<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JULY 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to ____________
Commission file number _______
CALDERA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0617393
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
240 West Center Street
Orem, Utah 84057
(Address of principal executive office and zip code)
(801) 765-4999
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
YES [X] NO [ ]
As of September 14, 2000, 39,036,847 shares of the Registrant's common stock
were outstanding.
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CALDERA SYSTEMS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Number
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of July 31, 2000 and
October 31, 1999.............................................................. 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the three and nine months ended
July 31, 2000 and 1999........................................................ 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended July 31, 2000 and 1999........................................... 5
Notes to Condensed Consolidated Financial Statements............................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................. 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 25
Risk Factors.................................................................... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 42
Item 2. Changes in Securities and Use of Proceeds....................................... 42
Item 3. Defaults Upon Senior Securities................................................. 42
Item 4. Submission of Matters to a Vote of Security Holders............................. 42
Item 5. Other Information............................................................... 43
Item 6. Exhibits and Reports on Form 8-K................................................ 43
Item 7. Signatures...................................................................... 43
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALDERA SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, October 31,
2000 1999
-------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 28,757,215 $ 121,989
Available-for-sale securities 56,462,090 --
Accounts receivable, net of allowance for doubtful
accounts of $302,500 and $90,000, respectively 1,518,045 670,043
Stock subscriptions receivable 1,500,000 1,500,000
Other receivables 6,552 375,000
Inventories 317,187 169,409
Other current assets 1,669,324 33,524
-------------- --------------
Total current assets 90,230,413 2,869,965
-------------- --------------
PROPERTY AND EQUIPMENT:
Computer equipment 1,063,498 609,665
Furniture and fixtures 1,263,130 675,181
Leasehold improvements 316,708 86,973
-------------- --------------
2,643,336 1,371,819
Less accumulated depreciation and amortization (989,313) (652,399)
-------------- --------------
Net property and equipment 1,654,023 719,420
-------------- --------------
INVESTMENTS IN NON-MARKETABLE SECURITIES:
Affiliate 1,966,174 --
Non-affiliates 3,999,497 --
-------------- --------------
5,965,671 --
-------------- --------------
OTHER ASSETS, net 104,073 124,430
-------------- --------------
Total assets $ 97,954,180 $ 3,713,815
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,293,243 $ 1,309,255
Accrued liabilities 1,712,393 450,157
Accrued marketing development 76,078 172,900
Accrued sales returns and other allowances 484,146 169,000
Deferred revenue 67,803 38,080
Current portion of long-term debt -- 3,698
Related party payables 31,500 48,933
-------------- --------------
Total current liabilities 4,665,163 2,192,023
-------------- --------------
LONG-TERM DEBT, net of current portion -- 5,762
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 25,000,000 shares authorized -- --
Common stock, $0.001 par value; 75,000,000 shares authorized,
39,036,847 and 26,607,329 shares outstanding, respectively 39,037 26,607
Additional paid-in capital 151,863,065 16,160,312
Stock subscriptions receivable -- (1,500,000)
Deferred compensation (5,896,447) (2,734,934)
Accumulated comprehensive income (loss) 454,903 (4,365)
Accumulated deficit (53,171,541) (10,431,590)
-------------- --------------
Total stockholders' equity 93,289,017 1,516,030
-------------- --------------
Total liabilities and stockholders' equity $ 97,954,180 $ 3,713,815
============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CALDERA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended July 31, Nine Months Ended July 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
Software and related products $ 631,173 $ 1,007,536 $ 2,148,867 $ 1,997,527
Services 556,561 87,026 953,200 178,857
------------ ------------ ------------ ------------
Total revenue 1,187,734 1,094,562 3,102,067 2,176,384
------------ ------------ ------------ ------------
COST OF REVENUE:
Software and related products 463,783 768,549 1,491,918 1,257,694
Services 766,517 208,735 1,371,101 397,025
------------ ------------ ------------ ------------
Total cost of revenue 1,230,300 977,284 2,863,019 1,654,719
------------ ------------ ------------ ------------
GROSS (DEFICIT) MARGIN (42,566) 117,278 239,048 521,665
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing (exclusive of non-cash compensation
of $418,700, $10,182, $1,324,532 and $10,182,
respectively) 4,625,353 1,024,631 10,503,694 2,351,597
Research and development (exclusive of non-cash
compensation of $240,904, $5,920, $845,767 and $5,920,
respectively) 1,111,167 655,325 3,391,111 1,600,581
General and administrative (exclusive of non-cash
compensation of $383,338, $7,578, $1,830,452 and
$7,578, respectively) 1,985,687 510,808 4,490,393 1,179,768
Amortization of deferred compensation 1,042,942 23,680 4,000,751 23,680
------------ ------------ ------------ ------------
Total operating expenses 8,765,149 2,214,444 22,385,949 5,155,626
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (8,807,715) (2,097,166) (22,146,901) (4,633,961)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense -- (54,095) (547) (241,785)
Other income (expense) 1,288,444 5,303 2,149,652 (2,189)
------------ ------------ ------------ ------------
Other income (expense), net 1,288,444 (48,792) 2,149,105 (243,974)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (7,519,271) (2,145,958) (19,997,796) (4,877,935)
PROVISION FOR INCOME TAXES (11,440) (11,300) (38,590) (25,210)
------------ ------------ ------------ ------------
NET LOSS $ (7,530,711) $ (2,157,258) $(20,036,386) $ (4,903,145)
============ ============ ============ ============
DIVIDENDS RELATED TO CONVERTIBLE PREFERRED STOCK $ -- $ -- $(12,252,717) $ --
============ ============ ============ ============
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (7,530,711) $ (2,157,258) $(32,289,103) $ (4,903,145)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.19) $ (0.13) $ (1.05) $ (0.30)
============ ============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 39,036,847 16,231,895 30,822,422 16,078,148
============ ============ ============ ============
OTHER COMPREHENSIVE LOSS:
Net loss $ (7,530,711) $ (2,157,258) $(32,289,103) $ (4,903,145)
Unrealized gain on available-for-sale securities 457,995 -- 457,995 --
Foreign currency translation adjustment 13,230 1,007 1,273 (3,443)
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $ (7,059,486) $ (2,156,251) $(31,829,835) $ (4,906,588)
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CALDERA SYSTEMS, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Nine Months Ended July 31,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(20,036,386) $ (4,903,145)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 372,022 167,960
Amortization of deferred compensation 4,000,751 23,680
Issuance of common stock for services 134,664 -
Accrued interest converted to equity - 167,267
Changes in operating assets and liabilities:
Accounts receivable, net (848,002) (427,713)
Other receivables 368,448 (375,000)
Inventories (147,778) (183,123)
Other current assets (1,635,800) 75,232
Other assets (12,976) (7,789)
Accounts payable 966,555 1,006,303
Accrued liabilities 1,262,236 213,371
Accrued marketing development (96,822) -
Accrued sales returns and other allowances 315,146 43,474
Deferred revenue 29,723 98,196
------------ ------------
Net cash used in operating activities (15,328,219) (4,101,287)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash payment to Caldera, Inc. in asset acquisition - (14,963,826)
Purchase of property and equipment (1,271,517) (336,922)
Purchase of available-for-sale securities (56,005,368) -
Acquisition of investment in non-marketable security (2,000,000) -
------------- ------------
Net cash used in investing activities (59,276,885) (15,300,748)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from majority stockholder under convertible promissory note - 4,819,000
Borrowings from majority stockholder 300,000 -
Repayment of borrowings from majority stockholder (300,000) -
Proceeds from long-term debt - 11,202
Repayments of long-term debt (9,460) (1,442)
Proceeds from issuance of common shares upon incorporation - 15,481,000
Proceeds from sale of common stock, net of offering costs 73,281,359 -
Proceeds from sale of Series B convertible preferred stock, net of offering costs 29,790,674 -
Proceeds from exercise of common stock options 176,484 -
------------ ------------
Net cash provided by financing activities 103,239,057 20,309,760
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 28,633,953 907,725
CUMULATIVE TRANSLATION ADJUSTMENT 1,273 (3,442)
CASH AND CASH EQUIVALENTS, beginning of period 121,989 75,586
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 28,757,215 $ 979,869
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CALDERA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended July 31,
2000 1999
-------------- --------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 547 $ --
Cash paid for income taxes $ 41,031 $ --
Unrealized gain on available-for-sale securities $ 457,995 $ --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common shares for a note receivable $ -- $ 6,000,000
Issuance of common shares and the acquisition of a license fee for $ 1,999,497 $ --
non-marketable securities
Conversion of 6,596,146 shares of common stock to 6,596,146
shares of Series A convertible preferred stock $ 6,596 $ --
Conversion of 6,596,146 shares of Series A convertible preferred stock and
5,000,000 shares of Series B convertible preferred stock to 11,596,146
shares of common stock $ 11,596 $ --
Dividends related to Series B convertible preferred stock $ 12,252,717 $ --
Issuance of common shares in exchange for investment in Lineo, Inc. $ 10,000,000 $ --
Distribution to majority stockholder for fair value of shares issued in
excess of the carryover basis of the investment in Lineo, Inc. $ (9,999,999) $ --
Distribution to majority stockholder for license rights $ (450,849) $ --
Contribution of additional shares of Lineo, Inc. from majority stockholder $ 1,966,173 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 7
CALDERA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Caldera Systems, Inc. ("Caldera"), was incorporated as a Utah
corporation on August 21, 1998, and was reincorporated as a Delaware corporation
on March 6, 2000. Caldera develops and markets software and provides related
services that enable the development, deployment and management of Linux-based
specialized servers and Internet devices that extend the eBusiness
infrastructure. Caldera sells and distributes its software and related products
indirectly through distributors and solutions providers, which include
value-added resellers ("VARs"), original equipment manufactures ("OEMs"),
systems integrators, as well as directly to end-user customers. These sales
occur throughout the United States and in certain international locations.
