNUAL RATES OF STOCK SECURITIES OPTIONS EXERCISE PRICE APPRECIATION FOR OPTION UNDERLYING GRANTED TO PRICE PER TERM OPTIONS EMPLOYEES IN SHARE EXPIRATION ----------------------------- NAME GRANTED FISCAL YEAR ($/SHARE) DATE 0% 5% 10% ---- ---------- ------------ --------- ---------- ------- -------- -------- Ransom H. Love............. 68,000 18.03% $1.00 12/28/2008 -- $ 42,765 $108,374 492,000 $1.00 6/3/2009 $61,500 $409,593 $943,636 Drew A. Spencer............ 45,000 3.22% $1.00 12/28/2008 -- $ 28,300 $ 71,718 55,000 $1.00 6/3/2009 $ 6,875 $ 45,788 $105,488
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED OCTOBER 31, 1999 AND YEAR-END OPTION VALUES None of our executive officers exercised options during the year ended October 31, 1999. The following table presents the number of shares of common stock subject to vested and unvested stock options held as of October 31, 1999 by each of our 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 assumed initial public offering price of $ per share.
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS OCTOBER 31, 1999 AT OCTOBER 31, 1999 ----------------------- -------------------- NAME VESTED UNVESTED VESTED UNVESTED ---- --------- ---------- -------- -------- Ransom H. Love.................................... 377,233 182,767 Drew A. Spencer................................... 27,083 72,917
1998 STOCK OPTION PLAN The 1998 Stock Option Plan was adopted by the board of directors on December 29, 1998 and subsequently approved by the stockholders. The plan became effective upon its adoption by the board. 5,000,000 shares of common stock were authorized for issuance under the 1998 Stock Option Plan. Under the 1998 Stock Option Plan eligible individuals in our employ or service (including officers, non-employee board members and consultants) could be granted options to purchase shares of our common stock. The 1998 Stock Option Plan is administered by our compensation committee. 51 56 The exercise price for the options may be paid in cash or in shares of our common stock valued at fair market value on the exercise date. The option may also be exercised through a same-day sale program without any cash outlay by the optionee. In the event that we are acquired, whether by merger or asset sale, each outstanding option not assumed by the successor corporation, and all outstanding repurchase rights not assigned to the successor corporation, will automatically terminate. Each option assumed by the successor corporation 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 compensation committee has the authority, with the consent of the affected option holders, to cancel outstanding options in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the common stock on the new grant date. The board may amend or modify the 1998 Stock Option Plan at any time, subject to any required stockholder approval. The 1998 Stock Option Plan will terminate no later than December 29, 2008. 1999 OMNIBUS STOCK INCENTIVE PLAN The 1999 Omnibus Stock Incentive Plan is intended to serve as the successor equity incentive program to our 1998 Stock Option Plan. The 1999 plan became effective upon its adoption by the board of directors on December 1, 1999; it was approved by the stockholders by unanimous written consent on December 1, 1999. 3,605,238 shares of common stock have been authorized for issuance under the 1999 plan. This share reserve includes 1,905,238 shares available for issuance under the 1998 Stock Option Plan on the effective date of approval of the 1999 plan by the stockholders. 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 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 Caldera System's employ or service. The 1999 plan will be administered by our compensation committee. This committee will determine 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 our common stock valued at fair market value on the exercise date or by having us retain sufficient shares of our 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. 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 Caldera Systems 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, we may issue stand-alone stock appreciation rights which will entitle the holder to receive a cash payment from Caldera Systems 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 our common stock on the vesting date. 52 57 In the event that we are acquired (whether by merger or asset sale) or there is a change in who controls us (effected through an acquisition of 50% or more of our 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 we are acquired or experience a change in control, all restrictions on outstanding vested shares of restricted stock granted under Section 10 of our 1999 Omnibus Stock Incentive 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 if we are acquired or experience a change in control. The board may amend or modify the 1999 plan at any time, subject to any required stockholder approval. The 1999 plan will terminate no later than December 1, 2009. 2000 EMPLOYEE STOCK PURCHASE PLAN We plan to adopt an Employee Stock Purchase Plan prior to the date of this offering. The plan will become effective immediately upon the execution of the underwriting agreement for this offering. The plan is designed to allow eligible employees of Caldera Systems, Inc. and its participating subsidiaries to purchase shares of our common stock, at semi-annual intervals, through their periodic payroll deductions. A total of 500,000 shares of our common stock will initially be 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 any participant purchase more than 1,000 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 will begin on the day the underwriting agreement is executed in connection with this offering 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 our 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 will be October 31, 2000. Should the fair market value of our common stock on any semi-annual purchase date be less than the fair market value on the first day of the offering period, then the current offering period will automatically end and a new offering period will begin, based on the lower fair market value. Individuals who are eligible employees on the start date of any offering period may enter the Plan on that start date or on any subsequent semi-annual entry date (generally May 1 or November 1 each year). Individuals who become eligible employees after the start date of the offering period may join the plan on any subsequent semi-annual entry date within that period. A participant may contribute up to 15% 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 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. 53 58 CERTAIN TRANSACTIONS Other than the transactions described below, since October 31, 1997 there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were 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. We began operations in 1994 as a business unit comprising substantially all of the operations of Caldera, Inc. 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. On September 1, 1998, we entered into a sublease with Caldera, Inc. for office space in Orem, Utah. The sublease provides for annual rent of approximately $150,000 and terminates August 31, 2000. Ralph J. Yarro III, chairman of our board of directors, and Raymond J. Noorda, one of our directors, are directors of Caldera, Inc. Caldera, Inc. is 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. Effective August 31, 1998, we sold 16,000,000 shares of our 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 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, we entered into a convertible promissory note with The Canopy Group. The note, which was secured by all of our assets, was due on December 31, 1999. The note bore interest at the prime rate, less 1/2% (currently 7.5%), 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 $455,000 of accrued interest was converted into 5,273,974 shares of our common stock on August 19, 1999. In May 2000, we anticipate moving into new office space, under a lease to be entered into with The Canopy Group on market terms. The Canopy Group holds more than 5% of our common stock. Mr. Noorda, one of our directors, and his spouse are co-trustees of the Noorda Family Trust, which is the controlling stockholder of The Canopy Group. We have adopted a 401(k) plan sponsored by The Canopy Group for our employees, under which we began making matching contributions beginning January 1, 2000. RELATIONSHIP WITH MTI TECHNOLOGY CORPORATION Effective July 27, 1999, we sold 5,333,333 shares of our 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 to be due at January 1, 2000, and $1.5 million is due at July 1, 2000. The first 54 59 $1.5 million was paid early on November 15, 1999 in return for a waiver by us of accrued and future interest on the unpaid portions of the purchase price. On August 12, 1999, we 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 our products, technology or services that are commercially available for sale, and we sell or license, 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 our products, technology, or services that are commercially available. This agreement is terminable by either party on 90 days prior written notice. We use 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 our 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 our 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. We have begun to provide OpenLinux to Lineo, Inc. for inclusion in their embedded Linux products, although we have not reached an agreement with respect to the economics of this arrangement. We expect to enter into agreement with Lineo on market terms. In January, 2000 we sold 1,250,000 shares of our common stock to Lineo in return for 3,238,437 shares of common stock of Lineo. Lineo is majority-owned by Caldera, Inc., which 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. PREFERRED STOCK TRANSACTIONS Effective December 30, 1999, we entered into a conversion agreement with The Canopy Group and MTI Technology Corporation. Under the conversion agreement, we issued and exchanged 5,273,974 shares of our Series A convertible preferred stock for 5,273,974 shares of our common stock held by The Canopy Group. We also issued and exchanged 1,322,172 shares of our Series A convertible preferred stock for 1,322,172 shares of our common stock held by MTI Technology Corporation. In December 1999 and January 2000, we issued 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. Under a voting agreement entered into 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 agreed to a board of nine directors, of which two would be designated by the holders of a majority of the outstanding shares of Series A convertible preferred stock, one would be designated by Citrix Systems Inc., one would be designated by Egan Managed-Capital, one would be designated by Novell Inc., one would be designated by Sun Microsystems, one would be designated by MTI Technology Corporation, one would be our chief executive officer and one would be designated by the holders of a majority of the capital stock subject to the voting agreement. The parties also agreed that if this offering does not close by June 30, 2000, the board will be increased to eleven directors, with the two additional directors to be designated by a majority of the outstanding shares of Series A convertible preferred stock. The rights to designate members of the board under the voting agreement terminate upon the closing of this offering. We have not yet increased our board size, and the parties have not designated directors pursuant to the terms of this agreement. 55 60 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 us, under which: - We are 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 Capital Stock -- Registration Rights." - We 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 will terminate upon the closing of this offering. INDEMNIFICATION AGREEMENTS Prior to the close of this offering, we will enter into indemnification agreements with our non-employee directors. 56 61 PRINCIPAL STOCKHOLDERS The following table presents information as to the beneficial ownership of our common stock as of January 10, 2000 by: - Each shareholder known by us to be the beneficial owner of more than 5% of our common stock; - Each of our directors; - Each executive officer listed in our summary compensation table; and - All directors and executive officers 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 January 10, 2000 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.
PERCENT OF SHARES BENEFICIALLY OWNED ----------------------- NUMBER OF SHARES BEFORE THE AFTER THE NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING ---------------- ------------------ ---------- --------- The Canopy Group, Inc.......................... 21,273,974(1) 64.0% MTI Technology Corporation..................... 5,333,333(2) 16.1 Ransom H. Love................................. 532,616(3) 1.6 Drew A. Spencer................................ 59,434(4) * Ralph J. Yarro, III............................ 60,417(5) * Raymond J. Noorda.............................. 27,857,307(6) 83.8 Thomas P. Raimondi, Jr......................... --(7) * All 11 directors and executive officers as a group........................................ 28,710,194(8) 84.2
- ------------------------- * Less than 1% (1) The address for The Canopy Group, Inc. is 240 West Center Street, Orem, Utah 84057. (2) The address for MTI Technology Corp. is 4905 East La Palma Avenue, Anaheim, California 92807. (3) Consists of options to purchase 532,616 shares of common stock. (4) Consists of options to purchase 59,434 shares of common stock. (5) Consists of options to purchase 60,417 shares of common stock. Mr. Yarro is President and Chief Executive Officer of The Canopy Group, Inc. Mr. Yarro disclaims beneficial ownership of the shares held by The Canopy Group, Inc. (6) 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 Caldera, Inc., which 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 such shares. The address for Mr. Noorda is c/o MTI Technology Corporation, 4905 East La Palma Avenue, Anaheim, California 92807. (7) Mr. Raimondi is President and Chief Executive Officer of MTI Technology Corporation. Mr. Raimondi disclaims beneficial ownership of the shares held by MTI Technology Corporation. (8) See notes 3 through 7. Includes an additional 200,420 shares issuable upon the exercise of options. 57 62 DESCRIPTION OF CAPITAL STOCK GENERAL Upon completion of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock, par value $0.001 per share. As of January 10, 2000, assuming conversion of our Series A and Series B convertible preferred stock into common stock, there were outstanding 33,163,685 shares of common stock held of record by approximately twenty stockholders and options to purchase 5,288,896 shares of common stock. Prior to the closing of this offering, we will reincorporate in Delaware and amend and restate our certificate of incorporation. The following summary of certain provisions of the common stock and preferred stock does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the forms of amended and restated certificate of incorporation and amended and restated bylaws to be effective upon the closing of this offering. 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 our board 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 is not provided for in our articles of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. No Preemptive or Similar Rights. Our common stock is not entitled to preemptive rights and is not subject to conversion or redemption. Right to Receive Liquidation Distributions. Upon our liquidation, dissolution, or winding up, the assets legally available for distribution to our stockholders are distributable ratably among the holders of our 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. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and non-assessable. PREFERRED STOCK Upon the closing of this offering, there will be no shares of preferred stock outstanding. Upon the closing of this offering, the board of directors 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. We have no present plans to issue any shares of preferred stock. See "-- Anti-Takeover Effects of Various Provisions of Delaware Law and Caldera Systems's Certificate of Incorporation and Bylaws." REGISTRATION RIGHTS Pursuant to a Second Amended and Restated Investors Rights Agreement, dated January 7, 2000, we entered into with holders of 11,596,146 shares of our common stock (assuming conversion of all outstanding shares of preferred stock), the holders of these shares are entitled to certain registration rights regarding these shares. The registration rights provide that if we propose to register any securities under the Securities Act, either for our own account or for the account of other security holders exercising 58 63 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 six months after our initial public offering, the holders of at least 22 percent of these shares may also require us to file up to two registration statements under the Securities Act at our expense with respect to their shares of common stock. We are required to use our best efforts to effect these registrations, subject to conditions and limitations. Furthermore, the holders of these shares may require us to file additional registration statements on Form S-3, subject to conditions and limitations. These rights terminate on the earlier of three years after the effective date of this offering, or when a holder is able to sell all its shares pursuant to Rule 144 under the Securities Act in any 90-day period. DELAWARE ANTI-TAKEOVER LAW AND CHARTER PROVISIONS The provisions of the Delaware General Corporation Law, our certificate of incorporation and our bylaws described below may have the effect of delaying, deferring, or discouraging another person from acquiring control of us. We will be 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, we have 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 us. CHARTER AND BYLAWS Charter Upon the closing of this offering, our certificate of incorporation will provide that all stockholder actions must be effected at a duly-called annual or special meeting and not by a consent in writing. Our certificate of incorporation will also require the approval of our board of directors to adopt, amend or repeal our bylaws. In addition, our certificate of incorporation will permit the stockholders to adopt, amend or repeal our bylaws only upon the affirmative vote of the holders of at least two-thirds of the voting power of all then outstanding shares of stock entitled to vote. Directors will be removable for cause only by stockholders holding a majority of the then outstanding shares of stock entitled to vote. Vacancies on the board of directors resulting from death, resignation, removal or other reason 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 59 64 office. Lastly, the provisions in the certificate of incorporation described above and other provisions pertaining to the limitation of liability and indemnification of directors will be able to 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 Caldera Systems, which could have an adverse effect on the market price of our common stock. Bylaws Upon the closing of this offering, our bylaws will also contain many of the provisions in our certificate of incorporation described above. Our bylaws will not permit stockholders to call a special meeting. In addition, our bylaws will establish an advance notice procedure for matters to be brought before an annual or special meeting of our stockholders, including the election of directors. Business permitted to be conducted at any annual meeting or special meeting of stockholders will be limited to business properly brought before the meeting. Our bylaws will also provide that we will indemnify officers and directors against losses that they may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures. These provisions may have the effect of preventing changes in our management. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY Our certificate of incorporation limits the liability of directors to the fullest extent permitted by the Delaware General Corporation Law. In addition, our certificate of incorporation and bylaws provide that we will indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law. We intend to enter into separate indemnification agreements with our directors and executive officers that provide them indemnification protection if our certificate of incorporation is subsequently amended. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is American Securities Transfer and Trust, Inc. 60 65 SHARES ELIGIBLE FOR FUTURE SALE Before this offering, there has been no public market for our common stock. Future sales of substantial amounts of our common stock, including shares issued upon exercise of outstanding options, in the public market after this offering could adversely affect market prices prevailing from time to time. Furthermore, as described below, no shares currently outstanding will be available for sale immediately after this offering due to contractual and legal restrictions on resale. Nevertheless, sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. - Upon the closing of this offering, we will have outstanding an aggregate of approximately shares of common stock. - Of these shares, the shares of common stock to be sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless the shares are held by affiliates of Caldera Systems, Inc., defined as persons who directly or indirectly control or are controlled by or are under common control with Caldera Systems, Inc. All remaining shares held by our existing stockholders were issued and sold by Caldera Systems, Inc. in private transactions and are eligible for public sale as follows:
APPROXIMATE NUMBER OF SHARES THAT DATE MAY BE SOLD COMMENT ---- --------------------- ------- Date of this prospectus 0 Freely tradable shares 181 days after the date of this prospectus 16,000,022 Restricted securities held for at least one year may be sold under Rule 144, in some cases subject to the volume of other restrictions described below.
LOCK-UP AGREEMENTS All of our officers and directors and substantially all of our security holders have signed lock-up agreements under which they agreed not to sell, dispose of, loan, pledge or grant any rights to any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock without the prior written consent of FleetBoston Robertson Stephens for a period of 180 days after the date of this prospectus. FleetBoston Robertson Stephens may choose to release some of these shares from these restrictions before the expiration of this 180-day period, although it has no current intention to do so. RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1% of the shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or - The average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 for the sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. 61 66 RULE 144(K) Under Rule 144(k), a person who has not been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, shares that have been held by a non-affiliate for at least two years may be sold in the open market immediately after the lock-up agreements expire. RULE 701 Any employee, officer or director of, or consultant to, us who purchases his shares under a written compensatory plan or contract may be entitled to sell his shares in reliance on Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell these shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling those shares. However, all shares issued under Rule 701 are subject to lock-up agreements and will only become eligible for sale when the 180-day lock-up agreements expire. REGISTRATION RIGHTS Following this offering, in some circumstances and subject to conditions, holders of 11,596,146 shares of our outstanding common stock will have demand registration rights to require us to register their shares of common stock under the Securities Act, and they will have rights to participate in any future registration of securities by us. These holders are subject to lock-up periods of not more than 180 days following the date of this prospectus and of not more than 90 days after any subsequent prospectus. See "Description of Capital Stock -- Registration Rights." STOCK OPTIONS We intend to file a Form S-8 registration statement under the Securities Act on or immediately after the date of this prospectus to register all shares of common stock covered by outstanding options or reserved for future issuance under our 1998 Stock Option Plan, our 1999 Omnibus Stock Incentive Plan and our 2000 Employee Stock Purchase Plan. Such registration statement will automatically become effective upon filing. Accordingly, shares covered by that registration statement will thereupon be eligible for sale in the public markets, unless such options are subject to vesting restrictions or the contractual restrictions described above. 62 67 UNDERWRITING The underwriters named below, acting through their representatives, FleetBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc., Wit Capital Corporation and First Security Van Kasper, have severally agreed with us, subject to the terms and conditions of the underwriting agreement, to purchase from us the number of shares of common stock set forth opposite their respective names below. The underwriters are committed to purchase and pay for all shares if any are purchased.
NUMBER OF UNDERWRITER SHARES ----------- --------- FleetBoston Robertson Stephens Inc. ........................ Bear, Stearns & Co. Inc. ................................... Wit Capital Corporation..................................... First Security Van Kasper................................... -------- Total............................................. ========
The representatives have advised us that the underwriters propose to offer the shares of common stock to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession of not more than $ per share, of which $ may be reallowed to other dealers. After this offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The common stock is offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. The underwriters have advised us that they do not expect sales to discretionary accounts to exceed ten percent of the total number of shares offered. Over-allotment Option. We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to additional shares of common stock, at the initial public offering price per share as we will receive for the shares that the underwriters have agreed to purchase. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment, subject to conditions, to purchase approximately the same percentage of the additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the shares offered hereby. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the shares are being sold. We will be obligated, pursuant to the option, to sell shares to the extent the option is exercised. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the shares of common stock offered in this offering. If this option is exercised in full, the total public offering price, underwriting discounts and commissions and proceeds to us will be $ , $ and $ , respectively. The following table summarizes the compensation to be paid to the underwriters by us:
TOTAL ---------------------------------- WITHOUT WITH PER OVER- OVER- SHARE ALLOTMENT ALLOTMENT ------ ----------- ----------- Underwriting discounts and commissions payable by us........ $ $ $
We estimate that expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $ . Indemnity. The underwriting agreement contains covenants of indemnity among the underwriters and us against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. 63 68 Lock-Up Agreements. Each of our officers and directors and stockholders has agreed, for a period of 180 days after the date of this prospectus, that, subject to exceptions, they will not offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock, any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or, with certain exceptions, thereafter acquired directly by those holders or with respect to which they have or hereafter acquire the power of disposition, without the prior written consent of FleetBoston Robertson Stephens Inc. However, FleetBoston Robertson Stephens Inc. may, in its sole discretion and at any time, without notice, release all or any portion of the securities subject to the lock-up agreements. There are no agreements between the representatives and any of our stockholders providing consent to the sale of shares prior to the expiration of the lock-up period. Future Sales. In addition, we have agreed that until 180 days after the date of this prospectus, we will not, subject to certain exceptions, without the prior written consent of FleetBoston Robertson Stephens Inc.: - Consent to the disposition of any shares held by stockholders prior to the expiration of the lock-up period; or - Issue, sell, contract to sell, or otherwise dispose of, any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than 1) the sale of shares in this offering; 2) the issuance of common stock upon the exercise of outstanding options or warrants; and 3) the issuance of options under existing stock option and incentive plans. See "Shares Eligible for Future Sales." Listing. We have applied for quotation on the Nasdaq National Market under the symbol CALD. No Prior Public Market. Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the common stock offered hereby will be determined through negotiations between us and the representatives. Among the factors to be considered in such negotiations are prevailing market conditions, certain of our financial information, market valuations of other companies that we and the representatives believe to be comparable to us, estimates of our business potential, our present state of development and other factors deemed relevant. Stabilization. The representatives have advised us that, pursuant to Regulation M under the Securities Act, certain persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the shares of the common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "syndicate covering transaction" is the bid for or the purchase of the common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with this offering. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with this offering if the common stock originally sold by such underwriter or syndicate member is purchased by the representatives in a syndicate covering transaction and has therefore not been effectively placed by such underwriter or syndicate member. The representatives have advised us that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. 64 69 NASD Compliance. Entities affiliated with FleetBoston Robertson Stephens Inc. and Wit Capital each acquired 66,666 shares of our Series B convertible preferred stock in our December 1999 private placement at a price of $6.00 per share. Directed Share Program. At our request, the underwriters have reserved for sale, at the initial public offering price, up to ten percent of the shares of common stock offered in this offering under a directed share program. We currently expect that approximately half of these shares will be offered to directors, officers, employees, business associates, and related persons of Caldera Systems pursuant to a directed share program being administered by FleetBoston Robertson Stephens Inc., and that approximately half of these shares, pursuant to a directed share program being administered by Wit Capital Corporation, will be offered to open source software developers and other persons that we believe have contributed to the success of the open source software community and to the growth of Caldera Systems. We cannot assure you that any of the reserved shares will be so purchased. The number of shares of common stock available for sale to the general public in this offering will be reduced by the number of reserved shares sold. Any reserved shares not purchased will be offered to the general public on the same basis as the other shares offered in this offering. Purchases of the reserved shares pursuant to the directed share program administered by Wit Capital are to be made through an account at Wit Capital in accordance with Wit Capital's procedures for opening an account and transacting in securities. In addition, Wit Capital is an underwriter of additional shares in the offering. A prospectus in electronic format is being made available on an Internet web site maintained by Wit Capital. In addition, all dealers purchasing common shares from Wit Capital in this offering have agreed to make a prospectus in electronic format available on a web site maintained by each of them. Other than the prospectus in electronic format, the information on the web site and any information contained on any other web site maintained by Wit Capital or any dealer purchasing common shares from it is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us or any underwriter in its capacity as underwriter and should not be relied on by prospective investors. The National Association of Securities Dealers, Inc. approved the membership of Wit Capital on September 4, 1997. Since that time, Wit Capital has acted as a co-lead managing underwriter on one offering, a co-managing underwriter on 61 offerings and a dealer on 107 offerings. LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Brobeck, Phleger & Harrison LLP, Broomfield, Colorado. Certain legal matters in connection with the offering will be passed upon for the underwriters by Cooley Godward LLP, San Francisco, California. EXPERTS The audited financial statements and schedule included in this prospectus and elsewhere in the registration statement 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. 65 70 WHERE YOU CAN FIND ADDITIONAL INFORMATION Caldera Systems, Inc. has filed with the Securities and Exchange Commission a registration statement on Form S-1, including exhibits, schedules and amendments filed with the registration statement, under the Securities Act with respect to the common stock to be sold in this offering. This prospectus does not contain all of the information set forth in this registration statement. For further information about Caldera Systems, Inc. and the shares of common stock to be sold in the offering, please refer to this registration statement. For additional information, please refer to the exhibits that have been filed with our registration statement on Form S-1. You may read and copy all or any portion of the registration statement or any other information Caldera Systems files at the Securities and Exchange Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C., 20549. You can request copies of these documents upon payment of a duplicating fee, by writing to the Securities and Exchange Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information about the public reference rooms. Caldera Systems, Inc.'s Securities and Exchange Commission filings, including the registration statement, will also be available to you on the Securities and Exchange Commission's Web site (http://www.sec.gov). We intend to furnish our stockholders with annual reports containing audited financial statements by an independent public accounting firms and quarterly reports containing unaudited financial information for the first three quarters of each year. 66 71 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- 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
F-1 72 After the reincorporation discussed in Note 12 to the consolidated financial statements of Caldera Systems, Inc., the carved-out portion of Caldera, Inc. and their subsidiary, we expect to be in a position to render the following audit report. ARTHUR ANDERSEN LLP Salt Lake City, Utah January 10, 2000 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, 1998 and 1999, and the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended October 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1999 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Salt Lake City, Utah January 10, 2000 (except with respect to the reincorporation discussed in the first paragraph of Note 12, as to which the date is , 2000) F-2 73 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 1998 AND 1999 ASSETS
1998 1999 ----------- ------------ CURRENT ASSETS: Cash........................................................ $ 75,586 $ 121,989 Accounts receivable, net of allowance for doubtful accounts of $15,000 and $90,000, respectively.......... 151,546 670,043 Stock subscription receivable............................. -- 1,500,000 Other receivables......................................... -- 375,000 Inventories............................................... 49,746 169,409 Other current assets...................................... 176,605 33,524 ----------- ------------ Total current assets................................... 453,483 2,869,965 ----------- ------------ PROPERTY AND EQUIPMENT: Computer equipment........................................ 401,015 609,665 Furniture and fixtures.................................... 332,915 675,181 Leasehold improvements.................................... 50,514 86,973 ----------- ------------ 784,444 1,371,819 Less accumulated depreciation and amortization............ (366,269) (652,399) ----------- ------------ Net property and equipment............................. 418,175 719,420 ----------- ------------ OTHER ASSETS, net........................................... -- 124,430 ----------- ------------ Total assets........................................... $ 871,658 $ 3,713,815 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 314,138 $ 1,309,255 Accrued liabilities....................................... 112,948 450,157 Accrued marketing development............................. -- 172,900 Accrued sales returns and other allowances................ 54,000 169,000 Deferred revenue.......................................... -- 38,080 Current portion of long-term debt......................... -- 3,698 Related party payables.................................... -- 48,933 ----------- ------------ Total current liabilities.............................. 481,086 2,192,023 ----------- ------------ LONG-TERM DEBT, net of current portion...................... -- 5,762 ----------- ------------ COMMITMENTS AND CONTINGENCIES (Notes 1, 7, and 12) STOCKHOLDERS' EQUITY: Preferred stock, $0.001 par value; 25,000,000 shares authorized -- Series A convertible preferred stock, 6,596,146 shares designated, 3,966,517 and 6,596,146 shares outstanding, respectively............................ 3,967 6,596 Series B convertible preferred stock, 5,000,000 shares designated, no shares outstanding.................... -- -- Common stock, $0.001 par value; 75,000,000 shares authorized, 12,033,483 and 20,011,183 shares outstanding, respectively.............................. 12,033 20,011 Additional paid-in capital................................ 1,752,693 16,160,312 Stock subscriptions receivable............................ (317,110) (1,500,000) Deferred compensation..................................... -- (2,734,934) Accumulated comprehensive income (loss)................... 3,991 (4,365) Accumulated deficit....................................... (1,065,002) (10,431,590) ----------- ------------ Total stockholders' equity............................. 390,572 1,516,030 ----------- ------------ Total liabilities and stockholders' equity............. $ 871,658 $ 3,713,815 =========== ============
See accompanying notes to consolidated financial statements. F-3 74 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999
1997 1998 1999 ----------- ----------- ----------- REVENUE: Software and related products..................... $ 1,116,794 $ 1,057,088 $ 2,772,878 Services.......................................... -- -- 277,429 ----------- ----------- ----------- Total revenue.................................. 1,116,794 1,057,088 3,050,307 ----------- ----------- ----------- COST OF REVENUE: Software and related products..................... 1,142,187 1,016,682 2,388,601 Services.......................................... -- -- 537,877 Write-off of prepaid royalties.................... -- 1,381,695 -- ----------- ----------- ----------- Total cost of revenue.......................... 1,142,187 2,398,377 2,926,478 ----------- ----------- ----------- GROSS MARGIN (DEFICIT).............................. (25,393) (1,341,289) 123,829 ----------- ----------- ----------- OPERATING EXPENSES: Sales and marketing............................... 4,619,341 2,223,814 4,767,508 Research and development.......................... 2,136,118 1,489,041 2,302,302 General and administrative........................ 796,806 1,798,872 1,748,087 Amortization of deferred compensation............. -- -- 409,296 ----------- ----------- ----------- Total operating expenses....................... 7,552,265 5,511,727 9,227,193 ----------- ----------- ----------- LOSS FROM OPERATIONS................................ (7,577,658) (6,853,016) (9,103,364) ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest expense.................................. (593,182) (1,081,179) (225,657) Other income (expense)............................ 22,923 4,838 (2,792) ----------- ----------- ----------- Other expense, net............................. (570,259) (1,076,341) (228,449) ----------- ----------- ----------- LOSS BEFORE INCOME TAXES............................ (8,147,917) (7,929,357) (9,331,813) PROVISION FOR INCOME TAXES.......................... -- (33,780) (34,775) ----------- ----------- ----------- NET LOSS............................................ $(8,147,917) $(7,963,137) $(9,366,588) =========== =========== =========== BASIC AND DILUTED NET LOSS PER COMMON SHARE......... $ (0.68) $ (0.66) $ (0.67) =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.......... 12,033,483 12,033,483 13,881,785 =========== =========== =========== OTHER COMPREHENSIVE LOSS: Net loss.......................................... $(8,147,917) $(7,963,137) $(9,366,588) Foreign currency translation adjustments.......... -- 3,991 (8,356) ----------- ----------- ----------- COMPREHENSIVE LOSS.................................. $(8,147,917) $(7,959,146) $(9,374,944) =========== =========== ===========
See accompanying notes to consolidated financial statements. F-4 75 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999
SERIES A CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK ------------------ -------------------- PAID-IN SUBSCRIPTIONS DEFERRED SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION --------- ------ ---------- ------- ----------- ------------- ------------ Balance, October 31, 1996......... -- $ -- -- $ -- $ -- $ -- $ -- Debt funding and related accrued interest applicable to carved-out operations of Caldera, Inc. ..... -- -- -- -- -- -- -- Net loss applicable to carved-out operations of Caldera, Inc. ..... -- -- -- -- -- -- -- --------- ------ ---------- ------- ----------- ----------- ----------- 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 reorganization of Caldera, Inc. ................... 3,966,517 3,967 12,033,483 12,033 1,752,693 (317,110) -- Cumulative translation adjustment....................... -- -- -- -- -- -- -- Net loss for the period subsequent to incorporation................. -- -- -- -- -- -- -- --------- ------ ---------- ------- ----------- ----------- ----------- Balance, October 31, 1998......... 3,966,517 3,967 12,033,483 12,033 1,752,693 (317,110) -- Receipt of stock subscription receivable....................... -- -- -- -- -- 317,110 -- Conversion of promissory note and accrued interest to common and Series A convertible preferred shares at $1.00 per share........ 1,307,457 1,307 3,966,517 3,967 5,268,700 -- -- Issuance of common and Series A convertible preferred shares for cash and stock subscription receivable at $1.13 per share.... 1,322,172 1,322 4,011,161 4,011 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......... 6,596,146 $6,596 20,011,183 $20,011 $16,160,312 $(1,500,000) $(2,734,934) ========= ====== ========== ======= =========== =========== =========== CALDERA, INC.'S ACCUMULATED EQUITY IN COMPREHENSIVE ACCUMULATED CARVED-OUT INCOME (LOSS) DEFICIT OPERATIONS ------------- ------------ --------------- Balance, October 31, 1996......... $ -- $ -- $ 575,567 Debt funding and related accrued interest applicable to carved-out operations of Caldera, Inc........ -- -- 9,891,743 Net loss applicable to carved-out operations of Caldera, Inc. ..... -- -- (8,147,917) ------- ------------ ----------- Balance, October 31, 1997......... -- -- 2,319,393 Debt funding and related accrued interest applicable to carved-out operations of Caldera, Inc. ..... -- -- 5,511,325 Net loss applicable to carved-out operations of Caldera, Inc. through August 31, 1998.......... -- -- (6,898,135) Incorporation of Caldera Systems, Inc. and reorganization of Caldera, Inc. ................... -- -- (932,583) 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) -- Receipt of stock subscription receivable....................... -- -- -- Conversion of promissory note and accrued interest to common and Series A convertible preferred shares at $1.00 per share........ -- -- -- Issuance of common and Series A convertible preferred 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) $ -- ======= ============ ===========
See accompanying notes to consolidated financial statements. F-5 76 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999 INCREASE (DECREASE) IN CASH
1997 1998 1999 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................................................ $(8,147,917) $(7,963,137) $(9,366,588) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization...................... 120,551 132,221 288,797 Amortization of deferred compensation.............. -- -- 409,296 Accrued interest converted to equity............... 608,623 1,082,260 254,910 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable, net........................................... (283,961) 142,075 (518,497) Increase in other receivables.................... -- -- (375,000) (Increase) decrease in inventories............... (279,717) 281,936 (119,663) (Increase) decrease in other current assets...... (1,212,248) 1,617,138 143,081 (Increase) decrease in other assets.............. (123,432) 625,712 (10,097) Increase (decrease) in accounts payable.......... 395,832 (908,994) 1,044,050 Increase (decrease) in accrued liabilities....... 52,849 (159,496) 337,209 Increase in accrued marketing development........ -- -- 172,900 Increase (decrease) in accrued sales returns and allowances.................................... 83,300 (46,000) 115,000 Increase in deferred revenue..................... -- -- 38,080 ----------- ----------- ----------- Net cash used in operating activities......... (8,786,120) (5,104,285) (7,586,522) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment.................... (306,339) (169,764) (587,375) Purchase of other long-lived assets................... -- -- (80,000) ----------- ----------- ----------- Net cash used in investing activities......... (306,339) (169,764) (667,375) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings from majority stockholder under convertible promissory note.................................... -- -- 4,819,000 Proceeds from long-term debt.......................... -- -- 11,486 Repayments of long-term debt.......................... -- -- (2,026) Borrowings from majority stockholder prior to reorganization..................................... 9,283,120 4,429,065 -- Proceeds from common and Series A convertible preferred shares upon incorporation................ -- 519,000 15,481,000 Cash payment to Caldera, Inc. in asset acquisition.... -- -- (14,963,826) Capitalized offering costs............................ -- -- (37,000) Proceeds from common and Series A convertible preferred stock.................................... -- -- 3,000,000 Proceeds from exercise of common stock option......... -- -- 22 ----------- ----------- ----------- Net cash provided by financing activities..... 9,283,120 4,948,065 8,308,656 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH......................... 190,661 (325,984) 54,759 CUMULATIVE TRANSLATION ADJUSTMENT....................... -- 3,991 (8,356) CASH, beginning of year................................. 206,918 397,579 75,586 ----------- ----------- ----------- CASH, end of year....................................... $ 397,579 $ 75,586 $ 121,989 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-6 77 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999
1997 1998 1999 ---------- ----------- ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.................................... $ -- $ -- $ 424 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of common and Series A convertible preferred 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 and Series A convertible preferred shares for a note receivable............................ -- -- 3,000,000 Issuance of common and Series A convertible preferred shares upon conversion of secured convertible promissory note payable and related accrued interest............... -- -- 5,273,974
See accompanying notes to consolidated financial statements. F-7 78 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND DESCRIPTION OF BUSINESS Caldera Systems, Inc. ("Caldera"), originally incorporated as a Utah corporation on August 21, 1998, (see Note 12 for description of reincorporation as a Delaware corporation) 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, effective September 1, 1998, 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 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). Effective upon incorporation, Caldera agreed to issue 16,000,000 shares of common stock (converted to 12,033,483 shares of common stock and 3,966,517 shares of Series A convertible preferred stock in connection with the December 1999 recapitalization, see Note 5) 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 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 treated as a reorganization of entities under common control. Accordingly, the accompanying consolidated financial statements include the carved-out operations of the Predecessor related to the Linux business through September 1, 1998, the effective date of the reorganization. The acquired assets and liabilities are reflected at carry-over basis. 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. The resulting net balance as of the date of reorganization, September 1, 1998, of $932,583 was transferred to equity of Caldera. 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 to create Linux business solutions. The Company sells and distributes its software and related products indirectly through distributors, value added resellers, original equipment manufactures, and system integrators and directly to end-user customers. These sales occur throughout the United States and in certain international locations. The Company is subject to certain risks including the uncertainty of market acceptance and demand for Linux related products and services, competition from larger, more established companies, short product life cycles, the Company's ability to develop and bring to market new products on a timely basis, F-8 79 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) dependence on key employees, the ability to attract and retain additional qualified personnel and the ability to obtain adequate financing to support growth. (2) SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of 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. 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 subsidiary 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. 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, 1998 and 1999, inventories consisted of raw materials of approximately $40,400 and $79,400, respectively, and finished goods of approximately $9,300 and $90,000, respectively. Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values. Due to competitive pressures and technological innovation, it is possible that estimates of the net realizable value could change in the near term. 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. F-9 80 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments that extend the useful lives of existing equipment are capitalized and depreciated. On retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the statement of operations. CAPITALIZED SOFTWARE COSTS In accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards 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, 1997, 1998 and 1999. 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 purchased technology and capitalized offering costs. The purchased technology is to be used in the development of the Company's web-based products and is being amortized using the straight-line method over a period of two years. Capitalized offering costs include legal and accounting fees in connection with the Company's anticipated equity offerings. These costs will be netted against the actual offering proceeds. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews its long-lived assets, including intangibles, for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable. The Company evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. The Company uses an estimate of future undiscounted net cash flows of the related asset or group of assets over the remaining life in measuring whether the assets are recoverable. As of October 31, 1999, the Company does not consider any of its long-lived assets to be impaired. REVENUE RECOGNITION The Company generates revenues from software and related products sold indirectly through distributors and business solution providers and directly to end-users. The Company also generates revenues from training royalties and tuition fees, consulting fees, and customer support fees. During fiscal 1997 and fiscal 1998, all of the Company's revenues were derived from software and related products offerings. Revenue from the sale of software and related products is recognized upon delivery of the product if collection is probable. The Company provides certain telephone and e-mail technical support services at no additional charge. The cost of providing the post-contract support services are not significant; accordingly, the Company accrues the estimated costs of providing the services at the time of revenue recognition. 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. F-10 81 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In October 1997, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), which the Company has adopted for transactions entered into for the years ended October 31, 1998 and 1999. The adoption of SOP 97-2 did not have a significant impact on the Company's revenue recognition practices, or its results of operations, financial position or liquidity. In December 1998, the AICPA issued Statement of Position No. 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition, With Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amends SOP 97-2 to require recognition of revenue using a "residual method" in certain circumstances. We adopted SOP 98-9 for transactions entered into for the years ended October 31, 1998 and 1999. The adoption of this statement did not have a significant effect on the Company's revenue recognition practices or its results of operations, financial position or liquidity. Sales to certain distributors are subject to agreements allowing for rights of return and price protection. Allowances for estimated future returns, price protection, stock rotations, as well as anticipated end-user customer rebates and other customer incentives, are provided at the time of sale based on the Company's policies and historical experience. At October 31, 1998 and 1999, allowances for returns, price protection and stock rotations totaled approximately $54,000 and $169,000, respectively, and are reflected as a current liability in the accompanying consolidated balance sheets. Service revenue from training royalties and tuition fees and consulting fees are recognized as the services are performed. Revenues from customer support fees is recognized ratably over the period of the contract, typically one year. Deferred revenue primarily relates to customer support fees, which have been paid by customers in advance of the services being 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 the Company determined that the remaining balance of prepaid royalties was impaired and accordingly was written-off. This write-off amounted to approximately $1,381,700 and has been classified as part of cost of revenue in the accompanying consolidated statement of operations for the year ended October 31, 1998. 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 $2,515,800, $967,700 and $1,228,600 for the years ended October 31, 1997, 1998 and 1999, 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 F-11 82 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Company's products. As of October 31, 1998 and 1999, the Company recorded an accrual of $0 and $172,900, respectively, for these costs. INCOME TAXES The Company recognizes a liability or asset for the deferred tax consequences of all temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. These deferred tax assets or liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. Deferred tax assets are reviewed periodically for recoverability and valuation allowances are provided, as necessary. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS The Company offers credit terms on the sale of its software products to certain customers. The Company performs ongoing credit evaluations of its customers' financial condition and requires no collateral from its customers. The Company maintains an allowance for uncollectable accounts receivable based upon the expected collectibility of all accounts receivable. As of October 31, 1998, three distributors accounted for approximately 67 percent of the gross accounts receivable balance. As of October 31, 1999, three distributors accounted for approximately 71 percent of the gross accounts receivable balance. As of October 31, 1998 and 1999, the allowance for bad debts was $15,000 and $90,000, respectively. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the AICPA issued Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires entities to capitalize certain costs related to internal-use software once certain criteria have been met. SOP 98-1 was adopted by the Company in fiscal 1999. The adoption of SOP 98-1 did not have a material impact on the Company's results of operations, financial position or liquidity. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("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 is effective for financial statements issued for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not expect this statement to have a material impact on the Company's results of operations, financial position or liquidity. COMPREHENSIVE INCOME (LOSS) In fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive income (loss) and its components in financial statements. Comprehensive income (loss) consists of net loss and foreign currency translation adjustments 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. F-12 83 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NET LOSS PER COMMON SHARE The Company computes net loss per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS 128 and SAB 98, basic net loss per common share ("Basic EPS") is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share ("Diluted EPS") is computed by dividing net loss by the sum of the weighted average number of common shares and the dilutive potential common share equivalents then outstanding. Potential common share equivalents consist of shares issuable upon the exercise of stock options and shares issuable upon the conversion of Series A convertible preferred stock. As of October 31, 1997, 1998 and 1999, there were 3,966,517, 3,966,517 and 6,596,146 shares of Series A convertible preferred stock outstanding, respectively, and there were 2,964,240 outstanding options to purchase common shares as of October 31, 1999 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 years ended October 31, 1997 and 1998, the 12,033,483 shares (post Series A convertible preferred stock conversion, see Note 5) issued in the initial capitalization of Caldera were treated as outstanding for the entire fiscal year. (3) OTHER RECEIVABLES Other receivables consist 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. (4) SECURED CONVERTIBLE PROMISSORY NOTE PAYABLE TO CANOPY In connection with the incorporation of Caldera, Caldera and Canopy entered into a Secured Convertible Promissory Note Agreement (the "Note Agreement") pursuant to which the Company could borrow up to $2,000,000, or such other greater amount as determined necessary, to fund ongoing operations. Interest accrued on borrowings under the Note Agreement at the prime rate, less one-half percent compounded annually. 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 (converted to 3,966,517 shares of common stock and 1,307,457 shares of Series A convertible preferred shares in connection with the December 1999 recapitalization, see Note 5) and the Note Agreement was cancelled. (5) STOCKHOLDERS' EQUITY REINCORPORATION AS A DELAWARE CORPORATION As discussed in Note 12, all share and per share amounts in the accompanying consolidated financial statements have been adjusted to give effect to the reincorporation. F-13 84 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 have 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 have initial stated values per share of $4.03 and $6.00, respectively, and rank 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 are 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 is deemed to be $6.00. Any holder of Series A or B shares may convert all or any shares of Series A or B into common shares and each share of Series A or B automatically converts 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 converts into one share of common stock. The conversion ratio is adjusted for stock splits and like events. The holders of Series A and B shares are 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 is 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 shall be entitled to receive, on a pari passu basis, out of the assets available for distribution to stockholders an amount equal to the greater of (i) the sum of (1) the respective stated value per share plus (2) an amount equal to all unpaid accruing dividends (whether or not declared) plus (3) any other dividends declared but unpaid, and (ii) the amount that such holder of Series A 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. CONVERSION OF COMMON SHARES INTO SERIES A SHARES Prior to the offering of Series B shares discussed in Note 12, effective 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. This transaction has been accounted for as a recapitalization and has been retroactively reflected in the accompanying consolidated financial statements for all periods presented. F-14 85 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) COMMON STOCK TRANSACTIONS On September 1, 1998, in connection with the initial capitalization of Caldera, Canopy purchased 16,000,000 shares of Caldera's common stock (converted to 12,033,483 shares of common stock and 3,966,517 shares of Series A in connection with the recapitalization discussed above) 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 stock subscription receivable of $317,110 included in the accompanying consolidated financial statements represented the difference between the $15,481,000 to be received from Canopy, less borrowings and accrued interest of $15,163,890 payable to the Predecessor. At the time of incorporation, Canopy agreed to continue to fund the operations of the Company through a secured convertible promissory note (see Note 4). 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 (converted to 3,966,517 shares of common stock and 1,307,457 shares of Series A in connection with the recapitalization discussed above). 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 (converted to 4,011,161 shares of common stock and 1,322,172 shares of Series A in connection with the recapitalization discussed above) 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 bears 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 2000 and July 2000. The Company negotiated to receive the initial installment of $1,500,000 in November 1999 in exchange for the Company agreeing to forego the interest component attached to the note receivable. As a result of this modification, the Company did not record any accrued interest in the consolidated balance sheet as of October 31, 1999. The $1,500,000 received in November 1999 has been reflected as a current asset in the accompanying consolidated balance sheet as of October 31, 1999 and the remaining $1,500,000 has been reflected as a component of stockholders' equity as of October 31, 1999. In connection with MTI's investment, the Company entered into an Investors' Rights Agreement with MTI and Canopy pursuant to which MTI received registration rights applicable to the stock acquired. This Investors' Rights Agreement was amended and superceded in connection with the Conversion Agreement discussed above and the subsequent offering of Series B preferred shares discussed in Note 12. 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, 1999, options to purchase 2,035,738 shares of common stock were available for future grants under the 1998 Plan. F-15 86 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 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. 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 will be administered by the compensation committee of the board of directors. This committee will determine 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. Tandem stock appreciation rights may be issued under the 1999 plan which will provide the holders with the election to surrender their outstanding options for a cash appreciation distribution from the Company equal to the fair market value of the vested shares subject to the surrendered option less the aggregate exercise price payable for such shares. In addition, the Company may issue stand-alone stock appreciation rights which will entitle the holder to receive a cash payment from the Company equal to the fair market value of the vested shares subject to the right less the base price for such right. Phantom stock awards will entitle the holder to receive in cash the fair market value of common stock on the vesting date. In the event that 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 our 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. A summary of stock option activity under the stock option plans for the year ended October 31, 1999 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 =========
F-16 87 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 year ended October 31, 1999 is as follows:
WEIGHTED AVERAGE WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED EXERCISE PRICE OPTIONS --------------- ---------------- ---------------- 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 ==========
A summary of the options outstanding and options exercisable under the Company's stock option plans at October 31, 1999 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.................... 2,116,740 9.5 $1.00 736,092 $1.00 1.13.................... 847,500 9.9 1.13 16,114 1.13 --------- ------- 2,964,240 9.6 1.04 752,206 1.00 ========= =======
STOCK-BASED COMPENSATION The Company accounts for its stock options issued to directors, officers and employees under Accounting Principles Board Opinion No. 25 and related interpretations ("APB 25"). Under APB 25, compensation expense is recognized if an option's exercise price on the measurement date is below the 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. Subsequent to year-end, the Company has granted 2,369,388 additional stock options with exercise prices ranging from $1.13 to $6.00. The granting of these options will result in approximately $5,280,000 of additional deferred compensation to be recognized as expense over the vesting period of the options. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") 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 year ended October 31, 1999: risk-free interest rate of 5.5 percent; expected dividend yield of 0 percent; volatility of 0 percent, and expected exercise lives of five years. For purposes of the pro forma disclosure, the estimated fair market value of the stock options is amortized over the vesting periods F-17 88 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) of the respective stock options. The following is the pro forma disclosure and the related impact on net loss for the year ended October 31, 1999:
1999 ----------- Net loss as reported........................................ $(9,366,588) Pro forma net loss.......................................... (9,773,906)
(6) INCOME TAXES As described in Note l, Caldera became a separate legal entity effective September 1, 1998. The income tax attributes associated with the carved-out portion of Caldera, Inc. prior to September 1, 1998 remained with the Predecessor. 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 year ended October 31, 1999:
1998 1999 ----------- ----------- Domestic U.S. operations.................................. $(1,070,632) $(9,401,363) Operations of foreign subsidiary, Caldera GmbH............ 11,260 69,550 ----------- ----------- Total................................................... $(1,059,372) $(9,331,813) =========== ===========
The components of the provision for income taxes for the period from the reorganization (September 1, 1998) through October 31, 1998 and for the year ended October 31, 1999 are as follows:
1998 1999 --------- ----------- Current: U.S. Federal............................................... $ -- $ -- U.S. State............................................... -- -- Non-U.S. ................................................ 33,780 34,775 --------- ----------- 33,780 34,775 --------- ----------- Deferred: U.S. Federal ............................................ (368,163) (3,050,789) U.S. State .............................................. (53,436) (468,597) Change in valuation allowance............................ 421,599 3,519,386 --------- ----------- -- -- --------- ----------- Total provision for income taxes...................... $ 33,780 $ 34,775 ========= ===========
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities. They are measured by applying the enacted tax rates and laws in effect for the years in which such differences are expected to reverse. The significant components of the Company's deferred income tax assets and liabilities at October 31, 1998 and 1999 are as follows:
1998 1999 ----------- ------------ Deferred income tax assets: Net operating loss carryforwards..................... $ 442,760 $ 3,967,242 Tax basis in excess of book basis related to assets acquired by Caldera from Predecessor.............. 7,077,046 6,599,942 Reserves and accrued expenses........................ 35,931 268,510 Stock-based compensation............................. -- 152,667 Book depreciation in excess of tax................... -- 62,570 Foreign tax credit................................... 22,970 46,617 ----------- ------------ Total deferred income tax assets.................. 7,578,707 11,097,548 Valuation allowance.................................. (7,578,162) (11,097,548) ----------- ------------ Net deferred income tax assets.................... 545 -- ----------- ------------
F-18 89 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1998 1999 ----------- ------------ Deferred income tax liabilities: Tax depreciation in excess of book................... (545) -- ----------- ------------ Total deferred income tax liabilities............. (545) -- ----------- ------------ Net deferred income taxes......................... $ -- $ -- =========== ============
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 valuation allowance against its deferred income tax assets. Management believes that, 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, 1999, the Company had net operating loss carryforwards for federal income tax reporting purposes totaling approximately $10,636,000. The net operating loss carryforwards expire as follows:
YEAR OF EXPIRATION AMOUNT ------------------ ----------- 2018........................................................ $ 1,187,000 2019........................................................ 9,449,000 ----------- $10,636,000 ===========
The Internal Revenue Code contains provisions that likely could reduce or limit the availability and utilization of net operating loss carryforwards if certain changes in ownership have taken place or will take place. The Company has not performed an analysis to determine whether any such limitations have occurred. The differences between the provision (benefit) for income taxes at the U.S. statutory rate and the Company's effective tax rate is as follows:
1998 1999 ----- ----- Benefit at statutory rate................................... (34.0%) (34.0%) Non-deductible items........................................ 0.1% 0.1% State income taxes, net of federal effect................... (3.3%) (3.3%) Foreign income taxes........................................ 0.6% (0.1%) Increase in valuation allowance............................. 39.8% 37.7% ----- ----- Total provision for income taxes.......................... 3.2% 0.4% ===== =====
(7) 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. OPERATING LEASE AGREEMENTS The Company leases its corporate office facilities from the Predecessor. The lease commenced on September 1, 1998 and expires on August 31, 2000. The rent payment under this lease is approximately F-19 90 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) $12,100 per month and is based on the portion of total square footage used by the Company. Rent expense under this arrangement totaled approximately $0, $19,200 and $144,700 for the years ended October 31, 1997, 1998 and 1999, respectively. This lease requires the Company to pay taxes, maintenance, insurance and certain other operating costs of the leased property. In October 1999, the Company entered into an assignment and extension of an existing operating lease with an unrelated lessor for research and development space. Monthly lease payments under this arrangement are $10,000 and require the Company to pay certain operating expenses such as maintenance, insurance and other operating costs. The Company does not anticipate renewing the lease when it expires in July 2000. 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 $4,880 U.S. dollars based on the exchange rate as of October 31, 1999) 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 an unrelated lessor under an eighteen-month lease which expires in November 2000. Rent expense under the lease is approximately $32,000 per year. 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 are 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 has committed to make certain payments to the Company. Based on the performance commitment, the date of the amended contract has been determined to be the measurement date and the estimated fair value of the Company's common stock on that date of $269,336, or $8 per share, will be expensed as the services are rendered. CONTINGENT CASH AWARDS In August 1999, the Company granted 24 individuals the right to receive the cash value of 25 shares of common stock if the Company completes an initial public offering, such value to be determined by the market price per share of the Company's common stock as reported on the Nasdaq National Market on the thirtieth day following the first day the Company's common stock is publicly traded. (8) RELATED PARTY TRANSACTIONS 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 4). In August 1999, the principal borrowings and accrued interest of $454,974 were converted into 5,273,974 shares of common stock. The chairman of the Company's board of directors is the president and chief executive officer and a F-20 91 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1997, 1998 and 1999, transactions with these related parties were as follows:
1997 1998 1999 ------ ------- -------- Rent (see Note 7)..................................... $ -- $19,200 $144,700 Training and testing.................................. -- -- 48,200 Insurance............................................. 4,600 13,200 13,800 ------ ------- -------- Total expenses...................................... $4,600 $32,400 $206,700 ====== ======= ========
As discussed in Note 9, the Company participates in a 401(k) plan sponsored by Canopy. As of October 31, 1999, the Company had related party payables of $48,933. LINEO, INC. As discussed in Note 12, 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 another director are also directors of Lineo. Sales to Lineo amounted to $1,700 during the year ended October 31, 1999. 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 October 31, 1999, the Company agreed to forego the interest component of the note receivable in exchange for an acceleration of the payment terms (see Note 5). 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 during the year ended October 31, 1999. (9) EMPLOYEE BENEFIT PLAN The Company has adopted a prototype 401(k) plan (the "Benefit Plan") sponsored by Canopy in which all eligible employees are entitled to make pre-tax contributions. All full-time employees become eligible for participation in the Benefit Plan once they have reached the age of 21. Eligible participants can elect to make contributions to the Benefit Plan and such contribution amounts are subject to certain limitations under the Internal Revenue Code. As of October 31, 1999, the Company has not made any contributions to the Benefit Plan; however, the Board of Directors of Canopy has approved a discretionary matching program allowing the Company to match up to 50 percent of each dollar contributed by F-21 92 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) employees at a maximum of six percent of the employee's salary. This matching program will be in effect beginning January 1, 2000. (10) SIGNIFICANT CUSTOMERS During the year ended October 31, 1997, the Company did not have sales to any one customer that accounted for more than ten percent of total net revenues. During the year ended October 31, 1998, the Company had sales to one customer that accounted for approximately 11 percent of total net revenues. 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 net revenues, respectively. No other customer accounted for more than ten percent of net revenues during the years ended October 31, 1998 and 1999. (11) SEGMENT INFORMATION In June 1998, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). 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, 1997, 1998 and 1999. However, the Company does sell software and related products in geographic locations outside of the United States. Revenues attributed to individual countries based on the location of sales to unaffiliated customers for the years ended October 31, 1997, 1998 and 1999 is as follows:
1997 1998 1999 ---------- ---------- ---------- Revenue: United States.................................. $1,116,794 $1,000,943 $2,847,789 Other countries................................ -- 56,145 202,518 ---------- ---------- ---------- Total revenue................................ $1,116,794 $1,057,088 $3,050,307 ========== ========== ==========
(12) SUBSEQUENT EVENTS REINCORPORATION AS A DELAWARE CORPORATION Prior to completion of the Company's initial public offering, Caldera will reincorporate in Delaware and amend and restate its certificate of incorporation. The reincorporation into Delaware will be 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 will be entitled to receive 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. 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 preferred stock at $6 per share with the rights, preferences, privileges and restrictions as described in Note 5. As of January 10, 2000, the 5,000,000 shares had been sold for net proceeds of approximately $29,500,000. The Company anticipates using the proceeds from the sale of Series B preferred stock to F-22 93 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) fund ongoing research and development efforts, sales and marketing activities, and other working capital requirements. In connection with the preferred stock purchase agreement, the Company and the investors entered into an 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 (see Note 5), and the investors in the Series B preferred stock (collectively the "Preferred Stockholders") have certain rights beginning six months following the closing of a qualified public offering with respect to registration of the common shares issued or issuable upon conversion of the Series A and Series B preferred shares in compliance with the Securities Exchange Act of 1934. The Preferred Stockholders have certain demand and 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. 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. Pursuant to one of the software license agreements, the Company agreed to pay Sun a nonrefundable payment in the amount of $1,250,000 as follows: $400,000 within 30 days from execution of the agreement and $850,000 by March 24, 2000 for the rights to the software for an initial term of 18 months. The agreement also contains a renewal option for an additional nonrefundable payment at the end of the initial term. The other software license agreements provide for future royalty payments based on units sold. 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; (ii) the Company and Evergreen will engage in joint development and integration of their respective software products; (iii) the Company and Evergreen will cooperate to create educational training courses for the combined products; (iv) the Company 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 (the 592,592 shares of Evergreen's common stock acquired by the Company is approximately 4 percent of Evergreen's common and preferred stock); and (v) the parties agreed to work together to identify new business solution opportunities for their joint products. STOCK EXCHANGE AGREEMENT WITH LINEO, INC. 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 and is 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 common stock) in exchange for 1,250,000 shares of the Company's F-23 94 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) common stock. The Company and Lineo have also agreed in principle to provide each other with certain marketing and other services pursuant to a strategic alliance agreement to be completed. 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 agreed to acquire 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. F-24 95 [Art to be on back cover shows the Caldera logo, with text in various formats reading "eBusiness," "Success", "Solutions," "Integration," "Linux Revolution," "Support," "Award-Winning" and "Linux for eBusiness."] 96 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth an estimate of the costs and expenses, other than the underwriting discounts and commissions, payable by the Registrant in connection with the issuance and distribution of the common stock being registered. SEC registration fee........................................ $ 15,180 NASD fee.................................................... 6,250 NASDAQ listing fee.......................................... 5,000 Legal fees and expenses..................................... Accounting fees and expenses................................ Printing expenses........................................... Blue sky fees and expenses.................................. Transfer Agent and Registrar fees and expenses.............. Miscellaneous............................................... -------- Total..................................................... $ ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Registrant's certificate of incorporation in effect as of the date hereof, and the registrant's amended and restated certificate of incorporation to be in effect upon the closing of this offering (collectively, the "Certificate") provides that, except to the extent prohibited by the Delaware General Corporation Law, as amended (the "DGCL"), the registrant's directors shall not be personally liable to the registrant or its stockholders for monetary damages for any breach of fiduciary duty as directors of the registrant. Under the DGCL, the directors have a fiduciary duty to the registrant which is not eliminated by this provision of the Certificate and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available. In addition, each director will continue to be subject to liability under the DGCL for breach of the director's duty of loyalty to the registrant, for acts or omissions which are found by a court of competent jurisdiction to be not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by DGCL. This provision also does not affect the directors' responsibilities under any other laws, such as the Federal securities laws or state or Federal environmental laws. The registrant intends to obtain liability insurance for its officers and directors prior to the closing of this offering. Section 145 of the DGCL empowers a corporation to indemnify its directors and officers and to purchase insurance with respect to liability arising out of their capacity or status as directors and officers, provided that this provision shall not eliminate or limit the liability of a director: (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) arising under Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit. The DGCL provides further that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under the corporation's bylaws, any agreement, a vote of stockholders or otherwise. The Certificate eliminates the personal liability of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL and provides that the registrant shall fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was a director or officer of the registrant, or is or was serving at the request of the registrant as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorney's fees), judgments, fines II-1 97 and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent as to which indemnification will be required or permitted under the Certificate. The registrant is not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In the three fiscal years preceding the filing of this registration statement, the Registrant has issued the following securities that were not registered under the Securities Act: (i) On August 31, 1998, the Registrant issued to The Canopy Group, Inc. 16,000,000 shares of common stock in exchange for $20,892,674. (ii) From December 1998 through December 1999, the Registrant granted options to purchase an aggregate of 5,475,954 shares of common stock under its 1998 Stock Option Plan and 1999 Omnibus Stock Incentive Plan with a weighted average exercise price of $3.04 (iii) On July 27, 1999, the Registrant issued and sold 5,333,333 shares of common stock to MTI Technology Corporation at a purchase price of $1.13 per share. (iv) On August 19, 1999, under the terms of Secured Convertible Promissory Note dated September 1, 1998, $5,273,974 owed to The Canopy Group was converted into 5,273,974 shares of the Registrant's common stock. (v) On January 4, 2000, the Registrant issued 16,834 shares of common stock to United Systems Engineers in exchange for services rendered and agreed to issue an additional 16,833 shares of common stock to United Service Engineers upon the completion of services to be rendered, pursuant to Regulation S under the Securities Act of 1933, as amended. (vi) On December 30, 1999, the Registrant issued and exchanged 5,273,974 shares of Series A convertible preferred stock for the same number of shares of common stock held by The Canopy Group, Inc. The Registrant also issued and exchanged 1,322,172 shares of Series A convertible preferred stock for the same number of shares of common stock held by MTI Technology Corporation. (vii) In December 1999 and January 2000, the Registrant sold a total of 5,000,000 shares of Series B convertible preferred stock at a purchase price of $6.00 per share to ten accredited investors. (viii) In December 1999, the Registrant issued and sold 106,356 shares of common stock to Troll Tech AS in exchange for 159 shares of common stock of Troll Tech AS. (ix) In January 2000, the Registrant issued and sold 200,000 shares of common stock to Evergreen Internet, Inc. in exchange for 592,592 shares of common stock of Evergreen Internet, Inc.. No underwriters were involved in the foregoing sales of securities. Except as noted such sales were deemed to be exempt under the Securities Act in reliance upon Section 4(2) thereof relative to sales by an issuer not involving any public offering, or, in the case of options to purchase common stock, Rule 701 under the Securities Act. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. II-2 98 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1* Form of Underwriting Agreement. 3.1* Amended and Restated Articles of Incorporation, as amended. 3.2* Form of Amended and Restated Certificate of Incorporation to be in effect upon the closing of the offering. 3.3* Bylaws. 3.4* Form of Amended and Restated Bylaws to be in effect upon the closing of this offering. 4.1* Specimen Common Stock certificate. 5.1* Opinion of Brobeck, Phleger & Harrison LLP. 10.1 Conversion Agreement dated December 30, 1999, between the Registrant, The Canopy Group, Inc. and MTI Technology Corporation. 10.2 Form of Series B Preferred Stock Purchase Agreement between the Registrant and the Series B investors. 10.3 1998 Stock Option Plan. 10.4 1999 Omnibus Stock Incentive Plan. 10.5* 2000 Employee Stock Purchase Plan. 10.6 Secured Convertible Promissory Note dated September 1, 1998 by the Registrant in favor of The Canopy Group, Inc. 10.7 Security Agreement dated September 1, 1998 between the Registrant and The Canopy Group, Inc. 10.8 Asset Purchase and Sale Agreement dated September 1, 1998 between Caldera, Inc. and the Registrant. 10.9 Amended and Restated Asset Purchase Agreement dated as of September 1, 1998 between Caldera, Inc. and the Registrant. 10.10 Stock Purchase Agreement dated July 27, 1999 by and among the Registrant, The Canopy Group, Inc. and MTI Technology Corporation. 10.11 Stock Purchase Agreement dated January 6 , 2000 between the Registrant and Lineo, Inc. 10.12 Form of Second Amended and Restated Investors Rights Agreement by and among the Registrant and the holders of the Series A and Series B convertible preferred stock. 10.13 Form of Indemnification Agreement by and between the Registrant and its outside directors. 10.14 GNU General Public License. 10.15+ Computer Software Distribution Agreement dated December 14, 1998 between the Registrant and Navarre Corporation. 10.16+ OEM Reciprocal License Agreement dated January 6, 2000 between the Registrant and Evergreen Internet, Inc. 10.17+ Sun Community Source License version 2.3 dated January 7, 2000 between the Registrant and Sun Microsystems, Inc. 10.18+ Sun Community Source License version 2.7 dated January 7, 2000 between the Registrant and Sun Microsystems, Inc. 10.19 Lease Agreement dated September 1, 1998 between the Registrant and Caldera, Inc. 10.20 Assignment and Extension of Lease dated October 6, 1999 between the Registrant and Voxel, Inc. 10.21 Form of Voting Agreement between the Registrant and the holders of the Series A and Series B convertible preferred stock. 23.1* Consent of Brobeck Phleger & Harrison LLP (included in Exhibit 5.1).
