<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 2000.
REGISTRATION NO. 333-45936
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CALDERA INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7372 87-0662823
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE) IDENTIFICATION NUMBER)
</TABLE>
240 WEST CENTER STREET
OREM, UT 84057
(801) 765-4999
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RANSOM H. LOVE
CHIEF EXECUTIVE OFFICER
CALDERA INTERNATIONAL, INC.
240 WEST CENTER STREET
OREM, UT 84057
(801) 765-4999
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN E. HAYES, III, ESQ. MICHAEL J. DANAHER, ESQ.
LEXI S. METHVIN, ESQ. WILSON SONSINI GOODRICH & ROSATI
BROBECK, PHLEGER & HARRISON LLP PROFESSIONAL CORPORATION
370 INTERLOCKEN BOULEVARD, SUITE 500 650 PAGE MILL ROAD
BROOMFIELD, CO 80021 PALO ALTO, CA 94304
(303) 410-2000 (650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effective time of the consummation of the combination.
------------------------
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
[CALDERA LOGO]
Dear Caldera Systems Stockholders:
I am writing to you today about our proposed combination with the server
and professional services groups of The Santa Cruz Operation, Inc. The
combination will create a combined company to offer comprehensive business
solutions based on both the Linux and UNIX platforms.
In the combination, each share of Caldera Systems common stock will be
exchanged for one share of common stock of a new entity, Caldera International,
Inc. SCO and its employees who join Caldera International will receive
approximately 28.6% of Caldera International, or 18.2 million shares of Caldera
International common stock (including approximately two million shares reserved
for employee options assumed or replaced by Caldera International for options
currently held by SCO employees joining Caldera International), and SCO will
receive $7 million in cash. In the combination, Caldera Systems will become a
subsidiary of Caldera International. Please refer to page 65 for further
discussion of the types and amounts of consideration to be paid to SCO in the
combination. The combination is described more fully in the accompanying joint
proxy statement/prospectus.
You will be asked to vote on a proposal to combine our company with SCO's
server and professional services groups and to issue approximately 18.2 million
shares in connection with the combination, at a special meeting of Caldera
Systems stockholders to be held on , 2000 at 10:00 a.m. Mountain
time, at Caldera Campus, Building 1, 240 West Center Street, Orem, Utah. The
holders of a majority of the outstanding shares of Caldera Systems common stock
present in person or by proxy and entitled to vote at the special meeting must
approve these transactions. Only stockholders who hold shares of Caldera Systems
at the close of business on , 2000 will be entitled to vote at the
special meeting.
At the meeting, you will also be asked to vote on some additional proposals
which are described on the attached Notice of Special Meeting of Stockholders.
We are very excited about the opportunities we envision for the combined
company. AFTER CAREFUL CONSIDERATION, OUR BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE COMBINATION AND CONCLUDED THAT IT IS IN THE BEST INTERESTS OF
CALDERA SYSTEMS AND YOU, OUR STOCKHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT YOU
VOTE "FOR" THE PROPOSED COMBINATION AND EACH OF THE ADDITIONAL PROPOSALS.
This joint proxy statement/prospectus provides detailed information about
Caldera Systems and SCO's server and professional services groups. Please give
all of this information your careful attention. IN PARTICULAR, YOU SHOULD
CAREFULLY CONSIDER THE DISCUSSION IN THE SECTION ENTITLED "RISK FACTORS"
BEGINNING ON PAGE 17 OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
Holders of over 72% of the outstanding common stock of Caldera Systems as
of August 15, 2000 have entered into voting agreements with The Santa Cruz
Operation, Inc. whereby they have agreed to vote all of their Caldera Systems
common stock "For" the combination and have appointed representatives of The
Santa Cruz Operation, Inc. as proxies to vote their Caldera Systems common stock
at the meeting.
We invite you to attend the meeting. Whether or not you plan to attend,
please complete, sign and date the enclosed proxy and return it to us in the
enclosed envelope. If you attend the meeting, you may vote in person if you
wish, even if you have previously returned your proxy. It is important that your
shares be represented and voted at the meeting.
You will not be required to exchange your Caldera Systems stock
certificates for Caldera International certificates. PLEASE DO NOT SEND YOUR
CERTIFICATES.
Sincerely,
/s/ RANSOM H. LOVE
--------------------------------------
Ransom H. Love
President and Chief Executive Officer
<PAGE> 3
THIS JOINT PROXY STATEMENT/PROSPECTUS RELATES TO THE ISSUANCE OF UP TO
APPROXIMATELY 64.9 MILLION SHARES OF CALDERA INTERNATIONAL, INC. COMMON STOCK IN
CONNECTION WITH THE COMBINATION DESCRIBED INSIDE THIS DOCUMENT. WE ANTICIPATE
THAT THIS STOCK WILL BE TRADED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"CALD".
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION OR THE CALDERA
INTERNATIONAL, INC. COMMON STOCK TO BE ISSUED IN THE COMBINATION, OR DETERMINED
IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED , 2000, AND WAS
FIRST MAILED TO CALDERA SYSTEMS STOCKHOLDERS ON OR ABOUT , 2000.
<PAGE> 4
[CALDERA LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To our Stockholders:
We will hold a special meeting of Caldera Systems, Inc. stockholders at
Caldera Campus, Building 1, 240 West Center Street, Orem, Utah on ,
2000 at 10:00 a.m. Mountain time to consider and vote on the following
proposals:
1. To combine our company with the server and professional services
groups of The Santa Cruz Operation, Inc., and to issue approximately 18.2
million shares to SCO and employees of the SCO server and professional
service groups who join Caldera in connection with this combination and to
pay $7 million to SCO. In the combination, Caldera will become a subsidiary
of a new parent company, which we call New Caldera, and SCO will contribute
to New Caldera the assets of its server and professional services groups.
2. To amend our 1999 Omnibus Stock Incentive Plan to increase the
number of shares reserved for issuance from 4,105,238 to 6,405,238 and to
provide for an automated director option grant program.
3. To amend our 2000 Employee Stock Purchase Plan to increase the
number of shares reserved for issuance from 500,000 to 2,000,000.
4. To amend our Certificate of Incorporation to increase the
authorized number of shares of common stock from 75,000,000 to 175,000,000.
5. To transact such other business as may properly come before the
special meeting or any adjournment or postponement thereof.
For more information about the combination, the reorganization agreement
and related matters, please review the accompanying joint proxy
statement/prospectus.
The close of business on , 2000 is the record date for the
determination of our stockholders entitled to vote at this meeting.
/s/ RANSOM H. LOVE
--------------------------------------
Ransom H. Love
Chief Executive Officer
Orem, Utah
, 2000
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE
PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. YOU CAN
REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED.
<PAGE> 5
[SCO LOGO]
425 ENCINAL STREET
SANTA CRUZ, CALIFORNIA 95061
Dear Shareholder of The Santa Cruz Operation:
We invite you to attend a special meeting of the shareholders of The Santa
Cruz Operation, Inc. ("SCO") to be held at at a.m. local time, on
, 2000. At the special meeting, we will ask you to consider a
proposal to approve and adopt the agreement and plan of reorganization that we
entered into with Caldera Systems, Inc. and Caldera International, Inc. on
August 1, 2000 and amended on September 13, 2000, and a proposal to change our
corporate name to "Tarantella, Inc."
Under the reorganization agreement, Caldera Systems, Inc. will acquire the
assets of our server and our professional services groups. A new company,
Caldera International, Inc., will be formed, combining the assets of Caldera
Systems with the assets acquired from SCO. After the combination is completed,
we will continue to operate our Tarantella business, and accordingly, have
decided to change our corporate name. Under the proposed transaction, SCO and
its employees who join Caldera International will receive approximately 28.6% of
Caldera International, or 18.2 million shares of Caldera International common
stock (including approximately two million shares reserved for employee options
assumed or replaced by Caldera International for options currently held by SCO
employees joining Caldera International), and SCO will receive $7 million in
cash. Please refer to page 65 for further discussion of the types and amounts of
consideration to be received by SCO in the combination.
We are very excited about the opportunities we envision for the combined
company and for our ongoing operations. However, we cannot complete the
combination unless all of the conditions to the closing are satisfied, including
the approval and adoption of the reorganization agreement by holders of a
majority of SCO voting stock.
Douglas Michels, our President and Chief Executive Officer and largest
shareholder with beneficial ownership of approximately 10% of the outstanding
SCO common stock as of September 30, 2000, has entered into a voting agreement
with Caldera Systems to vote all of his SCO common stock in favor of approving
and adopting the agreement and plan of reorganization and to appoint
representatives of Caldera Systems as proxies to vote his common stock of The
Santa Cruz Operation at the meeting.
Your vote is very important. Whether or not you plan to attend the special
meeting, you should complete, sign, date and promptly return the enclosed proxy
card in the enclosed envelope or complete the your proxy via telephone or the
internet to ensure that your shares will be represented at the meeting. If you
attend the meeting, you may vote in person if you wish, even though you have
previously returned your proxy.
AFTER CAREFUL CONSIDERATION, OUR BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE COMBINATION AND CONCLUDED THAT IT IS IN THE BEST INTERESTS OF THE
SANTA CRUZ OPERATION AND YOU, OUR SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT
YOU VOTE "FOR" THE PROPOSED COMBINATION AND THAT YOU VOTE "FOR" THE PROPOSED
NAME CHANGE.
This joint proxy statement/prospectus provides detailed information about
Caldera Systems and the server and professional services groups. Please give all
of this information your careful attention. IN PARTICULAR, YOU SHOULD CAREFULLY
CONSIDER THE DISCUSSION IN THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE
17 OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
/s/ STEVEN M. SABBATH
------------------------------------
Steven M. Sabbath
Secretary
This joint proxy statement/prospectus is dated , 2000, and
was first mailed to shareholders of The Santa Cruz Operation on or about
, 2000.
<PAGE> 6
[SCO LOGO]
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 2000
To our Shareholders:
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders of The
Santa Cruz Operation, Inc., will be held on , 2000 at ,
local time at for the following purposes:
1. To approve and adopt the agreement and plan of reorganization,
dated August 1, 2000 and amended on September 13, 2000, by and among The
Santa Cruz Operation, Inc., Caldera Systems, Inc., and Caldera
International, Inc.
2. To approve an amendment to our articles of incorporation to change
our corporate name to "Tarantella, Inc."
3. To transact such other business as may properly come before the
special meeting or any adjournment or postponement thereof.
These items of business are more fully described in the joint proxy
statement/prospectus accompanying this notice. Shareholders of record at the
close of business on , 2000, are entitled to notice of and to vote
at the special meeting and any adjournment or postponement thereof. All
shareholders are cordially invited to attend the special meeting in person.
If the reorganization agreement is approved by SCO shareholders, holders of
SCO common stock who elect to dissent from the approval and who follow the
procedural requirements of the California Corporations Code may, under certain
circumstances, be entitled to receive cash for their SCO common stock at their
fair market value.
YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING, TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO MARK,
SIGN, DATE AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE IN THE
POSTAGE-PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE OR TO CAST YOUR VOTE VIA
TELEPHONE OR THE INTERNET. You may revoke your proxy in the manner described in
the attached document at any time before it has been voted at the special
meeting. Any shareholder attending the meeting may vote in person even if he or
she has returned a proxy.
Sincerely,
/s/ STEVEN M. SABBATH
------------------------------------
Steven M. Sabbath
Secretary
Santa Cruz, California
, 2000
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FREQUENTLY ASKED QUESTIONS.................................. ii
SUMMARY..................................................... 1
MARKET PRICE INFORMATION.................................... 15
RISKS FACTORS............................................... 17
RISKS OF CALDERA............................................ 23
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... 32
WHERE YOU CAN FIND MORE INFORMATION......................... 33
THE CALDERA MEETING......................................... 34
THE SCO MEETING............................................. 37
THE COMBINATION............................................. 40
INTERESTS OF PERSONS IN THE COMBINATION..................... 63
THE REORGANIZATION AGREEMENT................................ 64
AGREEMENTS RELATED TO THE COMBINATION....................... 73
THE EMPLOYEE STOCK OPTION ALTERNATIVES...................... 77
SELECTED FINANCIAL DATA OF CALDERA.......................... 81
CALDERA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 83
SELECTED FINANCIAL DATA OF THE SANTA CRUZ OPERATION, INC.... 97
SELECTED FINANCIAL DATA OF THE SERVER AND PROFESSIONAL
SERVICES GROUPS........................................... 98
SERVER AND PROFESSIONAL SERVICES GROUPS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................. 99
BUSINESS OF CALDERA......................................... 105
BUSINESS OF SERVER AND PROFESSIONAL SERVICES GROUPS......... 119
BUSINESS OF NEW CALDERA..................................... 124
MANAGEMENT OF CALDERA AND NEW CALDERA....................... 124
CERTAIN TRANSACTIONS OF CALDERA AND NEW CALDERA............. 135
PRINCIPAL STOCKHOLDERS OF NEW CALDERA....................... 139
PRINCIPAL STOCKHOLDERS OF CALDERA........................... 141
PRINCIPAL SHAREHOLDERS OF SCO............................... 143
DESCRIPTION OF CALDERA AND NEW CALDERA CAPITAL STOCK........ 145
COMPARISON OF RIGHTS OF HOLDERS OF SCO COMMON STOCK AND NEW
CALDERA COMMON STOCK...................................... 148
ADDITIONAL PROPOSALS TO BE VOTED UPON BY CALDERA
STOCKHOLDERS.............................................. 153
PROPOSAL TWO: APPROVAL OF AMENDMENTS TO THE STOCK INCENTIVE
PLAN...................................................... 154
OPTION TRANSACTIONS......................................... 166
PROPOSAL THREE: APPROVAL OF AMENDMENTS TO THE EMPLOYEE STOCK
PURCHASE PLAN............................................. 169
PROPOSAL FOUR: AMENDMENTS TO CALDERA'S CERTIFICATE OF
INCORPORATION............................................. 174
OTHER ACTION TO BE TAKEN AT THE SCO SPECIAL MEETING......... 175
LEGAL MATTERS............................................... 176
EXPERTS..................................................... 176
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION............................................... P-1
INDEX TO FINANCIAL STATEMENTS............................... F-1
INDEX TO APPENDICES......................................... IA-1
</TABLE>
i
<PAGE> 8
FREQUENTLY ASKED QUESTIONS
This document contains a great deal of important information. Your
individual circumstances will determine which aspects of that information apply
to you, and the decisions you will make in connection with this document. For
these reasons, this series of frequently asked questions will not answer all of
the questions you may have. Rather they are designed to give you a clearer
understanding of the choices you will make.
INTRODUCTORY QUESTIONS
Q: WHAT IS THE COMBINATION BEING PROPOSED?
A: The transaction being proposed is as follows:
- a new company, Caldera International, Inc., or New Caldera, has been
formed to facilitate the proposed combination.
- Caldera Systems, Inc., or Caldera, will merge to become a wholly-owned
subsidiary of New Caldera.
- The Santa Cruz Operation, Inc., or SCO, will contribute the assets of its
server and professional services groups to New Caldera.
Q: WHAT IS "NEW CALDERA"?
A: New Caldera is what we call the combined company after the combination in
this joint proxy statement/prospectus. The entity will be called Caldera
International, Inc., and it will become the parent company of Caldera
Systems. New Caldera will also directly own the server and professional
services groups contributed by SCO.
QUESTIONS FOR CALDERA STOCKHOLDERS
Q: WHAT WILL I RECEIVE IN THE COMBINATION?
A: If we complete the combination, each share of Caldera common stock you own
will automatically be converted into one share of New Caldera common stock.
Your current Caldera stock certificate will then no longer represent shares
of Caldera, and will instead represent shares of New Caldera. The Caldera
stockholders and stock option holders will own approximately 71.4% of New
Caldera on a fully diluted basis.
Q: WHAT WILL I GIVE UP IN THE COMBINATION?
A: You will give up your stock ownership in Caldera. However, you will not give
up your stock certificate or make any payment because your old stock
certificate will represent your interest in New Caldera. PLEASE DO NOT SEND
YOUR CALDERA STOCK CERTIFICATES.
Q: WHAT TAXES WILL I OWE AS A RESULT OF THE COMBINATION?
A: None. The combination will be tax-free to Caldera and its stockholders for
U.S. federal income tax purposes. See page 58.
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE
COMBINATION?
A: Yes. In evaluating the combination, you should keep in mind that if the
combination occurs, you will be subject to the risks related to the business
of New Caldera. You should, therefore, consider the factors discussed in the
section entitled "Risk Factors" beginning on page 17.
Q: DOES THE BOARD OF DIRECTORS OF CALDERA RECOMMEND APPROVAL OF THE MERGER
AGREEMENT AND THE REORGANIZATION?
A: Yes. After careful consideration, the board of directors of Caldera
unanimously recommends that its stockholders vote in favor of the approval
and adoption of the reorganization agreement and the proposed combination.
Q: WHAT RIGHTS DO I HAVE TO DISSENT FROM THE COMBINATION?
A: None. If the reorganization agreement is approved, you will not, under
Delaware General Corporation Law, have the right to dissent from the
approval.
QUESTIONS FOR SCO SHAREHOLDERS
Q: WHAT WILL SCO RECEIVE IN THE COMBINATION?
A: In exchange for the assets of SCO's server and professional services groups,
SCO and its employees who join New Caldera will receive approximately 28.6%
of New Caldera, or
ii
<PAGE> 9
18.2 million shares of New Caldera common stock (including approximately two
million shares reserved for employee options assumed or replaced by New
Caldera for options currently held by SCO employees joining New Caldera),
and SCO will receive $7 million in cash.
Q: WILL THE CURRENT SHAREHOLDERS OF SCO BE ISSUED SHARES OF NEW CALDERA WHEN
THE COMBINATION CLOSES?
A: No. The New Caldera shares received by SCO in the combination will become an
asset of SCO. There is no current intention to distribute New Caldera stock
directly to SCO shareholders because of the adverse tax impact of
distributing the shares and because the shares will serve as security for
the $18 million line of credit to SCO from The Canopy Group, the majority
stockholder of Caldera. There are also distribution limitations that are
part of the reorganization agreement with Caldera.
Q: WHAT IS THE EFFECT ON SCO IF THE COMBINATION TAKES PLACE?
A: SCO will continue to operate its Tarantella division and hold the assets of
that division, the SCO OpenServer intellectual property and its future
revenue stream, and the assets of our investment holdings, including shares
of New Caldera common stock received in the combination. SCO's headquarters
will remain in Santa Cruz, California and there will be approximately 230
employees worldwide.
Q: DOES THE BOARD OF DIRECTORS OF SCO RECOMMEND VOTING IN FAVOR OF THE PROPOSED
COMBINATION?
A: Yes. After careful consideration, the board of directors of SCO unanimously
recommends that its shareholders vote in favor of the approval and adoption
of the reorganization agreement and the proposed reorganization.
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE
COMBINATION?
A: Yes. In evaluating the combination, you should keep in mind that if the
combination occurs, you will be subject to the risks related to the business
of Caldera as well as risks that relate to SCO's business. You should,
therefore, consider the factors discussed in the section entitled "Risk
Factors" beginning on page 17.
QUESTIONS FOR SCO OPTION HOLDERS WHO BECOME NEW CALDERA EMPLOYEES
Q: WHAT WILL BECOME OF THE OPTIONS I CURRENTLY HOLD FOR SCO COMMON STOCK?
A: Assuming you are offered and accept employment with New Caldera, you will be
entitled to select between two alternatives with respect to the treatment of
each of your SCO option grants. Under the first alternative, you may elect
to have some or all of your option grants assumed by New Caldera. Under the
second alternative, you may elect to have some or all your existing SCO
option grants cancelled and replaced with new options to purchase New
Caldera common stock.
Q: WHAT WILL HAPPEN TO MY SCO STOCK OPTIONS IF I CHOOSE THE "ASSUMPTION"
ALTERNATIVE?
A: SCO stock option grants assumed by New Caldera will continue to have their
original terms (including vesting schedule and termination provisions), and
be subject to their original conditions, that were applicable to the option
immediately prior to the effective time, except that:
- each SCO stock option will become exercisable for shares of New Caldera
common stock,
- the number of shares of New Caldera common stock issuable upon the
exercise of any given SCO option will be one half of the number of shares
of SCO common stock subject to the option immediately prior to the
effective time, rounded down to the nearest whole number,
- the per share exercise price of any given option will be two times the
exercise price
iii
<PAGE> 10
of the option immediately prior to the effective time, rounded up to the
nearest whole cent, and
- the option for shares of New Caldera may not qualify as an incentive stock
option even though the SCO option may have.
For an illustration of how this alternative works, please see page 77.
Q: WHAT WILL HAPPEN TO MY SCO STOCK OPTIONS IF I CHOOSE THE "REPLACEMENT"
ALTERNATIVE?
A: Under the "replacement" alternative:
- each SCO stock option will be exchanged for an option exercisable for
shares of New Caldera common stock,
- the number of shares of New Caldera common stock issuable upon the
exercise of the replacement option will be one half of the number of
shares of SCO common stock under the cancelled option immediately prior to
the effective time, rounded down to the nearest whole number,
- the per share exercise price of an option will be the fair market value of
New Caldera common stock immediately after the closing of the combination,
- the vesting schedule of the New Caldera options will be determined as
follows: (i) the number of vested shares of common stock under the New
Caldera replacement options will equal the number of vested shares of
common stock under the SCO option grant immediately prior to the effective
time multiplied by 0.25 and (ii) the remaining unvested replacement
options will vest over a period of months determined by the following
equation: 48 months less one half of the number of months vested under the
SCO option grant immediately prior to the effective time, and
- the replacement option grants will qualify as incentive stock options to
the maximum extent permissible under the federal tax laws.
For an illustration of how this alternative works, please see page 76.
Q: WHAT WILL BE THE TAX CONSEQUENCES OF THESE OPTION ALTERNATIVES?
A: There will be no immediate tax consequences from either alternative.
However, under the assumption alternative, if you had an incentive stock
option while at SCO, you may have a non-qualified option after the
assumption.
Q: WHAT WILL HAPPEN IF I DO NOT ELECT TO HAVE MY SCO OPTIONS ASSUMED OR
REPLACED?
A: If you do not elect to participate in the employee stock option assumption
and replacement, the unvested portion of your SCO stock options will be
canceled as of the date the combination is completed. You will have only 30
days after the completion of the combination to exercise the vested portion
of your SCO stock options.
Q: WHAT DO I NEED TO DO NOW?
A: Your options will not be assumed or replaced automatically when you become
an employee of New Caldera. If you wish to exchange your SCO stock options
assumed by New Caldera or cancelled and replaced with New Caldera stock
options, please follow the instructions beginning on page 78. IF YOU DO NOT
FOLLOW THESE DIRECTIONS, YOUR OPTIONS WILL EXPIRE.
OTHER QUESTIONS FOR ALL STOCKHOLDERS/SHAREHOLDERS
Q: WHAT DO I NEED TO DO NOW?
A: We urge you to read this joint proxy statement/prospectus, including its
appendices, carefully, and to consider how the merger will affect you as a
shareholder. You may also want to review the documents referenced under
"Where You Can Find More Information" on page 33.
Q: WHEN DO YOU EXPECT THE COMBINATION TO BE COMPLETED?
A: We are working toward completing the combination as quickly as possible. We
hope to complete it during the fourth calendar quarter of 2000.
iv
<PAGE> 11
Q: WHAT DO I NEED TO DO NOW TO VOTE?
A: Just indicate on your proxy card how you want to vote, and sign and mail it
in the enclosed return envelope as soon as possible, so that your shares may
be represented at your meeting. If you sign and send in your proxy and do
not indicate how you want to vote, your proxy will be counted as a vote in
favor of the combination. You may instead choose to attend your meeting and
vote your shares in person.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED IN MY SIGNED PROXY CARD?
A: You may change your vote at any time before the vote takes place at the
Caldera or SCO special meeting, respectively. To change your vote, you may
either submit a later dated proxy card or send a written notice stating that
you would like to revoke your proxy. In addition, you may attend the special
meeting and vote in person. However, if you elect to vote in person at the
Caldera or SCO special meeting, respectively, and your shares are held by a
broker, bank or other nominee, you must bring to the special meeting a legal
proxy from the broker, banker or other nominee authorizing you to vote the
shares.
Q: IF MY SHARES OF STOCK ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote. Without instructions, your shares will not be voted. You should
instruct your broker to vote your shares, following the directions provided
by your broker. See pages 34 and 37.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. Neither Caldera stockholders nor SCO shareholders will exchange their
stock certificates.
Q: WHERE CAN I FIND MORE INFORMATION ABOUT CALDERA AND SCO?
A: Both Caldera and SCO file reports, proxy and information statements and
other information with the Securities and Exchange Commission. You may read
and copy this information at the SEC's public reference facilities. Please
call the SEC at 1-800-SEC-0330 for information about these facilities. This
information is also available at the Internet site the SEC maintains at
www.sec.gov. See "Where You Can Find More Information" beginning on page 33
of this document.
Q: WHOM AT CALDERA OR SCO SHOULD I CONTACT IF I HAVE ANY QUESTIONS ABOUT THE
COMBINATION?
A: You should contact either Kathy Allred of Caldera by telephone at
801-765-4999 or by e-mail at [email protected], or Lynn Schroeder of SCO
by telephone at 831-427-7399 or by e-mail at [email protected], with any
questions about the combination.
v
<PAGE> 12
SUMMARY
For your convenience, we have summarized here information that is contained
elsewhere in this document. It highlights selected information and does not
contain all of the information that is important to you. To understand the
transactions more fully and for a more complete description of the legal terms
of these transactions, you should carefully read this document and the documents
to which we have referred. See "Where You Can Find More Information" and "SCO is
Incorporating its SEC Filings in this Document by Reference" on pages 33 and 32.
We have included page references parenthetically to direct you to a more
complete description of the topics in this summary.
THE COMPANIES
<TABLE>
<S> <C> <C>
CALDERA SYSTEMS, INC. AND
CALDERA INTERNATIONAL, INC.
240 West Center Street
Orem, Utah 84057
(801) 765-4999
</TABLE>
Caldera develops and markets business solutions based on the Linux
operating system, or Linux-based solutions, including eDesktop and eServer
products, technical training, certification and support. Caldera's OpenLearning
Providers offer distribution-neutral Linux training and certification based on
Linux Professional Institute (LPI) certification standards. Caldera Systems
supports the open source community and is an advocate of Linux Standard Base
(LSB) and LPI.
New Caldera was formed to facilitate the proposed combination. New Caldera
has not engaged in any business and will not engage in business until the
combination has been completed. New Caldera currently has no assets or
liabilities and no outstanding capital stock.
THE SANTA CRUZ OPERATION, INC.
425 Encinal Street
Santa Cruz, California 95061
(831) 425-7222
SCO provides server-based software for networked business computing. SCO
also provides server operating systems based on UNIX technology, or UNIX server
operating systems, and network computing software that enables clients of all
kinds -- including, personal computers, graphical terminals, network computers,
and other devices -- to have webtop access to business-critical applications
running on servers of all kinds.
THE COMBINATION
Caldera, New Caldera and SCO have entered into a reorganization agreement
that provides for the following transactions:
- New Caldera will purchase the server and professional services groups
from SCO by issuing to SCO and its employees who join New Caldera
approximately 18.2 million shares, or approximately 28.6% on a fully
diluted basis, of New Caldera's common stock (including approximately 2.0
million shares reserved for employee options assumed or replaced by New
Caldera for options currently held by SCO employees joining New Caldera)
and paying $7 million cash to SCO. There will be no adjustment to the
purchase price for changes in the market price of Caldera's common stock.
The New Caldera shares paid to SCO will be held as an asset of SCO. SCO
has no current interest to distribute New Caldera stock directly to SCO
shareholders. The server and professional services groups operate as a
provider of server software and related support for networked business
computing, and are a leading provider of UNIX server operating systems
through their UnixWare line of products. For a further description of the
business, products and technology of the server and
1
<PAGE> 13
professional services groups, see "Business of Server and Professional
Services Groups" on page 117.
- Caldera will merge with a subsidiary of New Caldera and as a result will
become a wholly-owned subsidiary of New Caldera. Stockholders of Caldera
will become stockholders of New Caldera following the merger, and each
share of Caldera common stock will be exchanged for one share of New
Caldera common stock.
- SCO will retain all rights and title to its OpenServer product and
intellectual property, with New Caldera operating as a sales agent for
this product under the terms of a Sales Representative and Support
Agreement to be entered into between New Caldera and SCO at closing.
We urge you to read carefully the reorganization agreement. The
reorganization agreement is attached as Appendix A to this joint proxy
statement/prospectus.
In conjunction with the signing of the reorganization agreement, Caldera
and The Canopy Group, Inc., the majority stockholder of Caldera, agreed to loan
to SCO $7 million and $18 million, respectively. If the combination is
completed, Caldera's advance to SCO would be forgiven and would be treated by
New Caldera and SCO as the cash portion of the consideration to SCO for the
server and professional services groups. Caldera has also agreed to reimburse
SCO for $1.5 million of transition costs relating to the retention of various
employees of SCO who will become employees of New Caldera.
VOTE REQUIRED
Approval of the combination and reorganization agreement requires the
affirmative vote of holders of a majority of the outstanding shares of Caldera
common stock and the affirmative vote of holders of a majority of the
outstanding shares of SCO common stock.
CALDERA RECOMMENDATION TO STOCKHOLDERS
The Caldera board of directors voted unanimously to approve the
reorganization agreement and the combination. The Caldera board of directors
believes that the combination is advisable and in your best interest and
recommends that you vote FOR the proposal to approve the reorganization
agreement and the combination.
SCO RECOMMENDATION TO SHAREHOLDERS
The SCO board of directors voted unanimously to approve and adopt the
reorganization agreement and the combination. The SCO board of directors
believes that the combination is advisable and in the best interest of the SCO
shareholders and recommends that you vote FOR the proposal to approve and adopt
the reorganization agreement and the combination.
NO SOLICITATION BY SCO (SEE PAGE 69)
Subject to the applicable fiduciary duties to its shareholders, the SCO
board of directors have agreed that neither it, SCO nor any of SCO's
subsidiaries will do any of the following:
- solicit, initiate or encourage the submission of any alternative
proposal;
- engage in discussions or negotiations concerning, or provide any
non-public information to a third party regarding an alternative
proposal;
- take any other action intended, designed or reasonably likely to
facilitate any inquiries or the making of any proposal that constitutes
or would reasonably be expected to lead to any alternative proposal;
- enter into any letter of intent, agreement in principle or similar
agreement with respect to any alternative transactions; or
2
<PAGE> 14
- make or authorize any statement, recommendation or solicitation in
support of any alternative transactions.
SCO has also agreed to cause each of its officers, directors, employees,
financial advisors, representatives and agents not to take any of these actions.
TERMINATION OF THE REORGANIZATION AGREEMENT (SEE PAGE 71)
Caldera and SCO can mutually agree to terminate the reorganization
agreement without completing the transaction, and either Caldera or SCO can
terminate the reorganization agreement if:
- the other party materially breaches any representation, warranty,
covenant or agreement in the reorganization agreement and fails to cure
the breach within 30 days of receiving notice of the breach;
- the transactions contemplated by the reorganization agreement are not
completed on or before February 28, 2001;
- Caldera stockholders or SCO shareholders do not approve the
reorganization agreement and the transactions contemplated by the
reorganization agreement;
- if a final and non-appealable permanent injunction or other court order
restrains or prohibits the transactions contemplated by the
reorganization agreement; or
- the board of the other party modifies or withdraws its approval or
recommendation of the combination.
In addition, Caldera may terminate the reorganization agreement if the
board of SCO recommends any SCO alternative proposal.
TERMINATION FEES AND EXPENSE
SCO must pay Caldera a termination fee equal to 3 1/2% of the value of 28%
of Caldera common stock if the reorganization agreement is terminated and the
SCO board has changed its recommendation.
SCO will also pay a termination fee if:
- SCO shareholders do not approve the combination after an alternative
proposal has been disclosed and not withdrawn; or
- SCO has violated its non-solicitation obligations; and
- within 6 months an agreement is entered into for an alternative proposal
or within 12 months an alternative proposal is consummated.
Caldera must pay SCO the termination fee if the reorganization agreement is
terminated because the Caldera board has changed its recommendation.
OPINIONS OF FINANCIAL ADVISORS (SEE PAGES 46 AND 51)
In deciding to approve the combination, our boards of directors considered
the opinions of each of our financial advisors.
Caldera received an opinion from its financial advisor, Broadview
International, LLC, that as of August 1, 2000, the consideration to be paid for
the server and professional services groups was fair to Caldera from a financial
point of view. Caldera has agreed to pay Broadview fees totaling approximately
$2.2 million. Caldera paid $300,000 upon delivery of the fairness opinion and
the remainder of the fee is contingent upon consummation of the combination.
Broadview and Caldera believe that these fees are customary in transactions of
this nature.
SCO received an opinion from its financial advisor, Chase H&Q, that as of
August 1, 2000 the consideration to be received by SCO from New Caldera was fair
to SCO from a financial point of view.
3
<PAGE> 15
SCO has agreed to pay Chase H&Q fees totaling approximately $2.1 million. SCO
has paid a $25,000 agreement fee and a $750,000 retainer. The remainder of the
fee is contingent upon consummation of the combination. SCO and Chase H&Q
believe that these fees are customary in transactions of this nature.
WE ENCOURAGE YOU TO READ THESE OPINIONS CAREFULLY. THEY ARE ATTACHED AS
APPENDICES B AND C.
INTERESTS OF PERSONS IN THE COMBINATION (SEE PAGE 63)
Certain persons and entities have interests in the combination which may
differ from yours because of their status as a director, nominee for director or
executive officer of Caldera, SCO or New Caldera. For instance:
- Certain officers of SCO, including David McCrabb, Jack Moyer and James
Wilt will become executive officers of New Caldera;
- SCO will provide change-of-control benefits to its current executive
officers;
- SCO will have the right to nominate 2 directors of the New Caldera board;
- Doug Michels and an individual to be determined by SCO and approved by
Caldera will be directors of New Caldera;
- SCO has granted additional "stay-put" options to certain executive
officers to encourage those individuals to remain with SCO following the
combination; and
- Each person who becomes an executive officer or key employee of New
Caldera will sign an employment agreement with New Caldera that provides
for terms of employment and severance benefits, among other things.
DISSENTERS' RIGHTS (SEE PAGES 36 AND 38)
The Caldera stockholders do not have dissenters' rights in connection with
the combination.
If holders of 5% or more of the outstanding shares of SCO common stock
entitled to vote at the SCO special meeting vote against the reorganization
agreement and comply with certain other procedures specified in Chapter 13 of
the California Corporations Code, SCO shareholders of record who take such
actions will be entitled to exercise dissenters' rights. In accordance with the
provisions of the California Corporations Code, dissenting SCO shareholders will
have the right to be paid in cash the fair market value of their shares of SCO
common stock, determined as of the day before the first announcement of the
combination, and excluding any appreciation or depreciation as a result of the
combination. A copy of Chapter 13 of the California Corporations Code is
attached to this document as Appendix N.
ACCOUNTING TREATMENT OF THE COMBINATION (SEE PAGE 60)
We expect the combination will be accounted for as a purchase, which means
that we will incur substantial non-cash charges to earnings of approximately
$7.8 million per quarter over the next three years and approximately $6.0
million per quarter for the subsequent two years related to the amortization of
goodwill and other intangible assets.
We expect that SCO will recognize a gain on the combination equivalent to
approximately 70.5% of the difference between the fair value of the New Caldera
shares received and its carrying amount of the server and professional services
groups, which will be approximately $26.1 million. After the combination closes,
SCO will report approximately 29.5% of the operations of New Caldera under the
equity method of accounting, after certain adjustments, in its financial
statements.
4
<PAGE> 16
OWNERSHIP OF NEW CALDERA FOLLOWING THE COMBINATION
The following table illustrates the approximate percentage ownership of New
Caldera if the combination is completed. The percentages reflect the estimated
ownership of all common stock, assuming the exercise of all stock options of New
Caldera, and are calculated based on shares outstanding as of October 31, 2000.
<TABLE>
<CAPTION>
APPROXIMATE NUMBER
OF SHARES PERCENTAGE OF
OF NEW CALDERA NEW CALDERA
-------------------- -------------
<S> <C> <C>
Caldera stockholders and option holders 45.6 million shares 71.4%
SCO and employees joining New Caldera 18.2 million shares 28.6%
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS OF NEW CALDERA FOLLOWING THE COMBINATION (SEE
PAGE 122)
If we complete the combination, the board of directors of New Caldera will
initially consist of all of the current board members of Caldera as well as Doug
Michels and an individual to be determined by SCO and approved by Caldera.