(2) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Caldera Systems, Inc. and subsidiary (the "Company") have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the following disclosures, when
read in conjunction with the financial statements and the notes thereto included
in the Company's Registration Statement on Form S-1 declared effective by the
SEC on March 20, 2000, are adequate to make the information presented not
misleading.
The condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) that, in the opinion of
management, are necessary to present fairly the financial position and results
of operations of the Company as of the balance sheet dates and for the periods
presented. Operating results for the three and nine months ended July 31, 2000
are not necessarily indicative of the results that may be expected for the year
ending October 31, 2000.
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.
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<PAGE> 8
CALDERA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
Caldera and its wholly owned subsidiary, Caldera Deutschland GmbH ("Caldera
GmbH"), after elimination of intercompany accounts and transactions.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with maturities of three or fewer
months to be cash equivalents. Cash equivalents primarily consist of investments
in money market mutual funds.
AVAILABLE FOR-SALE-SECURITIES
Available for-sale-securities include investments with lives in excess
of three months. These investments are recorded at fair market value, based on
quoted market prices and unrealized gains and losses are recorded as a component
of comprehensive income.
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 July 31, 2000 and October 31, 1999, inventories
consisted of raw materials of approximately $231,900 and $79,400, respectively,
and finished goods of approximately $85,300 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.
REVENUE RECOGNITION
The Company generates revenue from software and related products sold
indirectly through distributors and solutions providers and directly to
end-users. The Company also generates services revenue from training royalties
and tuition fees, consulting fees, and customer support fees.
Revenue from the sale of software and related products is recognized
upon delivery of the product when persuasive evidence of an arrangement exists,
the price is fixed or determinable and collection is probable. All sales into
the distribution channel or to OEMs require a binding purchase order. Sales to
resellers for which payment is considered to be substantially contingent on the
reseller's success in distributing individual units of the product or sales to
resellers with which the Company does not have historical experience are
accounted for as consignments and the revenue is recognized once sell-through
verification has been received and payments from
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<PAGE> 9
CALDERA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
customers become due. Direct sales to end-users are evidenced by concurrent
payment for the product via credit card and are governed by a license agreement.
Generally, the only multiple element arrangement of the Company's initial
software sales is certain telephone and e-mail technical support services the
Company provides at no additional charge. These services do not include product
update or upgrade rights. After the initial support period, customers can elect
to enter into separate support agreements. The cost of providing the initial
support services is not significant; accordingly, the Company accrues the
estimated costs of providing the services at the time of revenue recognition.
Revenue from the extended support agreements are deferred and recognized over
the period of the contract or as the services are provided.
If other significant post-delivery vendor obligations exist or if a
product is subject to customer acceptance, revenue is deferred until no
significant obligations remain or acceptance has occurred. To date, the Company
has not shipped any software and related products subject to acceptance terms or
subject to other post-delivery vendor obligations. Additionally, the Company has
not recognized revenue on any contracts with customers that may include customer
cancellation or termination clauses that indicate a demonstration period or
otherwise incomplete transaction.
The Company also offers its customers consulting, training and other
services separate from the software sale. The services are not integral to the
functionality of the software and are available from other vendors. Services
revenue is recognized as the services are performed.
Sales to certain distributors are subject to agreements allowing for
rights of return and price protection. Allowances for estimated future returns,
price protection, stock rotations, and other customer incentives, are provided
at the time of sale based on the Company's policies and historical experience.
At July 31, 2000 and October 31, 1999, allowances for returns, price protection
and stock rotations totaled approximately $484,100 and $169,000, respectively,
and are reflected as current liabilities in the accompanying condensed
consolidated balance sheets.
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 and Series B convertible preferred stock. For the three and nine months ended
July 31, 2000, there were 4,184,794 and 7,659,524 common share equivalents that
were not included in the computation of diluted net loss
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<PAGE> 10
CALDERA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
per common share as their effect would have been anti-dilutive, thereby
decreasing the net loss per common share.
(3) INITIAL PUBLIC OFFERING
On March 20, 2000, the Company completed the sale of an
aggregate of 5.0 million shares of common stock at a price of $14.00 per share
in a firm commitment underwritten public offering. The offering was affected
pursuant to a Registration Statement on Form S-1 (Registration No. 333-94351),
which was declared effective on March 20, 2000 by the United States Securities
and Exchange Commission. On April 17, 2000, the underwriters exercised their
over allotment option for an additional 750,000 shares of our common stock.
We received $80.5 million in proceeds from this offering, of which $5.6
million was paid to the underwriters as underwriting discounts and commissions
and approximately $3.0 million was paid for direct offering expenses.
(4) 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. During the nine months ended July 31, 2000, the Company made the
required payments to Sun and recorded the payments as prepaid license fees and
marketing expense. Under the agreements, the Company has access to certain of
Sun's technologies as well as participates with Sun in various marketing
activities. The Company is expensing the portion of the fee allocated to the
technology ratably over the length of the agreements and is expensing the
portion of the fee allocated to the marketing activities as they occur.
(5) INVESTMENTS IN NON-MARKETABLE SECURITIES
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. 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 Company has recorded its investment in
Evergreen at cost, based on the cash consideration paid by the Company and the
estimated fair market value of the Company's common stock on the date of the
agreement of $8.00 per share. The total investment of $3.6 million is included
in the caption Investments in Non-marketable Securities - Non-affiliates in the
accompanying July 31, 2000 condensed consolidated balance sheet.
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<PAGE> 11
CALDERA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
TROLL TECH AS
In December 1999, the Company and The Canopy Group ("Canopy"), the
Company's majority stockholder, 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 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. The Company has recorded its
investment in Troll Tech's common stock at $399,999, based on the cash price per
share paid by Canopy. The Company determined that the cash price per share paid
by Canopy is the most reliable evidence of the value of Troll Tech's common
stock. The difference between the estimated fair value of the 106,356 shares of
the Company's common stock at $8.00 per share of $850,848 and the $399,999
investment has been reflected as a distribution to Canopy. The total investment
of $399,999 is included in the caption Investments in Non-marketable Securities
- Non-affiliates in the accompanying July 31, 2000 condensed consolidated
balance sheet.
LINEO, INC.
In January 2000, the Company and Lineo, Inc. ("Lineo") entered into a
stock purchase and sale agreement. Pursuant to the stock purchase agreement, the
Company agreed to purchase 3,238,437 shares of common stock of Lineo in exchange
for 1,250,000 shares of the Company's common stock. Because Lineo is also
majority owned by Canopy, the investment in Lineo has been accounted for as a
transaction between entities under common control with the transfer being
reflected in the condensed consolidated financial statements at Lineo's carry
over basis. At the date of the agreement, Lineo had a stockholders' deficit.