II-3 99
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 23.2 Consent of Arthur Andersen LLP. 24.1 Powers of Attorney (see Signature Page on Page II-5). 27 Financial Data Schedule.
- ------------------------- * To be filed by amendment. + Application has been made to the Commission to seek confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the Commission. (b) FINANCIAL STATEMENT SCHEDULES Schedule II -- Valuation and Qualifying Accounts Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or the notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 100 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Orem, State of Utah, on this 10th day of January, 2000. CALDERA SYSTEMS, INC. By: /s/ RANSOM H. LOVE ------------------------------------ Name: Ransom H. Love Title: President and Chief Executive Officer POWER OF ATTORNEY We, the undersigned directors and/or officers of Caldera Systems, Inc. (the "Company"), hereby severally constitute and appoint Ransom H. Love, Chief Executive Officer, and Alan Hansen, Chief Financial Officer, and each of them individually, with full powers of substitution and resubstitution, our true and lawful attorneys, with full powers to them and each of them to sign for us, in our names and in the capacities indicated below, the registration statement on Form S-1 filed with the Securities and Exchange Commission, and any and all amendments to said registration statement (including post-effective amendments), and any registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in connection with the registration under the Securities Act of 1933, as amended, of equity securities of the Company, and to file or cause to be filed the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as each of them might or could do in person, and hereby ratifying and confirming all that said attorneys, and each of them, or their substitute or substitutes, shall do or cause to be done by virtue of this Power of Attorney. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated below:
SIGNATURE TITLE(S) DATE --------- -------- ---- /s/ RANSOM H. LOVE President, Chief Executive January 10, 2000 - --------------------------------------------------- Officer and Director Ransom H. Love (Principal Executive Officer) /s/ ALAN HANSEN Chief Financial Officer January 10, 2000 - --------------------------------------------------- (Principal Financial and Alan Hansen Accounting Officer) /s/ RALPH J. YARRO III Chairman of the Board of January 10, 2000 - --------------------------------------------------- Directors Ralph J. Yarro III /s/ RAYMOND J. NOORDA Director January 10, 2000 - --------------------------------------------------- Raymond J. Noorda /s/ THOMAS P. RAIMONDI, JR. Director January 10, 2000 - --------------------------------------------------- Thomas P. Raimondi, Jr.
II-5 101 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To Caldera Systems, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Caldera Systems, Inc, the carved-out portion of Caldera, Inc. and their subsidiary included in this registration statement and have issued our report thereon dated January 10, 2000. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II -- Valuation and Qualifying Accounts is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Salt Lake City, Utah January 10, 1999 S-1 102 CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD ----------- ------------ ---------- ---------- ---------- Allowance for doubtful accounts: Year ended October 31, 1997................... $ 22,000 $ 91,000 $ (1,000)* $112,000 Year ended October 31, 1998................... 112,000 265,000 (362,000)* 15,000 Year ended October 31, 1999................... 15,000 222,000 (147,000)* 90,000
- ------------------------- * Represents write-offs of uncollectable accounts receivable S-2 103 EXHIBIT INDEX
EXHIBIT NUMBER - ------- DESCRIPTION 1.1* Form of Underwriting Agreement. 3.1* Amended and Restated Articles of Incorporation, as amended. 3.2* Form of Amended and Restated Certificate of Incorporation to be in effect upon the closing of the offering. 3.3* Bylaws. 3.4* Form of Amended and Restated Bylaws to be in effect upon the closing of this offering. 4.1* Specimen Common Stock certificate. 5.1* Opinion of Brobeck, Phleger & Harrison LLP. 10.1 Conversion Agreement dated December 30, 1999, between the Registrant, The Canopy Group, Inc. and MTI Technology Corporation. 10.2 Form of Series B Preferred Stock Purchase Agreement, between the Registrant and the Series B investors. 10.3 1998 Stock Option Plan. 10.4 1999 Omnibus Stock Incentive Plan. 10.5* 2000 Employee Stock Purchase Plan. 10.6 Secured Convertible Promissory Note dated September 1, 1998 by the Registrant in favor of The Canopy Group, Inc. 10.7 Security Agreement dated September 1, 1998 between the Registrant and The Canopy Group, Inc. 10.8 Asset Purchase and Sale Agreement dated September 1, 1998 between Caldera, Inc. and the Registrant. 10.9 Amendment to Asset Purchase Agreement dated as of September 1, 1998 between Caldera, Inc. and the Registrant. 10.10 Stock Purchase Agreement dated July 27, 1999 by and among the Registrant, The Canopy Group, Inc. and MTI Technology Corporation. 10.11 Stock Purchase Agreement dated January 6, 2000 between the Registrant and Lineo Inc. 10.12 Form of Second Amended and Restated Investors Rights Agreement by and among the Registrant and the holders of the Series A and Series B convertible preferred stock. 10.13 Form of Indemnification Agreement by and between the Registrant and its outside directors. 10.14 GNU General Public License. 10.15+ Computer Software Distribution Agreement dated December 14, 1998 between the Registrant and Navarre Corporation. 10.16+ OEM Reciprocal License Agreement dated January 6, 2000 between the Registrant and Evergreen Internet, Inc. 10.17+ Sun Community Source License version 2.3 dated January 7, 2000 between the Registrant and Sun Microsystems, Inc. 10.18+ Sun Community Source License version 2.7 dated January 7, 2000 between the Registrant and Sun Microsystems, Inc. 10.19 Lease Agreement dated September 1, 1998 between the Registrant and Caldera, Inc. 10.20 Assignment and Extension of Lease dated October 6, 1999 between the Registrant and Voxel, Inc. 10.21 Form of Voting Agreement between the Registrant and the holders of the Series A and Series B convertible preferred stock. 23.1* Consent of Brobeck Phleger & Harrison LLP (included in Exhibit 5.1).
104
EXHIBIT NUMBER - ------- DESCRIPTION 23.2 Consent of Arthur Andersen LLP. 24.1 Powers of Attorney (see Signature Page on Page II-5). 27 Financial Data Schedule.
- ------------------------- * To be filed by amendment. + Application has been made to the Commission to seek confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the Commission.
EX-10.1 2 CONVERSION AGREEMENT DATED 12/30/1999 1 Exhibit 10.1 CONVERSION AGREEMENT THIS CONVERSION AGREEMENT (this "Agreement") is executed as of December 30, 1999 (the "Effective Date") by and among MTI TECHNOLOGY CORPORATION, a Delaware corporation ("MTI"), THE CANOPY GROUP, INC., a Utah corporation ("CGI") and CALDERA SYSTEMS, INC., a Utah corporation (the "Company"). Each of the capitalized terms used but not otherwise defined herein shall have the meaning assigned to such term under the Agreement (as defined below). WHEREAS, the Company has authorized 6,596,146 shares of Series A Preferred Stock (the "Series A Preferred") for issuance; WHEREAS, MTI and CGI desire to convert the MTI Shares (as defined below) and the CGI Shares (as defined below), respectively, into an equal number of shares of the Series A Preferred all as set forth below; and WHEREAS, in consideration for the Company granting to MTI and CGI the right to convert the MTI Shares and CGI Shares into shares of the Series A Preferred, MTI and CGI have agreed to enter into the Waiver of Investor Rights agreement, the Voting Agreement and the Amended and Restated Investor Rights Agreement, all dated as of the date hereof; and WHEREAS, MTI, CGI and the Company desire to enter into this Agreement to provide the terms and conditions upon which the MTI Shares and the CGI Shares will be converted to shares of the Series A Preferred; NOW THEREFORE, in exchange for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, MTI, CGI and the Company agree as follows: 1. Conversion. As of the Effective Date, CGI hereby elects to convert 5,273,974 shares of the common stock of the Company (the "Common Stock") held by CGI (the "CGI Shares") into a number of shares of the Series A Preferred equal to the number of the CGI Shares and MTI hereby elects to convert 1,322,172 shares of the Common Stock held by MTI (the "MTI Shares") into the number of shares of the Series A Preferred equal to the number of the MTI Shares. 2. Representations, Warranties and Covenants (a) Of the Company. The Company hereby makes the following representations, warranties and covenants in favor of each of MTI and CGI: (i) Authorized Shares. The shares of the Series A Preferred identified in Section 1 of this Agreement constitute duly authorized shares of the capital stock of the Company the issuance of which to MTI and CGI has been duly authorized by the board of directors of the Company. (ii) Validly Issued. Upon issuance of the shares of the Series A Preferred identified in Section 1 of this Agreement and receipt by the Company of the certificates representing the MTI Shares and the CGI Shares properly endorsed and accompanied by all instruments necessary to effect the transfer of such shares of the Common Stock to the Company (collectively, the "Certificates"), such shares of the Series A Preferred shall be validly issued and 2 outstanding, fully paid, nonassessable and free and clear of all liens and encumbrances arising through the actions of the Company or its directors, officers, employees or agents. (iii) ISSUANCE OF SERIES A PREFERRED. Upon the Company's receipt of the Certificates and the duly executed counterparts of this Agreement from each of CGI and MTI, the Company shall issue the shares of the Series A Preferred specified in Section 1 of this Agreement to the party identified in Section 1 of this Agreement as electing to receive such shares. (b) Of MTI and CGI. Each of MTI and CGI (each being, individually, a "Shareholder") hereby make the following representations, warranties and covenants with respect to such Shareholder in favor of the Company. (i) TITLE TO SHARES. Such Shareholder is the owner of record of the MTI Shares, in the case of MTI, or the CGI Shares, in the case of CGI, and owns such shares of the Common Stock free and clear of all liens, claims and encumbrances. (ii) AUTHORIZATION. Such Shareholder has full power and authority to enter into this Agreement, and this Agreement, when executed and delivered, will constitute a valid and legally binding obligation of such Shareholder. The individual signing this Agreement on behalf of such Shareholder is duly authorized to execute this Agreement for and on behalf of such Shareholder. All organizational action required to be taken to authorize (i) the execution and delivery of this Agreement by the undersigned individual for and on behalf of such Shareholder and (ii) the performance by such Shareholder of such Shareholder's obligations hereunder has been taken. (iii) PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with such Shareholder in reliance upon such Shareholder's representation to the Company, which, by such Shareholder's execution of this Agreement, such Shareholder hereby confirms, that the shares of Series A Preferred to be purchased by such Shareholder and any securities issuable upon conversion thereof (such shares of the Series A Preferred and securities issuable upon conversion thereof being, collectively, the "Securities") are being and will be acquired for investment for such Shareholder's own account, not as nominee or agent, and not with a view to the resale or distribution of any part thereof, and that neither such Shareholder nor any of its officers, members, managers or representatives with the authority, responsibility or power to make a decision with regard to the purchase or sale of the Securities or any portion thereof (collectively, such "Shareholder's Representatives") has any present intention of selling, granting any participation in or otherwise distributing the same. Such Shareholder and such Shareholder's Representatives are familiar with the phrase "acquired for investment and not with a view to distribution" as it relates to the Securities Act of 1933, as amended (the "Securities Act") and state securities laws and the special meaning given to such term by the Securities and Exchange Commission (the "SEC"). By executing this Agreement, such Shareholder further represents that such Shareholder does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. 2 3 (iv) Reliance Upon Shareholder's Representations and Warranties. Such Shareholder and such Shareholder's Representatives understand that the Securities are not, and upon issuance of any of the Securities on conversion of shares of the Series A Preferred, at the time of issuance may not be, registered under the Securities Act on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the Securities Act, and that the Company's reliance on such exemption is predicated on such Shareholder's representations and warranties set forth herein. Such Shareholder and such Shareholder's Representatives realize that the basis for the exemption may not be present if, notwithstanding such representations and warranties, such Shareholder or any of such Shareholder's Representatives has in mind merely acquiring the Securities or any portion thereof for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. Neither such Shareholder nor any of such Shareholder's Representatives has any such intention. Furthermore, such Shareholder hereby covenants to indemnify the Company for and hold the Company harmless from all losses, costs, damages, liabilities and expenses arising out of or in connection with any breach or inaccuracy of any representation, warranty or covenant made by such Shareholder in this Letter. (v) Receipt of Information. Such Shareholder and such Shareholder's Representatives have received all the information they consider necessary or appropriate for deciding whether to purchase the Securities and each portion thereof. Such Shareholder further represents that such Shareholder and such Shareholder's Representatives have had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Securities and each portion thereof and the business, properties, prospects and financial condition of the Company and to obtain additional information necessary to verify the accuracy of any information furnished to such Shareholder or such Shareholder's Representatives or to which such Shareholder or such Shareholder's Representatives had access. Neither such Shareholder nor any of such Shareholder's Representatives has received, or is relying upon, any representations, written or oral, from the Company, or its officers, directors, employees, attorneys or agents. In making the decision to purchase the Securities and each portion thereof, such Shareholder and such Shareholder's Representatives have relied solely upon their review of this Agreement, the Articles of Amendment to the Company's Articles of Incorporation designating the terms and conditions of the Series A Preferred, and independent investigations made by such Shareholder or such Shareholder's Representatives without assistance of the Company or its officers, directors, employees, attorneys or agents. Such Shareholder further represents and affirms that none of the following information has ever been represented, guaranteed or warranted to such Shareholder or any of its officers, members, managers or representatives, expressly or by implication, by any person: (1) The approximate or exact length of time that such Shareholder will be required to remain a shareholder of the Company, 3 4 (2) The percentage of profit and/or amount of or type of consideration, profit or loss to be realized, if any, as a result of an investment in the Company; or (3) The possibility that the past performance or experience on the part of the Company or any affiliate, officer, director, employee or agent of the Company, might in any way indicate or predict the results of ownership of the Securities or the potential success of the Company's operations. (vi) Investment Experience. Such Shareholder represents that it and such Shareholder's Representatives are experienced in evaluating and investment in private placement transactions of securities of companies in a similar stage of development as the Company and acknowledges that such Shareholder can bear the economic risk of such Shareholder's investment and that such Shareholder's Representatives have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the investment in the Securities. (vii) Accredited Investor. Such Shareholder is an Accredited Investor, as such term is defined in Regulation D promulgated under the Securities Act. (viii) Restricted Securities. Such Shareholder and each of such Shareholder's Representatives understands that neither the Securities nor any portion thereof may be sold, transferred or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Securities (or such portion thereof) or an available exemption from registration under the Securities Act, the Securities and each portion thereof must be held indefinitely. Such Shareholder and each of such Shareholder's Representatives realizes that the Securities and each portion thereof are unlikely to qualify for sale or other disposition under Rule 144 issued by the SEC. Furthermore, such Shareholder and each of such Shareholder's Representatives is aware that neither the Securities nor any portion thereof may be sold pursuant to Rule 144 promulgated under the Securities Act unless all of the conditions of that Rule are met. Among the conditions for use of Rule 144 may be the availability of current information to the public about the Company. Such information is not now available and the Company has no present plans to make such information available. Such Shareholder further acknowledges that the Company is under no obligation to register the Securities or any portion thereof under the Securities Act or under any state securities laws or to assist in complying with any exemption from such registration if such Shareholder should at a later date wish to dispose of the Securities or such portion. (ix) Legends. To the extent applicable, each certificate or other document evidencing any of the Securities shall be endorsed with the legends substantially in the form set forth below: The following legend under the Securities Act: 4 5 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT, OR UNLESS CALDERA SYSTEMS, INC. (THE "COMPANY") HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. Also the Company shall endorse such certificates with each legend imposed or required by the Company's Articles of Incorporation , the Company's Bylaws or applicable state securities laws. (x) Public Sale. Such Shareholder agrees not to make, without the prior written consent of the Company, any public offering or sale of any of the Securities, although permitted to do so pursuant to Rule 144(k) promulgated under the Securities Act, until the earlier of (i) the date on which the Company effects its initial registered public offering pursuant to the Securities Act or (ii) the date on which it becomes a registered company pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended, or (iii) five years after the Effective Date. 3. Governing Law. This Agreement shall be governed by the laws of the State of Utah, without reference to the choice of laws rules of such state. 4. Attorneys' Fees. In the event any party hereto fails to perform any of its obligations under this Agreement or the transactions contemplated hereby or in the event a dispute arises concerning the meaning or interpretation of any provision of this Agreement, the defaulting party or the party not prevailing in such dispute, as the case may be, shall pay any and all reasonable costs and expenses incurred by the other party in enforcing or establishing its rights hereunder, including court costs and reasonable attorneys' fees. 5. Successors and Assigns. This Agreement shall be binding upon each party hereto and its respective successors and assigns. 6. Severability. If any term of provision of this Agreement or any application thereof shall be held invalid or unenforceable, the remainder of this Agreement and any other application of such term or provision shall not be affected thereby. 7. Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof, and may not be changed or modified except by an agreement in writing signed by the parties hereto. The Company, MTI and CGI hereby agree that all prior or contemporaneous oral understandings, agreements or negotiations relative to the subject matter hereof are merged into and revoked by this Agreement. 8. Interpretation. All provisions of this Agreement shall be interpreted according to their fair meaning and shall not be strictly construed against any party. 9. Counterparts; Facsimile Signature. This Agreement may be executed in one or more counterparts, each of which shall be an original, but all of which, taken together, shall 5 6 constitute one agreement. An original signature or copy thereof transmitted by facsimile shall constitute an original signature for purposes of this Agreement. [Signatures are set forth on the following page.] 6 7 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the Effective Date. COMPANY CALDERA SYSTEMS, INC., a Utah corporation By: /s/ RANSOM H. LOVE -------------------------- Name: Ransom H. Love ------------------------ Title: President & CEO ----------------------- CGI THE CANOPY GROUP, INC., a Utah corporation By: /s/ RAYMOND J. NOORDA -------------------------- Name: ------------------------ Title: ----------------------- MTI MTI TECHNOLOGY CORPORATION, a Delaware corporation By: /s/ DALE R. BOND -------------------------- Name: Dale R. Bond ------------------------ Title: Sr. Vice President & Chief Financial Officer ----------------------- EX-10.2 3 PREFERRED STOCK PURCHASE AGREEMENT 1 Exhibit 10.2 PREFERRED STOCK PURCHASE AGREEMENT CALDERA SYSTEMS, INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT THIS SERIES B PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement') is made as of the 30TH day of December, 1999, by and between Caldera Systems, Inc., a Utah corporation (the "Company"), and each of the persons listed on Schedule A hereto, each of which is herein referred to as an "Investor". THE PARTIES HEREBY AGREE AS FOLLOWS: 1. PURCHASE AND SALE OF STOCK. 1.1 SALE AND ISSUANCE OF SERIES B PREFERRED STOCK. (a) The Company has adopted and filed with the Department of Commerce, Division of Corporations of the State of Utah Amended Articles of Incorporation in the form attached hereto as Exhibit A (the "Amended Articles"). (b) Subject to the terms and conditions of this Agreement, each Investor agrees, severally and not jointly, to purchase at the Closing and the Company agrees to sell and issue to each Investor, severally and not jointly, at the Closing that number of shares of the Company's Series B Preferred Stock set forth opposite each Investor's name on Schedule A hereto at a purchase price of $6.00 per share. The Series B Preferred Stock will have the rights, preferences, privileges and restrictions set forth in the Amended Articles. The sale of the Series B Preferred Stock to each Investor shall constitute a separate sale hereunder. 1.2 CLOSING. (a) The purchase and sale of the Series B Preferred Stock shall take place at the offices of Parr Waddoups Brown Gee & Loveless, at 10:00 a.m. on December 30, 1999, or at such other time and place as the Company and Investors shall mutually agree, either orally or in writing (which time and place are designated as the "Closing"). (b) At the Closing, the Company shall deliver to each Investor a certificate representing the shares of Series B Preferred Stock that such Investor is purchasing against payment of the purchase price therefor by check, wire transfer or such other form of payment as shall be mutually agreed upon by such Investor and the Company. 1.3 SUBSEQUENT SALE OF SERIES B PREFERRED STOCK. 1 2 If less than all of the authorized number of shares of Series B Preferred Stock are sold at the Closing, then, subject to the terms and conditions of this Agreement, the Company may sell, on or before January 10, 2000, up to the balance of the authorized but unissued Series B Preferred Stock to such persons as the Board of Directors of the Company may determine at the same price per share as the Series B Preferred Stock purchased and sold at the Closing. Any such sale shall be made upon the same terms and conditions as those contained herein, and such persons or entities shall become parties to this Agreement and all Ancillary Agreements, and shall have the rights and obligations of an Investor hereunder and thereunder. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND ITS SUBSIDIARIES. Each of the Company and its Subsidiaries hereby represents and warrants to each Investor that as of the date of this Agreement, except as set forth on a Schedule of Exceptions attached hereto, specifically identifying the relevant subparagraph(s) hereof, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 ORGANIZATION; GOOD STANDING; QUALIFICATION. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Utah, has all requisite corporate power and authority to own and operate its properties and assets and to carry on its business as now conducted and as presently proposed to be conducted, to execute and deliver this Agreement, and any other agreement to which the Company is a party, the execution and delivery of which is contemplated hereby (the "Ancillary Agreements"), to issue and sell the Series B Preferred Stock and the Common Stock issuable upon conversion thereof, and to carry out the provisions of this Agreement, the Amended Articles and any Ancillary Agreement. The Company is duly qualified and is authorized to transact business and is in good standing as a foreign corporation in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business, properties, prospects or financial condition. 2.2 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, and any Ancillary Agreement, the performance of all obligations of the Company hereunder and thereunder at the Closing and the authorization, issuance (or reservation for issuance), sale and delivery of the Series B Preferred Stock being sold hereunder and the Common Stock issuable upon conversion thereof has been taken or will be taken prior to the Closing, and this Agreement, and any Ancillary Agreement, when executed and delivered, will constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms except (i) (as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. The sale of the Series B Preferred Stock is not and the subsequent conversion of the Series B Preferred Stock into Common Stock will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. 2.3 VALID ISSUANCE OF PREFERRED AND COMMON STOCK. 2 3 The Series B Preferred Stock that is being purchased by the Investors hereunder, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid and non-assessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and under applicable state and federal securities laws. The Common Stock issuable upon conversion of the Series B Preferred Stock being purchased under this Agreement has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Amended Articles, will be duly and validly issued, fully paid and non-assessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and under applicable state and federal securities laws. 2.4 GOVERNMENTAL CONSENTS No consent, approval, qualification, order or authorization of, or filing with, any local, state or federal governmental authority is required on the part of the Company or any of its Subsidiaries in connection with the Company's valid execution, delivery or performance of this Agreement, the offer, sale or issuance of the Series B Preferred Stock by the Company or the issuance of Common Stock upon conversion of the Series B Preferred Stock, except (i) the filing of the Amended Articles with the Department of Commerce, Division of Corporations, State of Utah, and (ii) such filings as have been made prior to the Closing, except any notices of sale required to be filed with the Securities and Exchange Commission under Regulation D of the Securities Act of 1933, as amended (the "Securities Act"), or such post-closing filings as may be required under applicable state securities laws, which will be timely filed within the applicable periods therefor. 2.5 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the Company consists, or will consist immediately prior to the Closing, of: (a) Preferred Stock. 25,000,000 shares of Preferred Stock, no par value, of which 6,596,146 shares have been designated Series A Preferred Stock, all of which are issued and outstanding, and 5,000,000 shares have been designated Series B Preferred Stock, up to all of which may be sold pursuant to this Agreement. The rights, privileges and preferences of the Series A and Series B Preferred Stock are as stated in the Amended Articles. (b) Common Stock. 75,000,000 shares of common stock, no par value ("Common Stock"), of which 26,744,050 shares are issued and outstanding. (c) The outstanding shares of Series A Preferred Stock and Common Stock are owned by the stockholders and in the numbers specified in Exhibit B hereto. (d) The outstanding shares of Series A Preferred Stock and Common Stock have been duly authorized and validly issued, are fully paid and non-assessable, and were issued in accordance with the registration or qualification provisions of the Securities Act and any relevant state securities laws or pursuant to valid exemptions therefrom. The shares of Series B Preferred Stock issuable pursuant to this Agreement have been duly authorized and, upon issuance in compliance with the terms of this Agreement following receipt of the consideration required hereby, will be validly issued and is fully paid and non-assessable. The Common Stock issuable upon the conversion of the Series B Preferred Stock purchased under this Agreement has been duly and 3 4 validly reserved for issuance and, when issued in accordance with the Amended Articles, will be validly issued, fully paid and non-assessable. (e) Except for (i) the Series A Preferred Stock and Series B Preferred Stock and the rights of the holders thereof, (ii) the rights of the Investors and other parties pursuant to this Agreement and the Ancillary Agreements, (iii) currently outstanding and non-expired options to purchase 5,288,882 shares of Common Stock granted to present or former employees and directors of the Company pursuant to the Company's 1998 Stock Option Plan and 1999 Omnibus Stock Incentive Plan (collectively, the "Option Plans"), and (iv) rights that have been duly waived with respect to the transactions contemplated by the Agreements, (A) there are no subscriptions, preemptive rights, options, convertible securities, warrants, conversion privileges or other rights (or agreements for any such rights, contingent or otherwise) outstanding to purchase or otherwise obtain any of the Company's capital stock, (B) the Company has no obligation (contingent or otherwise) to issue subscriptions, preemptive rights, options, convertible securities, warrants, conversion privileges or other rights or to issue or distribute to holders of any shares of its capital stock any evidences of indebtedness or assets of the Company, and (C) the Company has no obligation (contingent or otherwise) to purchase, redeem, or otherwise acquire any shares of its capital stock or any interest therein or to pay any dividend or make any distribution in respect thereof. In addition to the aforementioned options, the Company has reserved an additional 1,380,731 shares of its Common Stock for purchase upon exercise of options to be granted in the future under the Option Plans. No stock plan, stock purchase, stock option or other agreement or understanding between the Company and any holder of any equity securities of the Company or rights to purchase equity securities of the Company provides for acceleration or other changes in the vesting provisions or other terms of such securities, as the result of any merger, sale of stock or assets, change in control or other similar transaction by the Company except at the discretion of the Board of Directors. The Company is not a party or subject to any agreement or understanding, and, to the best of the Company's knowledge after due inquiry, there is no agreement or understanding between any persons that affects or relates to the voting or giving of written consents with respect to any security or the voting by a director of the Company. For purposes of this Agreement, "due inquiry" shall mean inquiry of the officers and directors of the Company and those management-level employees of the Company who have responsibility for the area of inquiry. 2.6 SUBSIDIARIES. The Company does not own or control, directly or indirectly, any interest in any other corporation, partnership, limited liability company, association or other business entity. The Company is not a participant in any joint venture, partnership or similar arrangement. 2.7 CONTRACTS AND OTHER COMMITMENTS. Neither the Company nor any of its Subsidiaries has and or is bound by any contract, agreement, lease, commitment, or proposed transaction, judgment, order, writ or decree, written or oral, absolute or contingent, other than (i) contracts for the purchase of supplies and services that were entered into in the ordinary course of business and that do not involve more than $50,000 in the aggregate from any individual vendor or supplier, and do not extend for more than one (1) year beyond the date hereof, (ii) sales contracts entered into in the ordinary course of business, and (iii) contracts terminable at will by the Company on no more than thirty (30) days' notice without cost or liability to the Company or such Subsidiary and that do not involve any employment or consulting arrangement and are not material to the conduct of the Company's or such 4 5 Subsidiary's business. For the purpose of this paragraph, employment and consulting contracts and license agreements and any other agreements relating to the Company's or any Subsidiary's acquisition or disposition of Intellectual Property (other than standard end-user license agreements) shall not be considered to be contracts entered into in the ordinary course of business. 2.8 RELATED-PARTY TRANSACTIONS. No employee, officer, stockholder or director of the Company or any of its Subsidiaries or member of his or her immediate family is indebted to the Company, nor is the Company or any Subsidiary indebted (or committed to make loans or extend or guarantee credit) to any of them, other than (i) for payment of salary for services rendered, (ii) reimbursement for reasonable expenses incurred on behalf of the Company or such Subsidiary, and (iii) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of the Company or such Subsidiary). To the best of the Company's or such Subsidiary's knowledge after due inquiry, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company or such Subsidiary is affiliated or with which the Company or such Subsidiary has a business relationship, or any firm or corporation that competes with the Company or such Subsidiary, except that employees, stockholders, officers or directors of the Company or such Subsidiary and members of their immediate families may own stock in publicly-traded companies that may compete with the Company or such Subsidiary. To the best of the Company's or such Subsidiary's knowledge after due inquiry, no officer, director or stockholder or any member of their immediate families is, directly or indirectly, interested in any material contract with the Company or such Subsidiary (other than such contracts as relate to any such person's ownership of capital stock or other securities of the Company or such Subsidiary). 2.9 REGISTRATION RIGHTS. Except as set forth in the Investor Rights Agreement (as defined below), the Company is presently not under any obligation and has not granted any rights to register under the Securities Act any of its presently outstanding securities or any of its securities that may subsequently be issued. 2.10 PERMITS. Each of the Company and its Subsidiaries has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects or financial condition of the Company or any such Subsidiary, and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as presently planned to be conducted. Neither the Company nor any Subsidiary is in default in any material respect under any of such franchises, permits, licenses or other similar authority. 5 6 2.11 COMPLIANCE WITH OTHER INSTRUMENTS. Neither the Company nor any Subsidiary is in violation or default in any material respect of any provision of its Amended Articles or Bylaws or organization documents or in any material respect of any provision of any mortgage, indenture, agreement, instrument or contract to which it is a party or by which it is bound or, to the best of its knowledge after due inquiry, of any federal or state judgment, order, writ, decree, statute, rule, regulation or restriction applicable to the Company or such Subsidiary. The execution, delivery and performance by the Company of this Agreement and any Ancillary Agreement, and the consummation of the transactions contemplated hereby and thereby, will not result in any such violation or be in material conflict with or constitute, with or without the passage of time or giving of notice, either a material default under any such provision or any event that results in the creation of any material lien, charge or encumbrance upon any assets of the Company or any of its Subsidiaries or the suspension, revocation, impairment, forfeiture, or non-renewal of any material permit, license, authorization, or approval applicable to the Company or any of its Subsidiaries, their respective business or operations, or any of their respective assets or properties. 2.12 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the best of the Company's or any of its Subsidiary's knowledge after due inquiry, currently threatened against the Company or any of its Subsidiary's that questions the validity of this Agreement, any Ancillary Agreement or the right of the Company to enter into such agreements, or to consummate the transactions contemplated hereby or thereby, or that might result, either individually or in the aggregate, in any material adverse change in the assets, business, properties, prospects, or financial condition of the Company or any of its Subsidiaries, or in any material change in the current equity ownership of the Company or any of its Subsidiaries. The foregoing includes, without limitation, any action, suit, proceeding, or investigation pending or currently threatened involving the prior employment of any of the Company's or any of its Subsidiaries' employees, their use in connection with the Company's or such Subsidiary's business of any information or techniques allegedly proprietary to any of their former employers, their obligations under any agreements with prior employers, or negotiations by the Company or such Subsidiary with potential backers of, or investors in, the Company such Subsidiary or its proposed business. Neither the Company nor any of its Subsidiaries is a party to or, to the best of its knowledge after due inquiry, named in or subject to any order, writ, injunction, judgment or decree of any court, government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company or any of its Subsidiaries currently pending or that the Company or any of its Subsidiaries currently intends to initiate. 2.13 RETURNS AND COMPLAINTS. Neither the Company nor any of its Subsidiaries has received any customer complaints concerning alleged defects in its products (or the design thereof) that, if true, would materially adversely affect the operations or financial condition of the Company or any of its Subsidiaries. 6 7 2.14 DISCLOSURE. The Company has provided each Investor with all the information reasonably available to it without undue expense that such Investor has requested for deciding whether to purchase the Series B Preferred Stock and all information that the Company believes is reasonably necessary to enable such Investor to make such decision. To the best of the Company's and each of its Subsidiaries' knowledge after due inquiry, neither this Agreement nor any other agreements, written statements or certificates made or delivered in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading. 2.15 CONFIDENTIAL OFFERING MEMORANDUM. The Confidential Offering Memorandum issued on November 12, 1999 previously delivered to each Investor (the "Memorandum") was prepared in good faith by the Company and does not, to the best of the Company's and each of its Subsidiaries' knowledge after due inquiry, contain any untrue statement of a material fact nor does it omit to state a material fact necessary to make the statements therein not misleading, except that with respect to assumptions, projections and expressions of opinion or predictions contained in the Memorandum, the Company represents only that such assumptions, projections, expressions of opinion and predictions were made in good faith and that the Company believes there is a reasonable basis therefor. 2.16 OFFERING. Subject, in part, to the truth and accuracy of each Investor's representations set forth in this Agreement, the offer, sale and issuance of the Series B Preferred Stock as contemplated by this Agreement are exempt from the registration requirements of the Securities Act, and neither the Company, any of its Subsidiaries, nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 2.17 TITLE TO PROPERTY AND ASSETS; LEASES. Except (i) as reflected in the Financial Statements (defined in paragraph 2.18), (ii) for liens for current taxes not yet delinquent, (iii) for liens imposed by law and incurred in the ordinary course of business for obligations not past due to carriers, warehousemen, laborers, materialmen and the like, (iv) for liens in respect of pledges or deposits under workers' compensation laws or similar legislation or (v) for minor defects in title, none of which, individually or in the aggregate, materially interferes with the use of such property, each of the Company and its Subsidiaries has good and marketable title to its property and assets free and clear of all mortgages, liens, claims and encumbrances. With respect to the property and assets it leases, each of the Company and its Subsidiaries is in compliance with such leases and, to the best of its knowledge after due inquiry, holds a valid leasehold interest free of any liens, claims or encumbrances, subject to clauses (i)-(v) above. 2.18 FINANCIAL STATEMENTS. The Company has delivered to each Investor its audited financial statements (balance sheet and profit and loss statement, statement of stockholders' equity and statement of cash flows, 7 8 including notes thereto) at October 31, 1999 and for the fiscal year then ended (the "Financial Statements"). Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated. The Financial Statements fairly present the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein. Except as set forth in the Financial Statements, neither the Company nor any of its Subsidiaries has any material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to October 31, 1999 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Financial Statements, which in both cases, individually or in the aggregate, are not material to the financial condition or operating results of the Company or any of its Subsidiaries. Except as disclosed in the Financial Statements, neither the Company nor any of its Subsidiaries is a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. The Company and each of its Subsidiaries maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 2.19 CHANGES. Since October 31, 1999, there has not been any event or condition of any type that has materially and adversely affected the business, properties or financial condition of the Company or any of its Subsidiaries. 2.20 INTELLECTUAL PROPERTY. To the best of the Company's and its Subsidiaries' knowledge after due inquiry, the Company, its Subsidiaries and their products have not infringed and do not infringe the copyrights of any third party. To the best of the Company's and its Subsidiaries' knowledge after due inquiry, neither the Company nor its Subsidiaries has misappropriated or is misappropriating any trade secrets or proprietary confidential information of any third party, and the products of the Company and its Subsidiaries do not include or embody any trade secret or proprietary confidential information misappropriated by the Company or its Subsidiaries from any third party. To the best of the Company's and its Subsidiaries' knowledge after due inquiry, each of the Company and its Subsidiaries and their respective products have not infringed and do not infringe any patents, trademarks, service marks, or trade names of any third party. Each item of Intellectual Property owned by or licensed to the Company and its Subsidiaries immediately prior to the Closing hereunder will be owned by or licensed to the Company and the Subsidiary on identical terms and conditions immediately subsequent to the Closing hereunder (i.e., identical to any applicable terms and conditions immediately prior to the Closing). (i) To the best of the Company's and its Subsidiaries' knowledge after due inquiry, none of the Company or its Subsidiaries or their directors and officers (and employees with responsibility for Intellectual Property matters) has ever received any charge, complaint, claim, demand, or notice alleging any such infringement, misappropriation, or violation by the Company or its Subsidiaries of Intellectual Property (including any claim that the Company and its Subsidiaries must license or refrain from using any Intellectual Property rights of any third party). To the best of the Company's and its Subsidiaries' knowledge after due inquiry and the directors and officers (and employees with responsibility for Intellectual Property matters) of the Company and its Subsidiaries, no third party has infringed, misappropriated, or otherwise violated any Intellectual Property rights of the Company and its Subsidiaries. (ii) The Schedule of Exceptions identifies (a) each patent which has been issued or assigned to the Company or any of its Subsidiaries, (b) each pending patent application which has 8 9 been filed by or for the Company or any of its Subsidiaries, (c) each trademark or service mark registration issued or assigned to the Company or any of its Subsidiaries, (d) each pending trademark or service mark application which has been filed by or for the Company or any its Subsidiaries, (e) each copyright registration issued or assigned to the Company or any of its Subsidiaries, (f) each pending copyright application which has been filed by or for the Company or any of its Subsidiaries, and (g) each license which the Company and its Subsidiaries has granted to any third party with respect to any of the Company's Intellectual Property excluding licenses to end users of Company products granted in the ordinary course of business. The Company has delivered to the Investors correct and complete copies of all such patents, registrations, applications, and licenses (as amended to date). The Schedule of Exceptions also identifies each trade name and each unregistered trademark or service mark owned or claimed by any of the Company and its Subsidiaries in connection with any of their businesses. With respect to each patent, application, and registration (each an "item") identified in the Schedule of Exceptions: (B) the Company and its Subsidiaries possess all right, title, and interest in and to the item, free and clear of any Security Interest, license, lien or other encumbrance; (C) to the best of the Company's and its Subsidiaries' knowledge after due inquiry, the item is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; (D) to the best of the Company's or its Subsidiaries' knowledge after due inquiry, no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or, to the best of the Company's or its Subsidiaries' knowledge after due inquiry, the directors and officers (and employees with responsibility for Intellectual Property matters) of the Company and its Subsidiaries, is threatened which challenges the legality, validity, enforceability, use, or ownership of the item; and (E) none of the Company and its Subsidiaries has ever agreed to indemnify any Person for or against any interference, infringement, misappropriation, or other conflict with respect to the item. (ii.) The Schedule of Exceptions identifies each item of Intellectual Property that any third party owns and licenses to any of the Company and its Subsidiaries, excluding licenses to commercially available software products (e.g., Windows, Microsoft Office, etc.) used by any of the Company and its Subsidiaries as an end user. The Company has delivered to the Investors correct and complete copies of all agreements applicable to such licenses (as amended to date). The term "license" is intended to include "sublicense." With respect to each such license and agreement required to be identified in the Schedule of Exceptions, to the best of the Company's or its Subsidiaries' knowledge after due inquiry; (A) The license and agreement are legal, valid, binding, enforceable, and in full force and effect; (B) The license and agreement will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms on the day immediately following the Closing; 9 10 (C) no party to the agreement is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default or permit termination, modification, or acceleration thereunder; (D) no party to the agreement has repudiated any provision thereof; (E) the license is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; and (F) no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or is threatened which challenges the legality, validity, or enforceability of the license or agreement. (iii.) To the best of the Company's and its Subsidiaries' knowledge after due inquiry and to the knowledge after due inquiry of the directors and officers (and employees with responsibility for Intellectual Property matters) of the Company and its Subsidiaries, neither the Company nor any of its Subsidiaries will infringe, misappropriate, or otherwise violate any Intellectual Property rights of third parties as a result of the continued operation of its businesses as presently conducted and as presently proposed to be conducted. Notwithstanding anything herein to the contrary, to the extent any representation or warranty, in whole or in part, contained in this Agreement may be deemed to be breached because of infringement of any Intellectual Property, such representation or warranty shall be read as if it contained the following qualification: "To the best of the Company's and its Subsidiaries' knowledge after due inquiry". For purposes of this paragraph, the term "infringement" is intended to include the infringement, misappropriation and/or violation of Intellectual Property. 2.21 YEAR 2000 PROBLEM. To the best of the Company's and its Subsidiaries' knowledge after due inquiry, the Year 2000 Readiness Disclosure as currently published by the Company on its web site is accurate. A copy of this Year 2000 Readiness Disclosure is included the Schedule of Exceptions. 2.22 MANUFACTURING AND MARKETING RIGHTS. Except as set forth on the Schedule of Exceptions, neither the Company nor any of its Subsidiaries has granted rights to manufacture, produce, assemble, license, market or sell its products to any other person and is not bound by any agreement that affects the Company's or such Subsidiary's exclusive right to develop, manufacture, assemble, distribute, market or sell its products. 10 11 2.23 EMPLOYEES; EMPLOYEE COMPENSATION. To the best of the Company's and its Subsidiary's knowledge after due inquiry, the relationships between the Company and its Subsidiaries and their respective employees are good and no labor dispute or claims are pending or threatened. None of the Company's or any of its Subsidiary's employees belongs to any union or collective bargaining unit. To the best of the Company's and its Subsidiaries' knowledge after due inquiry, the Company and each of its Subsidiaries has complied in all material respects with all applicable state and federal laws related to employment. To the best of the Company's and it Subsidiary's knowledge after due inquiry, no employee of the Company or any such Subsidiary is or will be in violation of any judgment, decree or order, or any term of any employment contract, patent disclosure agreement, or other contract or agreement relating to the relationship of any such employee with the Company, any of its Subsidiaries, or any other party because of the nature of the business conducted or presently proposed to be conducted by the Company or any of its Subsidiaries or to the use by the employee of his or her best efforts with respect to such business. Except for agreements entered into pursuant to the Option Plans and the Company's 401k plan, the Company is not a party to or bound by any currently effective employment contract, deferred compensation agreement, incentive plan, profit sharing plan, retirement agreement or other employee compensation agreement. Neither the Company nor any of its Subsidiaries is aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company or any of its Subsidiaries, nor does the Company or any of its Subsidiaries have a present intention to terminate the employment of any of the foregoing. Subject to general principles related to wrongful termination of employees, the employment of each officer and employee of the Company and each of its Subsidiaries is terminable at the will of the Company or such Subsidiary, as applicable. 2.24 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS. Except as set forth on the Schedule of Exceptions, all of the current employees and all of the officers of the Company and each of its Subsidiaries has executed an Employee Inventions and Confidentiality Agreement in the forms attached hereto on Exhibit C. No current or former employee or officer has excluded works or inventions made prior to his or her employment with the Company or any of its Subsidiaries from his or her assignment of inventions pursuant to such employee's Employee Inventions and Confidentiality Agreement. Copies of all contracts with independent contractors engaged to develop or create computer programs, works of authorship or intellectual property for the Company or its Subsidiaries are identified on the Schedule of Exceptions. 2.25 TAX RETURNS, PAYMENTS, AND ELECTIONS. The Company and each of its Subsidiaries has timely filed all tax returns and reports (federal, state and local) as required by law. These returns and reports are true and correct in all material respects. The Company and each of its Subsidiaries has paid all taxes and other assessments due, except those contested by it in good faith. Neither the Company nor any of its Subsidiaries has elected pursuant to the Internal Revenue Code of 1986, as amended ("Code"), to be treated as an S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a material effect on the business, properties, prospects or financial condition of the Company or any 11 12 of its Subsidiaries. Neither the Company nor any of its Subsidiaries has ever had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. None of the Company's or any Subsidiary's income tax returns (federal or otherwise) and none of its state income or franchise tax or sales or use tax returns has ever been audited by governmental authorities. The Company and each of its Subsidiaries has made adequate provisions on its books of account for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. The Company and each of its Subsidiaries has withheld or collected from each payment made to each of its employees, the amount of all taxes, including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositaries. 2.26 INSURANCE. The Schedule of Exceptions contains a description of each insurance policy maintained by the Company and its Subsidiaries with respect to its properties, assets and businesses, and each such policy is in full force and effect as of the Closing. Neither the Company nor any Subsidiary is in default with respect to its obligations under any insurance policy maintained by it, and neither the Company nor any Subsidiary has been denied insurance coverage. Except as set forth on the Schedule of Exceptions, the Company and its Subsidiaries do not have any self-insurance or co-insurance programs, and the reserves set forth on the Latest Balance Sheet are adequate to cover all anticipated liabilities with respect to any such self-insurance or co-insurance programs. 2.27 ENVIRONMENTAL AND SAFETY LAWS. Neither the Company nor any of its Subsidiaries is in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 2.28 MINUTE BOOKS. A true, correct and complete copy of the minute book of the Company and each of its Subsidiaries have been delivered to the Investors. Such copy contains minutes of all meetings of directors and stockholders and all actions by written consent without a meeting by the directors and stockholders since the date of incorporation or organization and accurately reflects all actions by the directors (and any committee of directors) and stockholders with respect to all transactions referred to in such minutes in all material respects. 12 13 2.29 SMALL BUSINESS MATTERS. The Company, together with its "affiliates" (as that term is defined in Title 13, Code of Federal Regulations, Section 121.103), is a "small business concern" within the meaning of the Small Business Investment Act of 1958 and the regulations thereunder, including Title 13, Code of Federal Regulations, Section 121.103. The information regarding the Company and its affiliates set forth in the Small Business Administration ("SBA") Form 480, Form 652 and Part A of Form 1031 delivered at the Closing is accurate and complete. Copies of such forms shall have been completed and executed by the Company and delivered at the Closing, together with a written statement of the Company regarding its planned use of the proceeds from the sale of the Series B Preferred Stock. The Company does not presently engage in, and it shall not hereafter engage in, any activities, nor shall the Company use directly or indirectly the proceeds from the sale of the Series B Preferred Stock hereunder for any purpose, for which a Small Business Investment Company is prohibited from providing funds by the Small Business Investment Act of 1958 and the regulations thereunder (including Title 13, Code of Federal Regulations, Section 107.720). 2.30 QUALIFIED SMALL BUSINESS. The Company represents and warrants to the Purchasers that, the Company should qualify as a "qualified small business" within the meaning of Section 1202(d) of the Code as of the date hereof, and the Series B Preferred Stock sold hereunder is being acquired at its original issue in exchange for cash. The Company further represents and warrants that, as of the date hereof, it meets the "active business requirement" of Section 1202(e) of the Code, and it has made no "significant redemptions" within the meaning of Section 1202(c)(3)(B) of the Code. 3. REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR. Each Investor, severally, and not jointly, hereby represents and warrants to the Company that: 3.1 AUTHORIZATION. Such Investor has full power and authority to enter into this Agreement, and that this Agreement, when executed and delivered, will constitute a valid and legally binding obligation of such Investor, enforceable in accordance with their respective terms except (i) (as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with each Investor in reliance upon such Investor's representation to the Company, which by such Investor's execution of this Agreement such Investor hereby confirms, that the Series B Preferred Stock to be purchased by such Investor and the Common Stock issuable upon conversion thereof (collectively, "Securities") will be acquired for investment for such Investor's own account, not as nominee or agent, and not with a view to the resale or distribution of any part thereof, and that such Investor has no present intention of selling, granting any participation in or otherwise distributing the same. By executing this Agreement, each Investor further represents that such Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. 13 14 3.3 RELIANCE UPON INVESTORS' REPRESENTATIONS. Each Investor understands that the Series B Preferred Stock is not, and any Common Stock acquired on conversion thereof at the time of issuance may not be, registered under the Securities Act on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the Securities Act pursuant to Section 4(2) thereof, and that the Company's reliance on such exemption is predicated on the Investors' representations set forth herein. Each Investor realizes that the basis for the exemption may not be present if, notwithstanding such representations, the Investor has in mind merely acquiring shares of the Series B Preferred Stock for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. No Investor has any such intention. 3.4 RECEIPT OF INFORMATION. Each Investor believes such Investor has received all the information such Investor considers necessary or appropriate for deciding whether to purchase the Series B Preferred Stock. Each Investor further represents that such Investor has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Series B Preferred Stock and the business, properties, prospects and financial condition of the Company and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to such Investor or to which such Investor had access. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Investors to rely thereon. 3.5 INVESTMENT EXPERIENCE. Each Investor represents that such Investor is experienced in evaluating and investing in private placement transactions of securities of companies in a similar stage of development and acknowledges that such Investor is able to fend for himself, herself or itself, can bear the economic risk of such Investor's investment, and has such knowledge and experience in financial and business matters that such Investor is capable of evaluating the merits and risks of the investment in the Series B Preferred Stock. If other than an individual, Investor also represents such Investor either (a) has not been organized for the purpose of acquiring the Series B Preferred Stock or (b) has equity owners that are all Accredited Investors. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Investors to rely thereon. 3.6 ACCREDITED INVESTOR. (a) The term "Accredited Investor" as used herein refers to: (i) A person or entity who is a director or executive officer of the Company; (ii) Any bank as defined in Section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934; any insurance company as defined in Section 2(13) of the Securities Act; any investment company registered under 14 15 the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; (iii) Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; (iv) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000; (v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of the purchase exceeds $1,000,000; (vi) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; (vii) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a person who has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment; or (viii) Any entity in which all of the equity owners are accredited investors. As used in this Paragraph 3.6(a), the term "net worth" means the excess of total assets over total liabilities. For the purpose of determining a person's net worth, the principal residence owned by an individual should be valued at fair market value, including the cost of improvements, net of current encumbrances. As used in this Paragraph 3.6(a), "income" means actual economic income, which may differ from adjusted gross income for income tax purposes. Accordingly, each Investor should consider whether such Investor should add any or all of the following items to such Investor's adjusted gross income for income tax purposes in order to reflect more accurately such Investor's actual economic income: any amounts attributable to tax-exempt income received, losses claimed as a limited partner in any limited partnership, deductions claimed for depletion, contributions to an IRA or Keogh retirement plan and alimony payments. 16 (a) Each Investor as to such Investor, severally and not jointly, further represents to the Company that except as otherwise disclosed to the Company, in writing, prior to such Investor's execution hereof, such Investor is either: (i) an Accredited Investor; or (ii) not an Accredited Investor and neither such Investor nor any beneficiary of any trust or any investment client for whose account such Investor is purchasing is a citizen or resident of the United States or any state, territory or possession thereof, including, but not limited to, any estate of any such person, or any corporation, partnership, trust or other entity created or existing under the laws thereof, or any entity controlled or owned by any of the foregoing (a "U.S. Person"). 3.7 RESTRICTED SECURITIES. Each Investor understands that the Series B Preferred Stock (and any Common Stock issued on conversion thereof) may not be sold, transferred or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Securities (or the Common Stock issued on conversion thereof) or an available exemption from registration under the Securities Act, the Series B Preferred Stock (and any Common Stock issued on conversion thereof) must be held indefinitely. In particular, each Investor is aware that the Series B Preferred Stock (and any Common Stock issued on conversion thereof) may not be sold pursuant to Rule 144 promulgated under the Securities Act unless all of the conditions of that Rule are met. Among the conditions for use of Rule 144 may be the availability of current information to the public about the Company. Such information is not now available and the Company has no present plans to make such information available. 3.8 LEGENDS. To the extent applicable, each certificate or other document evidencing any of the Series B Preferred Stock or any Common Stock issued upon conversion thereof shall be endorsed with the legends substantially in the form set forth below: (a) The following legend under the Securities Act: "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." (b) Any legend imposed or required by the Company's Bylaws or applicable state securities laws. 4. CONDITIONS OF INVESTORS' OBLIGATIONS AT CLOSING. 16 17 4.1 The obligations of each Investor under subparagraph 1.1(b) of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions, the waiver of which shall not be effective against any Investor who does not consent in writing thereto: 4.2 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company and its Subsidiaries contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 4.3 PERFORMANCE. The Company and its Subsidiaries shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 4.4 COMPLIANCE CERTIFICATE. The President of the Company shall deliver to each Investor at the Closing a certificate certifying that the conditions specified in paragraphs 4.1 through 4.6, inclusive, have been fulfilled. 4.5 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Series B Preferred Stock pursuant to this Agreement shall be duly obtained and effective as of the Closing. 4.6 PROCEEDINGS AND DOCUMENTS; CERTIFICATE OF DESIGNATIONS. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to the Investors' special counsel, which shall have received all such counterpart original and certified or other copies of such documents as it may reasonably request. The Company shall have delivered to the Investors evidence of filing of the Amended Articles with the Department of Commerce, Division of Corporations of the State of Utah. 4.7 OPINION OF COMPANY COUNSEL. Each Investor shall have received from Parr Waddoups Brown Gee & Loveless, counsel for the Company, an opinion, dated the date of the Closing, in form and substance satisfactory to special counsel to the Investors, as to the matters set forth in Exhibit D hereto. 4.8 INVESTOR RIGHTS AGREEMENT. The Company and the Investors and the other parties thereto shall have entered into an amended and restated investor rights agreement in form and substance as set forth in Exhibit E 18 hereto (the "Investor Rights Agreement"), and the Investor Rights Agreement shall be in full force and effect as of the Closing. 4.9 VOTING AGREEMENT. The Company and the Investors and the other parties thereto shall have entered into a voting agreement in form and substance as set forth in Exhibit F hereto (the "Voting Agreement"), and the Voting Agreement shall be in full force and effect as of the Closing. 5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company to each Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions by that Investor: 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of each Investor contained in Section 3 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 5.2 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Stock pursuant to this Agreement shall be duly obtained and effective as of the Closing. 6. POST-CLOSING COVENANTS OF THE COMPANY. 6.1 SMALL BUSINESS CONCERN DOCUMENTS. The Company shall execute and deliver to each Investor who requests them the following documents: (a) Within 75 days after the Closing and at the end of each month thereafter until all of the proceeds from the financing hereunder have been used by the Company, the Company shall deliver to Investor which is an SBIC ("SBIC Holder") a written statement certified by the Company's president or chief financial officer describing in reasonable detail the use of the proceeds of the financing hereunder by the Company. In addition to any other rights granted hereunder, the Company shall grant the SBIC Holder and the SBA access to the Company's records for the purpose of verifying the use of such proceeds. (b) Promptly after the end of each fiscal year (but in any event prior to February 28 of each year), the Company shall deliver to the SBIC Holder a written assessment of the economic impact of the SBIC Holder's investment in the Company, specifying the full-time equivalent jobs created or retained in connection with the investment, the impact of the investment on the businesses of the Company in terms of expanded revenue and taxes and other economic benefits resulting from 19 the investment (including, but not limited to, technology development or commercialization, minority business development, urban or rural business development and expansion of exports). 6.2 REGULATORY COMPLIANCE COOPERATION. (a) In the event that the SBIC Holder determines that it has a Regulatory Problem (as defined below), the Company shall take all such actions as are reasonably requested by the SBIC Holder in order to (a) effectuate and facilitate any transfer by the SBIC Holder of any securities of the Company then held by the SBIC Holder, (b) permit the SBIC Holder (or any Affiliate of the SBIC Holder) to exchange all or any portion of the Series B Preferred Stock then held by the SBIC Holder on a share-for-share basis for shares of a class of non-voting common stock of the Company, which non-voting common stock shall be identical in all respects to such Series B Preferred Stock, except that such common stock shall be non-voting and shall be convertible into Common Stock on such terms as are requested by the SBIC Holder in light of regulatory considerations then prevailing, (c) continue and preserve the respective allocation of the voting interests with respect to the Company provided for in the Amended Articles with respect to the SBIC Holder's ownership of the Company's Series B Preferred Stock and underlying Common Stock, and (d) amend this Agreement, the Amended Articles and other related agreements to effectuate and reflect the foregoing. Such actions may include, but shall not necessarily be limited to: (i) entering into such additional agreements as are requested by the SBIC Holder to permit any person(s) and/or entities designated by the SBIC Holder to exercise any voting power which is relinquished by the SBIC Holder upon any exchange of Common Stock for non-voting stock of the Company; and (ii) entering into such additional agreements, adopting such amendments to the Amended Articles and Bylaws of the Company and taking such additional actions as are reasonably requested by the SBIC Holder in order to effectuate the intent of the foregoing. (a) For purposes of this Agreement, a "Regulatory Problem" means any set of facts or circumstances wherein it has been asserted by any governmental regulatory agency (or the SBIC Holder believes that there is a substantial risk of such assertion) that the SBIC Holder and its Affiliates are not entitled to hold, or exercise any significant right with respect to, the Series B Preferred Stock or the Common Stock. 6.3 FINANCIAL STATEMENTS AND OTHER INFORMATION. The Company shall deliver to Investor: (a) as soon as available, but in any event within 45 days after the end of each quarterly accounting period in each fiscal year, unaudited statements of income and cash flows of the Company for such quarterly period and for the period from the beginning of the fiscal year to the end of such quarter, and unaudited balance sheets of the Company as of the end of such quarterly period, setting forth in each case comparisons to the Company's annual budget and to the corresponding period in the preceding fiscal year, and all such statements shall be prepared in accordance with generally accepted accounting principles, consistently applied, subject to the absence of footnote disclosures and to normal year-end adjustments for recurring accruals, and shall be certified by the Company's chief financial officer; 20 (b) within 90 days after the end of each fiscal year, audited statements of income and cash flows of the Company for such fiscal year, and audited balance sheets of the Company as of the end of such fiscal year, setting forth in each case comparisons to the Company's annual budget and to the preceding fiscal year, all prepared in accordance with generally accepted accounting principles, consistently applied, and accompanied by, with respect to the consolidated portions of such statements, an opinion containing no exceptions or qualifications (except for qualifications regarding specified contingent liabilities) of an independent accounting firm of recognized national standing; (c) promptly upon receipt thereof, any additional reports, management letters or other detailed information concerning significant aspects of the Company's operations or financial affairs given to the Company by its independent accountants (and not otherwise contained in other materials provided hereunder); (d) at least 5 days but not more than 90 days prior to the beginning of each fiscal year, an annual business plan prepared on a monthly basis for the Company for such fiscal year (displaying anticipated statements of income and cash flows and balance sheets), and promptly upon preparation thereof any other significant business plans prepared by the Company and any revisions of such annual or other business plans; (e) prompt notification of any matter or matters which would reasonably be expected to, individually or in the aggregate, have a material adverse effect on the financial condition, operating results, business, assets, operations, employee relations or customer or supplier relations of the Company (a "Material Adverse Effect"); (f) within ten days after transmission thereof, copies of all financial statements, proxy statements, reports and any other general written communications which the company sends to its shareholders and copies of all registration statements and all regular, special or periodic reports which it files, or any of its officers or directors file with respect to the Company, with the SEC or with any securities exchange on which any of its securities are then listed, and copies of all press releases and other statements made available generally by the Company to the public concerning material developments in the Company's business; and (g) with reasonable promptness, such other information and financial data concerning the Company as any person entitled to receive information under this Section 6.8 may reasonably request. Each of the financial statements referred to in subparagraphs (a) and (b) shall be true and correct in all material respects as of the dates and for the periods stated therein, subject in the case of the unaudited financial statements to changes resulting from normal year-end adjustments for recurring accruals (none of which would, alone or in the aggregate, be materially adverse to the financial condition, operating results, business, assets, operations, business prospects, employee relations or customer or supplier relations of the Company). 