The executive officers of New Caldera will consist of all of the current
executive officers of Caldera, as well as David McCrabb, Jim Wilt and Jack
Moyer.
LISTING OF NEW CALDERA COMMON STOCK (SEE PAGE 58)
We expect that the shares of New Caldera common stock to be issued in
connection with the combination will be approved for listing on the Nasdaq
National Market, subject to official notice of issuance. The trading symbol for
the New Caldera common stock will be "CALD," the symbol currently used for
Caldera.
CONDITIONS TO COMPLETION OF THE COMBINATION (SEE PAGE 67)
The respective obligations of the parties to complete the combination are
subject to approval of the reorganization agreement and combination by Caldera's
stockholders and SCO's shareholders, as well as the prior satisfaction or waiver
(if permitted by applicable law) of conditions specified in the reorganization
agreement. The following conditions, among others, must be satisfied or waived
before the combination can be completed:
- the combination shall have been approved and adopted by both the Caldera
stockholders and the SCO shareholders;
- the board of directors of New Caldera shall have appointed Mr. Michels
and an individual to be determined by SCO and approved by Caldera to the
board of directors of New Caldera;
- the relevant parties shall have entered into the stockholder agreement,
the escrow agreement, sales representation and support agreement, and the
voting agreements;
- the New Caldera common stock to be issued in the combination shall have
been approved for quotation on the Nasdaq National Market, subject to
notice of issuance;
- the representations and warranties of the other party contained in the
reorganization agreement shall be accurate except for representations and
warranties that address matters as of a particular date and where the
breaches have not resulted in a material adverse effect;
- the parties shall have materially complied with the covenants contained
in the reorganization agreement; and
- each of Caldera and SCO shall have received an opinion of their counsel
as to the tax consequences of the combination.
5
<PAGE> 17
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE COMBINATION (SEE
PAGE 58)
The combination has been structured as a tax-free transaction described in
Section 351 of the Internal Revenue Code and, as to Caldera, a "reorganization"
under Section 368 of the Internal Revenue Code for United States federal income
tax purposes. If the combination qualifies as a tax-free transaction and, as to
Caldera, as a "reorganization" under Section 368 of the Internal Revenue Code,
neither Caldera's stockholders generally nor SCO will recognize gain or loss for
United States federal income tax purposes in the combination (except to the
extent of cash received by SCO in the combination). It is a condition to the
completion of the combination that each of Caldera and SCO receive an opinion of
their counsel as to the tax consequences of the combination.
MARKET PRICES OF THE COMMON STOCK OF CALDERA AND SCO
<TABLE>
<CAPTION>
CALDERA SCO
------- -----
<S> <C> <C>
August 1, 2000 closing price -- the last trading day before
the announcement of the proposed combination.............. $6.937 $3.25
January , 2000 closing price -- the last practical trading
day before the printing of this document.................. $ $
</TABLE>
6
<PAGE> 18
SUMMARY OF THE EMPLOYEE STOCK OPTION ASSUMPTION
AND REPLACEMENT OFFER
Employees of the server and professional services groups who become
employees of New Caldera have the opportunity to either (i) have their SCO stock
options cancelled and replaced with options to purchase shares of New Caldera
common stock at an exercise price equal to the fair market value of New Caldera
common stock immediately after the closing or (ii) have their SCO options
assumed by New Caldera for shares of New Caldera common stock at an exercise
price equal to twice the exercise price of the SCO stock options. Regardless of
the alternative chosen, the number of shares of New Caldera common stock
issuable upon the exercise of any given SCO option will be one half of the
number of shares of SCO common stock subject to the option immediately prior to
the effective time. Please see "The Employee Stock Option Alternatives" on page
77.
SCO's stock option plan will continue to govern the option grants of
employees of SCO who do not become employees of New Caldera and remain with SCO.
If you become an employee of New Caldera and do not choose to have your SCO
options assumed or replaced, your options will terminate 30 days after the
closing of the combination pursuant to SCO's stock option plan.
OUR REASONS FOR THE EMPLOYEE STOCK OPTION ASSUMPTION AND REPLACEMENT OFFER
Caldera and SCO negotiated the employee stock option assumption and
replacement offer to provide the server and professional services groups'
employees, similar equity incentives to those possessed by other New Caldera
option holders and to allow them to participate in the success of New Caldera.
Caldera and SCO agreed to halve the number of shares underlying each
outstanding SCO option based on the fact that at the time the reorganization
agreement was signed Caldera's common stock was trading at approximately twice
the per share price of SCO's common stock.
The replacement alternative is designed to incent the server and
professional services groups employees holding options for SCO common stock at
an exercise price equal to more than half of the New Caldera trading price at
closing. Based on the current trading price of Caldera common stock and the
exercise prices of outstanding SCO options, New Caldera believes the replacement
alternative will be the desirable alternative for most of the former SCO
employees. However, New Caldera is still offering the assumption alternative in
recognition that some SCO employees have outstanding options with low exercise
prices which may make the assumption option desirable.
The assumption alternative is designed to incent the server and
professional services groups' employees holding options for SCO common stock at
an exercise price equal to less than half of the New Caldera trading price at
the closing. Under the assumption alternative, the exercise price per share of
the New Caldera options will be twice that of the SCO options because, as noted
above, Caldera's common stock was trading at a price per share twice that of
SCO's common stock at the time the reorganization agreement was signed. A former
SCO employee who chooses the assumption alternative will incur the same
aggregate exercise price (number of shares times exercise price per share) in
exercising options to purchase New Caldera common stock as he or she would have
incurred in exercising SCO options; in this way, the assumption alternative
preserves the benefit of the employee's low exercise price, relative to the
replacement alternative.
Since the time of signing the reorganization agreement, the trading price
of Caldera common stock has fluctuated widely. Consequently, former SCO
stockholders choosing between the replacement alternative and the assumption
alternative should obtain updated market price information before choosing an
alternative.
7
<PAGE> 19
ASSUMPTION OFFER
To illustrate the effect of choosing the assumption alternative for a
specific option grant, assume our combination closes on February 1, 2001 and, at
that point, an employee had a SCO option to purchase 100 shares which was
granted on February 1, 1999 when SCO's common stock was at $8.00 per share, and
which was vested as to 50 shares on February 1, 2001. The employee would receive
the following:
- an option to purchase 50 shares of New Caldera common stock, which is
vested as to 25 shares, and
- the exercise price of the option would be $16.00.
REPLACEMENT OFFER
To illustrate the effect of choosing the replacement option for a specific
option grant, assume again our combination closes on February 1, 2001 and at
that point an employee had a SCO option to purchase 100 shares which was granted
on February 1, 1999 when SCO's common stock was at $8.00 per share, and which
was vested as to 50 shares on February 1, 2001. The employee would receive the
following:
- options to purchase 50 shares of New Caldera common stock, which is
vested as to 25 shares, and
- the exercise price would be the fair market value of New Caldera common
stock on February 1, 2001.
PROCEDURES TO EFFECT ASSUMPTION OR REPLACEMENT (SEE PAGE 78)
Server and professional services group employees who hold SCO stock options
should send the enclosed notice of election, by mail postmarked on or before
, 2000, to:
The Santa Cruz Operation, Inc.
425 Encinal Street
Santa Cruz, California 95061
Attn: Steve Sabbath
IF YOU ARE OFFERED AND ACCEPT EMPLOYMENT WITH NEW CALDERA AND DO NOT
COMPLETE APPENDIX M, THE NOTICE OF ELECTION TO PARTICIPATE IN THE ASSUMPTION AND
REPLACEMENT OFFER, THE UNVESTED PORTION OF YOUR SCO STOCK OPTIONS WILL BE
CANCELED AS OF THE DATE THE COMBINATION IS COMPLETED. YOU WILL HAVE ONLY 30 DAYS
AFTER THE COMBINATION IS COMPLETED TO EXERCISE THE VESTED PORTION OF YOUR SCO
OPTIONS.
THE TAX STATUS OF SCO OPTIONS WILL DEPEND ON THE ALTERNATIVE CHOSEN BY AN
EMPLOYEE (SEE PAGE 58)
There will be no immediate tax consequences from either alternative. Under
the replacement alternative, the new option granted to an employee will be an
incentive stock option to the maximum extent permissible under the federal tax
laws. Under the assumption alternative, if an employee had an incentive stock
option while at SCO, an employee may have a non-qualified option after the
assumption.
VESTING SCHEDULE OF OPTIONS (SEE PAGE 65)
Under either the assumption or replacement alternative, your vesting
schedule will not be changed.
8
<PAGE> 20
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following tables present summary historical financial data for Caldera,
SCO and the server and professional services groups and summary pro forma
combined financial data for Caldera and SCO. The summary pro forma combined
financial data of New Caldera includes the combined results of operations and
financial data of Caldera and the server and professional services groups and
the summary pro forma financial data of SCO excludes the server and professional
services groups. The historical financial data has been derived from financial
statements and related notes of Caldera, SCO and the server and professional
services groups. Caldera and the server and professional services groups'
financial statements are included elsewhere in this joint proxy
statement/prospectus and SCO's financial statements are incorporated by
reference in this joint proxy statement/prospectus.
You should read the following summary financial data together with "Caldera
Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Server and Professional Services Groups Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes included elsewhere in this joint proxy
statement/prospectus.
SUMMARY HISTORICAL FINANCIAL DATA OF CALDERA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
----------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................................. $ 1,108 $ 1,117 $ 1,057 $ 3,050 $ 4,274
Gross margin (deficit).................................. 228 (25) (1,341) 124 253
Loss from operations.................................... (2,649) (7,578) (6,853) (9,103) (31,999)
Net loss................................................ (2,757) (8,148) (7,963) (9,367) (26,923)
Net loss attributable to common stockholders............ (2,757) (8,148) (7,963) (9,367) (39,176)
Basic and diluted net loss attributable to common
stockholders per share................................ $ (0.17) $ (0.51) $ (0.50) $ (0.51) $ (1.19)
Basic and diluted weighted average common shares
outstanding........................................... 16,000 16,000 16,000 18,458 32,922
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ------- ------ --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 207 $ 398 $ 76 $ 122 $ 36,560
Working capital (deficit)............................. (122) 1,313 290 678 88,680
Total assets.......................................... 1,639 3,915 16,353 3,714 107,518
Long-term liabilities, net of current portion......... -- -- -- 6 --
Predecessor's equity in carved-out operations......... 576 2,319 -- -- --
Total stockholders' equity............................ -- -- 708 1,516 102,215
</TABLE>
9
<PAGE> 21
SUMMARY HISTORICAL FINANCIAL DATA OF SCO
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.............................................. $207,890 $193,660 $171,900 $223,624 $148,923
Gross margin......................................... 153,488 138,345 124,804 173,846 107,127
Operating income (loss).............................. (23,581) (16,594) (13,593) 16,373 (51,233)
Net income (loss).................................... (22,414) (15,170) (14,665) 16,858 (56,953)
Net loss attributable to common shareholders......... (22,414) (15,170) (14,665) 16,858 (56,953)
Earning (loss) per share -- basic.................... (0.62) (0.41) (0.41) 0.49 (1.59)
Earning (loss) per share -- diluted.................. $ (0.62) $ (0.41) $ (0.41) $ 0.46 $ (1.59)
Shares used in per share calculation -- basic........ 36,179 36,628 35,817 34,232 35,720
Shares used in per share calculation -- diluted...... 36,179 36,628 35,817 36,402 35,720
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term
investments......................................... $ 54,831 $ 51,711 $ 51,076 $ 62,844 $26,446
Working capital....................................... 61,935 46,164 32,221 44,813 16,654
Total assets.......................................... 166,807 146,665 131,189 139,284 82,202
Long-term liabilities, net of current portion......... 9,332 9,545 12,027 11,094 5,462
Shareholders' equity.................................. 101,581 81,462 60,135 70,338 31,202
</TABLE>
SUMMARY HISTORICAL FINANCIAL DATA OF THE SERVER AND PROFESSIONAL SERVICES GROUPS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................................ $ 53,144 $ 52,805 $ 57,178 $ 76,929 $ 74,508
Gross margin........................................ 27,344 23,460 28,372 44,748 42,262
Net loss............................................ (46,286) (60,434) (52,261) (40,182) (59,825)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ----------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ -- $ -- $ 3,517 $ 2,223 $ 511
Working capital deficit........................... (18,389) (29,621) (26,912) (26,095) (18,442)
Total assets...................................... 55,626 39,524 39,935 41,275 29,116
Long-term liabilities, net of current portion..... 5,945 4,878 7,703 5,557 1,433
Divisional deficit and accumulated other
comprehensive loss.............................. (23,373) (3,936) (5,510) (9,110) (6,794)
</TABLE>
10
<PAGE> 22
UNAUDITED SUMMARY PRO FORMA COMBINED FINANCIAL DATA OF NEW CALDERA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table presents summary pro forma combined financial data for
Caldera and the server and professional services groups and should be read in
conjunction with the introduction to pro forma condensed combined financial
information, pro forma condensed combined financial statements and related notes
included elsewhere in this joint proxy statement/prospectus. This information
has been derived from each company's respective financial statements and notes,
which are included elsewhere in this joint proxy statement/prospectus. The
summary pro forma combined financial data below presents New Caldera's statement
of operations data on a pro forma basis to reflect the proposed combination of
Caldera and the server and professional service groups as though the transaction
had occurred on November 1, 1999 and presents balance sheet data on a pro forma
basis as though the transaction occurred on October 31, 2000. The pro forma
statement of operations data also gives effect to the terms of the sales
representative and support agreement under which New Caldera will operate as a
sales agent for SCO's OpenServer product, the rights of which are being retained
by SCO and gives effect to the Open Server research and development agreement.
You should not rely on the summary pro forma combined financial data as an
indication of the results of operations or financial position that would have
been achieved if the combination had taken place earlier or as an indication of
the results of operations or financial position of New Caldera after completion
of the combination.
<TABLE>
<CAPTION>
YEAR
ENDED
OCTOBER 31,
2000
-----------
<S> <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ 92,535
Gross margin................................................ 50,379
Amortization of intangibles and deferred compensation....... 36,345
Loss from operations........................................ (122,043)
Net loss.................................................... (117,250)
Net loss attributable to common stockholders................ (129,503)
Basic and diluted net loss attributable to common
stockholders per share.................................... $ (2.63)
Basic and diluted weighted average common shares
outstanding............................................... 49,165
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
2000
-----------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 26,721
Working capital............................................. 68,439
Goodwill and other intangibles.............................. 146,794
Total assets................................................ 252,393
Long-term liabilities, net of current portion............... 13,201
Total stockholders' equity.................................. 223,365
</TABLE>
11
<PAGE> 23
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA OF SCO
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table presents summary pro forma combined financial data for
SCO after completion of the reorganization and should be read in conjunction
with the introduction to pro forma condensed financial information, pro forma
condensed financial statements of SCO and related notes included elsewhere in
this joint proxy statement/prospectus. This information has been derived from
SCO and the server and professional services groups' respective financial
statements and notes, which are included elsewhere in this joint proxy
statement/prospectus. The summary pro forma financial data below presents SCO's
statement of operations data on a pro forma basis to reflect the proposed sale
of the server and professional service groups as though the transaction had
occurred on October 1, 1999 and presents balance sheet data on a pro forma basis
as though the transaction occurred on September 30, 2000. The pro forma
statement of operations data also gives effect to the sales representative and
support agreement under which New Caldera will act as a sales agent for SCO's
OpenServer products, the rights to which are being retained by SCO and gives
effect to the OpenServer research and development agreement. You should not rely
on the summary pro forma financial data as an indication of the results of
operations or financial position that would have been achieved if the
reorganization had taken place earlier or as an indication of the results of
operations or financial position of SCO after completion of the reorganization.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
2000
-------------
<S> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:
Net revenues................................................ $ 74,415
Gross margin................................................ 64,865
Income from operations...................................... 7,342
Net loss.................................................... (25,486)
Net loss per share:
Basic and diluted......................................... $ (0.71)
Shares used in net loss per share calculation:
Basic and diluted......................................... 35,720
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
------------------
<S> <C>
PRO FORMA BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 39,401
Working capital............................................. 17,150
Equity investment in New Caldera............................ 24,278
Total assets................................................ 111,801
Long-term liabilities, net of current portion............... 4,029
Total stockholders' equity.................................. 43,828
</TABLE>
12
<PAGE> 24
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA FOR CALDERA
The information below reflects the historical net loss and book value per
share of Caldera stock in comparison with the pro forma combined net loss and
book value per share of New Caldera after giving effect to the proposed
combination of Caldera and the server and professional services groups as though
such combination had occurred at November 1, 1999 using the purchase method of
accounting for business combinations. The pro forma combined book value per
share is computed by dividing pro forma combined stockholders' equity by the pro
forma combined number of shares outstanding as of October 31, 2000.
You should read the tables below in conjunction with the respective
financial statements and related notes of Caldera and the server and
professional services groups and the pro forma condensed combined financial
statements and related notes included elsewhere in this joint proxy
statement/prospectus.
CALDERA
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, 2000
----------------
<S> <C>
HISTORICAL PER SHARE DATA:
Basic and diluted net loss per common share............... $(1.19)
Book value per share at year end.......................... $ 2.59
</TABLE>
PRO FORMA COMBINED
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, 2000
----------------
<S> <C>
PRO FORMA COMBINED PER SHARE DATA:
Basic and diluted net loss per common share............... $(2.63)
Book value per share at year end.......................... $ 4.01
</TABLE>
13
<PAGE> 25
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA FOR SCO
The information below reflects the historical net loss and book value per
share of SCO stock in comparison with the pro forma net loss and book value per
share of SCO after giving effect to the proposed combination of Caldera and the
server and professional services groups as though such combination had occurred
at October 1, 1999 using the purchase method of accounting for business
combinations. The pro forma book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares outstanding as of
September 30, 2000.
You should read the tables below in conjunction with the respective
financial statements and related notes of SCO and the server and professional
services groups and the pro forma condensed financial statements and related
notes included elsewhere in this joint proxy statement/prospectus.
SCO
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 2000
------------------
<S> <C>
HISTORICAL PER SHARE DATA:
Basic and diluted net loss per share...................... $(1.59)
Book value per share at period end........................ $ 0.79
</TABLE>
PRO FORMA
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 2000
------------------
<S> <C>
PRO FORMA PER SHARE DATA:
Basic and diluted net loss per share...................... $(0.71)
Book value per share at period end........................ $ 1.11
</TABLE>
14
<PAGE> 26
MARKET PRICE INFORMATION
CALDERA MARKET PRICE INFORMATION
Caldera common stock has traded on the Nasdaq National Market under the
symbol "CALD" since March 21, 2000.
The table below sets forth the range of high and low closing prices of
Caldera common stock as reported on the Nasdaq National Market since March 21,
2000, the date of Caldera's initial public offering.
<TABLE>
<CAPTION>
CALDERA
COMMON STOCK
----------------
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 2000
Quarter ended April 30, 2000 (from March 21, 2000).......... $29.44 $ 9.56
Quarter ended July 31, 2000................................. 16.25 7.05
Quarter ended October 31, 2000.............................. 8.50 3.25
FISCAL 2001
Quarter ending January 31, 2001 (through December 7,
2000)..................................................... 4.88 1.84
</TABLE>
As of , 2000, Caldera had stockholders of record.
SCO MARKET PRICE INFORMATION
SCO common stock has traded on the Nasdaq National Market under symbol
"SCOC" since May 1993.
The table below sets forth the range of high and low closing prices of SCO
common stock as reported on the Nasdaq National Market for the periods
indicated.
<TABLE>
<CAPTION>
SCO
COMMON STOCK
-----------------
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1999
Quarter ended December 31, 1998............................. $ 5.59 $ 3.25
Quarter ended March 31, 1999................................ 5.88 4.00
Quarter ended June 30, 1999................................. 7.06 5.38
Quarter ended September 30, 1999............................ 14.13 6.44
FISCAL 2000
Quarter ended December 31, 1999............................. 34.65 11.25
Quarter ended March 31, 2000................................ 31.25 9.39
Quarter ended June 30, 2000................................. 8.95 4.39
Quarter ended September 30, 2000............................ 6.13 2.78
FISCAL 2001
Quarter ended December 31, 2000 (through December 7,
2000)..................................................... 4.25 1.56
</TABLE>
As of , 2000, SCO had stockholders of record.
15
<PAGE> 27
RECENT CLOSING PRICES
The following table sets forth the closing prices per share of Caldera
common stock and SCO common stock as reported on the Nasdaq National Market on
August 1, 2000, the last full trading day prior to the public announcement that
Caldera and SCO had entered into the merger agreement, and on December , 2000,
the last full trading day for which closing prices were available at the time of
the printing of this joint proxy statement/prospectus.
<TABLE>
<CAPTION>
CALDERA SCO
DATE COMMON STOCK COMMON STOCK
---- ------------ ------------
<S> <C> <C>
August 1, 2000.............................................. $6.937 $3.25
December , 2000...........................................
</TABLE>
DIVIDENDS
Caldera has never declared or paid cash dividends on Caldera common stock.
Caldera currently intends to retain earnings, if any, to support its growth
strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Caldera board of directors after taking into account various factors, including
Caldera's financial condition, operating results, current and anticipated cash
needs and plans for expansion.
SCO has never paid cash dividends on its capital stock and does not intend
to pay any cash dividends on its common stock in the foreseeable future. SCO
currently intends to retain earnings, if any, to support its operations. Payment
of future dividends, if any, will be at the discretion of SCO's board of
directors.
16
<PAGE> 28
RISK FACTORS
In evaluating the proposals to be voted on at your meeting please carefully
consider the information presented throughout this document, and in particular
the following risk factors. Some of these risk factors relate directly to the
combination described in this document, while others relate to the businesses of
New Caldera, Caldera and the server and professional services group.
RISKS RELATING TO THE COMBINATION
New Caldera might fail to successfully integrate the businesses of Caldera and
the server and professional services groups
Product line integration will be difficult. If New Caldera completes the
combination of the server and professional services groups with Caldera's Linux
business, which is not assured, New Caldera will need to integrate two
independent businesses. One key issue will be the integration of Caldera's Linux
product offerings and SCO's UnixWare. This product line integration will involve
consolidation of products with duplicative functionality, coordination of
research and development activities, and convergence of the technologies
supporting the various products.
Other business integration issues could arise. Other problems inherent in
integrating the businesses of Caldera and the server and professional services
groups include:
- maintaining brand recognition for key products of the server business,
such as UnixWare while migrating customer identification of the brands to
New Caldera;
- resolving channel conflicts that may arise between third party
distributor and electronic solution provider channels of Caldera and the
channels of the server business;
- coordinating, integrating and streamlining geographically dispersed
operations; and
- coping with customers' uncertainty about continued support for
duplicative New Caldera products.
Management and employee integration issues could arise. Potential
management and employee integration problems include:
- resolving differences between the corporate cultures of Caldera and the
server and professional services groups;
- employee turnover; and
- integrating the management teams of both companies successfully.
The integration will be expensive. In addition, management's focus on the
combination is likely to interrupt the current business activities of Caldera
and the server and professional services groups. Any of these risks could harm
New Caldera's revenue and results of operations.
Operational issues could arise. Potential operational integration problems
include conflict between each of Caldera's and SCO's:
- management information systems;
- telephone systems; and
- customer data.
Certain individuals have interests that are different from or in addition to
yours, which could influence them to support the combination
Members of the boards of directors and management of Caldera and SCO, and
certain officers of SCO will receive benefits from the combination in addition
to those which you will receive. Because of
17
<PAGE> 29
these benefits, these persons may be influenced to vote in favor of or to
recommend the combination. These interests include:
- The current executive officers and directors of Caldera will become
executive officers and directors of New Caldera;
- David McCrabb, Jack Moyer and Jim Wilt are executive officers of SCO or
employees of the server and professional services groups, and will become
executive officers of New Caldera;
- Each of the SCO executive officers and employees of the server and
professional services groups who will become executive officers of New
Caldera, and other key employees of the server and professional services
groups, will sign employment agreements with New Caldera that provide for
terms of employment and severance benefits, among other things;
- SCO will provide change-of-control benefits to its current executive
officers;
- SCO has granted additional "stay-put" options to certain executive
officers to encourage those individuals to remain with SCO following the
combination; and
- SCO will have the right to nominate two members of the New Caldera board
of directors, who will initially be Doug Michels and an individual to be
named by SCO and approved by Caldera.
New Caldera will incur significant accounting charges in connection with the
combination that will impact its operating results immediately and in the future
The significant costs of integration associated with the combination
increases the risk that New Caldera will not realize the anticipated benefits.
Because New Caldera will account for the combination as a purchase, it expects
to incur a non-cash charge of approximately $1.0 million at the date of the
combination, related to the write-off of in-process research and development.
New Caldera also will record goodwill and other intangible assets of
approximately $141.5 million. This amount will be amortized over periods ranging
from three to five years, and will result in charges to operations of
approximately $7.8 million per quarter for the first three years and
approximately $6.0 million per quarter for the subsequent two years. Please see
"New Caldera Unaudited Pro Forma Condensed Combined Financial Statements" on
page P-1.
Because the Nasdaq National Market is likely to experience extreme price and
volume fluctuations, particularly with respect to the stock of internet
companies such as New Caldera, the price of New Caldera's stock may decline even
if New Caldera's business is doing well
The market price of New Caldera's common stock could fluctuate
significantly as a result of:
- New Caldera's susceptibility to quarterly variations in operating
results, which may cause it to fail to meet analysts' or investors'
expectations;
- earnings and other announcements by, and changes in analyst and investor
evaluations of, internet firms and New Caldera;
- announcements or implementation by New Caldera or its competitors of
technological innovations or new products or services; and
- trading volume of New Caldera common stock.
The securities of many companies have experienced significant price and
volume fluctuations in recent years, often unrelated to the companies' operating
performance. Specifically, market prices for securities of technology companies
have sometimes reached elevated levels. These levels may not be sustainable and
may not bear any relationship to the operating performances of these companies.
For example, on March 21, 2000, Caldera's stock closed at a high of $29.44 per
share, but has since declined significantly. As of December 4, 2000, it closed
at $1.84 per share. Similarly, the stock price of SCO closed at $34.63 per share
on December 27, 1999. However, as of December 4, 2000, it closed at $1.59 per
share.
18
<PAGE> 30
Because the number of shares to be received in the combination by SCO is fixed,
the market value of the consideration could fluctuate as a result of changes in
the market price of Caldera's common stock
There will be no adjustment to the merger consideration received by SCO for
changes in the market price of Caldera's common stock, and neither SCO nor
Caldera will be permitted to terminate the merger agreement solely because of
changes in the market price of Caldera common stock. Accordingly, the market
value of the consideration to be paid to SCO for the assets of its server and
professional services groups will fluctuate depending upon the market value of
the Caldera common stock at the time of completion of the merger. At $6.937 per
share of Caldera common stock on August 1, 2000, the closing price on the day
the merger agreement was signed, the aggregate consideration to be paid to SCO
(together with the value of the shares underlying options to be granted to its
employees), was valued at approximately $133.3 million. Based on , the
closing price per share of Caldera common stock on December , 2000, the last
full trading day for which closing prices were available at the time of printing
of this joint proxy statement/prospectus, the aggregate consideration was valued
at approximately . Such fluctuations may continue until the closing
of the combination. To the extent that SCO continues to hold shares of New
Caldera common stock following the merger, its market value will continue to
fluctuate with the stock price of New Caldera's common stock.
RISKS RELATING TO NEW CALDERA AFTER THE COMBINATION
New Caldera may not be profitable or achieve positive cash flow; if New Caldera
does not achieve and sustain profitability and positive cash flow, New Caldera's
financial condition would be adversely affected and its stock price could suffer
Caldera has not been profitable. The server and professional services
groups have not been profitable and their revenue has been declining. If New
Caldera's revenue declines or grows at a slower rate than anticipated or if New
Caldera is unable to efficiently reduce operating expenses, New Caldera may not
achieve or sustain profitability or generate positive cash flow. In this case,
the value of an investment in New Caldera could be reduced.
Based on a pro forma analysis, the combination will result in a material
increase in the losses incurred by, and in a material decrease in the working
capital available to, New Caldera as compared with Caldera. For the fiscal year
ended October 31, 2000, Caldera incurred net losses attributable to common
stockholders of approximately $39.2 million. As of October 31, 2000, Caldera had
incurred total net losses of $56.5 million since its inception in 1994. For the
fiscal year ended September 30, 2000, the server and professional services
groups incurred net losses of approximately $59.8 million. On a pro forma basis,
the combined operations of Caldera and the server and professional services
groups would have incurred net losses attributable to common stockholders of
approximately $129.5 million for the fiscal year ended October 31, 2000.
In connection with the acquisition of the server and professional services
groups, New Caldera anticipates additional working capital requirements to fund
the acquired operations. On a pro forma basis, the combined operations of
Caldera and the server and professional services groups would have working
capital of approximately $68.4 million as of October 31, 2000. During the year
ended September 30, 2000, the server and professional services groups used
approximately $54.9 million in cash for operating activities. Although New
Caldera hopes to reduce employee headcount and generate other cost reductions
and efficiencies from the acquisition to minimize the negative impact on working
capital, it may not be successful in attaining such cost reductions and
efficiencies. Additionally, New Caldera will not acquire certain working capital
accounts such as cash, accounts receivable or accounts payable. As a result, New
Caldera will be required to provide all working capital for the initial 30 to 60
days of operations from its cash reserves.
Caldera believes that its current cash and cash equivalents and short-term
investments will be sufficient to meet capital expenditures and working capital
requirements for at least the next twelve
19
<PAGE> 31
months. However, after the combination, New Caldera may need to raise additional
funds to carry out its business plan. Additional funding may not be available in
amounts or on terms acceptable to New Caldera. If sufficient funds are not
available or are not available on acceptable terms, New Caldera may be unable to
carry out its business plan and achieve profitability and positive cash flow.
Because New Caldera's product and service offerings, which will include both
Unix and Linux products and services, may not be accepted, New Caldera may not
be successful
New Caldera will face risks and uncertainties relating to its ability to
successfully implement its strategy. New Caldera's business model is based on an
expectation that it can create and develop demand for product and service
offerings, which will include both UNIX and Linux products and services. There
is no current market for business solutions combining both Linux and UNIX-based
products and services. At present Microsoft and other non-Linux operating
systems are favored by the business community.
In order for New Caldera's product offering to be accepted New Caldera
must:
- broaden awareness of the New Caldera brand;
- maintain its current, and develop new, strategic relationships with
technology partners and solution providers;
- continue to develop and upgrade product offerings tailored for business;
and
- respond effectively to competitive pressures.
If New Caldera is unable to execute its strategy, New Caldera may not be
successful.
In addition, New Caldera's business model will be subject to many of the
same risks currently facing Caldera's business model, which relies on a
combination of open source software and proprietary technology. While the UNIX
products of the server group to be acquired by New Caldera do not contain open
source software components, the Linux products will continue to do so. For
further discussion of risks associated with Caldera's business model, see
"-- Risks of Caldera" beginning on page 23.
New Caldera will have a workforce approximately four times the size of the
Caldera workforce. The management of New Caldera will face many difficulties in
managing a larger company
In deciding whether to approve and adopt the reorganization agreement and
the combination, you should bear in mind that the larger combined company will
create new challenges for Caldera's existing management. If New Caldera fails to
meet these challenges, the value of an investment in New Caldera may decline.
After the combination, New Caldera will have a workforce approximately four
times the size of the Caldera workforce prior to the combination. Key personnel
have little experience managing this type of growth. This growth is likely to
strain New Caldera's management control systems and resources, including
decision support, accounting and management information systems. New Caldera
will need to continue to improve its financial and management controls and its
reporting systems and procedures to manage its employees and to obtain
additional facilities. If New Caldera does not succeed in these efforts, it
could reduce New Caldera's revenue and the value of an investment.
If New Caldera is unable to retain key personnel in an intensely competitive
environment, its operations could be adversely affected
As a result of the combination, New Caldera will need to retain the
personnel of both Caldera and the server and professional services groups.
Competition for qualified professionals in the software industry is intense, and
New Caldera may be unable to retain sufficient professionals to operate the
combined business. Departures of existing personnel could be disruptive to its
business and can result in the departure of other employees.
The loss or departure of any of New Caldera's officers or key employees
could harm New Caldera's ability to implement its business plan and could lower
its revenue. New Caldera's future success depends
20
<PAGE> 32
to a significant extent on the continued service and coordination of its
management team, particularly Ransom H. Love, New Caldera's Chief Executive
Officer. New Caldera does not maintain key person insurance for any member of
its management team.
Even though New Caldera intends to enter into employment agreements with
key management personnel, these agreements cannot prevent the departure of those
employees.
New Caldera will operate in a highly competitive market and faces significant
competition from a variety of current and potential sources, including Red Hat
and Sun Microsystems; Many of New Caldera's current and potential competitors
will have greater financial and technical resources; Thus, New Caldera may fail
to compete effectively in its market
In considering whether to approve this combination, Caldera stockholders
and SCO shareholders should bear in mind that New Caldera will have new
competitors. New Caldera's principal competitors include:
- Microsoft;
- Cygnus Solutions;
- VA Linux;
- Wind River Systems;
- Sun Microsystems;
- Corel;
- MacMillan;
- Red Hat;
- SuSE;
- AT&T;
- Compaq;
- Hewlett-Packard;
- IBM;
- Novell; and
- Unisys.
Many of New Caldera's competitors have substantially greater financial and
technical resources, more extensive marketing and distribution capabilities;
larger development staffs and more widely recognized brands and products.
Also, due to the open source nature of Linux, anyone can freely download
Linux and many Linux applications and modify and re-distribute them with few
restrictions. For example, solution providers upon whom New Caldera depends for
the distribution of its products could instead create their own Linux solutions
to provide to their customers. Also, established companies and other
institutions could easily produce competing versions of Linux.
New Caldera's foreign-based operations and sales create special problems,
including the imposition of governmental controls and fluctuations in currency
exchanges, that could hurt its results
As a result of the purchase of the server and professional services groups
from SCO, New Caldera will have significant foreign operations, including
development facilities, sales personnel and customer
21
<PAGE> 33
support operations, in Europe, Latin America and Southeast Asia. These foreign
operations are subject to certain inherent risks, including:
- potential loss of developed technology through piracy, misappropriation,
or more lenient laws regarding intellectual property protection;
- imposition of governmental controls, including trade restrictions;
- fluctuations in currency exchange rates and economic instability;
- longer payment cycles for sales in foreign countries;
- difficulties in staffing and managing the foreign operations;
- seasonal reductions in business activity in the summer months in Europe
and other countries; and
- political unrest, particularly in areas in which New Caldera will have
facilities.
In addition, operating expenses will be denominated in local currency,
creating risk of foreign currency translation gains and losses that could harm
New Caldera's financial results. If New Caldera generates profits or losses in
foreign countries, its effective income tax rate could also be increased.
In Latin America and Southeast Asia in particular, several countries have
suffered and may be especially susceptible to recessions and economic
instability which may lead to increased governmental ownership or regulation of
the economy, higher interest rates, increased barriers to entry such as higher
tariffs and taxes, and reduced demand for goods manufactured in the United
States.
New Caldera's business plan contemplates additional acquisitions, which may
divert management's attention and present difficulties with respect to
integrating operations and employees of these acquisitions
New Caldera expects to pursue other acquisitions in the future.
Acquisitions involve a number of special risks and challenges, including:
- management's attention may be diverted, particularly in the case of
multiple concurrent acquisitions;
- New Caldera must integrate the target's operations and employees with its
existing business;
- New Caldera may have difficulty incorporating technology into its
existing product lines;
- key employees may leave; and
- New Caldera may have difficulty presenting a unified corporate image.
New Caldera does not have experience in integrating the operations of
acquired companies.
Caldera and SCO could each be harmed if the combination is not completed
Caldera and SCO have each expended substantial management time and incurred
costs in negotiating the combination. These costs will not be recouped if the
combination is not completed. If the combination is not completed, Caldera and
SCO will continue to operate as independent entities, despite customers' and
employees' expectations. Each of our reputations and relationships with
customers could be damaged if Caldera and SCO fail to complete the combination.
If Caldera or SCO does not complete the combination, in certain circumstances,
SCO or Caldera may be required to pay a significant breakup fee to the other
party.