Accordingly, the investment was recorded at a nominal value of $1.00 because the
Company does not have any obligation to provide additional funding to Lineo. The
Company has recorded the estimated fair value of the shares of its common stock
issued to Lineo at $10.0 million with the difference between the $10.0 million
and the $1.00 investment recorded as a distribution to Canopy.
On May 11, 2000, Canopy transferred 1,761,563 shares of Lineo's common
stock held by Canopy to Caldera Systems. This transfer has been reflected as a
capital contribution by Canopy at Lineo's carry over basis of $1,966,173. As a
result of this transaction, the Company currently holds a total of 5,000,000
shares of Lineo's common stock. The total investment of $1,966,174 is included
in the caption Investments in Non-marketable Securities - Affiliate in the
accompanying July 31, 2000 condensed consolidated balance sheet.
(6) STOCKHOLDERS' EQUITY
CONVERSION OF COMMON SHARES INTO SERIES A PREFERRED SHARES
Prior to the offering of Series B shares discussed below, on December
30, 1999, the Company entered into a Conversion Agreement with its two major
stockholders,
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<PAGE> 12
CALDERA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
Canopy and MTI Technology Corporation ("MTI"). These two stockholders held 99
percent of the outstanding shares of the Company's common stock at December 30,
1999. Pursuant to the Conversion Agreement, the Company converted 6,596,146
shares of outstanding common stock held by Canopy and MTI into 6,596,146 shares
of Series A preferred shares.
ISSUANCE OF SERIES B CONVERTIBLE PREFERRED STOCK
On December 30, 1999, the Company's board of directors authorized the
issuance of 5,000,000 shares of Series B convertible preferred stock at $6.00
per share. During January 2000, the 5,000,000 shares were sold for net proceeds
of $29,790,674. Each share of Series B convertible preferred stock was
immediately convertible to one share of common stock upon issuance. During the
nine months ended July 31, 2000, the Company recorded a dividend related to the
Series B convertible preferred stock in the amount of $10.0 million representing
the value of the beneficial conversion feature. The beneficial conversion
feature was calculated based on the difference between the conversion price of
$6.00 per share and the estimated fair value of the common stock of $8.00 per
share for financial reporting purposes based on the estimated price range for
the Company's IPO. The Company's board of directors determined that the $6.00
per share price for the Series B preferred stock represented their estimate of
the fair value of the Series B preferred stock at the time sold and that the
Series B preferred shares were not issued for other consideration or goods and
services.
WARRANT AGREEMENT BETWEEN CANOPY AND SERIES B PREFERRED STOCKHOLDER
In connection with the Series B preferred stock offering, Canopy and
Egan-Managed Capital, L.P. ("EMC"), one of the investors in the Series B
preferred stock offering, entered into a letter agreement wherein Canopy agreed
to purchase the shares of Series B convertible preferred stock purchased by EMC
in the event that EMC did not receive a warrant in a satisfactory form to EMC to
purchase 416,667 shares of the Company's common stock from Canopy. On March 13,
2000, Canopy sold to EMC a warrant for $10,000 to purchase 416,667 shares of the
Company's common stock held by Canopy at $5.98 per share for a two-year period.
Since the sale of this warrant directly related to the issuance of the Series B
preferred stock, the Company has accounted for this transaction as if the
Company had sold the warrant to EMC with an offsetting contribution to capital.
Accordingly, the Company recorded the fair value of the warrant of $2,252,717,
determined using the Black-Scholes option-pricing model, as a beneficial
conversion feature reflected as a dividend related to the Series B preferred
stock during the nine months ended July 31, 2000. Assumptions used in the
Black-Scholes option-pricing model were the following: estimated fair value of
common stock of $8.00 per share; risk-free interest rate of 6 percent; expected
dividend yield of 0 percent; volatility of 118 percent; and expected exercise
life of two years.
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<PAGE> 13
CALDERA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
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
fair market value of the Company's common stock. During the nine months ended
July 31, 2000, the Company granted 3,858,137 stock options with exercise prices
that were below the estimated fair market value on the measurement date
resulting in $6,790,261 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 $1,042,942 and $4,000,751, respectively,
during the three and nine months ended July 31, 2000.
During the nine months ended July 31, 1999, the Company granted
1,455,338 stock options with exercise prices that were below the estimated fair
market value on the measurement date resulting in $181,917 in deferred
compensation. For the three and nine months ended July 31, 1999, amortization of
deferred compensation was $23,680.
As a result of an option agreement between Canopy and Ralph J. Yarro
III, which was subsequently rescinded, the Company expensed a one-time
compensation charge of $372,000 during the nine months ended July 31, 2000. The
option agreement allowed Mr. Yarro to purchase shares of the Company's common
stock directly from Canopy. No shares were purchased under the agreement. Mr.
Yarro is the president and chief executive officer of Canopy and the Chairman of
the Company's board of directors.
(7) COMMITMENTS AND CONTINGENCIES
OPERATING LEASE AGREEMENTS
On March 30, 2000, the Company entered into an operating lease
agreement whereby the Company will lease 5,146 square feet of office space for
$8,255 per month. This lease is for a term of five years and commences on June
1, 2000.
On April 5, 2000, the Company entered into an amended operating lease
agreement whereby the Company will lease additional office space adjacent to its
current corporate offices. The amendment requires additional lease payments of
approximately $34,934 per month, and the lease expires December 2002. The lease
may be terminated at an earlier date in accordance with the provisions of the
original lease agreement.
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 results of operations, financial
position or liquidity.
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<PAGE> 14
CALDERA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
SEVERANCE AGREEMENTS
During July and August 2000, the Company entered into Severance
Agreements with certain members of management. The agreements are only in effect
upon a change of control and termination or effective termination of employment
with the Company. Change of control is defined as: (1) any person or entity who
becomes the beneficial owner of 51 percent or more of the Company's common
stock, (2) sale of substantially all of the Company's assets, (3) approval of a
merger or consolidation in which at least 50 percent of the voting securities
are acquired, and (4) certain changes in the composition of the Company's board
of directors. Specific provisions for Senior Vice Presidents and Executive
Officers include but are not limited to the following; salary and bonus payments
equal to 150 percent of the then current annual base salary and bonuses, 18
months of accelerated vesting on outstanding stock options and continuating
insurance benefits for a period up to six months. Specific provisions for Vice
Presidents include but are not limited to the following; salary and bonus
payments equal to 100% of the then current annual base salary and bonuses, 12
months of accelerated vesting on outstanding stock options and continuating
insurance benefits for a period of six months.
(8) 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 the 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 does not have any separately
reportable operating segments. However, the Company does sell software and
related products in geographic locations outside of the United States.
Revenue attributed to individual countries based on the location of
sales to unaffiliated customers for the three and nine months ended July 31,
2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended July 31, Nine Months Ended July 31,
2000 1999 2000 1999
-------------------------- --------------------------
Revenue:
<S> <C> <C> <C> <C>
United States $ 712,547 $1,018,070 $2,157,775 $2,045,801
Asia pacific 258,802 37,033 442,875 61,374
Europe 158,481 34,515 341,114 56,151
Other countries 57,904 4,944 160,303 13,058
---------- ---------- ---------- ----------
Total revenue $1,187,734 $1,094,562 $3,102,067 $2,176,384
========== ========== ========== ==========
</TABLE>
(9) SUBSEQUENT EVENTS
PROPOSED ACQUISITION OF THE SANTA CRUZ OPERATION'S SERVER SOFTWARE AND
PROFESSIONAL SERVICES DIVISIONS
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<PAGE> 15
CALDERA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
On August 1, 2000 and as amended on September 13, 2000, Caldera
Systems, Inc., Caldera, Inc. ("New Caldera"), and The Santa Cruz Operation, Inc.