6.4 INSPECTION OF PROPERTY. The Company shall permit each Investor, upon reasonable notice and during normal business hours and at such other times as any such holder may reasonably request, to (i) visit and inspect any of the properties of the Company, (ii) examine the corporate and financial records of the Company 21 and make copies thereof or extracts therefrom, and (iii) discuss the affairs, finances and accounts of any such corporations with the directors, officers and key employees of the Company. Notwithstanding anything to the contrary contained herein, the terms and provisions of this paragraph Section 6.5 shall terminate automatically and be of no further force and effect upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement filed under the Securities Act covering the offer and sale of Common Stock for the account of the Company at a price per share equal to or greater than $8.00 and in which the aggregate public offering price (before deduction of underwriters' discounts and qualifications) equals or exceeds $25,000,000 (a "Qualified Public Offering"). 6.5 ATTENDANCE AT BOARD MEETINGS. The Company shall deliver to each Investor which, together with its affiliates and or permitted transferees, holds at least 500,000 shares of the Series B Preferred Stock (a "Representative Holder") written notice of each meeting of its board of directors and each committee thereof at least three business days prior to the date of each such meeting, and the Company shall permit a representative of each such Representative Holder to attend as an observer all meetings of its board of directors and all committees thereof; provided that in the case of telephonic meetings conducted in accordance with the bylaws and the Company and applicable law, each such Representative Holder need receive only actual notice thereof at least 48 hours prior to any such meeting, and each such Representative Holder's representative shall be given the opportunity to listen to such telephonic meetings. Each representative shall be entitled to receive all written materials and other information (including, without limitation, copies of meeting minutes) given to directors in connection with such meetings substantially at the same time such materials and information are given to the directors; provided, however, that the Company reserves the right to exclude such representative from access to any material or portion thereof if the Company believes upon advice of counsel that such exclusion is reasonably necessary to preserve the Company's attorney-client privilege. If the Company proposes to take any action by written consent in lieu of a meeting of its board of directors or of any committee thereof, the Company shall give written notice thereof to each such Representative Holder promptly after the effective date of such consent describing in reasonable detail the nature and substance of such action. The Company shall pay the reasonable out-of-pocket expenses of each representative incurred in connection with attending any such board and committee meetings which are held outside of the State of Utah. Notwithstanding anything to the contrary contained herein, the terms and provisions of this paragraph Section 6.5 shall terminate automatically and be of no further force and effect upon the consummation of a Qualified Public Offering. 6.6 CURRENT PUBLIC INFORMATION. At all times after the Company has filed a registration statement with the Securities and Exchange Commission pursuant to the requirements of either the Securities Act or the Securities Exchange Act, the Company shall file all reports required to be filed by it under the Securities Act and the Securities Exchange Act and the rules and regulations adopted by the Securities and Exchange Commission thereunder and shall take such further action with respect to the provision of information as any holder or holders of Securities may reasonably request, all to the extent required to enable such holders to sell Securities pursuant to (i) Rule 144 adopted by the Securities and Exchange Commission under the Securities Act (as such rule may be amended from time to time) or any similar rule or regulation hereafter adopted by the Securities and Exchange Commission, or (ii) a registration statement on Form S-2 or S-3 or any similar registration form hereafter adopted by the Securities and Exchange Commission. Upon request, the Company shall deliver to any holder of Securities a written statement as to whether it has complied with such requirements. 22 6.7 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS. The Company and each of its Subsidiaries shall their use their collective best efforts to cause all of the current employees and all of the officers of the Company and each of its Subsidiaries to execute an Employee Inventions and Confidentiality Agreement in the forms attached hereto on Exhibit C within thirty (30) days after the Closing. 7 MISCELLANEOUS. 7.1 ENTIRE AGREEMENT. This Agreement and the documents referred to herein constitute the entire agreement among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants, except as specifically set forth herein or therein. 7.2 SURVIVAL OF WARRANTIES. The warranties, representations and covenants of the Company and the Investors contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing. 7.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including permitted transferees of any shares of Series B Preferred Stock sold hereunder or any Common Stock issued upon conversion thereof). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 7.4 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Utah as applied to agreements among Utah residents entered into and to be performed entirely within Utah. 7.5 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 7.6 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 23 7.7 NOTICES. Unless otherwise provided, all notices and other communications required or permitted under this Agreement shall be in writing and shall be mailed by United States first-class mail, postage prepaid, sent by facsimile or delivered personally by hand or by a nationally recognized courier addressed to the party to be notified at the address or facsimile number indicated for such person on Schedule A hereto, or at such other address or facsimile number as such party may designate by ten (10) days' advance written notice to the other parties hereto. All such notices and other written communications shall be effective on the date of mailing, confirmed facsimile transfer or delivery. 7.8 FINDER'S FEES. Each party represents that it neither is nor will be obligated for any finder's fee or commission in connection with this transaction. Each Investor, severally and not jointly, agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder's fee (and the cost and expenses of defending against such liability or asserted liability) for which such Investor or any of its officers, partners, employees or representatives is responsible. The Company agrees to indemnify and hold harmless each Investor from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 7.9 EXPENSES. (a) At the Closing, the Company shall reimburse the Investors for their reasonable out-of-pocket fees and expenses incurred in connection with the investigation, negotiation and documentation of the transactions contemplated hereby (including, without limitation, attorneys' and accountants' fees) not to exceed in the aggregate $150,000.00. (b) The Company shall pay its own out-of-pocket expenses and all stamp and other taxes which may be payable in respect of the execution and delivery of this Agreement, the Ancillary Agreements, or the issuance, delivery or acquisition of the Series B Preferred Stock. (c) The Company further agrees to reimburse the Investors on demand for the Investors' reasonable out-of-pocket fees and expenses incurred in connection with any amendment to or waiver of any provision of this Agreement necessitated by the breach of any provision of this Agreement by the Company or enforcement of this Agreement by the Investors (subject to the terms and provisions of Section 7.10 below). 7.10 ATTORNEYS' FEES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, any Ancillary Agreement or the Amended Articles, the prevailing party shall be entitled to be reimbursed by the non-prevailing party for reasonable attorneys' fees, costs and disbursements, in addition to any other relief to which such party may be entitled. 24 7.11 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of more than 50% of the Common Stock not previously sold to the public that is issued or issuable upon conversion of the Series B Preferred Stock. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities have been converted), each future holder of all such securities, and the Company. 7.12 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. * * * * * 25 IN WITNESS WHEREOF, the parties have executed this Series B Preferred Stock Purchase Agreement as of the date first above written. CALDERA SYSTEMS, INC., A UTAH CORPORATION By: /s/ RANSOM H. LOVE ------------------------------------- Name: Ransom H. Love Title: President CHICAGO VENTURE PARTNERS, L.P. By: Chicago Venture Management, L.L.C. Its: General Partner By: CVM, Inc. Its: Manager By: ------------------------------------- Name: John Fife Title: President CHICAGO VENTURE PARTNERS B, L.L.C. By: Burlington Investments, Inc. Its: Manager By: ------------------------------------- Name: John Fife Title: President EGAN MANAGED-CAPITAL, L.P. By: EMC Partners, L.P. Its: General Partner By: ------------------------------------- Name: Michael H. Shanahan Title: General Partner 26 ENSIGN PEAK ADVISORS, INC. By: ------------------------------- Name: F. James Cowan Title: Senior Vice President THE SANTA CRUZ OPERATION, INC. By: ------------------------------- Name: Jenny Twaddle Title: Acting CFO and Corporate Controller SUN MICROSYSTEMS, INC. By: ------------------------------- Name: Title: NOVELL, INC. By: ------------------------------- Name: Title: CITRIX SYSTEMS, INC. By: ------------------------------- Name: Title: 27 ARISTA CAPITAL PARTNERS, L.P. By: Arista Capital Management, L.L.C. Its: General Partner By: ------------------------------------- Name: Title: BAYVIEW By: ------------------------------------- Name: Title: FIC By: ------------------------------------- Name: Title: EX-10.3 4 1998 STOCK OPTION PLAN 1 EXHIBIT 10.3 CALDERA SYSTEMS, INC. 1998 STOCK OPTION PLAN ARTICLE I GENERAL PROVISIONS I. PURPOSE OF THE PLAN This 1998 Stock Option Plan is intended to promote the interests of CALDERA SYSTEMS, INC., a Utah corporation, by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix. II. ADMINISTRATION OF THE PLAN A. The Plan shall be administered by the Board. However, any or all administrative functions otherwise exercisable by the Board may be delegated to the Committee. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may also at any time terminate the functions of the Committee and reassume all powers and authority previously delegated to the Committee. B. The Plan Administrator shall have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Plan and to make such determinations under, and issue such interpretations of, the Plan and any outstanding options thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Plan or any option thereunder. III. ELIGIBILITY A. The persons eligible to participate in the Plan are as follows: (i) Employees, (ii) non-employee members of the Board or the non-employee members of the board of directors of any Parent or Subsidiary, and (iii) consultants who provide services to the Corporation (or any Parent or Subsidiary). B. The Plan Administrator shall have full authority to determine which eligible persons are to receive option grants, the time or times when such option grants are to be made, the number of shares to be covered by each such grant the exercise price of option, the time or times at which each option is to become exercisable, the vesting schedule applicable to the option shares and the maximum term for which the option is to remain. IV. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or re-acquired Common Stock. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 1,000,000 shares. B. Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (i) the options expire or terminate for any reason prior to exercise in full or (ii) the 2 options are canceled in accordance with the cancellation-regrant provisions of Article 2. All shares issued under the Plan, whether or not those shares are subsequently repurchased by the Corporation pursuant to its repurchase rights under the Plan, shall reduce on a share-for-share basis the number of shares of Common Stock available for subsequent issuance under the Plan. C. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan and (ii) the number and/or class of securities and the exercise price per share in effect under each outstanding option in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. ARTICLE 2 OPTION GRANTS I. OPTION TERMS Each option shall be a Non-Statutory Option and shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below A. Exercise Price. (i) The exercise price per share shall be fixed by the Plan Administrator which may be less than the Fair Market Value per share of Common Stock on the option grant date. (ii) The exercise price shall become immediately due upon exercise of the option and shall, subject to the documents evidencing the option, be payable in cash or check made payable to the Corporation. B. Exercise and Term of Options. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date. C. Effect of Termination of Service. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i) Should the Optionee cease to remain in Service for any reason other than Cause, Disability or death, then the Optionee shall have a period of three (3) months following the later of (i) the date of such cessation of Service, or (ii) the date the Options first become exercisable, during which to exercise each outstanding option held by such Optionee. (ii) Should the Optionee cease to remain in Service for Cause, then all outstanding Options shall terminate on the date of such cessation of Service. (iii) Should such Service terminate by reason of Disability, then the Optionee shall have a period of twelve (12) months following the later of (i) the date of such cessation of Service, or (ii) the date the Options first become exercisable, during which to exercise each outstanding option held by such Optionee. (iv) Should the Optionee die while holding one or more outstanding options, then the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution shall have a period of twelve (12) months following the later of (i) date of the Optionee's death, or (ii) the date the Options first become exercisable, during which to exercise each outstanding option held by such Optionee. 2 3 (v) Under no circumstances, however, shall any such option be exercisable after the specified expiration of the option term or earlier termination of the option. (vi) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable an the date of the Optionee's cessation of Service. The option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised upon the earlier of the following: (i) expiration of the applicable post-Service exercise period, (ii) upon the termination of the option as a result of a Corporate Transaction, or (iii) upon the expiration of the option term. The option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent the option has not vested on the date of such cessation of Service. D. Shareholder Rights. The holder of an option shall have no shareholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. Unvested Shares. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, all or (at the discretion of the Corporation and with the consent of the Optionee) any of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. The Plan Administrator may impose a vesting schedule upon any option grant or any shares of Common Stock subject to the option. F. First Refusal Rights. Until such time as the Common Stock is FIRST registered under Section 12(g) of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed disposition by the Optionee (or any successor in interest) of any shares of Common Stock issued under the Plan. Such right of first refusal shall be exercisable in accordance with the terms established by the Plan Administrator and set forth in the document evidencing such right. G. Limited Transferability of Option. During the lifetime of the Optionee, the option shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will, by the laws of descent and distribution following the Optionee's death, or be assigned in accordance with the terms of a Qualified Domestic Relations Order. The assigned option may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to such Qualified Domestic Relations Order. The terms applicable to the assigned option (or portion thereof) shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. II. CORPORATE TRANSACTION A. In the event of any Corporate Transaction, each outstanding option shall terminate and cease to be outstanding, except to the extent such option is assumed by the successor corporation (or parent thereof) in connection with such Corporate Transaction. In addition, all outstanding repurchase rights shall terminate automatically in the event of any Corporate Transaction, except to the extent the repurchase rights are assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction. B. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in the consummation of such Corporate Transaction, had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities available for issuance under the Plan following the consummation of such Corporate Transaction and (ii) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. 3 4 C. The grant of options under the Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. III. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Plan and to grant in substitution therefor new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new option grant date. IV. ADDITIONAL AUTHORITY The Plan Administrator shall have the discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: (i) extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service or death from the limited period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term; (ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service or death but also with respect to one or more additional installments in which the Optionee would have vested under the option had the Optionee continued in Service; and/or (iii) accelerate or waive the Vesting Schedule and/or the date the option first becomes exercisable. ARTICLE 3 MISCELLANEOUS I. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan shall become effective when adopted by the Board. The Plan Administrator may grant options and issue shares under the Plan at any time after the effective date of the Plan and before the date fixed herein for termination of the Plan. B. The Plan shall terminate upon the earliest of (i) the expiration of the ten (10)-year period measured from the date the Plan is adopted by the Board, (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise of options or the issuance of shares (whether vested or unvested) under the Plan or (iii) the termination of all outstanding options in connection with a Corporate Transaction. Upon such Plan termination, all options and unvested stock issuances outstanding under the Plan shall continue to have full force and effect in accordance with the provisions of the documents evidencing such options or issuances. II. AMENDMENT OF THE PLAN The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to options or unvested stock issuances at the time outstanding under the Plan, unless the Optionee consents to such amendment or modification. III. USE OF PROCEEDS 4 5 Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. IV. WITHHOLDING The Corporation's obligation to deliver shares of Common Stock upon the exercise of any options or upon the issuance or vesting of any shares issued under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. V. REGULATORY APPROVALS The implementation of the Plan, the granting of any options under the Plan and the issuance of any shares of Common Stock upon the exercise of any option shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the shares of Common Stock issued pursuant to it. VI. NO EMPLOYMENT OR SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. 5 6 APPENDIX The following definitions shall be in effect under the Plan A. Board shall mean the Corporation's Board of Directors. B. Cause shall mean any of the following: (i) Optionee's material breach of any employee, confidentiality, or other employment related agreement with the Corporation, (ii) Optionee's violation of the Corporation's policies or procedures set forth in the Corporation's Policies and Procedure Manual, as amended from time to time, or (iii) Optionee's conviction of or entrance of a plea of nolo contenders to a felony or to any other crime punishable by incarceration. C. Code shall mean the Internal Revenue Code of 1986, as amended. D. Committee shall mean a committee of two (2) or more Board members appointed by the Board to exercise one or more administrative functions under the Plan. E. Common Stock shall mean the Corporation's common stock. F. Corporate Transaction shall mean either of the following shareholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets, or the complete liquidation or dissolution of the Corporation. G. Corporation shall mean Caldera Systems, Inc., a Utah corporation. H. Disability shall mean the inability of the Optionee to engage in the performance of his duties as an Employee for a period exceeding three (3) months by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances. I. Domestic Relations Order shall mean any judgment, decree or order (including approval of a property settlement agreement) which provides or otherwise conveys, pursuant to applicable State domestic relations laws (including community property laws), marital property rights to any spouse or former spouse of the Optionee. J. Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. K. Exercise Date shall mean the date on which the Corporation shall have received written notice of the Date option exercise. L. Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: A-1 7 (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the Nasdaq National Market, then the Fair Market Value shall be conclusively determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. M. 1934 Act shall mean the Securities Exchange Act of 1934, as amended. N. Non-Statutory Option shall mean an option not intended to satisfy the requirements of Code Section 422. O. Optionee shall mean any person to whom an option is granted under the Plan. P. Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Q. Plan shall mean the Corporation's 1998 Stock Option Plan, as set forth in this document. R. Plan Administrator shall mean either the Board or the Committee, to the extent the Committee is at the time responsible for the administration of the Plan. S. Qualified Domestic Relations Order shall mean a Domestic Relations Order which substantially complies with the requirements of Code Section 414(p). The Plan Administrator shall have the sole discretion to determine whether a Domestic Relations Order is a Qualified Domestic Relations Order. T. Service shall mean the provision of services to the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant except to the extent otherwise specifically provided in the documents evidencing the option or stock issuance. U. Stock Exchange shall mean either the American Stock Exchange or the New York Stock Exchange. V. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A-2 EX-10.4 5 1999 OMNIBUS STOCK INCENTIVE PLAN 1 EXHIBIT 10.4 CALDERA SYSTEMS, INC 1999 OMNIBUS STOCK INCENTIVE PLAN 1. Establishment and Purpose. There is hereby adopted the Caldera Systems, Inc. 1999 Omnibus Stock Incentive Plan (the "Plan"). The Plan shall be the successor to the Caldera Systems, Inc. 1998 Stock Option Plan (the "Predecessor Plan"). Upon adoption of the Plan by the Board of Directors and approval of the Plan by the stockholders of Caldera Systems, Inc. (the "Company"), no further awards shall be made under the Predecessor Plan. If the Plan is not approved by the stockholders of the Company, the Predecessor Plan shall remain in full force and effect. The Plan is intended to promote the interests of the Company and the stockholders of the Company by providing officers, other employees of the Company, directors who are not employees of the Company, and other persons who are expected to make a long-term contribution to the success of the Company with appropriate incentives and rewards to encourage them to enter into and continue in the employ of the Company and/or to acquire a proprietary interest in the long-term success of the Company, thereby aligning their interest more closely to the interest of stockholders. 2. Definitions. As used in the Plan, the following definitions apply to the terms indicated below: (a) "Award Agreement" shall mean the written agreement between the Company and a Participant evidencing an Incentive Award. (b) "Board of Directors" shall mean the Board of Directors of the Company. (c) "Cause," when used in connection with the termination of a Participant's employment by the Company, shall mean (i) the willful and continued failure by the Participant substantially to perform his duties and obligations to the Company (other than any such failure resulting from his incapacity due to physical or mental illness) or (ii) the willful engaging by the Participant in misconduct which is materially injurious to the Company. For purposes of this Section 2(c), no act, or failure to act, on a Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant in bad faith and without reasonable belief that his action or omission was in the best interest of the Company. The Committee shall determine whether a termination of employment is for Cause. (d) "Change in Control" shall mean any of the following occurrences: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of not more than two consecutive years (not including any period prior to the adoption of the Plan), individuals who at the beginning of such 2 period constitute the Board of Directors and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this Section) whose election by the Board of Directors or nomination for election was approved by a vote of at least two-thirds (2/3) 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 at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as herein above defined) acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" shall mean the Compensation Committee of the Board of Directors. The Committee shall consist of two or more persons each of whom is an "outside director" within the meaning of Section 162(m) of the Code and a "Non-Employee Director" within the meaning of Rule 16b-3 under the Exchange Act (or who satisfies any other criteria for administering employee benefit plans as may be specified by the Securities and Exchange Commission in order for transactions under such plan to be exempt from the provisions of Section 16(b) of the Exchange Act). (g) "Company" shall mean, Caldera Systems, Inc., a Utah corporation. (h) "Common Stock" shall mean the common stock of the Company, no par value per share. (i) "Disability" shall mean: (1) any physical or mental condition that would qualify a Participant for a disability benefit under the long-term disability plan maintained by the Company or a Subsidiary of the Company and applicable to such Participant; or (2) when used in connection with the exercise of an Incentive Stock Option following termination of employment, disability within the meaning of Section 22(e)(3) of the Code. (j) "Effective Date" shall mean the date upon which this Plan is adopted by the Board of Directors. (k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. 2 3 (l) "Executive Officer" shall have the meaning set forth in Rule 3b-7 promulgated under the Exchange Act. (m) "Exercise Date" shall mean the date on which a Participant may exercise an Incentive Award. (n) "Fair Market Value" of a share of Common Stock, as of a date of determination, shall mean (i) the closing sales price per share of Common Stock on the national securities exchange on which such stock is principally traded for the last preceding date on which there was a sale of such stock on such exchange, or (ii) if the shares of Common Stock are not listed or admitted to trading on any such exchange, the closing price as reported by the Nasdaq Stock Market for the last preceding date on which there was a sale of such stock on such exchange, or (iii) if the shares of Common Stock are not then listed on the Nasdaq Stock Market, the average of the highest reported bid and lowest reported asked prices for the shares of Common Stock as reported by the National Association of Securities Dealers, Inc. Automated Quotations System for the last preceding date on which there was a sale of such stock in such market, or (iv) if the shares of Common Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as determined by the Committee in good faith. (o) "Incentive Award" shall mean an Option, Tandem SAR, Stand-Alone SAR, Restricted Stock grant, Phantom Stock grant or Stock Bonus granted pursuant to the terms of the Plan. (p) "Incentive Stock Option" shall mean an Option that is an "incentive stock option" within the meaning of Section 422 of the Code. (q) "Issue Date" shall mean the date established by the Company on which certificates representing shares of Restricted Stock shall be issued by the Company pursuant to the terms of Section 10(e)of the Plan. (r) "Non-Qualified Stock Option" shall mean an Option that is not an Incentive Stock Option. (s) "Option" shall mean an option to purchase shares of Common Stock granted pursuant to Section 7 of the Plan. (t) "Participant" shall mean an employee of the Company or a subsidiary of the Company to whom an Incentive Award is granted pursuant to the Plan, and, upon his death, his successors, heirs, executors and administrators, as the case may be. (u) "Phantom Stock" shall mean the right, granted pursuant to Section 11 of the Plan, to receive in cash the Fair Market Value of a share of Common Stock. (v) "Plan" shall mean this 1999 Omnibus Stock Incentive Plan, as amended from time to time. (w) "Reference Value" shall mean, with respect to Stand-Alone SARs, the greater of the Fair Market Value or the value given by the Compensation Committee. 3 4 (x) "Restricted Stock" shall mean a share of Common Stock which is granted pursuant to the terms of Section 10 hereof and which is subject to the restrictions set forth in Section 10 of the Plan. (y) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Exchange Act. (z) "Section 162(m)" shall mean Section 162(m) of the Code and the regulations promulgated thereunder. (aa) "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. (ab) "Stand-Alone SAR" shall mean a stock appreciation right granted pursuant to Section 9 of the Plan which is not related to any Option. (ac) "Stock Bonus" shall mean a bonus payable in shares of Common Stock granted pursuant to Section 12 of the Plan. (ad) "Subsidiary" shall mean a "subsidiary corporation" within the meaning of Section 424(f) of the Code. (ae) "Tandem SAR" shall mean a stock appreciation right granted pursuant to Section 8 of the Plan which is related to an Option. (af) "Vesting Date" shall mean the date established by the Committee on which a share of Restricted Stock or Phantom Stock may vest. 3. Stock Subject to the Plan. (a) Shares Available for Awards. The maximum number of shares of Common Stock reserved for issuance under the Plan shall be 3,705,238 shares (subject to adjustment as provided herein), which shall include 2,705,238 shares authorized but unissued under the Predecessor Plan. The total number of shares reserved for issuance hereunder may be authorized but unissued Common Stock or authorized and issued Common Stock held in the Company's treasury or acquired by the Company for the purposes of the Plan. The Committee may direct that any stock certificate evidencing shares issued pursuant to the Plan shall bear a legend setting forth such restrictions on transferability as may apply to such shares pursuant to the Plan. The grant of a Tandem SAR shall not reduce the number of shares of Common Stock with respect to which Incentive Awards may be granted pursuant to the Plan. Upon the exercise of any Tandem SAR, the related Option shall be canceled to the extent of the number of shares of Common Stock as to which the Tandem SAR is exercised and, notwithstanding the foregoing, such number of shares shall no longer be available for Incentive Awards under the Plan. 4 5 (b) Individual Limitation. The total number of shares of Common Stock subject to Incentive Awards (including Incentive Awards payable in cash but denominated as shares of Common Stock, i.e., Stand-Alone SARs and Phantom Stock), awarded to any employee during any tax year of the Company, shall not exceed 200,000 shares. Determinations under the preceding sentence shall be made in a manner that is consistent with Section 162(m) of the Code. (c) Adjustment for Change in Capitalization. In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Common Stock, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, spin-off, combination, repurchase, or 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 Plan, then the Committee shall make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (i) the number and kind of shares of stock which may thereafter be issued in connection with Incentive Awards, (ii) the number and kind of shares of stock issued or issuable in respect of outstanding Incentive Awards, and (iii) the exercise price, grant price, or purchase price relating to any Incentive Award; provided that, with respect to Incentive Stock Options, such adjustment shall be made in accordance with Section 424 of the Code. (d) Re-Use of Shares. The following shares of Common Stock shall again become available for Incentive Awards: any shares subject to an Incentive Award that remain unissued upon the cancellation, surrender, exchange or termination of such award for any reason whatsoever; any shares of Restricted Stock forfeited; and any shares in respect of which a stock appreciation right is settled for cash. 4. Administration of the Plan. The Plan shall be administered by the Committee. The Committee shall have the authority in its sole discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to grant Incentive Awards; to determine the persons to whom and the time or times at which Incentive Awards shall be granted; to determine the type and number of Incentive Awards to be granted, the number of shares of Stock to which an Award may relate and the terms, conditions, restrictions and performance criteria relating to any Incentive Award; to determine whether, to what extent, and under what circumstances an Incentive Award may be settled, canceled, forfeited, exchanged, or surrendered; to subject shares of Stock to which an Award may relate to rights of repurchase or rights of refusal in favor of the Company under the circumstances and upon the terms set forth in an Award Agreement; to make adjustments in the performance goals in recognition of unusual or non-recurring events affecting the Company or the financial statements of the Company (to the extent in accordance with Section 162(m)of the Code, if applicable), or in response to changes in applicable laws, regulations, or accounting 5 6 principles; to construe and interpret the Plan and any Incentive Award; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of Award Agreements; and to make all other determinations deemed necessary or advisable for the administration of the Plan. The Committee may, in its absolute discretion, without amendment to the Plan, (i) accelerate the date on which any Tandem SAR or Stand-Alone SAR or Incentive Award relating to Phantom Stock granted under the Plan becomes exercisable, waive or amend the operation of Plan provisions respecting exercise after termination of employment or otherwise adjust any of the terms of such Option or Stand-Alone SAR, and (ii) accelerate the Exercise Date or Issue Date, or waive any condition imposed hereunder, with respect to any share of Restricted Stock or Phantom Stock or otherwise adjust any of the terms applicable to such share. No member of the Committee shall be liable for any action, omission or determination relating to the Plan, and the Company shall indemnify and hold harmless each member of the Committee and each other director or employee of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been delegated against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Committee) arising out of any action, omission or determination relating to the 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 the Company. 5. Eligibility. The persons who shall be eligible to receive Incentive Awards pursuant to the Plan shall be such employees of the Company or its Subsidiaries (including officers of the Company or its Subsidiaries, whether or not they are directors of the Company or its Subsidiaries) as the Committee shall select from time to time. Directors and others who are not employees or officers of the Company, including persons who may be expected to make a contribution to the Company's future success, shall also be eligible to receive Incentive Awards under the Plan. 6. Awards Under the Plan; Award Agreement. The Committee may grant Options, Tandem SARs, Stand-Alone SARs, shares of Restricted Stock, shares of Phantom Stock and Stock Bonuses, in such amounts and with such terms and conditions as the Committee shall determine, subject to the provisions of the Plan. Each Incentive Award granted under the Plan (except an unconditional Stock Bonus) shall be evidenced by an Award Agreement which shall contain such provisions as the Committee may in its sole discretion deem necessary or desirable. By accepting an Incentive Award, a Participant thereby agrees that the award shall be subject to all of the terms and provisions of the Plan and the applicable Award Agreement. 7. Options. (a) Identification of Options. Each Option shall be clearly identified in the applicable Award Agreement as either an Incentive Stock Option or a Non-Qualified Stock Option. 6 7 (b) Exercise Price. Each Award Agreement with respect to an Option shall set forth the amount (the "option exercise price") payable by the grantee to the Company upon exercise of the Option. The option exercise price per share shall be determined by the Committee but shall in no event be less than the Fair Market Value of a share of Common Stock on the date the Option is granted. (c) Term and Exercise of Options. (1) Unless the applicable Award Agreement provides otherwise, an Option shall become cumulatively exercisable as to 25 percent of the shares covered thereby on each of the first, second, third and fourth anniversaries of the date of grant. The Committee shall determine the expiration date of each Option; provided, however, that no Incentive Stock Option shall be exercisable more than 10 years after the date of grant. Unless the applicable Award Agreement provides otherwise, no Option shall be exercisable prior to the first anniversary of the date of grant. (2) An Option may be exercised for all or any portion of the shares as to which it is exercisable, provided, that no partial exercise of an Option shall be for an aggregate exercise price of less than $1,000. The partial exercise of an Option shall not cause the expiration, termination or cancellation of the remaining portion thereof. (3) An Option shall be exercised by delivering notice to the Company's principal office, to the attention of its Secretary, no less than one business day in advance of the effective date of the proposed exercise. Such notice shall specify the number of shares of Common Stock with respect to which the Option is being exercised and the effective date of the proposed exercise and shall be signed by the Participant or other person then having the right to exercise the Option. Such notice may be withdrawn at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise. 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: (i) in cash, by certified check, bank cashier's check or wire transfer; (ii) by delivering a properly executed exercise notice to the Company together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the full amount of the Purchase Price, (iii) by delivering shares of Common Stock owned by the Participant with appropriate stock powers, (iv) by electing to have the Company retain shares of Common Stock which would otherwise be issued on the exercise of the Option, or (v) any combination of the foregoing forms. In determining the number of shares of Common Stock necessary to be delivered to or retained by the Company, such shares shall be valued at their Fair Market Value as of the exercise date. (4) Certificates for shares of Common Stock purchased upon the exercise of an Option shall be issued in the name of the Participant or other person entitled to receive such shares, and delivered to the Participant or such other person as soon as practicable following the effective date on which the Option is exercised. 7 8 (d) Limitations on Incentive Stock Options. (1) 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 Plan and any other stock option plan of the Company (or any Subsidiary of the Company) shall exceed $100,000, or such higher value as may be permitted under Section 422 of the Code, such Options shall be treated as Non-Qualified Stock Options. Such Fair Market Value shall be determined as of the date on which each such Incentive Stock Option is granted. (2) No Incentive Stock Option may be granted to an individual if, at the time of the grant, such individual owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company unless (i) the exercise price per share of such Incentive Stock Option is at least 110 percent of the Fair Market Value of a share of Common Stock at the time such Incentive Stock Option is granted and (ii) such Incentive Stock Option is not exercisable after the expiration of five years from the date such Incentive Stock Option is granted. (e) Effect of Termination of Employment. (1) Unless the applicable Award Agreement provides otherwise, in the event that the employment of a Participant with the Company or a Subsidiary of the Company shall terminate for any reason other than death, Disability or Cause, (i) Options granted to such Participant, to the extent that they are exercisable at the time of such termination, shall remain exercisable until the date that is ninety (90) days 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, shall expire at the close of business on the date of such termination. Notwithstanding the foregoing, no Option shall be exercisable after the expiration of its term. (2) Unless the applicable Award Agreement provides otherwise, in the event that the employment of a Participant with the Company or a Subsidiary of the Company shall terminate on account of the Disability or death of the Participant (i) Options granted to such Participant, to the extent that they were exercisable at the time of such termination, shall remain exercisable until the first anniversary of 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, shall expire at the close of business on the date of such termination. Notwithstanding the foregoing, no Option shall be exercisable after the expiration of its term. (3) If a Participant's employment with the Company or a Subsidiary of the Company is terminated for Cause, all outstanding options granted to such Participant shall expire at the commencement of business on the date of such termination. 8 9 (f) Effect of Change in Control. Upon the occurrence of a Change in Control, (i) Options granted to a Participant, to the extent that they were exercisable at the time of a Change in Control, shall remain exercisable until their expiration notwithstanding the provisions of Section 7(e)(1) and (2) of the Plan, and (ii) Options granted to such Participant, to the extent they were not exercisable at the time of a Change in Control, shall expire at the close of business on the date of such Change in Control. Notwithstanding the foregoing, no Option shall be exercisable after the expiration of its term. 8. Tandem SARs. The Committee may grant in connection with any Option granted hereunder one or more Tandem 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. A Tandem SAR may be granted at the same time as, or, in the case of a Non-Qualified Stock Option, subsequent to the time that, its related Option is granted. (a) Benefit Upon Exercise. The exercise of a Tandem SAR with respect to any number of shares of Common Stock shall entitle 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 option exercise price per share of the related Option. Such payment shall be made as soon as practicable after the effective date of such exercise. (b) Term and Exercise of Tandem SAR. (1) A Tandem SAR shall be exercisable only if and to the extent that its related Option is exercisable. (2) The exercise of a Tandem SAR with respect to a number of shares of Common Stock shall cause 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 (other than pursuant to this Section 8(b)(2)), with respect to a number of shares of Common Stock shall cause the automatic and immediate cancellation of any related Tandem SARs to the extent that the number of shares of Common Stock remaining subject to such Option is less than the number of shares then subject to such Tandem SAR. Such Tandem SARs shall be canceled in the order in which they become exercisable. (3) A Tandem SAR may be exercised for all or any portion of the shares as to which the related Option is exercisable; provided, that no partial exercise of a Tandem SAR shall be for less than a number of shares having an aggregate option exercise price of less than $1,000. The partial exercise of a Tandem SAR shall not cause the expiration, termination or cancellation of the remaining portion thereof. 9 10 (4) No Tandem SAR shall be assignable or transferable otherwise than together with its related Option, and any such transfer or assignment will be subject to the provisions of Section 20 of the Plan. (5) A Tandem SAR shall be exercisable by delivering notice to the Company's principal office, to the attention of its Secretary, no less than one business day in advance of the effective date of the proposed exercise. Such notice shall specify the number of shares of Common Stock with respect to which the Tandem SAR is being exercised and the effective date of the proposed exercise and shall be signed by the Participant or other person then having the right to exercise the Option to which the Tandem SAR is related. Such notice may be withdrawn at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise. 9. Stand-Alone SARs. (a) Benefit Upon Exercise. The exercise of a Stand-Alone SAR with respect to any number of shares of Common Stock shall entitle 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 of the Stand-Alone SAR. Such payments shall be made as soon as practicable after the effective date of such exercise. (b) Term and Exercise of Stand-Alone SARs. (1) Unless the applicable Award Agreement provides otherwise, a Stand-Alone SAR shall become cumulatively exercisable as to 25 percent of the shares covered thereby on each of the first, second, third and fourth anniversaries of the date of grant. The Committee shall determine the expiration date of each Stand-Alone SAR. Unless the applicable Award Agreement provides otherwise, no Stand-Alone SAR shall be exercisable prior to the first anniversary of the date of grant. (2) A Stand-Alone SAR may be exercised for all or any portion of the shares as to which it is exercisable; provided, that no partial exercise of a Stand-Alone SAR shall be for an aggregate Reference Value of less than $1,000. The partial exercise of a Stand-Alone SAR shall not cause the expiration, termination or cancellation of the remaining portion thereof. (3) A Stand-Alone SAR shall be exercised by delivering notice to the Company's principal office, to the attention of its Secretary, no less than one business day in advance of the effective date of the proposed exercise. Such notice shall specify the number of shares of Common Stock with respect to which the Stand-Alone SAR is being exercised, and the effective date of the proposed exercise, and shall be signed by the Participant. The Participant may withdraw such notice at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise. 10 11 (c) Effect of Termination of Employment. The provisions set forth in Section 7(e) with respect to the exercise of Options following termination of employment shall apply as well to the exercise of Stand-Alone SARs. (d) Effect of Change in Control. Upon the occurrence of a Change in Control, (i) Stand-Alone SARs granted under the Plan, to the extent exercisable at the time of a Change of Control, shall remain exercisable until their expiration notwithstanding the provisions of Section 7(e) of the Plan which are incorporated into this Section 9, and (ii) Stand-Alone SARs not exercisable at the time of a Change in Control shall expire at the close of business on the date of such Change in Control. 10. Restricted Stock. (a) Issue Date and Vesting Date. At the time of the grant of shares of Restricted Stock, the Committee shall establish an Issue Date or Issue Dates and a Vesting Date or Vesting Dates with respect to such shares. The Committee may divide such shares into classes and assign a different Issue Date and/or Vesting Date for each class. If the grantee is employed by the Company or a Subsidiary of the Company on an Issue Date (which may be the date of grant), the specified number of shares of Restricted Stock shall be issued in accordance with the provisions of Section 10(e) of the Plan. Provided that all conditions to the vesting of a share of Restricted Stock imposed pursuant to Section 10(b) of the plan are satisfied, and except as provided in Section 10(g) of the Plan, upon the occurrence of the Vesting Date with respect to a share of Restricted Stock, such share shall vest and the restrictions of Section 10(c) of the Plan shall lapse. (b) Conditions to Vesting. At the time of the grant of shares of Restricted Stock, the Committee may impose such restrictions or conditions to the vesting of such shares as it, in its absolute discretion, deems appropriate. (c) Restrictions on Transfer Prior to Vesting. 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, shall be permitted. Immediately upon any attempt to transfer such rights, such share, and all of the rights related thereto, shall be forfeited by the Participant. (d) Dividends on Restricted Stock. The Committee in its discretion may require that any dividends paid on shares of Restricted Stock shall be held in escrow until all restrictions on such shares have lapsed. 11 12 (e) Issuance of Certificates. (1) Reasonably promptly after the Issue Date with respect to shares of Restricted Stock, the Company shall cause to be issued a stock certificate, registered in the name of the Participant to whom such shares were granted, evidencing such shares; provided, that the Company shall not cause such a stock certificate to be issued unless it has received a stock power duly endorsed in blank with respect to such shares. Each such stock certificate shall bear the following legend: The transferability of this certificate and the shares of stock represented hereby are subject to the restrictions, terms and conditions (including forfeiture provisions and restrictions against transfer) contained in the 1999 Omnibus Stock Incentive Plan of Caldera Systems, Inc. and an Award Agreement entered into between the registered owner of such shares and Caldera Systems, Inc. A copy of such Plan and Award Agreement is on file in the office of the Secretary of Caldera Systems, Inc., 240 West Center Street, Orem, Utah 84057. Such legend shall not be removed until such shares vest pursuant to the terms of the applicable Award Agreement. (2) Each certificate issued pursuant to this Section 10(e), together with the stock powers relating to the shares of Restricted Stock evidenced by such certificate, shall be held by the Company unless the Committee determines otherwise. (f) Consequences of Vesting. Upon the vesting of a share of Restricted Stock pursuant to the terms of the applicable Award Agreement, the restrictions of Section 10(c) of the Plan shall lapse, except as otherwise provided in the Award Agreement. Reasonably promptly after a share of Restricted Stock vests, the Company shall cause to be delivered to the Participant to whom such shares were granted, a certificate evidencing such share, free of the legend set forth in Section 10(e) of the Plan. (g) Effect of Termination of Employment. (1) Subject to such other provision as the Committee may set forth in the applicable Award Agreement, and to the Committee's amendment authority pursuant to Section 4 of the Plan, upon the termination of a Participant's employment by the Company or any Subsidiary of the Company for any reason other than Cause, any and all shares to which restrictions on transferability apply shall be immediately forfeited by the Participant and transferred to the Company, provided that if the Committee, in its sole discretion and within thirty (30) days after such termination of employment notifies the Participant in writing of its decision not to terminate the Participant's rights in such shares, then the Participant shall continue to be the owner of such shares subject to such continuing restrictions as the Committee may prescribe in such notice. If shares of Restricted Stock are forfeited in accordance with the provision of this Section 10, the Company shall also have 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. (2) In the event of the termination of a Participant's employment for Cause, all shares of Restricted Stock granted to such Participant which have not vested as of the 12 13 date of such termination shall immediately be returned to the Company, together with any dividends paid on such shares. (h) Effect of Change in Control. Upon the occurrence of a Change in Control, all restrictions on outstanding vested shares shall immediately lapse and all outstanding shares of Restricted Stock which have not theretofore vested shall immediately expire and be cancelled. (i) Special Provisions Regarding Restricted Stock Awards. Notwithstanding anything to the contrary contained herein, Restricted Stock granted pursuant to this Section 10 shall be based on the attainment by the Company (or a Subsidiary or division of the Company if applicable) of performance goals pre-established by the Committee, based on one or more of the following criteria: (i) the attainment of a specified percentage return on total stockholder equity of the Company; (ii) the attainment of a specified percentage increase in earnings per share of Common Stock; (iii) the attainment of a specified percentage increase in net income of the Company; and (iv) the attainment of a specified percentage increase in profit before taxation of the Company (or a Subsidiary or division of the Company if applicable). Attainment of any such performance criteria shall be determined in accordance with generally accepted accounting principles as in effect from time to time. Such shares of Restricted Stock shall be released from restrictions only after the attainment of such performance measures have been certified by the Committee. 11. Phantom Stock. (a) Vesting Date. At the time of the grant of shares of Phantom Stock, the Committee shall establish a Vesting Date or Vesting Dates with respect to such shares. The Committee may divide such shares into classes and assign a different Vesting Date for each class. Provided that all conditions to the vesting of a share of Phantom Stock imposed pursuant to Section 11(c) of the Plan are satisfied, and except as provided in Section 11(d) of the Plan, upon the occurrence of the Vesting Date with respect to a share of Phantom Stock, such share shall vest. (b) Benefit Upon Vesting. Upon the vesting of a share of Phantom Stock, the Participant shall be entitled to receive in cash, within 30 days of the date on which such share vests, an amount equal to the sum of (i) the Fair Market Value of a share 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. 13 14 (c) Conditions to Vesting. At the time of the grant of shares of Phantom Stock, the Committee may impose such restrictions or conditions to the vesting of such shares as it, in its absolute discretion, deems appropriate. (d) Effect of Termination of Employment. (1) Subject to such other provisions as the Committee may set forth in the applicable Award Agreement, and to the Committee's amendment authority pursuant to Section 4 of the Plan, shares of Phantom Stock that have not vested, together with any dividends credited on such shares, shall be forfeited upon the Participant's termination of employment for any reason other than Cause. (2) In the event of the termination of a Participant's employment for Cause, all shares of Phantom Stock granted to such Participant which have not vested as of the date of such termination shall immediately be forfeited, together with any dividends credited on such shares. (e) Effect of Change in Control. Upon the occurrence of a Change in Control, all outstanding shares of Phantom Stock which have not theretofore vested shall immediately expire and be cancelled. (f) Special Provisions Regarding Phantom Stock Awards. Notwithstanding anything to the contrary contained herein, Phantom Stock granted pursuant to this Section 11 to Executive Officers shall be based on the attainment by the Company (or a Subsidiary or division of the Company if applicable) of performance goals pre-established by the Committee, based on one or more of the following criteria: (i) the attainment of a specified percentage return on total stockholder equity of the Company; (ii) the attainment of a specified percentage increase in earnings per share of Common Stock from continuing operations; (iii) the attainment of a specified percentage increase in net income of the Company; and (iv) the attainment of a specified percentage increase in profit before taxation of the Company (or a Subsidiary or division of the Company if applicable). Attainment of any such performance criteria shall be determined in accordance with generally accepted accounting principles as in effect from time to time. No cash payment in respect of any Phantom Stock award will be paid to an Executive Officer until the attainment of the respective performance measures have been certified by the Committee. 12. Stock Bonuses. In the event that the Committee grants a Stock Bonus, a certificate for the shares of Common Stock comprising such Stock Bonus shall be issued in the name of the Participant to whom such grant was made and delivered to such Participant as soon as practicable after the date on which such Stock Bonus is payable. 14 15 13. Rights as a Stockholder. No person shall have any rights as a stockholder with respect to any shares of Common Stock covered by or relating to any Incentive Award until the date of issuance of a stock certificate with respect to such shares. Except as otherwise expressly provided in Section 3(c) of the Plan, no adjustment to any Incentive Award shall be made for dividends or other rights for which the record date occurs prior to the date such stock certificate is issued. 14. No Special Employment Rights; No Right to Incentive Award. Nothing contained in the Plan or any Award Agreement shall confer upon any Participant any right with respect to the continuation of employment by the Company or any Subsidiary of the Company or interfere in any way with the right of the Company or any Subsidiary of the Company, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Participant. No person shall have any claim or right to receive an Incentive Award hereunder. The Committee's granting of an Incentive Award to a Participant at any time shall neither require the Committee to grant any other Incentive Award to such Participant or other person at any time or preclude the Committee from making subsequent grants to such Participant or any other person. 15. Securities Matters. (a) The Company shall be under no obligation to effect the registration pursuant to the Securities Act of any interests in the Plan or any shares of Common Stock to be issued hereunder or to effect similar compliance under any state laws. Notwithstanding anything herein to the contrary, the Company shall not be obligated to cause to be issued or delivered any certificates evidencing shares of Common Stock pursuant to the Plan unless and until the Company is advised by its counsel that the issuance and delivery of such certificates is in compliance with all applicable laws, regulations of governmental authority and the requirements of any securities exchange on which shares of Common Stock are traded. The Committee may require, as a condition of the issuance and delivery of certificates evidencing shares of Common Stock pursuant to the terms hereof and of the applicable Award Agreement, that the recipient of such shares make such covenants, agreements and representations, and that such certificates bear such legends, as the Committee, in its sole discretion, deems necessary or desirable. (b) The transfer of any shares of Common Stock hereunder shall be effective only at such time as counsel to the Company shall have determined that the issuance and delivery of such shares is in compliance with all applicable laws, regulations of governmental authority and the requirements of any securities exchange on which shares of Common Stock are traded. The Committee may, in its sole discretion, defer the effectiveness of any transfer of shares of Common Stock hereunder in order to allow the issuance of such shares to be made pursuant to registration or an exemption from registration or other methods for compliance available under federal or state securities laws. The Committee shall inform the Participant in writing of its decision to defer the effectiveness of a transfer. During the period of such deferral in connection with the exercise of an Option, the Participant may, by written notice, withdraw such exercise and obtain the refund of any amount paid with respect thereto. 15 16 16. Withholding Taxes. Whenever cash is to be paid pursuant to an Incentive Award, the Company shall have 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 Incentive Award, the Company shall have the right to require the Participant to remit to the Company 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 the Company withhold from delivery shares of Common Stock having a fair market value equal to the amount of tax to be withheld. Such shares shall be valued at their Fair Market Value on the date on which the amount of tax to be withheld is determined (the "Tax Date"). Fractional share amounts shall be settled in cash. Such a withholding election may be made with respect to all or any portion of the shares to be delivered pursuant to an Incentive Award. 17. Notification of Election Under Section 83(b) of the Code. If any Participant shall, in connection with the acquisition of shares of Common Stock under the Plan, make the election permitted under Section 83(b) of the Code (i.e., an election to include in gross income in the year of transfer the amounts specified in Section 83(b)), such Participant shall notify the Company of such election within 10 days of filing notice of the election with the Internal Revenue Service, in addition to any filing and a notification required pursuant to regulation issued under the authority of Code Section 83(b). 18. Notification Upon Disqualifying Disposition Under Section 421(b) of the Code. Each Award Agreement with respect to an Incentive Stock Option shall require the Participant to notify the Company of any disposition of shares of Common Stock issued pursuant to the exercise of such Option under the circumstances described in Section 421(b) of the Code (relating to certain disqualifying dispositions), within 10 days of such disposition. 19. Amendment or Termination of the Plan. The Board of Directors may, at any time, suspend or terminate the Plan or revise or amend it in any respect whatsoever; provided, however, that stockholder approval shall be required if and to the extent the Board of Directors determines that such approval is appropriate for purposes of satisfying Section 162(m) or 422 of the Code or to the extent such approval is required by the rules of any stock exchange on which the Common Stock is listed. Nothing herein shall restrict the Committee's ability to exercise its discretionary authority pursuant to Section 4 of the Plan, which discretion may be exercised without amendment to the Plan. No action hereunder may, without the consent of a Participant, reduce the Participant's rights under any outstanding Incentive Award. 16 17 20. Transfers Upon Death; Non-Assignability. Upon the death of a Participant, outstanding Incentive Awards granted to such Participant may be exercised only by the executor or administrator of the Participant's estate or by a person who shall have acquired the right to such exercise by will or by the laws of descent and distribution. No transfer of an Incentive Award by will or the laws of descent and distribution shall be effective to bind the Company unless the Committee shall have been furnished with (a) written notice thereof and with a copy of the will and/or such evidence as the Committee may deem necessary to establish the validity of the transfer and (b) an agreement by the transferee to comply with all the terms and conditions of the Incentive Award that are or would have been applicable to the Participant and to be bound by the acknowledgments made by the Participant in connection with the grant of the Incentive Award. During a Participant's lifetime, the Committee may permit the transfer, assignment or other encumbrance of an outstanding Option or outstanding shares of Restricted Stock unless such Option is an Incentive Stock Option and the Committee and the Participant intend that it shall retain such status. Notwithstanding the foregoing, subject to any conditions as the Committee may prescribe, a Participant may, upon providing written notice to the Secretary of the Company, elect to transfer any or all Options granted to such Participant pursuant to the Plan to members of his or her immediate family, including, but not limited to, children, grandchildren and spouse or to trusts for the benefit of such immediate family members or to partnerships in which such family members are the only partners; provided, however, that no such transfer by any Participant may be made in exchange for consideration. 21. Expenses and Receipts. The expenses of the Plan shall be paid by the Company. Any proceeds received by the Company in connection with any Incentive Award will be used for general corporate purposes. 22. Failure to Comply. In addition to the remedies of the Company elsewhere provided for herein, failure by a Participant (or beneficiary or transferee) to comply with any of the terms and conditions of the Plan or the applicable Award Agreement, unless such failure is remedied by such Participant (or beneficiary or transferee) within ten days after notice of such failure by the Committee, shall be grounds for the cancellation and forfeiture of such Incentive Award, in whole or in part, as the Committee, in its absolute discretion, may determine. 23. Effective Date and Term of Plan. The Plan became effective on the Effective Date, but the Plan (and any grants of Incentive Awards made prior to stockholder approval of the Plan) shall be subject to the requisite approval of the stockholders of the Company. In the absence of such approval, such Incentive Awards shall be null and void. Unless earlier terminated by the Board of Directors, the right to grant Incentive Awards under the Plan will terminate on the tenth anniversary of the Effective Date. Incentive Awards outstanding at Plan termination will remain in effect according to their terms and the provisions of the Plan. 24. Applicable Law. 17 18 Except to the extent preempted by any applicable federal law, the Plan will be construed and administered in accordance with the laws of the State of Utah, without reference to the principles of conflicts of law. 25. Participant Rights. No Participant shall have any claim to be granted any Incentive Award under the Plan, and there is no obligation for uniformity of treatment for Participants. Except as provided specifically herein, a Participant or a transferee of an Incentive Award shall have no rights as a stockholder with respect to any shares covered by any award until the date of the issuance of a Common Stock certificate to him for such shares. 26. Unfunded Status of Awards. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant pursuant to an Incentive Award, nothing contained in the Plan or any Award Agreement shall give any such Participant any rights that are greater than those of a general creditor of the Company. 27. No Fractional Shares. No fractional shares of Common Stock shall be issued or delivered pursuant to the Plan. The Committee shall determine whether cash, other Incentive Awards, or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. 28. Beneficiary. A Participant may file with the Committee a written designation of a beneficiary on such form as may be prescribed by the Committee and may, from time to time, amend or revoke such designation. If no designated beneficiary survives the Participant, the executor or administrator of the Participant's estate shall be deemed to be the Participant's beneficiary. 29. Interpretation. The Plan is designed and intended to comply with Rule 16b-3 promulgated under the Exchange Act and, with Section 162(m) of the Code, and all provisions hereof shall be construed in a manner to so comply. 18 EX-10.6 6 SECURED CONVERTIBLE PROMISSORY NOTE 1 EXHIBIT 10.6 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES LAWS. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED, SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THESE SECURITIES UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. SECURED CONVERTIBLE PROMISSORY NOTE OF CALDERA SYSTEMS, INC. $2,000,000 September 1, 1998 Caldera Systems, Inc., a Utah corporation (the "COMPANY"), for value received, hereby promises to pay to The Canopy Group, Inc., a Utah corporation (the "NOTEHOLDER"), at 240 West Center Street, Orem, Utah 84057, or its assigns, the sum of Two Million Dollars ($2,000,000), or such other or greater amount as may be outstanding, plus interest accrued on unpaid principal, compounded annually, at a rate per annum, calculated initially on the date of this secured convertible promissory note (this "NOTE") and recalculated on the date of each annual anniversary convertible of this Note (each such date, a "CALCULATION DATE"), equal to the prime rate (as determined by the Federal Reserve on such Calculation Date) less one-half percent (1/2%), from the date of this Note until the principal amount hereof and all interest accrued thereon is paid (or converted, as provided in Section 2 hereof). The initial interest rate of provided this Note shall be 7.25%. The principal amount of this Note, and the interest accrued thereon, shall be payable at the principal offices of the Noteholder or by mail to the registered address of the holder of this Note on the earliest to occur of (i) thirty (30) days after demand, (ii) a default under this Note in accordance with Paragraph 8 below, (iii) a default as that term defined in the Security Agreement executed herewith, and (iv) the date thirty (30) days after the date of any breach by the Company of any agreement with the Noteholder and/or any affiliate of the Noteholder, unless this Note shall have been previously converted pursuant to Section 2 hereof or as provided otherwise in this Note. The following is a statement of the rights of the holder of this Note and the conditions to which this Note is subject, and to which the holder hereof, by the acceptance of this Note, agrees: 1. DEFINITIONS. The following definitions shall apply for all purposes of this Note: 2 1.1 "COMPANY" shall mean the Company as defined above and includes any corporation which shall succeed to or assume the obligations of the Company under this Note. 1.2 "CHANGE OF CONTROL TRANSACTION" shall mean a merger, acquisition, or other business combination in which fifty percent (50%) or more of the Company's outstanding voting stock is transferred to different holders in a single transaction or a series of related transactions; provided, however, that an acquisition by the Noteholder (including its affiliates) of all or substantially all of the voting securities of the Company shall not constitute a Change of Control Transaction for the purposes hereunder. 1.3 "CONVERSION DATE" shall mean the date on which, pursuant to Sections 2 and 3 hereof, the Noteholder exercises its right to convert this Note into the Conversion Stock at the Note Conversion Price. 1.4 "CONVERSION STOCK" shall mean the shares of common stock, no par value, of the Company. The number and character of shares of Conversion Stock are subject to adjustment as provided herein and the term "Conversion Stock" shall include shares and other securities and property at any time receivable or issuable upon conversion of this Note in accordance with its terms. 1.5 "NOTE CONVERSION PRICE" shall be $1.00 per share (after giving effect to the 2-1 forward stock split effected by the Articles of Restatement of the Company dated November 19, 1998). 1.6 "NOTEHOLDER," "HOLDER," or similar terms, when the context refers to a holder of this Note, shall mean any person who shall at the time be the registered holder of this Note. 2. CONVERSION. 