In addition, Caldera and SCO have agreed that Caldera will advance to SCO
$7 million cash portion of the purchase price prior to the closing of the
combination, the terms of which advance are currently being negotiated. If the
combination is not completed, SCO would have an outstanding debt obligation to
Caldera that might be difficult to repay. Also, Caldera would maintain an
investment that is unrelated to its business plan, leaving it with fewer
resources to devote to the growth of its business.
22
<PAGE> 34
New Caldera will be dependent upon certain strategic relationships with its
technology partners and the loss of any of these relationships could adversely
affect its business prospects
New Caldera will depend on alliances with technology partners such as
Citrix Systems, Fujitsu, IBM, Intel, Novell, Compaq and Sun Microsystems. These
relationships encompass product integration, two-way technology transfers, joint
marketing to electronic service providers and revenue-generating initiatives in
areas such as product bundles, training and education and third-level technical
support, relating to modification of the operating system code, for its
partners. New Caldera expects that these relationships will create opportunities
for its products and services in business markets in which it otherwise might
not have access. If New Caldera is unable to maintain these relationships, it
will not be able to develop and deploy its products in certain segments of the
business community and its product development and sales will not grow.
In addition, existing strategic relationships of Caldera and SCO with
technology partners do not, and any future strategic relationships may not,
afford New Caldera any exclusive marketing development or distribution rights.
As a result, the companies with which New Caldera will have strategic alliances
are free to pursue alternative technologies and to develop alternative products
and services in addition to or in lieu of New Caldera's products and services,
either on their own or in collaboration with others, including competitors of
New Caldera. Moreover, New Caldera cannot guarantee that the companies with
which Caldera and SCO have strategic relationships will market New Caldera's
products effectively or continue to devote the resources necessary to provide it
with effective sales, marketing and technical support, or that these partners
will not choose to open source products into which Caldera and SCO have invested
significant time and resources, thereby reducing the value of New Caldera's
rights in these products.
Raymond J. Noorda will be able to exert significant control over New Caldera,
and his interests may differ from those of other stockholders
After the combination, Raymond J. Noorda will have beneficial ownership of
approximately 49.9% of our outstanding common stock. As a result, Mr. Noorda
could exercise significant control and determine the outcome of actions that
require stockholder approval. For example, Mr. Noorda could delay or prevent a
transaction in which stockholders might receive a premium over the prevailing
market price for their shares and control changes in management.
RISKS OF CALDERA
Caldera is a new company with a limited operating history, which may make it
difficult for you to assess the risks related to its business
Although Caldera began operations in 1994, during the past 24 months
Caldera has substantially revised its business plan to focus on Linux for
eBusiness, or business conducted over the internet, made additions to its
product line and hired a significant number of new employees, including key
members of its management team. Caldera recently developed and released its
server product, eServer. Its historical sales have been primarily from its
OpenLinux products, including OpenLinux 2.3 (renamed eDesktop because of its
focus on the desktop environment), which were historically developed for
first-time Linux users who predominantly have experience using Windows desktop
environments. As a company in a new and rapidly evolving industry, Caldera faces
risks and uncertainties relating to its ability to successfully implement its
strategy. You must consider the risks, expenses and uncertainties facing a
company like Caldera, operating with an unproven business model, faces in a new
and rapidly evolving market such as the market for Linux software. These risks
also include Caldera's ability to:
- broaden awareness of the Caldera Systems brand;
- maintain its current, and develop new, strategic relationships with
technology partners and solutions providers;
- attract, integrate and retain qualified management personnel;
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- attract, integrate and retain qualified personnel for the expansion of
its sales, professional services, engineering, marketing and customer
support organizations;
- continue to develop and upgrade product offerings tailored for business;
- respond effectively to competitive pressures; and
- generate revenue from the sale of software products, services, education
programs and training.
If Caldera cannot address these risks and uncertainties or is unable to
execute its strategy, Caldera may not be successful.
You should not rely on Caldera's quarterly operating results as an indication of
its future results because they are subject to significant fluctuations;
Fluctuations in Caldera's operating results or the failure of its operating
results to meet the expectations of public market analysts and investors may
negatively impact Caldera's stock price
Caldera's quarterly operating results have varied in the past and Caldera
expects them to fluctuate significantly in the future due to a variety of
factors that could affect revenue or expenses in any particular quarter.
Historically, Caldera has experienced substantial fluctuations in its software
and related products revenue from period to period relating to the introduction
of new products and new versions of its existing products. For example, revenue
from software and related products for the three-month period ended January 31,
1999 was 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
ended April 30, 2000. Software and related products revenue then decreased to
approximately $631,000 during the three-month period ended July 31, 2000 and
then increased to approximately $845,000 for the three-month period ended
October 31, 2000. These quarterly revenue fluctuations were primarily due to the
fluctuation of sales of Caldera's OpenLinux products, and these fluctuations in
revenue can be expected to continue as a result of fluctuating sales of all of
Caldera's products, including its new product offerings.
Upon announcement of an expected release date for a new product or upgrade,
Caldera often experiences a significant decrease in sales of its existing
products. Additionally, Caldera often experiences the strongest sales for a new
product during the first 30 days after its introduction as Caldera fills advance
orders from its distribution channel. Fluctuations in quarterly operating
results could cause Caldera's stock price to decline. You should not rely on
quarter-to-quarter comparisons of Caldera's results of operations as an
indication of future performance. Factors that may affect our quarterly results
include:
- the interest level of electronic solutions providers in recommending
Caldera's Linux business solutions to end users;
- the introduction, development, timing, competitive pricing and market
acceptance of Caldera's products and services and those of its
competitors;
- changes in general economic conditions, such as recessions, that could
affect capital expenditures and recruiting efforts in the software
industry in general and in the Linux environment in particular;
- the magnitude and timing of marketing initiatives;
- changing business attitudes toward Linux as a viable operating system
alternative to other competing systems;
- the maintenance and development of Caldera's strategic relationships with
technology partners and solution providers;
- the attraction, retention and training of key personnel; and
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- Caldera's ability to manage anticipated growth and expansion.
As a result of the factors listed above and elsewhere, it is possible that
in some future periods Caldera's results of operations may be below the
expectations of public market analysts and investors. This could cause Caldera's
stock price to decline. In addition, Caldera plans to increase its operating
expenses to expand its sales and marketing, administration, consulting and
training, maintenance and technical support and research and development groups.
If revenue falls below expectations in any quarter and Caldera is unable to
quickly reduce its spending in response, Caldera's operating results would be
lower than expected and Caldera's stock price may fall.
Caldera's business model, which relies on a combination of open source software
and proprietary technology, is unproven
Caldera's business model incorporates as integral elements of its product
offerings both commercial products and open source software. Caldera knows of no
company that has built a profitable business based in whole or in part on open
source software. By incorporating open source components in its product
offerings, Caldera faces many of the same risks that other open source companies
experience, including the inability to offer warranties and indemnities on
products and services. In addition, by developing products based on proprietary
technology that is not freely downloadable Caldera may run counter to the
perception of Linux as an open source model and alienate the Linux community.
For example, its 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 Caldera is trying to dominate the market for Linux operating systems much
like other companies have been able to dominate traditional software markets.
Caldera's critics argue that its 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 its customers,
developers or the open source community, could harm Caldera's reputation,
diminish its brand and decrease its revenue. Caldera's business will fail if it
is unable to successfully implement its business model.
Caldera's business model also depends upon incorporating contributions from
the open source community into products that it open sources. The viability of
Caldera's product offerings depends in large measure upon the efforts of the
open source community in enhancing products and making them compatible for use
across multiple software and hardware platforms. There are no guarantees that
these products will be embraced by the open source community such that
programmers will contribute sufficient resources for their development. If the
open source community does not embrace products that Caldera views as integral
to providing eBusiness solutions, Caldera will be required to devote significant
resources to develop these products on its own.
The sales cycle for Caldera's products is long and Caldera may incur substantial
non-recoverable expenses; Caldera devotes significant resources to sales that
may not occur when anticipated or at all
The length of time between initial contact with a potential customer and
sale of a product, or Caldera's sales cycle, outside the retail channel is
typically complex and lengthy, lasting from three to nine months. These direct
sales also represent Caldera's largest orders. Therefore, Caldera's revenue for
a period is likely to be affected by the timing of larger orders, which makes
the related revenue difficult to predict. Caldera's revenue for a quarter could
be reduced if large orders forecasted for a certain quarter are delayed or are
not realized. The cycle factors that could delay or defer an order, include:
- time needed for technical evaluations of our software by customers;
- customer budget restrictions;
- customer internal review and testing procedures; and
- engineering work needed to integrate our software with the customer's
systems.
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Because Caldera's products have relatively short life cycles, Caldera must
develop and introduce new products to sustain its level of sales
Caldera's software products have a limited life cycle and it is difficult
to estimate when they will become obsolete. If Caldera does not develop and
introduce new products before its existing products have completed their life
cycles, Caldera would not be able to sustain its level of sales. In addition, to
succeed, many customers must adopt Caldera's new products early in the product's
life cycle. Therefore, if Caldera does not attract sufficient customers early in
a product's life, it may not realize the amount of revenue that Caldera
anticipated for the product. Caldera cannot be sure that it will continue to be
successful in marketing its key products.
Caldera relies on independent developers in the open source community, such as
Linus Torvalds, in order to release upgrades of its Linux-based products
Many of the components of Caldera's software products, including the Linux
kernel, the core of the Linux operating system, are developed by independent
developers in the open source community and are available for inclusion in
Caldera's products without cost. Linus Torvalds, the original developer of the
Linux kernel, and a small group of independent engineers have in the past
developed and upgraded the Linux kernel. Neither Mr. Torvalds nor any
significant contributor to the Linux kernel is an employee of Caldera, and none
of these individuals 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 Caldera's
products on a timely basis, or at all, Caldera's ability to enhance its product
offerings will suffer. As a consequence, Caldera will be forced to rely to a
greater extent on its own development efforts or license commercial software
products as replacements, which would increase its expenses and delay
enhancements to its products. For example, in the past, Caldera has sometimes
been unable to upgrade all open source components of a product in connection
with a proposed release because enhancements had not yet been made by these
independent developers. Any failure on the part of the kernel developers to
further develop and enhance the kernel could also stifle the development of
additional Linux applications.
Caldera's reliance on independent third parties who develop most of the software
included in its Linux products could result in delays or unreliable products and
damage to Caldera's reputation
Caldera's products consist of many different software components and
applications, most of which are developed by independent third parties over whom
Caldera has limited or no control. While Caldera uses rigid engineering
standards in testing the products or applications that Caldera integrates in its
products, Caldera cannot guarantee that it has selected or will select in the
future the most reliable components available in the market or that it will
successfully integrate the many components of its products. In addition, if any
of these third-party products are not reliable or available, Caldera may have to
develop them internally, which would significantly increase its development
expenses and delay the time to market. Caldera's customers could be dissatisfied
if any of these products fail to work as designed or if adequate support is not
provided, which could damage its reputation and lead to potential litigation.
If the market for Linux business solutions does not grow as Caldera anticipates,
Caldera may not be able to continue its business plan and grow its business
Caldera's strategy for marketing Linux solutions to businesses depends in
part upon its belief that many businesses will follow a trend away from the use
of networked computers linked by centralized servers and move toward the use of
distributed applications through thin appliance servers, or specialized servers,
internet access devices and application service providers. Caldera is also
relying on electronic solution providers making these technologies available on
Linux and on Linux then becoming a desirable operating system under these
circumstances. Caldera also plans to market its Linux products for use on these
specialized servers and internet access devices, which Caldera believes will
become widely used for eBusiness. However, if businesses, which at present favor
Microsoft and other non-Linux operating systems, do not adopt these trends in
the near future, or if Linux is not viewed as a desirable operating
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system in connection with these trends, a significant market for our products
may not develop. Factors that may keep businesses from adopting these trends
include:
- costs of installing and implementing new hardware devices;
- costs of porting legacy systems into new platforms;
- security concerns regarding manipulation of data through application
service providers;
- limited adoption of Linux among businesses generally;
- previous significant investments in competing systems;
- lack of adequate Linux-trained professionals and support services;
- lack of standards among Linux products and applications; and
- lack of acceptance of the internet as a medium for distributing business
applications.
Even if these trends toward distributed applications are adopted, if the
development of Linux products and Linux applications is not sufficient to meet
the needs of eBusiness, a significant market for Linux business solutions such
as Caldera's may not materialize.
Caldera could be prevented from selling or developing its products if the GNU
general public license and similar licenses under which its products are
developed and licensed are not enforceable
The Linux kernel and certain other components of Caldera's products have
been developed and licensed under the GNU General Public License and similar
licenses. These licenses state that any program licensed under them may be
liberally copied, used, modified and distributed freely, so long as all
modifications are also freely made available and licensed under the same
conditions. Caldera knows of no instance in which a party has challenged the
validity of these licenses or in which these licenses have been interpreted in a
legal proceeding. To date, all compliance with these licenses has been
voluntary. It is possible that a court would hold one or more of these licenses
to be unenforceable in the event that someone were to file a claim asserting
proprietary rights in a program developed and distributed under them. Any ruling
by a court that these licenses are not enforceable, or that Linux operating
systems, or significant portions of them, may not be liberally copied, modified
or distributed freely, would have the effect of preventing Caldera from selling
or developing its products, unless Caldera is able to negotiate a license to use
the software or replace the affected portions. These licenses could be
expensive, which could impair Caldera's ability to price its products
competitively.
Caldera is vulnerable to claims that its products infringe third-party
intellectual property rights, particularly because its products are comprised of
many distinct software components developed by thousands of independent parties
Caldera may be exposed to future litigation based on claims that its
products infringe the intellectual property rights of others. This risk is
exacerbated by the fact that most of the code in its products is developed by
independent parties over whom Caldera exercises no supervision or control and
who, themselves, might not have the same financial resources as Caldera to pay
damages to a successful litigant. Claims of infringement could require Caldera
to re-engineer its products or seek to obtain licenses from third parties in
order to continue offering its products. In addition, an adverse legal decision
affecting Caldera's intellectual property, or the use of significant resources
to defend against this type of claim, could place a significant strain on
Caldera's financial resources and harm its reputation.
Failure to protect Caldera's intellectual property rights adequately would
result in significant harm to its business
While much of the code for Caldera's products is open source, its success
depends significantly on Caldera's ability to protect its trademarks, trade
secrets and certain proprietary technology contained in its products. Caldera
relies on a combination of copyright and trademark laws, and on trade secrets
and
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confidentiality provisions and other contractual provisions to protect its
proprietary rights. These measures afford only limited protection. Some
trademarks that have been registered in the United States have been licensed to
Caldera, and Caldera has other trademark applications pending in the United
States. Effective trademark protection may not be available in every country in
which Caldera intends to offer its products and services. Caldera's means of
protecting its proprietary rights in the United States or abroad may not be
adequate and competitors may independently develop similar technologies. For
example, on March 15, 2000 Caldera received a letter from counsel of a third
party demanding that Caldera immediately stop using the term eServer in
connection with its products. The third party alleges that it is the owner of
the trademark ESERVER and several related marks. Caldera has responded to this
letter and has received no additional correspondence. Caldera's future success
will depend in part on its ability to protect its proprietary rights. Despite
Caldera's efforts to protect its proprietary rights and technologies,
unauthorized parties may attempt to copy aspects of Caldera's products or to
obtain and use trade secrets or other information that Caldera regards as
proprietary. Legal proceedings to enforce Caldera's intellectual property rights
could be burdensome and expensive and could involve a high degree of
uncertainty. These legal proceedings may also divert management's attention from
growing Caldera's business. In addition, the laws of some foreign countries do
not protect its proprietary rights as fully as do the laws of the United States.
If Caldera does not enforce and protect Caldera's intellectual property, its
business may suffer substantial harm.
Caldera may face potential liability for material published or made available on
its web site and other sites linked to it
Caldera may be sued for defamation, civil rights infringement, negligence,
copyright or trademark infringement, personal injury, product liability or other
legal claims relating to information that is published or made available on its
web site and the other sites linked to it. These types of claims have been
brought, sometimes successfully, against providers of online services in the
past. Caldera could also be sued for the content that is accessible from its web
site and through links to other internet sites or through content and materials
that may be posted by members in chat rooms or on bulletin boards. Caldera's
insurance does not specifically provide for coverage of these types of claims
and therefore may not adequately protect it against these types of claims. In
addition, Caldera could incur significant costs in investigating and defending
such claims, even if Caldera ultimately is not liable. If any of these events
occur, its revenues and the value of your investment could be materially
adversely affected.
Caldera must achieve rapid market penetration of its products in order to
compete successfully
Because the Linux and eBusiness markets are new and emerging, companies
that are early in providing products and solutions for these markets will have
an advantage in building awareness and consumer loyalty. Therefore, in order for
Caldera to successfully market its products on a wide scale, Caldera must
rapidly achieve market penetration. For example, if Caldera is unable to
demonstrate the viability of its products through rapid growth:
- software developers will be less likely to develop applications for its
products;
- Caldera will be unable to achieve economies of scale;
- Caldera will be less able to negotiate favorable terms with distributors
and other partners; and
- customers will be less likely to devote resources to purchasing and
implementing its products if they are not seen as an industry standard.
Caldera may lack the economic and managerial resources necessary to promote
this growth. Also, the fact that Caldera relies almost entirely on the success
of a few principal products affects its ability to penetrate diversified
markets. In addition, while Caldera believes its process of self-hosting results
in superior products, it requires time and resources that may delay new product
releases and upgrades. These delays could affect its ability to take advantage
of market opportunities on a timely basis.
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To achieve the type of broad recognition necessary to succeed, Caldera will need
to expend significant financial and management resources; There is no guarantee
that these expenditures will enable Caldera to receive the recognition necessary
to its success.
Caldera believes that broad recognition and a favorable audience perception
of the Caldera brand will be essential to its success. If Caldera's brand does
not achieve broad recognition as the leading provider of Linux solutions for
eBusiness, our success will be limited. Caldera intends to build brand
recognition through advertising its products and services. During the fiscal
year ended October 31, 1999, Caldera spent approximately $1.2 million for
advertising. During the fiscal year ended October 31, 2000, Caldera spent
approximately $1.5 million for advertising. Caldera expects to increase its
advertising expenses in future periods as Caldera builds the Caldera brand and
awareness of Caldera's products and services. In addition, Caldera provides
education and training to build brand recognition, which may not be successful
if Caldera is unable to generate wide-acceptance of these services. Caldera may
lack the resources necessary to accomplish these initiatives. Even if the
resources are available, Caldera cannot be certain that its brand enhancement
strategy will deliver the brand recognition and favorable audience perception
that Caldera seeks. If Caldera's strategy is unsuccessful, these expenses may
never be recovered and Caldera may be unable to increase future revenues. Even
if Caldera achieves greater recognition of its brand, competitors with greater
resources or a more recognizable brand could reduce its market share of the
emerging Linux market, as well as the broader market for the provision of
eBusiness solutions.
Caldera's strategy to provide solutions for eBusiness depends upon its ability
to successfully introduce products tailored for eBusiness and there is no
assurance that these products will gain commercial acceptance
To date, practically all of its sales revenue has come from retail sales of
OpenLinux, which is designed to assist the first-time Linux user who may be
familiar with a Windows, desktop environment. However, Caldera's business model
is targeted toward using Linux solutions to facilitate eBusiness. In order for
our strategy of providing Linux solutions for eBusiness to be successful,
Caldera must provide products that meet the needs of solution providers and
their eBusiness customers. Caldera recently developed its server product,
OpenLinux eServer. This new product, which is Caldera's primary eBusiness
product, may not be adopted by solution providers and their customers for any
number of reasons, including lack of customer awareness of Caldera and its
products, malfunction of the products and failure to meet needs of eBusiness. If
Caldera's eBusiness products are not successful, Caldera will fail to execute
its strategy and its sales may not grow.
Because software programs frequently contain errors or defects, Caldera could
lose significant revenue if its software programs do not perform as expected
Software programs frequently contain errors or defects, especially when
first introduced or when new versions are released. Caldera could, in the
future, lose revenue as a result of errors or defects in its software products.
Caldera cannot assure you that errors will not be found in new products or
releases. Although Caldera has both product liability and errors and omissions
insurance, Caldera might incur losses in excess of the dollar limits or beyond
the scope of coverage of its policies. While Caldera tests its products prior to
release, the fact that most of the components of its software offerings are
developed by independent parties over whom Caldera exercises no supervision or
control makes it particularly difficult to identify and remedy any errors or
defects that could exist. Any errors could result in loss of revenue, or delay
in market introduction or acceptance, diversion of development resources, damage
to its reputation or increased service costs.
Caldera's current and potential customers may find it difficult to hire and
train qualified employees to handle installation and implementation of its
products, which could negatively affect sales of its products to new customers
and lead to dissatisfaction among current customers
There are limited numbers of individuals that are trained and qualified to
manage Linux systems, including OpenLinux and our other products. End users and
Caldera's distribution partners may lack the resources to hire or train such
qualified personnel to install and implement Caldera's products, which could
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lead to dissatisfaction with Caldera's products among end users and deter
potential end users from purchasing Caldera's product.
The growth of Caldera's business will be diminished if the internet is not
accepted as a medium for commerce and business networking applications
An important part of Caldera's business strategy is to develop and market
its products for the support of secure business networks hosted on the internet.
In addition, Caldera plans to sell its products and provide a significant amount
of technical support and education via its web site. If the internet is not
accepted as a medium for commerce and business networking applications, demand
for its products and services will be diminished. A number of factors may
inhibit internet usage, including:
- inadequate network infrastructure;
- lack of knowledge and training on internet use and benefits;
- consumer concerns for internet privacy and security;
- lack of availability of cost-effective, high-speed service;
- interruptions in internet commerce caused by unauthorized users;
- changes in government regulation relating to the internet; and
- internet taxation.
If internet usage grows, the infrastructure may not be able to support the
demands placed on it by that growth and its performance and reliability may
decline. Web sites have experienced interruptions as a result of delays or
outages throughout the internet infrastructure. If these interruptions continue,
internet usage may decline.
Future sales of Caldera's common stock may negatively affect its stock price
The market price of Caldera's common stock could decline as a result of
sales of a large number of shares of Caldera common stock in the market in the
future, or the perception that such sales could occur. Caldera has a large
number of shares of common stock outstanding and available for resale beginning
at various points in time in the future. These sales also might make it more
difficult for Caldera to sell equity securities in the future at a time and at a
price that it deems appropriate. The shares of Caldera common stock currently
outstanding will become eligible for sale without registration pursuant to Rule
144 under the Securities Act, subject to certain conditions of Rule 144,
including the shares issued to SCO in the combination.
RISKS RELATING TO SCO AFTER THE COMBINATION
Following the combination, the shares of New Caldera stock will become a
significant asset of SCO's, the value of which may not be reflected, in whole or
in part, in SCO's trading price.
Because SCO has no current intention of distributing the shares of New
Caldera common stock that it receives as a result of the combination directly to
its shareholders, SCO shareholders who do not otherwise own shares of New
Caldera may not directly benefit from the transaction. The market value of SCO
common stock following the combination, may not, in whole or in part reflect the
value of New Caldera common stock held by SCO. Conversely, by virtue of SCO's
ownership of New Caldera common stock following the combination, the value of
SCO common stock may decline as much as a potential decline in the trading price
of New Caldera or disproportionately so. Therefore, a shareholder of SCO should
study the risks that pertain specifically to Caldera and New Caldera in addition
to the risks that SCO faces.
The proposed sale by SCO of the server and professional services groups, which
traditionally comprise a large percentage of SCO's revenues, may result in
significant harm to SCO's business
Historically, revenues generated by the server business and professional
services have been a significant portion of SCO's total revenues. The sale of
the server and professional services groups, while
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also significantly reducing headcount and operating expenses, will lead to a
dramatic decline in SCO's revenues. For the year ended September 30, 2000,
revenues generated by these two divisions were 50.0% of SCO's total revenues.
For fiscal years 1999 and 1998, revenues generated by these 2 divisions were
34.4% and 33.3% of total revenues, respectively.
Subsequent to the asset sale, Tarantella, Inc., as SCO will then be called,
will derive revenue from two sources, the first being sales of its Tarantella
products, including the CID products, and the second being sales of the legacy
OpenServer products. Tarantella, Inc. may never generate combined revenues equal
to those revenues previously generated by the assets sold to Caldera.
Following the combination, SCO will be largely dependent upon New Caldera to
support, market and sell the legacy OpenServer products. If New Caldera fails to
do so adequately, a significant source of Tarantella's revenues will diminish
Under the Sales Representative and Support Agreement and the OpenServer
Research and Development Agreement to be entered into in connection with the
combination, SCO will have virtually totally outsourced the management of the
OpenServer business to New Caldera, including research and development,
marketing, and sales and support. In the event New Caldera fails to provide
adequate engineering support or fails to adequately market and sell the
products, Tarantella, Inc. may suffer shortfalls in revenue and may be unable to
either locate a third party to take over such tasks from New Caldera or to
resume operation of the business in-house.
Certain of SCO's revenue sources have declined dramatically during fiscal year
2000 and will likely continue to decline
SCO has experienced declining revenues in its OpenServer and client
integration devices, or CID, products during fiscal year 2000, which are likely
to continue. Y2K significantly affected SCO's revenues in fiscal year 2000. SCO
saw a significant number of customers upgrading or replacing server software in
anticipation of Y2K in the middle of 1999. By the first quarter of fiscal 2000,
customers had completed their upgrades or replacements, and customer orders for
server products slowed dramatically. OpenServer product sales further suffered
in fiscal 2000 due to customer migration from the OpenServer products to the
newly released UnixWare 7 server products, as well as the products of SCO
competitors. In fiscal 1999, OpenServer revenues were $131 million; for the
first 9 months of 2000, OpenServer revenues were only $52 million. SCO
anticipates this trend of declining revenues to continue, and the decline may be
larger than anticipated.
Similarly, SCO experienced declines in its CID products during fiscal 2000.
In fiscal 1999, CID revenues were $7.8 million; for the first 9 months of 2000,
CID revenues were only $3.9 million. CID (client integration devices) products
are legacy products, which were the precursor to the new Tarantella technology.
The CID product line has not been emphasized by SCO and revenues have,
therefore, been declining as anticipated. However, it is possible that CID
product sales will decline more quickly than expected and that the Company will,
therefore, realize lower revenue, which yields relatively high profit margins,
than anticipated. Furthermore, while the Tarantella product line may offset some
of the decline, there can be no assurance that the increase in Tarantella
revenues will compensate for such declines.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Summary," "Risk Factors," "Caldera
Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Server and Professional Services Groups Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business of
Caldera," "Business of New Caldera" and elsewhere in this joint proxy
statement/prospectus constitute forward-looking statements. In some cases, you
can identify forward-looking statements by terms such as "may," "might,"
"could," "will," "should," "expect," "plan," "intend," "project," "forecast,"
"anticipate," "believe," "estimate," "predict," "foreseeable," "potential,"
"continue" or the negative of these terms or other comparable terminology. The
forward-looking statements contained in this prospectus involve known and
unknown risks, uncertainties, and other factors that may cause our or our
industry's actual results, level of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these statements. These factors include,
among others, those listed under "Risk Factors" and elsewhere in this
prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements.
SCO IS INCORPORATING ITS SEC FILINGS IN THIS DOCUMENT BY REFERENCE
The SEC allows SCO to "incorporate by reference" information into this
joint proxy statement/prospectus, which means that SCO can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
joint proxy statement/prospectus, except for any information superseded by
information in this joint proxy statement/prospectus. This joint proxy
statement/prospectus incorporates by reference the documents set forth below
that SCO has previously filed with the SEC. These documents contain important
information about SCO and its finances that you should read.
<TABLE>
<CAPTION>
SCO SEC FILINGS PERIOD
--------------- ------
<S> <C>
Annual Report on Form 10-K............................. Fiscal year ended September 30, 2000
Registration Statement on Form 8-A/A................... Filed on March 3, 1999
Registration Statement on Form 8-A..................... Filed on April 1, 1993
</TABLE>
SCO is also incorporating by reference additional documents that SCO may
file with the SEC between the date of this joint proxy statement/prospectus and
the date of the special meeting of SCO shareholders.
Documents incorporated by reference are available from SCO without charge,
excluding all exhibits unless SCO has specifically incorporated by reference an
exhibit in this joint proxy statement/prospectus. Shareholders may obtain
documents incorporated by reference in this joint proxy statement/prospectus
from SCO by requesting them in writing or by telephone at the following address:
THE SANTA CRUZ OPERATION, INC.
ATTENTION: LYNN SCHROEDER
425 ENCINAL STREET
SANTA CRUZ, CALIFORNIA 95061
TELEPHONE: (831) 425-7222
If you would like to request documents from SCO, please do so by
, 2000, to receive them before the SCO special meeting.
You should rely only on the information contained or incorporated by
reference in this joint proxy statement/prospectus to vote on the reorganization
agreement and the combination Caldera and SCO have not authorized anyone to
provide you with information that is different from what is contained in this
joint proxy statement/prospectus. This joint proxy statement/prospectus is dated
, 2000. You should not assume that the information contained in
this joint proxy statement/prospectus is accurate as of
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any date other than , 2000, and the mailing of the joint proxy
statement/prospectus to Caldera and SCO stockholders should not create any
implication to the contrary.
WHERE YOU CAN FIND MORE INFORMATION
Caldera and SCO each file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information Caldera or
SCO file at the SEC's public reference rooms at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, as well as at the SEC's regional offices at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of these materials may also
be obtained from the SEC at prescribed rates by writing to the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington D.C. 20549. Our filings
are also available to the public from commercial document retrieval services and
at the web site maintained by the SEC at http://www.sec.gov.
New Caldera has filed a registration statement on Form S-4 with respect to
the common stock to be issued to holders of Caldera common stock. This document
constitutes the prospectus of New Caldera that is filed as part of the
registration statement. Other parts of the registration statement are omitted
from this document in accordance with the rules and regulations of the SEC.
Copies of the registration statement, including exhibits, may be inspected,
without charge, at the offices of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies may be obtained from the SEC at prescribed rates.
You should rely only on the information contained in this document to vote
on the proposals. We have not authorized anyone to provide you with information
that is different from what is contained in this document.
Caldera has supplied all information contained in this document relating to
Caldera and New Caldera. SCO has supplied all information relating to the server
and professional services groups.
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THE CALDERA MEETING
WHEN AND WHERE THE MEETING WILL BE HELD
We will hold a special meeting of Caldera Systems, Inc. stockholders at
Caldera's offices at 240 West Center Street, Orem, Utah on , 2000
at 8:00 a.m. Mountain time to consider and vote on the proposals set forth
below.
WHAT WILL BE VOTED UPON
At the Caldera meeting, you will be asked to approve the following
proposals:
- To combine Caldera with the server and professional services groups of
The Santa Cruz Operation, Inc. In connection with the combination, SCO
and its employees who join Caldera International, Inc. will receive
approximately 28.6% of Caldera International, Inc. or 18.2 million shares
of Caldera International, Inc. common stock (including approximately two
million shares reserved for employee options assumed or replaced by
Caldera International, Inc. for options currently held by SCO employees
joining Caldera International, Inc.), and SCO will receive $7 million in
cash. In the combination, Caldera will become a subsidiary of a new
parent company, which we call New Caldera, and SCO will contribute to New
Caldera the assets of its server and professional services groups.
- To amend our 1999 Omnibus Stock Incentive Plan to increase the number of
shares reserved for issuance from 4,105,238 to 6,405,238 and to provide
for an automated director option grant program.
- To amend our 2000 Employee Stock Purchase Plan to increase the number of
shares reserved for issuance from 500,000 to 2,000,000.
- To amend our Certificate of Incorporation to increase the authorized
number of shares of common stock from 75,000,000 to 175,000,000.
- To transact such other business as may properly come before the special
meeting or any adjournment or postponement thereof.
We do not anticipate that any other matter will be presented for action at
the meeting. If any other material matters are properly brought before the
meeting, we will re-solicit proxies. None of the proposals, including the
combination, is contingent upon the approval of any other proposal.
ONLY STOCKHOLDERS ON , 2000 WILL BE ENTITLED TO VOTE
You will be entitled to vote at the Caldera meeting only if you are a
holder of record of shares of Caldera common stock at the close of business on
, 2000, the Caldera record date. On that date, there were
shares of Caldera common stock outstanding and entitled to vote. These shares
were held of record by approximately stockholders.
Each Caldera stockholder is entitled to one vote for each share of Caldera
common stock held on the Caldera record date for each matter to be acted upon in
the Caldera meeting.
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VOTES REQUIRED TO APPROVE THE PROPOSALS
The approval and adoption of each of the proposals described above will
require the affirmative vote of the Caldera stockholders as follows:
<TABLE>
<CAPTION>
REQUIRES THE AFFIRMATIVE
PROPOSAL VOTE OF A MAJORITY OF THE:
-------- ------------------------------------
<S> <C>
The combination Outstanding common stock
The amendments to the Caldera Stock Outstanding common stock in person
Option Plan and Employee Stock or represented in proxy at the
Purchase Plan meeting entitled to vote
The amendment to the Caldera Outstanding common stock
certificate of incorporation
</TABLE>
SHARES HELD BY DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES
On October 31, 2000, directors and executive officers of Caldera and their
affiliates as a group held 29.7 million shares of Caldera common stock, or
approximately 73.4% of the outstanding shares of Caldera common stock. The
Canopy Group, Inc. and MTI Technology Corporation, affiliates of Caldera, have
executed voting agreements with SCO, under which they have agreed to vote all of
their shares in favor of the combination.
VOTES NEEDED FOR A QUORUM
The required quorum for the transaction of business at the meeting is a
majority of the shares of Caldera common stock outstanding on the Caldera record
date.
EFFECT OF ABSTENTIONS AND BROKER NON-VOTES
Abstentions and broker non-votes will be included in determining the number
of shares present and voting at the meeting. Abstentions will have the same
effect as votes against all of the proposals.
For the proposals relating to the combination and the amendment to the
Caldera certificate of incorporation, broker non-votes will have the same effect
as votes cast against the proposals.
For each of the proposals relating to the Caldera equity incentive plans
broker non-votes will have no effect.
CALDERA WILL PAY THE EXPENSES OF PROXY SOLICITATION
Caldera will pay the expenses of soliciting proxies to be voted at the
meeting. Following the original mailing of the proxies and other soliciting
materials, Caldera and its agents also may solicit proxies by mail, telephone,
telegraph or in person.
Following the original mailing of the proxies and other soliciting
materials, Caldera will request brokers, custodians, nominees and other record
holders of Caldera common stock to forward copies of the proxy and other
soliciting materials to persons for whom they hold shares of Caldera common
stock and to request authority for the exercise of proxies. In these cases,
Caldera, upon the request of the record holders, will reimburse the holders for
their reasonable expenses.
HOW PROXIES WILL BE VOTED
All properly executed proxies received by Caldera prior to the vote at the
meeting that are not revoked will be voted at the meeting according to the
instructions indicated on the proxies. If no direction is indicated, they will
be voted to approve each of the proposals.
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HOW YOU CAN REVOKE YOUR PROXY
A Caldera stockholder who has given a proxy may revoke it at any time
before it is exercised at the meeting, by:
- delivering to the Secretary of Caldera by any means, including facsimile,
a written notice, bearing a date later than the date of the proxy,
stating that the proxy is revoked;
- signing and so delivering a proxy relating to the same shares and bearing
a later date prior to the vote at the meeting; or
- attending the meeting and voting in person, although attendance at the
meeting will not, by itself, revoke a proxy.
Please note, that if your shares are held of record by a broker, bank or
other nominee and you wish to vote at the meeting, you must bring to the Caldera
meeting a letter from the broker, bank or other nominee confirming your
ownership of the shares.
YOU DO NOT HAVE DISSENTERS' OR APPRAISAL RIGHTS
You are not entitled to dissenters' rights or appraisal rights with respect
to any proposals to be considered at the Caldera meeting.
YOU MUST ACT BY A SPECIFIED DATE TO PRESENT A STOCKHOLDER PROPOSAL AT THE NEXT
CALDERA ANNUAL MEETING
Stockholders are entitled to present proposals for action at a forthcoming
meeting if they comply with the requirements of the proxy rules established by
the Securities and Exchange Commission. In order for submitted proposals by New
Caldera stockholders to be considered for inclusion in the proxy statement for
the next annual meeting of New Caldera stockholders if the combination is
approved, the proposals must be received a reasonable time before New Caldera
begins to print and mail its proxy materials. If the combination is not
approved, , 2000 will be the deadline for the submission of
proposals for the next Caldera annual meeting.