("SCO") entered into an Agreement and Plan of Reorganization (the
"Reorganization Agreement"). As a result of the transactions proposed by the
Reorganization Agreement (the "Reorganization"), (i) a newly formed, wholly
owned subsidiary of New Caldera will be merged with and into Caldera, with
Caldera being the surviving corporation, and all outstanding Caldera securities
will be converted, on a share for share basis, into New Caldera securities
having identical rights, preferences and privileges, with New Caldera assuming
any and all outstanding options and other rights to purchase shares of capital
stock of Caldera (with all such New Caldera securities issued to former Caldera
security holders initially representing in the aggregate a fully-diluted
interest in New Caldera equal to approximately 71.4% in New Caldera); (ii) SCO
and certain of its subsidiaries will contribute to New Caldera, all of the
capital stock held of certain contributed companies and certain assets in
consideration for the issuance by New Caldera to SCO of shares of common stock
of New Caldera, $0.001 par value ("New Caldera Common Stock") (the
"Acquisition"); (iii) New Caldera will assume all options to acquire common
stock held by employees (except for three officers) hired or retained by Caldera
and such options will be converted into options to purchase New Caldera Common
Stock (the "New Caldera Options"); and (iv) SCO will receive shares of New
Caldera Common Stock (including shares reserved for New Caldera Options)
representing in the aggregate a fully diluted equity interest in New Caldera
equal to approximately 28.6% of New Caldera and $7,000,000 in cash. In
conjunction with the Reorganization Agreement, The Canopy Group, Inc., a major
stockholder of Caldera has agreed to loan $18 million to SCO and Caldera has
agreed to loan $7 million to SCO. Each of these loans will be secured by the
assets of SCO.
In addition, certain stockholders of SCO and certain stockholders of
Caldera have entered into Voting Agreements to vote in favor of the
Reorganization and against certain other matters (the "Voting Agreements"). The
Reorganization is intended to constitute a reorganization under Section 351 of
the Internal Revenue Code of 1986, as amended, and to be accounted for as a
purchase transaction. Consummation of the Reorganization is subject to various
conditions, including, among other things, receipt of the necessary approvals of
the stockholders of Caldera, shareholders of SCO and certain regulatory bodies.
The combination will be accounted for under the purchase method of
accounting. The purchase price of the contributed assets, or the aggregate
merger consideration, including direct costs of the combination, will be
allocated to the assets acquired, including in-process research and development,
and liabilities assumed based upon their estimated fair values. The excess
purchase consideration will be allocated to goodwill.
PROPOSED SALE OF COMMON STOCK OF LINEO, INC. TO METROWERX HOLDINGS
On August 31, 2000, the Company, Canopy and Metrowerx Holdings, Inc.
("Metrowerx"), an affiliate of Motorola, Inc., entered into a Stock Purchase and
Sale Agreement whereby the Company and Canopy will sell 2.0 million and 1.0
million shares, respectively, of common stock of Lineo, Inc., to Metrowerx at
$7.50 per share. The sale will
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<PAGE> 16
CALDERA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
close upon the receipt of certain required regulatory approvals and the
completion of other closing conditions.
In conjunction with the sale of the common stock of Lineo, the Company
also entered into a stockholder agreement among and between Canopy, Lineo, Inc.
and certain other stockholders of Lineo which provides for a right of first
refusal for the benefit of Metrowerx with respect to Lineo shares held by the
Company and other Lineo stockholders. The Company has also agreed to indemnify
Metrowerx up to an amount equal to the amount of proceeds received by the
Company for any damages sustained by Metrowerx as a result of breaches by the
Company under the stock purchase and sale agreement and the stockholder
agreement or for breaches by Lineo under a warrant agreement between Lineo and
Metrowerx.
The difference between the $7.50 per share price and the Company's per
share carrying value will be recorded as a contribution to equity.
-16-
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our condensed
consolidated financial statements and notes thereto, included elsewhere in this
quarterly filing as well as our Form S-1 registration statement filed with the
Securities and Exchange Commission. 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 quarterly filing.
OVERVIEW
We began operations in 1994 as Caldera, Inc. In July 1996, through an
asset purchase, Caldera, Inc. acquired an additional business unit that 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, under an asset purchase agreement dated as of September
1, 1998, as amended, sold the assets relating to its business of developing and
marketing Linux software to Caldera Systems, Inc., a newly-formed corporation.
Caldera Systems, Inc. has operated as a separate legal entity engaged in
developing and marketing Linux software since September 1, 1998. Since September
1, 1998, we have invested heavily in the expansion of our sales, marketing and
professional services organizations to support our long-term growth strategy. As
a result, our employee headcount has increased from 28 at September 1, 1998 to
209 at July 31, 2000. We have incurred net losses in each fiscal period since
inception and as of July 31, 2000, had an accumulated deficit of $53.2 million.
On August 1, 2000 and as amended on September 13, 2000, Caldera
Systems, Inc., Caldera, Inc. ("New Caldera"), and The Santa Cruz Operation, Inc.
("SCO") entered into an Agreement and Plan of Reorganization (the
"Reorganization Agreement"). As a result of the transactions proposed by the
Reorganization Agreement (the "Reorganization"), (i) a newly formed, wholly
owned subsidiary of New Caldera will be merged with and into Caldera, with
Caldera being the surviving corporation, and all outstanding Caldera securities
will be converted, on a share for share basis, into New Caldera securities
having identical rights, preferences and privileges, with New Caldera assuming
any and all outstanding options and other rights to purchase shares of capital
stock of Caldera (with all such New Caldera securities issued to former Caldera
security holders initially representing in the aggregate a fully-diluted
interest in New Caldera equal to approximately 71.4% in New Caldera); (ii) SCO
and certain of its subsidiaries will contribute to New Caldera, all of the
capital stock held of certain contributed companies and certain assets in
consideration for the issuance by New Caldera to SCO of shares of common stock
of New Caldera, $0.001 par value ("New Caldera Common Stock") (the
"Acquisition"); (iii) New Caldera will assume all options to acquire common
stock held by employees (except for three officers) hired or retained by Caldera
and such options will be converted into options to purchase New Caldera Common
Stock (the "New Caldera Options"); and (iv) SCO will receive shares of New
Caldera Common Stock (including shares reserved for New Caldera Options)
representing in the aggregate a fully diluted equity interest in New Caldera
equal to approximately 28.6% of New Caldera and $7,000,000 in cash. In
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<PAGE> 18
conjunction with the Reorganization Agreement, The Canopy Group, Inc., a major
stockholder of Caldera has agreed to loan $18 million to SCO and Caldera has
agreed to loan $7 million to SCO. Each of these loans will be secured by the
assets of SCO.
In addition, certain stockholders of SCO and certain stockholders of
Caldera have entered into Voting Agreements to vote in favor of the
Reorganization and against certain other matters.
Substantially all of our current revenue is derived from sales of Linux
products and related services. We expect that until the closing of the
combination, the majority of our revenue will continue to be derived from sales
of our eDesktop and eServer products. Subsequent to the closing of the
Combination, the majority of our revenue will be derived from sales of combined
products resulting from the integration of our Linux products with the Unix
based server products and related applications that we would acquire in
conjunction the acquisition of the Server and Professional Services Divisions.
Related product sales are comprised of shipments of incomplete box units or
documentation materials that customers request from time to time.
Historically, we have experienced substantial fluctuations in our
revenue 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 channel partners.
We recognize revenue in accordance with the American Institute of
Certified Public Accountants, or AICPA, Statement of Position 97-2, or SOP 97-2
and Statement of Position 98-9, or SOP 98-9. Accordingly, revenue from the sale
of software is recognized upon delivery of the product when persuasive evidence
of an arrangement exists, the price is fixed or determinable and collection is
probable. All sales into the distribution channel or to OEMs and VARs require a
binding purchase order. Sales to resellers for which payment is considered to be
substantially contingent on the reseller's success in distributing individual
units of the product or sales to resellers with which we do not have historical
experience are accounted for as consignment sales and the revenue is recognized
once sell-through verification is received and payments from customers become
due. During the nine months ended July 31, 2000, approximately 15 percent of our
product revenue was derived on a sell-through basis. Direct sales to end-users
are evidenced by concurrent payment for the product via credit card and are
governed by a license agreement. Generally, the only multiple element
arrangement of our initial software sales is certain telephone and e-mail
technical support services we provide at no additional charge. These services do
not include product update or upgrade rights. After the initial support period,
customers can elect to enter into separate support agreements. The cost of
providing the initial support services is not significant; accordingly, we
accrue the estimated costs of providing the services at the time of revenue
recognition. Revenue from the extended support agreements are deferred and
recognized over the period of the contract or as the services are provided.