2.1 (a) Conversion of Note. At any time, the Noteholder shall have the right, at the holder's option, to convert the principal and accrued interest on this Note, in whole or in part, into Conversion Stock at the Note Conversion Price. Conversion under this Section 2 shall occur only upon surrender of this Note for conversion at the principal offices of the Company, accompanied by written notice of election to convert. (b) Conversion in the Event of Prepayment or Payment of Note. The Company shall have the right to prepay the entire principal balance, plus accrued interest, due under the Note at any time prior to the maturity date if the Note. The Noteholder shall have no obligation to accept any payment less than the entire principal balance, plus accrued interest. At such time that the Company has funds immediately available and elects to pay the entire principal balance and accrued interest (whether as a prepayment or payment at or after maturity of this Note), the Noteholder shall have fifteen (15) days from the receipt of notice of the Company's election to pay off the Note to convert the Note into Conversion Stock at the Note Conversion Price. 2.2 Certain Transactions. The Company shall give written notice to the 2 3 Noteholder of any Change of Control Transaction at least twenty (20) business days prior to the date on which such Change of Control Transaction shall take place. Prior to the closing of such Change of Control Transaction, the Company shall, at Noteholder's election, either (i) repay all unpaid principal and interest under this Note or (ii) convert this Note into Conversion Stock at the Note Conversion Price. 3. ISSUANCE OF CONVERSION STOCK. As soon as practicable after conversion of this Note, the Company, at its expense, will cause to be issued in the name of and delivered to the holder of this Note, a certificate or certificates for the number of shares of Conversion Stock to which the holder shall be entitled upon such conversion (bearing such legends as may be required by applicable state and federal securities laws in the opinion of legal counsel of the Company), together with any other securities and property to which the holder is entitled upon such conversion under the terms of this Note. Such conversion shall be deemed to have been made (i) under Section 2 above and (ii) immediately prior to the close of business on the date that the Note shall have been surrendered for conversion, accompanied by written notice of election to convert. No fractional shares will be issued upon conversion of this Note. If upon any conversion of this Note a fraction of a share would otherwise result, then, in lieu of such fractional share, the Company will pay the cash value of that fractional share, calculated on the basis of the applicable Note Conversion Price. 4. ADJUSTMENT OF NUMBER OF SHARES. The number and character of shares of Conversion Stock issuable upon conversion of this Note (or any shares of stock or other securities or property at the time receivable or issuable upon conversion of this Note) are subject to adjustment upon the occurrence of any of the following events: 4.1 Adjustment for Stock Splits, Stock Dividends, Recapitalizations, etc. In the event that the Company shall fix a record date for the determination of holders of securities affected by any stock split, stock dividend, reclassification, recapitalization or other similar event that will, in the future, affect the number of outstanding shares of the Company's capital stock, then, and in each such case, the Noteholder, upon conversion of this Note at any time after the Company shall fix the record date for such event, shall receive, in addition to the shares of Conversion Stock issuable upon conversion on the Conversion Date, the right to receive the securities of the Company to which such holder would have been entitled if such holder had converted this Note immediately prior to such record date (all subject to further adjustment as provided in this Note). 4.2 Adjustment for Dividends and Distributions. In the event that the Company shall make or issue, or shall fix a record date for the determination of eligible holders of securities entitled to receive, a dividend or other distribution payable with respect to the Conversion Stock (or any shares of stock or other securities at the time issuable upon conversion of this Note) that is payable in (a) securities of the Company other than capital stock or (b) any other assets, then, and in each such case, the Noteholder, upon conversion of this Note at any time after the consummation, effective date or record date of such event, shall receive, in addition to the shares of Conversion Stock (or such other stock or securities) issuable upon such conversion prior to such date, the securities or such other assets of the Company to which such holder would have been entitled upon such date if such holder had converted this Note immediately prior thereto (all subject to further adjustment as provided in this Note). 3 4 4.3 Adjustment for Reorganization, Consolidation, Merger. In the event of any reorganization not considered a Change of Control Transaction of the Company (or any other corporation the stock or other securities of which are at the time receivable upon the conversion of this Note) after the date of this Note, or in the event, after such date, the Company (or any such corporation) shall consolidate with or merge into another corporation or convey all or substantially all of its assets to another corporation where such transaction is not considered a Change of Control Transaction, then, and in each such case, the Noteholder, upon the conversion of this Note (as provided in Section 2) at any time after the consummation of such reorganization, consolidation, merger or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the conversion of this Note prior to such consummation, the stock or other securities or property to which such Noteholder would have been entitled upon the consummation of such reorganization, consolidation, merger or if such holder had converted this Note immediately prior thereto, all subject to further adjustment as provided in this Section 4, and the successor or purchasing corporation in such reorganization, consolidation, merger or conveyance (if other than the Company) shall duly execute and deliver to the Noteholder a supplement hereto acknowledging such corporation's obligations under this Note. In each such case, the terms of the Note shall be applicable to the shares of stock or other securities or property receivable upon the conversion of this Note after the consummation of such reorganization, consolidation, merger or conveyance. 4.4 Conversion of Stock. In the event that all of the authorized Conversion Stock of the Company is converted, pursuant to the Company's Articles of Incorporation, into other capital stock or securities or property, or the Conversion Stock otherwise ceases to exist, then the Noteholder, upon conversion of this Note at any time after the date on which the Conversion Stock is so converted or ceases to exist (the "TERMINATION DATE"), shall receive, in lieu of the number of shares of Conversion Stock that would have been issuable upon such conversion immediately prior to the Termination Date (the "FORMER NUMBER OF SHARES OF CONVERSION STOCK"), the stock and other securities and property to which such Noteholder would have been entitled to receive upon the Termination Date if such holder had converted this Note with respect to the Former Number of Shares of Conversion Stock immediately prior to the Termination Date (all subject to further adjustment as provided in this Note). 4.5 Notice of Adjustments. The Company shall promptly give written notice of each adjustment or readjustment of the number of shares of Conversion Stock or other securities issuable upon conversion of this Note, by first class mail, postage prepaid, to the registered holder of this Note at the holder's address as shown on the Company's books. The notice shall describe the adjustment or readjustment and show in reasonable detail the facts on which the adjustment or readjustment is based. 4.6 No Change Necessary. The form of this Note need not be changed because of any adjustment in the number of shares of Conversion) Stock issuable upon its conversion. 4.7 Reservation of Stock. The Company has taken all necessary corporate action and obtained all necessary Government consents and approvals to authorize the issuance of this Note and, prior to the conversion hereof, the shares of Conversion Stock issuable upon 4 5 conversion of this Note. If at any time the number of authorized but unissued Common Shares or other securities shall not be sufficient to effect the conversion of this Note, then the Company will take such corporate action as may, in the opinion of its legal counsel, be necessary to increase its authorized but unissued Common Shares or other securities to such number of shares of Common Shares or other securities as shall be sufficient for such purpose. 5. FULLY PAID SHARES. All shares of Conversion Stock issued upon the conversions this Note shall be validly issued, fully paid and non-assessable. 6. NO RIGHTS OR LIABILITIES AS SHAREHOLDER. This Note does not by itself entitle the Noteholder to any voting rights or other rights as a shareholder of the Company. In the absence of conversion of this Note, no provisions of this Note, and no enumeration herein of the rights or privileges of the holder, shall cause such holder to be a shareholder of the Company for any purpose. 7. CORPORATE ACTION; NO IMPAIRMENT. The Company will not, by amendment of its Articles of Incorporation or bylaws, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, repurchase of securities, sale of assets or any other action, avoid or seek to avoid the observance or performance of any of the terms of this Note, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Noteholder under this Note against wrongful Impairment. The Company shall not amend its Articles of Incorporation or issue any capital stock or options to purchase any capital stock of the Company without the prior written consent of the Noteholder. 8. DEFAULT. The Company will be in default if the Company fails to make any payment when due hereunder. The Company will also be in default if any of the following occurs and such default is not cured within a ten (10) day period after the Noteholder has given the Company written notice of such default: (a) The Company breaches any material obligation to the Noteholder hereunder. (b) A receiver is appointed for any part of the Company's property, the Company makes an assignment for the benefit of creditors, or any proceeding is commenced either by the Company or against the Company under any bankruptcy or insolvency laws. (c) The Company materially defaults under the Security Agreement referred to in Section 9 below. (d) The Company suspends its normal business operations or otherwise fails to continue to operate its business in the ordinary course. In the event of a default under this Section 8, Noteholder shall, in addition to any other remedies allowed by law, be entitled to accelerate all unpaid principal and interest under this Note. 9. SECURITY AGREEMENT. This Note is secured by a security interest in certain 5 6 collateral, which security interest was granted by the Company to the original holder of the Note pursuant to the terms of a certain security agreement (the "SECURITY AGREEMENT"), dated on or about the date of this Note, are among the original holder of the Note and the Company, and are incorporated herein by this reference. 10. REVOLVING LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note may be requested orally by any Company officer or other authorized person. The Noteholder may, but need not, require that all oral requests be confirmed in writing. The Company agrees to be liable for all sums advanced in accordance with the instructions of its officers or authorized persons. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note, by a Schedule attached to this Note, or by The Noteholder's internal records, including computer printouts. The Noteholder will have no obligation to advance funds under this Note and may decline to make future advances for any reason or no reason. 11. WAIVER AND AMENDMENT. ANY PROVISION OF THIS NOTE MAY BE AMENDED, WAIVED, MODIFIED, DISCHARGED OR TERMINATED SOLELY UPON THE WRITTEN CONSENT OF BOTH THE COMPANY AND THE NOTEHOLDER. 12. ASSIGNMENT; BINDING, UPON SUCCESSORS AND ASSIGNS. The Company may not assign any of its obligations hereunder without the prior written consent of Noteholder. The terms and conditions of this Note shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties. 13. WAIVER OF NOTICE; ATTORNEYS' FEES. The Company and all endorsers of this Note hereby waive notice, demand, notice of nonpayment, presentment, protest and notice of dishonor. If any action at law or in equity is necessary to enforce this Note or to collect payment under this Note, the Noteholder shall be entitled to recover, as an element of the costs of suit and not as damages, reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which it may be entitled. Noteholder will be entitled to recover its costs of suit, regardless of whether such suit proceeds to final judgment. 14. CONSTRUCTION OF NOTE. The terms of this Note have been negotiated by the Company, the original holder of this Note and their respective attorneys and the language hereof will not be construed for or against either Company or Noteholder. Unless otherwise explicitly set forth, a reference to a Section will mean a Section in this Note. The titles and headings herein are for reference purposes only and will not in any manner limit the construction of this Note which will be considered as a whole. 15. NOTICES. Any notice or other communication required or permitted to be given under this Note shall be in writing, shall be delivered by hand or overnight courier service, by certified mail, postage prepaid, or by facsimile, and will be deemed given upon delivery, delivered personally, one business day after deposit with a national courier service for overnight delivery, or one business day after transmission by facsimile with confirmation of receipt, and three days after deposit in the mails, if mailed, to the following addresses: (i) If to the Noteholder: 6 7 The Canopy Group 240 West Center Street Orem, Utah 84057 (ii) If to Company: Systems, Inc. 240 West Center Street Orem, Utah 84057 or to such other address as may have been furnished to the other party in Section 15, except that notices of change of address shall only be effective upon receipt. 16. GOVERNING LAW. This Note shall be governed by and construed under the internal laws of the United States and the State of Utah as applied to agreements among Utah residents entered into and to be performed entirely within Utah, without reference to principles of conflict of laws or choice of laws. 7 8 IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name as of the date first above written. CALDERA SYSTEMS, INC. By: /s/ RANSOM H. LOVE -------------------------------- Name: Ransom H. Love ------------------------------ Title: President & CEO ----------------------------- 8 EX-10.7 7 SECURITY AGREEMENT 1 EXHIBIT 10.7 SECURITY AGREEMENT THIS SECURITY AGREEMENT (the "Security Agreement") is entered into as of September 1, 1998, by and between CALDERA SYSTEMS, INC., a Utah corporation (the "Company"), and THE CANOPY GROUP, INC., a Utah corporation ("Secured Party"). RECITALS A. Company has borrowed funds and may borrow through subsequent advances additional funds, from Secured Party pursuant to a $2,000,000 Secured Convertible Promissory Note of even date herewith (the "Note"). B. As security for its repayment obligations under the Note, Company has agreed to grant Secured Party a security interest in all of its assets on the terms set forth in this Security Agreement. NOW, THEREFORE, to that end and in consideration of the premises, covenants and agreements set forth below, and the mutual benefits to be derived from this Security Agreement, and other good and valuable consideration, the parties hereto agree as follows: 1. SECURITY INTEREST. To secure the "Obligation" (as defined below), Company hereby transfers, conveys, assigns, and grants to Secured Party a security interest in all of Company's assets, which may include one or more of the following items (hereinafter, collectively, the "Collateral"): (a) GENERAL INTANGIBLES. All of Company's General Intangibles, now existing or hereafter arising or acquired, together with the proceeds therefrom. As used herein, the term "General Intangibles" means all personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments, and money, and includes, but is not limited to, business records, deposit accounts, inventions, intellectual property, designs, patents, patent applications, trademarks, trademark applications, trademark registrations, service marks, service mark applications, service mark registrations, trade names, goodwill, technology, knowhow, confidential information, trade secrets, customer lists, supplier lists, copyrights, copyright applications, copyright registrations, licenses, permits, franchises, tax refund claims, and any letters of credit, guarantee claims, security interests, or other security held by the Company to secure any "Accounts" (as hereinafter defined). (b) ACCOUNTS (INCLUDING ACCOUNTS RECEIVABLE). All of Company's Accounts, whether now existing or hereafter arising or acquired, together with the proceeds therefrom. As used herein, the term "Accounts" means any right of Company to receive payment from another person or entity, including payment for goods sold or leased, or for services rendered, no matter how evidenced or arising, and regardless of whether yet earned by performance. It includes, but is not limited to, accounts, accounts receivable, contract rights, 2 contracts receivable, purchase orders, notes, drafts, acceptances, all rights to payment earned or unearned under a charter or other contract involving the use or hire of a vessel and all rights incident to the charter or contract, and other forms of obligations and receivables. (c) INVENTORY. All of Company's Inventory, whether now owned or hereafter acquired, together with the products and proceeds therefrom and all packaging, manuals, and instructions related thereto. As used herein, the term "Inventory" means all goods, merchandise, and personal property held for sale or leased or furnished or to be furnished under contracts of service, and all raw materials, work in process, or materials used or consumed in Company's business, wherever located and whether in the possession of Company, a warehouseman, a bailee, or any other person. (d) EQUIPMENT. All of Company's Equipment, now owned or hereafter acquired, together with the products and proceeds therefrom, and all substitutes and replacements therefor. As used herein, the term "Equipment" includes all equipment, machinery, tools, office equipment, supplies, furnishings, furniture, or other items used or useful, directly or indirectly, in Company's business, all accessions, attachments, and other additions thereto, all parts used in connection therewith, all packaging, manuals, and instructions related thereto, and all leasehold or equitable interests therein. (e) FIXTURES. All of Company's interest in and to all fixtures and furnishings, now owned or hereafter acquired, together with the products and proceeds therefrom, all substitutes and replacements therefor, all accessories, attachments, and other additions thereto, all tools, parts, and supplies used in connection therewith, and all packaging, manuals, and instructions related thereto, located on or attached to Company's business premises located at 240 West Center, Orem, Utah 84058. (f) CHATTEL PAPER, DOCUMENTS AND INSTRUMENTS. All of Company's right, title, and interest in any chattel paper, documents, or instruments, now owned or hereafter acquired or arising, or now or hereafter coming into the possession, control, or custody of either Company or Secured Party, together with all proceeds therefrom. The terms "chattel paper," "documents," and "instruments" shall have those meanings ascribed to them in the Utah Uniform Commercial Code. 2. OBLIGATION. This security interest is given as security for all indebtedness and obligations owed by Company to Secured Party, whether now existing or hereafter incurred, under this Security Agreement or the Note, together with all extensions, modifications, or renewals thereof (hereinafter referred to, collectively, as the "Obligation"). 3. PROCEEDS. As used in this Security Agreement, the term "proceeds" means all products of the Collateral and all additions and accessions to, replacements of, insurance or condemnation proceeds of, and documents covering any of the Collateral, all property received wholly or partly in trade or exchange for any of the Collateral, all leases of any of the Collateral, and all rents, revenues, issues, profits, and proceeds arising from the sale, lease, license, encumbrance, collection, or any other temporary or permanent disposition, of any of the Collateral or any interest therein. 2 3 4. TITLE; FILING. Company warrants that, except as previously disclosed in writing to Secured Party, it is the owner of the Collateral free and clear of all liens, claims, and encumbrances of whatever kind or nature. Company covenants that so long as any portion of the Obligation remains unpaid, Company will not execute or file a financing statement or security agreement covering the Collateral to anyone other than Secured Party, except in the ordinary course of business or as otherwise allowed. Company agrees to sign and deliver one or more financing statements or supplements thereto or other instruments as Secured Party may from time to time require to comply with the Uniform Commercial Code or other applicable law to preserve, protect and enforce the security interest of Secured Party and to pay all costs of filing such statements or instruments. In addition, Company shall promptly file a financing statement to perfect Secured Party's interest in the Collateral. 5. CARE OF COLLATERAL. Company will keep in effect all licenses, permits and franchises required by law or contract relating to Company's business (if applicable), property, or the Collateral; maintain insurance on the Collateral; keep the Collateral in good repair and be responsible for any loss or damage to it; at all times warrant and defend Company's ownership and possession of the Collateral keep the Collateral free from all liens, claims, encumbrances and security interests; pay when due all taxes, license fees, and other charges upon the Collateral or upon Company's business, property or the income therefrom; and not misuse, conceal or in any way use or dispose of the Collateral unlawfully or contrary to the provisions of this Security Agreement or of any insurance coverage. Loss of, damage to, or uncollectability of the Collateral or any part thereof will not release Company from any of its obligations hereunder. 6. DEFAULT. A default hereunder will occur if any of the following events occur: (1) Company fails to pay any portion of the Obligation when due; (2) Company fails to perform any undertaking or materially breaches any warranty or covenant in this Security Agreement or the Note; (3) any statement, representation or warranty of Company under this Security Agreement or the Note is untrue in any material respect when made; (4) Company becomes insolvent or unable to pay debts as they mature or makes an assignment for the benefit of creditors or any proceeding is instituted by or against it alleging that it is insolvent or unable to pay its debts as they mature; (5) dissolution of Company; (6) an attachment, garnishment, execution or other process is issued or a lien filed against any property of Company, which is not removed within a reasonable period of time; and (7) Company transfers an interest in any of the Collateral contrary to the provisions of this Security Agreement without the prior written consent of Secured Party other than in the ordinary course of business. Waiver of any default will not constitute a waiver of any other or subsequent default. 7. REMEDIES. Upon the occurrence of any default hereunder at any time thereafter, all of the Obligation will, at the election of Secured Party and without notice of such election, or demand for payment, become immediately due and payable and Secured Party will have the remedies of a secured party under the Utah Uniform Commercial Code or other applicable law. 8. GENERAL. The wavier by Secured Party of any breach of any provision of this Security Agreement or warranty or representation herein set forth will not be construed as a 3 4 waiver of any subsequent breach. The failure to exercise any right hereunder by Secured Party will not operate as a waiver of such night. All rights and remedies herein provided are cumulative. Company may not assign its nights or delegate its duties hereunder without Secured Party's written consent. This Security Agreement may not be altered or amended except by a writing signed by all the parties hereto. This Security Agreement will be governed by and construed and interpreted in accordance with the laws of the State of Utah. Any provision hereof found to be invalid will not invalidate the remainder. All words used herein will be construed to be of such gender and number as the circumstances require. This Security Agreement binds Company, its successors and assigns, and inures to the benefit of Secured Party, its successors and assigns. IN WITNESS WHEREOF, the parties have executed this Security Agreement as of the date first written above. COMPANY: CALDERA SYSTEMS, INC., a Utah corporation By: /s/ RANSOM LOVE -------------------------------- Ransom Love Its: President SECURED PARTY: THE CANOPY GROUP, INC., a Utah corporation By: /s/ RALPH YARRO -------------------------------- Ralph Yarro Its: President 4 5 This FINANCING STATEMENT is presented to a filing officer for filing pursuant to the Uniform Commercial Code. For Filing Officer (Date, Time, Number, and Filing Office) 1. Debtor(s) (Last Name First) and address(es) CALDERA SYSTEMS, INC. 240 WEST CENTER OREM, UT 84057 Social Security or ------------------ Emp. Fed. I.D. No. 87-0617393 ------------------ 2. Secured Party(ies) and address(es) THE CANOPY GROUP 240 WEST CENTER STREET OREM, UTAH 84057 3. Maturity date (if any): Approved by Division of Corporations and Commercial Code, Department of Business Regulations 4. This Financing Statement covers the following types (or items) of property: All items listed on the attached Attachment 1 including, but not limited to general intangibles, accounts (including accounts receivable), inventory, equipment, fixtures, and chattel paper, documents and instruments now owned or hereafter acquired. The Secured party is [ ] is not [x] a seller or Purchase money lender of the collateral. 5. Assignee(s) of Secured Party and Address(es) 6. Gross sales price of collateral $ --------------------------------- $ Sales --------------------------------- or use tax paid to State of This statement is filed without the debtor's signature to perfect a security interest in collateral (Check x if so) [ ] already subject to a security interest in another jurisdiction when it was brought into this state. [ ] which is proceeds or the original collateral described above in which a security interest was perfected. Microfilm No. Check [X] if covered: [X] Proceeds of Collateral are also covered. [X] Products of Collateral are also covered. No. of additional Sheets presented: 1 - -------------------------------------------------------------------------------- Caldera Systems, Inc. The Canopy Group - -------------------------------------- -------------------------------------- By: /s/ RANSOM H. LOVE By: /s/ RALPH YARRO ----------------------------------- ----------------------------------- Signature(s) of Debtor(s) Signature(s) of Secured Party(ies) STANDARD FORM UCC-1 6 ATTACHMENT 1 TO FINANCING STATEMENT BETWEEN CALDERA SYSTEMS, INC, AS DEBTOR, AND THE CANOPY GROUP, AS SECURED PARTY The security interest covered by this Financing Statement includes the following property: (a) GENERAL INTANGIBLES. All of Debtor's General Intangibles, now existing or hereafter arising or acquired, together with the proceeds therefrom. As used herein, the term "General Intangibles" means all personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments, and money, and includes, but is not limited to, business records, deposit accounts, inventions, intellectual property, designs, patents, patent applications, trademarks, trade names, trade secrets, goodwill, copyrights, registrations, licenses, permits, franchises, tax refund claims, and any letters of credit, guarantee claims, security interests, or other security held by Debtor to secure any "Accounts" (as hereinafter defined). (b) ACCOUNTS (INCLUDING ACCOUNTS RECEIVABLE). All of Debtor's Accounts, whether now existing or hereafter arising or acquired, together with the proceeds therefrom. As used herein, the term "Accounts" means any right of Debtor to receive payment from another person or entity, including payment for goods sold or leased, or for services rendered, no matter how evidenced or arising, and regardless of whether yet earned by performance. It includes, but is not limited to, accounts, accounts receivable, contract rights, contracts receivable, purchase orders, notes, drafts, acceptances, all rights to payment earned or unearned under a charter or other contract involving the use or hire of a vessel and all rights incident to the charter or contract, and other forms of obligations and receivables. (c) INVENTORY. All of Debtor's Inventory, whether now owned or hereafter acquired, together with the products and proceeds therefrom and all packaging, manuals, and instructions related thereto. As used herein, the term "Inventory" means all goods, merchandise, and personal property held for sale or leased or furnished or to be furnished under contracts of service, and all raw materials, work in process, or materials used or consumed in Debtor's business, wherever located and whether in the possession of Debtor, a warehouseman, a bailee, or any other person. (d) EQUIPMENT. All of Debtor's Equipment, now owned or hereafter acquired, together with the products and proceeds therefrom, and all substitutes and replacements therefor. As used herein, the term "Equipment" includes all equipment, machinery, tools, office equipment, supplies, furnishings, furniture, or other items used or useful, directly or indirectly, in Company's business, all accessions, attachments, and other additions thereto, all parts used in connection therewith, all packaging, manuals, and instructions related thereto, and all leasehold or equitable interests therein. (e) FIXTURES. All of Debtor's interest in and to all fixtures and furnishings, now owned or hereafter acquired, together with the products and proceeds therefrom, all substitutes and replacements therefor, all accessories, attachments, and other additions thereto, all tools, parts, and supplies used in connection therewith, and all packaging, manuals, and instructions related thereto, located on or attached to Debtor's business premises located at 240 West Center, Orem, Utah 84057. (f) CHATTEL PAPER, DOCUMENTS AND INSTRUMENTS. All of Debtor's right, title, and interest in any chattel paper, documents, or instruments, now owned or hereafter acquired or arising, or now or hereafter coming into the possession, control, or custody of either Debtor or Secured Party, together with all proceeds therefrom. The terms "chattel paper," "documents," and "instruments" shall have those meanings ascribed to them in the Utah Uniform Commercial Code. EX-10.8 8 AMENDMENT TO ASSET PURCHASE AGREEMENT 1 EXHIBIT 10.8 ASSET PURCHASE AND SALE AGREEMENT THIS ASSET PURCHASE AND SALE AGREEMENT (this "Agreement") is made and entered into this 1st day of September 1998, by and between CALDERA SYSTEMS, INC., a Utah corporation ("Purchaser") and CALDERA, INC., a Utah corporation ("Seller"). RECITALS A. Seller is in the business of developing, marketing, licensing, selling and distributing Linux computer software and other software, products and services relating to Linux (the "Business"). Seller desires to sell to Purchaser all of Seller's assets used in or relating to the Business. B. All of the assets Seller uses in or which relate to the Business consist of the following, which shall hereinafter collectively be designated the "Assets": (i) Accounts Receivable. all accounts receivable of Seller as of September 1, 1998, identified in and that will be the subject of the Bill of Sale set forth in Exhibit "A" attached hereto, (ii) Inventory. the items of inventory identified in and that will be the subject of the Bill of Sale set forth in Exhibit "A" attached hereto, (iii) Tangible Personal Property. the items of tangible personal property in and that will be the subject of the Bill of Sale set forth in Exhibit "A" attached hereto, (iv) Customer Lists, Etc. all of Seller's customer lists and addresses of Seller's past, present and potential customers which will be the subject of the Bill of Sale set forth in Exhibit "A" attached hereto, (v) Contracts. certain rights, services and contractual obligations under the contracts which were used by the Business and which Seller has entered into identified in and that will be the subject of the Contracts Assignment and Assumption Agreement set forth in Exhibit "B" attached hereto. (vi) Trademarks. all right, title and interest of Seller in and to the trademarks, service marks, trade names, logos, and product names and the 2 goodwill of the business associated therewith (the "Trademarks") as identified in and that will be subject of the Trademarks Assignment Agreement set forth in Exhibit "C" attached hereto, (vii) Copyrights. all right, title and interest of Seller in and to the copyrights, copyright applications, and copyright registrations (the "Copyrights") identified in and what will be subject of the Copyright Assignment Agreement set forth in exhibit "D" attached hereto, (viii) Patents. all right, title and interest of Seller in and to the patents and patent applications (the "Patents") identified in and that will be subject of the Patent Assignment Agreement set forth in Exhibit "E" attached hereto, (ix) Intellectual Property. any other intellectual property used in or relating to the Business (other than the Trademarks, Copyrights and Patents) of Seller including, without limitation, all trade secrets, proprietary technology, and confidential information, (the "Intellectual Property") identified in and that will be subject of the Intellectual Property Assignment Agreement set forth in Exhibit "F" attached hereto, and (x) Numbers, Permits and Licenses. Seller's telephone and fax numbers, permits and business licenses as identified in Exhibit "G" attached hereto. C. Purchaser desires to purchase the Assets from Seller and Seller desires to sell the Assets to Purchaser, all as provided in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants, agreements, representations and warranties contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: SECTION 1 -- TERMS OF PURCHASE 1.1 Purchase of Assets. In reliance on the representations and warranties contained herein and in consideration of the purchase price as set forth in section 1.3 hereof and subject to all other terms and conditions hereof, at the Closing (as defined in section 2.1), and effective as of the Effective Date (as defined in Section 2.1), Purchaser shall purchase and accept, and Seller shall sell, assign, transfer, convey and deliver to Purchaser, all of Seller's rights, titles 2 3 and interests in and to all the Assets (defined in Recital Paragraph B, above). 1.2 No Assumption of Obligations, Liabilities and Indebtedness. (a) Except for those obligations assumed pursuant to the Contracts Assignment and Assumption Agreement (see Exhibit "B" attached hereto), Purchaser shall not assume or in any way become liable for any obligations or liabilities of or relating to the Assets or Seller. (b) Except as expressly set forth in Section 1.2(a) hereof, Purchaser does not by this Agreement, or otherwise, assume, become liable for or agree to pay any obligation, liability or indebtedness of Seller which may now exist or which may arise in the future, whether associated with the Assets, the Business, Seller or otherwise. (c) Any obligations, liabilities or indebtedness of Seller including, but not limited to, contingent liabilities, such as, but not limited to, liabilities relating to patent, trademark, copyright or other business infringement, environmental or hazardous waste liability, tort liability, employment discrimination, errors and omissions liability, employee payroll and employee benefits liability, liability under employment agreements or pertaining to covenants not to compete, obligations arising out of or relating to pension plans and other retirement plans, and federal, state or local taxes, shall remain the sole and separate responsibility of Seller, and Seller hereby agrees to indemnify, defend and hold Purchaser harmless from and against any and all such obligations, liabilities or indebtedness. (d) Seller shall not assume or in any way become liable for any obligations or liabilities of Purchaser relating to the Assets, the Business or Purchaser that arise from the business and operations of Purchaser and that occur in whole from and after the Closing. 1.3 Purchase Price and Allocation of Purchase Price. Subject to upward adjustment as provided in this Section 1.3, the purchase price for the Assets (the "Purchase Price") shall be Fifteen Million and no/100 Dollars ($15,000,000.00) and the Purchase Price shall be allocated to the Assets as set forth on Exhibit "H" attached hereto. It is anticipated that the Purchaser will obtain an appraisal or valuation of the Assets, as of the date hereof, for tax, accounting or other purposes. In the event such an appraisal or valuation is obtained and the fair market value of the Assets, as of the date hereof, is greater than the Purchase Price, then the Purchase Price shall be increased to the fair market value of the Assets; provided, however, any such appraisal or valuation must be obtained before December 31, 1998, and any increase in the Purchase Price shall not be due and payable until the later of (i) December 31, 1998 3 4 or (ii) sixty days after the receipt by Purchaser of said appraisal or valuation. 1.4 Payment of Purchase Price. The Purchase Price shall be paid by Purchaser by: (a) delivering to the Seller a promissory note substantially in the form of Exhibit "I" attached hereto, made by the Purchaser to the order of the Seller in the original principal amount of $14,963,826 ($15,000,000 less $36,174 of liabilities assumed as set forth in Section 1.4(b)) (the "Promissory Note"), together with a Security Agreement substantially in the form of Exhibit "J" attached hereto; and (b) assuming liabilities in the amount of $36,174 as identified in the Contracts Assignment and Assumption Agreement attached hereto as Exhibit "B". 1.5 Taxes. The Purchase Price shall be exclusive of any sales or similar taxes that may be imposed. Seller shall be solely responsible for any sales or similar taxes that may be imposed on the purchase and sale of the Assets contemplated by this Agreement. 1.6 Documentation of Sale of Accounts Receivable, Inventory and Tangible Personal Property. At the Closing Seller shall execute and deliver to Purchaser the Bill of Sale attached hereto as Exhibit "A" (the "Bill of Sale") to evidence and effect the transfer of the accounts receivable, inventory and other tangible personal property identified in Exhibit "A". 1.7 Documentation of Assignment and Assumption of Contracts. At the Closing Seller and Purchaser shall execute and deliver to the other the Contracts Assignment and Assumption Agreement attached hereto as Exhibit "B" to evidence and effect the assignment and assumption of said contracts. 1.8 Documentation of Assignment of Trademarks. At the Closing Seller and Purchaser shall execute and deliver to the other the Trademarks Assignment Agreement attached hereto as Exhibit "C" to evidence and effect the assignment of the Trademarks. 1.9 Documentation of Assignment of Copyrights. At the Closing Seller and Purchaser shall execute and deliver to the other the Copyright Assignment Agreement attached hereto as Exhibit "D" to evidence and effect the assignment of the Copyrights. 1.10 Documentation of Assignment of Patents. At the Closing Seller and Purchaser shall execute and deliver to the other the Patent Assignment Agreement attached hereto as Exhibit "E" to evidence and effect the assignment of the Patents. 4 5 1.11 Documentation of Assignment of Intellectual Property. At the Closing Seller and Purchaser shall execute and deliver to the other the Intellectual Property Assignment Agreement attached hereto as Exhibit "F" to evidence and effect the assignment of the Intellectual Property. Seller agrees to execute any and all such further or other documents that Purchaser prepares which are reasonably necessary to further evidence or effect the purpose and intention of this Agreement. 1.12 Documentation of Assignment of Numbers, Permits and Licenses. At the Closing Seller shall assign and transfer to Purchaser the telephone and fax numbers, permits and business licenses as identified in Exhibit "G" attached hereto. 1.13 Bulk Transfer Compliance. Purchaser hereby waives compliance by Seller with the provisions of the Utah or other applicable "bulk transfer" statutes. Seller hereby indemnifies and agrees to defend and hold Purchaser harmless from and against any liability or obligation to creditors of Seller or to others that may result from failure to comply with the Utah or other applicable "bulk transfer" laws in connection with the purchase and sale of the Assets. SECTION 2 - THE CLOSING 2.1 Closing. The closing of the transaction contemplated by this Agreement (the "Closing") shall be held at the office of Seller in Orem, Utah, at 11:00 a.m. local time, on September 1, 1998, or at such other time or place as the parties may hereafter agree in writing. That date, or if the Closing is advanced or postponed under this Section 2.1, then notwithstanding the date to which it is advanced or postponed, the effective date of the Closing shall be 12:01 a.m. on September 1, 1998, and is in this Agreement designated the "Effective Date." 2.2 Events at the Closing. The following events shall occur at the Closing, each of which shall be a condition precedent to each of the others and all of which shall be deemed to have occurred concurrently: Seller's Deliverables (a) Seller shall deliver possession of its business premises to purchaser and in connection therewith, shall provide Purchaser with keys to the Leasehold Premises, all as shall be allowed and agreed by Seller's Landlord; (b) Seller shall execute and deliver to Purchaser the Bill of Sale (see Exhibit "A" attached hereto); (c) Seller shall execute and deliver to Purchaser the Contracts Assignment and Assumption Agreement (see Exhibit "B" attached hereto); 5 6 (d) Seller shall execute and deliver to Purchaser the Trademarks Assignment Agreement (see Exhibit "C" attached hereto); (e) Seller shall execute and deliver to Purchaser the Copyrights Assignment Agreement (see Exhibit "D" attached hereto); (f) Seller shall execute and deliver to Purchaser the Patent Assignment Agreement (see Exhibit "E" attached hereto); (g) Seller shall execute and deliver to Purchaser the Intellectual Property Assignment Agreement (see Exhibit "F" attached hereto); (h) Seller shall execute and deliver to Purchaser an assignment and transfer of the telephone and fax numbers, permits and business licenses as identified in Exhibit "G" attached hereto; (i) Seller shall execute and deliver to Purchaser such other documents as may be reasonably required by Purchaser to evidence Seller's compliance with any covenant and condition herein set forth or to complete the transactions herein contemplated; PURCHASER'S DELIVERABLES (j) Purchaser shall execute and deliver to Seller the Promissory Note (see Exhibit "I" attached hereto); (k) Purchaser shall execute and deliver to Seller the Security Agreement (see Exhibit "J" attached hereto); (l) Purchaser shall execute and deliver to Seller a copy of the Contracts Assignment and Assumption Agreement (see Exhibit "B" attached hereto); (m) Purchaser shall execute and deliver to Seller a copy of the Trademarks Assignment Agreement (see Exhibit "C" attached hereto); (n) Purchaser shall execute and deliver to Seller a copy of the Copyrights Assignment Agreement (see Exhibit "D" attached hereto); (o) Purchaser shall execute and deliver to Seller the Patent Assignment Agreement (see Exhibit "E" attached hereto); (p) Purchaser shall execute and deliver to Seller the Intellectual Property Assignment Agreement (see Exhibit "F" 6 7 attached hereto); (q) Purchaser shall execute and deliver to Seller an acceptance of the assignment and transfer of the telephone and fax numbers, permits and business licenses as identified in Exhibit "G" attached hereto; (r) Purchaser shall execute and deliver to Seller such other documents as may be reasonably required by Seller to evidence Purchaser's compliance with any covenant and condition herein set forth or to complete the transactions herein contemplated. SECTION 3 - REPRESENTATIONS AND WARRANTIES 3.1 Representations and Warranties of Seller. Except as set forth in the Schedule of Seller's Exceptions in Exhibit "K" attached hereto, Seller represents and warrants to Purchaser as follows: (a) Sale of All Assets. By this Agreement and the instruments contemplated hereby, Seller is transferring to Purchaser all of the assets of Seller that are used in the Business. (b) Title to Assets; Liens. Seller has good and marketable title to the Assets and none of the Assets are subject to any mortgage, pledge, lien, security interest, lease, charge, claim or encumbrance. Neither the Seller nor any of Seller's affiliates use any asset, other than the Assets, in the Business. (c) Litigation. There is no material suit, action, litigation or other proceeding or governmental or administrative investigation or inquiry pending or threatened against Seller, the Business, and/or the Assets, which, if decided adversely to the interests of Seller, would prevent or prohibit Seller from transferring the Assets, free and clear from any security interests, liens, charges, claims or other encumbrances of any nature whatsoever or from otherwise complying in full with the provisions of this Agreement. (d) Authorization. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Utah. Seller has all the requisite corporate and legal power and authority to own, lease and operate the Assets as currently owned, leased and operated. Seller is duly licensed, authorized and qualified to transact business and is in good standing in Utah. (e) Execution and Enforceability. This Agreement, the Bill of Sale, the Contracts Assignment and Assumption Agreement, Trademarks Assignment Agreement, Copyrights Assignment Agreement, Patent Assignment Agreement, the Intellectual Property Assignment Agreement (see Exhibits "A" 7 8 through "F", respectively) and any other document required to be executed by Seller at the Closing, will, when duly executed and delivered by Seller, constitute valid and binding obligations of Seller, enforceable against Seller in accordance with their respective terms. (f) Seller's Records. In contemplation of this Agreement, Purchaser has had access to Seller's files, documents and business records. Seller agrees to keep and make available to Seller and its representatives during business hours with reasonable notice, all of its files, documents and business records relating to any of its present customers and past customers within the last three (3) years (the "Records"). Seller may examine and make copies of the Records, provided Seller agrees to and Seller hereby does agree to keep confidential all confidential and proprietary information and trade secrets, if any, in the Records. Nothing in this Section 3.1(f) shall require Seller to retain any of the Records beyond the period for which they must be maintained pursuant to applicable tax laws and regulations. 3.2 Representations and Warranties of Purchaser. Except as set forth in the Schedule of Purchaser's Exceptions in Exhibit "L" attached hereto, Purchaser represents and warrants to Seller as follows: (a) Authorization. Purchaser is a corporation, duly organized, validly existing and in good standing under the laws of the State of Utah and has all necessary corporate power and corporate authority to consummate the transactions contemplated herein. This Agreement, and the transactions contemplated herein, have been duly authorized by all necessary corporate action on the part of Purchaser. (b) Execution and Enforceability. This Agreement and any other documents required to be executed by Purchaser at the Closing will, when duly executed and delivered by Purchaser constitute valid and binding obligations of Purchaser, enforceable against Purchaser in accordance with their respective terms. (c) Compliance with Other Instruments; Consents. Purchase is not in material violation of any material agreement, instrument, judgment, decree or order applicable to Purchaser, and to Purchaser's best knowledge and belief, of any material statute, rule or governmental regulation applicable to Purchaser. The execution, delivery and performance of this Agreement by Purchaser and the transactions contemplated hereby will not result in any material violation of, be in conflict with or constitute a material default under any such material agreement, instrument, judgment, decree or order or, to the best knowledge and belief of Purchaser, of any such material statute, rule or governmental regulation. No consent of any vendor, lessor, lender or creditor of Purchaser, or any other person, is 8 9 necessary in order for Purchaser to consummate this Agreement or the transactions contemplated hereby in accordance with all of the provisions herein contained. SECTION 4 -- COVENANTS OF SELLER AND PURCHASER 4.1 Covenants of Seller. Seller hereby covenants to and agrees with Purchaser that: (a) Maintenance of Assets. Prior to the Closing, Seller shall maintain the Assets in customary repair, order and condition, and will maintain insurance thereon in such amounts and of such kinds as is and currently in effect. (b) Maintenance of Free and Clear Title. Prior to the Closing, Seller shall not mortgage, pledge or subject to any lien, charge, claim or encumbrance any of the Assets or transfer, convey or lease any of the Assets or any of Seller's rights, titles or interests therein, outside of the ordinary course of business. (c) Conduct of the Business. Prior to the Closing, Seller shall conduct the activities of the Business in the ordinary, normal and customary course and manner, keep proper business and accounting records, and, both before and at all times after the Closing, use Seller's best efforts to preserve the Business and its material customers intact and preserve for and make available to Purchaser all of Seller's customers and the goodwill of the Business and the goodwill of the Clients, customers, distributors and others having business material relationships with the Business. (d) Representations and Warranties True at Closing. If any representation or warranty of Seller set forth in this Agreement becomes inaccurate in any material respect at or before the Closing, Seller shall immediately inform Purchaser in writing of the particulars in which any such warranty or representation is no longer accurate. Despite such disclosure by Seller, any such material inaccuracy shall constitute a failure of the conditions precedent to the obligations of Purchaser as set forth in Section 6.1 hereof, and Purchaser shall have the right and option either to waive such condition or to terminate this Agreement. 4.2 Covenants of Purchaser. Purchaser hereby covenants to and agrees with Seller that if any representation or warranty of Purchaser set forth in this Agreement becomes inaccurate in any material respect at or before the Closing, Purchaser shall immediately inform Seller in writing of the particulars in which any such warranty or representation is no longer accurate. Despite such disclosure by Purchaser, any such material inaccuracy shall constitute a failure of the conditions precedent to the obligations of Seller as set forth in Section 9 10 6.2 hereof, and Seller shall have the right and option either to waive such condition or to terminate this Agreement. SECTION 5 - SPECIAL PROVISIONS 5.1 Seller's Employees. All employees of Seller shall be terminated, as of or before the Effective Date. Purchaser shall not be responsible for, and Seller agrees to indemnify, defend and hold harmless Purchaser from and against any and all claims, losses, damages, fees, costs or liabilities that arise or accrue as a direct or indirect result of or in connection with Seller's prior employment of or Seller's termination of the employment of Seller's Employees, including, but not limited to, any claims or wrongful or unlawful termination or discharge that are threatened or brought by Seller's Employees. Nothing contained herein shall be construed as an agreement by Purchaser to provide employment for any of Seller's Employees or, should Purchaser determine to employ any of Seller's Employees after the Effective Date, to continue the employment of any Seller's Employees to the extent Purchaser determines, for any reason, that such employee does not meet Purchaser's standards of performance or productivity or that such employee is no longer needed or desired as an employee of Purchaser. SECTION 6 - CONDITIONS PRECEDENT TO CLOSING 6.1 Conditions Precedent to the Obligations of Purchaser. The obligation of Purchaser to purchase the Assets and to consummate the transactions contemplated hereby is subject to fulfillment by Seller prior to or at the Closing of all of the conditions set forth in this Section 6.1. Purchaser may waive any or all of said conditions in whole or in part without prior notice; provided, however, that no such waiver of a condition shall constitute a waiver by Purchaser of any other condition or of its other rights or remedies, at law or in equity. (a) Seller's Representations and Warranties True at Closing. All representations and warranties of Seller contained in this Agreement, the Contracts Assignment and Assumption Agreement, Trademarks Assignment Agreement, Copyrights Assignment Agreement, Patent Assignment Agreement, the Intellectual Property Assignment Agreement (see Exhibits "A" through "F", respectively) and any other written document, agreement or statement to be delivered to Purchaser by Seller at or before Closing pursuant to this Agreement, shall be accurate in all material respects on and as of the Effective Date as though such representations and warranties were made at and as of the Closing Date. (b) Authorization. All material proceedings required to be taken and all consents required to be obtained in connection with the transactions contemplated by this Agreement, shall have been taken, completed or obtained, as the case may be, and all documents incident thereto shall be reasonably 10 11 satisfactory in form and substance to Purchaser, who shall have received originals or certified or other copies of all of such documents as Seller may reasonably request. (c) No Insolvency Action. No petition in bankruptcy, insolvency proceeding or a petition for reorganization or for the appointment of a receiver or trustee shall have been filed by or against Seller. 6.2 Conditions Precedent to the Obligations of Seller. All obligations of Seller under this Agreement are subject to fulfillment by Purchaser prior to or at the Closing of all of the conditions set forth in this Section 6.2. Seller may waive any or all of said conditions in whole or in part without prior notice; provided, however, that no such waiver of a condition shall constitute a waiver by Seller of any other condition or of Seller's other rights or remedies, at law or in equity. (a) Purchaser's Representations and Warranties True at Closing. All representations and warranties of Purchaser contained in this Agreement or in any written statement delivered to Seller by Purchaser pursuant to this Agreement shall be true and correct in all material respects on and as of the Effective Date as though such representation and warranties were made at and as of the Effective Date. (b) Performance Agreements. Purchaser shall have performed all obligations and agreements and complied with all covenants and conditions contained in this Agreement to be performed and complied with by Purchaser on or prior to the Effective Date. (c) Authorization. All corporate and other proceedings required to be taken by Purchaser and all consents required to be obtained in connection with the transactions contemplated by this Agreement, shall have been taken, completed or obtained, as the case may be, and all documents incident thereto shall be reasonably satisfactory in form and substance to Seller, who shall have received originals or certified or other copies of all of such documents as Seller may reasonably request. (d) No Litigation. No action or proceeding shall be pending or threatened to restrain or prevent the carrying out of the transactions contemplated hereby. SECTION 7 - TERMINATION 7.1 Right to Terminate Agreement. This Agreement may be terminated upon the occurrence of any of the following events: 11 12 (a) by Purchaser, by written notice from Purchaser to Seller, if any of the conditions set forth in Section 6.1 hereof have not been fulfilled by the Closing; (b) by Seller, by written notice from Seller to Purchaser, if any of the conditions set forth in Section 6.2 hereof have not been fulfilled by the Closing; (c) by Seller or Purchaser, by written notice to the other, if the Closing shall not have been held prior to September 30, 1998, or such later date as the parties shall mutually agree in writing; or (d) the parties shall mutually agree in writing to terminate this Agreement. 7.2 Effect of Termination. Upon termination of this Agreement pursuant to Section 7.1 hereof, all obligations of the Parties pursuant to this Agreement shall terminate and shall be of no further force and effect such that Purchaser shall have no further obligations to Seller and Seller shall have no further obligations to Purchaser, except that Purchaser shall not use and shall keep confidential any and all information, customer lists, customer addresses, supplier addresses, price lists, agreements, trade secrets and/or business plans of Seller relating to the Business. SECTION 8 - GENERAL ------------------- 8.1 Costs. The parties shall each pay their own costs and expenses (including attorneys' fees and accountants' fees) incurred or to be incurred by them in negotiating and preparing this Agreement and in closing and carrying out the transactions contemplated hereby. 8.2 Headings. The section and other headings of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. 8.3 Entire Agreement; Modification. This Agreement (including the recitals A through C hereof and Exhibits "A" through "L" attached hereto and the representations and warranties set forth herein), constitute the entire agreement between the parties pertaining to the subject matter of the transactions contemplated by this Agreement. This Agreement supersedes all written or oral, prior and contemporaneous agreements, representations, warranties and understandings of the parties with respect thereto. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by the parties. 8.4 Parties in Interest. Nothing in this Agreement, whether express or implied, is intended to confer any rights or 12 13 remedies under or by reason of this Agreement on any persons other than the parties to this Agreement and their respective successors and permitted assigns, nor is anything in this Agreement intended to relieve or discharge the obligation or liability of any third persons to any party to this Agreement, nor shall any provision hereof give any third party any right of subrogation or action over or against any party to this Agreement. 8.5 Binding Effect; No Assignment. This Agreement shall be binding on and shall inure to the benefit of the parties and their respective legal representatives, successors and assigns. None of the rights or obligations under this Agreement of any party to this Agreement may be conveyed, transferred, assigned or delegated expressly, by operation of law or otherwise, without the prior written consent of the other party to this Agreement. 8.6 Survival of Representations and Warranties. All representations, warranties, covenants and agreements of the parties contained in this Agreement or in any instrument or other writing provided for in this Agreement shall survive the Closing and the term of this Agreement and shall not be deemed merged into any documents delivered at the Closing. 8.7 Additional Documents After the Closing. Purchaser shall after the Closing execute and deliver to Seller such other documents as may be reasonably required by Seller to evidence Purchaser's compliance with any covenant and condition herein set forth or to complete the transactions herein contemplated. Without limiting the generality of the foregoing, Purchaser shall comply with all reasonable requests of Seller in connection with the recordation of any assignments or transfers under this Agreement. 8.8 Arbitration. Any controversy or dispute arising out of or relating to this Agreement or its subject matter which the parties are unable to resolve within ten (10) days after written notice by one party to the other party of the existence of such controversy or dispute, may be submitted to binding arbitration by either party. If so submitted to arbitration, the matter shall be finally settled by binding arbitration conducted in accordance with the current rules and procedures of the American Arbitration Association. Such arbitration shall take place in Orem, Utah. The decision by the arbitrator on any matter submitted to arbitration shall be binding and conclusive upon the parties, their heirs, successors and assigns, as the case may be and they shall comply with such decision in good faith. Each party hereby submits itself to the jurisdiction of the state and federal courts within the State of Utah for the entry of judgment with respect to the decision of the arbitrator hereunder. Judgment upon the award may be entered in any state or federal court within the State of Utah and/or any other court having jurisdiction. At the unilateral option of either party, 13 14 this Section 8.8 shall not apply to any claim or cause of action arising from any breach of Section 7.2 hereof regarding confidentiality or from any infringement of intellectual property. 8.9 Notices. All notices, requests, demands and other communications made under, pursuant to or in accordance with this Agreement, except for normal day-to-day business communications which may be made orally or in a writing sent by fax, regular mail or hand delivered without need for a receipt, shall be in writing and shall either be delivered personally or deposited in the United States mails and sent by first-class mail, certified, return receipt requested, postage prepaid and properly addressed as follows: If to Purchaser, to: Caldera Systems, Inc. 240 West Center Street Orem, Utah 84057 Attention: Chief Executive Officer If to Seller, to: Caldera, Inc. 240 West Center Street Orem, Utah 84057 Attention: Chief Executive Officer or to such other address or addresses as a party thereto may indicate to the other party in the manner provided for by this Section 8.9. Notices given by mail shall be deemed effective and complete forty-eight (48) hours following the time of posting and mailing thereof in accordance herewith, and notices delivered personally shall be deemed effective and complete at the time of the delivery thereof and the obtaining of a signed receipt therefor. 8.10 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement, where the context requires, the singular shall include the plural and the plural shall include the singular, and any gender or the neuter gender shall include both other genders as the case may require. 8.1 Waiver. No waiver of any provision of this Agreement shall be deemed or shall constitute a waiver of any 14 15 other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party hereto making such waiver. 8.12 Governing Law. This Agreement shall be governed in all respects by the laws of the State of Utah applied to contracts made and to be fully performed entirely within such State between residents of such State. All disputes arising out of this Agreement shall be subject to the exclusive jurisdiction and venue of the Utah state courts of Utah County, Utah (or, if there is exclusive federal jurisdiction, the United States District Court of Utah), and the parties consent to the personal and exclusive jurisdiction and venue of these courts. 8.13 Time is of the Essence. Time is of the essence in this Agreement. IN WITNESS WHEREOF, this Agreement has been executed by the parties as of the day and year first above written. Purchaser: Caldera Systems, Inc. By: /s/ RANSOM H. LOVE ------------------ Ransom H. Love ------------------ Seller: Caldera, Inc. By: /s/ BRYAN SPARKS ------------------ Bryan Sparks ------------------ 15 EX-10.9 9 AMENDMENT TO ASSET PURCHASE AGREEMENT 1 EXHIBIT 10.9 AMENDMENT TO ASSET PURCHASE AGREEMENT OF CALDERA, SYSTEMS, INC. AND CALDERA, INC. This Amendment to that certain Asset Purchase Agreement dated as of September 1, 1998 (the "Agreement") by and between Caldera Systems, Inc., a Utah corporation ("Purchaser") and Caldera, Inc., a Utah corporation ("Seller") is dated and effective as of September 1, 1998. 1. The Agreement is hereby amended by striking and deleting the first sentence of Section 1.3 as it presently exists and substituting for and in lieu thereof the following: 1.1 Purchase Price and Allocation of Purchase Price. Subject to upward adjustment as provided in this Section 1.3, the purchase price for the Asset (the "Purchase Price") shall be Nineteen Million Nine Hundred Twenty Eight Thousand Eight Hundred Forty Eight and no/100 Dollars $19,928,848.00 and the Purchase Price shall be allocated to the Assets as set forth on Exhibit "H" attached hereto. 2. The Agreement is hereby amended by adding a new subsection (c) in Section 1.4 as follows: and (c) by canceling $4,928,848.00 of indebtedness owed by seller to the Canopy Group, Inc. and which indebtedness has then been assigned by the Canopy Group, Inc. to the purchaser. 3. The Agreement is hereby amended by striking and deleting the Section 1.6 as it presently exists and substituting for and in lieu thereof the following: 1.6 Documentation of Sale of Inventory and Tangible Personal Property. At the Closing Seller shall execute and deliver to Purchaser the Bill of Sale attached hereto as Exhibit "A" (the "Bill of Sale") to evidence and effect the transfer of the inventory and other tangible personal property identified in Exhibit "A". 4. The Agreement is hereby amended by striking and deleting subsection (i) entitled "Accounts Receivable" under Section B, of the Recitals. 5. Except as herein amended, the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment to the Asset Purchase Agreement as of the day above first written. CALDERA SYSTEMS, INC. By: /s/ RANSOM H. LOVE ---------------------------- Title: President/CEO ------------------------- CALDERA, INC. By: /s/ Bryan Sparks ---------------------------- Title: CEO ------------------------- EX-10.10 10 STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.10 STOCK PURCHASE AGREEMENT AMONG MTI TECHNOLOGY CORPORATION, a Delaware corporation CALDERA SYSTEMS, INC., a Utah corporation AND THE CANOPY GROUP, INC., a Utah corporation Dated as of July 27, 1999 2 TABLE OF CONTENTS
Page ---- 1. DEFINITIONS ....................................................... 1 2. PURCHASE AND SALE OF COMPANY SHARES AND SHAREHOLDER SHARES ........ 4 2.1 Basic Transaction.......................................... 4 2.2 Purchase Price............................................. 4 2.3 The Closing................................................ 5 2.4 Deliveries at the Closing.................................. 5 3. REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION ......... 5 3.1 Representations and Warranties of the Company.............. 5 3.2 Representations and Warranties of the Shareholder.......... 16 3.3 Representations and Warranties of the Buyer................ 17 4. PRE-CLOSING COVENANTS ............................................. 18 4.1 General ................................................... 18 4.2 Notices and Consents....................................... 18 4.3 Operation of Business...................................... 18 4.4 Preservation of Business................................... 18 4.5 Full Access................................................ 19 4.6 Notice of Developments..................................... 19 4.7 Exclusivity ............................................... 19 5. POST-CLOSING COVENANTS ............................................ 19 5.1 General ................................................... 19 5.2 Consultation............................................... 19 5.3 Records.................................................... 20 5.4 Observer Rights............................................ 20 5.5 Legends.................................................... 20 5.6 Distribution and License Agreement......................... 21 6. CONDITIONS TO OBLIGATION TO CLOSE.................................. 21 6.1 Conditions to Obligation of the Buyer...................... 21 6.2 Conditions to Obligation of the Company and Shareholder.... 22 7. REMEDIES FOR BREACHES OF THIS AGREEMENT............................ 23 7.1 Survival of Representations and Warranties................. 23 7.2 Indemnification Provisions for Benefit of the Buyer........ 23 7.3 Indemnification Provisions for Benefit of the Company and Shareholder................................................ 24 7.4 Matters Involving Third Parties............................ 24 7.5 Determination of Adverse Consequences...................... 25 7.6 Recoupment Against Purchase Price.......................... 26 7.7 Other Indemnification Provisions........................... 26
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Page ---- 8. TAX MATTERS........................................................ 27 8.1 Certain Taxes.............................................. 27 9. TERMINATION........................................................ 27 9.1 Termination of Agreement................................... 27 9.2 Effect of Termination...................................... 27 10. MISCELLANEOUS ..................................................... 28 10.1 Press Releases and Public Announcements.................... 28 10.2 No Third-Party Beneficiaries............................... 28 10.3 Entire Agreement........................................... 28 10.4 Succession and Assignment.................................. 28 10.5 Counterparts............................................... 28 10.6 Headings................................................... 28 10.7 Notices.................................................... 28 10.8 Governing Law.............................................. 29 10.9 Amendments and Waivers..................................... 29 10.10 Severability............................................... 30 10.11 Expenses................................................... 30 10.12 Construction............................................... 30 10.13 Incorporation of Exhibits, Annexes, and Schedules.......... 30 10.14 Specific Performance....................................... 30 10.15 Submission to Jurisdiction................................. 30 10.16 Confidentiality............................................ 31 10.17 California Corporate State Securities Law.................. 31