If a stockholder intends to submit a proposal at the next annual meeting of
New Caldera stockholders which is not eligible for inclusion in the proxy
statement relating to that meeting, the stockholder must give notice to New
Caldera in accordance with the requirements set forth in the Securities Exchange
Act no later than a reasonable time before New Caldera mails its proxy materials
for the meeting. If the combination is not approved, , 2000 will be
the deadline for giving notice to Caldera of the intent to submit a proposal at
the next Caldera annual meeting. If a stockholder fails to comply with this
notice provision, the proxy holders will be allowed to use their discretionary
voting authority when and if the proposal is raised at that meeting, or the
annual meeting of New Caldera stockholders if the combination is approved.
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THE SCO MEETING
WHEN AND WHERE THE MEETING WILL BE HELD
A special meeting of the shareholders of SCO will be held at
a.m., local time, on , , 2001, at
.
WHAT WILL BE VOTED UPON
At the SCO meeting, you will be asked to approve the following proposals:
- To approve and adopt the agreement and plan of reorganization, dated
August 1, 2000 and amended on September 13, 2000 and on December 12,
2000, by and among The Santa Cruz Operation, Inc., Caldera Systems, Inc.,
and Caldera International, Inc.
- To approve an amendment to SCO's articles of incorporation to change our
corporate name to "Tarantella, Inc."
- To transact such other business as may properly come before the special
meeting or any adjournment or postponement thereof.
RECORD DATE AND OUTSTANDING SHARES
SCO's board of directors has fixed the close of business on ,
2001 as the record date for the special meeting. You will be entitled to vote at
the SCO special meeting only if you are a holder of record of shares of SCO
common stock at the close of business on the SCO record date. On that date,
there were shares of SCO common stock outstanding and entitled to
vote. These shares were held of record by approximately shareholders.
SCO has been informed that there are in excess of beneficial owners.
VOTING RIGHTS AND VOTES REQUIRED TO APPROVE THE PROPOSALS
Each SCO shareholder is entitled to one vote for each share of SCO common
stock held on the SCO record date for each matter to be acted upon in the SCO
meeting.
The approval and adoption of each proposal by the SCO shareholders
described above will require the affirmative vote of a majority of the
outstanding common stock.
SHARES HELD BY DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES
As of October 31, 2000, directors and executive officers of SCO and their
affiliates as a group beneficially owned approximately 15.68% of the outstanding
shares of SCO common stock. Doug Michels, Chief Executive Officer and President
of SCO, has executed a voting agreement with Caldera, under which he has agreed
to vote all of his shares in favor of approving and adopting the reorganization
agreement.
QUORUM, ABSTENTIONS AND BROKER NON-VOTES
The required quorum for the transaction of business at the meeting is a
majority of the shares of SCO common stock issued and outstanding on the SCO
record date.
Abstentions will be included in determining the number of shares present
and voting at the meeting and will have the same effect as votes against all of
the proposals.
While there is no definitive statutory or case law authority in California
as to the proper treatment of abstentions in the counting of votes with respect
to a proposal, SCO believes that abstentions should be counted for purposes of
determining both (i) the presence or absence of a quorum for the transaction of
business and (ii) the total number of votes cast with respect to the proposal.
In the absence of controlling
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precedent to the contrary, we intend to treat abstentions in this manner.
Accordingly, abstentions will have the same effect as a vote against the
proposal. Broker non-votes, shares held by brokers that are present but not
voted because the brokers were prohibited from exercising discretionary
authority ("broker non-votes"), will be counted for purposes of determining the
presence or absence of a quorum for the transaction of business, but will not be
counted for purposes of determining the number of votes cast with respect to the
proposal.
SOLICITATION OF PROXIES
SCO will pay the expenses of soliciting proxies to be voted at the meeting.
Following the original mailing of the proxies and other soliciting materials,
SCO and its agents also may solicit proxies by mail, telephone, telegraph,
e-mail or in person. SCO has retained a proxy solicitation firm, Skinner &
Company, to aid it in the solicitation process. SCO will pay that firm a fee
equal to $7,500. Following the original mailing of the proxies and other
soliciting materials, SCO will request brokers, custodians, nominees and other
record holders of SCO common stock to forward copies of the proxy and other
soliciting materials to persons for whom they hold shares of SCO common stock
and to request authority for the exercise of proxies. In these cases, SCO, upon
the request of the record holders, will reimburse the holders for their
reasonable expenses. Proxies may also be solicited by certain of SCO's
directors, officers and regular employees, without additional compensation,
personally, by telephone or by e-mail.
HOW PROXIES WILL BE VOTED
All properly executed proxies received by SCO prior to the vote at the
meeting that are not revoked will be voted at the meeting according to the
instructions indicated on the proxies. If no direction is indicated, they will
be voted to approve each of the proposals.
HOW YOU CAN REVOKE YOUR PROXY
A SCO shareholder who has given a proxy may revoke it at any time before it
is exercised at the meeting, by:
- delivering to the Secretary of SCO by any means, including facsimile, a
written notice, bearing a date later than the date of the proxy, stating
that the proxy is revoked;
- signing and so delivering a proxy relating to the same shares and bearing
a later date prior to the vote at the meeting; or
- attending the meeting and voting in person, although attendance at the
meeting will not, by itself, revoke a proxy.
Please note, that if your shares are held of record by a broker, bank or
other nominee and you wish to vote at the meeting, you must bring to the SCO
meeting a letter from the broker, bank or other nominee confirming your
ownership of the shares.
DISSENTERS' RIGHTS
If the reorganization agreement is approved by SCO shareholders, SCO
shareholders who elect to dissent from the approval and who follow the
procedural requirements of Chapter 13 of the California Corporations Code may,
under certain circumstances, be entitled to receive cash for their SCO common
stock at their fair market value. A copy of Chapter 13 of the California
Corporations Code is attached to this document as Appendix N.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSAL
SCO shareholders are entitled to present proposals for action at a
forthcoming meeting if they comply with the requirements of the proxy rules
established by the Securities and Exchange Commission. In order
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for submitted proposals by shareholders to be considered for inclusion in the
proxy statement for the next annual meeting of shareholders, the proposals must
be received in a reasonable time before SCO begins to print and mail its proxy
materials. Proposals of SCO shareholders that are intended to be presented for
consideration at SCO's 2001 annual meeting of shareholders must be received by
SCO no later than September 23, 2000 in order that they may be considered for
inclusion in the proxy statement and form of proxy relating to that meeting.
If a shareholder intends to submit a proposal at the 2001 annual meeting of
shareholders that is not eligible for inclusion in the proxy statement and
proxy, the shareholder must give notice to SCO in accordance with the
requirements set forth in the Securities Exchange Act no later than December 7,
2000. If a shareholder fails to comply with this notice provision, the proxy
holders will be allowed to use their discretionary voting authority when and if
the proposal is raised at that meeting, or the annual meeting of SCO
shareholders.
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THE COMBINATION
This section of the joint proxy statement/prospectus describes aspects of
the proposed merger that we consider important. While we believe that the
subscription covers the material terms of the combination and related
transactions, this summary may not contain all the information that is important
to Caldera stockholders and SCO shareholders. Stockholders and shareholders
should read the merger agreement and the other documents we refer to carefully
for a more complete understanding of the combination.
BACKGROUND OF THE COMBINATION
The Linux and Unix industries are highly competitive. Since each company's
inception, Caldera and SCO have continually evaluated strategic relationships of
various forms with various third parties in their efforts to enhance their
market position and grow their businesses in an increasingly competitive
environment. Over time, representatives of Caldera and SCO became familiar with
each others' products through informal contacts at industry trade shows and
through interaction with various industry participants.
On March 23 and 24, 2000 Ransom Love, President and Chief Executive Officer
of Caldera, met with Doug Michels, President and Chief Executive Officer of SCO,
to discuss a possible transaction between the two companies.
On April 21, 2000 Messrs. Love and Michels met again regarding pursuing a
relationship between Caldera and SCO.
On May 10, 2000, officers of Caldera met with Broadview International LLC
to discuss risks and opportunities concerning a potential transaction with SCO.
On May 15, 2000, SCO entered into a financial advisory services agreement
with Chase H&Q.
On May 18, 2000, Caldera and SCO entered into a mutual non-disclosure
agreement allowing for the exchange of non-public information.
On May 23, 2000, officers of Caldera and representatives of Broadview met
with officers of SCO and representatives of Chase H&Q to discuss potential
structure and synergies of a transaction.
On June 5, 2000 representatives of Caldera and Broadview met with
representatives of SCO and Chase H&Q to discuss how the business plans of the
two companies might integrate and to develop cost and revenue models for the
possible new entity.
On June 6, 2000, Caldera retained Broadview International LLC to act as its
financial advisor in connection with a possible transaction between Caldera and
SCO and signed an engagement letter.
On June 7, 2000, Caldera and Broadview proposed an acquisition to SCO and
Chase H&Q of SCO's open server business in return for a percentage ownership in
the combined company, with a portion of future operating income from the open
server business to go to SCO. Over the course of the following week, officers of
SCO and Caldera exchanged proposals for a potential transaction. On June 13,
2000, the parties reached a tentative agreement in principle as to the structure
of the transaction.
On June 14, 2000, the board of directors of SCO met to discuss the proposal
combination with Caldera. The SCO board authorized its officers to conduct due
diligence, and to continue discussions and negotiations regarding the potential
combination.
On June 16 and 19, 2000, the board of directors of Caldera met in person
and telephonically to discuss the proposed combination with SCO. The board of
Caldera authorized officers of Caldera to conduct due diligence, continue
discussions concerning the terms of the combination and negotiate the terms of
the reorganization agreement.
On June 23, 2000, representatives of Broadview and Chase H&Q met to discuss
possible no-shop language for both companies during the negotiation process.
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On June 25, 2000, Caldera and SCO entered into a letter agreement
concerning restrictions on public announcements by either party and restrictions
on negotiations by SCO with third parties regarding transactions relating to
SCO's server division through July 26, 2000.
On June 28, 2000, counsel to Caldera distributed the first draft of the
reorganization agreement. Representatives of Caldera and SCO met to discuss the
Asian and Latin American components of SCO's current business strategy.
On June 29, 2000, officers of Caldera reviewed with officers of SCO
business and financial information in connection with SCO's due diligence.
During July 2000, additional meetings and telephone conferences took place
between the marketing, communications and human resources teams from Caldera and
SCO for the purpose of due diligence and planning logistics of public and
internal announcements in the event the parties reached agreement on the
material terms of the proposed combination. The companies also discussed
providing information regarding the combination of employees and customers if
they reached an agreement regarding the contribution of SCO's server business to
the combined company.
On July 14, 2000, after conducting due diligence, Caldera proposed to
re-structure certain terms of the proposed transaction. SCO rejected this
proposal and sent a letter to Caldera purporting to unilaterally terminate the
restrictions on negotiations by SCO contained in the June 26, 2000 letter
agreement.
On July 19, 2000 and again on July 21, 2000, the SCO board met to discuss
the direction of the company and the proposed combination in light of recent
events involving Caldera and SCO, and instructed management to report back with
any further developments.
On July 23, 2000, officers of the two companies discussed renewing
negotiations concerning the proposed combination.
On July 25, 2000, Mr. Love met with Mr. Michels in Santa Cruz, California
and discussed the terms of and implementation of the combination. During this
discussion, Mr. Michels suggested that Caldera and The Canopy Group, one of
Caldera's major stockholders, loan up to an aggregate of $25 million to SCO for
purposes of helping SCO pay restructuring and operating costs that would arise
between signing of the reorganization agreement and the closing of the
combination.
On July 26, 2000, SCO management briefed the SCO board on the latest
discussions with Caldera. The SCO board authorized the officers to continue
negotiating the terms of the reorganization agreement and any ancillary
agreements related to the combination.
From July 25, 2000 through July 28, 2000, officers of and counsel for the
two companies met in Palo Alto, California and Santa Cruz, California to
negotiate and finalize the terms of the reorganization agreement, the voting
agreements and related forms of agreements to be entered into at the closing of
the combination. During these discussions, the companies also discussed the
purchase by the combined company of the professional services division of SCO.
Officers of the two companies settled on including the assets of the
professional services division with the other assets of SCO to be sold to the
combined entity pursuant to the reorganization agreement, in return for
increasing the purchase price by $7 million in cash. However, as a condition to
SCO entering into the reorganization agreement on these terms, SCO would require
that a loan of $7 million would be provided to SCO by Caldera at the time of
signing the reorganization agreement. This loan would be unsecured, but if not
paid before the maturity date, it would convert into shares of common stock of
SCO at up to a 20% discount from the fair market value of SCO's shares at that
time.
On July 31, 2000, the board of directors of each of Caldera and SCO met to
consider the proposed combination and the related transactions. The boards
reviewed, among other things, the background of the proposed combination,
strategic alternatives, financial and valuation analyses of the transaction, and
the terms of the combination. During the meetings, the boards of Caldera and SCO
each received an oral financial fairness opinion from their respective financial
advisors, which was subsequently confirmed in writing. After extensive
discussion and consideration, the board of directors of SCO approved the terms
of
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the combination and authorized its officers to complete the terms of the
reorganization agreement and the ancillary agreements. The board of directors of
Caldera, however, expressed concern in lending $7 million unsecured to SCO, and
instructed the officers to negotiate with SCO concerning receiving adequate
security for the loan amount.
On August 1, 2000, the officers of the two companies discussed the terms of
a binding memorandum of understanding whereby Caldera would commit to providing
a secured loan to SCO in the amount of $7 million, so long as The Canopy Group
also executed a binding memorandum of understanding in which it would commit to
provide a secured loan to SCO in the amount of $18 million. The board of
directors of each of Caldera and SCO then reconvened to discuss the revised
terms of the loan financings. After extensive discussion and consideration, the
boards of each company approved the terms of the combination and revised loan
financing and authorized its officers to complete the terms of the
reorganization agreement and the ancillary agreements, including the binding
memorandum of understanding between SCO and Caldera. Each company then executed
and delivered the reorganization agreement. Voting agreements between The Canopy
Group and MTI Technology Corporation and SCO and between Doug Michels and
Caldera were simultaneously executed, as were the binding memorandums of
understanding concerning the loan financing.
On August 2, 2000, the companies announced the entering into the
reorganization agreement by the issuance of a joint press release.
On September 13, 2000 and December 12, 2000 Caldera and SCO entered into
amendments to the reorganization agreement to provide for adjustments to the
treatment of employee options, amend certain exhibits and provide for the
sharing of some of the transition costs of SCO.
From November 17 through December 12, 2000, Caldera and The Canopy Group
negotiated the final terms and conditions of the secured loans to SCO.
REASONS FOR THE COMBINATION
The SCO board and the Caldera board unanimously recommend that the
shareholders and the stockholders of their respective companies vote "FOR" the
approval and adoption of the combination for the reasons set forth below.
Joint reasons for the combination
We have identified a number of potential mutual benefits of the combination
that we believe will contribute to the success of New Caldera.
These potential benefits include:
- The operating system software industry in which we both compete is
extremely competitive. We recognized that substantial technical,
financial and other resources are necessary to compete with these larger,
more diversified operating system software companies. The combination may
allow each of us, through our participation in New Caldera, to achieve
greater scale and greater presence in the operating systems software
industry. We believe New Caldera will have a stronger position from which
to compete more effectively against larger software companies. Our
combined experience, financial resources, size, complementary product
offerings and the complementary scope of distribution channels may allow
New Caldera to respond more quickly and effectively to technological
change, increased competition and customer demands in an industry
experiencing rapid innovation and change;
- The combined research and development and technology resources resulting
from the combination may allow us to compete more effectively by
developing more advanced products in a shorter time period than either of
us could develop independently. Because achieving a rapid rate of
technical innovation in the operating system software industry is
critical, increasing our technical personnel may permit us to respond
more quickly and effectively to changes and to anticipate the
advancements in our industry more readily;
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- The product portfolios of Caldera and SCO's server business are
complementary. Products and technologies developed for SCO's UNIX
platform can be ported for use with Caldera's Linux product offerings and
would create the opportunity for us to create and deliver a broader range
of solutions for eBusiness;
- We anticipate that we will benefit from the combined original equipment
manufacturer and strategic alliance partner relationships of Caldera and
the server and professional services groups, which include many industry
leaders, including Compaq, Hewlett-Packard, IBM and Sun Microsystems,
among others;
- The server and professional services groups' direct sales, value
added-reseller and original equipment manufacturer channels complement
Caldera's retail distribution capability, giving us the opportunity to
access a broader range of key management sales channels and market
segments;
- The combination of the server and professional services groups and
Caldera's Linux business will give us the opportunity to benefit from
economies of scale generated by our greater critical mass when addressing
the eBusiness solution needs of large global businesses; and
- The global development infrastructure allows not only worldwide
development cycles but the UNIX and Linux engineers can take advantage of
synergies in their respective expertises.
In addition to the joint reasons discussed above, the board of directors of
each company also considered separate reasons for approving the combination,
which are summarized below.
Caldera's reasons for the combination
The Caldera board of directors believes that the following are additional
reasons for stockholders of Caldera to vote "For" approval and adoption of the
combination:
- The server and professional services groups have a comprehensive,
international, multi-tiered distribution channel, including several joint
venture, value added resellers and original equipment manufacturers.
These could provide New Caldera with significant additional opportunities
to market its Linux offerings domestically and internationally;
- The server and professional services groups have an extensive
international infrastructure that could accelerate New Caldera's ability
to market Linux technologies in foreign markets;
- The server and professional services groups own and have rights to
several technologies that, if ported for use on a Linux platform, could
significantly expand Caldera's Linux product offerings; and
- New Caldera would have significantly higher revenue than Caldera. New
Caldera's pro forma net revenue was $92.5 million for fiscal 2000. We
believe these revenue streams could provide greater flexibility for
purposes of financing operations of New Caldera.
In the course of its deliberations, the Caldera board of directors reviewed
with Caldera's management a number of factors relevant to the combination.
In particular, it considered, among other things:
- The proposed terms of the combination, including the terms of the
stockholder agreement, the voting agreements, the sales representative
and support agreement, the convertible note and related security
agreements, the proposed employment agreements and other ancillary
agreements;
- The likelihood of realizing superior benefits through alternative
business strategies, including internal growth and development;
- The likelihood of leveraging current distribution channels of the server
and professional services groups to increase sales opportunities for
Caldera's Linux products;
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- Information concerning Caldera's and the server and professional services
groups' respective businesses, historical financial performances,
operations and products, including the due diligence reports from
Caldera's management and legal, accounting and financial advisers;
- The possibility of synergies from combining the Caldera and the server
and professional services groups product lines;
- An analysis of the relative value that the server and professional
services groups might contribute to the future business and prospects of
New Caldera;
- The financial analysis presented by its financial advisor and the opinion
that its financial advisor delivered that as of the date of such opinion
and based upon the limitations set forth therein, the consideration to be
paid for the server and professional services groups was fair from a
financial point of view to Caldera. See "-- Opinions of Financial
Advisors" on pages 45 and 50; and
- The likelihood of increasing profitability of the server and professional
services groups through reducing costs.
The Caldera board of directors also considered certain risks that could
arise in connection with the combination, including:
- The difficulties of successfully integrating such a large company into
Caldera, managing geographically dispersed operations and the risk that
employees of the server and professional services groups may not stay
with New Caldera;
- The material adverse effect the combination would have on New Caldera's
operating losses and working capital;
- The effect on Caldera's business of declining revenue streams from the
server and professional services group;
- The risk that synergies and cost savings anticipated by the combination
would not be achieved;
- The potential disruption of Caldera's business that might result from
employee and customer uncertainty and lack of focus following
announcement of the combination or the integration of the operations of
Caldera and the server and professional services group;
- The risks of product integration due to overlapping products and
technology;
- The possibility that the combination might not close;
- The substantial accounting charges to be incurred due to the combination
related to the write-off of in-process research and development and the
substantial amount of intangible assets that would have to be amortized
as a result of the combination being accounted for as a purchase;
- The risk that redundancy in staffing and infrastructure could reduce
efficiency and increase costs;
- The risk that the other benefits sought to be achieved by the combination
will not be achieved; and
- The other risks described under "Risk Factors" on page 17.
In the view of the Caldera board, these risks were not sufficient either
individually or in the aggregate to outweigh the advantages of the combination.
Specifically, with respect to the material increase in losses that will be
incurred by New Caldera if the combination occurs, the Caldera board felt that
the long-term benefits of the combination would outweigh this negative
consequence. In view of the wide variety of factors, both positive and negative,
considered by the Caldera board, the Caldera board did not find it practical to
and did not quantify or otherwise assign relative weights to the specific
factors considered.
For the reasons discussed above, Caldera's board of directors has
unanimously approved the reorganization agreement and the combination and has
determined that the combination is advisable and in the best interests of
Caldera and its stockholders and unanimously recommends that Caldera
stockholders vote "FOR" approval of the reorganization agreement and the
combination.
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SCO's reasons for the combination
At a meeting held on July 31, 2000, the SCO board of directors concluded
that the combination was in the best interests of SCO and its shareholders and
determined to recommend that the shareholders approve and adopt the
reorganization agreement and approve the combination. In its evaluation of the
merger, the SCO board of directors identified several potential benefits of the
combination, the most important of which included the board's belief that the
combination would:
- combine SCO, the world's leader in UNIX server operating systems, with
Caldera, a leader in the rapidly growing open source movement and a
leading provider of Linux for eBusiness resulting in the very best range
of products for both companies' existing customers and channel partners;
- enable SCO to monetize its server and professional services groups and
receive publicly traded New Caldera common stock, immediate cash to fund
the Tarantella business and future revenue from the Open Server product
line; and
- permit SCO's management to focus on the Tarantella business.
SCO's board of directors consulted with senior management, as well as its
legal counsel, independent accountants and financial advisors, in reaching its
decision to approve the combination. In its evaluation of the combination, the
SCO board reviewed several factors, including, but not limited to, the
following:
- SCO management's view of the financial condition, results of operations
and business of SCO and Caldera before and after giving effect to the
combination and SCO's determination of the combination's effect on
shareholder value;
- historical information concerning SCO's and Caldera's business, financial
performance and condition, operations, technology and management,
including reports concerning results of operations during the most recent
fiscal period filed with the Securities and Exchange Commission;
- the consideration to be received by SCO in the combination in light of
comparable transactions;
- the current and prospective industry environment for SCO's products and
services;
- current financial market conditions and historical market prices,
volatility and trading information for Caldera and SCO;
- the opinion of Chase H&Q that, as of the date of its opinion and based
upon and subject to the assumptions made, matters considered and limits
of the review undertaken by Chase H&Q, the consideration to be received
in connection with the combination was fair from a financial point of
view to SCO;
- the belief that the terms of the reorganization agreement are reasonable;
- the potential impact of the combination on SCO's customers, channel
partners and employees;
- discussions with its management, legal and financial advisors as to the
results of the due diligence investigation of Caldera; and
- the expectation that the combination will be a reorganization for United
States federal income tax purposes.
The SCO board also identified and considered a number of potentially
negative factors in its deliberations concerning the combination including the
following:
- the risk that the potential benefits of the combination may not be
realized;
- uncertain prospects for the Linux market;
- the difficulty and risk associated with the integration of management and
organizational structures;
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- the effect of the public announcement and consummation of the combination
on Caldera's and SCO's existing customers and channel partners;
- limited visibility into the near and long-term financial performance of
New Caldera;
- the possibility that the combination may not be consummated; and
- other applicable risks described in this joint proxy statement/prospectus
under "Risk Factors" beginning on page 17.
The SCO board concluded that on balance the potential benefits of the
combination outweighed the potential risks. This discussion of the information
and factors considered by the board is not meant to be exhaustive. Given the
complexity and the number of factors considered, the board did not attempt to
quantify or otherwise assign relative weight to specific factors.
OPINIONS OF FINANCIAL ADVISORS
Opinion of Caldera's Financial Advisor
Broadview is Caldera's financial advisor. The Caldera board selected
Broadview to act as financial advisor based on Broadview's reputation and
experience in the information technology, communication and media sector and the
telecommunications carrier access equipment industry in particular. In its role
as financial advisor, Broadview was requested to render an opinion to the
Caldera board regarding the fairness from a financial point of view to Caldera
stockholders of the exchange ratio of one share of New Caldera common stock
issued per share of Caldera stock in the merger of Caldera with New Caldera,
which is part of the combination. At the meeting of the Caldera board on July
31, 2000, Broadview delivered its written opinion that, as of July 31, 2000,
based upon and subject to the various factors and assumptions, the exchange
ratio was fair, from a financial point of view, to Caldera stockholders. Neither
Caldera nor any of its affiliates has had any relationship with Broadview in the
past two years.
BROADVIEW'S OPINION, WHICH DESCRIBES THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY BROADVIEW, IS ATTACHED AS
APPENDIX B TO THIS DOCUMENT. CALDERA STOCKHOLDERS ARE URGED TO, AND SHOULD, READ
THE BROADVIEW OPINION CAREFULLY. THE BROADVIEW OPINION IS DIRECTED TO THE
CALDERA BOARD AND ADDRESSES ONLY THE FAIRNESS OF THE CONSIDERATION PAID TO SCO
FOR THE SERVER AND PROFESSIONAL SERVICES GROUPS FROM A FINANCIAL POINT OF VIEW
TO CALDERA AS OF THE DATE OF THE OPINION. THE BROADVIEW OPINION DOES NOT ADDRESS
ANY OTHER ASPECT OF THE TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY HOLDER OF CALDERA COMMON STOCK AS TO HOW TO VOTE AT THE CALDERA SPECIAL
MEETING. THE SUMMARY OF THE BROADVIEW OPINION SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, ALTHOUGH MATERIALLY COMPLETE, IS QUALIFIED BY REFERENCE TO
THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, Broadview, among other things:
- reviewed the terms of a draft of the reorganization agreement furnished
to them by Caldera's counsel on July 30, 2000 (which, for the purposes of
their opinion, Broadview assumed, with Caldera's permission, to be
identical in all material respects to the reorganization agreement
executed except that, Broadview assumed with Caldera's permission that
the server and professional services groups (as defined in the
reorganization agreement) includes, among other things, the professional
services business of SCO and its subsidiaries);
- reviewed the balance sheet relating to the server and professional
services groups as of March 31, 2000 prepared by SCO management and
provided to them by Caldera management;
- reviewed annual financial projections through October 31, 2001 for New
Caldera assuming completion of the combination prepared and provided to
them by Caldera management;
- reviewed certain internal financial and operating information concerning
the server and professional services groups (without giving effect to the
combination), including income statement projections through October 31,
2001 jointly prepared and provided to them by Caldera and SCO management;
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- participated in discussions with SCO management concerning the
operations, business strategy, financial performance and prospects for
the server and professional services groups;
- discussed with SCO management its view of the strategic rationale for the
combination;
- compared certain aspects of the financial performance of the server and
professional services groups with public companies they deemed
comparable;
- analyzed available information, both public and private, concerning other
mergers and acquisitions they believed to be comparable in whole or in
part to the combination;
- reviewed Caldera's prospectus dated March 20, 2000, including the audited
financial statements of Caldera for its fiscal years ended October 31,
1997, 1998, and 1999 included therein, and Caldera's Form 10-Q for the
period ended April 30, 2000, including the unaudited financial statements
included therein;
- reviewed certain internal financial and operating information concerning
Caldera (without giving effect to the combination), including quarterly
projections through October 31, 2001, relating to Caldera, prepared and
furnished to them by Caldera management;
- participated in discussions with Caldera management concerning the
operations, business strategy, current financial performance and
prospects for Caldera;
- discussed with Caldera management its view of the strategic rationale for
the combination;
- reviewed the recent reported closing prices and trading activity for
Caldera common stock;
- compared certain aspects of the financial performance of Caldera with
public companies they deemed comparable;
- reviewed recent equity research analyst reports covering Caldera;
- analyzed the anticipated effect of the combination on the future
financial performance of New Caldera;
- participated in discussions related to the combination with Caldera, SCO
and their respective advisors; and
- conducted other financial studies, analyses and investigations as they
deemed appropriate for purposes of this opinion.
The following is a brief summary of some of the sources of information and
valuation methodologies used by Broadview in rendering Broadview's opinion.
These analyses were orally presented to the Caldera board at its meeting on July
31, 2000 and delivered with the opinion on August 10, 2000. This summary
includes the financial analyses used by Broadview and deemed to be material, but
does not purport to be a complete description of analyses performed by Broadview
in arriving at its opinion. Broadview did not explicitly assign any relative
weights to the various factors of analyses considered. This summary of financial
analyses includes information presented in tabular format. In order to fully
understand the financial analyses used by Broadview, the tables must be read
together with the text of each summary. The tables alone do not constitute a
complete description of the financial analyses.
Public Company Comparable Analysis. Broadview considered ratios of market
capitalization, adjusted for cash and debt when necessary, to selected
historical and projected operating results in order to derive multiples placed
on a company in a particular market segment. In order to perform this analysis,
Broadview compared financial information of the server and professional services
groups with publicly available information for the companies competing in the
North American software and related services industry with revenues for the last
twelve months between $50 million to $500 million and negative projected annual
revenue growth for the year ending December 31, 2000. The server and
professional services groups Comparable Index consists of the following
companies: Transaction Systems Architects, Inc.; eShare Communications, Inc.;
Pervasive Software, Inc.; Epicor Software Corporation; AVT
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<PAGE> 59
Corporation; Brightstar Information Technology Group, Inc.; and Alternative
Resources Corporation. For this analysis, as well as other analyses, Broadview
examined publicly available information, as well as a range of estimates based
on securities research analyst reports.
The following table presents, as of July 28, 2000, the median total market
capitalization (defined as equity market capitalization plus total debt minus
cash and cash equivalents) as multiples of selected operating metrics and the
range of those multiples for the server and professional services groups
Comparable Index:
<TABLE>
<CAPTION>
MEDIAN RANGE OF
MULTIPLE MULTIPLES
-------- -----------
<S> <C> <C>
Total market capitalization/revenue for the last 12
months.................................................... 0.58x 0.27x-1.64x
Projected 2000 total market capitalization/Projected 2000
revenue................................................... 0.56x 0.26x-1.05x
</TABLE>
The following table presents, as of July 28, 2000, the median implied
values and the range of implied values of the server and professional services
groups, calculated by using the multiples shown above and the appropriate server
and professional services groups operating metric (in thousands):
<TABLE>
<CAPTION>
IMPLIED
MEDIAN RANGE OF
VALUE IMPLIED VALUES
------- ----------------
<S> <C> <C>
Total market capitalization/revenue for the last 12
months.................................................. $47,452 $21,827-$134,676
Projected 2000 total market capitalization/Projected 2000
revenue................................................. 34,764 16,376- 65,635
</TABLE>
Broadview compared the implied values to the proposed transaction value of
$133 million, derived based on the closing price of Caldera common stock of
$7.13 on July 28, 2000 multiplied by 17.7 million New Caldera shares plus $7
million in cash, and noted that the proposed transaction value was within the
range.
No company utilized in the public company comparables analysis as a
comparison is identical to the server and professional services groups. In
evaluating the comparables, Broadview made numerous assumptions with respect to
software and services industry performance and general economic conditions, many
of which are beyond the control of Caldera. Mathematical analysis, such as
determining the median, average, or range, is not in itself a meaningful method
of using comparable company data.
Transaction Comparables Analysis. Broadview considered ratios of equity
purchase price, adjusted for the seller's cash and debt when appropriate, to
selected historical operating results in order to indicate valuation multiples
that strategic and financial acquirers have been willing to pay for companies in
a particular market segment. In order to perform this analysis, Broadview
reviewed a number of transactions that they considered similar to the
Transaction. Broadview selected these transactions by choosing transactions from
January 1, 2000 through July 28, 2000 involving sellers in the systems
management software industry, with revenues for the last 12 months greater than
$10 million and less than $200 million. Broadview used multiples derived from
the median of the valuation multiples calculated for the transactions used in
valuing the server and professional services group. For this analysis, as well
as other analyses, Broadview examined publicly available information, as well as
information from Broadview's proprietary database of published and confidential
merger and acquisition transactions in the information technology, communication
and media industries. These transactions consisted of the acquisition of:
- Ganymede Software Inc. by Mission Critical Software, Inc.;
- Architel Systems Corporation by Nortel Networks Corporation;
- AXENT Technologies, Inc. by Symantec Corporation;
- Vinca Corporation by Legato Systems, Inc.;
- Softworks, Inc. by EMC Corporation;
- Simware Inc. by NetManage, Inc.;
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- Interlink Computer Sciences, Inc. by Sterling Software, Inc.;
- Sterling Commerce, Inc. (Managed Systems Division -- formerly Xcellenet,
Inc.) by Francisco Partners, LP; and
- Wall Data Inc. by NetManage, Inc.
The following table presents, as of July 28, 2000, the median Adjusted
Price (defined as equity price plus total debt minus cash and cash equivalents)
as a multiple of the seller's revenue in the last reported twelve months prior
to acquisition for the transactions listed above and the range of those
multiples:
<TABLE>
<CAPTION>
MEDIAN RANGE OF
MULTIPLE MULTIPLES
-------- ------------
<S> <C> <C>
Adjusted Price/revenue for the last reported 12 months...... 3.11x 0.31x-16.35x
</TABLE>
The following table presents, as of July 28, 2000, the median implied value
and the range of implied values of the server and professional services groups,
calculated by multiplying the multiples shown above by the appropriate operating
metric of the server and professional services groups for the twelve months
ended June 30, 2000:
<TABLE>
<CAPTION>
IMPLIED
MEDIAN RANGE OF
VALUE IMPLIED VALUES
-------- ------------------
<S> <C> <C>
Adjusted Price/revenue for the 12 months ended June 30,
2000................................................. $300,419 $30,672-$1,579,463
</TABLE>
Broadview compared the implied values to the proposed transaction value of
$133 million, derived based on the closing price of Caldera common stock of
$7.13 on July 28, 2000 multiplied by 17.7 million New Caldera shares plus $7
million in cash, and noted that the proposed transaction value was within the
range.
No transaction utilized as a comparable in the transaction comparables
analysis is identical to the Transaction. In evaluating the comparables,
Broadview made numerous assumptions with respect to the software and services
industry's performance and general economic conditions, many of which are beyond
the control of Caldera or SCO. Mathematical analysis, such as determining the
average, median, or range, is not in itself a meaningful method of using
comparable transaction data.
Relative Contribution Analysis. Broadview examined the relative
contribution of the server and professional services groups to Caldera for a
number of historical and projected operating metrics. In this analysis,
projected figures are derived from selected equity analyst reports covering
Caldera and Caldera and SCO management estimates for the server and professional
services groups.
The following reflect the relative contribution of the server and
professional services groups and Caldera for each operating metric:
<TABLE>
<CAPTION>
GROUP
BUSINESS CALDERA
-------- -------
<S> <C> <C>
TTM Revenue................................................. 96.1% 3.9%
Projected 2000 Revenue...................................... 90.6% 9.4%
</TABLE>
Given the Caldera ratio of 72.0% as defined in the reorganization
agreement, the results of the transaction comparables analysis by themselves are
supportive of Broadview's opinion.
Relative Ownership Analysis. A relative ownership analysis measures each of
the merging companies' relative equity ownership and relative entity ownership
(entity ownership compares the relative entity values of the combining
companies; entity value equals equity value minus cash and cash equivalents plus
total debt). At the Caldera ratio defined in the reorganization agreement, the
implied equity ownership is 72.0% for Caldera and 28.0% for the server and
professional services groups, while the implied entity ownership is 64.9% for
Caldera and 35.1% for the server and professional services groups.
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Caldera Stock Performance Analysis. Broadview compared the recent stock
performance of Caldera with that of the S&P500 and NASDAQ Composites and the
Caldera Comparable Index. The Caldera Comparable Index is comprised of public
companies that Broadview deemed comparable to Caldera. Broadview selected three
public companies in the Linux-based operating system and application
infrastructure industry.
The Linux-based operating system and application infrastructure public
companies consist of:
Red Hat, Inc.;
Cobalt Networks, Inc.; and
VA Linux Systems, Inc.
Based on this analysis and the evaluation of Caldera equity analysis
discussed below, Broadview was able to assess the public market valuation of the
Caldera common stock as compared to the selected comparables.