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<PAGE> 19
If other significant post-delivery vendor obligations exist or if a
product is subject to customer acceptance, revenue is deferred until no
significant obligations remain or acceptance has occurred. To date, we have not
shipped any software and related products subject to acceptance terms or subject
to other post-delivery vendor obligations. Additionally, we have not recognized
revenue on any contracts with customers that may include customer cancellation
or termination clauses that indicate a demonstration period or otherwise
incomplete transaction.
We also offer our customers consulting, training and other services
separate from the software sale. The services are not integral to the
functionality of the software and are available from other vendors. These
services revenue are recognized as the services are performed.
Software and related products revenue is comprised of revenue from the
sale of software and other products such as shipments of incomplete box units or
documentation materials. Services revenue is comprised of training royalties and
tuition fees, consulting fees and customer support fees.
Cost of software and related products revenue primarily consists of 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 offerings are included in these costs.
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.
RESULTS OF OPERATIONS
THREE-MONTH PERIODS ENDED JULY 31, 2000 AND JULY 31, 1999
Revenue
Our revenue was $1.2 million for the three-month period ended July 31,
2000 and $1.1 million for the three-month period ended July 31, 1999. During the
three-month period ended July 31, 2000, approximately 53 percent of our revenue
was generated evenly from the sale of software and related products. During the
three-month period ended July 31, 1999, our revenue was primarily generated from
the sale of software and related products. Revenue from international customers
was
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<PAGE> 20
approximately 40 percent of total revenue for the three-month period ended July
31, 2000, and 7 percent of total revenue for the three-month period ended July
31, 1999.
Software and Related Products. Our software and related products
revenue was $631,000 for the three-month period ended July 31, 2000 and $1.0
million for the three-month period ended July 31, 1999, a decrease of $376,000,
or 37%. The decrease during the three-month period ended July 31, 2000 is
primarily attributed to the release of OpenLinux 2.2, which started shipping
during the three-month period, ended July 31, 1999.
Services. Our services revenue was $557,000 for the three-month period
ended July 31, 2000 and $87,000 for the three-month period ended July 31, 1999,
an increase of $470,000, or 540%. The increase in services revenue over the same
quarter of the prior year was primarily attributed to our increased education
and training-related offerings as well as from promotional fees received from
our electronic Linux marketplace program. During the three-month period ended
July 31, 2000, we continued to increase our marketing efforts for our services.
Cost of Revenue
Cost of Software and Related Products Revenue. Our cost of software and
related products revenue was $464,000 for the three-month period ended July 31,
2000 and $769,000 for the three-month period ended July 31, 1999, a decrease of
$305,000, or 40%. Cost of software and related products revenue as a percentage
of software and related products revenue was 73% for the three-month period
ended July 31, 2000 and 76% for the three-month period ended July 31, 1999.
Cost of Services Revenue. Our cost of services revenue was $767,000 for
the three-month period ended July 31, 2000 and $209,000 for the three-month
period ended July 31, 1999, an increase of $558,000, or 267%. The increase was
primarily due to additional employees and other internal costs to increase our
services and support offerings capabilities as well as all costs incurred from
our electronic Linux marketplace program.
Operating Expenses
Sales and Marketing. Our sales and marketing expenses were $4.6 million
for the three-month period ended July 31, 2000 and $1.0 million for the
three-month period ended July 31, 1999, an increase of $3.6 million, or 351%.
The increase was primarily attributed to additional sales and marketing salaries
and benefits as headcount totals increased significantly, additional advertising
and related costs and tradeshow participation. We expect our sales and marketing
expenses to continue to increase as the Company continues to grow.
Research and Development. Our research and development expenses were
$1.1 million for the three-month period ended July 31, 2000 and $655,000 for the
three-month period ended July 31, 1999, an increase of $456,000, or 70%. The
increase in research and development expenses was primarily attributed to
payroll costs and related benefits for additional employees for software
development and quality assurance.
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<PAGE> 21
General and Administrative. Our general and administrative expenses
were $2.0 million for the three-month period ended July 31, 2000 and $511,000
for the three-month period ended July 31, 1999, an increase of $1.5 million, or
289%. The increase in expenses was mainly attributed to increased salaries and
benefits for additional general and administrative employees and increased
facilities and related costs consistent with our growth in headcount and overall
business.
Amortization of Deferred Compensation. In connection with stock options
granted to employees, we amortized $1.0 million of deferred compensation during
the three-month period ended July 31, 2000. During the three-month period ended
July 31, 1999, we amortized $24,000 of deferred compensation.
Other Income (Expense), net
Other income (expense), net consists primarily of interest expense on
borrowings and interest income received on cash reserves. Interest expense was
$0 during the three-month period ended July 31, 2000, and $54,000 during the
three-month period ended July 31, 1999. Other income was $1.3 million during the
three-month period ended July 31, 2000, and $5,000 during the three-month period
ended July 31, 1999. The increase is primarily related to interest income on the
proceeds received from our initial public offering during March 2000.
Provision for Income Taxes
For the three-month periods ended July 31, 2000 and 1999, our
subsidiary, Caldera GmbH, incurred income tax expense of $11,000 and $11,000,
respectively.
NINE-MONTH PERIODS ENDED JULY 31, 2000 AND JULY 31, 1999
Revenue
Our revenue was $3.1 million for the nine-month period ended July 31,
2000 and $2.2 million for the nine-month period ended July 31, 1999. During each
of these six-month periods, our revenue was generated primarily from the sale of
software and related products. Revenue from international customers was
approximately 30 percent of total revenue for the nine-month period ended July
31, 2000, and 6 percent of total revenue for the nine-month period ended July
31, 1999.
Software and Related Products. Our software and related products
revenue was $2.1 million for the nine-month period ended July 31, 2000 and $2.0
million for the nine-month period ended July 31, 1999, an increase of $151,000,
or 8%. The primary component of software and related product revenue for the
nine months ended July 31, 2000 was derived from sales of eDesktop and eServer
products.
Services. Our services revenue was $953,000 for the nine-month period
ended July 31, 2000 and $179,000 for the nine-month period ended July 31, 1999,
an increase of $774,000, or 433%. The increase in services revenue over the
nine-month period of the prior year was primarily attributed to our increased
education and training-related offerings, promotional fees received from our
electronic Linux marketplace program and the increased effectiveness of our
marketing efforts for these programs.
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<PAGE> 22
Cost of Revenue
Cost of Software and Related Products Revenue. Our cost of software and
related products revenue was $1.5 million for the nine-month period ended July
31, 2000 and $1.3 million for the nine-month period ended July 31, 1999, an
increase of $234,000, or 19%. Cost of software and related products revenue as a
percentage of software and related products revenue was 69% for the nine-month
period ended July 31, 2000 and 63% for the nine-month period ended July 31,
1999. The increase of 6 percentage points was due to decreases in sales prices
while the costs have remained fixed.
Cost of Services Revenue. Our cost of services revenue was $1.4 million
for the nine-month period ended July 31, 2000 and $397,000 for the nine-month
period ended July 31, 1999, an increase of $974,000, or 245%. The increase was
primarily due to payroll and related benefits costs from hiring additional
employees and other internal costs to increase our service and support offering
capabilities as well as all costs incurred from our electronic Linux marketplace
program.
Operating Expenses
Sales and Marketing. Our sales and marketing expenses were $10.5
million for the nine-month period ended July 31, 2000 and $2.4 million for the
nine-month period ended July 31, 1999, an increase of $8.1 million, or 347%. The
increase in expense was primarily attributed to additional sales and marketing
salaries and benefits as headcount totals increased significantly, advertising,
tradeshows and related expenses, increases in marketing development to build and
expand our distribution channels, and initial costs related to the establishment
of our electronic Linux marketplace.
Research and Development. Our research and development expenses were
$3.4 million for the nine-month period ended July 31, 2000 and $1.6 million for
the nine-month period ended July 31, 1999, an increase of $1.8 million, or 112%.
The main increase in research and development expenses was attributed to payroll
and related costs for additional employees for software development and quality
assurance. Other increases were for product localization in various
international locations as well as for strategic development.