ii 4 Exhibit "A" -- Historical Financial Statements Exhibit "B" -- Form of Opinion of Counsel to the Company Exhibit "C" -- Form of Investors Rights Agreement Exhibit "D" -- Distribution and License Agreement Annex I -- Disclosure Schedule of Exceptions to the Company and its Subsidiaries Representations and Warranties Concerning the Transaction Annex II -- Exceptions to the Shareholder's Representations and Warranties Concerning the Transaction Annex III -- Exceptions to the Buyer's Representations and Warranties Concerning the Transaction iii 5 STOCK PURCHASE AGREEMENT Agreement entered into as of July 27, 1999, by and among MTI Technology Corporation, a Delaware corporation (the "Buyer"), Caldera Systems, Inc., a Utah corporation (the "Company"), and The Canopy Group, Inc., a Utah corporation (the "Shareholder"). The Buyer, the Company and the Shareholder are referred to collectively herein as the "Parties." A. The Company has 50,000,000 shares of authorized common stock, 16,000,000 of which are issued and outstanding. B. The Shareholder owns sixteen million (16,000,000) shares of the outstanding capital stock of the Company. C. Buyer desires to acquire an aggregate of 25% of the issued and outstanding capital stock of the Company, calculated immediately following the closing of the transactions contemplated hereunder. Now, therefore, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the Parties agree as follows. 1 . Definitions. "Accredited Investor" has the meaning set forth in Regulation D promulgated under the Securities Act. "Adverse Consequences" means all actions, suits, proceedings, hearings, investigations, charges, complaints, claims, demands, injunctions, judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid in settlement, Liabilities, obligations, Taxes, liens, losses, expenses, and fees, including court costs and reasonable attorneys' fees and expenses. "Affiliate" has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act. "Affiliated Group" means any affiliated group within the meaning of Code Section 1504(a) or any similar group defined under a similar provision of state, local or foreign law. "Applicable Rate" means the prime rate of interest publicly announced from time to time by The Wall Street Journal plus 1% per annum. "Basis" means any past or present fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction that forms or could form the basis for any specified consequence. "Buyer" has the meaning set forth in the preface above. "Closing" has the meaning set forth in Section 2.3 below. "Closing Date" has the meaning set forth in Section 2.3 below. 1 6 "Code" means the Internal Revenue Code of 1986, as amended. "Company" has the meaning set forth in the preface above. "Company Share" means any of the 5,333,333 shares of Common Stock, no par value, of the Company that the Buyer is purchasing from the Company as contemplated in this Agreement. "Confidential Information" has the meaning set forth in Section 10.16 below. "Deductible" has the meaning set forth in Section 7.2 below. "Deferred Intercompany Transaction" has the meaning set forth in Reg. Section 1.1502-13. "Disclosure Schedule" has the meaning set forth in Section 3.1 below. "Distribution and License Agreement" shall mean the reciprocal Distribution and License Agreement identified in Sections 5.6 and 6.1(k) below. "Employee Benefit Plan" means any (a) nonqualified deferred compensation or retirement plan or arrangement which is an Employee Pension Benefit Plan, (b) qualified defined contribution retirement plan or arrangement which is an Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan or arrangement which is an Employee Pension Benefit Plan (including any Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe benefit plan or program. "Employee Pension Benefit Plan" has the meaning set forth in ERISA Section 3(2). "Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section 3(l). "Environmental, Health, and Safety Requirements" shall mean all federal, state, local and foreign statutes, regulations, ordinances and other provisions having the force or effect of law, all judicial and administrative orders and determinations, all contractual obligations and all common law concerning public health and safety, worker health and safety, and pollution or protection of the environment, including without limitation all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation, each as amended and as now or hereafter in effect. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Excess Loss Account" has the meaning set forth in Reg. Section 1.1502-19. "Fiduciary" has the meaning set forth in ERISA Section 3(21). "Financial Statement" has the meaning set forth in Section 3.1(h) below. "Final Distribution" has the meaning set forth in Section 2.2 below. 2 7 "GAAP" means United States generally accepted accounting principles as in effect from time to time. "Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Indemnified Party" has the meaning set forth in Section 7.4 below. "Indemnifying Party" has the meaning set forth in Section 7.4 below. "Informed Party" has the meaning set forth in Section 10.16 below. "Informing Party" has the meaning set forth in Section 10.16 below. "Initial Distribution" has the meaning set forth in Section 2.2 below. "Intellectual Property" means (a) patent rights, patent applications, and patents, and reissuances, continuations, continuations-in-part, divisions, extensions, and reexaminations thereof, (b) trademarks, service marks, and trade names, and applications to register trademarks or service marks, and registrations of trademarks and service marks, (c) copyrights, and all applications to register copyrights, and all registrations of copyrights, and renewals thereof, (d) trade secrets and other proprietary rights, and (e) any other intellectual property. "Investors Rights Agreement" means an Investors Rights Agreement between the Company, the Shareholder and Buyer substantially in the form of Exhibit "C." "Knowledge" means actual knowledge after reasonable investigation; provided, however, that there is no obligation to conduct intellectual property searches or other intellectual property investigations outside the Company and its subsidiaries. "Liability" means any liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due), including any liability for Taxes. "Millennial Dates" has the meaning set forth in Section 3.1(m)(vi) below. "Most Recent Balance Sheet" means the balance sheet at June 23, 1999. "Multiemployer Plan" has the meaning set forth in ERISA Section 3(37). "Ordinary Course of Business" means the ordinary course of business consistent with past or current custom and practice. "Party" has the meaning set forth in the preface above. "PBGC" means the Pension Benefit Guaranty Corporation. "Person" means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof). "Products" has the meaning set forth in Section 3.1(m)(vi) below. "Purchase Price" has the meaning set forth in Section 2.2 below. "Reduction Notice" has the meaning set forth in Section 7.6(a) below. 3 8 "Reduction Disputing Notice" has the meaning set forth in Section 7.6(b) below. "Reportable Event" has the meaning set forth in ERISA Section 4043. "Securities Act" means the Securities Act of 1933, as amended. "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended. "Security Interest" means any mortgage, pledge, lien, encumbrance, charge, or other security interest, other than (a) mechanic's, materialmen's, and similar liens, (b) liens for Taxes not yet due and payable or for Taxes that the taxpayer is contesting in good faith through appropriate proceedings, (c) purchase money liens and liens securing rental payments under capital lease arrangements, and (d) other liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money. "Subsidiary" means any corporation or other entity with respect to which a specified Person (or a Subsidiary thereof) owns a majority of the common stock or has the power to vote or direct the voting of sufficient securities to elect a majority of the directors or similar governing body (e.g. managers). "Tax" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code Section 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. "Third Party Claim" has the meaning set forth in Section 7.4 below. "Transactional Agreements" means this Agreement and the Investors Rights Agreement. "Year 2000 Compliant" has the meaning set forth in Section 3.1(m)(vi) below. 2. Purchase and Sale of Company Shares and Shareholder Shares. 2.1 Basic Transaction. On and subject to the terms and conditions of this Agreement, the Buyer agrees to purchase from the Company, and the Company agrees to sell to the Buyer, an aggregate of 5,333,333 Company Shares for the consideration specified below in this Section 2. 2.2 Purchase Price. The Buyer agrees to pay to the Company an aggregate of Six Million Dollars ($6,000,000) in consideration for the Company Shares (the "Purchase Price"). The Purchase Price shall be delivered by the Buyer to the Company in three distributions. The Buyer shall deliver 4 9 Three Million Dollars ($3,000,000) to the Company at the Closing (hereinafter the "Initial Distribution"). On the later of (a) the resolution of any pending recoupment pursuant to Section 7.6 or (b) six (6) months after the Closing, the Buyer shall deliver to the Company One Million Five Hundred Thousand Dollars ($1,500,000), plus interest accrued thereon at the Applicable Rate, and less any amounts due Buyer under Section 7 (hereinafter the "Second Distribution"). On the later of (y) the resolution of any pending recoupment pursuant to Section 7.6 or (z) twelve (12) months after the Closing, the Buyer shall deliver to the Company One Million Five Hundred Thousand Dollars ($1,500,000), plus interest accrued thereon at the Applicable Rate, and less any amounts due Buyer under Section 7, to the Company (hereinafter the "Final Distribution"). 2.3 The Closing. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Morrison & Foerster LLP at 19900 MacArthur Boulevard, Irvine, California, commencing at 9:00 a.m. local time on the later of August 6, 1999 or the second business day following the satisfaction or waiver of all conditions to the obligations of the Parties to consummate the transactions contemplated hereby (other than conditions with respect to actions the respective Parties will take at the Closing itself) or such other date as the Buyer and the Company may mutually determine (the "Closing Date"). 2.4 Deliveries at the Closing. At the Closing, (i) the Company will deliver to the Buyer the various certificates, instruments, and documents referred to in Section 6.1 below, (ii) the Buyer will deliver to the Company the various certificates, instruments, and documents referred to in Section 6.2 below, (iii) the Company will deliver to the Buyer stock certificates representing all of the Company Shares, and (iv) the Buyer will deliver to the Company the consideration specified in Section 2.2 above. 3. Representations and Warranties Concerning the Transaction. 3.1 Representations and Warranties of the Company and its Subsidiaries. The Company represents and warrants to the Buyer that the statements contained in this Section 3 are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Section 3), except as set forth in the disclosure schedule delivered by the Company to the Buyer on the date hereof and initialed by the Parties (the "Disclosure Schedule"), attached hereto as Annex I. Nothing in the Disclosure Schedule shall be deemed adequate to disclose an exception to a representation or warranty made herein, however, unless the Disclosure Schedule identifies the exception and the relevant facts with reasonable detail. Without limiting the generality of the foregoing, the mere listing (or inclusion of a copy) of a document or other item shall not be deemed adequate to disclose an exception to a representation or warranty made herein (unless the representation or warranty has to do with the existence of the document or other item itself). The Disclosure Schedule will be arranged in paragraphs corresponding to the lettered and numbered paragraphs contained in this Section 3. (a) Organization, Qualification and Corporate Power. Each of the Company and its Subsidiaries is a corporation duly organized, validly existing, and in good 5 10 standing under the laws of the jurisdiction of its incorporation. Each of the Company and its Subsidiaries is duly authorized to conduct business and is in good standing under the laws of each jurisdiction where such qualification is required (except for any such jurisdiction in which the failure to be so qualified, individually or in the aggregate, would not have a material adverse effect on the Company or any of its Subsidiaries). Each of the Company and its Subsidiaries has full corporate power and authority and all licenses, permits, and authorizations necessary to carry on the businesses in which it is engaged and in which it presently proposes to engage and to own and use the properties owned and used by it, except for any such licenses, permits and authorizations, the failure of which to obtain, individually or in the aggregate, would not have a material adverse effect on the Company or any of its Subsidiaries. The Company has delivered to the Buyer correct and complete copies of the charter and bylaws of each of the Company and its Subsidiaries (as amended to date). The minute books (containing the records of meetings of the stockholders, the board of directors, and any committees of the board of directors), the stock certificate books, and the stock record books of each of the Company and its Subsidiaries are correct and complete. None of the Company or any of its Subsidiaries is in default under or in violation of any provision of its charter or bylaws. (b) Authorization of Transaction. The Company has full corporate power and authority to execute and deliver this Agreement, the Investors Rights Agreement and the Distribution and License Agreement and to perform its obligations hereunder and thereunder. Each of the Transactional Agreements constitutes the valid and legally binding obligation of the Company, enforceable in accordance with their respective terms and conditions. Except for filings that may be required by applicable state securities laws, the Company need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order to consummate the transactions contemplated by the Transactional Agreements. (c) Noncontravention. Neither the execution and the delivery of the Transactional Agreements, nor the consummation of the transactions contemplated hereby and thereby, will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which any of the Company and its Subsidiaries is subject or any provision of the charter or bylaws of any of the Company and its Subsidiaries, or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which any of the Company or any of its Subsidiaries is a party or by which it is bound or to which any of their respective assets are subject (or result in the imposition of any Security Interest upon any of their respective assets). (d) Brokers' Fees. The Company has no Liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement for which the Buyer could become liable or obligated. (e) Company Shares. The Company Shares have been duly and validly authorized and at the Closing will be duly and validly issued, nonassessable and fully paid, free and clear of any restrictions on transfer (other than any restrictions under the Securities Act and state securities laws), Taxes, Security Interests, options, warrants, purchase rights, contracts, 6 11 commitments, equities, claims, and demands, except as provided in the Investors Rights Agreement. (f) Title to Assets. The Company and its Subsidiaries have good and marketable title to, or a valid leasehold or license interest in, or other right to use, the properties and assets used by them, located on their premises, or shown on the Most Recent Balance Sheet or acquired after the date thereof, free and clear of all Security Interests, except for properties and assets disposed of in the Ordinary Course of Business since the date of the Most Recent Balance Sheet. This subsection (f) shall not apply to Intellectual Property or any infringement, misappropriation or violation of Intellectual Property. Any warranty of the Company concerning Intellectual Property is limited to subsections (m) and (p) below. (g) Subsidiaries. Section 3.1(g) of the Disclosure Schedule sets forth for each Subsidiary of the Company (i) its name and jurisdiction of incorporation or organization, (ii) the number of shares of authorized capital stock of each class of its capital stock, (iii) the number of issued and outstanding shares of each class of its capital stock, the names of the holders thereof, and the number of shares held by each such holder, and (iv) the number of shares of its capital stock held in treasury. All of the issued and outstanding shares of capital stock of each Subsidiary of the Company have been duly authorized and are validly issued, fully paid, and nonassessable. The Company or its Subsidiary holds of record and owns beneficially the number of shares of each Subsidiary of the Company as set forth in Section 3.1(g) of the Disclosure Schedule, free and clear of any restrictions on transfer (other than restrictions under the Securities Act and state securities laws), Taxes, Security Interests, options, warrants, purchase rights, contracts, commitments equities, claims, and demands. There are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights, or other contracts or commitments that could require any of the Company and its Subsidiaries to sell, transfer, or otherwise dispose of any capital stock of any of its Subsidiaries or that could require any Subsidiary of the Company to issue, sell, or otherwise cause to become outstanding any of its own capital stock. There are no voting trusts, proxies, or other agreements or understandings with respect to the voting of any capital stock of any Subsidiary of the Company. None of the Company and its Subsidiaries controls directly or indirectly or has any direct or indirect equity participation in any corporation, partnership, trust, or other business association which is not a Subsidiary of the Company. (h) Financial Statements. Attached hereto as Exhibit "A" are the following financial statements (collectively the "Financial Statements"): (i) unaudited consolidated monthly income statement for November 1998 through April 1999, and the individual monthly statements for such quarter, for the Company and its Subsidiaries; (ii) unaudited balance sheets as of June 23, 1999 for the Company and its Subsidiaries; and (iii) the Company's Business Plan covering operations from November 1, 1999 through October 31, 2001. The Financial Statements (including the notes thereto) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, and except as to the projection and Business Plan, present fairly the financial condition of the Company and its Subsidiaries as of such dates and the results of operations of the Company and its Subsidiaries for such periods, are correct and complete, and are consistent with the books and records of the Company and its Subsidiaries (which books and records are correct and complete), subject to normal year-end adjustments (which 7 12 will not be material individually or in the aggregate) and lack footnotes and other presentation items. (i) Events Subsequent to Most Recent Balance Sheet. Since the date of the Most Recent Balance Sheet, there has not been any adverse change in the business, financial condition, operations, results of operations, or future prospects of any of the Company and its Subsidiaries. Without limiting the generality of the foregoing, since that date: (i) none of the Company or its Subsidiaries has sold, leased, transferred, or assigned any of its assets, tangible or intangible, other than in the Ordinary Course of Business and in the reasonable business judgment of the Company for a fair consideration; (ii) none of the Company or its Subsidiaries has entered into any agreement, contract, lease, or license (or series of related agreements, contracts, leases, and licenses) either involving more than $100,000 or outside the Ordinary Course of Business; (iii) no party (including any of the Company and its Subsidiaries) has accelerated, terminated, modified, or cancelled any agreement, contract, lease, or license (or series of related agreements, contracts, leases, and licenses) involving more than $100,000 to which any of the Company and its Subsidiaries is a party or by which any of them is bound; (iv) none of the Company or its Subsidiaries has imposed any Security Interest upon any of its assets, tangible or intangible; (v) none of the Company or its Subsidiaries has made any capital expenditure (or series of related capital expenditures) either involving more than $100,000 or outside the Ordinary Course of Business; (vi) none of the Company or its Subsidiaries has made any capital investment in, any loan to, or any acquisition of the securities or assets of, any other Person (or series of related capital investments, loans, and acquisitions) either involving more than $100,000 or outside the Ordinary Course of Business; (vii) none of the Company or its Subsidiaries has issued any note, bond, or other debt security or created, incurred, assumed, or guaranteed any indebtedness for borrowed money or capitalized lease obligation either involving more than $250,000 singly or $1,000,000 in the aggregate; (viii) none of the Company or its Subsidiaries has delayed or postponed the payment of accounts payable and other Liabilities outside the Ordinary Course of Business; (ix) none of the Company or its Subsidiaries has cancelled, compromised, waived, or released any right or claim (or series of related rights and claims) either involving more than $100,000 or outside the Ordinary Course of Business; (x) except as set forth in Section 3.1(i)(x) of the Disclosure Schedule, none of the Company or its Subsidiaries has granted any license or sublicense of any rights under or with respect to any Intellectual Property; 8 13 (xi) there has been no change made or authorized in the charter or bylaws of any of the Company and its Subsidiaries; (xii) none of the Company or its Subsidiaries has experienced any material damage, destruction, or loss (whether or not covered by insurance) to its property; (xiii) none of the Company or its Subsidiaries has made any loan to, or entered into any other transaction with, any of its directors, officers, and employees outside the Ordinary Course of Business; (xiv) except as set forth on Section 3.1(i)(xiv) of the Disclosure Schedule, none of the Company or its Subsidiaries has entered into any employment contract or collective bargaining agreement, written or oral, or modified the terms of any existing such contract or agreement; (xv) none of the Company or its Subsidiaries has granted any increase in the base compensation of any of its directors, officers, and employees outside the Ordinary Course of Business; (xvi) none of the Company or its Subsidiaries has adopted, amended, modified, or terminated any bonus, profit-sharing, incentive, severance, or other plan, contract, or commitment for the benefit of any of its directors, officers, and employees (or taken any such action with respect to any other Employee Benefit Plan); (xvii) none of the Company or its Subsidiaries has made any other change in employment terms for any of its directors, officers, and employees outside the Ordinary Course of Business; (xviii) none of the Company or its Subsidiaries has made or pledged to make any charitable or other capital contribution outside the Ordinary Course of Business; (xix) there has not been any other occurrence, event, incident, action, failure to act, or transaction outside the Ordinary Course of Business involving any of the Company and its Subsidiaries; and (xx) none of the Company or its Subsidiaries has committed to any of the foregoing. (j) Undisclosed Liabilities. None of the Company or its Subsidiaries has any Liability (and there is no Basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand against any of them giving rise to any Liability), except for (i) Liabilities set forth on the face of the Most Recent Balance Sheet (rather than in any notes thereto) and (ii) Liabilities which have arisen after the date of the Most Recent Balance Sheet in the Ordinary Course of Business (none of which results from, arises out of, relates to, is in the nature of, or was caused by any breach of contract, breach of warranty, tort, infringement, or violation of law). (k) Legal Compliance. Each of the Company, its Subsidiaries, and their respective predecessors and Affiliates, has complied with all applicable laws (including rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder) 9 14 of federal, state, local, and foreign governments (and all agencies thereof), and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or notice has been filed or commenced against any of them alleging any failure so to comply. (1) Tax Matters. The Company and its Subsidiaries have filed all Tax Returns that each was required to file. All such Tax Returns were correct and complete in all respects. All Taxes owed by the Company and any of its Subsidiaries (whether or not shown on any Tax Return) have been paid. Neither of the Company nor any of its Subsidiaries currently is the beneficiary of any extension of time within which to file any Tax Return. No claim has ever been made by an authority in a jurisdiction where the Company or any of its Subsidiaries does not file Tax Returns that the Company or such Subsidiary is or may be subject to taxation by that jurisdiction. There are no Security Interests on any of the assets of the Company or any of its Subsidiaries imposed by any tax authority. (i) Each of the Company and its Subsidiaries has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party. (ii) Neither the Company nor any director or officer (or employee responsible for Tax matters) of any of the Company and its Subsidiaries expects any authority to assess any additional Taxes for any period for which Tax Returns have been filed. There is no dispute or claim concerning any Tax Liability of any of the Company and its Subsidiaries either (A) claimed or raised by any authority in writing or (B) as to which any of the Shareholder, the Company and the directors and officers (and employees responsible for Tax matters) of the Company and its Subsidiaries has Knowledge based upon personal contact with any agent of such authority. (iii) The Company has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. (iv) Neither of the Company nor any of its Subsidiaries has filed a consent under Code Section 341(f) concerning collapsible corporations. Neither of the Company nor any of its Subsidiaries has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could obligate it to make any payments that will not be deductible under Code Sections 162(m) or 280G. Neither of the Company nor any of its Subsidiaries has been a United States real property holding corporation within the meaning of Code Section 897(c)(2) during the applicable period specified in Code Section 897(c)(1)(A)(ii). The Company and each of its Subsidiaries has disclosed on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Code Section 6662. Neither of the Company nor any of its Subsidiaries is a party to any Tax allocation or sharing agreement. Neither of the Company nor any of its Subsidiaries (A) has been a member of an Affiliated Group filing a consolidated federal income Tax Return (other than a group the common parent of which was the Shareholder) and (B) does not have any Liability for the Taxes of any Person (other than the Company or any of its Subsidiaries) under Reg. Section 1.1502-6 (or any similar provision of state, local, or 10 15 foreign law), as a transferee or successor, by contract, or otherwise. The Company and each of its Subsidiaries is in compliance with the terms and conditions of any applicable Tax exemptions, agreements or orders of any government to which it may be subject or which it may have claimed, and the transaction contemplated by this Agreement will not have any adverse effect on such compliance. (v) The unpaid Taxes of the Company and its Subsidiaries (A) did not, as of the date of the Most Recent Balance Sheet, exceed the reserve for Tax Liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of the Most Recent Balance Sheet (rather than in any notes thereto) and (B) do not exceed that reserve as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of the Company and its Subsidiaries in filing their Tax Returns. (m) Intellectual Property. The Company, its Subsidiaries and their products have not infringed and do not infringe the copyrights of any third party. Neither the Company nor its Subsidiaries has misappropriated or is misappropriating any trade secrets or proprietary confidential information of any third party, and the products of the Company and its Subsidiaries do not include or embody any trade secret or proprietary confidential information misappropriated by the Company or its Subsidiaries from any Third Party. To the Knowledge of the Company, each of the Company and its Subsidiaries and their respective products have not infringed and do not infringe any patents, trademarks, service marks, or trade names of any third party. Each item of Intellectual Property owned by or licensed to the Company and its Subsidiaries immediately prior to the Closing hereunder will be owned by or licensed to the Company and the Subsidiary on identical terms and conditions immediately subsequent to the Closing hereunder (i.e., identical to any applicable terms and conditions immediately prior to the Closing). (i) None of the Company or its Subsidiaries or their directors and officers (and employees with responsibility for Intellectual Property matters) has ever received any charge, complaint, claim, demand, or notice alleging any such infringement, misappropriation, or violation of Intellectual Property (including any claim that the Company and its Subsidiaries must license or refrain from using any Intellectual Property rights of any third party). To the Knowledge of the Company and its Subsidiaries and the directors and officers (and employees with responsibility for Intellectual Property matters) of the Company and its Subsidiaries, no third party has infringed, misappropriated, or otherwise violated any Intellectual Property rights of the Company and its Subsidiaries. (ii) Section 3.1(m) of the Disclosure Schedule identifies (a) each patent which has been issued or assigned to the Company and its Subsidiaries, (b) each pending patent application which has been filed by or for the Company and its Subsidiaries, (c) each trademark or service mark registration issued or assigned to the Company and its Subsidiaries, (d) each pending trademark or service mark application which has been filed by or for the Company and its Subsidiaries, (e) each copyright registration issued or assigned to the Company and its Subsidiaries, (f) each pending copyright application which has been filed by or for the Company and its Subsidiaries, and (g) each license which the Company and its Subsidiaries has granted to any third party with respect to any of the Company's Intellectual Property excluding licenses to end users of Company products 11 16 granted in the Ordinary Course of Business. The Company has delivered to the Buyer correct and complete copies of all such patents, registrations, applications, and licenses (as amended to date). Section 3.1(m) of the Disclosure Schedule also identifies each trade name and each unregistered trademark or service mark used by any of the Company and its Subsidiaries in connection with any of their businesses. With respect to each patent, application, and registration (each an "item") identified in Section 3.1(m) of the Disclosure Schedule: (A) the Company and its Subsidiaries possess all right, title, and interest in and to the item, free and clear of any Security Interest, license, or other restriction; (B) the item is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; (C) no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or, to the Knowledge of any of the Company, the directors and officers (and employees with responsibility for Intellectual Property matters) of the Company and its Subsidiaries, is threatened which challenges the legality, validity, enforceability, use, or ownership of the item; and (D) none of the Company and its Subsidiaries has ever agreed to indemnify any Person for or against any interference, infringement, misappropriation, or other conflict with respect to the item. (iii) Section 3.1(m) of the Disclosure Schedule identifies each item of Intellectual Property that any third party owns and licenses to any of the Company and its Subsidiaries, excluding licenses to commercially available software products (e.g., Windows, Microsoft Office, etc.) used by any of the Company and its Subsidiaries as an end user. The Company has delivered to the Buyer correct and complete copies of all agreements applicable to such licenses (as amended to date). The term "license" is intended to include "sublicense." With respect to each such license and agreement required to be identified in Section 3.1(m) of the Disclosure Schedule, to the Knowledge of the Company: (A) the license and agreement are legal, valid, binding, enforceable, and in full force and effect; (B) the license and agreement will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms on the day immediately following the Closing; (C) no party to the agreement is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default or permit termination, modification, or acceleration thereunder; (D) no party to the agreement has repudiated any provision thereof; 12 17 (F) the license is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; and (G) no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or is threatened which challenges the legality, validity, or enforceability of the license or agreement. (iv) To the Knowledge of any of the Company and the directors and officers (and employees with responsibility for Intellectual Property matters) of the Company and its Subsidiaries, neither the Company nor any of its Subsidiaries will infringe, misappropriate, or otherwise violate any Intellectual Property rights of third parties as a result of the continued operation of its businesses as presently conducted and as presently proposed to be conducted. (v) To the Knowledge of the Company, the Year 2000 Readiness Disclosure as currently published by the Company on its web site is accurate. A copy of this Year 2000 Readiness Disclosure is included in Section 3.1(m) of the Disclosure Schedule. The Company makes no other representation or warranty concerning any Year 2000 issue. (vi) Notwithstanding anything in this Agreement to the contrary, this subsection (m) and subsection (p) below are the sole, exclusive and entire representation and warranty of the Company concerning Intellectual Property or any infringement, misappropriation or violation of Intellectual Property. No other representation or warranty in this Agreement shall be construed as applying to Intellectual Property or any infringement, misappropriation or violation of Intellectual Property. (n) Tangible Assets. The Company and its Subsidiaries own or lease all buildings, machinery, equipment, and other tangible assets necessary for the conduct of their business as presently conducted and as presently proposed to be conducted. (o) Powers of Attorney. There are no outstanding powers of attorney executed on behalf of any of the Company and its Subsidiaries outside the Ordinary Course of Business. (p) Litigation. Section 3.1(p) of the Disclosure Schedule sets forth each instance in which any of the Company and its Subsidiaries (i) is subject to any outstanding injunction, judgment, order, decree, ruling, or charge or (ii) is a party or, to the Knowledge of any of the Company, the directors and officers (and employees with responsibility for litigation matters) of the Company and its Subsidiaries, is threatened to be made a party to any action, suit, proceeding, hearing, or investigation of, in, or before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator. None of the actions, suits, proceedings, hearings, and investigations set forth in Section 3.1(p) of the Disclosure Schedule alone or in the aggregate could result in any adverse change in the business, financial condition, operations, results of operations, or future prospects of any of the Company and its Subsidiaries. None of the Company the directors and officers (and employees with responsibility for litigation matters) of the Company and its Subsidiaries has any reason to believe that any such action, suit, proceeding, hearing, or investigation may be brought or threatened against any of the Company and its Subsidiaries. 13 18 (q) Employees. To the Knowledge of the Company, the directors and officers (and employees with responsibility for employment matters) of the Company and its Subsidiaries, no executive, key employee, or group of employees has any plans to terminate employment with any of the Company and its Subsidiaries. None of the Company and its Subsidiaries is a party to or bound by any collective bargaining agreement, nor has any of them experienced any strikes, grievances, claims of unfair labor practices, or other collective bargaining disputes. None of the Company and its Subsidiaries has committed any unfair labor practice. None of the directors and officers (and employees with responsibility for employment matters) of the Company and its Subsidiaries has any Knowledge of any organizational effort presently being made or threatened by or on behalf of any labor union with respect to employees of any of the Company and its Subsidiaries. (r) Guaranties. None of the Company or its Subsidiaries is a guarantor or otherwise is liable for any Liability or obligation (including indebtedness) of any other Person. (s) Certain Business Relationships with the Company and Its Subsidiaries. None of the Company's Affiliates has been involved in any business arrangement or relationship with any of the Company or its Subsidiaries within the past twelve (12) months, and none of the Company's Affiliates owns any asset, tangible or intangible, which is used in the business of any of the Company or its Subsidiaries. (t) Capitalization, Etc. (i) The authorized capital stock of the Company consists of 50,000,000 shares of common stock, no par value, 16,000,000 shares of which have been issued and are outstanding, 4,000,000 shares of which have been reserved for issuance pursuant to the Company's employee stock option plan and 1,000,000 additional shares of which are contemplated to be reserved for issuance pursuant to the Company's employee stock option plan. (ii) All of the Company's outstanding shares of Common Stock (i) have been duly authorized and validly issued, (ii) are fully paid and nonassessable, and (iii) have been issued in compliance with all applicable securities laws and other applicable legal requirements. (iii) Except as set forth in Section 3.1(t) of the Disclosure Schedule, there are no: (A) outstanding derivative securities; (B) contracts, agreements or other arrangements under which the Company is or may become obligated to sell or otherwise issue any shares of its capital stock or any derivative securities; or (C) conditions or circumstances that would directly or indirectly give rise to or provide a basis for the assertion of a claim by any Person to the effect that such Person is entitled to acquire or receive any shares of capital stock or other securities of the Company. 14 19 (iv) The Company has never repurchased, redeemed or otherwise reacquired (and has not agreed, committed or offered (in writing or otherwise) to reacquire) any shares of its capital stock or any derivative securities. (u) Real Property; Leases. The Company does not own any real property or any interest in real property, except for the leaseholds created under the real property leases identified in Section 3.1(u) of the Disclosure Schedule. Section 3.1(u) of the Disclosure Schedule accurately and completely describes the premises covered by said leases and the facilities located on such premises. The Company enjoys peaceful and undisturbed possession of such premises. All leases to which the Company is a party are valid, binding and enforceable in accordance with their respective terms and are in full force and effect; there are no material existing defaults by the Company or the other party thereunder, and no event of default has occurred which (whether with or without notice, lapse of time or the happening or occurrence of any other event) would constitute a material default thereunder. (v) Environmental Matters. The Company is in compliance with all applicable Environmental Health and Safety Requirements. The Company has not received any notice or other communication (in writing or otherwise) that alleges that the Company is not in compliance with any Environmental Health and Safety Requirements and to the Company's Knowledge there are no circumstances that are reasonably likely to prevent or interfere with the Company's compliance with any Environmental Health and Safety Requirements in the future. (w) Sale of Products; Performance of Services. To the Knowledge of the Company, no distributor, customer, end-user, consumer or other Person has ever asserted or threatened to assert any material claim against the Company (i) under or based upon any warranty provided by or on behalf of the Company, or (ii) relating to any product sold by the Company or any services performed by the Company. No event has occurred, and no condition or circumstance exists, that could (with or without notice or lapse of time) directly or indirectly give rise to or serve as a basis for the assertion of any such claim. (x) Full Disclosure. (i) None of the representations and warranties of the Company in this Agreement (including the Disclosure Schedule) contains or will contain as of the Closing Date any untrue statement of material fact or omits or will omit as of the Closing Date to state any fact necessary to make any of the representations, warranties or statements contained therein not misleading. To the extent such representations permit omission of items otherwise required to be discussed because they are not material or do not or would not have Adverse Consequences, such omissions in the aggregate will not as of the Closing Date and do not have Adverse Consequences. (ii) As of the date of this Agreement, the Company has provided the Buyer with full and complete access to all of the Company's records and other documents and data requested by it. (iii) There is no fact within the Knowledge of the Company or its directors, officers or employees (other than publicly known facts or facts within the Knowledge of Buyer) that have Adverse Consequences. 15 20 (iv) All of the written information set forth in the Disclosure Schedule, and all other information regarding the Company and its business, condition, assets, liabilities, operation, financial performance, net income and prospects that has been furnished to Buyer or any of its representatives by or on behalf of Company or any of the Company's representatives, is accurate and complete in all material respects. The Company acknowledges and agrees that although Buyer may tender certain assistance to Company in the preparation of the Disclosure Schedule, the provision of such assistance shall not be deemed to constitute an admission by Buyer of the accuracy of the same or any basis for any modification of any covenant, representation or warranty of Company and Buyer contained in this Agreement. (y) Customers and Suppliers. As of the date hereof, no customer that individually accounted for more than five percent (5%) of the Company's gross revenues during the 12-month period preceding the date hereof has notified the Company that it will stop, or decrease the rate of, buying services or products of the Company, or has at any time on or after December 31, 1998 decreased materially its purchase of the products of the Company. As of the date hereof, no supplier of the Company has notified the Company that it will stop, or decrease the rate of, supplying materials, products or services to the Company. The Company has not knowingly breached any contract with, or engaged in any fraudulent conduct with respect to, any customer or supplier of the Company. (z) Inventories. The inventories of the Company that are reflected in the Financial Statements consist of items that are usable or salable in the Ordinary Course of Business and do not include below-standard quality, damaged, defective or obsolete items the value of which has not been fully written down or with respect to which adequate reserves have not been provided, adjusted for operations and transactions through the Closing in accordance with the past custom and practice of the Company. (aa) Financial Projections. The Company's business plan as heretofore provided to Buyer has been prepared by the Company based on the Company's good faith estimates (based on reasonable investigation) of the projected financial performance of the Company following the Closing and certain assumptions set forth therein, which assumptions the Company believes are reasonable. The Company has concluded after reasonable investigation that the assumptions and conclusions of the Company's business plan constitute reasonable estimates of the Company's actual performance. However, such estimates and projections are not guaranteed or warranted. 3.2 Representations and Warranties of the Shareholder. The Shareholder represents and warrants to the Buyer that the statements contained in this Section 3.2 are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Section 3.2) with respect to itself, except as set forth in Annex II attached hereto. (a) Authorization of Transaction. The Shareholder has full power and authority to execute and deliver this Agreement and the Investors Rights Agreement, and to perform its obligations hereunder and thereunder. Each of the Transactional Agreements 16 21 constitutes the valid and legally binding obligation of the Shareholder, enforceable in accordance with their respective terms and conditions. The Shareholder need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order to consummate the transactions contemplated by the Transactional Agreements. (b) Noncontravention. Neither the execution and the delivery of the Transactional Agreements, nor the consummation of the transactions contemplated hereby and thereby, will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which the Shareholder is subject or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which the Shareholder is a party or by which it is bound or to which any of its assets is subject. (c) Company Representations. To Shareholder's Knowledge and subject to the matters described in the Disclosure Schedule, the representations and warranties of the Company in Section 3.1 are true and correct in all material respects. 3.3 Representations and Warranties of the Buyer. The Buyer represents and warrants to the Company and the Shareholder that the statements contained in this Section 3.3 are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Section 3.3), except as set forth in Annex III attached hereto. (a) Organization of the Buyer. The Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation. (b) Authorization of Transaction. The Buyer has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and the Investors Rights Agreement and to perform its obligations hereunder and thereunder. This Agreement and the Investors Rights Agreement constitute the valid and legally binding obligation of the Buyer, enforceable in accordance with their respective terms and conditions. The Buyer need not give any notice to, make any filing with, or obtain any authorization, consent or approval of any government or governmental agency in order to consummate the transactions contemplated by this Agreement or the Investors Rights Agreement. (c) Noncontravention. Neither the execution and the delivery of this Agreement or the Investors Rights Agreement, nor the consummation of the transactions contemplated hereby and thereby, will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which the Buyer is subject or any provision of its charter or bylaws or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which the Buyer is a party or by which it is bound or to which any of its assets is subject. 17 22 (d) Brokers' Fees. The Buyer has no Liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement for which the Company could become liable or obligated. (e) Investment. The Buyer (i) understands that the Company Shares have not been, and will not be, registered under the Securities Act, or under any state securities laws, and are being offered and sold in reliance upon federal and state exemptions for transactions not involving any public offering, (ii) is a sophisticated investor with knowledge and experience in business and financial matters, (iii) has received certain information concerning the Company and has had the opportunity to obtain additional information as desired in order to evaluate the merits and the risks inherent in holding the Company Shares, (iv) is able to bear the economic risk and lack of liquidity inherent in holding the Company Shares, and (v) is an Accredited Investor who is acquiring the Company Shares for investment purposes, for its own account, not as a nominee or agent and not with a view to the resale or distribution of any part thereof, and it has no present intention of selling, granting any participation in, or otherwise distributing the same. 4. Pre-Closing Covenants. The Parties agree as follows with respect to the period between the execution of this Agreement and the Closing. 4.1 General. Each of the Parties will use its best efforts to take all action and to do all things necessary, proper, or advisable in order to consummate and make effective the transactions contemplated by this Agreement (including satisfaction, but not waiver, of the closing conditions set forth in Section 6 below). 4.2 Notices and Consents. The Company and its Subsidiaries will give any notices to third parties and use its best efforts to obtain any third party consents, that the Buyer may reasonably request in connection with the matters referred to in Section 3.1 above. Each of the Parties will give any notices to, make any filings with, and use its best efforts to obtain any authorizations, consents, and approvals of governments and governmental agencies in connection with the matters referred to in Section 3.1(b), Section 3.2(a) and Section 3.3(b) above. 4.3 Operation of Business. The Company and its Subsidiaries will not engage in any practice, take any action, or enter into any transaction outside the Ordinary Course of Business. Without limiting the generality of the foregoing, the Company will not (a) declare, set aside, or pay any dividend or make any distribution with respect to its capital stock or redeem, purchase, or otherwise acquire any of its capital stock, or (b) otherwise engage in any practice, take any action, or enter into any transaction of the sort described in Section 3.1(i) above. 4.4 Preservation of Business. The Company and its Subsidiaries will keep their business and properties substantially intact, including its present operations, physical facilities, working conditions, and relationships with lessors, licensors, suppliers, customers, and employees. 18 23 4.5 Full Access. The Company and its Subsidiaries will permit representatives of the Buyer to have fall access at all reasonable times, and in a manner so as not to interfere with the normal business operations of the Company and its Subsidiaries, to all premises, properties, personnel, books, records (including Tax records), contracts, and documents of or pertaining to each of the Company and its Subsidiaries. Information disclosed by the Company and its Subsidiaries to the Buyer or learned by the Buyer or its representatives from the access provided under this Section 4.5 shall be subject to Section 10.16. 4.6 Notice of Developments. The Company and Shareholder will give prompt written notice to the Buyer of any material adverse development causing a breach of any of the representations and warranties in Section 3.1 and Section 3.2 above. Each Party will give prompt written notice to the others of any material adverse development causing a breach of any of his or its own representations and warranties in Section 3 above. No disclosure by any Party pursuant to this Section 4.6, however, shall be deemed to amend or supplement Annex I, Annex II, or Annex III or to prevent or cure any misrepresentation, breach of warranty, or breach of covenant. 4.7 Exclusivity. None of the Company or Shareholder will (i) solicit, initiate, or encourage the submission of any proposal or offer from any Person relating to the acquisition of control of a majority of any capital stock or other voting securities, or any substantial portion of the assets, of the Company and its Subsidiaries (including any acquisition structured as a merger, consolidation, or share exchange) or (ii) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in, or facilitate in any other manner any effort or attempt by any Person to do or seek any of the foregoing. Shareholder will not vote the Shareholder Shares in favor of any such acquisition structured as a merger, consolidation, or share exchange. The Company and Shareholder will notify the Buyer immediately if any Person makes any proposal, offer, inquiry, or contact with respect to any of the foregoing. This Section 4.7 shall terminate 60 days from the date of this Agreement. 5. Post-Closing Covenants. 5.1 General. In case at any time after the Closing any further action is necessary to carry out the purposes of this Agreement, each of the Parties will take such further action (including the execution and delivery of such further instruments and documents) as any other Party may reasonably request, all at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification therefor under Section 7 below). 5.2 Consultation. Buyer shall be entitled to reasonably consult with and advise management of the Company on significant business issues, including management's proposed annual operating plans, and management will meet with Buyer from time to time at the Company's facilities at Buyer's expense at mutually agreeable times for such consultation and advice and to review 19 24 progress in achieving said plans. The Company has no obligation to comply with any advice or directions from Buyer. Information disclosed to Buyer pursuant to this Section 5.2 will be subject to Section 10.16. The rights set forth in this Section 5.2 shall terminate upon the earlier of the following: (i) if at any time the Buyer ceases to own and control at least ten percent (10%) of the issued and outstanding capital stock of the Company; (ii) the closing of any initial public offering of the capital stock of the Company pursuant to an effective registration statement under the Securities Act; or (iii) the date the Company becomes subject to the reporting requirements of the Securities Exchange Act. 5.3 Records. Buyer may examine the books and records of the Company and inspect its facilities and may request information at reasonable times and intervals concerning the general status of the Company's financial condition and operations, provided that access to confidential or proprietary information and facilities need not be provided. Information disclosed to or learned by the Buyer pursuant to this Section 5.3 is subject to Section 10.16. The rights set forth in this Section 5.3 shall terminate upon the earlier of the following: (i) if at any time the Buyer ceases to own and control at least ten percent (10%) of the issued and outstanding capital stock of the Company; (ii) the closing of an initial public offering of the capital stock of the Company pursuant to an effective registration statement under the Securities Act; or (iii) the date the Company becomes subject to the reporting requirements of the Securities Exchange Act. 5.4 Observer Rights If Buyer is not represented on the Company's Board of Directors by an affiliate of Buyer, the Company shall give a representative of Buyer copies of all notices, minutes, consents and other material that the Company provides to its directors and the Company shall invite a representative of Buyer to attend all meetings of the Board of Directors in a non-voting observer capacity, except that Buyer may be excluded from access to any material or meeting or portion thereof if the Company believes, in good faith, that such exclusion is reasonably necessary to preserve the attorney-client privilege, to protect highly confidential or proprietary information, to protect the interests of the Company or for other similar reasons. Upon reasonable notice and at a scheduled meeting of the Board of Directors or such other time, if any, as the Board of Directors may determine in its sole discretion, such representative may address, subject to reasonable limitations, the Board of Directors with respect to Buyer's concerns regarding significant business issues facing the Company. Information disclosed to or learned by the Buyer pursuant to this Section 5.4 is subject to Section 10.16. The rights set forth in this Section 5.4 shall terminate upon the earlier of the following: (i) if at any time the Buyer ceases to own and control at least ten percent (10%) of the issued and outstanding capital stock of the Company; (ii) the closing of an initial public offering of the capital stock of the Company pursuant to an effective registration statement under the Securities Act; or (iii) the date the Company becomes subject to the reporting requirements of the Securities Exchange Act. 5.5 Legends. To the extent applicable, each certificate or other document evidencing any of the Company Shares shall be endorsed with the legend set forth below, and Buyer covenants that, except for the transfer of shares pursuant to Rule 144, the removal of the legend set forth in this 20 25 Section 5.5 pursuant to Rule 144, the transfer or the distributions to any Affiliate, and to the extent such restrictions are waived by the Company, Buyer shall not transfer the shares represented by any such certificate without complying with the restrictions on transfer described in the legends endorsed on such certificate: "THE SECURITIES REPRESENTED BY TIES CERTIFICATE HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND MAY BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO THE RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES LAWS OR IF THE COMPANY IS PROVIDED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION AND QUALIFICATION UNDER FEDERAL AND STATE SECURITIES LAWS IS NOT REQUIRED." 5.6 Distribution and License Agreement. The Company and Buyer shall enter into a reciprocal Distribution and License Agreement in the form attached hereto as Exhibit "D". 5.7 Further Actions. The Company shall, within 90 days after the Closing Date, provide to Buyer evidence of the Company's ownership of its Subsidiaries to Buyer's reasonable satisfaction. 6. Conditions to Obligation to Close. 6.1 Conditions to Obligation of the Buyer. The obligation of the Buyer to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (a) each of the representations and warranties set forth in Sections 3.1 and 3.2 above that is qualified by materiality shall be true and correct at and as of the Closing Date, and each of the representations and warranties set forth in Sections 3.1 and 3.2 above that is not so qualified shall be true and correct in all material respects at and as of the Closing Date; (b) the Company and Shareholder shall have performed and complied with all of their covenants hereunder in all material respects through the Closing; (c) the Company and its Subsidiaries shall have procured all of the third party consents specified in Section 3.1 above; (d) no action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling, or charge would (i) prevent consummation of any of the transactions contemplated by this Agreement, (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, (iii) affect adversely the right of the Buyer to own the Company Shares, or (iv) affect adversely the right of any of the Company and its Subsidiaries to own its assets and to operate its businesses (and no such injunction, judgment, order, decree, ruling, or charge shall be in effect); 21 26 (e) the Company Shares that are being purchased by the Buyer, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, nonassessable and free from rights of first refusal or other restrictions. (f) the Company shall have delivered to the Buyer a certificate to the effect that the conditions specified above in Section 6.1(a)-(e) are satisfied in all respects; (g) all applicable waiting periods (and any extensions thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been terminated and the Parties, including the Company's Subsidiaries, shall have received all other authorizations, consents, and approvals of governments and governmental agencies referred to in Section 3.1(b), Section 3.2(a), and Section 3.3(b) above; (h) the Buyer shall have received from counsel to the Company an opinion in form and substance as set forth in Exhibit "B" attached hereto, addressed to the Buyer, and dated as of the Closing Date; (i) the Buyer shall have obtained on terms and conditions satisfactory to it all of the financing it needs in order to consummate the transactions contemplated hereby; (j) the Company and Shareholder shall have entered into and delivered an Investors Rights Agreement substantially in the form attached as Exhibit "C"; (k) the Company and the Buyer shall have entered into and delivered the Distribution and License Agreement substantially in the form attached as Exhibit "D"; and (l) all actions to be taken by the Company and Shareholder in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby will be satisfactory in form and substance to the Buyer. The Buyer may waive any condition specified in this Section 6.1. 6.2 Conditions to Obligation of the Company and Shareholder. The obligation of the Company and Shareholder to consummate the transactions to be performed by them in connection with the Closing is subject to satisfaction of the following conditions: (a) the representations and warranties set forth in Section 3.3 above shall be true and correct in all material respects at and as of the Closing Date; (b) the Buyer shall have performed and complied with all of its covenants hereunder in all material respects through the Closing; (c) no action, suit, or proceeding shall be pending wherein an unfavorable injunction, judgment, order, decree, ruling, or charge would (i) prevent consummation of any of the transactions contemplated by this Agreement or (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation (and no such injunction, judgment, order, decree, ruling, or charge shall be in effect); 22 27 (d) the Buyer shall have delivered to the Company a certificate to the effect that each of the conditions specified above in Section 6.2(a)-(c) is satisfied in all respects; (e) all applicable waiting periods (and any extensions thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been terminated and the Parties, including the Company's Subsidiaries, shall have received all other authorizations, consents, and approvals of governments and governmental agencies referred to in Section 3.1(b), Section 3.2(a), and Section 3.3(b) above; and (f) the Company and the Buyer shall have entered into and delivered the Distribution and License Agreement substantially in the form attached as Exhibit "D"; (g) all actions to be taken by the Buyer in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby will be reasonably satisfactory in form and substance to the Company and Shareholder. The Company and Shareholder may waive any condition specified in this Section 6.2. 7. Remedies for Breaches of this Agreement. 7.1 Survival of Representations and Warranties. All of the representations and warranties of the Parties contained in Sections 3.1(a) through (e) and 3.3 of this Agreement shall survive the Closing hereunder (even if the damaged Party knew or had reason to know of any misrepresentation or breach of warranty or covenant at the time of Closing) and continue in full force and effect forever thereafter. The representations and warranties of the Company contained in Section 3.1(1) (with respect to taxes) shall survive the Closing hereunder and shall continue in full force and effect thereafter, as they relate to any taxable year of the Company, until sixty (60) days after the expiration of the statute of limitations applicable to the making of adjustments or assessments by any taxing authority as the same may be extended by the Company. All of the other representations, warranties and covenants of the Parties contained in this Agreement shall survive the Closing hereunder (even if the damaged Party knew or had reason to know of any misrepresentation or breach of warranty or covenant at the time of Closing) and continue in full force and effect thereafter until two years from the Closing Date. Except as otherwise provided in the first sentence of this Section 7.1, after said survival period, all representations and warranties shall terminate, and no party shall have any Liability or obligation with respect to any representation or warranty under this Agreement, provided that once notice of any claim has been timely given, additional related claims arising out of substantially the same circumstances may be made at any time prior to the resolution of such claim (by means of a final, non-appealable judgment of a court of competent jurisdiction, a binding arbitration decision or a settlement approved by the parties involved) even if such resolution occurs after the expiration or termination date, if any, prescribed for such representation or warranty in this Section 7.1. 7.2 Indemnification Provisions for Benefit of the Buyer. (a) In the event that (i) the Company breaches any of its representations, warranties, and covenants contained herein, then the Company agrees to indemnify the Buyer from and against any Adverse Consequences the Buyer may suffer through and after the date of the claim 23 28 for indemnification (including any Adverse Consequences the Buyer may suffer after the end of any applicable survival period) resulting from, arising out of or caused by such breach by the Company of any of its representations, warranties or covenants made herein, or (ii) the Shareholder breaches any of its representations, warranties, and covenants contained herein, then the Shareholder agrees to indemnify the Buyer from and against any Adverse Consequences the Buyer may suffer through and after the date of the claim for indemnification (including any Adverse Consequences the Buyer may suffer after the end of any applicable survival period) resulting from, arising out of or caused by such breach by the Shareholder of any of its representations, warranties or covenants made herein. (b) In the event that a third party asserts any claim against the Company alleging that the Company has violated the Intellectual Property rights of such third party based on acts that occurred during the two year period following the Closing Date, then the Company agrees to indemnify the Buyer from and against any Adverse Consequences the Buyer may suffer through and after the date of the claim for indemnification (including any Adverse Consequences the Buyer may suffer after the end of any applicable survival period) resulting from, arising out of or caused by such third party claim. (c) Notwithstanding the foregoing provisions of this Section 7.2, no indemnification shall be payable by the Company or the Shareholder with respect to any claim for breach of any representation, warranty or covenant made herein or claim by any third party until the total of such claims for indemnification shall exceed US$75,000 (the "Deductible"), in which event the Buyer shall be entitled to recover the amount of such claims in excess of the Deductible; and provided, further, that the aggregate liability of either the Company or the Shareholder for indemnification payable hereunder shall not exceed the amount of (i) the Purchase Price, plus (ii) reasonable attorneys' fees and expenses incurred by the Buyer in seeking indemnification under this Section 7. 7.3 Indemnification Provisions for Benefit of the Company and Shareholder. In the event the Buyer breaches any of its representations, warranties, and covenants contained herein, then the Buyer agrees to indemnify each of the Company and Shareholder from and against the entirety of any Adverse Consequences they may suffer through and after the date of the claim for indemnification (including any Adverse Consequences they may suffer after the end of any applicable survival period) resulting from, arising out of or caused by the breach; provided, however, that no indemnification shall be payable by the Buyer with respect to any claim for breach of any representation, warranty or covenant made herein until the total of such claims for indemnification shall exceed US$75,000, in which event the Company and the Shareholder, as the case may be, shall be entitled to recover the amount of such claims in excess of the Deductible; and provided, further, that the aggregate liability of the Buyer for indemnification payable hereunder shall not exceed $1 million, except for any breach of Buyer's obligation to pay the Purchase Price under Section 2. 7.4 Matters Involving Third Parties. (a) If any third party shall notify any Party (the "Indemnified Party") with respect to any matter (a "Third Party Claim") which may give rise to a claim for indemnification against any other Party (the "Indemnifying Party") under this Section 7, then the 24 29 Indemnified Party shall promptly notify each Indemnifying Party thereof in writing; provided, however, that no delay on the part of the Indemnified Party in notifying any Indemnifying Party shall relieve the Indemnifying Party from any obligation hereunder unless (and then solely to the extent) the Indemnifying Party thereby is prejudiced. (b) Any Indemnifying Party will have the right to defend the Indemnified Party against the Third Party Claim with counsel of its choice reasonably satisfactory to the Indemnified Party so long as (i) the Indemnifying Party notifies the Indemnified Party in writing within 15 days after the Indemnified Party has given notice of the Third Party Claim that the Indemnifying Party will indemnify the Indemnified Party from and against the entirety of any Adverse Consequences the Indemnified Party may suffer resulting from, arising out of, or caused by the Third Party Claim, (ii) the Indemnifying Party provides the Indemnified Party with evidence reasonably acceptable to the Indemnified Party that the Indemnifying Party will have the financial resources to defend against the Third Party Claim and fulfill its indemnification obligations hereunder, (iii) the Third Party Claim involves only money damages and does not seek an injunction or other equitable relief, (iv) settlement of, or an adverse judgment with respect to, the Third Party Claim is not, in the good faith judgment of the Indemnified Party, likely to establish a precedential custom or practice materially adverse to the continuing business interests of the Indemnified Party, and (v) the Indemnifying Party conducts the defense of the Third Party Claim actively and diligently. (c) So long as the Indemnifying Party is conducting the defense of the Third Party Claim in accordance with Section 7.4(b) above, (A) the Indemnified Party may retain separate co-counsel at its sole cost and expense and participate in the defense of the Third Party Claim, (B) the Indemnified Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party (not to be withheld unreasonably), and (C) the Indemnifying Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnified Party (not to be withheld unreasonably). (d) In the event any of the conditions in Section 7.4(b) above is or becomes unsatisfied, however, (i) the Indemnified Party may defend against, and consent to the entry of any judgment or enter into any settlement with respect to, the Third Party Claim in any manner it reasonably may deem appropriate (and the Indemnified Party need not consult with, or obtain any consent from, any Indemnifying Party in connection therewith), (ii) the Indemnifying Parties will reimburse the Indemnified Party promptly and periodically for the costs of defending against the Third Party Claim (including reasonable attorneys' fees and expenses), and (iii) the Indemnifying Parties will remain responsible for any Adverse Consequences the Indemnified Party may suffer resulting from, arising out of or caused by the Third Party Claim to the fullest extent provided in this Section 7. 7.5 Determination of Adverse Consequences. The Parties shall take into account the time cost of money (using the Applicable Rate as the discount rate) in determining Adverse Consequences for purposes of this Section 7. 25 30 7.6 Recoupment Against Purchase Price. (a) The Buyer shall have the option of recouping all or any part of any Adverse Consequences it may suffer (in lieu of seeking any indemnification to which it is entitled under this Section 7) at any time or from time to time by providing the Company with at least thirty (30) days' notice (a "Reduction Notice") of Buyer's intent to reduce the amount of Purchase Price due to the Company in the Second Distribution and the Final Distribution, together with all documentation and information reasonably necessary to substantiate Buyer's Adverse Consequences and Buyer's claim for satisfaction of such Adverse Consequences. (b) On or prior to the thirtieth (30th) day following the delivery of a Reduction Notice, the Company may deliver to Buyer a written statement (a "Reduction Disputing Notice") setting forth with reasonable specificity any disagreement with any of the amounts contained in the Reduction Notice which could affect the necessity or amount of any reduction of the portion of the Purchase Price due to the Company in the Second Distribution and the Final Distribution. The sole basis for any disagreement with a Reduction Notice shall be either (i) that the Adverse Consequences claimed by Buyer do not give rise to a claim for indemnification under this Section 7 or (ii) that there has been an arithmetical error in adding the Adverse Consequences. If the Company does not submit a Reduction Disputing Notice on or prior to such thirtieth (30th) day, then the portion of the Purchase Price due to the Company in the Second Distribution and the Final Distribution shall be deemed to have been reduced for purposes of this Agreement in the amount set forth in the Reduction Notice. If the Company does submit a Reduction Disputing Notice on or prior to such thirtieth (30th) day, any amounts contained in such Reduction Notice which are not disputed by the Reduction Disputing Notice shall be deemed to have been finally determined for purposes of this Agreement. (c) For a period of sixty (60) days, Buyer and the Company shall attempt to resolve in good faith any dispute or disagreement between a Reduction Notice and a Reduction Disputing Notice. Amounts contained on a Reduction Notice and resolved by such attempts shall be deemed to have been finally determined for purposes of this Agreement. After such sixty (60) day period, either party may commence legal proceedings to resolve any such dispute. 7.7 Exclusive Remedy for Non-Intentional Violations. The foregoing indemnification provisions shall be the sole and exclusive remedy for claims relating to any breach of the representations, warranties and covenants made herein by the respective Parties with respect to the transactions contemplated herein. Notwithstanding the foregoing limitation, in the case of any intentional or knowing breach of the representations, warranties or covenants made by the respective Parties herein or intentionally fraudulent or tortious conduct ("Intentional Violations"), the indemnification provisions herein are in addition to, and not in derogation of, any statutory, equitable or common law remedy (including without limitation any such remedy arising under Environmental, Health and Safety Requirements) any Party may have with respect to the Buyer, the Company, its Subsidiaries or the transactions contemplated by this Agreement. 26 31 8. Tax Matters. 8.1 Certain Taxes. All transfer, documentary, sales, use, stamp, registration and other such Taxes and fees (including any penalties and interest) incurred in connection with the sale of the Company Shares under this Agreement (including any gains tax or transfer tax imposed in state or subdivision), shall be paid by the Company when due, and the Company will, at its own expense, file all necessary Tax Returns and other documentation with respect to all such transfer, documentary, sales, use, stamp, registration and other Taxes and fees, and, if required by applicable law, Buyer will, and will cause its affiliates to, join in the execution of any such Tax Returns and other documentation. 9. Termination. 9.1 Termination of Agreement. Certain of the Parties may terminate this Agreement as provided below: (a) the Buyer and the Company may terminate this Agreement by mutual written consent at any time prior to the Closing; (b) the Buyer may terminate this Agreement by giving written notice to the Company prior to the Closing if the Buyer is not satisfied with the results of its continuing business, legal, environmental, and accounting due diligence regarding the Company and its Subsidiaries; (c) the Buyer may terminate this Agreement by giving written notice to the Company at any time prior to the Closing (i) in the event any of the Company or the Shareholder has breached any material representation, warranty, or covenant contained in this Agreement in any material respect, the Buyer has notified the Company or the Shareholder of the breach, and the breach has continued without cure for a period of 30 days after the notice of breach or (ii) if the Closing shall not have occurred on or before August 31, 1999, by reason of the failure of any condition precedent under Section 6.1 hereof (unless the failure results primarily from the Buyer itself breaching any representation, warranty, or covenant contained in this Agreement); and (d) the Company may terminate this Agreement by giving written notice to the Buyer at any time prior to the Closing (i) in the event the Buyer has breached any material representation, warranty, or covenant contained in this Agreement in any material respect, the Company has notified the Buyer of the breach, and the breach has continued without cure for a period of 30 days after the notice of breach or (ii) if the Closing shall not have occurred on or before August 31, 1999, by reason of the failure of any condition precedent under Section 6.2 hereof (unless the failure results primarily from any of the Company or the Shareholder themselves breaching any representation, warranty, or covenant contained in this Agreement). 9.2 Effect of Termination. If any Party terminates this Agreement pursuant to Section 9.1 above, all rights and obligations of the Parties hereunder shall terminate without any Liability of any Party to any other Party (except for any Liability of any Party then in breach). 27 32 10. Miscellaneous. 10.1 Press Releases and Public Announcements. No Party shall issue any press release or make any public announcement relating to the subject matter of this Agreement without the prior written approval of the Buyer and the Company; provided, however, that any Party may make any public disclosure it believes in good faith is required by applicable law or any listing or trading agreement concerning its publicly-traded securities (in which case the disclosing Party will use its reasonable best efforts to advise the other Parties prior to making the disclosure). 10.2 No Third-Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns. 10.3 Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements, or representations by or among the Parties, written or oral, to the extent they related in any way to the subject matter hereof. 10.4 Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the Buyer, the Company and the Shareholder; provided, however, that the Buyer may (a) assign any or all of its rights and interests hereunder to one or more of its Affiliates, (b) designate one or more of its Affiliates to perform its obligations hereunder (in any or all of which cases the Buyer nonetheless shall remain responsible for the performance of all of its obligations hereunder), and (c) assign any or all of its rights and interests hereunder in connection with any merger or sale of all or substantially all of its assets or capital stock. After the Closing and without any prior approval of any other Party, this Agreement may be assigned by any Party to any successor to its business or to any purchaser or transferee of substantially all of its assets; provided, however, that such assignment shall not be deemed to relieve the assigning Party of any of its obligations hereunder. 10.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 10.6 Headings. The Section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 10.7 Notices. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed 28 33 duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to the Company: Copy to: Caldera Systems, Inc. Parsons, Behle & Latimer 240 West Center Street 1 South Main Street Orem, Utah 84057 Suite 1800 Attn: Ransom Love, President & Salt Lake City, Utah 84145 Chief Executive Officer Attn: Brent Christensen, Esq. If to the Shareholder: Copy to: The Canopy Group, Inc. Parsons, Behle & Latimer 240 West Center Street 1 South Main Street Orem, Utah 84057 Suite 1800 Attn: Ray Noorda and Ralph Yarro Salt Lake City, Utah 84145 Attn: Brent Christensen, Esq. If to the Buyer: Copy to: MTI Technology Corporation Morrison & Foerster LLP 4905 East La Palma Avenue 19900 MacArthur Boulevard Anaheim, California 92807 Irvine, California 92612 Attn: Chief Financial Officer Attn: Tamara Powell Tate, Esq. Any Party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth. 10.8 Governing Law. This agreement is to be construed in accordance with and governed by the internal laws of the State of California (as permitted by Section 1646.5 of the California Civil Code or any similar successor provision) without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. 10.9 Amendments and Waivers. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Buyer, the company and the Shareholder. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 29 34 10.10 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 10.11 Expenses. Each of the Parties will bear its own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby. 10.12 Construction. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" shall mean including without limitation. The Parties intend that each representation, warranty, and covenant contained herein shall have independent significance. If any Party has breached any representation, warranty, or covenant contained herein in any respect, the fact that there exists another representation, warranty, or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the Party has not breached shall not detract from or mitigate the fact that the Party is in breach of the first representation, warranty, or covenant. 10.13 Incorporation of Exhibits, Annexes, and Schedules. The Exhibits, Annexes, and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. However, the Distribution and License Agreement shall be deemed a separate and complete agreement and shall exist and be governed independent of this Agreement. 10.14 Specific Performance. Each of the Parties acknowledges and agrees that the other Parties would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the Parties agrees that the other Parties shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having jurisdiction over the Parties and the matter (subject to the provisions set forth in Section 10.15 below), in addition to any other remedy to which they may be entitled, at law or in equity. 10.15 Submission to Jurisdiction. Each of the Parties submits to the jurisdiction of any state or federal court sitting in Orange County, California, in any action or proceeding arising out of or relating to this Agreement 30 35 and agrees that all claims in respect of the action or proceeding may be heard and determined in any such court. Each Party also agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court. Each of the Parties waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety, or other security that might be required of any other Party with respect thereto. Any Party may make service on any other Party by sending or delivering a copy of the process to the Party to be served at the address and in the manner provided for the giving of notices in Section 10.7 above. 10.16 Confidentiality. Each of the Parties and their respective representatives and employees shall keep strictly confidential and shall not disclose or use for any purpose other than this Agreement, any and all confidential and proprietary information ("Confidential Information") disclosed by any of the Parties (an "Informing Party") to any other Party (an "Informed Party") or learned by the Informed Party from the premises, properties, personnel, books, records (including Tax records), contracts, and documents to which it is given access. Each Party shall limit disclosure of Confidential Information to its representatives, financial advisors and employees on a need to know basis. The term "Confidential Information" does not include information which (i) is or becomes generally available to the public other than as a result of a disclosure by the Informed Party or its representatives, (ii) was available to the Informed Party on a non-confidential basis prior to its disclosure to the Informed Party by the Informing Party or its representatives, or (iii) becomes available to the Informed Party on a non-confidential basis from a source other than the Informing Party or its representatives, provided, however, that such source is not bound by a confidentiality agreement with the Informing Party or its representatives. Each of the Parties shall ensure that its representatives and employees comply with this Section 10.16. 10.17 California Corporate State Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA OR UTAH AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. 31 36 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written. MTI TECHNOLOGY CORPORATION, a Delaware corporation By: /s/ DALE R. BORD ------------------------------------ Title: Chief Financial Officer CALDERA SYSTEMS, INC., a Utah corporation By: /s/ RANSOM H. LOVE ------------------------------------- Title: President & CEO THE CANOPY GROUP, INC., a Utah corporation By: /s/ RALPH YARRO ------------------------------------- Title: President & CEO 32