Evaluation of Caldera Equity. Broadview compared financial information of
Caldera with publicly available information for companies comprising the Caldera
Comparable Index. For this analysis, as well as other analyses, Broadview
examined publicly available information, as well as a range of estimates based
on securities research analyst reports. Based on this analysis and the Caldera
stock performance analysis discussed above, Broadview was able to assess the
public market valuation of the Caldera common stock as compared to the selected
comparables.
Pro Forma Combination Analysis. Broadview calculated the pro forma impact
of the Transaction on the combined entity's projected earnings per share for
Caldera's fiscal year ending October 31, 2001, taking into consideration various
financial effects which will result from consummation of the Transaction. This
analysis relies upon certain financial and operating assumptions provided by
equity research analysts and publicly available data about Caldera and Caldera
and SCO management estimates for the server and professional services groups.
Broadview examined a purchase scenario under the assumption that no
opportunities for cost savings or revenue enhancements exist. This analysis
enabled Broadview to confirm that the pro forma pooling model indicates earnings
per share accretion excluding acquisition expenses, purchased R&D write-off,
goodwill, and foregone interest, for the fiscal year ending October 31, 2001.
Consideration of the Discounted Cash Flow Methodology. While discounted
cash flow is a commonly used valuation methodology, Broadview did not employ
such an analysis for the purposes of this opinion. Discounted cash flow analysis
is most appropriate for companies that exhibit relatively steady or somewhat
predictable streams of future cash flow. For a business such as the server and
professional services groups, a preponderance of the value in a valuation based
on discounted cash flow will be in the terminal value of the entity, which is
extremely sensitive to assumptions about the sustainable long-term growth rate
of the company. Given the uncertainty in estimating both the future cash flows
and a sustainable long-term growth rate for Caldera, Broadview considered a
discounted cash flow analysis inappropriate for valuing the server and
professional services groups.
In connection with the review of the Transaction by the Caldera board,
Broadview performed a variety of financial and comparative analyses. The summary
set forth above does not purport to be a complete description of the analyses
performed by Broadview in connection with the Transaction.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In arriving
at its opinion, Broadview considered the results of all of its analyses as a
whole and did not attribute any particular weight to any analysis or factor
considered by it. Furthermore, Broadview believes that selecting any portion of
its analyses, without considering all analyses, would create an incomplete view
of the process underlying its opinion.
In performing its analyses, Broadview made numerous assumptions with
respect to industry performance and general business and economic conditions and
other matters, many of which are beyond the control of Caldera or SCO. The
analyses performed by Broadview are not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable than
suggested by such analyses. The Caldera Ratio pursuant to the reorganization
agreement and other terms of the
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reorganization agreement were determined through arm's length negotiations
between Caldera and SCO, and were approved by the Caldera board. Broadview
provided advice to the Caldera board during such negotiations; however,
Broadview did not recommend any specific consideration to the Caldera board or
that any specific consideration constituted the only appropriate consideration
for the Transaction. In addition, Broadview's opinion and presentation to the
Caldera board was one of many factors taken into consideration by the Caldera
board in making its decision to approve the Transaction. Consequently, the
Broadview analyses as described above should not be viewed as determinative of
the opinion of the Caldera board with respect to the value of the server and
professional services groups or of whether the Caldera board would have been
willing to agree to a different consideration.
Upon consummation of the Transaction, Caldera will be obligated to pay
Broadview a transaction fee of approximately $2.2 million. The monthly retainer
fees and the fairness opinion fee will be credited against the transaction fee
payable by Caldera upon completion of the Transaction. In addition, Caldera has
agreed to reimburse Broadview for its reasonable expenses, including fees and
expenses of its counsel, and to indemnify Broadview and its affiliates against
certain liabilities and expenses related to their engagement, including
liabilities under the federal securities laws. The terms of the fee arrangement
with Broadview, which Caldera and Broadview believe are customary in
transactions of this nature, were negotiated at arm's length between Caldera and
Broadview, and the Caldera Board was aware of the nature of the fee arrangement,
including the fact that a significant portion of the fees payable to Broadview
is contingent upon completion of the Transaction.
Opinion of SCO Financial Advisor
SCO engaged Chase H&Q, a division of Chase Securities Inc., to act as an
exclusive financial advisor to SCO in connection with the proposed merger
combination. The SCO board of directors selected Chase H&Q to act as an
exclusive financial advisor based on Chase H&Q's qualifications, expertise and
reputation, as well as Chase H&Q's historic investment banking relationship and
familiarity with SCO. Chase H&Q delivered its oral opinion on July 31, 2000,
subsequently confirmed in writing, to the SCO board of directors that, as of
such date, based upon and subject to the assumptions made, matters considered
and limits of the review undertaken by Chase H&Q, the consideration to be
received by SCO in connection with the proposed combination was fair from a
financial point of view, to SCO.
THE FULL TEXT OF THE OPINION DELIVERED BY CHASE H&Q TO THE SCO BOARD OF
DIRECTORS, DATED AUGUST 1, 2000, WHICH SETS FORTH THE ASSUMPTIONS MADE, GENERAL
PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF REVIEW
UNDERTAKEN BY CHASE H&Q IN RENDERING ITS OPINION, IS ATTACHED AS APPENDIX C TO
THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE.
THE CHASE H&Q OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SCO
SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE
REORGANIZATION AGREEMENT. THE SUMMARY OF THE CHASE H&Q OPINION SET FORTH BELOW
IS QUALIFIED BY REFERENCE TO THE FULL TEXT OF SUCH OPINION ATTACHED HERETO AS
APPENDIX C. SCO SHAREHOLDERS ARE URGED TO READ THE OPINION CAREFULLY.
In reviewing the proposed transaction, and in arriving at its opinion,
Chase H&Q, among other things:
(i) reviewed the publicly available consolidated financial statements of
Caldera for recent years and interim periods to date and certain other
relevant financial and operating data of Caldera (including its capital
structure) made available to them from published sources;
(ii) reviewed certain publicly available projected financial and operating
information relating to Caldera;
(iii) discussed the business, financial condition and prospects of Caldera
with certain members of senior management;
(iv) reviewed the internal unaudited financial statements of the server and
professional services groups of SCO (the "Contributed Companies") for
recent years and interim periods to date
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and certain other relevant financial data of the Contributed Companies
made available to them from the internal records of SCO;
(v) reviewed certain internal projected financial and operating information
relating to the Contributed Companies prepared by the senior management
of SCO;
(vi) discussed the business, financial condition and prospects of the
Contributed Companies with certain members of senior management;
(vii) reviewed the recent reported prices and trading activity for the common
stock of Caldera and compared such information and certain financial
information for Caldera and the Contributed Companies with similar
information for certain other companies engaged in businesses they
consider comparable;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(ix) reviewed the reorganization agreement dated August 1, 2000;
(x) discussed the tax and accounting treatment of the proposed combination
with Caldera and Caldera's counsel and independent accountants; and
(xi) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations and
financial, economic and market data as they deemed relevant.
Chase H&Q did not assume responsibility for independent verification of,
and did not independently verify, any of the information concerning the
Contributed Companies or Caldera considered in connection with its review of the
proposed combination, including without limitation any financial information,
forecasts or projections, considered in connection with the rendering of its
opinion. Accordingly, for purposes of its opinion, Chase H&Q assumed and relied
upon the accuracy and completeness of all such information. In connection with
its opinion, Chase H&Q did not prepare or obtain any independent valuation or
appraisal of any of the assets or liabilities of the Contributed Companies or
Caldera, and it did not conduct a physical inspection of the properties and
facilities of the Contributed Companies or Caldera. With respect to the
financial forecasts and projections relating to the Contributed Companies,
prepared by SCO management, Chase H&Q assumed that they reflected the best
currently available estimates and judgments of the expected future financial
performance of the Contributed Companies and Chase H&Q expressed no view as to
the reasonableness of such forecasts and projections or the assumptions on which
such forecasts or projections were based. For the purposes of its opinion, Chase
H&Q also assumed that neither the Contributed Companies nor Caldera was a party
to any pending transactions, including without limitation external
recapitalizations or material merger or acquisition discussions, other than the
proposed merger and transactions in the ordinary course of conducting their
respective businesses. SCO advised Chase H&Q, and for purposes of its opinion
Chase H&Q assumed, that (i) the combination will qualify as a tax-free
reorganization for New Caldera and Caldera under the Internal Revenue Code, (ii)
the contribution will qualify as a nonrecognition transfer for SCO and New
Caldera under the Internal Revenue Code, and (iii) the proposed combination
would be treated as a purchase for financial accounting purposes.
In performing its analyses, Chase H&Q used financial forecasts and
projections prepared by SCO management for the Contributed Companies and
published research analyst estimates of financial performance of Caldera which
are based on numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond the
control of SCO, Caldera or Chase H&Q. The analyses performed by Chase H&Q and
summarized below are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than suggested
by such analyses. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of SCO, Caldera
or their respective advisors, neither SCO, Chase H&Q nor any other person
assumes responsibility if future results or actual
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values are materially different from the results of analyses based on forecasts
or assumptions. Additionally, analyses relating to the values of businesses do
not purport to be appraisals or to reflect the prices at which businesses or
securities actually may be acquired or bought or sold.
Chase H&Q's opinion is necessarily based upon market, economic, financial
and other conditions as they existed and can be evaluated as of the date of the
opinion and any subsequent change in such conditions would require a
reevaluation of such opinion. Although subsequent developments may affect its
opinion, Chase H&Q has assumed no obligation to update, revise or reaffirm it.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to summary description. The summary of Chase H&Q's
analyses set forth below summarizes the material analyses presented to the SCO
board of directors but is not a complete description of the presentation by
Chase H&Q to the SCO board of directors or the analysis performed by Chase H&Q
in connection with preparing its opinion. In arriving at its opinion, Chase H&Q
did not attribute any particular weight to any analyses or factors considered by
it, but rather made subjective, qualitative judgments as to the significance and
relevance of each analysis and factor. Accordingly, Chase H&Q believes that its
analyses and the summary set forth below must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, or of the
following summary, without considering all factors and analyses, could create an
incomplete view of the processes underlying the analyses set forth in the Chase
H&Q presentation to the SCO board of directors and Chase H&Q's opinion.
The terms of the proposed merger were determined through negotiations
between SCO and Caldera and were approved by the SCO board of directors.
Although Chase H&Q provided advice to SCO during the course of these
negotiations, the decision to enter into the merger was solely that of the SCO
board of directors. As described above, the opinion of Chase H&Q and its
presentation to the SCO board of directors were only one of a number of factors
taken into consideration by the SCO board of directors in making its
determination to approve the Proposed Transaction.
The following is a brief summary of the material financial analyses
performed by Chase H&Q in connection with providing its opinion to the SCO board
of directors on July 31, 2000. The summary includes information presented in
tabular format. You should read these tables together with the text of each
summary, because the tables alone are not a complete description of the
financial analysis.
Comparable Publicly Traded Companies Analysis. This analysis reviews a
business' operating performance and outlook relative to a group of peer
companies to determine an implied value. Using publicly available research
analyst estimates, Chase H&Q compared, among other things, the enterprise values
and projected revenues for calendar years 2000 and 2001 for the SCO Server
Business to corresponding measures for certain publicly traded companies that
Chase H&Q considered comparable.
The companies that Chase H&Q considered comparable were:
- NEON Systems, Inc.;
- BMC Software, Inc.;
- Computer Associates International Inc.;
- Compuware Corporation;
- Novell Inc.;
- Informix Corp.;
- Progress Software Corp.;
- Sapiens International Corp.;
- Inprise Corporation; and
- Sybase, Inc.
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Chase H&Q determined enterprise value to revenue multiples for these
companies. Enterprise value is defined as the share price multiplied by the
diluted shares outstanding plus debt and minority interest less cash. Applying
ranges of such multiples for the comparable companies to projected calendar year
2000 and 2001 revenues of the SCO Server Business resulted in an enterprise
value range for the SCO Server Business from which Chase H&Q subtracted the
present value of the estimated after-tax cash flow of the Open Server product
based on SCO management projections, as described below, and added the estimated
valuation range of the SCO Professional Services, as described below, to derive
a value for the Contributed Companies. The following table summarizes the
analysis:
<TABLE>
<CAPTION>
IMPLIED
SELECTED ENTERPRISE VALUE
MULTIPLE RANGE ($ IN MILLIONS)
-------------- ----------------
LOW HIGH LOW HIGH
----- ----- ------ ------
<S> <C> <C> <C> <C>
2000E Revenues......................................... 0.9x 1.7x $104 $197
2001E Revenues......................................... 0.8x 1.4x 110 193
---- ----
Selected Valuation Range of SCO Server Business........ 110 190
Less: PV of Open Server Product Cash Flow.............. (48) (50)
Plus: SCO Professional Services Valuation.............. 5 10
---- ----
Implied Valuation for the Contributed Companies........ $ 67 $150
==== ====
</TABLE>
Chase H&Q compared the implied enterprise valuation range for the
Contributed Companies of $67 million to $150 million to the proposed transaction
value of $119 million, derived based on the closing price of Caldera common
stock of $7.13 on July 28, 2000 multiplied by 15.7 million New Caldera shares
plus $7 million of cash, and noted that the proposed transaction value was
within the range.
Precedent Transactions Analysis. This analysis provides a valuation range
based on financial information of selected public companies that have been
recently acquired and are in similar industries as the business being evaluated.
Using publicly available research analyst estimates, Chase H&Q compared the
proposed merger with seven selected mergers and acquisitions transactions
involving companies in the software industry. The acquirors and targets in the
transactions that Chase H&Q deemed comparable to the proposed merger were:
- Compuware Corporation/Viasoft, Inc.;
- Sterling Software Inc./Interlink Computer Sciences Inc.;
- Sterling Software Inc./Information Advantage, Inc.;
- Invensys plc/Marcam Solutions, Inc.;
- Cadence Design Systems Inc./OrCAD Inc.;
- Activision Inc./Expert Software, Inc.; and
- Ardent Software Inc./Prism Solutions, Inc.
In examining these transactions, Chase H&Q analyzed, among other things,
the multiples of transaction values, defined as the offer price per share
multiplied by the diluted shares outstanding plus debt and minority interest
less cash for the most recent balance sheet prior to the announcement of the
transaction, to (1) revenues of the target for the last four fiscal quarters
preceding the public announcement of the transaction and (2) projected revenues
of the target for the calendar year following the public announcement of the
transaction. All multiples for the selected transactions were based on public
information available at the time of public announcement, and Chase H&Q's
analysis did not take into account different market and other conditions during
the two-year period during which the selected transactions occurred. Applying
ranges of such multiples for the precedent transactions to projected calendar
year 2000 and 2001 revenues of the SCO Server Business resulted in an enterprise
value range for the SCO Server Business from which Chase H&Q subtracted the
present value of the estimated after-
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tax cash flow of the Open Server product based on SCO management projections, as
described below, and added the estimated valuation range of the SCO Professional
Services, as described below, to derive a value for the Contributed Companies.
The following table summarizes the analysis:
<TABLE>
<CAPTION>
IMPLIED
SELECTED ENTERPRISE VALUE
MULTIPLE RANGE ($ IN MILLIONS)
-------------- ----------------
LOW HIGH LOW HIGH
----- ----- ------ ------
<S> <C> <C> <C> <C>
2000E Revenues......................................... 0.7x 1.5x $ 84 $174
2001E Revenues......................................... 0.7x 1.2x 100 165
---- ----
Selected Valuation Range of SCO Server Business........ 90 170
Less: PV of Open Server Product Cash Flow.............. (48) (50)
Plus: SCO Professional Services Valuation.............. 5 10
---- ----
Implied Valuation for the Contributed Companies........ $ 47 $130
==== ====
</TABLE>
Chase H&Q compared the implied enterprise valuation range for the
Contributed Companies of $47 million to $130 million to the proposed transaction
value of $119 million, derived based on the closing price of Caldera common
stock of $7.13 on July 28, 2000 multiplied by 15.7 million New Caldera shares
plus $7 million of cash, and noted that the proposed transaction value was
within the range.
Chase H&Q observed that no company used in the above analyses is identical
to SCO and the circumstances surrounding each of the companies are inherently
different. Accordingly, an analysis of the results of the foregoing is not
mathematical; rather it involves complex, qualitative considerations and
judgments, reflected in Chase H&Q's opinion, concerning differences in the
financial and operating characteristics of the compared companies and other
factors that could affect the public trading values of the comparable companies
and Caldera.
Discounted Cash Flow Analysis. This analysis calculates an implied value
based on the present value of the future cash flow from the Contributed
Companies. Chase H&Q performed a discounted cash flow analysis of the server
business based upon certain forecast and projection information provided to
Chase H&Q by the management of SCO for the years ending September 30, 2001
through 2003. Utilizing such information, Chase H&Q calculated a range of values
based upon the discounted present value of the sum of the projected stream of
unlevered free cash flows, defined as EBITDA less taxes less the change in
working capital less capital expenditures, to the SCO server business from
September 30, 2001 through September 30, 2003 and the projected terminal value
of the SCO server business at September 30, 2003 based upon a range of forward
revenue multiples applied to projected revenues in 2004. Chase H&Q calculated a
range of enterprise values of the SCO server business as of September 30, 2000
based on discount rates of 12.5%, 13.5% and 14.5% and on 2004 forward revenue
terminal multiples of 0.8x, 1.2x and 1.6x. The analysis resulted in an implied
enterprise value for the SCO server business from which Chase H&Q subtracted the
present value of the estimated after-tax cash flow of the Open Server product
based on SCO management projections, as described below, and added the estimated
valuation range of the SCO Professional Services, as described below, to derive
a value for the Contributed Companies. The following table summarizes the
analysis:
<TABLE>
<CAPTION>
IMPLIED
ENTERPRISE VALUE
($ IN MILLIONS)
----------------
LOW HIGH
------ ------
<S> <C> <C>
Selected Valuation Range of SCO Server Business............. $ 68 $135
Less: PV of Open Server Product Cash Flow................... (48) (50)
Plus: SCO Professional Services Valuation................... 5 10
---- ----
Implied Valuation for the Contributed Companies............. $ 25 $ 95
==== ====
</TABLE>
Chase H&Q compared the implied enterprise valuation range for the
Contributed Companies of $25 million to $95 million to the proposed transaction
value of $119 million, derived based on the closing
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price of Caldera common stock of $7.13 on July 28, 2000 multiplied by 15.7
million New Caldera shares plus $7 million of cash, and noted that the proposed
transaction value was above the range.
Other Component Analysis. To derive component calculations for the above
analyses, Chase H&Q also performed the following other analyses, including a
present value analysis of future Open Server Product cash flow and a comparable
public companies analysis of the SCO Professional Services Business which were
used in conjunction with the foregoing methods of analysis to derive valuation
ranges for the Contributed Companies.
Present Value of Open Server Product Cash Flow. This analysis calculates a
theoretical value based on the present value of future cash flow. Chase H&Q
performed a discounted cash flow analysis of the Open Server Product based upon
certain forecast and projection information provided to Chase H&Q by the
management of SCO for the years ending September 30, 2001 through 2003.
Utilizing such information, Chase H&Q calculated a range of values based upon
the discounted present value of the sum of the projected stream of unlevered
free cash flows, defined as EBITDA less taxes less the change in working capital
less capital expenditures, of the Open Server Product from September 30, 2001
through September 30, 2003 and the projected terminal value of the Open Server
Product at September 30, 2003 based upon the agreed upon buyout option of 3.0x
revenues. Chase H&Q calculated a range of enterprise values of the Open Server
Product as of September 30, 2000 based on discount rates of 12.5%, 13.5% and
14.5%. The analysis resulted in an implied enterprise value for the Open Server
Product of $48 million to $50 million.
Comparable Publicly Traded Professional Services Companies Analysis. This
analysis reviews a business' operating performance and outlook relative to a
group of peer companies to determine an implied value. Using publicly available
research analyst estimates, Chase H&Q compared, among other things, the
enterprise values and projected revenues for calendar years 2000 and 2001 for
the SCO Professional Services Business to corresponding measures for certain
publicly traded companies that Chase H&Q considered comparable.
The companies that Chase H&Q considered comparable were:
- AnswerThink Inc.;
- Complete Business Solutions, Inc.;
- MarchFIRST, Inc.; and
- Syntel, Inc.
Chase H&Q determined enterprise value to revenue multiples for these
companies. Applying ranges of such multiples for the comparable companies to
projected calendar year 2000 and 2001 revenues of the SCO Professional Services
Business resulted in a range of implied enterprise value of $5 million to $10
million.
The foregoing description of Chase H&Q's opinion is qualified by reference
to the full text of such opinion that is attached as Appendix C to this joint
proxy statement/prospectus statement.
Chase H&Q, as part of its investment banking services, is regularly engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, strategic transactions, corporate restructurings, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. In the past,
we have provided investment banking and other financial advisory services to SCO
and have received fees for rendering these services.
Pursuant to an engagement letter dated May 15, 2000 and amended July 24,
2000 with Chase H&Q, SCO has agreed to pay Chase H&Q a $750,000 fee upon the
delivery of the Chase H&Q fairness opinion and a transaction fee of 1% of the
transaction value, subject to a $1 million minimum. Upon signing the engagement
letter, SCO paid Chase H&Q a non-refundable retainer fee of $25,000, which is
creditable against the transaction fee. For purposes of calculating the 1%
transaction fee, the transaction value shall be calculated based on the closing
price of Caldera common stock on the closing date of the transaction plus the
cash received plus all indebtedness assumed by New Caldera in the transaction.
SCO also agreed to reimburse Chase H&Q for its reasonable out-of-pocket expenses
and to indemnify Chase H&Q against certain liabilities, including liabilities
under the federal securities laws or relating to or arising out of
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Chase H&Q's engagement as financial advisor. Although Chase H&Q and SCO enjoy a
longstanding relationship, during the past two years Chase H&Q has not been
engaged to provide any services nor charged any fees to SCO.
STRUCTURE OF THE COMBINATION
The Caldera merger
A wholly owned subsidiary of New Caldera will merge with and into Caldera,
Caldera will survive the merger and become a wholly owned subsidiary of New
Caldera. Caldera stockholders will become stockholders of New Caldera.
The contribution of the server and professional services groups
SCO will contribute the capital stock of the contributed companies, and SCO
and some of its subsidiaries will contribute to New Caldera the contributed
assets. The contributed assets and the contributed companies will be owned by
New Caldera.
"Contributed companies" means The Santa Cruz Operation Limited, The Santa
Cruz Operation (France) SARL, The Santa Cruz Operation (Deutschland) GmbH, The
Santa Cruz Operation (Italia) Srl, The Santa Cruz Operation Pty. Limited, SCO
Canada, CO, The Santa Cruz Operation de Mexico, S.De R.L. De C. V., The Santa
Cruz Operation (Asia) Ltd, SCO Foreign Sales Corporation, SCO, Kabushiki Kaisha,
The Santa Cruz Operation Latin America, Inc., Nihon SCO Limited, SCO do Brazil
Limitada, SCO Software (China) Company, Ltd., and Unix System Technologies China
Company, Ltd. (USTC).
"Contributed assets" means, subject to exceptions, (1) the assets listed on
certain schedules to the reorganization agreement, (2) intellectual property
rights material to the products of the server and professional services groups,
and (3) assets used in the server and professional services groups.
"Contributing companies" means SCO and certain other subsidiaries of SCO.
As a result of the transfer to New Caldera of the capital stock of the
contributed companies, New Caldera will own all of the outstanding equity
capital of the contributed companies, each of which will remain liable for their
existing liabilities. In addition, New Caldera will not acquire the accounts
receivables nor will it assume certain accounts payables and other liabilities
of the server and professional services groups. New Caldera shall assume,
however, the following liabilities relating to the server and professional
services groups business:
- all liabilities of the contributing companies under all contracts
contributed as part of the contributed assets;
- all liabilities of the contributing companies that are included in a
closing group account for the server and professional services groups as
of the closing date; and
- identified tax liabilities including those taxes attributable to the
operations of the contributed companies after the closing date.
Except for the liabilities of the contributed companies and their
subsidiaries, which will remain the sole responsibility of the applicable
contributed company, and the assumed liabilities described above, New Caldera
will not assume or otherwise have any obligation for any liabilities of SCO.
SCO has agreed to take all actions reasonably necessary to fully transfer
to New Caldera the capital stock of the contributed companies and the
contributed assets held by them or their subsidiaries and any contributed
contracts to which they are a party.
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RESTRICTIONS ON RESALE OF NEW CALDERA COMMON STOCK
The shares of New Caldera common stock to be issued in the combination will
have been registered under the Securities Act. These shares will be freely
transferable without restriction, except for shares received by SCO or by any
person who is an "affiliate" of either of us. Shares held by these affiliates
may be resold by them only in transactions permitted by the resale provisions of
Rule 145 or Rule 144 in the case of persons who become affiliates of New
Caldera. Persons who may be deemed to be affiliates of Caldera, SCO or New
Caldera generally include individuals or entities that control, are controlled
by, or are under common control with, that party and may include certain
officers and directors of such party as well as principal stockholders of that
party.
Pursuant to the reorganization agreement, SCO shall be able to distribute
its shares of New Caldera common stock to its shareholders six (6) months from
the closing date; provided, however, that SCO cannot sell more than 25% of its
shares of New Caldera in a six (6) month period.
New Caldera and SCO will enter into the stockholder agreement. This
agreement provides that, so long as SCO owns 10% of the outstanding stock of New
Caldera, it may not sell shares of New Caldera common stock to any person or
group holding five percent (5%) or more of New Caldera common stock without the
consent of New Caldera.
RESALE OF SHARES ISSUED UNDER THE CALDERA OPTION PLANS
New Caldera will be required to file with the Securities and Exchange
Commission a registration statement for the shares of New Caldera common stock
issuable upon exercise of the New Caldera stock options issued in the exchange
offer no later than the 10th day after the closing of the combination.
NASDAQ LISTING
We expect that the New Caldera common stock will be traded on the Nasdaq
National Market under the symbol "CALD."
It is a condition to the closing of the combination that the shares of New
Caldera common stock to be issued to SCO be approved for listing on the Nasdaq
National Market, subject to official notice of issuance.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE COMBINATION
The following discussion summarizes the material federal income tax
consequences relevant to the exchange of shares of Caldera common stock for New
Caldera common stock pursuant to the combination that are generally applicable
to holders of Caldera common stock, and the material federal income tax
considerations relevant to SCO's exchange of assets for New Caldera common
stock. This discussion is based on tax opinions delivered to Caldera by Brobeck,
Phleger & Harrison LLP and to SCO by Wilson, Sonsini Goodrich & Rosati,
Professional Corporation and on currently existing provisions of the Internal
Revenue Code (the "Code"), existing and proposed treasury regulations thereunder
and current administrative rulings and court decisions, all of which are subject
to change. Any such change, which may or may not be retroactive, could alter the
tax consequences to Caldera stockholders and to SCO as described herein.
The Caldera stockholders should be aware that this discussion does not deal
with all federal income tax considerations that may be relevant to particular
Caldera stockholders in light of their particular circumstances. For example,
different rules may apply to dealers in securities, persons subject to the
alternative minimum tax provisions of the Code, foreign persons, persons who do
not hold their Caldera common stock as capital assets, or persons who acquired
their shares in connection with stock option or stock purchase plans or in other
compensatory transactions. In addition, the following discussion does not
address the tax consequences of the combination under foreign, state or local
tax laws, the tax consequences of transactions effectuated prior or subsequent
to, or concurrently with, the combination
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(whether or not any such transactions are undertaken in connection with the
combination), including without limitation any transaction in which shares of
Caldera common stock are acquired or shares of New Caldera common stock are
disposed of, or the tax consequences of the assumption by New Caldera of Caldera
or SCO options or warrants. Accordingly, CALDERA STOCKHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF
THE COMBINATION, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES.
Material Federal Income Tax Consequences of the Combination to the Caldera
Stockholders
As to Caldera and its stockholders, the combination is intended to
constitute an exchange described in Section 351 of the Code as well as a
"reorganization" within the meaning of Section 368 of the Code. Provided that
the combination does so qualify as either an exchange under Section 351 or a
"reorganization," then, subject to the limitations and qualifications referred
to herein, the combination will generally result in the following federal income
tax consequences to the Caldera stockholders:
- No gain or loss will be recognized by holders of Caldera common stock
solely upon their receipt of New Caldera common stock in exchange for
Caldera common stock in the combination;
- The aggregate tax basis of the New Caldera common stock received by
Caldera stockholders in the combination will be the same as the aggregate
tax basis of the Caldera common stock surrendered in exchange therefor;
and
- The holding period of the New Caldera common stock received by each
Caldera stockholder in the combination will include the period for which
the Caldera common stock surrendered in exchange therefor was considered
to be held, provided that the Caldera common stock so surrendered is held
as a capital asset at the time of the combination.
Material Federal Income Tax Consequences of the Combination to SCO
As to SCO, the combination is intended to constitute an exchange within the
meaning of Section 351 of the Code. Provided that the combination does so
qualify, then, subject to the limitations and qualifications referred to herein,
the combination will result in the following federal income tax consequences to
SCO:
- SCO will recognize gain with respect to the cash and other non-stock
consideration, if any, received by SCO in partial consideration for SCO's
contribution of assets to New Caldera. For purposes of determining the
amount of gain recognized by SCO, the non-stock consideration received by
SCO from New Caldera will be allocated among the assets contributed by
SCO to New Caldera in proportion to their relative fair market values.
SCO will not recognize any loss for federal income tax purposes with
respect to any contributed asset;
- No gain or loss will be recognized by SCO upon SCO's receipt of New
Caldera common stock in exchange for assets contributed by SCO to New
Caldera; and
- The aggregate tax basis of the New Caldera common stock received by SCO
in the combination will be the same as the aggregate tax basis of the
assets surrendered in exchange therefor.
The parties are not requesting and will not request a ruling from the IRS
in connection with the combination. The consummation of the combination is
conditioned on the receipt by Caldera of a tax opinion from Brobeck, Phleger &
Harrison LLP that the combination will constitute a "reorganization" described
in Section 368 of the Code and the receipt by SCO of an opinion from Wilson
Sonsini Goodrich & Rosati, Professional Corporation to the effect that the
combination will constitute a transaction described in Section 351 of the Code.
Caldera stockholders and SCO shareholders should be aware that the tax opinions
do not bind the IRS and the IRS is therefore not precluded from successfully
asserting a contrary opinion. The tax opinions referred to above will be subject
to certain assumptions and qualifications, including but not limited to the
truth and accuracy of certain representations to be made by New Caldera,
Caldera, SCO and certain Caldera stockholders.
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A successful IRS challenge to tax treatment of the combination would result
in Caldera stockholders and SCO recognizing taxable gain or loss with respect to
each share of common stock of Caldera surrendered or with respect to the assets
contributed by SCO to New Caldera, respectively, equal to the difference between
the stockholder's or SCO's basis in such share or assets, respectively and the
fair market value, as of the effective time, of the New Caldera common stock
received in exchange therefor. In such event, a stockholder's or SCO's aggregate
basis in the New Caldera common stock so received would equal its fair market
value, and the stockholder's or SCO's holding period for such stock would begin
the day after the combination.
ACCOUNTING TREATMENT
Accounting treatment by New Caldera
The combination will be accounted for under the purchase method of
accounting. The purchase price of the contributed assets, or the aggregate
merger consideration, including direct costs of the combination, will be
allocated to the assets acquired, including in-process research and development,
and liabilities assumed based upon their estimated fair values. The excess
purchase consideration will be allocated to goodwill.
After the combination, the results of New Caldera's operations will include
the results of operations of Caldera and the server and professional services
groups.
The combination and the resulting conversion of Caldera common stock into
New Caldera common stock will be treated as a reorganization with no change in
the recorded amount of Caldera's assets and liabilities. The financial
statements of Caldera will become the financial statements of New Caldera upon
the closing of the combination.
Accounting treatment by SCO
The combination will be accounted for as a proportional sale of the net
assets of the server and professional services groups. As SCO will retain a
29.5% interest (based on New Caldera's outstanding shares as of September 1,
2000) SCO will record a gain equal to 70.5% of the fair value of the New Caldera
stock received by SCO less 70.5% of SCO's basis in the net assets of the server
and professional services groups plus cash consideration net of expenses.
Subsequent to the combination, SCO will include in its financial results
its share of the net income or loss of New Caldera based upon the percentage of
outstanding shares of New Caldera owned by SCO adjusted for the difference in
the carrying amount of SCO's investment in New Caldera and its proportional
share of the net income or loss of New Caldera.
The SCO unaudited pro forma statements beginning on page P-11 are based
upon certain assumptions. The ultimate pro rata gain to be recognized by SCO is
dependent upon the same factors described above for New Caldera. As a result of
these factors, the actual gain and related difference between SCO's investment
in New Caldera and its proportional share of New Caldera's net assets may differ
materially from the amounts assumed in the SCO unaudited pro forma statements.
GOVERNMENTAL AND REGULATORY APPROVALS
The combination may not be completed until notifications have been given
and certain information has been furnished to the Federal Trade Commission and
the Antitrust Division of the United States Justice Department and specified
waiting period requirements under the Hart-Scott-Rodino Antitrust Improvements
Act, or the HSR Act, have been satisfied. All required filings under the HSR Act
have been made and the waiting periods for the filings have expired.
The FTC and the Antitrust Division frequently scrutinize the legality under
the antitrust laws of the transactions such as the combination. Despite the
expiration of the waiting periods under the HSR Act, at any time before or after
the completion of the combination, the Federal Trade Commission, the antitrust
division, state attorneys general or others could take action under antitrust
laws. These actions could include seeking to enjoin the combination, seeking to
cause the divestiture of significant assets of Caldera
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or SCO or seeking to impose conditions on New Caldera with respect to the
business operations of the combined companies. If a challenge is made, we may
not prevail or we may be required to terminate the reorganization agreement, to
divest assets, to license proprietary technology to third parties or accept
conditions in order to complete the combination.
DISSENTERS' OR APPRAISAL RIGHTS
Caldera stockholders are not entitled to dissenters' or appraisal rights
with respect to the combination.
If holders of 5% or more of the outstanding shares of SCO common stock
entitled to vote at the SCO special meeting vote against the reorganization
agreement and comply with certain other procedures specified in Chapter 13 of
the California Corporations Code, SCO shareholders of record who take such
actions will be entitled to exercise dissenters' rights. In accordance with the
provisions of Chapter 13 of the California Corporations Code, dissenting SCO
shareholders will have the right to be paid in cash the fair market value of
their shares of SCO common stock, determined as of the day before the first
announcement of the combination, and excluding any appreciation or depreciation
as a result of the combination.
In order to exercise dissenters' rights, dissenting SCO shareholders must
comply with the procedural requirements of Chapter 13 of the California
Corporations Code, a description of which is included here and the full text of
which is attached to this document as Appendix N and is incorporated by
reference to this discussion. SCO shareholders wishing to exercise dissenters'
rights are advised to read Chapter 13 of the California Corporations Code
carefully. The failure of a dissenting SCO shareholder to timely and properly
comply with such procedures will result in the termination or waiver of such
rights.
DISSENTERS' RIGHTS CANNOT BE VALIDLY EXERCISED BY PERSONS OTHER THAN
SHAREHOLDERS OF RECORD REGARDLESS OF THE BENEFICIAL OWNERSHIP OF THE SHARES.
Persons who are beneficial owners of shares held of record by another person,
such as brokers, banks or nominees, should instruct the record holder to follow
the procedures outlined below if they wish to dissent from the combination with
respect to any or all of their shares.
Dissenting SCO shareholders must submit a written demand to SCO that it
purchase for cash some or all of their shares. The demand must:
- contain the number and class of the shares held of record by the
shareholder which the shareholder demands that SCO purchase; and
- contain a statement of what such shareholder claims to be the fair market
value of those shares as of the day before the announcement of the
proposed reorganization of short-form combination.
That statement of fair market value will constitute an offer by the dissenting
SCO shareholder to sell such shares at that price. The demand must be received
by SCO or its transfer agent not later than the date of the special meeting to
vote upon the reorganization, or , 2000 in the present instance. All
written demands for purchase of SCO shares should be sent or delivered to The
Santa Cruz Operation, Inc. at 425 Encinal Street, Santa Cruz, California 94043,
Attention: Steven Sabbath. SUCH DEMAND WILL NOT BE EFFECTIVE UNLESS IT IS
RECEIVED NO LATER THAN THE DATE OF THE SCO SPECIAL MEETING.