General and Administrative. Our general and administrative expenses
were $4.5 million for the nine-month period ended July 31, 2000 and $1.2 million
for the nine-month period ended July 31, 1999, an increase of $3.3 million, or
281%. The increase was primarily attributed to increased salaries and benefits
for additional general and administrative employees and increased facilities and
related costs.
Amortization of Deferred Compensation. During the nine-month period
ended July 31, 2000, we amortized $4.0 million of deferred compensation. During
the nine-month period ended July 31, 1999 we amortized $24,000 of deferred
compensation.
Other Income (Expense), net
Other income (expense), net consists primarily of interest expense on
borrowings and interest income received on cash and cash equivalents. Interest
expense was $1,000 during the nine-month
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<PAGE> 23
period ended July 31, 2000 and $242,000 during the nine-month period ended July
31, 1999. Other income (expense) was $2.1 million during the nine-month period
ended July 31, 2000 and ($2,000) during the nine-month period ended July 31,
1999. The increase is primarily related to interest income on the proceeds
received from the issuance of Series B preferred stock and our initial public
offering.
Provision for Income Taxes
For the nine-month periods ended July 31, 2000 and 1999, our
subsidiary, Caldera GmbH, incurred income tax expense of $39,000 and $25,000,
respectively.
Dividends Related to Convertible Preferred Stock
During the nine-month period ended July 31, 2000, we recorded preferred
stock dividends of $12.3 million. The preferred stock dividends comprised (i) a
warrant that was sold to Egan-Managed Capital by Canopy and (ii) a beneficial
conversion feature related to the issuance of 5.0 million shares of Series B
convertible preferred stock. The estimated fair market value of the warrant was
determined to be $2.3 million using the Black-Scholes option-pricing model, and
the value of the beneficial conversion feature was determined to be $10.0
million.
LIQUIDITY AND CAPITAL RESOURCES
Since inception as a separate legal entity in August 1998, we have
funded our operations primarily through loans from our major stockholder and
through sales of common and preferred stock.
As of July 31, 2000, we had cash and equivalents of $28.8 million and
working capital of $84.1 million. Increases in cash and equivalents and working
capital from October 31, 1999 were the result of net proceeds received from our
Series B preferred stock offering completed in January 2000 and net proceeds
received from our initial public offering completed in March 2000. Cash used in
operations, our investment in available for sale securities and our $2.0 million
cash investment in Evergreen Internet, Inc. partially offset these increases in
cash and equivalents.
Our net cash used in operations during the nine-month period ended July
31, 2000 was $15.3 million. Cash used in operations was primarily attributed to
the net loss of $20.0 million. We also paid $1.25 million to Sun Microsystems,
Inc. for certain rights to license software. These uses of cash were partially
offset by non-cash charges for the amortization of deferred compensation,
depreciation and amortization, and common stock issued for services.
Our investing activities have historically consisted of purchases of
property and equipment and certain intangible assets. During the nine-month
period ended July 31, 2000, cash used in investing activities was $59.3 million,
of which $56.0 million was used to purchase short-term investments to maximize
the yield on our available cash balances. We anticipate that we will experience
an increase in the level of our capital expenditures, lease commitments and
investment activities as we grow our operations.
Our financing activities provided $103.2 million during the nine-month
period ended July 31, 2000. The primary source of cash during the nine-month
period ended July 31, 2000, was from the net proceeds of $29.8 million received
in connection with the
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<PAGE> 24
Series B preferred stock issuance in January 2000 and net proceeds of $71.8
million received in connection with our initial public offering in March 2000.
We also received $1.5 million from a stock subscription receivable.
Subsequent to July 31, 2000, we received an additional $1.5 million on
a stock subscription receivable from MTI.
As of July 31, 2000, we had no outstanding debt obligations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", or SFAS 133. SFAS 133 establishes new
accounting and reporting standards for companies to report information about
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. This statement 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 beginning after June 15, 2000. We do not expect this
statement to have a material impact on the Company's results of operations,
financial position or liquidity.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements". This pronouncement summarizes certain of the SEC staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. The Company is required to adopt SAB 101 during the first
quarter of fiscal year 2001. Although management is currently evaluating the
impact, if any, of SAB 101, management does not presently believe it will have a
material impact on the Company's results of operations, financial position or
liquidity.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of Accounting Principles Board Opinion No. 25
("APB 25")". This interpretation clarifies the definition of employee for
purposes of applying APB 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. This interpretation is effective July 1, 2000, but certain
conclusions in this interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000, but before the effective date of July 1, 2000, the effects of applying
this interpretation are recognized on a prospective basis from July 1, 2000.
Although management is currently evaluating the impact, if any, of this
interpretation, management does not presently believe it will have a material
impact on the Company's results of operations, financial position or liquidity.
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YEAR 2000 COMPLIANCE
Prior to January 1, 2000, there was a great deal of concern regarding
the ability of computers to adequately recognize 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally and
the compliance and remediation work accomplished leading up to 2000 was
effective to prevent any problems. Computer experts have warned that there may
still be residual consequences of the change in centuries and any such
difficulties could result in a decrease in sales of our products, an increase in
allocation of resources to address Year 2000 problems of our customers without
additional revenue commensurate with such dedication of resources, or an
increase in litigation costs relating to losses suffered by our customers due to
such Year 2000 problems.
ITEM 3. QUANTITATIVE AND QUALITATIVE 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 U.S. dollar could make our Linux products less competitive
in foreign markets.
Our German subsidiary, Caldera Deutschland, GmbH, performs research and
development activities for us. This subsidiary is currently our only foreign
operation. To date, foreign currency fluctuations have had little effect on our
business because only our German subsidiary's contracts, payables and
receivables are denominated in a foreign currency. As of July 31, 2000, the
assets of Caldera Deutschland were approximately $840,000. All other
transactions of our business are denominated in the U.S. dollar. As time passes
and as management sees fit, more transactions in Europe and Asia may be
denominated in local currencies. As we expand operations in Europe and Asia, we
will continue to evaluate our foreign currency exposures and risks and develop
appropriate hedging or other strategies to manage those risks. We have not
revised our current business practices or modified any of our products to
conform to Europe's conversion to the euro. Additionally, we have not engaged in
any foreign currency hedging activities.
The primary objective of our cash management strategy is to invest
available funds in a manner that assures maximum safety and liquidity and
maximizes yield within such constraints. A portion of the securities that we
invest in may be subject to market risk, which means that a change in prevailing
rates or market conditions may adversely affect the principal amount of the
investment. To minimize this risk, we will invest in a broad range of short-term
fixed income securities with varying maturities. As of July 31, 2000, we have
invested in money market instruments, tax-exempt municipal funds, notes, and
bonds, and US government security backed instruments. The company does not
borrow money for short-term investment purposes.
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RISK FACTORS
RISKS RELATED TO OUR OPERATIONS
WE HAVE A LIMITED OPERATING HISTORY.
Although we began operations in 1994, during the past 18 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. We recently developed and released
our server product, eServer. Our historical sales have been primarily from our
OpenLinux products, including OpenLinux 2.3 (renamed eDesktop because of its
focus on the desktop environment), which were historically developed for
first-time Linux users who predominantly have experience using Windows desktop
environments. As a company in a new and rapidly evolving industry, we face risks
and uncertainties relating to our ability to successfully implement our
strategy. You must consider the risks, expenses and uncertainties 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 also include
our ability to:
- broaden awareness of the Caldera Systems brand;
- maintain our current, and develop new, strategic relationships with
technology partners and solutions providers;
- attract, integrate and retain qualified management personnel;
- attract, integrate and retain qualified personnel for the expansion of our
sales, professional services, engineering, marketing and customer support
organizations;
- continue to develop and upgrade product offerings tailored for business;
- respond effectively to competitive pressures; and
- generate 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.
WE HAVE NOT BEEN PROFITABLE AND WE EXPECT OUR LOSSES TO CONTINUE.