EX-10.11 11 STOCK PURCHASE & SALE AGREEMENT 1 EXHIBIT 10.11 STOCK PURCHASE AND SALE AGREEMENT THIS STOCK PURCHASE AND SALE AGREEMENT (this "Agreement") is made and entered into as of this 6th day of January, 2000 by and between Lineo, Inc., a Utah corporation ("Lineo"), and Caldera Systems, Inc., a Utah corporation ("Caldera Systems"). WHEREAS, Lineo and Caldera Systems have agreed in principle to provide each other with certain marketing and other services pursuant to a strategic alliance agreement, and Lineo and Caldera Systems each wishes to purchase from the other shares of common stock; NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: SECTION 1. PURCHASE AND SALE OF SHARES 1.1 PURCHASE OF LINEO STOCK. Upon the terms and subject to the conditions herein, in reliance on the representations and warranties set forth in Sections 2 and 4 hereof, Caldera Systems hereby purchases from Lineo, and Lineo hereby issues and sells to Caldera Systems 3,238,437 shares of the Common Stock of Lineo, representing 16.75% of the issued and outstanding shares of capital stock of Lineo on a fully-diluted basis as of the date hereof (the "Lineo Shares"). 1.2 PURCHASE OF CALDERA SYSTEMS STOCK. Upon the terms and subject to the conditions herein, in reliance on the representations and warranties set forth in Sections 3 and 4 hereof, Lineo hereby purchases from Caldera Systems, and Caldera Systems hereby issues and sells to Lineo, 1,250,000 shares of the Common Stock of Caldera Systems, representing 3.35% of the issued and outstanding shares of capital stock of Caldera Systems on a fully-diluted basis as of the date hereof (the "Caldera Systems Shares"). 1.3 CLOSING. The closing of the purchases and sales of the Lineo Shares and the Caldera Systems Shares contemplated by Sections 1.1 and 1.2 above (the "Closing") shall take place at 10:00 a.m. on the date hereof, or at such other time and date as the parties hereto mutually agree (the "Closing Date"). SECTION 2. REPRESENTATIONS AND WARRANTIES OF LINEO In order to induce Caldera Systems to enter into this Agreement, Lineo represents and warrants to Caldera Systems the following, except as set forth on a Schedule of Exceptions furnished by Lineo to Caldera Systems (the "Lineo Schedule of Exceptions"), specifically identifying the relevant subparagraph(s) hereof, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 ORGANIZATION AND CORPORATE POWER. Lineo is a corporation duly organized and validly existing under the laws of the State of Utah, and is qualified to do business as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a material adverse effect on its assets, liabilities, financial condition, business, or results of 2 operations (a "Material Adverse Effect"). Lineo has all required corporate power and corporate authority to carry on its business as presently conducted, to enter into and perform this Agreement and the agreements contemplated hereby to which it is a party and to carry out the transactions contemplated hereby and thereby, including the issuance of the Lineo Shares. Lineo is not in material violation of any term of its Articles of Incorporation (the "Lineo Articles of Incorporation"), or Bylaws (the "Lineo Bylaws"). 2.2 AUTHORIZATION AND NON-CONTRAVENTION. The execution, delivery and performance by Lineo of this Agreement and each other agreement, document and instrument to be executed and delivered by Lineo pursuant to or as contemplated by this Agreement, including, without limitation, the issuance and delivery of the Lineo Shares, have been duly authorized, by all necessary corporate action on behalf of Lineo. This Agreement and each such other agreement, document, and instrument, when executed and delivered, will constitute valid and binding obligations of Lineo, enforceable in accordance with their respective terms, except as may be limited by applicable law and public policy and subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) general principles of equity and/or laws relating to the availability of specific performance, injunctive relief or other equitable remedies, whether such enforceability is considered in a proceeding in equity or at law. The execution and delivery by Lineo of this Agreement and each other agreement, document and instrument to be executed and delivered by Lineo pursuant hereto or as contemplated hereby and the performance by Lineo of the transactions contemplated hereby and thereby, including, without limitation, the offer, sale, issuance and delivery of the Lineo Shares, do not and will not: (A) violate, conflict with or result in a default (whether after the giving of notice, lapse of time or both) under any material contract, mortgage, indenture, contract, instrument or obligation to which Lineo is a party or by which it or its assets are bound, or any provision of the Lineo Articles of Incorporation or Lineo Bylaws, or cause the creation of any material lien, charge or encumbrance upon any of the assets of Lineo; (B) to Lineo's knowledge, violate or result in a violation of, or constitute a default under, any provision of any material law, regulation or rule, or any judgment, order, writ, decree or statute of, or any restriction imposed by, any court or governmental agency applicable to Lineo; (C) require from Lineo any notice to, declaration or filing with, or consent or approval of any governmental authority or third party other than such filings as have been made prior to the Closing and/or as may be required to secure an exemption from qualification of the offer and sale of the Lineo Shares under the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities and blue sky laws; or (D) accelerate any obligation under, or give rise to a right of termination, suspension, revocation or impairment of, any material agreement, permit, license or authorization applicable to any of Lineo's, operations, assets or properties, or by which Lineo is bound. 2.3 CAPITALIZATION. As of the Closing, the authorized capital stock of Lineo will consist of 100,000,000 shares of Common Stock, of which 18,000,000 shares will be issued and outstanding. As of the Closing, other than the shares described in the preceding sentence and options to purchase 1,333,950 shares of the common stock of Lineo granted to employees and members of the Board of Directors of Lineo pursuant to Lineo's Stock Option Plan, Lineo has not issued any warrants, options, rights (including, without limitation, conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements or agreements of any kind for the purchase or acquisition from Lineo of any shares of capital stock or other securities, including, without limitation, any securities convertible into or exercisable or exchangeable for such shares or any warrants, options or other rights to acquire any such convertible securities. As of the Closing, and after giving effect to the transactions contemplated hereby, all of the outstanding shares of capital stock of Lineo and each of its Subsidiaries will have been duly and validly authorized and issued, fully paid and nonassessable and not subject to any preemptive rights and will have been offered, issued, sold and delivered 3 in compliance with applicable federal and state securities laws. There are no preemptive rights, rights of first refusal, put or call rights or obligations or anti-dilution rights with respect to the issuance, sale or redemption of Lineo's capital stock or other securities. Lineo is not a party or subject to any agreement or understanding, and, to the best of Lineo's knowledge, there is no agreement or understanding between any persons that affects or relates to the voting or giving of written consents with respect to any security or the voting by a director of Lineo. 2.4 VALID ISSUANCE OF LINEO SHARES. The Lineo Shares, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid and non-assessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and under applicable state and federal securities laws. 2.5 SUBSIDIARIES. Lineo does not own or control, directly or indirectly, any interest in any other corporation, partnership, limited liability company, association or other business entity. Lineo is not a participant in any joint venture, partnership or similar arrangement. 2.6 CONTRACTS AND OTHER COMMITMENTS. Lineo has not and/or is not bound by any contract, agreement, lease, commitment, or proposed transaction, judgment, order, writ or decree, written or oral, absolute or contingent, other than contracts entered into in the ordinary course of business. For the purpose of this paragraph, employment and consulting contracts and license agreements and any other agreements relating to Lineo's acquisition or disposition of Intellectual Property (other than standard end-user license agreements) shall not be considered to be contracts entered into in the ordinary course of business. 2.7 RELATED-PARTY TRANSACTIONS. No employee, officer, stockholder or director of Lineo or member of his or her immediate family is indebted to Lineo, nor is Lineo indebted (or committed to make loans or extend or guarantee credit) to any of them, other than (i) for payment of salary for services rendered, (ii) reimbursement for reasonable expenses incurred on behalf of Lineo, and (iii) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of Lineo or such Subsidiary). To the best of Lineo's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which Lineo is affiliated or with which Lineo has a business relationship, or any firm or corporation that competes with Lineo, except that employees, stockholders, officers or directors of Lineo and members of their immediate families may own stock in publicly-traded companies that may compete with Lineo. To the best of Lineo's, no officer, director or stockholder or any member of their immediate families is, directly or indirectly, interested in any material contract with Lineo (other than such contracts as relate to any such person's ownership of capital stock or other securities of Lineo). 4 2.8 REGISTRATION RIGHTS. Lineo is presently not under any obligation and has not granted any rights to register under the Securities Act any of its presently outstanding securities or any of its securities that may subsequently be issued. 2.9 PERMITS. Lineo has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects or financial condition of Lineo, and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as presently planned to be conducted. Lineo is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.10 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the best of Lineo's knowledge, currently threatened against Lineo that questions the validity of this Agreement, or the right of Lineo to enter into this Agreement, or to consummate the transactions contemplated hereby, or that might result, either individually or in the aggregate, in any material adverse change in the assets, business, properties, prospects, or financial condition of Lineo, or in any material change in the current equity ownership of Lineo. 2.11 RETURNS AND COMPLAINTS. Lineo has not received any customer complaints concerning alleged defects in its products (or the design thereof) that, if true, would materially adversely affect the operations or financial condition of Lineo. 2.12 DISCLOSURE. Lineo has provided Caldera Systems with all the information reasonably available to it without undue expense that Caldera Systems has requested for deciding whether to purchase the Lineo Shares and all information that Lineo believes is reasonably necessary to enable Caldera Systems to make such decision. 2.13 OFFERING. Subject, in part, to the truth and accuracy of Caldera Systems's representations set forth in this Agreement, the offer, sale and issuance of the Lineo Shares as contemplated by this Agreement are exempt from the registration requirements of the Securities Act, and neither Lineo, nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 2.14 TITLE TO PROPERTY AND ASSETS; LEASES. Except (i) as reflected in the Lineo Financial Statements (defined in paragraph 2.15), (ii) for liens for current taxes not yet delinquent, (iii) for liens imposed by law and incurred in the ordinary course of business for obligations not past due to carriers, warehousemen, laborers, materialmen and the like, (iv) for liens in respect of pledges or deposits under workers' compensation laws or similar legislation or (v) for minor defects in title, none of which, individually or in the aggregate, materially interferes with the use of such property, Lineo has good and marketable title to its property and assets free and clear of all mortgages, liens, claims and encumbrances. With respect to the property and assets it leases, Lineo is in compliance 5 with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances, subject to clauses (i)-(v) above. 2.15 FINANCIAL STATEMENTS. Lineo has made available to Caldera Systems its unaudited trial balance sheet (which includes assets and liabilities, ending balances, revenues and expenses, and the balance of stockholders' equity) at October 31, 1999 for the fiscal year then ended (the "Lineo Financial Statements"). The Lineo Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated. The Lineo Financial Statements fairly present the financial condition and operating results of Lineo as of the dates, and for the periods, indicated therein. Except as set forth in the Lineo Financial Statements, Lineo has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to October 31, 1999 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Lineo Financial Statements, which in both cases, individually or in the aggregate, are not material to the financial condition or operating results of Lineo. Except as disclosed in the Lineo Financial Statements, Lineo is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. Lineo maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 2.16 CHANGES. Since October 31, 1999, there has not been any event or condition of any type that has materially and adversely affected the business, properties or financial condition of Lineo or any of its Subsidiaries. 2.17 INTELLECTUAL PROPERTY. To the best of Lineo's knowledge, Lineo, and its products have not infringed and do not infringe the copyrights of any third party. To the best of Lineo's knowledge, Lineo has not misappropriated and is not misappropriating any trade secrets or proprietary confidential information of any third party, and the products of Lineo do not include or embody any trade secret or proprietary confidential information misappropriated by Lineo from any third party. To the best of Lineo's knowledge, Lineo and its products have not infringed and do not infringe any patents, trademarks, service marks, or trade names of any third party. Each item of Intellectual Property owned by or licensed to Lineo immediately prior to the Closing hereunder will be owned by or licensed to Lineo on identical terms and conditions immediately subsequent to the Closing hereunder (i.e., identical to any applicable terms and conditions immediately prior to the Closing). (i) To the best of Lineo's knowledge, none of Lineo and its directors and officers (and employees with responsibility for Intellectual Property matters) has ever received any charge, complaint, claim, demand, or notice alleging any such infringement, misappropriation, or violation by Lineo of Intellectual Property (including any claim that Lineo must license or refrain from using any Intellectual Property rights of any third party). To the best of Lineo's knowledge and the knowledge of directors and officers (and employees with responsibility for Intellectual Property matters) of Lineo, no third party has infringed, misappropriated, or otherwise violated any Intellectual Property rights of Lineo. (ii) Within thirty days of the date of Closing, Lineo will provide to Caldera Systems a schedule (the "IP Schedule") identifying (a) each patent which has been issued or assigned to Lineo, 6 (b) each pending patent application which has been filed by or for Lineo, (c) each trademark or service mark registration issued or assigned to Lineo, (d) each pending trademark or service mark application which has been filed by or for Lineo, (e) each copyright registration issued or assigned to Lineo, (f) each pending copyright application which has been filed by or for Lineo, and (g) each license which Lineo has granted to any third party with respect to any of Lineo's Intellectual Property excluding licenses to end users of Company products granted in the ordinary course of business. Lineo will deliver to Caldera Systems correct and complete copies of all such patents, registrations, applications, and licenses (as amended to date). The Lineo IP Schedule will also identify each trade name and each unregistered trademark or service mark owned or claimed by Lineo in connection with its business. With respect to each patent, application, and registration (each an "IP item") identified in the Lineo IP Schedule: (A) Lineo possess all right, title, and interest in and to the IP item, free and clear of any mortgage, lien, claim, license, or other encumbrance; (B) to the best of Lineo's knowledge, the IP item is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; (C) to the best of Lineo's knowledge, no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or, to the best of Lineo's or its Subsidiaries' knowledge, and the knowledge of the directors and officers (and employees with responsibility for Intellectual Property matters) of Lineo and its Subsidiaries, is threatened which challenges the legality, validity, enforceability, use, or ownership of the IP item; and (D) Lineo has never agreed to indemnify any Person for or against any interference, infringement, misappropriation, or other conflict with respect to the IP item. (iii) The Lineo IP Schedule will identify each item of Intellectual Property that any third party owns and licenses to Lineo, excluding licenses to commercially available software products (e.g., Windows, Microsoft Office, etc.) used by Lineo as an end user. Lineo will deliver with the IP Schedule to Caldera Systems correct and complete copies of all agreements applicable to such licenses (as amended to date). The term "license" is intended to include "sublicense." With respect to each such license and agreement required to be identified in the Lineo IP Schedule, to the best of Lineo's knowledge; the license and agreement are legal, valid, binding, enforceable, and in full force and effect; the license and agreement will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms on the day immediately following the Closing; no party to the agreement is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default or permit termination, modification, or acceleration thereunder; no party to the agreement has repudiated any provision thereof; the license is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; and 7 no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or is threatened which challenges the legality, validity, or enforceability of the license or agreement. (iv) To the best of Lineo's knowledge and to the knowledge of the directors and officers (and employees with responsibility for Intellectual Property matters) of Lineo, Lineo will not infringe, misappropriate, or otherwise violate any Intellectual Property rights of third parties as a result of the continued operation of its businesses as presently conducted and as presently proposed to be conducted. 2.18 MANUFACTURING AND MARKETING RIGHTS. Except as set forth on the Lineo Schedule of Exceptions, Lineo has not granted rights to manufacture, produce, assemble, license, market or sell its products to any other person and is not bound by any agreement that affects Lineo's exclusive right to develop, manufacture, assemble, distribute, market or sell its products. 2.19 EMPLOYEES; EMPLOYEE COMPENSATION. To the best of Lineo's knowledge, the relationships between Lineo and its employees are good and no labor dispute or claims are pending or threatened. None of Lineo's employees belongs to any union or collective bargaining unit. To the best of Lineo's knowledge, Lineo has complied in all material respects with all applicable state and federal laws related to employment. To the best of Lineo's knowledge, no employee of Lineo is or will be in violation of any judgment, decree or order, or any term of any employment contract, patent disclosure agreement, or other contract or agreement relating to the relationship of any such employee with Lineo, or any other party because of the nature of the business conducted or presently proposed to be conducted by Lineo or to the use by the employee of his or her best efforts with respect to such business. Lineo is not a party to or bound by any currently effective employment contract, deferred compensation agreement, incentive plan, profit sharing plan, retirement agreement or other employee compensation agreement. Lineo is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with Lineo, nor does Lineo have a present intention to terminate the employment of any of the foregoing. Subject to general principles related to wrongful termination of employees, the employment of each officer and employee of Lineo is terminable at the will of Lineo. 8 2.20 TAX RETURNS, PAYMENTS, AND ELECTIONS. Lineo has timely filed all tax returns and reports (federal, state and local) as required by law. These returns and reports are true and correct in all material respects. Lineo has paid all taxes and other assessments due, except those contested by it in good faith. Lineo has not elected, pursuant to the Internal Revenue Code of 1986, as amended ("Code"), to be treated as an S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a material effect on the business, properties, prospects or financial condition of Lineo. Lineo has never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. None of Lineo's income tax returns (federal or otherwise) and none of its state income or franchise tax or sales or use tax returns has ever been audited by governmental authorities. Lineo has made adequate provisions on its books of account for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. Lineo has withheld or collected from each payment made to each of its employees, the amount of all taxes, including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositaries. 2.21 ENVIRONMENTAL AND SAFETY LAWS. Lineo is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. SECTION 3. REPRESENTATIONS AND WARRANTIES OF CALDERA SYSTEMS In order to induce Lineo to enter into this Agreement, Caldera Systems represents and warrants to Lineo the following, except as set forth on a Schedule of Exceptions furnished by Caldera Systems to Lineo (the "Caldera Systems Schedule of Exceptions"), specifically identifying the relevant subparagraph(s) hereof, which exceptions shall be deemed to be representations and warranties as if made hereunder: 3.1 ORGANIZATION AND CORPORATE POWER. Each of Caldera Systems and its Subsidiaries is a corporation duly organized and validly existing under the laws of the State of Utah, and is qualified to own and operate its properties and assets, to do business as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a Material Adverse Effect. Each of Caldera Systems and its Subsidiaries has all required corporate power and corporate authority to carry on its business as presently conducted, to enter into and perform this Agreement and the agreements contemplated hereby to which it is a party and to carry out the transactions contemplated hereby and thereby, including the issuance of the Caldera Systems Shares. Caldera Systems is not in material violation of any term of its Articles of Incorporation, as amended as of the date hereof (the "Caldera Systems Articles of Incorporation"), or Bylaws, as amended as of the date hereof (the "Caldera Systems Bylaws"). 9 3.2 AUTHORIZATION AND NON-CONTRAVENTION. The execution, delivery and performance by Caldera Systems of this Agreement and each other agreement, document and instrument to be executed and delivered by Caldera Systems pursuant to or as contemplated by this Agreement, including, without limitation, the issuance and delivery of the Caldera Systems Shares, have been duly authorized, or will be duly authorized prior to the Closing, by all necessary corporate action on behalf of Caldera Systems. This Agreement and each such other agreement, document, and instrument, when executed and delivered, will constitute valid and binding obligations of Caldera Systems, enforceable in accordance with their respective terms, except as may be limited by applicable law and public policy and subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) general principles of equity and/or laws relating to the availability of specific performance, injunctive relief or other equitable remedies, whether such enforceability is considered in a proceeding in equity or at law. The execution and delivery by Caldera Systems of this Agreement and each other agreement, document and instrument to be executed and delivered by Caldera Systems pursuant hereto or as contemplated hereby and the performance by Caldera Systems of the transactions contemplated hereby and thereby, including, without limitation, the offer, sale, issuance and delivery of the Caldera Systems Shares, do not and will not: (A) violate, conflict with or result in a default (whether after the giving of notice, lapse of time or both) under any material contract, mortgage, indenture, contract, instrument or obligation to which Caldera Systems or any of its Subsidiaries is a party or by which it or its assets are bound, or any provision of the Caldera Systems Articles of Incorporation or Caldera Systems Bylaws, or cause the creation of any material lien, charge or encumbrance upon any of the assets of Caldera Systems or any of its Subsidiaries; (B) to Caldera Systems's knowledge, violate or result in a violation of, or constitute a default under, any provision of any material law, regulation or rule, or any judgment, order, writ, decree or statute of, or any restriction imposed by, any court or governmental agency applicable to Caldera Systems or any of its Subsidiaries; (C) require from Caldera Systems any notice to, declaration or filing with, or consent or approval of any governmental authority or third party other than such filings as have been made prior to the Closing and/or as may be required to secure an exemption from qualification of the offer and sale of the Caldera Systems Shares under the Securities Act, and applicable state securities and blue sky laws; or (D) accelerate any obligation under, or give rise to a right of termination, suspension, revocation or impairment of, any material agreement, permit, license or authorization applicable to any of Caldera Systems's, or any of its Subsidiaries', business, operations, assets or properties, to which Caldera Systems, or any of its Subsidiaries, is a party or by which Caldera Systems is bound. 3.3 CAPITALIZATION. As of the Closing, without giving effect to the transactions contemplated hereby, the authorized capital stock of Caldera Systems will consist of 75,000,000 shares of common stock, of which 20,144,904 shares will be issued and outstanding and 25,000,000 shares of preferred stock of which 6,596,146 shares have been designated Series A Preferred Stock, all of which are issued and outstanding, and 5,000,000 shares have been designated Series B Preferred Stock, all of which are isssued and outstanding. As of the Closing, other than the shares described in the preceding sentence, (ii) the conversion privileges of the Series A Preferred Stock and the Series B Preferred Stock of Caldera, and (iii) currently outstanding options to purchase 5,288,882 shares of the common stock of Caldera granted to employees and members of the Board of Directors of Caldera pursuant to Caldera's 1998 Stock Option Plan and 1999 Omnibus Stock Incentive Plan, Caldera Systems has not issued any warrants, options, rights (including, without limitation, conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements or agreements of any kind for the purchase or acquisition from Caldera Systems, or any of its Subsidiaries, of any shares of its, or any of its Subsidiaries', capital stock or other securities, including, without limitation, any securities convertible into or exercisable or exchangeable for such shares or any warrants, options or other rights to acquire any 10 such convertible securities. As of the Closing, and after giving effect to the transactions contemplated hereby, all of the outstanding shares of capital stock of Caldera Systems and each of its Subsidiaries will have been duly and validly authorized and issued, fully paid and nonassessable and not subject to any preemptive rights and will have been offered, issued, sold and delivered in compliance with applicable federal and state securities laws. Except as set forth in the Caldera Systems Articles of Incorporation and in that certain Amended and Restated Investor Rights Agreement, dated as of December 30, 1999, among Caldera Systems and the shareholders of Caldera Systems who are party thereto (the "Caldera Systems Investor Rights Agreement"), there are no preemptive rights, rights of first refusal, put or call rights or obligations or anti-dilution rights with respect to the issuance, sale or redemption of Caldera Systems's capital stock or other securities. Caldera Systems is not a party or subject to any agreement or understanding, and, to the best of Caldera Systems's knowledge, there is no agreement or understanding between any persons that affects or relates to the voting or giving of written consents with respect to any security or the voting by a director of Caldera Systems. 3.4 VALID ISSUANCE OF CALDERA SYSTEMS SHARES. The Caldera Systems Shares, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid and non-assessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and under applicable state and federal securities laws. 3.5 SUBSIDIARIES. Caldera Systems does not own or control, directly or indirectly, any interest in any other corporation, partnership, limited liability company, association or other business entity. Caldera Systems is not a participant in any joint venture, partnership or similar arrangement. 3.6 CONTRACTS AND OTHER COMMITMENTS. Neither Caldera Systems nor any of its Subsidiaries has and/or is bound by any contract, agreement, lease, commitment, or proposed transaction, judgment, order, writ or decree, written or oral, absolute or contingent, other than contracts entered into in the ordinary course of business. For the purpose of this paragraph, employment and consulting contracts and license agreements and any other agreements relating to Caldera Systems's or any of its Subsidiary's acquisition or disposition of Intellectual Property (other than standard end-user license agreements) shall not be considered to be contracts entered into in the ordinary course of business. 3.7 RELATED-PARTY TRANSACTIONS. No employee, officer, stockholder or director of Caldera Systems or any of its Subsidiaries or member of his or her immediate family is indebted to Caldera Systems, nor is Caldera Systems or any Subsidiary indebted (or committed to make loans or extend or guarantee credit) to any of them, other than (i) for payment of salary for services rendered, (ii) reimbursement for reasonable expenses incurred on behalf of Caldera Systems or such Subsidiary, and (iii) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of Caldera Systems or such Subsidiary). To the best of Caldera Systems's or such Subsidiary's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which Caldera Systems or such Subsidiary is affiliated or with which Caldera Systems or such Subsidiary has a business relationship, or any firm or corporation that competes with Caldera Systems or such Subsidiary, except that employees, stockholders, officers or directors of Caldera 11 Systems or such Subsidiary and members of their immediate families may own stock in publicly-traded companies that may compete with Caldera Systems or such Subsidiary. To the best of Caldera Systems's or such Subsidiary's knowledge, no officer, director or stockholder or any member of their immediate families is, directly or indirectly, interested in any material contract with Caldera Systems or such Subsidiary (other than such contracts as relate to any such person's ownership of capital stock or other securities of Caldera Systems or such Subsidiary). 3.8 REGISTRATION RIGHTS. Except as set forth in the Caldera Systems Investor Rights Agreement, Caldera Systems is presently not under any obligation and has not granted any rights to register under the Securities Act any of its presently outstanding securities or any of its securities that may subsequently be issued. 3.9 PERMITS. Each of Caldera Systems and its Subsidiaries has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects or financial condition of Caldera Systems or any such Subsidiary, and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as presently planned to be conducted. Neither Caldera Systems nor any Subsidiary is in default in any material respect under any of such franchises, permits, licenses or other similar authority. 3.10 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the best of Caldera Systems's or any of its Subsidiary's knowledge, currently threatened against Caldera Systems or any of its Subsidiary's that questions the validity of this Agreement, or the right of Caldera Systems to enter into this Agreement, or to consummate the transactions contemplated hereby, or that might result, either individually or in the aggregate, in any material adverse change in the assets, business, properties, prospects, or financial condition of Caldera Systems or any of its Subsidiaries, or in any material change in the current equity ownership of Caldera Systems or any of its Subsidiaries. 3.11 RETURNS AND COMPLAINTS. Neither Caldera Systems nor any of its Subsidiaries has received any customer complaints concerning alleged defects in its products (or the design thereof) that, if true, would materially adversely affect the operations or financial condition of Caldera Systems or any of its Subsidiaries. 3.12 DISCLOSURE. Caldera Systems has provided Lineo with all the information reasonably available to it without undue expense that Lineo has requested for deciding whether to purchase the Caldera Systems Shares and all information that Caldera Systems believes is reasonably necessary to enable Lineo to make such decision. 12 3.13 OFFERING. Subject, in part, to the truth and accuracy of Lineo's representations set forth in this Agreement, the offer, sale and issuance of the Caldera Systems Shares as contemplated by this Agreement are exempt from the registration requirements of the Securities Act, and neither Caldera Systems, any of its Subsidiaries, nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 3.14 TITLE TO PROPERTY AND ASSETS; LEASES. Except (i) as reflected in the Caldera Systems Financial Statements (defined in paragraph 3.15), (ii) for liens for current taxes not yet delinquent, (iii) for liens imposed by law and incurred in the ordinary course of business for obligations not past due to carriers, warehousemen, laborers, materialmen and the like, (iv) for liens in respect of pledges or deposits under workers' compensation laws or similar legislation or (v) for minor defects in title, none of which, individually or in the aggregate, materially interferes with the use of such property, each of Caldera Systems and its Subsidiaries has good and marketable title to its property and assets free and clear of all mortgages, liens, claims and encumbrances. With respect to the property and assets it leases, each of Caldera Systems and its Subsidiaries is in compliance with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances, subject to clauses (i)-(v) above. 3.15 FINANCIAL STATEMENTS. Caldera Systems has delivered to Lineo its audited financial statements (balance sheet and profit and loss statement, statement of stockholders' equity and statement of cash flows, including notes thereto) at October 31, 1999 and for the fiscal year then ended (the "Caldera Systems Financial Statements"). The Caldera Systems Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated. The Caldera Systems Financial Statements fairly present the financial condition and operating results of Caldera Systems as of the dates, and for the periods, indicated therein. Except as set forth in the Caldera Systems Financial Statements, neither Caldera Systems nor any of its Subsidiaries has any material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to October 31, 1999 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Caldera Systems Financial Statements, which in both cases, individually or in the aggregate, are not material to the financial condition or operating results of Caldera Systems or any of its Subsidiaries. Except as disclosed in the Caldera Systems Financial Statements, neither Caldera Systems nor any of its Subsidiaries is a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. Caldera Systems and each of its Subsidiaries maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 3.16 CHANGES. Since October, 1999, there has not been any event or condition of any type that has materially and adversely affected the business, properties or financial condition of Caldera Systems or any of its Subsidiaries. 13 3.17 INTELLECTUAL PROPERTY. To the best of Caldera Systems's and its Subsidiaries' knowledge, Caldera Systems, its Subsidiaries and their products have not infringed and do not infringe the copyrights of any third party. To the best of Caldera Systems's and its Subsidiaries' knowledge, neither Caldera Systems nor its Subsidiaries has misappropriated or is misappropriating any trade secrets or proprietary confidential information of any third party, and the products of Caldera Systems and its Subsidiaries do not include or embody any trade secret or proprietary confidential information misappropriated by Caldera Systems or its Subsidiaries from any third party. To the best of Caldera Systems's and its Subsidiaries' knowledge, each of Caldera Systems and its Subsidiaries and their respective products have not infringed and do not infringe any patents, trademarks, service marks, or trade names of any third party. Each item of Intellectual Property owned by or licensed to Caldera Systems and its Subsidiaries immediately prior to the Closing hereunder will be owned by or licensed to Caldera Systems and the Subsidiary on identical terms and conditions immediately subsequent to the Closing hereunder (i.e., identical to any applicable terms and conditions immediately prior to the Closing). (i) To the best of Caldera Systems's and its Subsidiaries' knowledge, none of Caldera Systems or its Subsidiaries or their directors and officers (and employees with responsibility for Intellectual Property matters) has ever received any charge, complaint, claim, demand, or notice alleging any such infringement, misappropriation, or violation by Caldera Systems or its Subsidiaries of Intellectual Property (including any claim that Caldera Systems and its Subsidiaries must license or refrain from using any Intellectual Property rights of any third party). To the best of Caldera Systems's and its Subsidiaries' knowledge and the knowledge of directors and officers (and employees with responsibility for Intellectual Property matters) of Caldera Systems and its Subsidiaries, no third party has infringed, misappropriated, or otherwise violated any Intellectual Property rights of Caldera Systems and its Subsidiaries. (ii) The Caldera Systems Schedule of Exceptions identifies (a) each patent which has been issued or assigned to Caldera Systems or any of its Subsidiaries, (b) each pending patent application which has been filed by or for Caldera Systems or any of its Subsidiaries, (c) each trademark or service mark registration issued or assigned to Caldera Systems or any of its Subsidiaries, (d) each pending trademark or service mark application which has been filed by or for Caldera Systems or any its Subsidiaries, (e) each copyright registration issued or assigned to Caldera Systems or any of its Subsidiaries, (f) each pending copyright application which has been filed by or for Caldera Systems or any of its Subsidiaries, and (g) each license which Caldera Systems and its Subsidiaries has granted to any third party with respect to any of Caldera Systems's Intellectual Property excluding licenses to end users of Company products granted in the ordinary course of business. Caldera Systems has delivered to Lineo correct and complete copies of all such patents, registrations, applications, and licenses (as amended to date). The Caldera Systems Schedule of Exceptions also identifies each trade name and each unregistered trademark or service mark owned or claimed by any of Caldera Systems and its Subsidiaries in connection with any of their businesses. With respect to each IP item identified in the Caldera Systems Schedule of Exceptions: (A) Caldera Systems and its Subsidiaries possess all right, title, and interest in and to the IP item, free and clear of any mortgage, lien, claim, license, or other encumbrance; (B) to the best of Caldera Systems's and its Subsidiaries' knowledge, the IP item is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; 14 (C) to the best of Caldera Systems's or its Subsidiaries' knowledge, no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or, to the best of Caldera Systems's or its Subsidiaries' knowledge, and the knowledge of the directors and officers (and employees with responsibility for Intellectual Property matters) of Caldera Systems and its Subsidiaries, is threatened which challenges the legality, validity, enforceability, use, or ownership of the IP item; and (D) none of Caldera Systems and its Subsidiaries has ever agreed to indemnify any Person for or against any interference, infringement, misappropriation, or other conflict with respect to the IP item. (iii) The Caldera Systems Schedule of Exceptions identifies each item of Intellectual Property that any third party owns and licenses to any of Caldera Systems and its Subsidiaries, excluding licenses to commercially available software products (e.g., Windows, Microsoft Office, etc.) used by any of Caldera Systems and its Subsidiaries as an end user. Caldera Systems has delivered to Lineo correct and complete copies of all agreements applicable to such licenses (as amended to date). The term "license" is intended to include "sublicense." With respect to each such license and agreement required to be identified in the Caldera Systems Schedule of Exceptions, to the best of Caldera Systems's or its Subsidiaries' knowledge; the license and agreement are legal, valid, binding, enforceable, and in full force and effect; the license and agreement will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms on the day immediately following the Closing; no party to the agreement is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default or permit termination, modification, or acceleration thereunder; no party to the agreement has repudiated any provision thereof; the license is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or is threatened which challenges the legality, validity, or enforceability of the license or agreement. (iv) To the best of Caldera Systems's and its Subsidiaries' knowledge and to the knowledge of the directors and officers (and employees with responsibility for Intellectual Property matters) of Caldera Systems and its Subsidiaries, neither Caldera Systems nor any of its Subsidiaries will infringe, misappropriate, or otherwise violate any Intellectual Property rights of third parties as a result of the continued operation of its businesses as presently conducted and as presently proposed to be conducted. 3.18 MANUFACTURING AND MARKETING RIGHTS. Except as set forth on the Caldera Systems Schedule of Exceptions, neither Caldera Systems nor any of its Subsidiaries has granted rights to manufacture, produce, assemble, license, market or sell its products 15 to any other person and is not bound by any agreement that affects Caldera Systems's or such Subsidiary's exclusive right to develop, manufacture, assemble, distribute, market or sell its products. 3.19 EMPLOYEES; EMPLOYEE COMPENSATION. To the best of Caldera Systems's and its Subsidiary's knowledge, the relationships between Caldera Systems and its Subsidiaries and their respective employees are good and no labor dispute or claims are pending or threatened. None of Caldera Systems's or any of its Subsidiary's employees belongs to any union or collective bargaining unit. To the best of Caldera Systems's and its Subsidiaries' knowledge, Caldera Systems and each of its Subsidiaries has complied in all material respects with all applicable state and federal laws related to employment. To the best of Caldera Systems's and it Subsidiary's knowledge, no employee of Caldera Systems or any such Subsidiary is or will be in violation of any judgment, decree or order, or any term of any employment contract, patent disclosure agreement, or other contract or agreement relating to the relationship of any such employee with Caldera Systems, any of its Subsidiaries, or any other party because of the nature of the business conducted or presently proposed to be conducted by Caldera Systems or any of its Subsidiaries or to the use by the employee of his or her best efforts with respect to such business. Caldera Systems is not a party to or bound by any currently effective employment contract, deferred compensation agreement, incentive plan, profit sharing plan, retirement agreement or other employee compensation agreement. Neither Caldera Systems nor any of its Subsidiaries is aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with Caldera Systems or any of its Subsidiaries, nor does Caldera Systems or any of its Subsidiaries have a present intention to terminate the employment of any of the foregoing. Subject to general principles related to wrongful termination of employees, the employment of each officer and employee of Caldera Systems and each of its Subsidiaries is terminable at the will of Caldera Systems or such Subsidiary, as applicable. 16 3.20 TAX RETURNS, PAYMENTS, AND ELECTIONS. Caldera Systems and each of its Subsidiaries has timely filed all tax returns and reports (federal, state and local) as required by law. These returns and reports are true and correct in all material respects. Caldera Systems and each of its Subsidiaries has paid all taxes and other assessments due, except those contested by it in good faith. Neither Caldera Systems nor any of its Subsidiaries has elected pursuant to the Code, to be treated as an S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a material effect on the business, properties, prospects or financial condition of Caldera Systems or any of its Subsidiaries. Neither Caldera Systems nor any of its Subsidiaries has ever had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. None of Caldera Systems's or any Subsidiary's income tax returns (federal or otherwise) and none of its state income or franchise tax or sales or use tax returns has ever been audited by governmental authorities. Caldera Systems and each of its Subsidiaries has made adequate provisions on its books of account for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. Caldera Systems and each of its Subsidiaries has withheld or collected from each payment made to each of its employees, the amount of all taxes, including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositaries. 3.21 ENVIRONMENTAL AND SAFETY LAWS. Neither Caldera Systems nor any of its Subsidiaries is in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 17 SECTION 4. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE PARTIES (a) Each party purchasing securities hereunder represents to the other that (i) it has such knowledge and experience in financial and business matters and in private placement transactions of securities of companies in a similar stage of development as the other party that it is capable of evaluating the merits and risks of the investment contemplated by such purchasing party under this Agreement and making an informed investment decision with respect thereto, (ii) it is able to bear the economic risk of such investment and can afford to sustain a substantial loss on such investment, (iii) it is an "accredited investor" as such term is defined in Rule 501 under the Securities Act, (iv) it is purchasing the securities purchased by it hereunder for its own account, for investment only and not with a view to, or any present intention of, effecting a resale ordistribution of or selling or granting any participation in such securities or any part thereof, (v) it realizes that the basis for any exemption pursuant to which the securities such party is purchasing hereunder have been issued may not be present if, notwithstanding the representations made by such party hereunder, such party has in mind merely acquiring the securities is is purchasing hereunder for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise and (vi) it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to such securities. Each party acknowledges that the securities purchased by it hereunder have not been registered under the Securities Act or the securities laws of any state or other jurisdiction in reliance on an exemption from registration thereunder and reliance on such exemption by the issuer of such securities is predicated on the representations and warranties set forth in this Agreement. Furthermore, each party purchasing securities hereunder acknowledges that such securities cannot be disposed of unless they are subsequently registered under the Securities Act and any applicable state laws or an exemption from such registration is available. (b) Each party understands that the securities have not been registered under the Securities Act, that there is no public market for the securities, and that it must bear the economic risk of investment for an indefinite period of time. In particular, such party is aware that the securities purchased by it hereunder may not be sold pursuant to Rule 144 promulgated under the Securities Act unless all of the conditions of that Rule are met. Among the conditions for use of Rule 144 may be the availability of current information to the public about the issuer of such securities. Such information is not now available and such issuer has no present plans to make such information available. (c) Each party represents that there are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of such party. Such party (the "Indemnifying Party") agrees to indemnify and to hold harmless the other from any liability for any commission or compensation in the nature of a finder's fee (and the cost and expenses of defending against such liability or asserted liability) for which such Indemnifying Party or any of its officers, partners, employees or representatives is responsible. (d) Each party believes it has received all the information it considers necessary or appropriate for deciding whether to purchase the securities purchased by it hereunder. Such party further represents that it has had an opportunity to ask questions and receive answers from the party issuing such securities regarding the terms and conditions of the offering of such securities and the business, properties, prospects and financial condition of such issuer and to obtain additional information (to the extent such issuer possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to such party or to which such party had access. The foregoing, however, does not limit or modify the representations and warranties of such issuer in Section 2 or 3, as applicable, of this Agreement or the right of such party to rely thereon. 18 SECTION 5. CONDITIONS TO CLOSING 5.1 CONDITIONS OF CALDERA SYSTEMS'S OBLIGATIONS AT CLOSING. The obligations of Caldera Systems under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions, the waiver of which shall not be effective against Caldera Systems unless it consents in writing thereto: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Lineo and its Subsidiaries contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. (b) PERFORMANCE. Lineo shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. (c) QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the L:ineo Shares pursuant to this Agreement shall be duly obtained and effective as of the Closing. (d) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Caldera Systems's counsel, which shall have received all such counterpart original and certified or other copies of such documents as it may reasonably request. 5.2 CONDITIONS OF LINEO'S OBLIGATIONS AT CLOSING. The obligations of Lineo under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions, the waiver of which shall not be effective against Lineo unless it consents in writing thereto: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Caldera Systems and its Subsidiaries contained in Section 3 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. (b) PERFORMANCE. 19 Caldera Systems and its Subsidiaries shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. (c) QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Caldera Systems Shares pursuant to this Agreement shall be duly obtained and effective as of the Closing. (d) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Lineo's counsel, which shall have received all such counterpart original and certified or other copies of such documents as it may reasonably request. SECTION 6. POST-CLOSING COVENANTS OF CALDERA SYSTEMS 6.1 FINANCIAL STATEMENTS. Caldera Systems shall deliver to Lineo: (a) as soon as available, but in any event within 45 days after the end of each quarterly accounting period in each fiscal year, unaudited statements of income and cash flows of Caldera Systems for such quarterly period and for the period from the beginning of the fiscal year to the end of such quarter, and unaudited balance sheets of Caldera Systems as of the end of such quarterly period, setting forth in each case comparisons to the corresponding period in the preceding fiscal year, and all such statements shall be prepared in accordance with generally accepted accounting principles, consistently applied, subject to the absence of footnote disclosures and to normal year-end adjustments for recurring accruals, and shall be certified by Caldera Systems's chief financial officer; (b) within 90 days after the end of each fiscal year, audited statements of income and cash flows of Caldera Systems for such fiscal year, and audited balance sheets of Caldera Systems as of the end of such fiscal year, setting forth in each case comparisons to the preceding fiscal year, all prepared in accordance with generally accepted accounting principles, consistently applied, and accompanied by, with respect to the consolidated portions of such statements, an opinion containing no exceptions or qualifications (except for qualifications regarding specified contingent liabilities) of an independent accounting firm of recognized national standing; and (c) prompt notification of any matter or matters which would reasonably be expected to, individually or in the aggregate, have a material adverse effect on the financial condition, operating results, business, assets, operations, employee relations or customer or supplier relations of Caldera Systems. Each of the financial statements referred to in subparagraphs (a) and (b) shall be true and correct in all material respects as of the dates and for the periods stated therein, subject in the case of the unaudited financial statements to changes resulting from normal year-end adjustments for recurring accruals (none of 20 which would, alone or in the aggregate, be materially adverse to the financial condition, operating results, business, assets, operations, business prospects, employee relations or customer or supplier relations of Caldera Systems). 6.2 CURRENT PUBLIC INFORMATION. At all times after Caldera Systems has filed a registration statement with the Securities and Exchange Commission pursuant to the requirements of either the Securities Act or the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), Caldera Systems shall file all reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the Securities and Exchange Commission thereunder and shall take such further action with respect to the provision of information as any holder or holders of Caldera Systems Shares may reasonably request, all to the extent required to enable such holders to sell Securities pursuant to Rule 144 adopted by the Securities and Exchange Commission under the Securities Act (as such rule may be amended from time to time) or any similar rule or regulation hereafter adopted by the Securities and Exchange Commission. Upon request, Caldera Systems shall deliver to any holder of Caldera Systems Shares a written statement as to whether it has complied with such requirements. SECTION 7. POST-CLOSING COVENANTS OF LINEO 7.1 FINANCIAL STATEMENTS. Lineo shall deliver to Caldera Systems: (a) audited financial statements for Lineo for the fiscal year ended October 31, 1999 including balance sheet, profit and loss statement, statement of stockholders' equity and statement of cash flows (including notes thereto) which Lineo expects to be completed by January 31, 2000; (b) as soon as available, but in any event within 45 days after the end of each quarterly accounting period in each fiscal year, unaudited statements of income and cash flows of Lineo for such quarterly period and for the period from the beginning of the fiscal year to the end of such quarter, and unaudited balance sheets of Lineo as of the end of such quarterly period, setting forth in each case comparisons to the corresponding period in the preceding fiscal year, and all such statements shall be prepared in accordance with generally accepted accounting principles, consistently applied, subject to the absence of footnote disclosures and to normal year-end adjustments for recurring accruals, and shall be certified by Lineo's chief financial officer; (c) within 90 days after the end of each fiscal year, audited statements of income and cash flows of Lineo for such fiscal year, and audited balance sheets of Lineo as of the end of such fiscal year, setting forth in each case comparisons to the preceding fiscal year, all prepared in accordance with generally accepted accounting principles, consistently applied, and accompanied by, with respect to the consolidated portions of such statements, an opinion containing no exceptions or qualifications (except for qualifications regarding specified contingent liabilities) of an independent accounting firm of recognized national standing; and (d) prompt notification of any matter or matters which would reasonably be expected to, individually or in the aggregate, have a material adverse effect on the financial condition, operating results, business, assets, operations, employee relations or customer or supplier relations of Lineo. 21 Each of the financial statements referred to in subparagraphs (a), (b) and (c) shall be true and correct in all material respects as of the dates and for the periods stated therein, subject in the case of the unaudited financial statements to changes resulting from normal year-end adjustments for recurring accruals (none of which would, alone or in the aggregate, be materially adverse to the financial condition, operating results, business, assets, operations, business prospects, employee relations or customer or supplier relations of Lineo). 7.2 CURRENT PUBLIC INFORMATION. At all times after Lineo has filed a registration statement with the Securities and Exchange Commission pursuant to the requirements of either the Securities Act or the Exchange Act, Lineo shall file all reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the Securities and Exchange Commission thereunder and shall take such further action with respect to the provision of information as any holder or holders of Lineo Shares may reasonably request, all to the extent required to enable such holders to sell Securities pursuant to Rule 144 adopted by the Securities and Exchange Commission under the Securities Act (as such rule may be amended from time to time) or any similar rule or regulation hereafter adopted by the Securities and Exchange Commission. Upon request, Lineo shall deliver to any holder of Lineo Shares a written statement as to whether it has complied with such requirements. 7.3 LINEO IP SCHEDULE. Lineo shall deliver the IP Schedule to Caldera Systems within thirty days of the date of this Agreement. SECTION 8. GENERAL 8.1 AMENDMENTS, WAIVERS AND CONSENTS. For the purposes of this Agreement and all agreements executed pursuant hereto, no course of dealing between or among any of the parties hereto and no delay on the part of any party hereto in exercising any rights hereunder or thereunder shall operate as a waiver of the rights hereof and thereof. No covenant or other provision hereof may be waived otherwise than by a written instrument signed by the party or parties so waiving such covenant or other provision. No amendment to this Agreement may be made without the written consent of all of the parties hereto. 8.2 LEGEND ON SECURITIES. The parties acknowledge and agree that the following legend shall be typed on each certificate evidencing any of the securities issued hereunder held at any time by a party: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES AND BLUE SKY LAWS RELATING TO THE DISPOSITION OF SECURITIES, PROVIDED THAT AN OPINION OF COUNSEL TO SUCH EFFECT IS PROVIDED TO 22 THE ISSUER OF SUCH SECURITIES, IN FORM SATISFACTORY TO SUCH ISSUER, IN CONNECTION THEREWITH. 8.3 GOVERNING LAW. This Agreement shall be deemed to be a contract made under, and shall be construed in accordance with, the laws of the State of Utah, as applied to agreements among Utah residents entered into and to be performed entirely within Utah, without giving effect to conflict of laws principles thereof. 8.4 SECTION HEADINGS. The descriptive headings in this Agreement have been inserted for convenience only and shall not be deemed to limit or otherwise affect the construction or interpretation of any provision thereof or hereof. 8.5 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute but one and the same document. 8.6 ENTIRE AGREEMENT. This Agreement, including the exhibits, documents and instruments referred to herein or therein, constitutes the entire agreement, and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. 8.7 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS The warranties, representations and covenants of Lineo and Caldera Systems contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing. 8.8 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including permitted transferees of any securities issued hereunder). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 8.9 NOTICES. Unless otherwise provided, all notices and other communications required or permitted under this Agreement shall be in writing and shall be mailed by United States first-class mail, postage prepaid, sent by facsimile or delivered personally by hand or by a nationally recognized courier addressed to the party to be notified at the address or facsimile number indicated for such person at the address set forth below, or at such other address or facsimile number as such party may designate by ten (10) days' advance written notice to the other parties hereto: If to Caldera Systems: Caldera Systems, Inc. 23 240 West Center Street Orem, Utah 84057 Attention: President If to Lineo: Lineo, Inc. 383 South 520 West Lindon, Utah 84042 Attention: Chief Financial Officer All such notices and other written communications shall be effective on the date of mailing, confirmed facsimile transfer or delivery. 8.10 ATTORNEYS' FEES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to be reimbursed by the non-prevailing party for reasonable attorneys' fees, costs and disbursements, in addition to any other relief to which such party may be entitled. 8.11 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. SECTION 9 DEFINITIONS For the purposes of this Agreement, each of the following terms shall have the meaning set forth opposite such term below: "knowledge" of a person shall mean actual knowledge of such person after (i) with respect to representations, warranties and statements made by or with respect to Caldera Systems, inquiry of the officers and directors of Caldera Systems and those management-level employees of Caldera Systems who have responsibility for the area of inquiry and (ii) with respect to representations, warranties and statements made by or with respect to Lineo, inquiry of the officers and directors of Lineo and those management-level employees of Lineo who have responsibility for the area of inquiry. "Intellectual Property" shall mean (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, trade names, and corporate names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all mask works and all applications, registrations, and renewals in connection therewith, (e) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (f) all computer software (including data and related documentation), (g) 24 all other proprietary rights, and (h) all copies and tangible embodiments thereof (in whatever form or medium). "Subsidiary" shall mean any corporation with respect to which a specified party (or a Subsidiary thereof) owns a majority of the common stock or has the power to vote or direct the voting of sufficient securities to elect a majority of the directors. "Subsidiaries" shall mean, for purposes of this Agreement, each Subsidiary of a party, collectively and individually. 