If SCO shareholders have a right to require SCO to purchase their shares
for cash under the dissenters' rights provisions of the California Corporations
Code, SCO will mail to each such shareholder a notice of approval of the
combination within ten days after the date of shareholder approval, stating the
price determined by it to represent the "fair market value" of the dissenting
shares, and a brief description of the procedure to be followed if the
shareholder desires to exercise such dissenters' rights. The statement of price
will constitute an offer to purchase any dissenting shares at that price.
To perfect their dissenters' rights, shareholders of record must:
- make written demand for the purchase of their dissenting shares upon SCO
on or before the date of the SCO special meeting;
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- vote their shares against adoption and approval of the reorganization
agreement; and
- within 30 days after the mailing to shareholders by SCO of the notice of
approval of the principal terms of the combination, submit the
certificate(s) representing their dissenting shares to SCO or its
transfer agent for notation thereon that they represent dissenting
shares.
The notice of approval of the combination will specify the date by which the
submission of certificates for endorsement must be made and a submission made
after that date will not be effective for any purpose. Failure to follow any of
these procedures may result in the loss of statutory dissenters' rights.
If a dissenting SCO shareholder and SCO agree that shares are dissenting
shares and agree upon the price of the shares, SCO, upon surrender of the
certificates, will make payment of that amount (plus interest thereon at the
legal rate on judgments from the date of such agreement) within 30 days after
such agreement. Any agreement between dissenting SCO shareholders and SCO fixing
the "fair market value" of any dissenting shares must be filed with the
Secretary of SCO.
If SCO denies that the shares are dissenting shares, or SCO and a
dissenting shareholder fail to agree upon the "fair market value" of the shares,
the dissenting SCO shareholder may, within six months after the date on which
notice of approval of the combination was mailed to the shareholder, but not
thereafter, file a complaint in the Superior Court of the proper county. A
dissenting SCO shareholder must bring such an action within six months after the
date on which the notice of approval of the reorganization agreement was mailed
to the shareholder, whether or not SCO responds within such time to the
shareholder's written demand that SCO purchase for cash shares voted against the
reorganization agreement. If such a complaint is timely filed, the court shall
determine whether the shares constitute dissenting shares, and may either
determine or appoint an appraiser to determine the fair market value of the
shares. If the court finds the report of the appraiser reasonable, the court may
confirm the report. The fair market value of the shares will be determined
excluding any appreciation or depreciation in consequence of the combination,
and will be awarded to the dissenting SCO shareholder, together with a fair rate
of interest, if any, to be paid upon the amount determined to be the fair market
value. The costs of the action may be determined by the court and taxed upon the
parties as the court deems equitable, but SCO shall pay such costs if the fair
market value of the shares as determined by the court exceeds the price offered
pursuant to its notice of approval.
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INTERESTS OF PERSONS IN THE COMBINATION
In considering the recommendations of the board of directors of Caldera and
SCO with respect to the reorganization agreement, stockholders of Caldera and
shareholders of SCO should be aware that certain executive officers and
directors have some interests in the combination that may be different from or
in addition to, the interests of stockholders of Caldera and shareholders of SCO
generally. The boards of directors were each aware of these interests and
considered them, among other matters, in making its recommendations. These
interests are described below.
Employment with Caldera. Each of Caldera's executive officers will have
positions with New Caldera, and each of the current directors of Caldera will
become directors of New Caldera.
All of the Caldera executive officers and the following executive officers
of SCO: David McCrabb, Senior Vice President and President, Server Division;
Jack Moyer, Senior Vice President, Human Resources; and James Wilt, Senior Vice
President and President, Professional Services Division, will become executive
officers of New Caldera. Further, these individuals will execute employment
agreements with New Caldera that will provide for terms of employment and
severance benefits, among other things. See "Agreements Related to the
Combination -- Employment Agreements."
SCO Change of Control Agreements. SCO's board of directors has resolved to
amend the change of control agreements with certain executive officers of SCO,
including those executive officers who will become executive officers of New
Caldera. The amended agreements will provide for:
- the full vesting on all outstanding options issued prior to August 1,
2000 to each executive officer;
- an extension of the option term through January 31, 2002 on options
issued to those individuals who will become executive officers of New
Caldera;
- an extension of the option term through January 31, 2002, in the case of
options held by those executive officers staying with SCO, if such
individuals are involuntarily terminated or terminated by mutual consent;
and
- a cash payment payable in one year from the date of the closing of the
combination, provided that such executive officer has not voluntarily
terminated his employment with SCO or New Caldera, as the case may be,
equal to: that individual's current annual salary and 100% of his target
bonus, together with 8.5% interest from the date of the closing of the
combination.
Accordingly, the following individuals will receive vesting acceleration on
all outstanding options granted prior to August 1, 2000, and potential
acceleration and cash payments as follows:
- Doug Michels, President and Chief Executive Officer -- $601,836;
- Randall Bresee, Senior Vice President and Chief Financial
Officer -- $334,180;
- Michael Orr, Senior Vice President and President of Tarantella
Division -- $390,193;
- Steven M. Sabbath, Senior Vice President, Law and Corporate Affairs, and
Secretary, -- $350,923;
- Geoff Seabrook, Senior Vice President, Corporate Development -- $267,873;
- David McCrabb, Senior Vice President and President, Server Software
Division -- $398,224;
- Jack Moyer, Senior Vice President, Human Resources -- $320,658; and
- James Wilt, Senior Vice President and Vice President, Professional
Services Division -- $353,855.
SCO Stay Home Options. On August 1, 2000, the compensation committee of
the SCO board granted options to purchase SCO common stock to certain executive
officers to encourage those individuals to remain with SCO following the
combination. All options shall vest over four years, which may accelerate in the
event of another change of control, and are exercisable at $3.125 per share, the
price
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at the close of trading on July 31, 2000. The following individuals received
grants of options to purchase shares of SCO common stock in the following
amounts:
- Randy Bresee -- 150,000 shares
- Doug Michels -- 175,000 shares
- Mike Orr -- 175,000 shares
- Steve Sabbath -- 50,000 shares
- Geoff Seabrook -- 50,000 shares
Stockholder Agreement. New Caldera and SCO will enter into a stockholder
agreement at the time of the closing of the combination. This agreement will
give SCO the right to have New Caldera nominate up to two directors for election
to New Caldera's board. These nominees will initially be Mr. Michels and an
individual to be named by SCO and approved by Caldera to the board of directors
of New Caldera.
Voting Agreements. The Canopy Group, Inc. and MTI Technology Corporation
have entered into voting agreements with SCO by which they have agreed to vote
in favor of the combination. Together, these stockholders hold approximately 72%
of the outstanding shares of Caldera. Doug Michels has entered into a voting
agreement with Caldera by which he has agreed to vote in favor of the
combination. Mr. Michels beneficially owns approximately 10% of the outstanding
shares of SCO as of October 31, 2000.
THE REORGANIZATION AGREEMENT
This section describes the reorganization agreement. A copy of the
reorganization agreement is attached as Appendix A to this joint proxy
statement/prospectus. The summary is materially complete, but you should read
the full and complete text of the reorganization agreement as it may contain
information that is important to you.
CLOSING
The closing of the combination will take place as soon as practicable after
the Caldera and SCO meetings and no later than the third business day after all
conditions to closing under the reorganization agreement are satisfied or
waived. The Caldera merger will become effective upon the filing of a
certificate of merger in the offices of the Secretary of State of the State of
Delaware.
WHAT CALDERA SECURITY HOLDERS WILL RECEIVE
Shares of Common Stock. Each share of common stock of Caldera that is
issued and outstanding will be automatically converted into one share of New
Caldera common stock. As of October 31, 2000 there were 39,444,457 shares of
Caldera common stock outstanding.
Stock options. Each outstanding option to purchase shares of Caldera
common stock will be automatically assumed and converted into an option to
purchase an equivalent number of shares of New Caldera common stock. The
exercise price per share will remain unchanged. As of October 31, 2000 there
were options to purchase 6,176,742 shares of Caldera common stock outstanding.
Employee stock purchase plan rights. Each of the outstanding rights to
purchase shares of Caldera common stock under the Caldera Employee Stock
Purchase Plan will be assumed and converted into a right to purchase the same
number of shares of New Caldera common stock on the next purchase date under the
Caldera stock purchase plan following the effective time. The purchase price per
share will be determined in accordance with the stock purchase plan.
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CALDERA STOCKHOLDERS WILL NOT NEED TO SURRENDER SHARE CERTIFICATES
Holders of Caldera common stock will not need to surrender their stock
certificates. After the effective time, their stock certificates will be deemed
to represent an equivalent number of shares of New Caldera common stock.
WHAT SCO WILL RECEIVE FOR CONTRIBUTING THE SERVER AND PROFESSIONAL SERVICES
GROUPS TO NEW CALDERA
At the closing of the combination, SCO and its employees who join New
Caldera will receive the amounts and kinds of consideration described below.
There will be no adjustments in the consideration for changes in the market
price of Caldera's common stock.
- SCO and its employees who join New Caldera will receive approximately
28.6% of New Caldera on a fully diluted basis, or approximately 18.2
million shares of New Caldera common stock (including approximately two
million shares reserved for employee options assumed or replaced by New
Caldera for options currently held by SCO employees joining New Caldera).
- New Caldera will assume or exchange the outstanding SCO options of the
employees of SCO who become employees of New Caldera, with the exception
of David McCrabb, Jack Moyer and Jim Wilt.
- Each option to purchase shares of SCO common stock assumed or exchanged
shall be converted into New Caldera options to acquire half the number of
shares of New Caldera common stock.
- New Caldera will pay SCO $7 million in cash.
Based on the closing price of Caldera's common stock on and around August
1, 2000, the date the reorganization agreement was entered into, the aggregate
value of the approximate 18.2 million shares of Caldera International and the $7
million cash to be paid for the server and professional services groups would
have been approximately $129.2 million. In negotiating this purchase price, the
parties discussed not only Caldera's and SCO's stock prices, but also the
relative values of the revenue streams, products and services, opportunities for
growth and other contributions that were to be provided by each party to the
combined entity. For a more detailed description of the various factors
considered by the boards of SCO and Caldera, please see "-- Reasons for the
Combination" beginning on page 41.
The New Caldera stock that SCO receives as a result of the combination will
be held as an asset of SCO. SCO has no current intention of distributing New
Caldera stock directly to SCO stockholders because of adverse tax consequences
of distributing the stock and because the shares will serve as security for the
$15 million line of credit to SCO from The Canopy Group, the majority
stockholder of Caldera.
STOCK OPTION AND BENEFIT PLANS AND RELATED SECURITIES
Caldera options
The term, exercisability, vesting schedule, status as an "incentive stock
option" under section 422 of the Internal Revenue Code, if applicable, and all
other terms and conditions of the Caldera options assumed by New Caldera will be
unchanged.
SCO options
New Caldera has agreed to assume or exchange the outstanding options of
those SCO employees who will become New Caldera employees, with the exception of
David McCrabb, Jack Moyer and Jim Wilt. Each option to purchase shares of SCO
common stock shall be converted into a New Caldera option to purchase half the
number of shares of New Caldera common stock. Under the assumption, the exercise
price of the New Caldera option will be twice the exercise price per share of
such SCO option. Under the exchange, the exercise price of the New Caldera
option will be the fair market value of New Caldera common stock immediately
prior to the closing of the combination. Under either the replacement or the
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exchange, all New Caldera options granted will be vested as to the same
percentage of underlying shares of New Caldera as the related SCO options were
vested in underlying shares of SCO; the New Caldera options will continue to
vest in accordance with the original vesting schedules of the related SCO
options. A vote for the combination will be deemed to constitute approval of the
issuance of New Caldera options in exchange for the assumed SCO options.
Caldera stock plans
In addition, the Caldera stock option and stock purchase plans, as proposed
to be amended, will be assumed and continued by New Caldera. See proposals 2 and
3 under "Additional Proposals to be Voted upon by Caldera Stockholders" on page
153 . A vote for the combination will be deemed to constitute approval of the
assumption and continuation of the Caldera plans as proposed to be amended.
Employee benefit plans
New Caldera has agreed to use reasonable efforts to provide the Caldera
benefit arrangements and Caldera employee plans to the employees of SCO who
become New Caldera employees. To the extent that New Caldera does not have any
such plan or arrangement in effect in a jurisdiction where there are
transferring employees, New Caldera has agreed to adopt plans providing
comparable benefits to the plans for the transferring employees.
New Caldera has agreed to provide all transferring employees with the
opportunity to participate in any employee stock option or other incentive
compensation plan of New Caldera on substantially the same terms and conditions
as are available to similarly situated employees of Caldera or New Caldera.
Prior to the effective time, Caldera, New Caldera and SCO will mutually agree
upon an integration plan which will include, among other things, provisions
relating to compensation and other equity incentives for employees.
New Caldera has agreed to take all steps necessary to cause each of the
benefit arrangements and employee plans of Caldera to waive any waiting period
or other requirement for duration of employment with New Caldera which would
prevent a transferring employee who is otherwise eligible to participate in the
plan from participating in the plan immediately following the effective time.
New Caldera has also agreed to pro rate any portion of a premium or
deductible with respect to a plan for any transferring employee for any plan
year that commenced prior to the effective time.
New Caldera has also agreed to take all steps necessary to cause each
employee plan to recognize each transferring employee's length of service under
comparable employee benefit plans maintained by SCO. Therefore, for purposes of
eligibility, participation, vesting and benefit accrual, the transferring
employee will be treated as if employed by New Caldera for such period.
DISTRIBUTION AND REGISTRATION OF SHARES
SCO has agreed not to distribute to its shareholders any of its shares of
New Caldera for six months after the closing date. SCO has further agreed not to
distribute to its shareholders more than 25% of its New Caldera shares during
any six (6) month period.
Caldera has agreed to file a registration statement to facilitate any such
distribution of New Caldera shares to the SCO shareholders.
CONDITIONS TO THE COMBINATION
The obligations of SCO and the other contributing companies, on the one
hand, and of New Caldera and Caldera, on the other, to effect the combination
are subject to a number of conditions, including:
- the combination shall have been approved and adopted by both the Caldera
stockholders and the SCO shareholders;
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- the board of directors of New Caldera shall have appointed Mr. Michels
and an individual to be named by SCO and approved by Caldera to the board
of directors of New Caldera;
- the relevant parties shall have entered into the stockholder agreement,
the escrow agreement, sales representation and support agreement, and the
voting agreements;
- the New Caldera common stock to be issued in the combination shall have
been approved for quotation on the Nasdaq National Market, subject to
notice of issuance;
- the representations and warranties of each party contained in the
reorganization agreement shall be accurate except where the breaches have
not resulted in a material adverse effect;
- each party shall have materially complied with the covenants contained in
the reorganization agreement;
- each of Caldera and SCO shall have received an opinion of their counsel
as to the tax consequences of the combination; and
- any applicable waiting periods of anti-trust requirements shall have
expired or been terminated and no order preventing the consummation of
the combination, shall have been issued by any federal or state court or
governmental agency.
Any of the conditions to the obligations of one party may be waived by such
party.
REPRESENTATIONS AND WARRANTIES
The reorganization agreement contains customary representations and
warranties of the parties. These representations and warranties relate to, among
other things, the parties' organizations, capital structures, authority to enter
into the transaction, filings with securities regulatory authorities, absence of
material litigation, the accuracy of information supplied for this document and
other matters. SCO has made additional representations and warranties including
representations relating to absence of defaults under material contracts,
intellectual property rights, title to, condition and sufficiency of the
contributed companies and the contributed assets.
COVENANTS
Covenants by both parties
The reorganization agreement contains mutual covenants, including:
- the negotiation of a mutually acceptable arrangement between SCO and New
Caldera and, if required, the other parties to the agreement, with
respect to the contracts that govern products or assets relating to both
the server and professional services groups and the Tarentella business
of SCO;
- the notification to the other party of:
- any event reasonably likely to render any of their representations or
warranties untrue or inaccurate in any material respect;
- any event reasonably likely to have a material adverse effect on either
Caldera or the server and professional services groups; and
- any material breach by them of any covenant or agreement contained in
the reorganization agreement;
- carrying on and preserving its business in the ordinary and usual course
consistent with past practice;
- obtaining consents required in connection with the material contracts;
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- providing reasonable access to information, including without limitation,
any and all information related to taxes; and
- cooperation on tax matters, including the preparation and defense of tax
returns.
In addition, each party has agreed that it will not, without the prior
consent of the other:
- borrow any money except for amounts which are not material;
- cause any of the contributed assets to become subject to any
non-permitted liens or encumbrance;
- dispose of any of the assets except in the ordinary course of business,
consistent with past practice;
- declare or pay any cash or stock dividend or other distribution in
respect of capital stock;
- amend the certificate of incorporation or bylaws of Caldera or of any of
the contributed companies;
- implement any layoffs or reductions in force; and
- fail to pay or withhold any material tax when due to be paid or withheld.
Caldera and New Caldera covenants
Caldera and New Caldera have agreed to:
- qualify the New Caldera options to be granted upon cancellation of the
SCO options pursuant to the reorganization agreement under state
securities or "blue sky" laws;
- have New Caldera adopt the Caldera employee plans, and have New Caldera
use reasonable efforts to provide the Caldera employee plans to the
transferring employees as provided to Caldera employees who are similarly
situated;
- maintain the indemnification, limitations of liability and directors' and
officers' insurance for Caldera executive officers and directors; and
- maintain indemnification and insurance for directors, officers, employees
and agents of the contributed companies and SCO involved in the server or
professional services groups and who become employees, officers or
directors of New Caldera or Caldera.
SCO covenants
SCO has agreed to:
- ensure that all intellectual property rights and intangible assets
required for the productions, development, marketing and support of the
products of the server and professional service groups have been
transferred to New Caldera;
- informally encourage some of their key employees to enter into employment
agreements with New Caldera;
- take action under the SCO stock option plans to prevent accelerated
vesting of stock options as a result of the combination; and
- maintain directors' and officers' liability insurance covering acts on or
before the effective time of employees who become New Caldera employees.
In addition, SCO and the contributed companies and subsidiaries have agreed
that they will not, without the prior consent of Caldera, where it would cause a
material adverse effect:
- grant any exclusive license to any of the intellectual property rights
relating to the server or professional services groups or grant any other
license to those rights except in the ordinary course of business;
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- materially amend or terminate any of its material contracts;
- cause any of the contributed companies to make any loans or grant any
guarantees, except loans in the ordinary course of business or advances
that are not material in amount; or
- cause any member of the contributed companies to merge, consolidate or
reorganize with or acquire any entity that is not a member of the
contributed companies subject to certain exceptions.
RESTRICTIONS ON SOLICITING ALTERNATIVE PROPOSALS
Obligations of SCO and related parties
SCO and the contributing companies have agreed that they will not directly
or indirectly:
- solicit, initiate or encourage the submission of any SCO alternative
proposal described below;
- engage in discussions or negotiations regarding any SCO alternative
proposal;
- take any other action intended, designed or reasonably likely to
facilitate any inquiries or the making of any proposal that constitutes
or would reasonably be expected to lead to, any SCO alternative proposal;
- enter into any letter of intent, acquisition agreement or other similar
agreement with any person with respect to any SCO alternative proposal;
or
- make or authorize any statement, recommendation or solicitation in
support of any SCO alternative proposal.
"SCO alternative proposal" means any inquiry, proposal or offer relating to
any direct or indirect (a) acquisition, purchase, sale or other disposition of
any of the server or professional services groups assets other than in the
ordinary course and disposal of worn or obsolete items consistent with past
practice, (b) acquisition, purchase, sale or other disposition of any of the
voting securities of any contributed company, or (c) merger, consolidation, sale
of any of the assets, liquidation, or similar transaction involving any
contributed company.
SCO may, in response to an unsolicited SCO alternative proposal,
participate in discussions or negotiations with, furnish information to a third
party, make a recommendation in support of the proposal, or accept the proposal,
subject to the following:
- the third party has made a bona fide written proposal to the SCO board
which identifies a price or range of values to be paid for the
outstanding securities or assets of SCO;
- after consultation with investment bankers of nationally recognized
reputation, the SCO board determines that the transaction is financially
more favorable to the shareholders of SCO than the combination;
- the SCO board determines, after consultation with investment bankers of
nationally recognized reputation, that the third party is financially
capable of consummating the SCO alternative proposal;
- the SCO board determines, after consultation with outside legal counsel,
that failure to take such action would be inconsistent with the
director's fiduciary duties;
- SCO has notified Caldera in writing of the SCO alternative proposal,
including its principal financial and other material terms and
conditions, including the identity of the person making the proposal; and
- SCO must advise Caldera of any request for non-public information which
it reasonably believes would lead to any SCO alternative proposal.
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INDEMNIFICATION
General indemnification
SCO has agreed to indemnify New Caldera and Caldera against:
- all liabilities relating to the server and professional services groups
not expressly assumed by Caldera or New Caldera, and all liabilities
whatsoever relating to the business retained by SCO;
- any claim by any contributing company asserting that the transfer of the
capital stock of the contributed companies and the contributed stock and
assets to New Caldera constitutes a fraudulent conveyance, fraudulent
transfer or a preference under any applicable foreign, state or federal
law;
- any breach by any contributing company of its representations and
covenants relating to fraudulent conveyances or any liabilities related
to non-compliance with bulk transfer laws in connection with the
combination;
- any liability relating to SCO's Tarantella business;
- any material liability omitted from the financial statements of the
server and professional services groups that was required by generally
accepted accounting principles to be included or reflected in the
financial statements;
- any claims brought by an SCO employee relating to such employment with or
termination by SCO prior to the closing;
- any breach of representation in the reorganization agreement; or
- any unforeseen tax liability, as described below.
This indemnification is triggered only when the aggregate of those
liabilities exceed $1.0 million at which time, SCO shall be required to pay the
entire amount of the loss.
However, in no event shall the amount of indemnification exceed 10% of the
value of 28% of New Caldera common stock on a fully diluted basis, based on the
average closing price of Caldera common stock for the five days prior to the
closing, except:
- losses relating to intellectual property which shall not exceed 50% of
the value of 28% of New Caldera common stock on a fully diluted basis;
and
- there are no limits on intentional fraud or misrepresentation.
Time limits for bringing indemnification claims
Claims for indemnification may generally be brought at any time prior to
the first anniversary of the closing of the combination.
ESCROW
An escrow consisting of 10% of the New Caldera common stock to be issued to
SCO shall be available for one year after the closing to compensate Caldera and
New Caldera for the indemnification obligations of SCO.
TAX INDEMNIFICATION
SCO shall also indemnify New Caldera with respect to certain tax matters,
including for any tax:
- of SCO or any member of the affiliated group of corporations of which SCO
is a member which is not related to the server and professional services
groups or to any contributed company;
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- relating to the income, business, assets, property or operations of the
server and professional services groups or of any contributed company to
the extent that the liability for tax is not disclosed to Caldera, and is
either (a) in respect of any taxable period that ends prior to the
closing or in respect of any taxable period that includes, but does not
end on, the closing, the portion of that period ending on the closing, or
(b) with respect to an excess loss account in the stock of any
contributed company or from a deferred intercompany transaction other
than among the contributed companies entered into prior to the closing
and is triggered as a result of any contributed company ceasing to be
affiliated with SCO;
- under Subpart F of the Internal Revenue Code attributable to transactions
by SCO; or
- as the result of a breach of representation or warranty, covenant or
agreement by SCO.
New Caldera must indemnify SCO and its affiliates with respect to certain
tax matters including for:
- any tax relating to the income, business, assets, property or operations
of the server and professional services groups or any of the contributed
companies in respect of all taxable periods beginning after the closing,
or, in the case of any taxable period that includes but does not end on
the closing, the portion of that period commencing on the day following
the closing;
- to the extent a liability for tax is reflected in the financial
statements for the server and professional services groups or previously
disclosed to New Caldera;
- under Subpart F of the Internal Revenue Code attributable to transactions
by New Caldera or Caldera after the closing; and
- as the result of a breach of representation or warranty, covenant or
agreement by New Caldera or Caldera.
TAXES
SCO and Caldera shall share equally all sales, use, stamp and other taxes
on the combination, except that Caldera shall not pay more than $300,000.
TERMINATION OF THE REORGANIZATION AGREEMENT
The reorganization agreement may be terminated by:
- mutual written agreement of SCO and Caldera;
- any party, if there has been a material breach by the other of any
representation, warranty, the covenant or agreement set forth in the
reorganization agreement, and the breach is not corrected within 30 days
after notice;
- any party, if the combination is not completed on or before February 28,
2001 for any reason, other than any wrongful action or as a result of a
breach of the reorganization agreement or related agreement by the
terminating party;
- by any party, if a permanent injunction or other order by any federal or
state court restraining or prohibiting the combination shall have become
final and non-appealable;
- by any party, if the stockholders of Caldera or SCO do not approve the
combination unless the failure to obtain approval was caused by any
breach by Caldera or SCO, as the case may be, of the reorganization
agreement or any related agreement in which case the breaching party
cannot terminate it;
- by Caldera, if (a) the board of directors of SCO withdraws or modifies in
an adverse manner its approval or recommendation of the combination, or
(b) the board of directors of SCO recommends or approves any SCO
alternative proposal;
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- by SCO, if the board of directors of Caldera withdraws or modifies in an
adverse manner its approval or recommendation of the combination; or
- by any party at any time prior to the SCO stockholder approval, if the
SCO board recommends or accepts a SCO alternative proposal, unless it
violates the non-solicitation obligations described under
"-- Restrictions on Soliciting Alternative Proposals" on page 68.
TERMINATION FEES
SCO will pay Caldera a termination fee equal to 3 1/2% of the value of 28%
of Caldera common stock on a fully diluted basis if the reorganization agreement
is terminated and the SCO board has changed its recommendation.
Caldera will pay SCO the termination fee if the reorganization agreement is
terminated and the Caldera board has changed its recommendation.
SCO will pay Caldera the termination fee if:
- the SCO shareholders do not approve the combination after a Caldera
alternative proposal has been publicly disclosed and not withdrawn and
prior to the rejection; or
- SCO has violated its non-solicitation obligations; and
- within 6 months an agreement is entered into for an alternative proposal
or within 12 months an alternative proposal is consummated.
EXPENSES OF THE COMBINATION
Each party will bear its own fees and expenses incurred with respect to the
negotiation, preparation and performance of the reorganization agreement and the
related transactions.
Caldera will reimburse SCO for $1.5 million of transition costs to be
incurred by SCO from August 2000 through December 2000. These costs relate to
the retention of various employees of SCO who will become employees of New
Caldera.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
All representations, warranties and covenants of the parties contained in
the reorganization agreement will remain operative for a period of two years
after effective time or any earlier termination of the reorganization agreement,
except for covenants and other provisions that by their express terms survive
for a longer period.
AMENDMENT AND WAIVER OF THE REORGANIZATION AGREEMENT
Any term or provision of the reorganization agreement may at any time be
amended or waived in a writing signed by all of the parties. After approval by a
party's stockholders, no amendment will be made which by law requires the
further approval of a party's stockholders without obtaining the further
approval.
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AGREEMENTS RELATED TO THE COMBINATION
VOTING AGREEMENTS
Voting agreements with SCO
The Canopy Group, Inc. and MTI Technology Corporation have entered into a
voting agreement with SCO. Together these stockholders hold approximately 72% of
the outstanding shares of Caldera common stock. Doug Michels has entered into a
voting agreement with Caldera. Mr. Michels holds approximately 10% of the
outstanding shares of SCO common stock.
Voting agreement terms
Under the voting agreements, each of these stockholders has agreed that
they will vote their shares in favor of the adoption of the reorganization
agreement and approval of the combination. They have also agreed to vote against
any dissolution or liquidation, any amendment to their respective governing
documents which would prevent or impede the combination. Mr. Michels has also
agreed to vote against a SCO alternative proposal.
These stockholders have also delivered irrevocable proxies with respect to
matters covered by the voting agreements. In addition, subject to exceptions,
these stockholders have agreed not to sell, transfer, dispose of or encumber any
shares held by them until the effective time or the valid termination of the
reorganization agreement.
These stockholders have also agreed that they shall not, directly or
indirectly:
- solicit or initiate discussions or engage in negotiations regarding any
alternative proposal;
- furnish any nonpublic information regarding their respective companies to
any person in connection with respect to or likely to facilitate
inquiries which could result in an acquisition proposal;
- enter into any letter of intent or other similar document relating to any
alternative proposal; or
- make or authorize any statement or recommendation in support of any
alternative proposal.
STOCKHOLDER AGREEMENT
Nomination rights
Caldera, New Caldera and SCO will enter into a stockholder agreement which
will provide that so long as SCO continues to own at least 10% and not more than
19.9% of the outstanding shares of New Caldera common stock, SCO shall be
entitled to name one nominee to the New Caldera board. So long as SCO continues
to own at least 20% of the outstanding shares of New Caldera common stock, SCO
shall be entitled to name two nominees to the New Caldera board. So long as SCO
owns at least 10% of the outstanding shares of New Caldera, the New Caldera
board shall not be increased to a number greater than nine. Each nominee must be
reasonably acceptable to New Caldera. New Caldera is also obligated to use its
best efforts to cause the New Caldera board to unanimously recommend to its
stockholders to vote in favor of the SCO nominees and to cause the shares for
which New Caldera's management holds proxies to be voted in favor of the SCO
nominees. In addition, the Canopy Group, Inc. and MTI Technology Corporation
agree to vote in favor of the SCO nominees.
Limits on resales
So long as SCO owns at least 5% of New Caldera's outstanding common stock,
they may sell their New Caldera shares only in accordance with the limitations
of Rule 144. SCO also agrees not to sell New Caldera securities constituting 5%
or more of the outstanding New Caldera securities to any one person or group.
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<PAGE> 85
Voting provisions
So long as SCO owns at least 10% of the outstanding stock of New Caldera,
SCO agrees to vote all of its shares of New Caldera common stock in favor of the
New Caldera nominees for election to the New Caldera board of directors.
So long as SCO owns at least 10% of the outstanding common stock of New
Caldera, they shall vote all shares of New Caldera common stock owned by them in
accordance with the recommendation of the New Caldera board. SCO may, however,
vote its shares in its sole discretion in the following specific matters:
- a proposal involving the right to vote and participate pro rata with
other common stockholders in any distribution to the holders of New
Caldera common stock;
- a recapitalization in which New Caldera common stock is converted or
exchanged for a security having substantially different rights than New
Caldera common stock;
- a transaction involving a conflict of interest between any member of the
board and New Caldera board;
- actions brought by a stockholder of New Caldera; or
- any amendment to the bylaws of New Caldera.
These voting provisions do not apply to any proposals for any
recapitalization or combination accomplished in connection with any merger,
acquisition, consolidation or combination, any transaction of a type
contemplated by Section 351 of the Internal Revenue Code or any other similar
transaction where (a) New Caldera is acquired by a third party, (b) there has
been a "change of control" so that the stockholders of New Caldera prior to a
transaction own, in the aggregate, less than a majority of the outstanding stock
of New Caldera or the acquiring entity after the transaction, (c) New Caldera
acquires another entity, or (d) New Caldera acquires all or substantially all of
the assets of another entity.
They also may not exercise dissenter's or appraisal rights for any event
described in clauses (a) through (d) of the preceding paragraph that has been
approved by the New Caldera board of directors.
Standstill provisions
Until the fifth anniversary of the combination, SCO will not, without New
Caldera's prior written consent:
- acquire, or enter into discussions, negotiations, arrangements or
understandings with any third party to acquire beneficial ownership of
any New Caldera voting securities if SCO would then beneficially own
and/or have the right to acquire more than the percentage of New Caldera
common stock held by it immediately after the closing of the combination,
which we refer to as the standstill percentage;
- make, or in any way participate in, any solicitation of proxies with
respect to the voting of any voting securities of New Caldera; or
- seek, either alone or in concert with others, to control the New Caldera
board or the policies of New Caldera.
The limitations described above shall be suspended upon the earlier to
occur of:
- the date that a third party not affiliated with SCO commences a tender or
exchange offer, that is not withdrawn or terminated, and that would
result in a person or group beneficially owning in the aggregate more
than 50.0% of the total voting power of New Caldera. If any tender or
exchange offer is withdrawn or terminated, the standstill limitation will
be reinstated;
- the public announcement by New Caldera that it has entered into any
agreement with respect to a merger, consolidation, combination or similar
transaction involving New Caldera in which all the stockholders of New
Caldera collectively will own less than 50.0% of the outstanding voting
stock
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<PAGE> 86
of the surviving or acquiring entity immediately after the transaction.
The standstill limitation will be reinstated if the transaction is
terminated prior to being completed; or
- the sale or disposition of substantially all of New Caldera's assets.
If SCO acquires shares that cause it to own a percentage of New Caldera's
outstanding stock that is greater than the standstill percentage, it will not be
obliged to dispose of any New Caldera voting stock to the extent the increased
shares were acquired:
- as a result of a recapitalization of New Caldera or a repurchase or
exchange of securities by New Caldera or any other action taken by New
Caldera or its affiliates;
SALES REPRESENTATIVE AND SUPPORT AGREEMENT
Under the terms of the sales representative and support agreement, New
Caldera will act as the sales representative for SCO's OpenServer UNIX products.
New Caldera will sell the OpenServer UNIX products in accordance with the
prices, discounts, warranties and other terms provided by SCO.
SCO will pay New Caldera a commission of 11% of net revenue, reduced by bad
debts applicable to such revenue, relating to license of the OpenServer UNIX
product and 25% of net revenue, similarly reduced by bad debts, relating to
sales of media kits of the OpenServer UNIX product. In addition, SCO will
reimburse Caldera for expenses relating to marketing activities in an amount
equal to the lesser of actual marketing expenses or 15% of net revenues actually
collected for such products; and
SCO retains the right to:
- reject any purchase order;
- approve or disprove any credit to be extended to any customer outside of
SCO's guidelines; and
- accept the return of products, make allowances, to give discounts or
adjustments beyond SCO's guidelines.
Caldera will:
- offer and provide support for the open-server products under SCO's
current outstanding agreements, at substantially the same level provided
by SCO; and
- offer support and maintenance agreements to new customers of the
open-server products.
The sales representative and support agreement will automatically terminate
after a period of five years. Caldera may terminate the agreement after three
years by paying SCO an amount equal to two times the OpenServer revenues during
the preceding 12-month period.
OPENSERVER RESEARCH & DEVELOPMENT AGREEMENT
Under the terms of the OpenServer research and development agreement, New
Caldera will be the exclusive provider of research and development services to
SCO for its OpenServer UNIX products. SCO will pay to New Caldera a fee equal to
110% of New Caldera's direct and indirect costs relating to providing these
services, and SCO will have the right to approve in advance the resources and
deliverables relating to the services to be provided to SCO. The OpenServer
research and development agreement will automatically terminate upon the
termination of the sales representative and support agreement.
EMPLOYMENT AGREEMENTS
The employees of SCO who will become executive officers or are otherwise
considered key employees of New Caldera will enter into employment agreements
with New Caldera. These agreements will provide for employment of one or two
years and severance benefits, among other things. To identify those persons who
are expected to become executive officers of New Caldera and enter into
executive employment agreements, please refer to "Management of Caldera and New
Caldera" on page 122.
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<PAGE> 87
LOAN AGREEMENTS
In conjunction with the signing of the reorganization agreement, Caldera
and The Canopy Group, Inc., the majority stockholder of Caldera, agreed to loan
SCO $7 million and $18 million, respectively, on or before the closing of the
combination.
Under the proposed terms of Caldera's loan agreement with SCO, Caldera will
loan $7 million to SCO. If the combination is completed, Caldera's advance to
SCO would be treated by Caldera and SCO as part of the consideration to SCO for
the combination. If the transaction is not completed, the advance will remain an
outstanding obligation of SCO. The interest rate is 10% per annum, and the
entire principal balance of the loan is due one year from the date of the
advance. The loan will be secured by a first priority security interest in all
of SCO's assets, and would be convertible into SCO common stock at Caldera's
option at a discount to the market price of SCO common stock at the date of
conversion.
Under the proposed terms of The Canopy Group's line of credit agreement
with SCO, The Canopy Group will advance up to $18 million to SCO. The interest
rate will be 10% per annum, and any advances made would be due 18 months from
the date of the agreement. Advances under The Canopy Group's line of credit will
be secured by a security interest in all of SCO's assets, subordinate only to
the security interest of Caldera. The Canopy Group's loan will be convertible
into SCO common stock at The Canopy Group's option at a discount to the market
price of SCO common stock at the date of conversion.
Caldera, SCO and The Canopy Group plan to enter into the proposed loan
agreements prior to the closing of the combination.