We have never been profitable and do not expect to achieve
profitability until at least fiscal year 2002. If our revenue declines or grows
at a slower rate than we anticipate, or if our spending levels exceed our
expectations or cannot be adjusted to reflect slower revenue growth, we may not
generate sufficient revenue to achieve or sustain profitability or generate
positive cash flow. For the nine months ended July 31, 2000, we incurred a net
loss of approximately $20.0 million. As of July 31, 2000, we had incurred total
net losses of approximately $49.6 million since the inception of our business in
1994. We expect to continue to incur net losses because we anticipate incurring
significant expenses in connection with developing our products, hiring and
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training employees, expanding our market reach and building awareness of our
brand. We forecast our future expense levels based on our operating plans and
our estimates of future revenue. We may find it necessary to accelerate
expenditures relating to product development and support and our sales and
marketing efforts beyond our current expectations or otherwise increase our
financial commitment to creating and maintaining brand awareness among potential
customers.
YOU SHOULD NOT RELY ON OUR QUARTERLY OPERATING RESULTS AS AN INDICATION OF OUR
FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
FLUCTUATIONS IN OUR OPERATING RESULTS OR THE FAILURE OF OUR OPERATING RESULTS TO
MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS MAY NEGATIVELY
IMPACT OUR STOCK PRICE.
Our quarterly operating results have varied in the past and we expect
them to fluctuate significantly in the future due to a variety of factors that
could affect our revenue or our expenses in any particular quarter.
Historically, we have experienced substantial fluctuations in our software and
related products revenue from period to period relating to the introduction of
new products and new versions of our existing products. For example, revenue
from software and related products for the three-month period ended January 31,
1999 were approximately $508,000. Software and related products revenue
decreased to approximately $482,000 during the three-month period ended April
30, 1999 but increased to approximately $1.0 million during the three-month
period ended July 31, 1999. Software and related products revenue decreased to
approximately $775,000 during the three-month period ended October 31, 1999,
further decreased to approximately $395,000 during the three-month period ended
January 31, 2000 and then increased to approximately $1.1 million for the
three-month period ending April 30, 2000. Software and related products revenue
then decreased to approximately $631,000 during the three-month period ended
July 31, 2000. These quarterly revenue fluctuations were primarily due to the
fluctuation of sales of our OpenLinux products, and these fluctuations in
revenue can be expected to continue as a result of fluctuating sales of all of
our products, including our new product offerings.
Upon 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 partners. 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 solutions providers in recommending our
Linux business solutions to end users;
- the introduction, development, timing, competitive pricing and market
acceptance of our products and services and those of our competitors;
- 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;
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- 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, it is possible
that in some future periods our results of operations may be below the
expectations of public market analysts and investors. This could cause our stock
price to decline. In addition, we plan to increase our operating expenses to
expand our sales and marketing, administration, consulting and training,
maintenance and technical support and research and development groups. If
revenue falls below 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 July 31, 2000, we had approximately 38 distributors
worldwide who purchased directly from us. These distributors in turn sell to
approximately 4,000 retail outlets in the United States and approximately 900
equivalent sites internationally. These relationships allow us to offer our
products and services to a much larger customer base than we would otherwise be
able to reach through our direct sales and marketing efforts. Some electronic
solutions providers also purchase eBusiness solutions through our distributors,
and we anticipate they will continue to do so as we expand our product offerings
for eBusiness. Because we usually sell indirectly through distributors to
electronic solutions providers, we cannot control the relationships through
which they purchase our products. In turn we do not control the presentation of
our products by electronic solutions providers to end-users. Therefore, our
distribution channel could be affected by disruptions in the relationships
between our distributors and electronic solutions providers or between
electronic solutions providers and end users. Also, distributors and electronic
solutions providers may choose not to emphasize use of our products to their
customers. Any of these occurrences could diminish the effectiveness of our
distribution channel and lead to decreased sales. However, to our knowledge,
none of our international distributors engages in discounting or other business
practices unique to their respective geographic regions that materially affects
or could materially affect our results of operations, although they could do so
in the future.
In particular, we are highly dependent on our relationships with our
distribution partners, such as Frank Kasper & Associates, Ingram Micro, Navarre
Corporation and Tech Data, domestically, and MediaGold in Europe, for the
distribution of our products. Sales to all distributors accounted for
approximately 67% of our total revenue for the
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nine-month period ended July 31, 2000. We plan to continue to develop
relationships with new distributors to introduce product and service offerings
into new markets, including into foreign countries. If any of these distribution
partners do not provide opportunities for growth or become closed to us, or if
we are 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, Fujitsu, IBM, Novell and Sun Microsystems. These
relationships encompass product integration, two-way technology transfers, joint
marketing to electronic service providers and revenue-generating initiatives in
areas such as product bundles, training and education and third-level technical
support, relating to modification of the operating system code, for 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 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
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open source community and are available for inclusion in our products without
cost. Linus Torvalds, the original developer of the Linux kernel, and a small
group of independent engineers have in the past developed and upgraded the Linux
kernel. Neither Mr. Torvalds nor any significant contributor to the Linux kernel
is an employee of ours, and none of these individuals are required to further
update the Linux kernel. If these independent developers and others in the open
source community do not further develop the Linux kernel and other open source
software included in our products on a timely basis, or at all, our ability to
enhance our product offerings will suffer. As a consequence, we will be forced
to rely to a greater extent on our own development efforts or license commercial
software products as replacements, which would increase our expenses and delay
enhancements to our products. For example, in the past we have sometimes been
unable to upgrade all open source components of a product in connection with a
proposed release because enhancements had not yet been made by these independent
developers. Any failure on the part of the kernel developers to further develop
and enhance the kernel could also stifle the development of additional Linux
applications.
OUR 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.
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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.
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.
Since software applications meeting business needs are readily available for
operating systems currently favored by the business community, such as Windows
NT and Unix, businesses may not adopt our Linux products even if they perceive
the Linux operating system to offer performance advantages over their current
operating systems. 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 solutions providers making these technologies available on Linux
and on Linux then becoming a desirable operating system under these
circumstances. We also plan to market our Linux products for use on these
specialized servers and Internet access devices, which we believe will become
widely used for eBusiness. However, if businesses, which at present favor
Microsoft and other non-Linux operating systems, do not adopt these trends in
the near future, or if Linux is not viewed as a desirable operating system in
connection with these trends, a significant market for our products may not
develop. Factors that may keep businesses from adopting these trends include:
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- 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 ARE PRODUCTS ARE DEVELOPED AND
LICENSED ARE NOT ENFORCEABLE.
The Linux kernel and certain other components of our products have been
developed and licensed under the GNU General Public License and similar
licenses. These licenses state that any program licensed under them may be
liberally copied, used, modified and distributed freely, so long as all
modifications are also freely made available and licensed under the same
conditions. We know of no instance in which a party has challenged the validity
of these licenses or in which these licenses have been interpreted in a legal
proceeding. To date, all compliance with these licenses has been voluntary. It
is possible that a court would hold one or more of these licenses to be
unenforceable in the event that someone were to file a claim asserting
proprietary rights in a program developed and distributed under them. Any ruling
by a court that these licenses are not enforceable, or that Linux operating
systems, or significant portions of them, may not be liberally copied, modified
or distributed freely, would have the effect of preventing us from selling or
developing our products, unless we are able to negotiate a license to use the
software or replace the affected portions. These licenses could be expensive,
which could impair our ability to price our products competitively.
WE ARE VULNERABLE TO CLAIMS THAT OUR PRODUCTS INFRINGE THIRD-PARTY INTELLECTUAL
PROPERTY RIGHTS, PARTICULARLY BECAUSE OUR PRODUCTS ARE COMPRISED OF MANY
DISTINCT SOFTWARE COMPONENTS DEVELOPED BY THOUSANDS OF INDEPENDENT PARTIES.
We may be exposed to future litigation based on claims that our
products infringe the intellectual property rights of others. This risk is
exacerbated by the fact that most of the code in our products is developed by
independent parties over whom
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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 PROTECT OUR INTELLECTUAL PROPERTY RIGHTS ADEQUATELY WOULD RESULT IN
SIGNIFICANT HARM TO OUR BUSINESS.
While much of the code for our products is open source, our success
depends significantly on our ability to protect our trademarks, trade secrets
and certain proprietary technology contained in our products. We rely on a
combination of copyright and trademark laws, and on trade secrets and
confidentiality provisions and other contractual provisions to protect our
proprietary rights. These measures afford only limited protection. Some
trademarks that have been registered in the United States have been licensed to
us, and we have other trademark applications pending in the United States.