25 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. Lineo, Inc., a Utah corporation By: /s/ BRYAN SPARKS ---------------------------------------- Bryan Sparks, President and CEO Caldera Systems, Inc., a Utah corporation By: /s/ RANSOM LOVE ---------------------------------------- Ransom Love, President and CEO EX-10.12 12 INVESTORS RIGHTS AGREEMENT 1 Exhibit 10.12 SECOND AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT THIS SECOND AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT (this "Agreement") is made and entered into as of the 5th day of January, 2000, by and among CALDERA SYSTEMS, INC., a Utah corporation (the "Company"), THE CANOPY GROUP, INC., a Utah corporation ("Shareholder"), MTI TECHNOLOGY CORPORATION, a Delaware corporation ("Holder"), and the investors listed on Schedule A attached hereto (sometimes referred to herein individually as an "Investor" and collectively as the "Investors"). The Shareholder, the Holder, and the Investors are sometimes referred to herein individually as an "Owner" and collectively as the "Owners". WHEREAS, certain of the parties hereto have entered into an Amended and Restated Investors Rights Agreement dated as of the 30th day of December, 1999 (the "1999 Investors Rights Agreement"); and WHEREAS, such parties desire to amend and restate such 1999 Investors Rights Agreement"; NOW, THEREFORE, the parties hereto hereby agree and acknowledge that the 1999 Investors Rights Agreement is hereby superceded, amended and restated in its entirety, as follows: SECTION 1 Registration Rights 1.1 Certain Definitions. As used in this Agreement, the following terms shall have the meanings set forth below. (a) "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. (b) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. (c) "holder of Registrable Securities" shall mean each Owner so long as it holds any Registrable Securities and any holder of Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with Section 1.13 hereof. (d) "Other Stockholders" shall mean persons other than holders of Registrable Securities who, by virtue of agreements with the Company, are entitled to include their securities in certain registrations hereunder. -1- 2 (e) "Qualified Public Offering" means the closing of a firm commitment underwritten public offering pursuant to an effective registration statement filed under the Securities Act, covering the offer and sale of Common Stock for the account of the Company at a price per share equal to or greater than $8.00 and in which the aggregate public offering price (before deduction of underwriters' discounts and qualifications) equals or exceeds $25 million. (f) "Registrable Securities" means (i) any Common Stock issued or issuable upon the conversion of any Preferred Stock held by the Owners, and (ii) any Common Stock issued or issuable with respect to the securities referred to in clause (i) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when they have been distributed to the public pursuant to a offering registered under the Securities Act or sold to the public in compliance with Rule 144. For purposes of this Agreement, a Person shall be deemed to be a holder of Registrable Securities, and the Registrable Securities shall be deemed to be in existence, whenever such Person has the right to acquire directly or indirectly such Registrable Securities (upon conversion or exercise in connection with a transfer of securities or otherwise, but disregarding any restrictions or limitations upon the exercise of such right), whether or not such acquisition has actually been effected, and such Person shall be entitled to exercise the rights of a holder of Registrable Securities hereunder. (g) The terms "register," "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. (h) "Registration Expenses" shall mean all expenses incurred in effecting any registration pursuant to this Agreement, including, without limitation, all registration, qualification, and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, the fees and disbursements of one (1) special counsel for the participating holders of Registrable Securities, blue sky fees and expenses, and expenses of any regular or special audits incident to or required by any such registration, but shall not include Selling Expenses and the compensation of regular employees of the Company, which shall be paid in any event by the Company. (i) "Restricted Securities" means (i) any equity securities of the Company, including, without limitation, any Common Stock or Preferred Stock, now or hereafter held by the Owners, (ii) any Common Stock issued or issuable upon the conversion of any Preferred Stock held by the Owners, and (iii) any Common Stock issued or issuable with respect to the securities referred to in clauses (i) and (ii) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. For purposes of this Agreement, a Person shall be deemed to be a holder of Restricted Securities, and the Restricted Securities shall be deemed to be in existence, whenever such Person has the right to acquire directly or indirectly such Restricted Securities (upon conversion or exercise in connection with a transfer of securities or otherwise, but disregarding any restrictions or limitations upon the exercise of such right), whether or not such acquisition -2- 3 has actually been effected, and such Person shall be entitled to exercise the rights of a holder of Restricted Securities hereunder. (j) "Rule 144" shall mean Rule 144 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission. (k) "Rule 145" shall mean Rule 145 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission. (l) "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. (m) "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and fees and disbursements of counsel for any holder of Registrable Securities (other than the fees and disbursements of counsel included in Registration Expenses). (n) "Transfer" means any direct or indirect transfer, donation, sale, assignment, pledge, hypothecation, granting a security interest in or other disposal or attempt at disposing all or any portion of a security or of any rights. 1.2 Requested Registration. (a) Request for Registration. If the Company shall receive, from holders of Registrable Securities holding at least twenty-two percent (22%) of the then-outstanding Registrable Securities (the "Initiating Holders") at any time or times not earlier than six (6) months after the effective date of the first registration statement filed by the Company covering an underwritten offering of any of its securities to the general public, a written request that the Company effect any registration with respect to all or a part of the Registrable Securities, the aggregate proceeds of which (after deduction for underwriter's discounts and expenses related to the issuance) equal or exceed $1,000,000 the Company will: (i) promptly give written notice of the proposed registration to all other holders of Registrable Securities; and (ii) as soon as practicable, use its best efforts to effect such registration (including, without limitation, filing post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws, and appropriate compliance with the Securities Act) and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any holder or holders of Registrable Securities joining in such request as are specified in a written request received by the Company within twenty (20) days after such written notice from the Company is deemed received by all such holders. -3- 4 The Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 1.2: (A) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (B) after the Company has initiated two such registrations pursuant to this Section 1.2(a) (counting for these purposes only registrations which have been declared or ordered effective and pursuant to which the holders of Registrable Securities are able to register and sell all of the Registrable Securities requested to be included in such registration and registrations which have been withdrawn by the holders of Registrable Securities as to which the holders of Registrable Securities have not elected to bear the Registration Expenses pursuant to Section 1.6 hereof and would, absent such election, have been required to bear such expenses); (C) during the period starting with the date of filing of, and ending on a date (1) one hundred eighty (180) days after the effective date of, the first Company-initiated registration or (2) in the case of subsequent Company-initiated registrations, one hundred twenty (120) days after the effective date of such registration; provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; (D) if the Company notifies the holders of Registrable Securities within thirty (30) calendar days of such request of the Company's intent to file a registration statement for a public offering of its shares within the following sixty (60) calendar days; or (E) if the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 in connection with a request made pursuant to Section 1.7 below. (b) Subject to the foregoing clauses (A) through (E), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the holders of Registrable Securities; provided, however, that if (i) in the good faith judgment of the Board of Directors of the Company, such registration would be seriously detrimental to the Company and the Board of Directors of the Company concludes, as a result, that it is essential to defer the filing of such registration statement at such time, and (ii) the Company shall furnish to such holders of Registrable Securities a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company for such registration statement to be filed in the near future and that it is, therefore, essential to defer the filing of such registration statement, then the Company shall have the right to defer such filing (except as provided in clause (C) above) for a period of not more than ninety (90) days after receipt of the request of such foregoing holders of Registrable Securities, and, provided further, that the Company shall not defer its obligation in this manner more than once in any consecutive twelve (12) month period. The registration statement filed -4- 5 pursuant to the request of the holders of Registrable Securities may include other securities of the Company with respect to which registration rights have been granted, and may include securities of the Company being sold for the account of the Company, in each case subject to Section 1.15. (c) Underwriting. If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as part of their request made pursuant to this Section 1.2 or any request pursuant to Section 1.7 and the Company shall include such information in the written notice referred to in Section 1.2(a) or Section 1.7 (a), as applicable. The right of any holders of Registrable Securities to registration pursuant to Section 1.2 shall be conditioned upon such holders' participation in such underwriting and the inclusion of such holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by the holders of at least twenty-two percent (22%) of the Registrable Securities and such holder with respect to such participation and inclusion) to the extent provided herein. A holder of Registrable Securities may elect to include in such underwriting all or a part of the Registrable Securities he, she or it holds. (d) (d) Procedures. For any underwritten registration pursuant to this Section 1.2, if the Company shall request inclusion of securities being sold for its own account, or if other persons shall request inclusion, the Initiating Holders shall, on behalf of all holders of Registrable Securities, offer to include such securities in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Section 1.2 (including Section 1.14). The Company shall (together with all holders of Registrable Securities and other persons proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by the holders of a majority of the Registrable Securities included in such registration, which underwriters are reasonably acceptable to the Company. Notwithstanding any other provision of this Section 1.2, if the representative of the underwriters advises the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, the number of shares to be included in the underwriting or registration shall be allocated as set forth in Section 1.15 hereof. If a person who has requested inclusion in such registration as provided above does not agree to the terms of any such underwriting, such person shall be excluded therefrom by written notice from the Company, the underwriter or the Initiating Holders. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall also be withdrawn from such registration. If shares are so withdrawn from the registration and if the number of shares to be included in such registration was previously reduced as a result of marketing factors pursuant to this Section 1.2(d), then the Company shall offer to all holders of Registrable Securities who have retained rights to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among such holders of Registrable Securities requesting additional inclusion in accordance with Section 1.15. 1.3 Special Registration. (a) Request for Registration. Notwithstanding anything in this Agreement to the contrary and in addition to the registration rights provided for in Section 1.2, if the Company shall receive from Holder at any time or times not earlier than six (6) months after the effective -5- 6 date of the first registration statement filed by the Company covering an underwritten offering of any of its securities to the general public, a written request that the Company effect any registration with respect to all or a part of an aggregate of up to 1,500,000 shares held by Holder (the "Holder Shares"), the Company will: (i) promptly given written notice of the proposed registration to all other holders of Registrable Securities; and (ii) as soon as practicable, use its best efforts to effect such registration (including, without limitation, filing post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws, and appropriate compliance with the Securities Act) and as would permit or facilitate the sale and distribution of all or such portion of such Holder Shares as are specified in such request, together with all or such portion of the Registrable Securities of any holder or holders of Registrable Securities joining in such request as are specified in a written request or requests received by the Company within twenty (20) days after such written notice from the Company is deemed received by all such holders. The Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 1.3: (A) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act. (B) After the Company has initiated two such registrations pursuant to this Section 1.3(a) (counting for these purposes only registrations which have been declared or ordered effective and pursuant to which the Holder is able to register and sell all of the Holder Shares requested to be included in such registration); (C) During the period starting with the date of filing of, and ending on a date (1) one hundred eighty (180) days after the effective date of, the first Company-initiated registration or (2) in the case of subsequent Company-initiated registrations, one hundred twenty (120) days after the effective date of such registration; provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective and provided, further, that in the case of subparagraph (2) of this Section 1.3(a)(ii)(C) that the portion of the Holder Shares requested by Holder to be included in such subsequent Company-initiated registration are included in the Registrable Securities in such registration; or (D) If the Company notifies the holders of Registrable Securities within thirty (30) calendar days of such request of the Company's intent to file a registration statement for a public offering of its shares within the following sixty (60) calendar days; provided that the Company agrees to include the Holder Shares in such registration upon Holder's request. (b) Subject to the foregoing clauses (A) through (D), the Company shall file a registration statement covering the Holder Shares and other Registrable Securities so requested to be registered as soon as practicable after receipt of the request of the Holder; provided, -6- 7 however, that if (i) in the good faith judgment of the Board of Directors of the Company, such registration would be seriously detrimental to the Company and the Board of Directors of the Company concludes, as a result, that it is essential to defer the filing of such registration statement at such time, and (ii) the Company shall furnish to such holders of Registrable Securities a certificate signed by the President of the company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company for such registration statement to be filed in the near future and that it is, therefore, essential to defer the filing of such registration statement, then the Company shall have the right to defer such filing (except as provided in clause (C) above) for a period of not more than ninety (90) days after receipt of the request of the Holder pursuant to this Section 1.3, and, provided further, that the Company shall not defer its obligation in this manner more than once in any consecutive twelve (12) month period. The registration statement filed pursuant to the request of the Holder may include other securities of the Company with respect to which registration rights have been granted, and may include securities of the Company being sold for the account of the Company, in each case subject to Section 1.15. (c) Underwriting. If the Holder intends to distribute the Holder Shares and other Registrable Securities covered by their request by means of an underwriting, it shall so advise the Company as part of its request made pursuant to this Section 1.3 and the Company shall include such information in the written notice referred to in Section 1.3(a). The right of any other holders of Registrable Securities to registration pursuant to Section 1.3 shall be conditioned upon such holders' participation in such underwriting and the inclusion of such holder's Registrable Securities in the underwriting (unless otherwise agreed by the Holder with respect to such participation and inclusion) to the extent provided herein. A holder of Registrable Securities may elect to include in such underwriting all or a part of the Registrable Securities he, she or it holds. (d) Procedures. For any underwritten registration pursuant to this Section 1.3, if the Company shall request inclusion of securities being sold for its own account, or if other persons shall request inclusion, the Holder shall, on behalf of all holders of Registrable Securities, offer to include such securities in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Section 1.3 (including Section 1.14). The Company shall (together with all holders of Registrable Securities and other persons proposing to distribute their securities through such underwriting) enter into underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by the Holder, which underwriters are reasonably acceptable to the Company. Notwithstanding any other provision of this Section 1.3, if the representative of the underwriters advises the Holder in writing that marketing factors require a limitation on the number of shares to be underwritten, the number of shares to be included in the underwriting or registration shall be allocated as set forth in Section 1.15 hereof. If a person who has requested inclusion in such registration as provided above does not agree to the terms of any such underwriting, such person shall be excluded therefrom by written notice from the Company, the underwriter or the Holder. The securities so excluded shall also be withdrawn from registration. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall also be withdrawn from such registration. If shares are so withdrawn from the registration and if the number of shares to be included in such registration was previously reduced as a result of marketing factors pursuant to this Section 1.3(d), then the Company shall offer to the Holder, -7- 8 to the extent the Holder Shares for which registration has been requested were cut back and then to all other holders of Registrable Securities and Other Stockholders who have retained rights to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among the holders requesting additional inclusion in accordance with Section 1.15. 1.4 Company Registration. (a) If the Company shall determine to register any of its securities either for its own account or the account of a security holder or holders exercising their respective demand registration rights (other than pursuant to Section 1.2 or 1.7 hereof), other than a registration relating solely to employee benefit plans, or a registration relating solely to a Rule 145 transaction, or a registration on any registration form that does not permit secondary sales, the Company will: (i) promptly give to each holder of Registrable Securities written notice thereof; and (ii) use its best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), except as set forth in Section 1.4(b) hereof, and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by any holder of Registrable Securities and received by the Company within ten (10) calendar days after the written notice from the Company described in clause (i) above is deemed received by such holder. Such written request may specify all or a part of a holder's Registrable Securities. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the holders of Registrable Securities as a part of the written notice given pursuant to Section 1.4(a)(i) hereof. In such event, the right of any holder of Registrable Securities to registration pursuant to this Section 1.4 shall be conditioned upon such holder's participation in such underwriting and the inclusion of such holder's Registrable Securities in the underwriting to the extent provided herein. All holders of Registrable Securities proposing to distribute their securities through such underwriting shall (together with the Company and the other holders of securities of the Company with registration rights to participate therein distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company. Notwithstanding any other provision of this Section 1.4, if the representative of the underwriters advises the Company in writing that marketing factors require a limitation on the number of shares to be underwritten, the representative may (subject to the limitations set forth below) exclude all Registrable Securities from, or limit the number of Registrable Securities to be included in, the registration and underwriting. If the registration is the first Company-initiated registered offering of the Company's securities to the general public, the Company may limit, to the extent so advised by the underwriters, the amount of securities (including Registrable Securities) to be included in the registration by the Company's shareholders (including the holders of Registrable Securities), or may exclude, to the extent so advised by the underwriters, -8- 9 such underwritten securities entirely from such registration. If such registration is the second or any subsequent Company-initiated registered offering of the Company's securities to the general public, the Company may limit, to the extent so advised by the underwriters, the amount of securities to be included in the registration; provided, however, that the aggregate value of Registrable Securities to be included in such registration by the holders of Registrable Securities may not be so reduced to less than thirty percent (30%) of the total value of all securities included in such registration. The Company shall so advise all holders of Registrable Securities requesting registration, and the number of shares of securities that are entitled to be included in such registration and underwriting (other than shares to be included by the Company) shall be allocated as set forth in Section 1.15 hereof. If any person does not agree to the terms of any such underwriting, he, she or it shall be excluded therefrom by written notice from the Company or the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. If shares are so withdrawn from the registration and if the number of shares of Registrable Securities to be included in such registration was previously reduced as a result of marketing factors, the Company shall then offer to all holders of Registrable Securities who have retained the right to include Registrable Securities in the registration the right to include additional shares of Registrable Securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares of Registrable Securities to be allocated among the holders requesting additional inclusion in accordance with the terms of this Agreement. 1.5 Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under Section 1.4 prior to the effectiveness of such registration whether or not any holder of Registrable Securities has elected to include securities in such registration. The Registration Expenses of such withdrawn registration shall be borne by the Company in accordance with Section 1.6 hereof. 1.6 Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Sections 1.2, 1.3, 1.4 and 1.7 hereof (including the expenses of one (1) special counsel to the participating holders of Registrable Securities and the reasonable fees and disbursements of each additional counsel retained by any holder of Registrable Securities for the purpose of rendering a legal opinion on behalf of such holder required by the Company in connection with any underwritten registration) shall be borne by the Company. All Selling Expenses relating to securities so registered shall be borne by the holders of such securities pro rata on the basis of the number of shares of securities so registered on their behalf. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 1.2, 1.3, or 1.7, the request of which has been subsequently withdrawn by the Initiating Holders unless the withdrawal is based upon material adverse information concerning the Company of which the Initiating Holders were not aware at the time of such request. 1.7 Registration on Form S-3. (a) After its initial public offering, the Company shall use its best efforts to qualify for registration on Form S-3 or any comparable or successor form or forms. After the Company has qualified for the use of Form S-3, in addition to the rights contained in the -9- 10 foregoing provisions of this Section 1.7, the holders of Registrable Securities shall have the right to request registrations on Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended methods of disposition of such shares by such holder or holders), provided, however, that the Company shall not be obligated to effect any such registration if the holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) on Form S-3 at an aggregate price to the public of less than $500,000 or in the circumstances described in clause (A) of Section 1.2(a)(ii), or if, in a given twelve (12) month period the Company has effected two (2) such registrations in such period. (b) If a request complying with the requirements of Section 1.7(a) hereof is delivered to the Company, the Company will: (i) promptly give written notice of the proposed registration to all other holders of Registrable Securities; and (ii) as soon as practicable, use its best efforts to effect such registration (including, without limitation, filing post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws, and appropriate compliance with the Securities Act) and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any holder or holders joining in such request as are specified in a written request received by the Company within twenty (20) days after such written notice from the Company is deemed received by such holder. The Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 1.7 in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification, or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act. (c) Subject to the limitations set forth in Section 1.7(a) and (b) above, the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the holders of Registrable Securities; provided, however, that if (i) in the good faith judgment of the Board of Directors of the Company, such registration would be seriously detrimental to the Company and the Board of Directors of the Company concludes, as a result, that it is essential to defer the filing of such registration statement at such time, and (ii) the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company for such registration statement to be filed in the near future and that it is, therefore, essential to defer the filing of such registration statement, then the Company shall have the right to defer such filing for the period during which such disclosure would be seriously detrimental, provided that the Company may not defer the filing for a period of more than sixty (60) days after receipt of the request of the holders of Registrable Securities, and, provided further, that the -10- 11 Company shall not defer its obligation in this manner more than once in any consecutive twelve (12) month period. The registration statement filed pursuant to the request of the holders of Registrable Securities may, subject to the provisions of Sections 1.7(b) and 1.15 hereof, include other securities of the Company with respect to which registration rights have been granted, and may include securities of the Company being sold for the account of the Company, provided the inclusion of securities of the Company does not reduce the number of Registrable Securities to be registered by the holders of Registrable Securities. (d) Underwriting. If the registration is for an underwritten offering, the provisions of Sections 1.7(d) and 1.7(e) hereof shall apply to such registration. In such event, the right of any holder of Registrable Securities to registration pursuant to Section 1.7 hereof shall be conditioned upon such holder's participation in such underwriting and the inclusion of such holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the holders and such holder with respect to such participation and inclusion) to the extent provided herein. A holder of Registrable Securities may elect to include in such underwriting all or a part of the Registrable Securities he, she or it holds. (e) Procedures. For any underwritten registration pursuant to this Section 1.7, if the Company shall request inclusion of securities being sold for its own account, or if other persons shall request inclusion, the holders of Registrable Securities shall, on behalf of all holders of Registrable Securities, offer to include such securities in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Section 1 (including Section 1.14 hereof). The Company shall (together with all holders of Registrable Securities and other persons proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by the holders of a majority of the Registrable Securities included in such registration, which underwriters are reasonably acceptable to the Company. Notwithstanding any other provision of this Section 1.7, if the representative of the underwriters advises the holders of Registrable Securities in writing that marketing factors require a limitation on the number of shares to be underwritten, the number of shares to be included in the underwriting or registration shall be allocated as set forth in Section 1.15 hereof. If a person who has requested inclusion in such registration as provided above does not agree to the terms of any such underwriting, such person shall be excluded therefrom by written notice from the Company, the underwriter or the holders of Registrable Securities. The securities so excluded shall also be withdrawn from registration. Any Registrable Securities or other securities excluded shall also be withdrawn from such registration. If shares are so withdrawn from the registration and if the number of shares to be included in such registration was previously reduced as a result of marketing factors pursuant to this Section 1.7(e), then the Company shall offer to all holders of Registrable Securities who have retained rights to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among such holders of Registrable Securities requesting additional inclusion in accordance with Section 1.15 hereof. -11- 12 1.8 Registration Procedures. In the case of each registration effected by the Company pursuant to Section 1.8 hereof, the Company will keep each holder of Registrable Securities advised in writing as to the initiation of each registration and as to the completion thereof. In addition, the Company shall use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto the Company, at its expense, shall as expeditiously as possible: (a) prepare and file with the Securities and Exchange Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish to the counsel selected by the holders of at least twenty-two percent (22%) of the Registrable Securities covered by such registration statement copies of all such documents proposed to be filed, which documents shall be subject to the review and comment of such counsel); (b) notify each holder of Registrable Securities of the effectiveness of each registration statement filed hereunder and prepare and file with the Securities and Exchange Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than 180 days with respect to a registration statement on Form S-1, S-2 or S-3, and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement; (c) furnish to each seller of Registrable Securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; (d) use its best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller (provided that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subsection, (ii) subject itself to taxation in any such jurisdiction, or (iii) consent to general service of process in any such jurisdiction); (e) notify each seller of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading in light of the circumstances in which they were made, and, at the request of any such seller, the Company shall prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not -12- 13 contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading in light of the circumstances in which they were made; (f) cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed and, if not so listed, to be listed on the NASD automated quotation system and, if listed on the NASD automated quotation system, use its reasonable efforts to secure designation of all such Registrable Securities covered by such registration statement as a NASDAQ "national market system security" within the meaning of Rule 11Aa2-1 of the Securities and Exchange Commission or, failing that, to secure NASDAQ authorization for such Registrable Securities and, without limiting the generality of the foregoing, to arrange for at least two market makers to register as such with respect to such Registrable Securities with the NASD; (g) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement; (h) enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the holders of at least twenty-two percent (22%) of the Registrable Securities being sold or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities (including effecting a stock split or a combination of shares); (i) make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement; (j) otherwise use its best efforts to comply with all applicable rules and regulations of the Securities and Exchange Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months beginning with the first day of the Company's first full calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; and (k) permit any holder of Registrable Securities which holder, in the Company's reasonable judgment, might be deemed to be an underwriter or a controlling person of the Company, to participate in the preparation of such registration or comparable statement and to require the insertion therein of material, furnished to the Company in writing, which in the reasonable judgment of such holder and its counsel should be included; (l) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any common stock included in such registration -13- 14 statement for sale in any jurisdiction, the Company shall use its best efforts promptly to obtain the withdrawal of such order; and (m) use reasonable efforts to obtain a cold comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters as the holders of at least twenty-two percent (22%) of the Registrable Securities being sold reasonably request (provided that such Registrable Securities constitute at least 10% of the securities covered by such registration statement). 1.9 Indemnification. (a) In the event any Registrable Securities are included in a Registration Statement under Section 1.2, 1.3, 1.4 or 1.7, to the fullest extent permitted by law, the Company will indemnify each holder of Registrable Securities, each of its officers, directors and partners, legal counsel, and each person controlling such holder within the meaning of section 15 of the Securities Act, with respect to which registration, qualification, or compliance has been effected pursuant to this Section 1.9, and each underwriter, if any, and each person who controls within the meaning of section 15 of the Securities Act any underwriter, against all expenses, claims, losses, damages, and liabilities (or actions, proceedings, or settlements in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, or other document (including any related registration statement, notification, or the like) related to any such registration, qualification, or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification, or compliance, and will reimburse each such holder of Registrable Securities, each of its officers, directors, partners, legal counsel, and each person controlling such holder, each such underwriter, and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending or settling any such claim, loss, damage, liability, or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability, or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such holder of Registrable Securities or underwriter for use therein. It is agreed that the indemnity agreement contained in this Section 1.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld). (b) Each holder of Registrable Securities will, if Registrable Securities held by him, her or it are included in the securities as to which such registration, qualification, or compliance is being effected, indemnify the Company, each of its directors, officers, partners, legal counsel, and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of section 15 of the Securities Act, each other such holder of Registrable Securities, and each of their officers, directors, and partners, and each person controlling such holder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on -14- 15 any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, and will reimburse the Company and such holders of Registrable Securities, directors, officers, partners, legal counsel, persons, underwriters, or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular, or other document in reliance upon and in conformity with written information furnished to the Company by such holder of Registrable Securities for use therein provided, however, that the obligations of such holder hereunder shall not apply to amounts paid in settlement of any such claims, losses, damages, or liabilities (or actions in respect thereof) if such settlement is effected without the consent of such holder (which consent shall not be unreasonably withheld) and provided further that the obligations of such holders hereunder shall be limited to an amount equal to the net proceeds from the offering received by each such holder of Registrable Securities sold as contemplated herein. (c) Each party entitled to indemnification under this Section 1.9 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 1.9, to the extent such failure is not materially prejudicial. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. (d) If the indemnification provided for in this Section 1.9 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage, or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue -15- 16 statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. 1.10 Information by Holder. Each holder of Registrable Securities shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification, or compliance referred to in this Section 1.10. 1.11 Limitations on Registration of Issues of Securities. From and after the date of this Agreement, the Company shall not, without the prior written consent of at least the holders of Registrable Securities holding seventy-five percent (75%) of the then outstanding Registrable Securities enter into any agreement with any holder or prospective holder of any securities of the Company giving such holder or prospective holder any registration rights the terms of which are more favorable than the registration rights granted to the holders of Registrable Securities hereunder. 1.12 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission that may permit the sale of the Restricted Securities to the public without registration, the Company agrees to use its best efforts to: (a) make and keep public information regarding the Company available as those terms are understood and defined in Rule 144 under the Securities Act, at all times from and after ninety (90) days following the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public; (b) file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements; and (c) so long as a holder of Registrable Securities owns any Restricted Securities, furnish to such holder forthwith upon written request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after ninety (90) days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as a holder of Registrable Securities may reasonably request in availing itself of any rule or regulation of the Commission allowing a holder of Registrable Securities to sell any such securities without registration. -16- 17 1.13 Transfer or Assignment of Registration Rights. The rights to cause the Company to register securities granted to a holder of Registrable Securities by the Company under this Section 1.13 may be transferred or assigned by a holder of Registrable Securities without restrictions as to minimum share holdings to: (a) any partner or retired partner of any holder which is a partnership, (b) any family member of any holder or any trust for the benefit of any holder, (c) any member of any holder which is a limited liability company, (d) any grantor of a holder that is a trust, (e) any stockholder of any holder which is a corporation, or (f) any transferee or assignee acquiring, in the aggregate, not less than twenty-five percent (25%) of the Registrable Securities owned by such holder (as presently constituted and subject to subsequent adjustments for stock splits, stock dividends, reverse stock splits, and the like); provided, however, that in each of the preceding cases (a) through (e), the Company is given written notice at the time of or within fifteen (15) days after such transfer or assignment, stating the name and address of the transferee or assignee and identifying the Registrable Securities being transferred or assigned, and, provided further, that the transferee or assignee of such rights assumes the obligations of such Holder under this Section 1.13. 1.14 "Market Stand-Off" Agreement. (a) If requested by the Company and an underwriter of Common Stock (or other securities) of the Company, a holder of Registrable Securities shall not sell or otherwise transfer or dispose of any Registrable Securities of the Company held by such holder (other than those included in the registration) during the one hundred eighty (180) day period following the effective date of the initial registration statement of the Company filed under the Securities Act; provided, however, that: (i) each of the Company's officers and directors and holders of at least one percent (1%) of the Company's voting securities shall likewise be bound by such one hundred eighty (180) day "Market Stand-Off" agreement; and, (ii) any discretionary waiver by the Company or representative of the underwriters of any person's "Market Stand-Off" agreement shall apply to all holders pro rata based on the number of Registrable Securities owned by the holders and the number of shares owned by the person(s) receiving the discretionary waiver. (b) The obligations described in this Section 1.14 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of such one hundred eighty (180) day period. (c) Each holder of Registrable Securities agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter which are consistent with the foregoing or which are necessary to give further effect thereto. In addition, if requested by the Company or the representative of the underwriters of Common Stock (or other securities) of the Company, each holder of Registrable Securities shall provide, within ten (10) days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company's securities pursuant to a registration statement filed under the Securities Act. -17- 18 1.15 Allocation of Registration Opportunities. (a) In connection with each underwritten registration, in any circumstance in which all of the Registrable Securities and other shares of Common Stock of the Company (including shares of Common Stock issued or issuable upon conversion of shares of any currently unissued series of Preferred Stock of the Company) with registration rights (the "Other Shares") requested to be included in a registration on behalf of the holders of Registrable Securities or Other Stockholders cannot be so included as a result of limitations of the aggregate number of Registrable Securities and Other Shares that may be so included, the number of Registrable Securities and Other Shares that may be so included shall be allocated among the holders of Registrable Securities and Other Stockholders so as to first reduce to zero (0) the number of Other Shares to be included in such registration. Thereafter, the number of Registrable Securities that may be so included shall be allocated among the holders of Registrable Securities requesting inclusion of shares pro rata on the basis of the number of Registrable Securities held by such holders; provided, however, that such allocation among Holders shall not operate to reduce the aggregate number of Registrable Securities to be included in such registration; and provided, further that, in the case of a requested registration by Holder under Section 1.3, the Holder Shares for which registration has been requested shall not be reduced, limited or cut back unless and until all other Registrable Securities for which requests for registration have been made have been reduced or cut back to zero. (b) If any holder of Registrable Securities or Other Stockholder does not request inclusion of the maximum number of Registrable Securities and Other Shares allocated to him pursuant to any registration hereunder, the remaining portion of his allocation shall be reallocated among those requesting holders of Registrable Securities and Other Stockholders whose allocations did not satisfy their requests pro rata on the basis of the number of shares of Registrable Securities and Other Shares which would be held by such holders and Other Stockholders, and this procedure shall be repeated until all of the Registrable Securities and Other Shares which may be included in the registration on behalf of the holders of Registrable Securities and Other Stockholders have been so allocated; provided, however, that in the case of a requested registration by Holder under Section 1.3, the Holder shall have the right to fully satisfy its request to register all of the Holder Shares prior to any pro rata allocation. (c) The Company shall not limit, cut back or in any manner reduce the number of Registrable Securities to be included in a registration pursuant to this Agreement in order to include shares held by stockholders with no registration rights or to include any other shares of stock issued to employees, officers, directors or consultants pursuant to option or benefit plans or, with respect to registrations under Sections 1.2 and 1.7 hereof, in order to include in such registration securities registered for the Company's own account. 1.16 Termination of Registration Rights. The right of any Holder to request registration or inclusion in any registration pursuant to Section 1 hereof shall terminate upon the expiration of three (3) years after the closing of the initial public offering of Common Stock of the Company. In addition, a Holder's registration rights shall expire if all Registrable Securities held by and issuable to such Holder may be sold under Rule 144 during any ninety (90) day period. SECTION 2 -18- 19 Right of First Offer 2.1 Right of First Offer. The Company hereby grants to each Owner a right of first offer with respect to future sales of New Securities (as defined in this Section 2) by the Company; provided, however, that no person or entity shall be deemed an Owner for purposes of this Section 2 unless the Company's sale of New Securities to such person or entity would be exempt from the registration and qualification requirements of applicable securities laws. 2.2 New Securities. Except as set forth below, "New Securities" shall mean any shares of capital stock of the Company, including Common Stock and any series of Preferred Stock, whether now authorized or not, and rights, options or warrants to purchase stock, and securities of any type whatsoever that are, or may become, convertible into or exchangeable for such capital stock. Notwithstanding the foregoing, the term "New Securities" does not include (a) securities issuable upon conversion of the Series A Preferred Stock and the Series B Preferred Stock; (b) Common Stock offered to the public generally pursuant to a registration statement under the Securities Act in connection with a public offering; (c) up to an aggregate of 6,700,000 shares of Common Stock issued to employees, officers and directors of, and consultants to, the Company; (d) securities issued pursuant to the acquisition of another business entity or business segment of any such entity by the Company by merger, purchase of substantially all the assets or other reorganization whereby the Company will own more than fifty percent (50%) of the voting power of such business entity or business segment of any such entity if such issuance is unanimously approved by the Board of Directors; (e) securities issued pursuant to any borrowings by the Company from financial institutions or pursuant to the conversion of any debt security held by the Shareholder which is currently outstanding, including any type of loan or payment evidenced by any type of debt instrument, with or without equity features including warrants, options or other rights to purchase capital stock and whether or not convertible into capital stock of the Company if such issuance is unanimously approved by the Board of Directors; (f) securities issued in connection with obtaining lease financing, whether issued to a lessor or guarantor, if such issuance is unanimously approved by the Board of Directors; (g) securities issued in connection with any stock split, stock dividend or recapitalization of the Company; (h) up to 1,600,000 shares of Common Stock issued to another business or entity as part of a strategic investment in or business relationship with such other business or entity; (i) any right, option or warrant to acquire any security convertible into the securities excluded from the definition of New Securities pursuant to subsections (a) through (i) above. 2.3 Exercise of First Offer Right. In the event the Company proposes to issue New Securities, it shall give each Owner written notice of its intention, describing the amount and type of New Securities, and the price and terms upon which the Company proposes to issue the same. Each Owner shall have ten calendar (10) days from the date it is deemed to have received any such notice to agree to purchase up to its respective Pro Rata Share (as defined below) of such New Securities for the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. An Owner's "Pro Rata Share" of New Securities, for purposes of this right of first offer, is the ratio that (a) the total number of shares of Common Stock then owned by such Owner bears to (b) the total number of shares of Common Stock of the Company then outstanding (assuming for clauses (a) and (b) above the conversion of outstanding preferred stock or other outstanding convertible -19- 20 securities and the exercise of options, warrants or other exercisable securities outstanding on the date of this Agreement). 2.4 Right of Over Allotment. If less than all of the Owners elect to purchase their full Pro Rata Share of the New Securities, then the Company shall promptly notify in writing the Owners who do so elect and shall offer such Owners the right to acquire the unsubscribed portions of the other Owners' Pro Rata Shares. Such electing Owners shall have five (5) days from the date it is deemed to have received such notice to notify the Company of their respective election to purchase all or part of the aggregate unsubscribed portion of such Pro Rata Shares. For purposes of this Section 2.4, each such Owner shall be entitled to purchase an amount of such unsubscribed portion equal to the ratio that (a) the total number of shares of Common Stock then owned by such Owners bears to (b) the total number of shares of Common Stock then owned by all such Owners exercising overallotment subscription rights pursuant to this Section 2.4 (assuming for clauses (a) and (b) above the conversion of outstanding preferred stock or other outstanding convertible securities and the exercise of options, warrants or other exercisable securities outstanding on the date of this Agreement). 2.5 Completion of Sale. Upon the expiration of the applicable notice periods set forth in Sections 2.3 and 2.4 above, the Company shall have ninety (90) days to sell the New Securities not elected to be purchased by the Owners, at the price and upon terms that are, when taken as a whole, no more favorable to the purchasers of such securities than specified in the Company's notice. In the event the Company has not sold the New Securities within said ninety (90) day period, the Company shall not thereafter issue or sell any New Securities without first offering such securities to the Owners in the manner provided above. 2.6 Termination of First Offer Rights. The rights set forth in this Section 2 shall terminate upon the closing of a Qualified Public Offering. 2.7 Transfer or Assignment of Rights. The rights of first offer granted to an Owner by the Company under this Section 2 may be transferred or assigned by an Owner to any permitted transferee or assignee of Registrable Securities under Section 1.12 above; provided, however, that the Company is given written notice at the time of or within fifteen (15) days after such transfer or assignment, stating the name and address of the transferee or assignee and identify the securities with respect to which such rights are being transferred or assigned, and provided further, that the transferee or assignee of such rights assumes the obligations of such Owner under this Section 2. SECTION 3 Covenants of the Company 3.1 Basic Financial and Other Information. (a) The Company will provide the following reports: (i) to each Owner, as soon as practicable after the end of each fiscal year, and in any event within ninety (90) days thereafter, consolidated balance sheets of the Company and its subsidiaries, if any, as of the end of such fiscal year, and -20- 21 consolidated statements of operations and of cash flows and stockholders' equity of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and audited by independent public accountants of national standing selected by the Company; (ii) to each Owner, as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within forty-five (45) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of each such quarterly period, and consolidated statements of operations and of cash flows and stockholders' equity of the Company and its subsidiaries, if any, for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles (other than for accompanying notes), subject to changes resulting from year-end audit adjustments, in reasonable detail and signed by the principal financial or accounting officer of the Company; (iii) to each Owner, as soon as practical after the end of each month and in any event within thirty (30) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as at the end of such month and consolidated statements of income and cash flows of the Company and its subsidiaries, for each month and for the current fiscal year of the Company to date, all subject to normal year-end audit adjustments, prepared in accordance with generally accepted accounting principles consistently applied and certified by the principal financial or accounting officer of the Company, together with a comparison of such statements to the corresponding periods of the prior fiscal year and to the Company's operating plan then in effect and approved by its Board of Directors; and (iv) to each Owner, at least fifteen (15) days prior to the beginning of each fiscal year, a financial plan and budget adopted by the Company's Board of Directors for the fiscal year ("Financial Plan"), prepared on a quarterly basis, including balance sheets and sources and applications of funds statements for such months and, as soon as practicable after being prepared, any other budgets or revised budgets prepared by the Company. (b) The Company shall permit each Owner, at such Owner's expense, to visit and inspect the Company's properties, to examine its books of account and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times during normal business hours as may be requested by such Owner; provided, however, that the Company shall not be obligated pursuant to this Section 3.1(b) to provide access to any information which it reasonably considers to be a trade secret or similar confidential information. The Company shall not be required to comply under this Section 3.1(b) in respect of any Owner whom the Board of Directors reasonably determines to be a competitor or an officer, director or greater than ten percent (10%) owner of a competitor. (c) The provisions of this Section 3.1 shall terminate upon the closing of a Qualified Public Offering. -21- 22 SECTION 4 Restrictions on Transferability 4.1 Restrictions on Transferability. The Restricted Securities shall not be sold, assigned, transferred or pledged except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. The Owners will cause any proposed purchaser, assignee, transferee, or pledgee of any such shares held by the Owners (the "Transferee") that is not a party to this Agreement to execute and deliver to the Secretary of the Company an agreement (the "Assumption Agreement") or similar obligation, pursuant to which such Transferee shall agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement. The terms and provisions of this Section 4.1 shall terminate on the closing of the Company's initial public offering of its Common Stock pursuant to an effective registration statement under the Securities Act. 4.2 Restrictive Legends. Each certificate representing the Restricted Securities shall (unless otherwise permitted by the provisions of Section 4.3 below) be stamped or otherwise imprinted with appropriate restrictive legends. Each Owner consents to the Company making a notation on its records and giving instructions to any transfer agent of the Preferred Stock or the Common Stock in order to implement the restrictions on transfer established in this Agreement. 4.3 Notice of Proposed Transfers. The holder of each certificate representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 4.3. Prior to any proposed sale, assignment, transfer or pledge (each, a "Transfer") of any such Restricted Securities (other than (a) a transfer not involving a change in beneficial ownership, (b) in transactions involving the distribution without consideration of Restricted Securities by the Owner to any of its direct or indirect members, partners, stockholders, retired members or retired partners, or to the estate of any of its direct or indirect members, partners, retired members or retired partners, (c) in transactions involving the transfer without consideration of Restricted Securities by the Owner during his lifetime by way of gift or on death by will or intestacy, (d) in transactions involving the transfer or distribution of Restricted Securities by a corporation or limited liability company to any subsidiary, parent or affiliated corporation or limited liability company of such corporation or limited liability company or in connection with a merger or sale of all or substantially all of its assets or capital stock, or (e) in transactions in compliance with Rule 144), unless there is in effect a registration statement under the Securities Act covering the proposed Transfer, the Owner thereof shall give written notice to the Company of such Owner's intention to effect such Transfer. Each such notice shall describe the manner and circumstances of the proposed Transfer in sufficient detail, and shall be accompanied, at such Owner's expense by either (i) an unqualified written opinion of legal counsel who shall be, and whose legal opinion shall be, reasonably satisfactory to the Company addressed to the Company, to the effect that the proposed Transfer of the Restricted Securities may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Commission to the effect that the Transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the Owner of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the Owner to the Company. -22- 23 Not later than fifteen (15) days following the date of any Transfer as to which prior notice is not required pursuant to this Section 4, the transferor of the Restricted Securities shall deliver to the Secretary of the Company written notification of such Transfer setting forth the name of the transferor, name and address of the transferee and the number of Restricted Securities which have been so transferred. Each certificate evidencing the Restricted Securities transferred as above provided shall bear, except if such Transfer is made pursuant to Rule 144, the appropriate restrictive legends, except that such certificate shall not bear such restrictive legend if, in the opinion of counsel for such Owner and the Company, such legends are not required in order to establish compliance with any provision of the Securities Act. SECTION 5 Restrictions on Transfer; Owner's Right of Last Refusal and Co-Sale Provisions 5.1 Restrictions on Transfer. Shareholder agrees that it will not, without the prior written consent of the Company and of the Owners holding two-thirds of the Restricted Securities (a "Two-Thirds Interest"), Transfer all or any portion of the shares of Common Stock of the Company (the "Shares") now owned or hereafter acquired by it, except in connection with, and in compliance with the conditions of, Sections 5.2 and 5.3 in each case made in accordance with the procedures set forth therein. 5.2 Right of Last Refusal. In the event that the Shareholder receives a bona fide offer to purchase all or any portion of the Shares held by such person (a "Transaction Offer") from a third party (the "Offeror"), such Shareholder (a "Transferring Shareholder") may, subject to the provisions of Section 5.3 hereof, Transfer such Shares pursuant to and in accordance with the following provisions of this Section 5.2: (a) Such Transferring Shareholder shall cause the Transaction Offer and all of the material terms thereof to be reduced to writing and shall notify each of the Owners and the Company of his or its wish to accept the Transaction Offer and otherwise comply with the provisions of this Section 5.2 and, if applicable, Section 5.3 (such notice, the "Offer Notice"). The Transferring Shareholder's Offer Notice shall constitute an irrevocable offer to sell such Shares to the Owners and, if and to the extent the Owners do not elect to purchase all of such Shares, the Company, on the basis described below at a purchase price equal to the price contained in, and on the same terms and conditions of, the Transaction Offer. The Offer Notice shall be accompanied by a true copy of the Transaction Offer (if it was submitted to the Transferring Shareholder in writing), which shall identify all material information in connection therewith. (b) Upon the deemed receipt of an Offer Notice, the Owners may elect to accept the offer to sell with respect to any or all of the Shares subject thereto as set forth herein and shall give written notice of such election to the Transferring Shareholder as provided below. In the case of a purchase by the Owners, each Owner shall have the right to offer to purchase up to that number of Shares covered by the Transaction Offer as shall be equal to the product -23- 24 obtained by multiplying (i) the total number of Shares subject to the Transaction Offer by (ii) a fraction, the numerator of which is the total number of shares of Common Stock of the Company owned by such Owner on the date of the Offer Notice, and the denominator of which is the total number of shares of Common Stock of the Company then held by all Owners (calculated on a fully-diluted basis) on the date of the Offer Notice, subject to increase as hereinafter provided. The number of shares that each Owner shall be entitled to purchase under this Section 5.2 as provided in the immediately preceding sentence shall be referred to as its "Pro Rata Portion." In the event an Owner does not wish to purchase its full Pro Rata Portion, then any Owner who so elects shall have the right to offer to purchase, on a pro rata basis with any other Owner who so elects, any Pro Rata Portion not purchased by such Owner. Each Owner shall have the right to accept the Transaction Offer by giving notice of such acceptance, indicating as to how many Shares of such Owner's Pro Rata Portion the Owner elects to accept the Transaction Offer, to the Transferring Shareholder as provided herein within fifteen (15) days after the Offer Notice is deemed received, which notice shall also indicate the maximum number of Shares subject thereto which the Owner and its transferee(s) are willing to purchase in the event fewer than all Owners elect to purchase their full Pro Rata Portions; provided that the Owners as a group may elect to exercise the right of last refusal under Section 5.2 with respect to fewer than all of the Shares which are subject to the Transaction Offer. The Company may elect to purchase any or all of the Shares subject to the Transaction Offer which the Owners do not elect to purchase, on the same basis and terms as are provided herein with respect to the Owners, by giving notice to the Transferring Shareholder (with a copy to the Owners) during the ten (10) day period after receipt by the Company of notice from the Transferring Shareholder indicating the number of such Shares available for purchase by the Company. Following receipt of such notice from the Company (or the lapse of such ten (10) day period), the Transferring Shareholder shall notify the Owners (the "Owners' Final Notice") of the number of Shares subject to the Transaction Offer which the Owners and the Company did not elect to purchase. In the event that the price set forth in the Offer Notice is stated in consideration other than cash or cash equivalents, the Transferring Shareholder, a Two Thirds Interest of the Owners and, if applicable, the Company shall determine the fair market value of such consideration, reasonably and in good faith, and the Owners and the Company may exercise their right to purchase under this Section 5.2 by payment of such fair market value in cash or cash equivalents. The number of Shares to be purchased by each Owner (and if applicable by the Company) shall be determined as follows: (x) first, there shall first be allocated to each Owner electing to purchase a number of Shares equal to the lesser of (A) the number of Shares as to which such Owner or transferee accepted the Transaction Offer or (B) such Owner's Pro Rata Portion (y) second, the balance, if any, not allocated under clause (x) above, shall be allocated to those Owners who accepted the Transaction Offer as to a number of Shares which exceeded their respective Pro Rata Portions, in each case on a pro rata basis in proportion to the amount of such excess, and (z) third, the balance, if any, not allocated under clause (x) or (y) above shall be allocated to the Company if and to the extent it has elected to purchase. The closing for any purchase of Shares by the Owners or the Company under this Section 5.2 shall take place within thirty (30) days after the expiration of the first fifteen (15) day period following the date of the Company's deemed receipt of the Offer Notice at -24- 25 the place and on the date reasonably specified by a Two Thirds Interest of the Owners (as to purchases by the Owners ) or the Company (as to purchases by the Company). (c) In the event that the Owners and the Company do not elect to exercise the rights to purchase under Section 5.2 with respect to all of the Shares proposed to be sold, the Transferring Shareholder may sell all of the Shares not so purchased to the Offeror on the terms and conditions set forth in the Offer Notice, subject to the provisions of Section 5.3. If the Transferring Shareholder's sale to an Offeror is not consummated in accordance with the terms of the Transaction Offer within the later of (i) one hundred twenty (120) days after the expiration of the right of last refusal under this Section 5.2 and the Co-Sale Option set forth in Section 5.3 below, if applicable, (ii) ninety (90) days after the later of the closings (if any) of the purchase of the Shares by the Owners and the Company in accordance with Section 5.2(b) above, and (iii) thirty (30) days after the satisfaction of all governmental approval or filing requirements, the Transaction Offer shall be deemed to lapse, and any Transfers of Shares pursuant to such Transaction Offer shall be deemed to be in violation of the provisions of this Agreement unless the Owners and the Company are once again afforded the right of last refusal provided for herein with respect to such Transaction Offer. 5.3 Co-Sale Option of Owners. In the event that any Transferring Shareholder receives a Transaction Offer from an Offeror, and the right of last refusal under Section 5.2 is exercised by the Owners or the Company as to less than all of the Shares subject to the Transaction Offer, such Transferring Shareholder may Transfer such Shares only pursuant to and in accordance with the following provisions of this Section 5.3: (a) Each of the Owners shall have the right to participate in the Transfer of Shares pursuant to the Transaction Offer with respect to any Shares subject thereto which are not purchased pursuant to Section 5.2 by giving written notice (the "Acceptance Notice") to the Transferring Shareholder within ten (10) days after delivery to it of the Owners' Final Notice (the "Co-Sale Option"). Each Acceptance Notice shall indicate the maximum number of Shares the Owner wishes to sell including the number of Shares it would sell if one or more other Owners do not elect to participate in the sale on the terms and conditions stated in the Offer Notice. (b) Each Owner shall have the right to sell a portion of its shares of Company Common Stock pursuant to the Transaction Offer which is equal to or less than the product obtained by multiplying (i) the total number of Shares subject to the Transaction Offer and available for sale to the Offeror by (ii) a fraction, the numerator of which is the total number of shares of Company Common Stock owned by such Owner on the date of the Offer Notice (calculated on a fully-diluted basis) and the denominator of which is the total number of shares of Company Common Stock then held by all Owners and the Transferring Shareholder on the date of the Offer Notice (calculated on a fully-diluted basis). To the extent one or more Owners elects not to sell, or fails to exercise its right to sell, the full amount of such Shares which it is entitled to sell pursuant to this Section 5.3, the right of Owners who have elected to sell shares of Company Common Stock shall be increased proportionately based on their relative holdings. (c) Within ten (10) days after the date by which the Owners were first required to notify the Transferring Shareholder of their intent to participate, the Transferring Shareholder shall notify each participating Owner of the number of shares of Company Common -25- 26 Stock held by such Owner that will be included in the sale and the date on which the Transfer pursuant to the Transaction Offer will be consummated, which shall be no later than as provided in Section 5.2(c) above. The Transferring Shareholder shall be permitted to participate in such sale with respect to the Shares subject to the Transaction Offer which were not purchased by the Owners or the Company pursuant to Section 5.2, except to the extent any Owners elect to sell their Shares pursuant to the terms of this Section 5.3. (d) Each participating Owner may effect its participation in any Transaction Offer hereunder by delivery to the Offeror, or to the Transferring Shareholder for delivery to the Offeror, of one or more instruments or certificates, properly endorsed for transfer, representing the shares of Company Common Stock it elects to sell therein, provided that each such Owner shall be required to make any representations or warranties or to provide any indemnities in connection therewith as the Transferring Shareholder makes. At the time of consummation of the Transaction Offer, the Offeror shall remit directly to each selling Owner that portion of the sale proceeds to which such Owner is entitled by reason of its participation therein (less any adjustments due to the conversion of any convertible securities or the exercise of any exercisable securities). No Shares may be purchased by an Offeror from the Transferring Shareholder unless the Offeror simultaneously purchases from the participating Owners all of the shares of Company Common Stock that they have elected to sell pursuant to this Section 5.3. (e) Any Shares held by a Transferring Shareholder which are the subject of the Transaction Offer that the Transferring Shareholder desires to sell following compliance with this Section 5.3 may be sold to the Offeror only during the period specified in Section 5.3(c) and only on terms no more favorable to the Transferring Shareholder than those contained in the Offer Notice. Promptly after such sale, the Transferring Stockholder shall notify the Owners of the consummation thereof and shall furnish such evidence of the completion and time of completion of such sale and of the terms thereof as may reasonably be requested by Two Thirds Interest of the Owners. So long as the Offeror is neither a party nor an affiliate or relative of a party to this Agreement, such Offeror shall take the Shares so Transferred free and clear of any further restrictions of this Agreement. In the event that the Transaction Offer is not consummated within the period required by this Section 5.3, the Transaction Offer shall be deemed to lapse, and any Transfers of Shares pursuant to such Transaction Offer shall be deemed to be in violation of the provisions of this Agreement unless the Transferring Shareholder once again complies with the provisions of Section 5.2 and this Section 5.3 hereof with respect to such Transaction Offer. 5.4 Prohibited Transfers. If any Transfer is made or attempted contrary to the provisions of this Agreement, such purported Transfer shall be void ab initio; the Company and the other parties hereto shall have, in addition to any other legal or equitable remedies which they may have, the right to enforce the provisions of this Agreement by actions for specific performance (to the extent permitted by law); and the Company shall have the right to refuse to recognize any such Transferee as one of its shareholders for any purpose. 5.5 Termination of Last Refusal and Co-Sale Rights. The rights set forth in this Section 5 shall terminate on the closing of the Company's initial public offering of its Common Stock pursuant to an effective registration statement under the Securities Act. -26- 27 SECTION 6 Restrictions on Transfer; Shareholder's Right of Last Refusal and Co-Sale Provisions 6.1 Restrictions on Transfer. Holder agrees that it will not, without the prior written consent of the Company and the Shareholder, Transfer all or any portion of the Shares now owned or hereafter acquired by it, except in connection with, and in compliance with the conditions of, Sections 6.2 and 6.3 in each case made in accordance with the procedures set forth therein. 