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<PAGE> 88
THE EMPLOYEE STOCK OPTION ALTERNATIVES
GENERAL
At the effective time of the combination, each outstanding option to
purchase shares of SCO common stock under SCO's plan, may be either assumed or
replaced on a grant by grant basis by New Caldera at the discretion of each
employee, subject to the terms and conditions set forth in this section.
A condition to New Caldera assuming or replacing an outstanding option is
that the optionee become employed with New Caldera or its subsidiaries. However,
any such employment relationship will be governed by the terms of an employment
"offer letter" and will only be on an "at will" basis, to the extent permissible
under applicable laws.
SCO's stock option plan will continue to govern the option grants of
employees of SCO who do not become employees of New Caldera and remain with SCO.
If you become an employee of New Caldera and do not choose to have your SCO
options assumed or replaced, your options will terminate 30 days after the
closing of the combination pursuant to SCO's stock option plan.
OUR REASONS FOR THE EMPLOYEE STOCK OPTION ASSUMPTION AND REPLACEMENT OFFER
Caldera and SCO negotiated the employee stock option assumption and
replacement offer to provide the server and professional services groups'
employees, similar equity incentives to those possessed by other New Caldera
option holders and to allow them to participate in the success of New Caldera.
Caldera and SCO agreed to halve the number of shares underlying each
outstanding SCO option based on the fact that at the time the reorganization
agreement was signed Caldera's common stock was trading at approximately twice
the per share price of SCO's common stock.
The replacement alternative is designed to incent the server and
professional services groups' employees holding options for SCO common stock at
an exercise price equal to more than half of the New Caldera trading price at
closing. Based on the current trading price of Caldera common stock and the
exercise prices of outstanding SCO options, New Caldera believes the replacement
alternative will be the desirable alternative for most of the former SCO
employees. However, New Caldera is still offering the assumption alternative in
recognition that some SCO employees have outstanding options with low exercise
prices which may make the assumption option desirable.
The assumption alternative is designed to incent the server and
professional services groups' employees holding options for SCO common stock at
an exercise price equal to less than half of the New Caldera trading price at
the closing. Under the assumption alternative, the exercise price per share of
the New Caldera options will be twice that of the SCO options because, as noted
above, Caldera's common stock was trading at a price per share twice that of
SCO's common stock at the time the reorganization agreement was signed. A former
SCO employee who chooses the assumption alternative will incur the same
aggregate exercise price (number of shares times exercise price per share) in
exercising options to purchase New Caldera common stock as he or she would have
incurred in exercising SCO options; in this way, the assumption alternative
preserves the benefit of the employee's low exercise price, relative to the
replacement alternative.
Since the time of signing the reorganization agreement, the trading price
of Caldera common stock has fluctuated widely. Consequently, former SCO
stockholders choosing between the replacement and the assumption alternative
should obtain updated market price information before choosing an alternative.
ASSUMPTION ALTERNATIVE
Under the assumption alternative, each SCO stock option will continue to
have its original terms (including the vesting schedule and termination
provisions), and be subject to the conditions that were applicable to the option
immediately prior to the effective time, except that:
- each SCO stock option will become exercisable for shares of New Caldera
common stock,
- the number of shares of New Caldera common stock issuable upon the
exercise of any given SCO option will be determined by multiplying the
number of shares of SCO common stock underlying
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<PAGE> 89
the option immediately prior the effective time by 0.5 and rounding down
to the nearest whole share,
- the per share exercise price of any given option will be determined by
dividing the exercise price of the option immediately prior to the
effective time by 0.5 and rounding up to the nearest whole cent, and
- the option for shares of New Caldera may not qualify as an incentive
stock option even though the SCO option may have qualified.
To illustrate the effect of choosing the assumption alternative for a
specific option grant, assume our combination closes on February 1, 2001 and, at
that point, an employee had a SCO option to purchase 100 shares which was
granted on February 1, 1999 when SCO's common stock was at $8.00 per share, and
which was vested as to 50 shares on February 1, 2001. The employee would receive
the following:
- an option to purchase 50 shares of New Caldera common stock, which is
vested as to 25 shares, and
- the exercise price of the option would be $16.00.
The assumption alternative is intended to provide an equity incentive to
SCO employees who were granted SCO options with an exercise price that is
currently in-the-money, or below the fair market value of SCO common stock. This
alternative allows these employees to retain the economic value of their SCO
options.
REPLACEMENT ALTERNATIVE
Under the replacement alternative, each SCO stock option will be treated as
follows:
- each SCO stock option will be cancelled and replaced with a new option
exercisable for shares of New Caldera common stock,
- the number of shares of New Caldera common stock issuable upon the
exercise of the replacement option will be determined by multiplying the
number of shares of SCO common stock underlying the cancelled SCO option
immediately prior to the effective time by 0.5 and rounding down to the
nearest whole share,
- the per share exercise price of any given option will be the fair market
value of New Caldera common stock immediately after the effective time,
and
- the New Caldera option granted will be vested as to the same percentage
of underlying shares of New Caldera as the related SCO option was vested
in underlying shares of SCO; the New Caldera option will continue to vest
in accordance with the original vesting schedule of the related SCO
option.
To illustrate the effect of choosing the replacement option for a specific
option grant, assume again our combination closes on February 1, 2001 and at
that point an employee had a SCO option to purchase 100 shares which was granted
on February 1, 1999 when SCO's common stock was at $8.00 per share, and which
was vested as to 50 shares on February 1, 2000. The employee would receive the
following:
- an option to purchase 50 shares of New Caldera common stock, which is
vested as to 25 shares, and
- the exercise price would be the fair market value of New Caldera common
stock on February 1, 2001.
The replacement alternative is intended to provide an equity incentive to
SCO employees who were granted SCO options with an exercise price that is
currently out-of-the-money, or above the fair market value of SCO common stock.
This alternative will allow these employees to receive an option that is set at
current fair market value.
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<PAGE> 90
PROCEDURE FOR ELECTING OPTION ALTERNATIVE
If you tender to New Caldera your SCO options and New Caldera accepts them,
assuming the other conditions of the employee stock option assumption and
replacement offer described in this section are met, you will have entered into
a binding agreement with New Caldera upon the terms and subject to the
conditions set forth in this section and in the accompanying notice of election
in Appendix M. You must send a properly completed and duly executed notice of
election to SCO at the address under "-- SCO is Acting as Exchange Agent" on
page 78 on or prior to the expiration date to participate in this assumption and
exchange offer.
THE METHOD OF DELIVERY OF NOTICES OF ELECTION AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF THE DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED IN ALL CASES. SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY.
New Caldera expressly reserves the right, at any time or from time to time,
to extend the period of time during which this assumption and replacement offer
is open either to all offerees as a group, and delay acceptance of any election,
by mailing written notice of the extension to the relevant holders as described
below. During any extension, all SCO options previously tendered will remain
subject to the assumption and replacement offer.
NO NOTICES OF ELECTION SHOULD BE SENT TO CALDERA
All questions as to the validity, form, eligibility, including time of
receipt and acceptance of the notice of election will be determined by New
Caldera and SCO in their sole discretion. This determination will be final and
binding. New Caldera reserves the absolute right to reject any notice of
election not properly delivered. New Caldera also reserves the absolute right in
its sole discretion to waive any defects or irregularities or conditions of the
employee stock option assumption and replacement offer either before or after
the expiration date, including the right to waive the ineligibility of any
holder who seeks to tender SCO option agreements in this assumption or
replacement offer. The interpretation of the terms and conditions of the
assumption and replacement offer as to any particular SCO option either before
or after the expiration date, including the notice of election and the related
instructions, by New Caldera shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of SCO options
for assumption or replacement must be cured within a reasonable period of time
that New Caldera shall determine. Neither New Caldera, SCO nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of SCO option for assumption or replacement, or shall any
of them incur any liability for failure to give any notification.
CONSEQUENCES OF FAILURE TO ELECT AN ALTERNATIVE
If you are a server and professional services groups employee and you
accept an offer of employment made by New Caldera, you will automatically become
an employee of New Caldera on the closing date of the combination and are
entitled to participate in the employee stock option assumption and replacement
offer subject to the terms and conditions set forth in this section and the
notice of election. If you are a server and professional services groups
employee and your notice of election is not post-marked by the expiration date
of the assumption and replacement offer period or if you do not submit a notice
of election, your SCO options will terminate according to the terms of the SCO
stock plan. This means that:
- the unvested portion of your SCO options will terminate as of the closing
date of the combination;
- you will have 30 days from the completion of the combination to exercise
the vested portion of your SCO options; and
- any vested options that you do not exercise will be cancelled on the 31st
day after the closing of the combination.
These consequences will occur because you will no longer be an employee of
SCO and will not be eligible to participate in its plans.
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RESALES OF OPTION SHARES
The assumed or replacement options as well as the shares of New Caldera
common stock issuable upon exercise of the assumed or replacement options will
continue to be subject to restrictions on transfers. In general, the options are
not transferable and the shares of New Caldera common stock issuable upon their
exercise may not be offered or sold unless registered under the Securities Act.
New Caldera anticipates that it will register under the Securities Act the New
Caldera common stock issuable under each assumed or replacement option shortly
after the employee stock option assumption and replacement offer is completed.
NO GUARANTEE OF EMPLOYMENT
A condition to your receiving a New Caldera option in this assumption and
replacement offer is that you become employed by New Caldera or its
subsidiaries. The tender of a SCO option is not a guarantee that you will be
employed or will continue to be employed by New Caldera or any of its
subsidiaries. Any employment relationship that is created in the future will be
governed by the terms of an employment "offer letter" and will only be on an "at
will" basis.
ACCEPTANCE OF OPTIONS FOR EXCHANGE AND DELIVERY OF NEW CALDERA OPTIONS
New Caldera will accept, promptly after the expiration date, all SCO
options properly tendered for cancellation under the notice of election and will
exchange New Caldera options for the cancelled SCO options promptly after:
- you deliver a properly completed and duly executed notice of election;
- the closing of the combination; and
- the commencement of your employment with New Caldera or one of its
subsidiaries.
The same conditions must also be satisfied if you elect to have your SCO
options assumed by New Caldera.
CANCELLATION OF SCO OPTIONS
Upon the acceptance by New Caldera of your election to have your SCO
options cancelled and replaced, the SCO options subject to that election will be
cancelled and may no longer by exercised.
SCO IS ACTING AS EXCHANGE AGENT
SCO is acting as the agent for the assumption and replacement offer. All
executed notices of election should be sent via mail, post-marked prior to the
expiration date to SCO at the address set forth below or sent via facsimile to
the number set forth below. We recommend that you use registered mail, return
receipt requested. Questions and requests for assistance, requests for
additional copies of this document or of the notice of election should be
directed to SCO, addressed as follows:
By mail or by hand:
The Santa Cruz Operation, Inc.
425 Encinal Street
Santa Cruz, California 95061
Attn: Steve Sabbath
DELIVERY OF THE NOTICE OF ELECTION TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF THE NOTICE OF ELECTION.
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SELECTED FINANCIAL DATA OF CALDERA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following tables present portions of Caldera's financial statements.
You should read the selected financial data set forth below in conjunction with
Caldera's financial statements and the related notes included elsewhere in this
joint proxy statement/prospectus and in conjunction with "Caldera Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this joint proxy statement/prospectus. The selected
statement of operations data for the years ended October 31, 1998, 1999 and 2000
and the selected balance sheet data as of October 31, 1999 and 2000 are derived
from, and are qualified by reference to, the audited financial statements and
related notes appearing elsewhere in this joint proxy statement/prospectus. The
selected statement of operations data for the years ended October 31, 1996 and
1997 and the selected balance sheet data as of October 31, 1996, 1997 and 1998
are derived from audited and unaudited financial statements not appearing in
this joint proxy statement/prospectus.
Caldera began operations in 1994 as Caldera, Inc., a Utah corporation (the
"Predecessor"). In July 1996, the Predecessor acquired an additional business
line which was not engaged in developing and marketing Linux software. The
Predecessor subsequently made the strategic determination to separate its two
business lines into separate entities and, under an asset purchase agreement,
dated as of September 1, 1998, as amended, sold the assets relating to its
business of developing and marketing Linux software to Caldera Systems, Inc., a
newly formed corporation. Caldera Systems, Inc. has operated as a separate legal
entity engaged in developing and marketing Linux software since September 1,
1998. For purposes of presenting Caldera's financial statements, Caldera has
segregated or "carved-out" the operations relating to the Linux business from
the historical financial statements of the Predecessor. Accordingly, Caldera's
consolidated financial statements in this joint proxy statement/prospectus and
the selected financial data present Caldera's financial condition and results of
operations as if Caldera had existed as a separate legal entity for all periods
presented. The carved-out historical results presented are not necessarily
indicative of what would have actually occurred had Caldera existed as a
separate legal entity and any historical results are not necessarily indicative
of results that may be expected for any future period.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
----------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software and related products..................... $ 1,108 $ 1,117 $ 1,057 $ 2,773 $ 2,993
Services.......................................... -- -- -- 277 1,281
------- ------- ------- ------- --------
Total revenue................................... 1,108 1,117 1,057 3,050 4,274
------- ------- ------- ------- --------
Cost of revenue:
Software and related products..................... 880 1,142 1,017 2,388 2,063
Services.......................................... -- -- -- 538 1,958
Write-off of prepaid royalties.................... -- -- 1,381 -- --
------- ------- ------- ------- --------
Total cost of revenue........................... 880 1,142 2,398 2,926 4,021
------- ------- ------- ------- --------
Gross margin (deficit).............................. 228 (25) (1,341) 124 253
------- ------- ------- ------- --------
Operating expenses:
Sales and marketing............................... $ 1,339 $ 4,620 $ 2,224 $ 4,768 $ 14,754
Research and development.......................... 826 2,136 1,489 2,302 4,954
General and administrative........................ 712 797 1,799 1,748 6,430
</TABLE>
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<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
----------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SCO cost-sharing arrangement...................... -- -- -- -- 898
Non-cash compensation*............................ -- -- -- 409 5,216
------- ------- ------- ------- --------
Total operating expenses........................ 2,877 7,553 5,512 9,227 32,252
------- ------- ------- ------- --------
Loss from operations................................ (2,649) (7,578) (6,853) (9,103) (31,999)
------- ------- ------- ------- --------
Equity in loss of affiliate......................... -- -- -- -- (387)
Other income (expense):
Interest expense.................................. (133) (593) (1,081) (226) --
Interest income................................... -- -- -- 2 3,238
Gain on sale of assets to Ebiz, Inc............... -- -- -- -- 2,306
Other income (expense)............................ 25 23 5 (5) --
------- ------- ------- ------- --------
Other income (expense), net......................... (108) (570) (1,076) (229) 5,544
------- ------- ------- ------- --------
Loss before income taxes............................ (2,757) (8,148) (7,929) (9,332) (26,842)
Provision for income taxes.......................... -- -- (34) (35) (81)
------- ------- ------- ------- --------
Net loss............................................ $(2,757) $(8,148) $(7,963) $(9,367) $(26,923)
======= ======= ======= ======= ========
Preferred stock dividends........................... $ -- $ -- $ -- $ -- $(12,253)
======= ======= ======= ======= ========
Net loss attributable to common stockholders........ $(2,757) $(8,148) $(7,963) $(9,367) $(39,176)
======= ======= ======= ======= ========
Basic and diluted net loss per common share......... $ (0.17) $ (0.51) $ (0.50) $ (0.51) $ (1.19)
======= ======= ======= ======= ========
Basic and diluted weighted average common shares
outstanding....................................... 16,000 16,000 16,000 18,458 32,922
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31,
-------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ------- ------ --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 207 $ 398 $ 76 $ 122 $ 36,560
Working capital (deficit)......................... (122) 1,313 290 678 88,680
Total assets...................................... 1,639 3,915 16,353 3,714 107,518
Long-term liabilities............................. -- -- -- 6 --
Predecessor's equity in carved-out operations..... 576 2,319 -- -- --
Total stockholders' equity........................ -- -- 708 1,516 102,215
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
--------------
1999 2000
---- ------
<S> <C> <C>
(*)Non-cash compensation has been excluded from the
following operating expenses:
Sales and marketing................................... $177 $1,970
Research and development.............................. 103 1,146
General and administrative............................ 129 2,100
</TABLE>
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CALDERA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with Caldera's
Consolidated Financial Statements and Notes thereto, included elsewhere in this
joint proxy statement/prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Caldera's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of various factors, including those set forth under "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
Caldera began operations in 1994 as Caldera, Inc., a Utah Corporation (the
"Predecessor"). In July 1996, through an asset purchase, the Predecessor
acquired an additional business unit, which was not engaged in developing and
marketing Linux software. The Predecessor subsequently made the strategic
determination to separate its two business lines into separate entities and,
under an asset purchase agreement dated as of September 1, 1998, as amended,
sold the assets relating to its business of developing and marketing Linux
software to Caldera Systems, Inc., a newly formed corporation. Caldera Systems,
Inc. has operated as a separate legal entity engaged in developing and marketing
Linux software since September 1, 1998. For purposes of presenting their
financial statements Caldera has segregated or carved-out the operations related
to the Linux business from the historical financial statements of the
Predecessor. Accordingly, Caldera's consolidated financial statements in this
joint proxy statement/ prospectus and the following discussion present Caldera's
financial condition and results of operations as if Caldera had existed as a
separate legal entity for all periods presented.
Since September 1, 1998, Caldera has invested heavily in the expansion of
its sales, marketing and professional services organizations to support its
long-term growth strategy. As a result, employee headcount has increased from 28
at September 1, 1998 to 178 at October 31, 2000. Caldera has incurred net losses
in each fiscal period since inception and as of October 31, 2000, had an
accumulated deficit of $50.1 million.
Substantially all of Caldera's revenue since fiscal 1996 has been derived
from sales of Linux products and related services. Management expects that until
the closing of the combination, the majority of Caldera's revenue will continue
to be derived from sales of eDesktop and eServer products. Subsequent to the
closing of the combination, the majority of Caldera's revenues will be derived
from sales of combined products resulting from the integration of Caldera's
Linux products with the Unix server products and related applications that
Caldera would acquire in conjunction with the acquisition of the server and
professional services businesses. Related product sales are comprised of
shipments of incomplete box units or documentation materials that customers
request from time to time. Historically, Caldera has experienced substantial
fluctuations in revenue from period to period relating to the introduction of
new products and new versions of existing products. Upon announcement of an
expected release date for new products or upgrades, Caldera often experiences a
significant decrease in sales of existing products. Additionally, Caldera often
experiences the strongest sales for a new product during the first 30 days after
its introduction as Caldera fills advance orders from its distribution channels.
Caldera began shipping its OpenLinux product in fiscal 1996 through
indirect distribution channels such as distributors, value added resellers,
original equipment manufacturers and system integrators, as well as directly to
the end user using its internal sales and marketing force. Over time, Caldera's
business model has evolved such that Caldera now sells primarily through its
two-tier distribution channels. Caldera began offering Linux training, support
and consulting services during fiscal 1999.
Caldera markets its software and related products primarily in North
America, Europe, Asia and Australia. Revenue from customers outside the United
States was $56,000 in fiscal 1998, $203,000 in fiscal 1999 and $1.3 million in
fiscal 2000. The largest growth in international revenue has been in the Asia
Pacific region where revenue increased from $91,000 in fiscal 1999 to $706,000
in fiscal 2000.
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Caldera recognizes revenue in accordance with the American Institute of
Certified Public Accountants, or AICPA, Statement of Position 97-2, or SOP 97-2.
Revenue from the sale of software is recognized upon delivery of the
product when persuasive evidence of an arrangement exists, the price is fixed or
determinable and collection is probable. All sales into the distribution channel
or to OEMs and VARs require a binding purchase order. Sales to resellers for
which payment is considered to be substantially contingent on the reseller's
success in distributing individual units of the product or sales to resellers
with which Caldera does not have historical experience are accounted for as
consignments and the revenue is recognized once sell-through verification has
been received and payments from customers become due. Prior to October 31, 1999,
Caldera did not have any consignment arrangements. During the year ended October
31, 2000, approximately 22 percent of product revenue was derived on a
sell-through basis. Direct sales to end-users are evidenced by concurrent
payment for the product via credit card and are governed by a license agreement.
Generally, the only multiple element arrangement of initial software sales is
certain telephone and e-mail technical support services Caldera provides at no
additional charge. These services do not include product update or upgrade
rights. After the initial support period, customers can elect to enter into
separate support agreements. The cost of providing the initial support services
are not significant; accordingly, Caldera accrues the estimated costs of
providing the services at the time of revenue recognition. Revenue from the
extended support agreements are deferred and recognized over the period of the
contract or as the services are provided.
If other significant post-delivery vendor obligations exist or if a product
is subject to customer acceptance, revenue is deferred until no significant
obligations remain or acceptance has occurred. To date, Caldera has not shipped
any software and related products subject to acceptance terms or subject to
other post-delivery vendor obligations. Additionally, Caldera has not recognized
revenue on any contracts with customers that may include customer cancellation
or termination clauses that indicate a demonstration period or otherwise
incomplete transaction.
Caldera also offers its customers consulting, training and other services
separate from the software sale. The services are not integral to the
functionality of the software and are available from other vendors. These
services revenue are recognized as the services are performed.
Since inception, Caldera has incurred substantial research and development
costs and has invested heavily in the expansion of its sales, marketing and
professional services organizations to support its long-term growth strategy. As
a result of these investments, Caldera has incurred net losses in each fiscal
period since inception and, as of October 31, 2000, had incurred total net
losses of approximately $56.5 million since inception. Management anticipates
that operating expenses will increase substantially for the foreseeable future
as Caldera increases the number of people and programs in sales and marketing,
product development and professional services. Accordingly, management expects
to incur net losses until at least fiscal year 2002.
In connection with the grant of stock options to employees during fiscal
1999 and 2000, Caldera recorded deferred compensation of $3.1 million and $6.8
million, respectively, representing the difference between the deemed fair
market value of the common stock for accounting purposes and the exercise price
of these options as of the date of grant. Deferred compensation is presented as
a reduction of stockholders' equity and is amortized over the vesting period of
the applicable options. Caldera expensed $409,000 of deferred compensation in
fiscal 1999 and $5.2 million in fiscal 2000. With respect to the options
outstanding as of October 31, 2000, Caldera expects to expense $2.1 million of
deferred compensation in fiscal 2001, $1.1 million in fiscal 2002, $493,000 in
fiscal 2003, and $57,000 in fiscal 2004.
As a result of an option agreement between The Canopy Group and Ralph J.
Yarro III, which was subsequently rescinded, Caldera expensed a one-time
compensation charge of approximately $372,000 during fiscal 2000. The option
agreement allowed Mr. Yarro to purchase shares of Caldera common stock directly
from The Canopy Group. No shares were purchased under the agreement. Mr. Yarro
is the president and chief executive officer of The Canopy Group and the
Chairman of Caldera's board of directors.
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In December 1999 and January 2000, Caldera sold 5.0 million shares of
Series B convertible preferred stock at $6.00 per share, resulting in net
proceeds of approximately $29.8 million. Each share of Series B convertible
preferred stock was immediately convertible into one share of common stock. Due
to the beneficial conversion feature associated with the Series B convertible
preferred stock, during the first quarter of fiscal 2000, Caldera recorded a
preferred stock dividend in the amount of $10.0 million thereby increasing the
net loss applicable to common stockholders. On March 13, 2000, Caldera's major
stockholder, The Canopy Group, sold a warrant for $10,000 to purchase 416,667
shares of our common stock held by The Canopy Group at $5.98 per share for a
two-year period to one of the Series B convertible preferred stockholders. Upon
exercise of the warrant, all proceeds will be paid to The Canopy Group. Caldera
recorded this transaction during the second quarter of fiscal 2000 as if Caldera
had sold the warrant to the stockholder with the fair value of the warrant of
$2,252,717 being recorded as a dividend related to convertible preferred stock
and an offsetting contribution to capital.
In December 1999 and January 2000, Caldera acquired an equity investment in
Lineo, Inc. in exchange for 1,250,000 shares of common stock, acquired an equity
investment in Evergreen Internet, Inc. in exchange for $2.0 million in cash and
200,000 shares of common stock and acquired an equity investment in Troll Tech
AS and certain license rights in exchange for 106,356 shares of common stock.
These three companies provide strategic technology solutions for the Linux
industry. Caldera has entered into agreements with Troll Tech AS and Evergreen
Internet whereby it will be licensing their technology for inclusion in
Caldera's products and service offerings. Caldera will pay future royalties to
Troll Tech and Evergreen Internet based on its sales of products, which
incorporate their technology. Caldera's licensing agreement with Evergreen
Internet also calls for Evergreen Internet to include Caldera's technology in
its products for which Caldera will be paid future royalties by Evergreen
Internet based on sales of products that incorporate Caldera's technology.
Management believes that these investments have the potential to benefit Caldera
through increased revenue from product sales, royalties and service
opportunities. Management does not expect that these investments will have a
material adverse impact on future liquidity. The investments in Evergreen
Internet and Troll Tech have been accounted for under the cost method of
accounting. Management has determined that Caldera's investment in Lineo should
be accounted for as a transaction between entities under common control with the
transfer being reflected in its financial statements at Lineo's carryover basis.
However, at the date of the transfer, Lineo had a stockholders' deficit, of
which approximately $150,000 would be associated with the 17% interest Caldera
acquired. Accordingly, Caldera recorded the investment at a nominal value of
$1.00 because Caldera does not have any obligation to fund or reimburse Lineo
for its allocated portion of Lineo's stockholders' deficit. Caldera recorded the
estimated fair value of the shares of its common stock issued to Lineo at $10.0
million with the difference between the $10.0 million and the $1.00 investment
being a distribution to The Canopy Group.
On May 11, 2000, The Canopy Group transferred 1,761,563 shares of Lineo's
common stock held by The Canopy Group to Caldera. This transfer has been
reflected as a capital contribution by The Canopy Group at Lineo's carryover
basis of $1,966,173. As a result of this transaction, Caldera held a total of
5,000,000 shares of Lineo's common stock (approximately 14% of Lineo's
outstanding voting stock).
In September 2000, Caldera and Metrowerks Holdings, Inc., an affiliate of
Motorola, Inc., entered into a Stock Purchase and Sale Agreement whereby Caldera
and The Canopy Group sold 2.0 million and 1.0 million shares, respectively, of
common stock of Lineo, Inc. to Metrowerks Holdings at $7.50 per share. The
difference between the $7.50 per share price and Caldera's carrying amount was
reflected as a capital contribution.
RESULTS OF OPERATIONS
Software and related products revenue is comprised of revenue from the sale
of software and other products such as shipments of incomplete box units or
documentation materials. Services revenue is comprised of training royalties and
tuition fees, consulting fees and customer support fees.
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Cost of software and related products revenue primarily consists of costs
for production, packaging, fulfillment and shipment of product offerings.
Additionally, royalties paid to third parties for inclusion of their software
products in Caldera's product offering are included in these costs. Cost of
services revenue is primarily comprised of salaries and related costs of support
services employees.
Included in sales and marketing expenses are the following: advertising,
channel promotions, marketing development funds, promotional activities, public
relations, trade show and personnel-related expenses such as salaries, benefits,
commissions, recruiting fees, travel and entertainment expenses.
Research and development expenses consist of payroll and related costs for
software engineers, technical writers, quality assurance and research and
development management personnel and the costs of materials used by these
employees in the development of new or enhanced product offerings. Also included
are the costs associated with outside contractors.
General and administrative expenses are comprised of professional fees,
salaries and related costs for accounting, administrative, finance, human
resources, information systems and legal personnel as well as costs associated
with implementing and expanding our internal information and management
reporting systems.
The following table sets forth certain statement of operations data as a
percentage of total revenue for the years indicated:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Revenue:
Software and related products............................. 100.0% 90.9% 70.0%
Services.................................................. -- 9.1 30.0
------ ------ ------
Total revenue.......................................... 100.0 100.0 100.0
------ ------ ------
Cost of Revenue:
Software and related products............................. 96.2 78.3 48.3
Services.................................................. -- 17.6 45.8
Other..................................................... 130.7 -- --
------ ------ ------
Total cost of revenue.................................. 226.9 95.9 94.1
------ ------ ------
Gross (deficit) margin...................................... (126.9) 4.1 5.9
------ ------ ------
Operating Expenses:
Sales and marketing (exclusive of non-cash
compensation).......................................... 210.4 156.3 345.2
Research and development (exclusive of non-cash
compensation).......................................... 140.8 75.5 115.9
General and administrative (exclusive of non-cash
compensation).......................................... 170.2 57.3 150.4
Other..................................................... -- 13.4 143.0
------ ------ ------
Total operating expenses............................... 521.4 302.5 754.5
------ ------ ------
Loss from operations........................................ (648.3) (298.4) (748.6)
Equity in loss of affiliate................................. -- -- (9.1)
Other (expense) income, net................................. (101.8) (7.5) 129.7
------ ------ ------
Loss before income taxes.................................... (750.1) (305.9) (628.0)
Provision for income taxes.................................. (3.2) (1.1) (1.9)
------ ------ ------
Net loss.................................................... (753.3) (307.0) (629.9)
====== ====== ======
Dividends related to convertible preferred stock............ -- -- (286.7)
====== ====== ======
Net loss attributable to common stockholders................ (753.3)% (307.0)% (916.6)%
====== ====== ======
</TABLE>
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FISCAL YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000
Revenue
Revenue was $1.1 million for fiscal 1998, $3.1 million for fiscal 1999 and
$4.3 million for fiscal 2000. During fiscal 1998, all revenue was derived from
our software and related products offerings. During fiscal 1999, approximately
91 percent of our revenue was generated from the sale of software and related
products. During fiscal 2000, approximately 70 percent of our revenue was
generated from the sale of software and related products. Although the
percentage of software and related products revenue as a percentage of total
revenue has declined the last two years, software and related products revenue
has increased in each of those years. Revenue from international customers was
approximately 5 percent in fiscal 1998, 7 percent in fiscal 1999 and 30 percent
in fiscal 2000. The increases in international revenue are the result of
Caldera's increased focus on customers and markets outside the United States.
Software and Related Products. Software and related products revenue was
$1.1 million in fiscal 1998, $2.8 million in fiscal 1999 and $3.0 million in
fiscal 2000, representing an increase of $1.7 million, or 162 percent, from
fiscal 1998 to fiscal 1999 and a $221,000, or 8 percent, increase from fiscal
1999 to fiscal 2000. The increase in software and related products revenue from
fiscal 1998 to fiscal 1999 was a result of management's expansion of sales and
marketing efforts, as well as the increased market awareness of the Linux
operating system. The increase in software and related products revenue from
fiscal 1999 to fiscal 2000 was due to improved sales and marketing strategies.
Sales to customers in international locations also generated increased software
and related products revenue in fiscal 2000 over the prior period.
Services. Services revenue was $0 in fiscal 1998, $277,000 in fiscal 1999
and $1.3 million in fiscal 2000, representing an increase of $1.0 million, or
362 percent, from fiscal 1999 to fiscal 2000. The increase in services revenue
was primarily attributed to the formal introduction of our education and
training-related offerings as well as from promotional fees received from our
Linux training program. The Linux training program is targeted at informing and
training customers and partners about the Linux operating system by conducting
training and seminars in cities across North America. This program began in
Caldera's third quarter of fiscal 2000 and a second program is planned for the
first quarter of fiscal 2001. Caldera also plans to continue to expand its
education, training and other services-related offerings and will increase sales
and marketing efforts for these programs.
Cost of Revenue
Cost of Software and Related Products Revenue. Cost of software and
related products revenue was $1.0 million in fiscal 1998, $2.4 million in fiscal
1999 and $2.1 million in fiscal 2000, representing an increase of $1.4 million,
or 135 percent, from fiscal 1998 to fiscal 1999 and a decrease of $326,000, or
14 percent, from fiscal 1999 to fiscal 2000. On a percentage basis of related
revenue, cost of software and related products revenue was 96 percent in fiscal
1998, 86 percent in fiscal 1999 and 67 percent in fiscal 2000. The decrease in
the cost of revenue percentage from fiscal 1998 to fiscal 1999 primarily
resulted from reduced royalty expenses as a component of product costs as
certain third-party software packages were open sourced and the elimination of
certain other royalty-bearing components. In addition, the decrease from fiscal
1998 to fiscal 1999 resulted from improved margins on increased volumes.
The decrease in the cost of software and related products revenue
percentage from fiscal 1999 to fiscal 2000 was due to increased efficiencies in
the production and fulfillment process as well as from reduced charges for
obsolete inventory. During fiscal 1999, the Company recorded an inventory
reserve of approximately $267,000 brought about by the over production of
finished products in connection with the release of OpenLinux 2.3. During fiscal
2000, the Company recorded an inventory reserve of approximately $43,000 as a
result of lower than expected sales of OpenLinux 2.3 and as a result of certain
raw materials becoming unusable due to changes in product packaging. The Company
has continued to sell OpenLinux 2.3 since the introduction of OpenLinux eDesktop
2.4. None of the reserved inventory will be scrapped, abandoned or disposed of
until sales of OpenLinux 2.3 are terminated.
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Cost of Services Revenue. Cost of services revenue was $0 in fiscal 1998,
$538,000 in fiscal 1999 and $2.0 million in fiscal 2000, an increase of $1.4
million, or 264 percent, from fiscal 1999 to fiscal 2000. Caldera did not begin
to recognize services revenue until fiscal 1999. The negative margin incurred
during fiscal 2000 and fiscal 1999 is due to Caldera's hiring of employees and
building infrastructure in anticipation of future training and support revenue.
In addition, cost of services revenue for fiscal 2000 also includes the costs
incurred in connection with the electronic Linux marketplace program. As a
percentage of services revenue, cost of services was 194 percent of services
revenue in fiscal 1999 and 153 percent of services revenue in fiscal 2000. The
marginal improvement from fiscal 1999 to fiscal 2000 was due to increased
revenue from services activities. The deficit achieved on services revenue is
materially different from the margins on software and related products revenue
due to the startup and infrastructure costs being incurred. Upon completion of
the server software and professional services groups acquisition, New Caldera
expects the margins on services revenue to improve because of the
fully-developed support services group in place.
Write-off of Prepaid Royalties. During fiscal 1996 and 1997, Caldera
entered into royalty agreements with a supplier pursuant to which Caldera
prepaid royalties of approximately $2.1 million. During fiscal 1998, Caldera
asserted that the supplier breached the terms of the royalty agreements and
determined that the remaining prepaid royalties, in the amount of $1.4 million,
were impaired and accordingly Caldera wrote off the remaining balance.
Management determined the asset was impaired because its value was tied to the
intellectual property value of the licenses Caldera had purchased. The vendor
breached the terms of the contract in management's view, when it open sourced
some of the related software. When the vendor decided to open source the
software, the licenses Caldera had purchased had no value in relation to that
software. Additionally, Caldera discontinued the development of a product
related to the licensed software resulting in the complete impairment of the
prepaid asset. Management determined that any attempt to pursue legal action
against the supplier would be costly and uncertain given the resources required
to pursue such an action and the uncertainties relating to interpreting the
royalty agreements.
Operating Expenses
Sales and Marketing. Sales and marketing expenses were $2.2 million in
fiscal 1998, $4.8 million in fiscal 1999 and $14.8 million in fiscal 2000,
representing an increase of $2.5 million, or 114 percent, from fiscal 1998 to
fiscal 1999 and an increase of $10.0 million, or 209 percent, from fiscal 1999
to fiscal 2000. Sales and marketing expenses represented 210 percent of total
revenue in fiscal 1998, 156 percent of total revenue in fiscal 1999 and 345
percent of total revenue in fiscal 2000. During fiscal 2000 and fiscal 1999,
Caldera significantly expanded its internal sales and marketing staff as well as
increased its marketing programs and campaigns, advertising, channel and
marketing development and trade show participation. Sales and marketing expenses
are expected to continue to increase in the future, and upon consummation of the
server software and professional services groups acquisition in an effort to
increase awareness of Linux, Unix and combined products and related offerings.
Research and Development. Research and development expenses were $1.5
million in fiscal 1998, $2.3 million in fiscal 1999 and $5.0 million in fiscal
2000, representing an increase of $813,000, or 55 percent, from fiscal 1998 to
fiscal 1999 and an increase of $2.7 million, or 115 percent, from fiscal 1999 to
fiscal 2000. Research and development costs represented 141 percent of total
revenue in fiscal 1998, 76 percent of total revenue in fiscal 1999 and 116
percent of total revenue in fiscal 2000. The increase in research and
development expenses from fiscal 1998 to fiscal 1999 and from fiscal 1999 to
fiscal 2000 was due to an increased investment in the number of software
developers, quality assurance personnel and outside contractors to support
Caldera's product development and testing activities including the development
of training courses and technical support offerings.