Effective trademark protection may not be available in every country in which we
intend to offer our products and services. Our means of protecting our
proprietary rights in the United States or abroad may not be adequate and
competitors may independently develop similar technologies. For example, on
March 15, 2000 we received a letter from counsel of a third party demanding that
we immediately stop using the term eServer in connection with our products. The
third party alleges that it is the owner of the trademark ESERVER and several
related marks. 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.
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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 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, 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
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and services and by marketing www.calderasystems.com as a premier online
resource for eBusiness solutions. During the nine months ended July 31, 2000, we
spent approximately $1.0 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
our strategy of providing Linux solutions for eBusiness to be successful, we
must provide products that meet the needs of solutions providers and their
eBusiness customers. We recently developed our server product, OpenLinux
eServer, and have made available for shipping our eBusiness framework product,
eBuilder. These new products, which are our primary eBusiness products, may not
be adopted by solutions 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
develop and market successfully our Linux courses could be adversely affected if
we do not:
- develop and maintain relationships with our Caldera Open Learning
Providers;
- 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.
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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. and
Microsoft. VA Linux and Wind River provide similar solutions embedded into their
hardware offerings. In addition, Sun Microsystems has announced plans to open
source its Solaris Unix operating system in an attempt to attract more
developers to that platform. Many of these competitors are large,
well-established companies that have significantly greater financial resources,
more extensive marketing and distribution capabilities, larger development
staffs and more widely recognized brands and products than we have.
We also compete with other providers of Linux operating systems,
particularly, Corel, MacMillan, Red Hat, SuSE and TurboLinux. Many of these
competitors, such as Red Hat, have more established customer bases and stronger
brand names than we do. Also, due to the open source nature of Linux, anyone can
freely download Linux and many Linux applications and modify and re-distribute
them with few restrictions. For example, solution providers upon whom we depend
for the distribution of our eBusiness products could instead create their own
Linux solutions to provide to their customers. Also, established companies and
other institutions could easily produce competing versions of Linux. In
particular, distributors of UNIX operating systems could leverage their existing
service organizations, due to the fact that Linux and UNIX operating systems
share many common features.
We compete with providers of other, more established operating systems.
AT&T, Compaq, Hewlett-Packard, IBM, Microsoft, Novell, Olivetti, Sun
Microsystems, and Unisys are each providers of competing operating systems,
which, in most cases, are more established among business users. We also compete
for services revenue with a number of companies that provide technical support
and other professional services to users of Linux operating systems, including
some original equipment manufacturers with which we have agreements. Many of
these companies have larger and more experienced service organizations than we
have, and have the benefit of being earlier market entrants.
OUR COMPETITIVE POSITION COULD DECLINE IF WE ARE UNABLE TO OBTAIN ADDITIONAL
FINANCING TO ACQUIRE BUSINESSES OR TECHNOLOGIES THAT ARE STRATEGIC FOR OUR
SUCCESS, OR OTHERWISE EXECUTE OUR BUSINESS STRATEGY, OR IF WE FAIL TO
SUCCESSFULLY INTEGRATE ANY ACQUISITIONS WITH OUR CURRENT BUSINESS.
We believe that our current cash and cash equivalents will be
sufficient to fund our working capital and capital expenditure requirements for
at least the next 12 months. However, we may need to raise additional funds to
support more rapid expansion, respond to competitive pressures, acquire
complementary businesses or technologies or respond to unanticipated
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
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our services or products, or otherwise respond to competitive pressures would be
significantly limited.
If appropriate opportunities arise, we intend to acquire businesses,
technologies, services or products that we believe are strategic for our
success. The market for eBusiness solutions such as Linux products is new and is
rapidly evolving and our competitive position could decline if we are unable to
identify and acquire businesses or technologies that are strategic for our
success in this market.
On August 1, 2000, Caldera Systems, Inc., Caldera, Inc., and The Santa
Cruz Operation, Inc. entered into an Agreement and Plan of Reorganization. The
transactions contemplated by this agreement are subject to various closing
conditions and there can be no assurance that the transaction will close.
OUR SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY MANAGE GROWTH.
We have recently experienced a period of rapid growth. In order to
execute our business plan, we must continue to grow. We had 28 employees when we
began operations as a separate legal entity in September 1998. As of July 31,
2000, the number had increased to 209. We expect that the number of our
employees will continue to increase for the foreseeable future.
Our planned growth entails risk. If we do not expand our operations in
an efficient manner, our expenses could grow disproportionately to revenue or
our revenue could decline or grow more slowly than expected, either of which
could negatively affect the value of your investment. Our current and
anticipated future growth, 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
revenue 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;
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- 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, including the imposition of
tariffs and taxes;
- unexpected changes in regulatory requirements, including laws and
regulations governing the conduct of commerce, and the collection of
personal data, on the Internet; and
- general political and economic trends, including potential economic
recessions in foreign markets, and fluctuations in foreign currency.
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 REVENUE 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.
Although we have both product liability and errors and omissions insurance, we
might incur losses in excess of the dollar limits or beyond the scope of
coverage of our policies. While we test our products prior to release, the fact
that most of the components of our software offerings are developed by
independent parties over whom we exercise no supervision or control 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.
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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 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 management, including our Chief
Financial Officer, Senior Vice President of Sales and Marketing, Vice President
of Sales and Vice President Legal Affairs, 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. 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 revenue. Our
future success depends to a significant extent on the continued service and
coordination of our management team, particularly Ransom H. Love, our President
and Chief Executive Officer. We do not maintain key person insurance for any
member of our management team, but may elect to do so in future periods.
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
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<PAGE> 40
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.
A SINGLE STOCKHOLDER WILL BE ABLE TO EXERT SIGNIFICANT CONTROL OVER CALDERA
SYSTEMS, INC.
Raymond J. Noorda has beneficial ownership of approximately 71% of our
outstanding common stock. As a result, Mr. Noorda will be able to determine the
outcome of actions that 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 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, or the perception
that such sales could occur. 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.
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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 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;
- interruptions in Internet commerce caused by unauthorized users;
- changes in government regulation relating to the Internet; and
- Internet taxation.
If Internet usage grows, the infrastructure may not be able to support
the demands placed on it by that growth and its performance and reliability may
decline. Web sites have experienced interruptions as a result of delays or
outages throughout the Internet infrastructure. If these interruptions continue,
Internet usage may decline.
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
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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, including our business
interruption insurance, 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 20, 2000, we completed the sale of an aggregate of 5.0 million shares
of our common stock at a price of $14.00 per share in a firm commitment
underwritten public offering. The offering was affected pursuant to a
Registration Statement on Form S-1 (Registration No. 333-94351), which was
declared effective on March 20, 2000 by the United States Securities and
Exchange Commission. The lead underwriters for this offering included Robertson
Stephens, Bear, Stearns & Co. Inc, Wit Soundview, and First Security Van Kasper.
On April 17, 2000, the underwriters exercised there over allotment option for an
additional 750,000 shares of our common stock, at $14.00 per share.
We received $80.5 million in proceeds from this offering, of which $5.6 million
was paid to underwriters as underwriting discounts and commissions and
approximately $3.0 million was paid in connection with direct offering expenses.
We anticipate using the proceeds generated from 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 the net proceeds to acquire or invest in complementary businesses,
technologies, services or products. 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. We have invested the net proceeds of
this offering in interest-bearing securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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1. During the three months ended July 31, 2000, the following
matters were submitted to the stockholders of the Company:
On or about August 1, 2000, we circulated an information
statement of Form 14C describing stockholder action purporting
to increase the number of shares authorized under the
Company's stock option plan. Notwithstanding any information
to the contrary contained therein, this action will not become
effective unless and until it has been submitted to a vote of
the stockholders of the Company at a duly called meeting of
the stockholders.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment No. 1 to the 1998 Stock Option Plan
27.1 Financial Data Schedule
(b) Caldera Systems, Inc. did not file any reports on Form 8-K
during the three months ended July 31, 2000:
ITEM 7. SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 14, 2000 CALDERA SYSTEMS, INC.
By: /s/ Alan J. Hansen
-----------------------------
Alan J. Hansen
Chief Financial Officer
(Principal Financial Officer)
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1 Amendment No. 1 to the 1998 Stock Option Plan
27.1 Financial Data Schedule
</TABLE>