6.2 Right of Last Refusal. In the event that the Holder receives a bona fide Transaction Offer from an Offeror, Holder may, subject to the provisions of Section 6.3 hereof, Transfer such Shares pursuant to and in accordance with the following provisions of this Section 6.2: (a) Holder shall provide an Offer Notice to each of the Shareholder and the Company relating to the Transaction Offer and otherwise comply with the provisions of this Section 6.2 and, if applicable, Section 6.3. Holder's Offer Notice shall constitute an irrevocable offer to sell such Shares to the Shareholder and, if and to the extent the Shareholder does not elect to purchase all of such Shares, the Company, on the basis described below at a purchase price equal to the price contained in, and on the same terms and conditions of, the Transaction Offer. The Offer Notice shall be accompanied by a true copy of the Transaction Offer (if it was submitted to the Holder in writing), which shall identify all material information in connection therewith. (b) Upon receipt of an Offer Notice, the Shareholder may elect to accept the offer to sell with respect to any or all of the Shares subject thereto as set forth herein and shall give written notice of such election to the Holder as provided below. Shareholder shall have the right to accept the Transaction Offer by giving notice of such acceptance, indicating as to how many Shares the Shareholder elects to accept the Transaction Offer, to the Holder as provided herein within fifteen (15) days after the deemed receipt of the Offer Notice, which notice shall also indicate the maximum number of Shares subject thereto which the Shareholder is willing to purchase; provided that the Shareholder may elect to exercise the right of last refusal under Section 6.2 with respect to fewer than all of the Shares which are subject to the Transaction Offer. The Company may elect to purchase any or all of the Shares subject to the Transaction Offer which the Shareholder does not elect to purchase, on the same basis and terms as are provided herein with respect to the Shareholder, by giving notice to the Holder (with a copy to the Shareholder) during the ten (10) day period after the deemed receipt by the Company of notice from the Holder indicating the number of such Shares available for purchase by the Company. Following the deemed receipt of such notice from the Company (or the lapse of such ten (10) day period), the Holder shall notify the Shareholder (the "Shareholders' Final Notice") of the number of Shares subject to the Transaction Offer which the Shareholder and the Company did not elect to purchase. In the -27- 28 event that the price set forth in the Offer Notice is stated in consideration other than cash or cash equivalents, the Holder and, if applicable, the Company shall determine the fair market value of such consideration, reasonably and in good faith, and the Shareholder and the Company may exercise their right to purchase under this Section 6.2 by payment of such fair market value in cash or cash equivalents. The number of Shares to be purchased by the Shareholder (and if applicable by the Company) shall be determined as follows: (y) there shall first be allocated to the Shareholder the number of Shares as to which the Shareholder accepted the Transaction Offer, and (z) the balance, if any, not allocated under clause (y) above shall be allocated to the Company if and to the extent it has elected to purchase. The closing for any purchase of Shares by the Shareholder or the Company under this Section 6.2 shall take place within thirty (30) days after the expiration of the first fifteen (15) day period following the date of the Company's receipt of the Offer Notice at the place and on the date reasonably specified by the Shareholder (as to purchases by the Shareholder) or the Company (as to purchases by the Company). (c) In the event that the Shareholder and the Company do not elect to exercise the rights to purchase under Section 6.2 with respect to all of the Shares proposed to be sold, the Holder may sell all of the Shares not so purchased to the Offeror on the terms and conditions set forth in the Offer Notice, subject to the provisions of Section 6.3. If the Holder's sale to an Offeror is not consummated in accordance with the terms of the Transaction Offer within the later of (i) one hundred twenty (120) days after the expiration of the right of last refusal under this Section 6.2 and the Co-Sale Option set forth in Section 6.3 below, if applicable, (ii) ninety (90) days after the later of the closings (if any) of the purchase of the Shares by the Shareholder and the Company in accordance with Section 6.2(b) above, and (iii) thirty (30) days after the satisfaction of all governmental approval or filing requirements, the Transaction Offer shall be deemed to lapse, and any Transfers of Shares pursuant to such Transaction Offer shall be deemed to be in violation of the provisions of this Agreement unless the Shareholder and the Company are once again afforded the right of last refusal provided for herein with respect to such Transaction Offer. 6.3 Co-Sale Option of Shareholder. In the event that Holder receives a Transaction Offer from an Offeror, and the right of last refusal under Section 6.2 is exercised by the Shareholder or the Company as to less than all of the Shares subject to the Transaction Offer, the Holder may Transfer such Shares only pursuant to and in accordance with the following provisions of this Section 6.3: (a) Shareholder shall have the right to participate in the Transfer of Shares pursuant to the Transaction Offer with respect to any Shares subject thereto which are not purchased pursuant to Section 6.2 by giving written notice (the "Acceptance Notice") to the Holder within ten (10) days after delivery to it of the Shareholders' Final Notice (the "Shareholder's Co-Sale Option"). Each Acceptance Notice shall indicate the maximum number of Shares the Shareholder wishes to sell. -28- 29 (b) Shareholder shall have the right to sell a portion of its shares of Company Common Stock pursuant to the Transaction Offer which is equal to or less than the product obtained by multiplying (i) the total number of Shares subject to the Transaction Offer and available for sale to the Offeror by (ii) a fraction, the numerator of which is the total number of shares of Company Common Stock owned by Shareholder on the date of the Offer Notice and the denominator of which is the total number of shares of Company Common Stock then held by Shareholder and all of the Holders on the date of the Offer Notice. (c) Within ten (10) days after the date by which the Shareholder was first required to notify the Holder of its intent to participate, the Holder shall notify the Shareholder of the number of shares of Company Common Stock held by Shareholder that will be included in the sale and the date on which the Transfer pursuant to the Transaction Offer will be consummated, which shall be no later than as provided in Section 6.2(c) above. The Holder shall be permitted to participate in such sale with respect to the Shares subject to the Transaction Offer which were not purchased by the Shareholder or the Company pursuant to Section 6.2, except to the extent Shareholder elects to sell its Shares pursuant to the terms of this Section 6.3. (d) Shareholder may effect its participation in any Transaction Offer hereunder by delivery to the Offeror, or to the Holder for delivery to the Offeror, of one or more instruments or certificates, properly endorsed for transfer, representing the shares of Company Common Stock it elects to sell therein, provided that Shareholder shall be required to make any representations or warranties or to provide any indemnities in connection therewith as the Holder makes. At the time of consummation of the Transaction Offer, the Offeror shall remit directly to the Shareholder that portion of the sale proceeds to which the Shareholder is entitled by reason of its participation therein (less any adjustments due to the conversion of any convertible securities or the exercise of any exercisable securities). No Shares may be purchased by an Offeror from the Holder unless the Offeror simultaneously purchases from the Shareholder all of the shares of Company Common Stock that it has elected to sell pursuant to this Section 6.3. (e) Any Shares held by the Holder which are the subject of the Transaction Offer that the Holder desires to sell following compliance with this Section 6.3 may be sold to the Offeror only during the period specified in Section 6.3(c) and only on terms no more favorable to the Holder than those contained in the Offer Notice. Promptly after such sale, the Holder shall notify the Shareholder of the consummation thereof and shall furnish such evidence of the completion and time of completion of such sale and of the terms thereof as may reasonably be requested by the Shareholder. So long as the Offeror is neither a party nor an affiliate or relative of a party to this Agreement, such Offeror shall take the Shares so Transferred free and clear of any further restrictions of this Agreement. In the event that the Transaction Offer is not consummated within the period required by this Section 6.3, the Transaction Offer shall be deemed to lapse, and any Transfers of Shares pursuant to such Transaction Offer shall be deemed to be in violation of the provisions of this Agreement unless the Holder once again complies with the provisions of Section 6.2 and this Section 6.3 hereof with respect to such Transaction Offer. 6.4 Prohibited Transfers. If any Transfer is made or attempted contrary to the provisions of this Agreement, such purported Transfer shall be void ab initio; the Company and the other parties hereto shall have, in addition to any other legal or equitable remedies which -29- 30 they may have, the right to enforce the provisions of this Agreement by actions for specific performance (to the extent permitted by law); and the Company shall have the right to refuse to recognize any such Transferee as one of its shareholders for any purpose. 6.5 Termination of Last Refusal and Co-Sale Rights. The rights set forth in this Section 6 shall terminate on the closing of the Company's initial public offering of its Common Stock pursuant to an effective registration statement under the Securities Act. -30- 31 SECTION 7 Restrictions on Transfer; Company's Right of Last Refusal with respect to the Investors 7.1 Restrictions on Transfer. Each Investor agrees that it will not, without the prior written consent of the Company Transfer all or any portion of the shares of Common Stock of the Company (the "Shares") now owned or hereafter acquired by it, except in connection with, and in compliance with the conditions of, Sections 7.2 and 7.3 in each case made in accordance with the procedures set forth therein. 7.2 Right of Last Refusal. In the event that an Investor receives a bona fide offer to purchase all or any portion of the Shares held by such person (a "Transaction Offer") from a third party (the "Offeror"), such Investor (a "Transferring Shareholder") may, subject to the provisions of Section 7.3 hereof, Transfer such Shares pursuant to and in accordance with the following provisions of this Section 7.2: (a) Such Transferring Shareholder shall cause the Transaction Offer and all of the material terms thereof to be reduced to writing and shall notify the Company of his or its wish to accept the Transaction Offer and otherwise comply with the provisions of this Section 7.2 and, if applicable, Section 7.3 (such notice, the "Offer Notice"). The Transferring Shareholder's Offer Notice shall constitute an irrevocable offer to sell such Shares to the Company, on the basis described below at a purchase price equal to the price contained in, and on the same terms and conditions of, the Transaction Offer. The Offer Notice shall be accompanied by a true copy of the Transaction Offer (if it was submitted to the Transferring Shareholder in writing), which shall identify all material information in connection therewith. (b) Upon the deemed receipt of an Offer Notice, the Company may elect to accept the offer to sell with respect to all (but not less than all) of the Shares subject thereto as set forth herein and shall give written notice of such election to the Transferring Shareholder as provided below. The Company shall have the right to accept the Transaction Offer by giving notice of such acceptance within five (5) days after receipt of the Offer Notice. In the event that the price set forth in the Offer Notice is stated in consideration other than cash or cash equivalents, the Transferring Shareholder shall determine the fair market value of such consideration, reasonably and in good faith, and the Company may exercise its right to purchase under this Section 7.2 by payment of such fair market value in cash or cash equivalents. The closing for any purchase of Shares by Company under this Section 7.2 shall take place immediately upon acceptance by the Company of such Offer Notice at the place and on the date reasonably specified by the Transferring Shareholder. (c) In the event that the Company does not elect to exercise the rights to purchase under Section 7.2 with respect to all of the Shares proposed to be sold, the Transferring Shareholder may sell all of the Shares not so purchased to the Offeror on the terms and conditions set forth in the Offer Notice, subject to the provisions of Section 7.3. If the Transferring Shareholder's sale to an Offeror is not consummated in accordance with the terms of the Transaction Offer within the later of (i) one hundred twenty (120) days after the expiration of the right of last refusal under this Section 7.2, and (ii) thirty (30) days after the satisfaction of all -31- 32 governmental approval or filing requirements, the Transaction Offer shall be deemed to lapse, and any Transfers of Shares pursuant to such Transaction Offer shall be deemed to be in violation of the provisions of this Agreement unless the Company is once again afforded the right of last refusal provided for herein with respect to such Transaction Offer. 7.3 Prohibited Transfers. If any Transfer is made or attempted contrary to the provisions of this Agreement, such purported Transfer shall be void ab initio; the Company and the other parties hereto shall have, in addition to any other legal or equitable remedies which they may have, the right to enforce the provisions of this Agreement by actions for specific performance (to the extent permitted by law); and the Company shall have the right to refuse to recognize any such Transferee as one of its shareholders for any purpose. 7.4 Termination of Last Refusal. The rights set forth in this Section 7 shall terminate on the closing of the Company's initial public offering of its Common Stock pursuant to an effective registration statement under the Securities Act. SECTION 8 Miscellaneous 8.1 Governing Law. This Agreement shall be governed in all respects by the laws of the State of Utah, as if entered into by and between Utah residents exclusively for performance entirely within Utah. 8.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 8.3 Entire Agreement; Amendment; Waiver. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated, except by a written instrument signed by the Company and the Owners representing at least seventy-five percent (75%) of the Registrable Securities and any such amendment, waiver, discharge or termination shall be binding on all the Owners, but in no event shall the obligation of any Owner hereunder be materially increased, except upon the written consent of such Owner. 8.4 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by United States first-class mail, postage prepaid, sent by facsimile, or delivered personally by hand or nationally recognized courier addressed (a) if to an Owner, at such addresses as indicated on the signature pages hereto, or at such other address or addresses as such Owner or permitted assignee shall have furnished to the Company in writing, (b) if to the Company, at 240 West Center Street, Orem, Utah 84057, Attn: President, or at such other address as the Company shall have furnished to each Owner in writing, or (c) if the Shareholder to 240 West Center Street, Orem, Utah 84057, Attn: Raymond Noorda, with a copy to Ralph Yarro, or such other address as the Shareholder shall have furnished to each Owner in writing. All such notices and other written communications shall be -32- 33 deemed received (i) if mailed, three (3) days after mailing, (ii) if delivered, upon delivery or (iii) if sent by facsimile, one (1) day after facsimile confirmation. 8.5 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any Owner, upon any breach or default of the Company or Shareholder under this Agreement shall impair any such right, power or remedy of such Owner nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default therefore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Owner of any breach or default under this Agreement or any waiver on the part of any Owner of any provisions or conditions of this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any Owner, shall be cumulative and not alternative. 8.6 Rights; Separability. Unless otherwise expressly provided herein, an Owner's rights hereunder are several rights, not rights jointly held with any of the other Owners. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 8.7 [INTENTIONALLY DELETED] 8.8 Information Confidential. Each Owner acknowledges that the information received by them pursuant hereto may be confidential and for its use only, and it will not use such confidential information in violation of the Exchange Act or reproduce, disclose or disseminate such information to any other person (other than its employees or agents having a need to know the contents of such information, and its attorneys), except in connection with the exercise of rights under this Agreement, unless the Company has made such information available to the public generally, such Owner is required to disclose such information by a governmental body, such Owner previously had such information or such Owner has independently developed such information. 8.9 Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 8.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 8.11 Aggregation of Shares. Notwithstanding anything to the contrary contained herein, an Owner may, for the purpose of exercising any right herein, the exercise of which is conditioned upon such Owner holding a minimum number of shares of Registrable Securities, aggregate all such shares of Registrable Securities owned by such Owner and its affiliates, partners or members to meet or otherwise satisfy such minimum holding requirement. * * * * * -33- 34 IN WITNESS WHEREOF, the parties have executed this Second Amended and Restated Investors Rights Agreement as of the date first above written. CALDERA SYSTEMS, INC., A UTAH CORPORATION By: --------------------------------- Name: Ransom H. Love Title: President THE CANOPY GROUP, INC. By: --------------------------------- Name: Title: MTI TECHNOLOGY CORPORATION By: --------------------------------- Name: Title: CHICAGO VENTURE PARTNERS, L.P. By: Chicago Venture Management, L.L.C. Its: General Partner By: CVM, Inc. Its: Manager By: --------------------------------- Name: John Fife Title: President -34- 35 CHICAGO VENTURE PARTNERS B, L.L.C. By: Burlington Investments, Inc. Its: Manager By: --------------------------------- Name: John Fife Title: President EGAN MANAGED-CAPITAL, L.P. By: EMC Partners, L.P. Its: General Partner By: --------------------------------- Name: Michael H. Shanahan Title: General Partner ENSIGN PEAK ADVISORS, INC. By: --------------------------------- Name: F. James Cowan Title: Senior Vice President THE SANTA CRUZ OPERATION, INC. By: --------------------------------- Name: Jenny Twaddle Title: Acting CFO and Corporate Controller -35- 36 SUN MICROSYSTEMS, INC. By: --------------------------------- Name: Title: NOVELL, INC. By: --------------------------------- Name: Title: CITRIX SYSTEMS, INC. By: --------------------------------- Name: Title: ARISTA CAPITAL PARTNERS, L.P. By: Arista Capital Management, L.L.C. Its: General Partner By: --------------------------------- Name: Title: -36- 37 BAYVIEW 99 I, L.P. By: Bayview 99 GP, LLC Its: General Partner By: --------------------------------- Name: Title: BAYVIEW 99 II, L.P. By: Bayview 99 GP, LLC Its: General Partner By: --------------------------------- Name: Title: BRILLIANT WORLD LIMITED By: --------------------------------- Name: Title: -37- EX-10.13 13 INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.13 INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered into effective as of the ______ day of ___________, _______, by and between Caldera Systems, Inc., a Utah Company (the "Company"), and ______________________________, an individual (the "Indemnified Party"). R E C I T A L S : A. The Company desires to attract and retain talented officers, directors and other personnel. B. In order to provide an additional incentive for qualified personnel to become and remain directors, officers or other key personnel of the Company, the Company is willing to enter into this Agreement setting forth its indemnification obligations with respect to the Indemnified Party. AGREEMENT: NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein and other good and valuable consideration, the Company and the Indemnified Party hereby agree as follows: 1. Indemnification. Except as provided in Section 2 below, the Company shall, to the maximum extent and in the manner permitted by the Utah Revised Business Corporations Act (the "Act"), indemnify the Indemnified Party against any liability incurred in any proceeding to which the Indemnified Party is made a party because he or she is or was a director or officer of the Company or is or was serving at the request of the Company as a director, officer, employee, fiduciary or agent of another company, partnership, joint venture, trust, or other enterprise (an "Indemnifiable Party"), if his or her conduct was in good faith, he or she reasonably believed that his or conduct was in, or not opposed to, the Company's best interest, and in the case of any criminal proceeding, he or she had no reasonable cause to believe his or her conduct was unlawful. Termination of the proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the Indemnified Party did not meet the standard of conduct described in this section. 2. Certain Restrictions on Indemnification. Notwithstanding anything to the contrary in this Agreement, the Company may not indemnify the Indemnified Party under Section 1, in connection with a proceeding by or in the right of the Company or any affiliate of the Company in which the Indemnified Party was adjudged liable to the Company or the respective affiliate of the Company, or in connection with any other proceeding charging that the Indemnified Party derived an improper personal benefit, whether or not involving action in his official capacity, in which proceeding he was adjudged liable on the basis he derived an improper personal benefit, unless ordered by a court of competent jurisdiction. 3. Mandatory Indemnification. The Company shall indemnify the Indemnified Party if he or she is successful, on the merits or otherwise, in the defense of any proceeding, or the defense of any claim, issue, or matter in the proceeding, to which he or she was a party because he or she is or was an Indemnifiable Party, against reasonable expenses incurred by him or her in connection with the proceeding or claim with respect to which he or she has been successful. 2 4. Determination. Notwithstanding anything to the contrary in this Agreement, the Company shall not indemnify the Indemnified Party under Section 1 unless authorized and a determination has been made in the specific case that indemnification of the Indemnified Party is permissible in the circumstances because the Indemnified Party has met the applicable standard of conduct set forth in Section 1. Such determination shall be made (1) by the Board of Directors by majority vote of those present at a meeting at which a quorum is present, and only those directors not parties to the proceeding shall be counted in satisfying the quorum, (2) if a quorum cannot be attained, by majority vote of a committee of the Board of Directors designated by the Board of Directors, which committee shall consist of two or more directors not parties to the proceeding, except that directors who are parties to the proceeding may participate in the designation of directors for the committee, (3) by special legal counsel selected by the Board of Directors or its committee in the manner prescribed by the Act, or (4) by the shareholders, by a majority of the votes entitled to be cast by holders of qualified shares (i.e. shares held by an person other than the Indemnified Person, family members of the indemnified person, or entities owned or controlled by the Indemnified Person) that are present in person or by proxy at a meeting. A majority of the votes entitled to be cast by the holders of all qualified shares constitutes a quorum for purposes of action that complies with this section. Shareholders' action that otherwise complies with this section is not affected by the presence of holders, or the voting, of shares that are not qualified shares. 5. General Indemnification. The indemnification and advancement of expenses provided by this Agreement shall not be construed to be exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any Articles of Incorporation of the Company, bylaw, other agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. 6. Advances. The Company shall pay for or reimburse the reasonable expenses incurred by the Indemnified Party if he or she is made party to a proceeding in advance of final disposition of the proceeding if: (1) the Indemnified Party furnishes the Company a written affirmation of his or her good faith belief that he or she has met the applicable standard of conduct described in Section 1, (2) the Indemnified Party furnishes to the Company a written undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that he or she did not meet the standard of conduct and (3) a determination is made that the facts then known to those making a determination would not preclude indemnification under this Agreement or the Act. 7. Scope of Indemnification. The indemnification and advancement of expenses authorized by this Agreement is intended to permit the Company to indemnify the Indemnified Party to the fullest extent, but not in excess of the fullest extent, permitted by the laws of the State of Utah. In the event the Act is amended to expand or restrict the circumstances under, extent to which, or method by which the Company may indemnify or advance expenses to the Indemnified Party, this Agreement shall automatically be deemed to comply with and include the substance of such amendment to the Act. 8. [INSURANCE. THE COMPANY SHALL PURCHASE AND MAINTAIN INSURANCE ON BEHALF OF ANY PERSON WHO IS OR WAS A DIRECTOR, OFFICER, EMPLOYEE, FIDUCIARY OR AGENT OF THE COMPANY, OR IS OR WAS SERVING AT THE REQUEST OF THE COMPANY AS A DIRECTOR, OFFICER, EMPLOYEE, FIDUCIARY OR AGENT OF ANOTHER COMPANY, PARTNERSHIP, JOINT VENTURE, TRUST, OR OTHER ENTERPRISE, AGAINST ANY LIABILITY ASSERTED AGAINST OR INCURRED BY HIM IN SUCH CAPACITY OR ARISING OUT OF HIS STATUS IN SUCH CAPACITY, WHETHER OR NOT THE COMPANY WOULD HAVE THE POWER TO INDEMNIFY HIM AGAINST THE LIABILITY UNDER THE PROVISIONS OF THIS AGREEMENT OR THE LAWS OF THE STATE OF UTAH, AS THE SAME MAY HEREAFTER BE AMENDED OR MODIFIED.] 9. No New Employment Rights. This Agreement does not create in Indemnified Person any right with respect to continuation of service, and it shall not be deemed to interfere in 2 3 any way with the Company's right to terminate, or otherwise modify, Indemnified Person's service at any time. 10. Titles and Captions. All Section titles and captions in this Agreement are for convenience or reference only, and shall not be deemed part of this Agreement, and in no way define, limit, extend or describe the scope or intent of any provision hereof. 11. Applicable Law. This Agreement shall be construed in accordance with and shall be governed by the laws of the State of Utah. 12. Assignment/Binding Effect. The Indemnified Person may not transfer or assign, by operation of law or otherwise, this Agreement or any interest in this Agreement. This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns. 13. No Waiver of Breach. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of the Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 14. Termination. This Agreement may be terminated by the Indemnified Person and the Company by mutual written agreement at any time. This Agreement shall only apply to the Indemnified Person's acts or omissions while functioning as an Indemnifiable Person, and this Agreement shall terminate upon the termination of the Indemnified Person's service as an Indemnifiable Person; provided, however, the rights and obligations of the parties under this Agreement shall continue to apply with respect to all periods prior to the date the Indemnified Persons cease to be an Indemnifiable Person. 15. Severability. In the event any condition, covenant or other provision herein contained is held to be invalid or void by any court of competent jurisdiction, the same shall be deemed severable from the remainder of this Agreement and shall in no way affect any other covenant or condition herein contained. If such condition, covenant or other provision shall be deemed invalid due to its scope or breadth, such provision shall be deemed valid to the extent of the scope or breadth permitted by law. 16. Definitions. The following words used herein shall have the same meaning as set forth in Section 16-10a-901 of the Act: (a) "liability," (b) "proceeding," (c) "director," and (d) "officer." 17. Amendment. This Agreement may be amended only by a writing signed by the Company and the Indemnified Person. [intentionally left blank; signature page follows] 3 4 IN WITNESS WHEREOF, the Company and the Indemnified Person have executed this Agreement as of the day and year first set forth above. "COMPANY" Caldera Systems, Inc., a Utah company By: Its: "INDEMNIFIED PERSON" __________________________________ Name: __________________________________ Position: __________________________________ Address: __________________________________ __________________________________ __________________________________ 4 EX-10.14 14 GNU GENERAL PUBLIC LICENSE 1 EXHIBIT 10.14 GNU GENERAL PUBLIC LICENSE Version 2, June 1991 Copyright (C) 1989, 1991 Free Software Foundation, Inc. 59 Temple Place, Suite 330, Boston, MA 02111-1307 USA Everyone is permitted to copy and distribute verbatim copies of this license document, but changing it is not allowed. Preamble The licenses for most software are designed to take away your freedom to share and change it. By contrast, the GNU General Public License is intended to guarantee your freedom to share and change free software--to make sure the software is free for all its users. This General Public License applies to most of the Free Software Foundation's software and to any other program whose authors commit to using it. (Some other Free Software Foundation software is covered by the GNU Library General Public License instead.) You can apply it to your programs, too. When we speak of free software, we are referring to freedom, not price. Our General Public Licenses are designed to make sure that you have the freedom to distribute copies of free software (and charge for this service if you wish), that you receive source code or can get it if you want it, that you can change the software or use pieces of it in new free programs; and that you know you can do these things. To protect your rights, we need to make restrictions that forbid anyone to deny you these rights or to ask you to surrender the rights. These restrictions translate to certain responsibilities for you if you distribute copies of the software, or if you modify it. For example, if you distribute copies of such a program, whether gratis or for a fee, you must give the recipients all the rights that you have. You must make sure that they, too, receive or can get the source code. And you must show them these terms so they know their rights. We protect your rights with two steps: (1) copyright the software, and (2) offer you this license which gives you legal permission to copy, distribute and/or modify the software. Also, for each author's protection and ours, we want to make certain that everyone understands that there is no warranty for this free software. If the software is modified by someone else and passed on, we want its recipients to know that what they have is not the original, so that any problems introduced by others will not reflect on the original authors' reputations. Finally, any free program is threatened constantly by software patents. We wish to avoid the danger that redistributors of a free program will individually obtain patent licenses, in effect making the program proprietary. To prevent this, we have made it clear that any patent must be licensed for everyone's free use or not licensed at all. The precise terms and conditions for copying, distribution and modification follow. 1 2 GNU GENERAL PUBLIC LICENSE TERMS AND CONDITIONS FOR COPYING, DISTRIBUTION AND MODIFICATION 0. This License applies to any program or other work which contains a notice placed by the copyright holder saying it may be distributed under the terms of this General Public License. The "Program", below, refers to any such program or work, and a "work based on the Program" means either the Program or any derivative work under copyright law: that is to say, a work containing the Program or a portion of it, either verbatim or with modifications and/or translated into another language. (Hereinafter, translation is included without limitation in the term "modification".) Each licensee is addressed as "you". Activities other than copying, distribution and modification are not covered by this License; they are outside its scope. The act of running the Program is not restricted, and the output from the Program is covered only if its contents constitute a work based on the Program (independent of having been made by running the Program). Whether that is true depends on what the Program does. 1. You may copy and distribute verbatim copies of the Program's source code as you receive it, in any medium, provided that you conspicuously and appropriately publish on each copy an appropriate copyright notice and disclaimer of warranty; keep intact all the notices that refer to this License and to the absence of any warranty; and give any other recipients of the Program a copy of this License along with the Program. You may charge a fee for the physical act of transferring a copy, and you may at your option offer warranty protection in exchange for a fee. 2. You may modify your copy or copies of the Program or any portion of it, thus forming a work based on the Program, and copy and distribute such modifications or work under the terms of Section 1 above, provided that you also meet all of these conditions: a) You must cause the modified files to carry prominent notices stating that you changed the files and the date of any change. b) You must cause any work that you distribute or publish, that in whole or in part contains or is derived from the Program or any part thereof, to be licensed as a whole at no charge to all third parties under the terms of this License. c) If the modified program normally reads commands interactively when run, you must cause it, when started running for such interactive use in the most ordinary way, to print or display an announcement including an appropriate copyright notice and a notice that there is no warranty (or else, saying that you provide a warranty) and that users may redistribute the program under these conditions, and telling the user how to view a copy of this License. (Exception: if the Program itself is interactive but does not normally print such an announcement, your work based on the Program is not required to print an announcement.) These requirements apply to the modified work as a whole. If identifiable sections of that work are not derived from the Program, and can be reasonably considered independent and separate works in themselves, then this License, and its terms, do not apply to those sections when you distribute them as separate works. But when you distribute the same sections as part of a whole which is a work based on the Program, the distribution of the whole must be on the terms of this License, whose permissions for other licensees extend to the entire whole, and thus to each and every part regardless of who wrote it. Thus, it is not the intent of this section to claim rights or contest your rights to work written entirely by you; rather, the intent is to exercise the right to control the distribution of derivative or collective works based on the Program. In addition, mere aggregation of another work not based on the Program with the Program (or with a work based on the Program) on a volume of a storage or distribution medium does not bring the other work under the scope of this License. 2 3 3. You may copy and distribute the Program (or a work based on it, under Section 2) in object code or executable form under the terms of Sections 1 and 2 above provided that you also do one of the following: a) Accompany it with the complete corresponding machine-readable source code, which must be distributed under the terms of Sections 1 and 2 above on a medium customarily used for software interchange; or, b) Accompany it with a written offer, valid for at least three years, to give any third party, for a charge no more than your cost of physically performing source distribution, a complete machine-readable copy of the corresponding source code, to be distributed under the terms of Sections 1 and 2 above on a medium customarily used for software interchange; or, c) Accompany it with the information you received as to the offer to distribute corresponding source code. (This alternative is allowed only for noncommercial distribution and only if you received the program in object code or executable form with such an offer, in accord with Subsection b above.) The source code for a work means the preferred form of the work for making modifications to it. For an executable work, complete source code means all the source code for all modules it contains, plus any associated interface definition files, plus the scripts used to control compilation and installation of the executable. However, as a special exception, the source code distributed need not include anything that is normally distributed (in either source or binary form) with the major components (compiler, kernel, and so on) of the operating system on which the executable runs, unless that component itself accompanies the executable. If distribution of executable or object code is made by offering access to copy from a designated place, then offering equivalent access to copy the source code from the same place counts as distribution of the source code, even though third parties are not compelled to copy the source along with the object code. 4. You may not copy, modify, sublicense, or distribute the Program except as expressly provided under this License. Any attempt otherwise to copy, modify, sublicense or distribute the Program is void, and will automatically terminate your rights under this License. However, parties who have received copies, or rights, from you under this License will not have their licenses terminated so long as such parties remain in full compliance. 5. You are not required to accept this License, since you have not signed it. However, nothing else grants you permission to modify or distribute the Program or its derivative works. These actions are prohibited by law if you do not accept this License. Therefore, by modifying or distributing the Program (or any work based on the Program), you indicate your acceptance of this License to do so, and all its terms and conditions for copying, distributing or modifying the Program or works based on it. 6. Each time you redistribute the Program (or any work based on the Program), the recipient automatically receives a license from the original licensor to copy, distribute or modify the Program subject to these terms and conditions. You may not impose any further restrictions on the recipients' exercise of the rights granted herein. You are not responsible for enforcing compliance by third parties to this License. 7. If, as a consequence of a court judgment or allegation of patent infringement or for any other reason (not limited to patent issues), conditions are imposed on you (whether by court order, agreement or otherwise) that contradict the conditions of this License, they do not excuse you from the conditions of this License. If you cannot distribute so as to satisfy simultaneously your obligations under this License and any other pertinent obligations, then as a consequence you may not distribute the Program at all. For example, if a patent license would not permit royalty free redistribution of the Program by all those who receive copies directly or indirectly through you, then the only way you could satisfy both it and this License would be to refrain entirely from distribution of the Program. If any portion of this section is held invalid or unenforceable under any particular circumstance, the balance of the section is intended to apply and the section as a whole is intended to apply in other circumstances. It is not the purpose of this section to induce you to infringe any patents or other property right claims or to contest validity of any such claims; this section has the sole purpose of protecting the integrity of the free software 3 4 distribution system, which is implemented by public license practices. Many people have made generous contributions to the wide range of software distributed through that system in reliance on consistent application of that system; it is up to the author/donor to decide if he or she is willing to distribute software through any other system and a licensee cannot impose that choice. This section is intended to make thoroughly clear what is believed to be a consequence of the rest of this License. 8. If the distribution and/or use of the Program is restricted in certain countries either by patents or by copyrighted interfaces, the original copyright holder who places the Program under this License may add an explicit geographical distribution limitation excluding those countries, so that distribution is permitted only in or among countries not thus excluded. In such case, this License incorporates the limitation as if written in the body of this License. 9. The Free Software Foundation may publish revised and/or new versions of the General Public License from time to time. Such new versions will be similar in spirit to the present version, but may differ in detail to address new problems or concerns. Each version is given a distinguishing version number. If the Program specifies a version number of this License which applies to it and "any later version", you have the option of following the terms and conditions either of that version or of any later version published by the Free Software Foundation. If the Program does not specify a version number of this License, you may choose any version ever published by the Free Software Foundation. 10. If you wish to incorporate parts of the Program into other free programs whose distribution conditions are different, write to the author to ask for permission. For software which is copyrighted by the Free Software Foundation, write to the Free Software Foundation; we sometimes make exceptions for this. Our decision will be guided by the two goals of preserving the free status of all derivatives of our free software and of promoting the sharing and reuse of software generally. NO WARRANTY 11. BECAUSE THE PROGRAM IS LICENSED FREE OF CHARGE, THERE IS NO WARRANTY FOR THE PROGRAM, TO THE EXTENT PERMITTED BY APPLICABLE LAW. EXCEPT WHEN OTHERWISE STATED IN WRITING THE COPYRIGHT HOLDERS AND/OR OTHER PARTIES PROVIDE THE PROGRAM "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF THE PROGRAM IS WITH YOU. SHOULD THE PROGRAM PROVE DEFECTIVE, YOU ASSUME THE COST OF ALL NECESSARY SERVICING, REPAIR OR CORRECTION. 12. IN NO EVENT UNLESS REQUIRED BY APPLICABLE LAW OR AGREED TO IN WRITING WILL ANY COPYRIGHT HOLDER, OR ANY OTHER PARTY WHO MAY MODIFY AND/OR REDISTRIBUTE THE PROGRAM AS PERMITTED ABOVE, BE LIABLE TO YOU FOR DAMAGES, INCLUDING ANY GENERAL, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THE USE OR INABILITY TO USE THE PROGRAM (INCLUDING BUT NOT LIMITED TO LOSS OF DATA OR DATA BEING RENDERED INACCURATE OR LOSSES SUSTAINED BY YOU OR THIRD PARTIES OR A FAILURE OF THE PROGRAM TO OPERATE WITH ANY OTHER PROGRAMS), EVEN IF SUCH HOLDER OR OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. END OF TERMS AND CONDITIONS 4 5 How to Apply These Terms to Your New Programs If you develop a new program, and you want it to be of the greatest possible use to the public, the best way to achieve this is to make it free software which everyone can redistribute and change under these terms. To do so, attach the following notices to the program. It is safest to attach them to the start of each source file to most effectively convey the exclusion of warranty; and each file should have at least the "copyright" line and a pointer to where the full notice is found. (one line to give the program's name and a brief idea of what it does.) Copyright (C) 19yy (name of author) This program is free software; you can redistribute it and/or modify it under the terms of the GNU General Public License as published by the Free Software Foundation; either version 2 of the License, or (at your option) any later version. This program is distributed in the hope that it will be useful, but WITHOUT ANY WARRANTY; without even the implied warranty of MERCHANTABILITY or FITNESS FOR A PARTICULAR PURPOSE. See the GNU General Public License for more details. You should have received a copy of the GNU General Public License along with this program; if not, write to the Free Software Foundation, Inc., 59 Temple Place, Suite 330, Boston, MA 02111-1307 USA Also add information on how to contact you by electronic and paper mail. If the program is interactive, make it output a short notice like this when it starts in an interactive mode: Gnomovision version 69, Copyright (C) 19yy name of author Gnomovision comes with ABSOLUTELY NO WARRANTY; for details type `show w'. This is free software, and you are welcome to redistribute it under certain conditions; type `show c' for details. The hypothetical commands `show w' and `show c' should show the appropriate parts of the General Public License. Of course, the commands you use may be called something other than `show w' and `show c'; they could even be mouse-clicks or menu items--whatever suits your program. You should also get your employer (if you work as a programmer) or your school, if any, to sign a "copyright disclaimer" for the program, if necessary. Here is a sample; alter the names: Yoyodyne, Inc., hereby disclaims all copyright interest in the program `Gnomovision' (which makes passes at compilers) written by James Hacker. (signature of Ty Coon), 1 April 1989 Ty Coon, President of Vice This General Public License does not permit incorporating your program into proprietary programs. If your program is a subroutine library, you may consider it more useful to permit linking proprietary applications with the library. If this is what you want to do, use the GNU Library General Public License instead of this License. 5 EX-10.15 15 COMPUTER SOFTWARE DISTRIBUTION AGREEMENT 1 EXHIBIT 10.15 COMPUTER SOFTWARE DISTRIBUTION AGREEMENT This Agreement is made and is effective as of the December 14th day of 1998 by and between Navarre Corporation ("Navarre") of 7400 49th Avenue North, New Hope, Minnesota, 55428 and Caldera Systems, Inc. ("Vendor") of 240 West Center St. Orem, Utah 84057. The Parties have agreed as follows: 1. DEFINITIONS 1.1 The term "Product(s)" shall mean all computer software and hardware, and related products manufactured or marketed by Vendor during the term of this Agreement. 1.2 The term "Dealer(s)" shall mean any third party or entity to which Navarre markets any Products for remarketing. 2. GRANT OF MARKETING RIGHTS 2.1 Vendor grants to Navarre and Navarre accepts from Vendor the right to purchase Products and to market and distribute Products to Customers in the United States and Canada, unless other territories are approved in writing. This grant is non-exclusive unless otherwise agreed to by the parties. 3. TERM 3.1 The initial term of this Agreement shall be for a period of one (1) year, unless sooner terminated as provided by this Agreement. 3.2 After the initial term, this Agreement shall be automatically renewed for successive one (1) year periods, unless either party gives the other written notice at least ninety (90) days prior to the expiration of the then current contract period that it does not desire that the Agreement continue. If such 2 notice is given, the Agreement shall terminate at the end of the then current term. 4. ORDERS AND SHIPMENT AND DELIVERY OF PRODUCTS 4.1 Navarre shall issue orders in writing (which includes facsimile transmission.) 4.2 Vendor shall deliver all products ordered by Navarre within the time agreed to. 4.3 All Products shall be shipped freight paid by Vendor, F.O.B. destination. 4.4 Navarre may cancel all or part of any order prior to the date of shipment. 4.5 Navarre shall have the option to accept or reject any partial shipments. 4.6 A packing list showing Navarre's purchase order number, quantity ordered, quantity shipped and a detailed identification of the Products must accompany all shipments. 4.7 All Products shall bear a UPC part code (sell code), and all shipping cartons shall contain a UPC shipping code (ship unit)[UPC number and bar code.] The UPC numbers and codes on Products and shipping cartons shall conform to the Uniform Code Council, National Office Products Association and Retail Industry Standards. 4.8 Navarre has the right to charge back to Vendor costs incurred by Navarre or its Customers due to missing, defective or inaccurate UPC codes. 5. PURCHASE PRICE 5.1 Vendor represents and warrants that the price, discounts, payment terms and return provisions set forth with respect to any Product shall never be less favorable to Navarre than those made available by Vendor to any other purchasers of such Product. Vendor agrees that if such a sale occurs, Vendor will sell the Product to Navarre at the same terms and reimburse Navarre retroactively from the date of such sale for the difference. 5.2 Navarre has the option to add any or all future products manufactured or marketed by Vendor. The Navarre price and the suggested retail price for any new release may only be increased by sixty (60) days advance written notice given by Vendor to Navarre. 5.3 Any announced or published price decrease by Vendor shall apply to Navarre orders shipped on or after the date the price decrease was announced or published. In addition, Vendor shall credit to Navarre an amount equal to the difference between the old cost to Navarre for a Product and the new cost, times the total number of units of the Product held in Navarre's inventory, defined as current on hand inventory, units sold within five (5) working days of price protection notification, and in-transit returns. A similar credit shall be made available for all affected Product held by Navarre's Customers at the time of a price decrease. Vendor shall cooperate with Navarre to implement the credit for Dealer stocks of Product affected by a price decrease. 3 6. PAYMENT 6.1 On or after the date of shipment, Vendor shall invoice Navarre for the purchase of Product. Initial purchase order shall be invoiced to Navarre at net [****] days from receipt of goods. Additional purchase orders shall be invoiced to Navarre at net sixty (60) days from receipt of goods. Navarre shall have the option to withhold payment of up to [****] of any invoice at a reserve against future returns, debit balances or chargebacks. This reserve will be released after two-hundred forty (240) days from the date of receipt of Products. Navarre shall have the option to deduct from invoices due Vendor any credits or money due Navarre from Vendor. In case there is a balance due Navarre, Vendor shall issue a check to Navarre within thirty (30) days for the credit balance. In case of a disputed account balance, both parties will make good faith effort to reconcile account within twenty-one (21) days. 7. STOCK BALANCING, RETURNS, PRODUCT RECALLS AND CREDITS 7.1 All defective inventory, either identified upon receipt from Vendor, or determined to be defective when returned from Navarre's customers, will be reported to Vendor. Vendor shall advise Navarre regarding the disposition of defective inventory within twenty-one (21) days of return request. Otherwise, the defective inventory will be destroyed. Vendor shall bear all expenses regarding the destruction or other disposition of defective inventory and will issue an immediate credit to Navarre for the purchase price plus all return freight charges for defective product. 7.2 Navarre may return for full credit up to 100% of all inventory received from Vendor. Upon receipt of return authorization request, Vendor shall provide a Return Authorization within seven (7) days of notice. Upon receipt of such Product, Vendor shall credit Navarre's account with the amount originally paid for the Product. Items delisted by Vendor (discontinued and/or version changes) must be communicated in writing to Navarre. Delisted items will be available for return with immediate and full credit for a period no less than [****] days. Returns to Vendor, FOB Destination. 7.3 Credits for products returns, advertising allowances or other credits provided for by this Agreement will be handled by the issuance of charge backs by Navarre, and the issuance of a credit memo by Vendor. 8. WARRANTIES, EXCLUSION OF CONSEQUENTIAL DAMAGES 8.1 Neither party shall, under any circumstances, be liable to the other for consequential, incidental, indirect or special damages arising out of or related to this Agreement or the transactions contemplated herein, even if such party has been appraised of the likelihood of such damages occurring. This Section 8.1 does not apply to the infringement of intellectual property and shall not limit the remedies for such infringement. ****CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO SUCH OMITTED PORTION. 4 8.2 Except as provided otherwise in Section 9, in no event shall the aggregate liability of vendor for all claims (Regardless of the form of action, whether contract, warranty, tort, product liability and/or otherwise) relating to a product exceed the amount paid to vendor under this agreement for the product. 8.3 Vendor makes no warranty to Navarre not expressly set forth in this agreement. All implied warranties, including the implied warranties of noninfringement, merchantability and fitness for a particular purpose are disclaimed and excluded by Vendor. 9. INDEMNIFICATION 9.1 In the event that a Product infringes any patent, trademark, copyright or trade secret of a third party not affiliated with Navarre, Vendor shall indemnify Navarre against any amounts, including damages, attorneys' fees, and cost, awarded by a court of competent jurisdiction to the third party because of such infringement, provide that: (i) Navarre promptly gives notice to Vendor of any claim against Navarre alleging such infringement, (ii) Navarre allows Vendor to control the defense and settlement of such claim, (iii) Navarre fully cooperates with Vendor in connection with the defense and settlement of such claim, and (iv) if requested by Vendor, Navarre ceases all use, distribution and sale of the infringing Product and returns all infringing Product units on hand to vendor. If Navarre is enjoined from continued sale of any infringing Product or if Navarre ceases sale of any Product at the request of Vendor under (iv) above, then Vendor shall (at its expense and option): (a) obtain the right for Navarre to continue to sell the infringing Product, (b) modify the infringing Product to eliminate the infringement, (c) provide substitute noninfringing Product to Navarre under this Agreement, or (d) refund to Navarre that the amount paid under this Agreement for the infringing Product upon its return to Vendor. Vendor has no other obligation or liability in the event of infringement. Vendor has no obligation of indemnification or to defend or hold harmless relating to infringement. Vendor shall not be liable for any costs or expenses incurred without its prior written authorization. Vendor shall have no obligation of indemnification or any liability if the infringement is based upon (a) any altered, charged or modified form of the Product not made by Vendor, or (b) the Product in combination with anything not provided by Vendor, or (c) any process in which the Product is used in a manner not contemplated by the Product's documentation or is used together with anything not provided by Vendor, or (d) the laws of any country other than the United States of America or its states. 9.2 Navarre's Liability -- If Navarre modifies the Product or its packaging and such modification results in a claim, suit, or proceeding brought against the Vendor on the issue of infringement of any patent, trademark, copyright, or trade secret, Navarre shall indemnify Vendor against and defend and hold Vendor harmless from any such claim, suit, or processing. 5 10. ADVERTISING 10.1 Navarre shall have the right to utilize Vendor's trade name and any trademarks and service marks associated with the Products to identify the origin of the Products in advertising and promotional materials. With respect to Products made by a third party, Vendor shall ensure that Navarre has the right to use the third party's trademarks and service marks associated with the Products in Navarre's advertising and promotional materials. 10.2 Vendor shall support Navarre and Navarre's Customers with advertising, marketing and promotional activities. As a part of these activities, Vendor shall implement cooperative advertising and market development programs that Navarre and its Customers can participate in. 10.3 Vendor agrees that it will provide support to Navarre for its advertising, marketing and promotional activities. This support can be in the form of ad production assistance, catalog direct mail programs, shows, advertising in regional or national trade and/or consumer publications, and sales training days. Vendor shall make available an amount equal to [****] percent of the total dollar amount Navarre has purchased from Vendor, to be held in reserve for use in Navarre's advertising and marketing programs described in Exhibit "B". Funds will only be applied upon Vendor's prior approval on a case-by-case basis. Participation in any Navarre advertising, marketing or promotional activity which exceeds [****] percent of the total dollar amount Navarre has purchased from Vendor will be charged back monthly to the Vendor, and Vendor will issue a credit memo for these costs. 10.4 All cooperative advertising and market development funds (MDF) charges for product ordered through Navarre must be authorized in writing prior to placement. No verbal commitments will be accepted. In the event that such Cooperative Advertising and/or Market Development Fund expenditure would cause Navarre's account to move to a debit balance, Navarre reserves the right to require Vendor to pay for these expenditures in advance. Claims for advertising and market development expenditure will be made by charge backs to the Vendor, and Vendor will issue a credit memo for these costs. 11. TERMINATION 11.1 Either party may terminate this Agreement not less than sixty (60) days after written notice in the event of a material breach by the other party, and the failure of such other party to cure such breach within thirty (30) days of such notification. 11.2 Upon expiration or termination of this Agreement, Navarre shall have the right, for one-hundred twenty (120) days after the termination, to return to Vendor all or portion of the Products in Navarre's inventory. Vendor agrees to repurchase any such returned Products at the prices paid for them by Navarre. ****CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO SUCH OMITTED PORTION. 6 11.3 Sections 8, 9 and 10.1 shall survive the expiration or termination of this Agreement. 12. MISCELLANEOUS 12.1 This agreement shall be governed by the laws of the state of Minnesota. Any dispute arising out of this Agreement shall be brought and prosecuted in a court within Hennepin County Minnesota. For this purpose, Vendor appoints the Secretary of State of Minnesota as its agent for service of process. 12.2 This Agreement shall not be assignable by either party, except that Vendor may assign this Agreement to any person or entity who acquires Vendor's intellectual property in the products. 12.3 This Agreement supersedes all prior oral or written proposals and communications between the parties related to this Agreement, and shall not be modified, rescinded, waived or otherwise changed except with the written consent of the parties. 12.4 Each party confirms that no inducements, promises or representations, not written herein, caused it to enter into this Agreement. 12.5 Notwithstanding anything in this Agreement to the contrary: (1) The Products are computer software and all use and rights thereto are subject to any governed by the license agreements included by Vendor in or with the Products. (2) To the extent they are included in any Product, Linux and any other general public license software to which Vendor has rights under the GNU General Public License shall be governed by such GNU General Public License, including, without limitation the "No Warranty" provisions of the GNU General Public License - GNU General Public License Version 2, June 1991. Vendor does not own Linux or such general public license software and makes no warranty or promise to indemnify with respect thereto. (3) Navarre shall comply with all applicable laws and regulations, including, without limitation, U.S. export laws and regulations. (4) No purchase order or other document submitted by Navarre to Vendor will alter any of the terms of this agreement. 12.6 Neither party to this Agreement is the employee, agent or legal representative of the other for any purpose whatsoever. The parties, by the actions of their authorized representatives, have executed this 7 Agreement, including the attached Exhibit A, as of the date first mentioned above. VENDOR NAVARRE CORPORATION /s/ RANSOM H. LOVE /s/ VICE PRESIDENT/GENERAL MANAGER - ----------------------------------- ----------------------------------- By By President & CEO Vice President/General Manager - ----------------------------------- ----------------------------------- Title Title 12/15/98 12/15/98 - ----------------------------------- ----------------------------------- Date Date 8 EXHIBIT "A" to DISTRIBUTION AGREEMENT OF 12/15/98 -------------------- (Date) Between NAVARRE CORPORATION and Caldera Systems, Inc. -------------------------- (Vendor) ADDITIONAL SERVICE COMMITMENTS *Show volume discounts and minimum order quantities here. TITLES COVERED UNDER THIS AGREEMENT
Product Name UPC Number MRP Price Navarre Price - -------------------------------- --------- ------------- 1. Open Linux 1.3 (761480502308) [****] [****] $20 mail in rebate 2. $ $ 3. $ $ 4. $ $ 5. $ $
The above program (5% DFI, Deduct from Invoice) applies to all current and future retail products, published or distributed by the vendor, during the terms of this agreement. Set up sheets should be attached to this agreement. Please Sign this Page /s/ RANSOM H. LOVE /s/ VICE PRESIDENT/GENERAL MANAGER - ----------------------------------- ---------------------------------------- VENDOR NAVARRE 12/15/98 12/15/98 - ----------------------------------- ---------------------------------------- DATE DATE ****CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO SUCH OMITTED PORTIONS. 9 EXHIBIT "B" NAVARRE MARKETING AND ADVERTISING PROGRAMS 1. Computer Retail Week (Industry Trade Publication) Bi-Monthly full page advertisement that features ten software titles at $2,500 per title. (Circulation approximately 40,000) 2. USA Today Full page, black and white, national advertisement featuring a major retailer. The ad is featured in the Lifestyles section on the last Thursday of the month includes approximately twenty software titles at $5,000 per title. (Circulation approximately 6 million) 3. Sales Training An opportunity to meet one-on-one with each of Navarre's account executives and formulate sales strategies. Second Tuesday of every month. Cost $3,000. 4. New Release Report Monthly resource mailed to all retail software buyers and executives on a national basis includes AA titles and new releases by category, publisher, title and release date. $1,000 per title per 1/4 page 4-color advertisement. 5. Spread The Bytes Two versions of a quarterly demo CD-ROM. One is received by over 3,000 stores nationwide and the other is customized for a major retailer and sold to consumers. $3,000 for the first title and $2,000 for each subsequent title. 6. Interchange Four day annual symposium that brings together publishers and retailers from across the country to lock in holiday merchandising, marketing, and promotion plans. Cost determined annually. 7. Other Navarre may add new programs from time-to-time which Vendor will have the option of participating in. *Prices quoted are subject to change with 30 day advance notification masters\distrib February 19, 1998
EX-10.16 16 OEM RECIPRICAL LICENSE AGREEMENT 1 EXHIBIT 10.16 [EVERGREEN LOGO] OEM RECIPROCAL LICENSE AGREEMENT This OEM Agreement (the "Agreement" or "License") is made as of January 6, 2000 between EVERGREEN INTERNET, INC., an Arizona Corporation having offices at 3260 North Colorado Street, Chandler, Arizona 85225 ("Evergreen" or "Licensor") and Caldera Systems, Inc., a Utah Corporation, having offices at 240 West Center, Orem Utah 84057 ("Caldera" or "Licensee"). This OEM License Agreement is a "Contract" made pursuant to a Master Agreement of even date. This Agreement, the Master Agreement and Exhibits B, C, D and E of the Master Agreement will become effective simultaneously, as of the date when this Agreement, the Master Agreement and all such Exhibits of the Master Agreement have been mutually signed and delivered by the parties. 1. DEFINITIONS "Code" means the computer programming code relating to ECential(TM) and OpenLinux(TM) software products in object and/or executable code form (machine-readable) not to include source code. "Documentation" means the textual materials relating to the Code provided to each other by Evergreen and Caldera, including operating instructions, related technical information, and user documentation. "ECential" means the ECential software products and programs for Linux, as listed in Exhibit A including their Code and Documentation, and any other existing or future e-Commerce Products that Evergreen determines is appropriate for Linux, including their Code and Documentation. Exhibit A shall be updated to keep it current with future e-Commerce Products of Evergreen for Linux and Updates. "e-Commerce Products" means software products and programs that are used in the creation, analysis, management and promotion of Internet E-Commerce web sites, storefronts, customer service, business logic,and e-commerce transactions for consumer-to-business and business-to-business solutions across the Internet or Intranets. Software products or programs that are not competitive with eCential or future releases thereof shall not be deemed to be within the definition of ecommerce products. "Marks" means Evergreen Marks and Caldera Marks. "Evergreen Marks" means the trademarks and/or product names of Evergreen. "Caldera Marks" means the trademarks and/or product names of Caldera. 1 2 "Proprietary Data" means any proprietary "know-how" which a disclosing party discloses to a receiving party relating to the development or use of the disclosing parties design, structure, configuration, programming, and protocol of the disclosing parties software. "Know-how" may include computer program designs, algorithms, subroutines, system specifications, programming logic, manufacturing techniques, and program architecture. "Evergreen Software" means any software proprietary to Evergreen including ECential programs or Code. It also refers to any ECential programs used in conjunction with Caldera Software. "Caldera Software" means the software proprietary to Caldera which is included by Caldera in OpenLinux eServer. "OpenLinux eServer" mean the Linux software distribution designated by Caldera for eServer. This Linux software distribution for eServer includes a Linux kernel, Caldera Software and OpenLinux Third Party Software. OpenLinux for eServer includes existing and future versions thereof. Third Party Software. "Third Party Software" means the software proprietary third parties which is included in eBuilder. "OpenLinux Third Party Software means the Third Party Software included by Caldera in OpenLinux for eBuilder. "ECential Third Party Software" means the Third Party Software included by Evergreen in ECential. "OpenLinux eBuilder" means the bundled combination of ECential with OpenLinux eServer plus third party software, plus any other software the parties agree to add. "Evergreen's version of the bundle" means the bundled combination of OpenLinux eServer with eCential plus any software the parties agree to add. "Reseller" shall mean a distributor, OEM, VAR, integrator, retailer, dealer or other reseller. "Updates" shall means updates and upgrades to, new versions of, and replacements for ECential. 2. OWNERSHIP 2.1 OWNERSHIP ECential is the proprietary product of Evergreen and others in accordance with Sections 3.3 and 3.4 below and is protected by the Copyright and Trademark Laws of the United States of America. Caldera acknowledges that Evergreen and others in accordance with Sections 3.3 and 3.4 below own the intellectual property in ECential software and Caldera makes no claim of ownership to their intellectual property in ECential or ECential itself. 2.2 EVERGREEN AND CALDERA MARKINGS Caldera and Evergreen shall not in any manner act adversely to each others Marks, Proprietary Data, or other intellectual property.. Caldera shall not remove the Evergreen Marks from ECential, unless granted in written permission from Evergreen. Evergreen shall not remove the Caldera Marks from OpenLinux, unless granted in written permission from Evergreen. 2.3 MUTUAL RIGHTS AND OBLIGATIONS 2 3 Evergreen acknowledges that all rights, ownership, and trademarks of OpenLinux for eBuilder are the exclusive property of Caldera and/or Caldera's licensors / suppliers. Caldera acknowledges that all rights, ownership and trademarks of eCential are the exclusive property of Evergreen and/or Evergreens licensors/suppliers. Evergreen shall not in any manner act adversely to the Caldera Marks, Caldera's Proprietary Data or other intellectual property of Caldera. The eBuilder product name and trademark shall belong exclusively to Caldera. The parties will work together in the spirit of an equal partnership so that there is agreement on all product issues such as content, look and feel and licensing terms. Caldera will be sure that the name eCential is featured in all packaging and promotion, web sites and software so that brand equity is built for both parties and their respective products (eBuilder and eCential). OpenLinux eBuilder must give prominent credit to eCential in all packaging and promotion. Evergreen must have the opportunity to approve packaging and promotional materials. Evergreen marketing materials, packaging and look & feel must come through in Caldera's packages, web sites and collateral. Evergreen is entitled to create its own version of the bundled software and for that version hereby extends to Caldera the same terms listed above. 3. LICENSE 3.1 LICENSE GRANT Evergreen grants a, non-transferable (except under Section 9. Y. of the Master Agreement), worldwide right and license for the Linux market during the term of this Agreement, (and Caldera grants Evergreen a non-transferable (except under Section 9. Y. of the Master Agreement), worldwide right and license for the linux market during the term of this agreement) to do the following: 3.1.1 bundle ECential with OpenLinux for eServer to create eBuilder and Evergreen's version of the bundled product. 3.1.2 market, distribute, package, and publish Ecential and OpenLinux, including ECential and OpenLinux Software and documentation, only as part of eBuilder or Evergreen's version of the bundled product and sell Ecential and OpenLinux licenses to end users who receive eBuilder; 3.1.3 use ECential (such use being limited to use by employees or by independent contractors of Caldera for internal use only). Such internal use will require payment of VisiBroker license fees based on the number of CPUs being used. Caldera shall be entitled to purchase such VisiBroker licenses from Evergreen at Evergreen's cost. Evergreen employees and independent contractors may use OpenLinux for internal development. 3.1.4 copy and reproduce ECential and OpenLinux for the purposes of this Agreement. 3.2 ECential is licensed, not sold. Title to the intellectual property and Source Code in ECential remains with Evergreen and its suppliers under Sections 3.3 and 3.4. Evergreen and/or its suppliers reserve all rights not expressly granted herein. Without limiting the foregoing, Caldera shall not modify, port, translate, localize, add features or functionality in the Code, or create derivative works of ECential, decompile, deencrypt, disassemble or otherwise reverse engineer ECential, the logic, 3 4 algorithms or program code of ECential, or attempt to do any of the same. Caldera shall not receive any rights by implication or otherwise in ECential or any component thereof, except as provided in the Business Alliance. 3.3 Caldera and Evergreen may market, distribute, package and publish ECential and OpenLinux under 3.1.2 above, directly to end users and/or indirectly to end users through Caldera's or Evergreen's Resellers. Bundling may be accomplished by physical bundling (e.g., inclusion of ECential physical media with OpenLinux eBuilder media) or electronic bundling (e.g., by making downloads of ECential available through the same web page as downloads of OpenLinux eBuilder) or by otherwise making ECential available in conjunction with eBuilder. The license and rights granted to Caldera may be exercised with respect to any or all of the ECential products as defined in Exhibit A. 3.4 FORM OF USER LICENSE If and to the extent that the parties agree it is practicable, use by an end user of ECential will require a license key. To obtain a license key for ECential, registration is required by the registered user of the product or by Caldera's Reseller. Registration is accomplished by the end user or Caldera's Reseller accessing a web registration page hosted by Evergreen and/or Caldera and filling in the required registration information. Upon completion of the registration process, the registered user will obtain (or the Reseller will obtain for its end user customer) the license key and a User License for the ECential software product being registered. The User License shall be the Software License Agreement of Attachment B. If obtained by either parties Reseller, then it will be passed on to the end user. Evergreen will provide Caldera with the information requested by Caldera to create and maintain the Caldera web page. Caldera will reciprocate. If this registration process is not utilized or if it does not include a procedure acceptable to Evergreen by which the end user accepts the Software License Agreement, then Caldera has the following obligation: The ECential licenses from Evergreen that Caldera is authorized to sell under Section 3.1 above shall be sold on behalf of Evergreen under this Agreement and are to include the Software License Agreement attached as Exhibit B to this Agreement. Caldera shall include a c