General and Administrative. General and administrative expenses were $1.8
million in fiscal 1998, $1.7 million in fiscal 1999, and $6.4 million in fiscal
2000, representing a decrease of $51,000, or 3 percent, from fiscal 1998 to
fiscal 1999 and an increase of $4.7 million, or 268 percent, from fiscal 1999 to
fiscal 2000. General and administrative expense represented 170 percent of total
revenue in fiscal 1998, 57 percent of total revenue in fiscal 1999 and 150
percent of total revenue in fiscal 2000. General and
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administrative expenses remained constant from fiscal 1998 to fiscal 1999 as the
nonrecurrence of the costs of reorganization of Caldera, Inc. was more than
offset by the increase in personnel in fiscal 1999. The significant increase
from fiscal 1999 to fiscal 2000 is the result of increased salaries and related
personnel costs associated with additional employees in finance, administration,
legal, human resources and information systems consistent with our growth in
headcount and overall business. Other increases in general and administrative
expenses were for increased professional services and facilities costs.
SCO cost-sharing arrangement. During August 2000 and after entering into
the reorganization agreement with SCO to acquire the server software and
professional services groups, the Company and SCO agreed that Caldera would
reimburse SCO for certain employee payroll and related costs. The costs for
which Caldera agreed to reimburse SCO for were related to employees that SCO had
identified for termination in a company-wide layoff in September 2000. Caldera
viewed these employees as a critical part of the success of the new combined
company and SCO agreed to retain the employees if Caldera would reimburse SCO
for a portion of their payroll and related costs. At the time Caldera committed
to reimburse SCO for these employee costs, the ultimate amount was not
determinable and both parties agreed that the amount would be determined prior
to the completion of the acquisition. During December 2000, both parties agreed,
pursuant to an amendment to the reorganization agreement, that Caldera would
reimburse SCO $1.5 million relating to services rendered from August through
December 2000. Accordingly, as of October 31, 2000, Caldera has accrued
$898,026. The Company will record the remaining $601,974 during the first
quarter of fiscal 2001. The actual payment will be made to SCO during Caldera's
first quarter of fiscal 2001.
Non-cash Compensation. In connection with the granting of stock options to
employees during fiscal 1999 and fiscal 2000, Caldera recorded deferred
compensation of $3.1 million and $6.8 million, respectively. During fiscal 1999
and fiscal 2000, Caldera amortized $409,000 and $5.2 million, respectively, of
deferred compensation. Caldera did not record any deferred compensation or
amortization during fiscal 1998 as no stock options were granted during fiscal
1998.
Equity in Loss of Affiliate
Caldera is accounting for its investment in Ebiz using the equity method of
accounting. Under the equity method, Caldera recognizes its portion of the net
income or net loss of Ebiz in its consolidated statement of operations. For the
year ended October 31, 2000, Caldera recognized $224,339 in its statement of
operations that represented its portion of Ebiz's net loss since the time of
Caldera's equity investment. In addition, because Ebiz had a stockholders'
deficit at the time of Caldera's investment, Caldera is amortizing on a
straight-line basis, the difference between its portion of the Ebiz net
stockholders' deficit and Caldera's basis in the Ebiz common stock. For the year
ended October 31, 2000, Caldera recognized $162,656 in its statement of
operations that represented this amortization. As of October 31, 2000, Caldera's
net investment amounted to $4,957,325. Caldera will continue to account for its
investment in Ebiz using the equity method of accounting until such time that
Caldera's ownership interest is less than 20 percent and is unable to exercise
control over Ebiz.
Other Income (Expense), net
Other income (expense), net, which consists principally of interest
expense, interest income and other income, was $(1.1) million in fiscal 1998,
$(228,000) in fiscal 1999 and $5.5 million in fiscal 2000. The decrease in net
expense from fiscal 1998 to fiscal 1999 was primarily the result of decreased
borrowings from the Predecessor. After the incorporation in fiscal 1998, Caldera
entered into a secured convertible promissory note arrangement with its major
stockholder. Caldera borrowed amounts during the last portion of fiscal 1998 and
during fiscal 1999 under this agreement. These borrowings were converted into
common stock through the exercise of the conversion feature in August 1999. The
significant increase from net other expense in fiscal 1999 to net other income
in fiscal 2000 was attributed to $3.2 million in total interest income earned on
the proceeds from the Series B preferred stock offering, interest earned on the
proceeds from the initial public offering and a gain recognized on the sale of
the electronic Linux marketplace assets.
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Income Taxes
For fiscal years 1998, 1999 and 2000, Caldera's German subsidiary, Caldera
Deutschland, GmbH, incurred income tax expense of $34,000, $35,000 and $81,000,
respectively. As of October 31, 2000, Caldera had net operating loss
carryforwards for federal and state income tax reporting purposes of
approximately $21.5 million that expire at various dates from 2018 to 2020. The
Internal Revenue Code contains provisions that likely could reduce or limit the
availability and utilization of Caldera's net operating loss carryforwards if
certain ownership changes have taken place or will take place, as of October 31,
2000, no such ownership changes had occurred.
Caldera had net deferred tax assets, including net operating loss
carryforwards and other temporary differences between book and tax deductions,
totaling approximately $15.4 million as of October 31, 2000. A valuation
allowance in the amount of $15.3 million has been recorded as of October 31,
2000 as a result of uncertainties regarding the realizability of the deferred
tax asset balance.
Dividends Related to Convertible Preferred Stock
During the year ended October 31, 2000, the Company recorded preferred
stock dividends of $12.3 million. The preferred stock dividends were comprised
of (i) a warrant that was sold to Egan-Managed Capital, an investor in the
Company's Series B preferred stock, by Canopy and (ii) a beneficial conversion
feature related to the issuance of 5.0 million shares of Series B convertible
preferred stock. The estimated fair market value of the warrant was determined
to be $2.3 million using the Black-Scholes option-pricing model, and the value
of the beneficial conversion feature was determined to be $10.0 million.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for the last eight quarters. This information has been derived
from Caldera's unaudited consolidated financial statements, which, in
management's opinion, have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the quarters presented. This information should be read in conjunction with the
audited financial statements and related notes included elsewhere in this joint
proxy statement/prospectus. Caldera has experienced, and expects to continue to
experience, fluctuations in operating results from quarter to quarter. The
operating results for any quarter are not necessarily indicative of the
operating results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------
JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCTOBER 31,
2000 2000 2000 1999 2000 2000 2000 2000
-------- --------- -------- -------- -------- --------- -------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software and related
products.......... $508 $482 $1,008 $775 $395 $1,123 $ 631 $ 845
Services............. 30 62 87 98 158 238 557 327
---- ---- ------ ---- ---- ------ ------ ------
Total revenue..... $538 $544 $1,095 $873 $553 $1,361 $1,188 $1,172
==== ==== ====== ==== ==== ====== ====== ======
</TABLE>
FLUCTUATIONS IN QUARTERLY RESULTS
Historically, Caldera has experienced substantial fluctuations in revenues
from period to period relating to the introduction of new products and new
versions of existing products. Upon announcement of an expected release date for
new products or upgrades, Caldera often experiences a significant decrease in
sales of existing products. Additionally, Caldera often experiences the
strongest sales for a new product during the first 30 days after its
introduction as it fills advance orders from its distribution partners.
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Our software and related products revenue decreased slightly in the quarter
ended April 30, 1999 from the quarter ended January 31, 1999 due to the timing
of the release of version 2.2 of OpenLinux, which occurred in late April 1999.
As a result of the version 2.2 release, software revenues for the quarter ended
July 31, 1999 increased significantly from the prior quarter. Software and
related products revenue during the quarter ended October 31, 1999 decreased
from the prior quarter in spite of the release of version 2.3 of OpenLinux in
September 1999. Sales of version 2.3 were lower than sales of version 2.2 due to
version 2.3 including only minor enhancements from version 2.2. The lower sales
of version 2.3 continued into the quarter ended January 31, 2000, which resulted
in a decrease in software revenue during the quarter ended January 31, 2000 from
the prior quarter. Caldera released eDesktop 2.4 during the quarter ended April
30, 2000, and consequently revenue increased from the prior quarter. Caldera did
not have a new release during the quarter ended July 31, 2000 when our revenue
decreased. Software and related products revenue increased during the quarter
ended October 31, 2000 from the prior quarter even though a new product release
was not made.
Services revenue has increased consistently from fiscal 1999 through July
31, 2000 as Caldera has increased its education and training-related offerings,
as well as support and consulting services. Services revenue during the quarter
ended October 31, 2000 decreased from the prior quarter as Caldera did not have
a Linux training program during the October 31, 2000 quarter, but anticipates
the training program to occur again during the first quarter of fiscal 2001.
Caldera has also increased personnel to promote its services offerings.
Caldera has incurred operating losses since inception and may never achieve
profitability in the future. Management believes that future operating results
will be subject to quarterly fluctuations due to a variety of factors, many of
which are beyond its control. Factors that may affect quarterly results include:
- the interest level of electronic solution providers in recommending
Caldera's Linux business solutions to end users;
- the introduction, development, timing, competitive pricing and market
acceptance of Caldera's products and services and those of its
competitors;
- changes in general economic conditions, such as recessions, that could
affect capital expenditures and recruiting efforts in the software
industry in general and in the Linux environment in particular;
- the magnitude and timing of marketing initiatives;
- changing business attitudes toward Linux as a viable operating system
alternative to other competing systems;
- the maintenance and development of Caldera's strategic relationships with
technology partners and solution providers;
- the attraction, retention and training of key personnel; and
- Caldera's ability to manage our anticipated growth and expansion.
As a result of the factors listed above and elsewhere in the "Risk Factors"
section of this joint proxy statement/prospectus, it is possible that in some
future periods Caldera's results of operations may fall below management's
expectations as well as the expectations of public market analysts and
investors. In addition, Caldera plans to significantly increase operating
expenses to expand sales and marketing, administration, consulting and training,
maintenance and technical support and research and development groups. If
revenue falls below management's expectations in any quarter and Caldera is
unable to reduce spending quickly in response, operating results would be lower
than expected.
ACQUISITION OF THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
The acquisition of the server and professional services groups is expected
to significantly increase the net revenue and operating expenses of New Caldera
for the next twelve months and future periods. Pro forma combined net revenue
and operating expenses were $92.5 million and $172.4 million, respectively,
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for the year ended October 31, 2000 as compared to $4.3 million and $32.3
million, respectively, for Caldera. Upon consummation of the combination, New
Caldera is expected to have over 700 employees as compared to Caldera's 178
employees as of October 31, 2000. The results of operations for New Caldera for
fiscal 2001 and future periods will also include non-cash charges for the
amortization of goodwill and other intangibles of approximately $7.8 million per
quarter for the first three years and $6.0 million per quarter for the next two
years.
In connection with the acquisition of the server and professional services
groups, New Caldera anticipates additional working capital requirements to fund
the acquired operations. During the year ended September 30, 2000, the server
and professional services groups used approximately $54.9 million in cash for
operating activities. Although New Caldera hopes to reduce employee headcount
and generate other cost reductions and efficiencies from the acquisition to
minimize the negative impact on working capital, it may not be successful in
attaining such cost reductions and efficiencies. Additionally, New Caldera will
not acquire certain working capital accounts such as cash, accounts receivable
or accounts payable. As a result, New Caldera will be required to provide all
working capital for the initial 30 to 60 days of operations.
New Caldera has also entered into separate agreements with SCO to act as a
sales representative for SCO's OpenServer products as well as to perform
contract services for maintaining, testing and supporting the OpenServer
products. It is anticipated that in the near term the sales representative and
development agreements will not have a negative impact on New Caldera's gross
margin and that over time these agreements will have a positive impact by
contributing to gross margin. Additionally, New Caldera will be paid monthly by
SCO under the sales representative and development agreements. New Caldera's
liquidity and financial position will be adversely impacted if SCO is unable to
meet its payment obligations under these agreements. However, management
believes that New Caldera has sufficient available working capital to meet its
operating needs for at least the next 12 months.
LIQUIDITY AND CAPITAL RESOURCES
Since inception as a separate legal entity in August 1998, Caldera has
funded its operations primarily through loans from its major stockholder and
through sales of common and preferred stock.
As of October 31, 2000, Caldera had cash and cash equivalents of $36.6
million and working capital of $88.7 million. Increases in cash and cash
equivalents and working capital from October 31, 1999 were the result of net
proceeds received from the Series B preferred stock offering completed in
January 2000, net proceeds received from the initial public offering completed
in March 2000 and the sale of Lineo, Inc., common stock to Metrowerks Holdings
in September 2000. These increases in cash and cash equivalents have been
partially offset by cash used in operations, investments in available-for-sale
securities, a $2.0 million cash investment in Evergreen Internet, Inc., and a
$3.0 million cash investment in Ebiz Enterprises, Inc.
Net cash used in operations during the year ended October 31, 2000 was
$21.8 million. Cash used in operations was primarily attributed to the net loss
of $26.9 million. Caldera also paid $1.25 million to Sun Microsystems, Inc. for
certain rights to license software. These uses of cash were partially offset by
non-cash compensation of $5.2 million and depreciation and amortization of
$580,000. Net cash used in operating activities was $7.6 million in fiscal 1999
and $5.1 million in fiscal 1998. Cash used in operating activities was primarily
attributed to the net loss of $9.4 million in fiscal 1999 and $8.0 million in
fiscal 1998 offset by non-cash expenses and changes in working capital.
Investing activities have historically consisted of purchases of property
and equipment and certain intangible assets, investments in strategic partners
as well as a $15.0 million payment during fiscal 1999 to the Predecessor, in
connection with the reorganization of the Predecessor and Caldera's own
incorporation. During the year ended October 31, 2000, cash used in investing
activities was $47.0 million, of which $102.0 million was used to purchase
available-for-sale securities to maximize the yield on available cash balances.
Additionally, during the year ended October 31, 2000, Caldera invested $2.0
million in the common stock of Evergreen Internet, Inc., a strategic partner,
paid $3.0 million to Ebiz Enterprises, Inc.
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for common stock and paid $1.4 million for property and equipment. Capital
expenditures totaled $587,000 in fiscal 1999 and $170,000 in fiscal 1998.
Additionally, Caldera invested $80,000 in certain intangible technology during
fiscal 1999. Historically, the acquisition of property and equipment has been
primarily through cash purchases. Management anticipates that Caldera will
experience an increase in the level of capital expenditures, lease commitments
and investment activities as Caldera grows its operations and completes the
acquisition of the SCO server software and professional services groups.
Financing activities provided $105.3 million during the year ended October
31, 2000. The primary sources of cash during the year ended October 31, 2000
included net proceeds of $29.8 million received in connection with the Series B
preferred stock financing completed in January 2000 and net proceeds of $71.8
million received in connection with the initial public offering in March 2000.
Caldera also received $3.0 million from a stock subscription receivable.
Financing activities provided $23.3 million in fiscal 1999 and $4.9 million
in fiscal 1998. During fiscal 1999, cash provided by financing activities
consisted primarily of $15.5 million of equity funding received from The Canopy
Group and $3.0 million of equity funding from MTI Technology Corporation.
Additionally, Caldera received $4.8 million from The Canopy Group under a
secured convertible promissory note agreement that accrued interest at the prime
rate less one-half percent (7.25 percent). Caldera accrued $88,000 in interest
associated with these borrowings. These proceeds plus accrued interest were
converted to equity during fiscal 1999. In fiscal 1998, cash provided by
financing activities consisted primarily of $4.4 million additional borrowings
from The Canopy Group that accrued interest at rates ranging from 8.00 percent
to 8.50 percent based on the prime rate. Caldera accrued $882,000 in interest
associated with these borrowings. Caldera also received $519,000 in equity
funding from The Canopy Group upon its incorporation.
As of October 31, 2000, Caldera had no outstanding debt obligations. As of
October 31, 1999, Caldera had only one debt arrangement for approximately
$9,500. As of that date, Caldera had no other bank or other borrowing
arrangements in place.
Caldera's accounts receivable balance increased from $670,000 as of October
31, 1999 to $1.5 million as of October 31, 2000, an increase of $874,000. The
increase in accounts receivable relates to an increase in international sales of
Caldera's products, which historically have had longer collection cycles than
domestic customers. The allowance for doubtful accounts increased from $90,000
as of October 31, 1999 to $312,000 as of October 31, 2000, an increase of
$222,000. As a percentage of total accounts receivable, the allowance increased
from 11.8 percent as of October 31, 1999 to 16.8 percent as of October 31, 2000,
as Caldera increased its general provision for uncollectable accounts as a
result of concerns related to certain past due accounts.
The accrued sales returns and other allowances balance increased from
$169,000 as of October 31, 1999 to $364,000 as of October 31, 2000, an increase
of $195,000. The increase was to provide for estimated future returns of
products by Caldera's distributors, which were subject to return and stock
rotation rights. No unusual provisions or modifications were made to the accrued
sales returns and other allowances accounts as of October 31, 2000.
On September 15, 2000, Caldera sold to Ebiz Enterprises, Inc. the rights,
title and interest in and to all of the intellectual property and assets
comprising Caldera's Electronic Linux Marketplace (the "ELM Assets"). Caldera
transferred assets with a net book value of approximately $38,000 as well as
cash of $3,000,000 for 4,000,000 shares of Ebiz common stock with an estimated
fair value of $6,400,000. Caldera may also receive up to 4,000,000 additional
shares of Ebiz common stock, depending on the amount of gross revenue generated
by the ELM Assets during the twelve-month period ending December 15, 2001.
Immediately after the closing of the transaction, Caldera owned approximately 31
percent of the outstanding voting shares of Ebiz. On an ongoing basis, Caldera
will account for its investment in Ebiz using the equity method of accounting.
As a result, Caldera will include its proportional share of Ebiz' net income or
loss in Caldera's results of operations.
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Management believes that its current cash and cash equivalents and
short-term investments will be sufficient to meet capital expenditures and
working capital requirements for at least the next twelve months. However,
Caldera may need to raise additional funds to support more rapid expansion,
respond to competitive pressures, acquire complimentary businesses or
technologies or respond to unanticipated requirements. Additionally, Caldera may
use cash more rapidly to provide working capital for the SCO server software and
professional services groups following the consummation of the acquisition.
Management cannot assure you that additional funding will be available in
amounts or on terms acceptable to Caldera. If sufficient funds are not available
or are not available on acceptable terms, the ability to fund expansion, take
advantage of acquisition opportunities, develop or enhance our services or
products, or otherwise respond to competitive pressures would be significantly
limited.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", or SFAS 133. SFAS 133 establishes new
accounting and reporting standards for companies to report information about
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. This statement, as amended, is effective for financial statements
issued for all fiscal quarters of fiscal years beginning after June 15, 2000.
Management does not expect this statement to have a material impact on our
results of operations, financial position or liquidity.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements". This pronouncement summarizes certain of the SEC Staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. The Company is required to adopt SAB 101 during the first
quarter of fiscal year 2001. 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 FASB issued Interpretation No. 44 "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of
Accounting Principles Board Opinion No. 25 ("APB 25")". This interpretation
clarifies the definition of employee for purposes of applying APB 25, the
criteria for determining whether a plan qualifies as a noncompensatory plan, the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and the accounting for an exchange of stock
compensation awards in a business combination. This interpretation is effective
July 1, 2000.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Caldera's products and services are primarily developed in the United
States and marketed in North America, and to a lesser extent in Europe and
Asia/Pacific regions. As a result, financial results could be affected by
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. Because all of the Caldera's revenues are currently denominated
in U.S. dollars, a strengthening of the dollar could make its Linux products
less competitive in foreign markets.
Caldera's German subsidiary, Caldera Deutschland, GmbH, performs research
and development activities for us. This subsidiary is currently Caldera's only
foreign operation. To date, foreign currency fluctuations have had little effect
on Caldera's business because only its German subsidiary's contracts, payables
and receivables are denominated in a foreign currency. As of October 31, 2000,
the assets of Caldera Deutschland were approximately $943,000. All other
transactions of Caldera's business are denominated in the U.S. dollar. As time
passes and as management sees fit, more transactions in Europe and Asia may be
denominated in local currencies. As Caldera expands operations in Europe and
Asia, management will continue to evaluate its foreign currency exposures and
risks and develop appropriate hedging or other strategies to manage those risks.
Management has not revised its current business
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practices to conform to Europe's conversion to the euro. Caldera has not
modified any of its products to address Europe's conversion to the euro.
Additionally, Caldera has not engaged in any foreign currency hedging
activities.
FOREIGN CURRENCY RISK
As a result of the acquisition of the server and professional services
groups, substantial portions of New Caldera's revenue will be derived from sales
to customers outside the United States. A substantial portion of this
international revenue will be denominated in U.S. dollars. However, a
substantial portion of the operating expenses related to the foreign-based sales
will be denominated in foreign currencies and therefore operating results will
be affected by changes in the U.S. dollar exchange rate in relation to foreign
currencies such as the U.K. pound sterling and the Euro, among others. If the
U.S. dollar weakens compared to the U.K. pound sterling and the Euro, then
operating expenses of foreign operations will be higher when translated back
into U.S. dollars and may require additional funds to meet these obligations.
New Caldera's revenue can also be affected by general economic conditions in the
United States, Europe and other international markets. Historically, the server
and professional services groups' operating strategy and pricing take into
account changes in exchange rates over time. However, New Caldera's results of
operations may be significantly affected in the short term by fluctuations in
foreign currency exchange rates.
New Caldera is aware of the issues associated with the new European
economic and monetary union (the "EMU"). One of the changes resulting from this
union required EMU member states to irrevocably fix their respective currencies
to a new currency, the Euro, on January 1, 1999. On that day, the Euro became a
functional legal currency within these countries. During the subsequent two
years, business in the EMU member states will be conducted in both the 25
existing national currencies, such as the Franc or Deutsche Mark, and the Euro.
As a result, companies operating in or conducting business in EMU member states
will need to ensure that their financial and other software systems are capable
of processing transactions and properly handling these currencies, including the
Euro. The server and professional services groups have done a preliminary
assessment of the impact that the EMU formation will have on both its internal
systems and the products it sells and has commenced appropriate actions. New
Caldera has not yet determined all of the costs related to addressing this
issue, and there can be no assurance that this issue and its related costs will
not have a materially adverse affect on New Caldera's business, operating
results and financial condition.
Historically, the server and professional services groups have entered into
forward foreign exchange contracts to hedge foreign currency exposure for
underlying assets, liabilities and other obligations. All forward contracts
entered into by the server and professional services groups are components of
hedging programs and are entered into for the sole purpose of hedging an
existing or anticipated currency exposure, not for speculation or trading
purposes. New Caldera expects to continue to hedge against the impact of foreign
currency fluctuations through the use of forward foreign exchange contracts.
There can be no assurance that Caldera will not experience fluctuations in
operating results or financial position as a result of these hedging activities.
INTEREST RATE RISK
The primary objective of Caldera's cash management strategy is to invest
available funds in a manner that assures maximum safety and liquidity and
maximizes yield within such constraints. A portion of the securities that
Caldera invests in may be subject to market risk, which means that a change in
prevailing rates or market conditions may adversely affect the principal amount
of the investment. To minimize this risk, Caldera will invest in a broad range
of short-term fixed income securities with varying maturities. As of October 31,
2000, available-for-sale securities included money market instruments,
tax-exempt municipal funds, notes, and bonds, and US government security backed
instruments. Caldera does not borrow money for short-term investment purposes.
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INVESTMENT RISK
Caldera has invested in equity instruments of privately-held and public
companies for business and strategic purposes. Investments in privately-held
companies are included under the caption Investments in the consolidated balance
sheet and are accounted for under the cost method as Caldera's ownership is less
than 20 percent and Caldera is not able to exercise significant influence over
operations. Caldera's only investment to date in a public Company is in Ebiz
Enterprises, Inc., which is recorded as Equity Investment in Affiliate.
Caldera's investment policy is to regularly review the assumptions and operating
performance of these companies and to record impairment losses when events and
circumstances indicate that these investments may be impaired. To date, no such
impairment losses have been recorded.
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SELECTED FINANCIAL DATA OF THE SANTA CRUZ OPERATION, INC.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected historical financial information of The Santa Cruz
Operation, Inc. ("SCO") as of September 30, 1999 and 2000 and for each of the
three years in the period ended September 30, 2000 has been derived from audited
historical consolidated financial statements and should be read in conjunction
with such financial statements and the notes incorporated herein by reference.
Historical statement of operation data for periods prior to October 1, 1997 and
balance sheet data prior to September 30, 1998, for SCO, are derived from
financial statements not incorporated herein by reference.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATION DATA:
Net revenues...................................... $207,890 $193,660 $171,900 $223,624 $148,923
Gross margin...................................... 153,488 138,345 124,804 173,846 107,127
Operating income (loss)........................... (23,581) (16,594) (13,593) 16,373 (51,233)
Net income (loss)................................. (22,414) (15,170) (14,665) 16,858 (56,953)
Net income (loss) attributable to common
shareholders.................................... (22,414) (15,170) (14,665) 16,858 (56,953)
Earnings (loss) per share -- basic................ (0.62) (0.41) (0.41) 0.49 (1.59)
Earnings (loss) per share -- diluted.............. (0.62) (0.41) (0.41) 0.46 (1.59)
Shares used in per share calculation -- basic..... 36,179 36,628 35,817 34,232 35,720
Shares used in per share calculation -- diluted... 36,179 36,628 35,817 36,402 35,720
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments..................................... $ 54,831 $ 51,711 $ 51,076 $ 62,844 $ 26,446
Working capital................................... 61,935 46,164 32,221 44,813 16,654
Total assets...................................... 166,807 146,665 131,189 139,284 82,202
Long-term liabilities............................. 9,332 9,545 12,027 11,094 5,462
Shareholders' equity.............................. 101,581 81,462 60,135 70,338 31,202
</TABLE>
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SELECTED FINANCIAL DATA OF THE SERVER AND PROFESSIONAL SERVICES GROUPS
(IN THOUSANDS)
The following selected statement of operations data for the server and
professional services groups for the years ended September 30, 1998, 1999 and
2000 and the balance sheet data as of September 30, 1999 and 2000 are derived
from, and qualified by reference to, the audited financial statements and
related notes appearing elsewhere in this proxy statement/prospectus.
For purposes of presenting the financial statements of the server and
professional services groups, the related operations have been segregated or
"carved-out" from the historical financial statements of SCO. Accordingly, the
financial statements of the server and professional services groups included in
this joint proxy statement/prospectus and the selected financial data present
the financial condition and results of operations as if the server and
professional services groups had existed as a separate legal entity for all
periods presented. The carved-out historical results presented are not
necessarily indicative of what would have actually occurred had the server and
professional services groups existed as a separate legal entity and any
historical results are not necessarily indicative of results that may be
expected for any future period.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ----------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................. $ 53,144 $ 52,805 $ 57,178 $ 76,929 $ 74,508
Gross margin................................. 27,344 23,460 28,372 44,748 42,262
Net loss..................................... (46,286) (60,434) (52,261) (40,182) (59,825)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ----------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ -- $ -- $ 3,517 $ 2,223 $ 511
Working capital.............................. (18,389) (29,621) (26,912) (26,095) (18,442)
Total assets................................. 55,626 39,524 39,935 41,275 29,116
Long-term liabilities, net of current
portion.................................... 5,945 4,878 7,703 5,557 1,433
Divisional deficit and accumulated other
comprehensive loss......................... (23,373) (3,936) (5,510) (9,110) (6,794)
</TABLE>
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SERVER AND PROFESSIONAL SERVICES GROUPS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations as of September 30, 2000 and for the years ended September
30, 2000, 1999 and 1998 should be read in conjunction with the sections of the
server and professional services groups' audited financial statements and
related notes included elsewhere in this proxy statement/prospectus.
OVERVIEW
On August 1, 2000, SCO announced that it had reached an agreement with
Caldera under which Caldera would purchase for stock and cash SCO's server and
professional services groups. Under the terms of the agreement SCO would retain
the rights to its OpenServer product with Caldera continuing to act as a sales
agent on SCO's behalf for this product.
The server and professional services groups operate as a global leader in
server software for networked business computing, and the world's leading
provider of UNIX(R) server operating systems. The server and professional
services groups sell and support their products through a worldwide network of
more than 15,000 distributors, resellers, system integrators and OEMs.
The mission of the server and professional services groups is to create,
market and support the server software that system builders choose for networked
business computing. SCO believe that server-based network computing, which is
based on internet and web technologies, enables businesses to dramatically
improve their customer information flow and business transaction efficiencies.
Companies that adopt a server-based network computing model can understand their
customers better, reach wider potential markets, bring products to market faster
and improve their overall customer satisfaction levels. With server-based
computing and products and services of the server and professional services
groups, IT professionals can immediately leverage their existing investments,
deploy applications faster and dramatically cut the cost of systems
administration and management.
In September 2000, SCO announced a layoff of 190 employees. The layoff was
done in coordination with Caldera pursuant to the reorganization agreement. SCO
and Caldera believe that the layoff will reduce operating expenses of the server
and professional services groups. Any charge taken in connection with the layoff
will not adversely impact SCO's ability to fulfill is obligations under the
reorganization agreement.
In addition to historical information contained herein, this Discussion and
Analysis contains forward-looking statements. These statements involve risks and
uncertainties and can be identified by the use of forward-looking terminology
such as "estimates," "projects," "anticipates," "plans," "future," "may,"
"will," "should," "predicts," "potential," "continue," "expects," "intends,"
"believes," and similar expressions. Examples of forward looking statements
include those relating to financial risk management activities and the adequacy
of financial resources for operations. These and other forward-looking
statements are only estimates and predictions. While SCO believes that the
expectations reflected in the forward-looking statements are reasonable, actual
results of the server and professional services groups could differ materially.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's expectations only as of the date hereof.
SCO undertakes no obligation to publicly release the results of any revision to
these forward-looking statements, which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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RESULTS OF OPERATIONS
Net Revenues
The net revenues of the server and professional services groups are derived
from software licenses and fees for services, which include engineering
services, consulting, support and training. Product license revenues are
recognized upon shipment, provided a signed contract exists, the fee is fixed
and determinable, collection is probable and returns can be reasonably
estimated. An estimate for product returns is made upon recognition of revenue
from customers having return rights. For sales through distributors we do not
have the data to reasonably estimate returns and therefore recognize revenue
when this right elapses, which occurs upon a sale by the distributor.
Net revenues for fiscal 2000 decreased to $74.5 million compared to $76.9
million in the same period in fiscal 1999. The fiscal 2000 decline in revenue
performance is attributable to customer delays and a slower than expected
recovery of the customer channel from the impact of Year 2000. Net revenues for
fiscal 1999 increased by 35% from $57.2 million in fiscal 1998. The stronger
revenue performance in fiscal 1999 was across all geographies and is
attributable to several factors including the ease of electronic licensing,
increased customer contacts as a result of added sales resources and Y2K upgrade
sales. For the fiscal years ended September 30, 2000, 1999 and 1998, no single
customer accounted for greater than 10% of the net revenues of the server and
professional services groups.
License Revenues
License revenues were $59.8 million for fiscal 2000 compared to $62.2
million for the same period of fiscal 1999. The fiscal 2000 decrease resulted
from customer delays due to Year 2000 issues and a slower than expected recovery
of the customer channel from the impact of Y2K. License revenues for fiscal 1999
increased by 45% compared to $42.7 million in fiscal 1998. The year over year
increase is due to strong revenue performance in all geographies, growing
electronic licensing sales, Y2K upgrade sales, and increased customer contacts
due to higher sales resources.
Service Revenues
Services revenues were $14.7 million in fiscal 2000 compared with $14.8
million in fiscal 1999 and $14.4 million in fiscal 1998. Service revenues
represented 20% of total revenue for fiscal 2000, 19% for fiscal 1999 and 25% of
total net revenue for fiscal 1998.
COST OF REVENUES
The server and professional services groups' overall cost of revenues as a
percentage of net revenues can be affected by mix changes in net revenue
contribution between product families, geographic regions and channels of
distribution, since both price and cost characteristics associated with these
revenue streams can vary greatly. The server and professional services groups
can also experience fluctuations in gross margin as net revenues increase or
decrease since certain costs of revenues including technology, service, product
assembly and distribution act as fixed costs within certain volume ranges.
Cost of License Revenues
Cost of license revenues includes royalties paid to certain software
vendors, amortization of acquired technologies, product packaging, documentation
and all costs associated with the acquisition of components, assembling of
finished products, warehousing and shipping. Cost of license revenues as a
percentage of license revenues increased to 23% for fiscal 2000 compared to 22%
for fiscal 1999. The fiscal 1999 cost of license revenues as a percentage of
license revenues of 22% was a decrease from 28% in fiscal 1998. The fiscal 2000
cost of revenues includes increases as a result of the impact of fixed costs
over lower unit sales volume. These fixed costs include technology and overhead
costs. This impact is offset by declining material costs resulting from the
continuing growth of e-commerce business. The fiscal 1999
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decrease resulted from reduced royalty rates and reduced technology costs
together with the impact of stable fixed costs over higher unit sales volume. In
addition, material costs declined as a result of increasing e-commerce trade.
Cost of Service Revenues
Cost of service revenues includes documentation, consulting and personnel
related expenses associated with providing such services. Cost of service
revenues was $18.5 million for fiscal 2000 as compared to $18.6 million for the
same period of fiscal 1999 and $16.8 million for the same period of fiscal 1998.
RESEARCH AND DEVELOPMENT
SCO invests in research and development both for new products and to
provide continuing enhancements to current products of the server and
professional services groups. Research and development expenses increased 15% to
$27.4 million for fiscal 2000 from $23.9 million in the same period of fiscal
1999. The increase in research and development was primarily due to increased
spending associated with accelerating development of Unixware 7. Research and
development expenses decreased 13% in fiscal year 1999 as compared to $27.6
million in fiscal year 1998. Research and development expenses represented 37%,
31% and 48% of net revenues for fiscal 2000, 1999 and 1998, respectively. The
decrease in research and development expenses during 1999 can be attributed to
the diversion of research and development resources to an outside funded
research and development project.
SALES AND MARKETING
Sales and marketing expenses decreased to $56 million, or 75% of net
revenues, in fiscal 2000 as compared to $55.9 million, or 73% of net revenues,
for the same period of fiscal 1999. The change in spending is a result of a
decline in sale program costs that vary directly with revenue, including
commissions and cooperative advertising. This decline was offset by an increase
in sales and marketing programs for Unixware products during the year. Sales and
marketing expenses in fiscal year 1999 increased 16% to $55.9 million, or 73% of
net revenues, compared to $48.0 million, or 84% of net revenues, in fiscal year
1998. The increase is due principally to an increase in the size of our direct
sales force and commissions as well as sales program costs that vary directly
with increased sales.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 87% for fiscal 2000 to $8.5
million, or 11% of net revenues, compared to $4.6 million, or 6% of net
revenues, in the same period of fiscal 1999. The increase in general and
administrative expenses is primarily driven by the transfer of certain staff
from other functions due to the divisionalization of SCO. In fiscal year 1999,
general and administrative expenses decreased by 2% to $4.6 million, or 6% of
net revenues, compared to $4.6 million, or 8% of total net revenues, in fiscal
1998. The fiscal 1999 increase was due to the movement of certain staff to other
functions.
RESTRUCTURING CHARGES
Non-recurring charges of $9.9 million were incurred in fiscal year 2000
that related to worldwide restructurings undertaken in the second and fourth
quarters of fiscal 2000, representing 13% of total net revenues for the fiscal
year. The restructurings included a reduction in personnel of 227 employees,
write-off of certain acquired technologies, write off of certain fixed assets,
and elimination of non-essential facilities. Of the $9.9 million, $8.5 million
related to cash expenditures and $1.4 million related to non-cash charges. The
restructuring charge related to cash expenditures included $6.6 million for
severance costs and $1.9 million for facilities costs. The non-cash charges
related to disposals of fixed assets and write-offs of technology. The disposal
of fixed assets is comprised of computer equipment that will no longer be in use
due to the reduction of personnel. The technology write-offs relates to
technology that will
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not be used in future product development due to the reduction in development
personnel. The Company has restructured its business operations into three
independent divisions, each with a separate management team and dedicated
development, marketing and sales organizations -- the Server Division, the
Tarantella Division and the Professional Services Division. As a result of the
restructuring plans various regional offices in the United States, United
Kingdom, Latin America and the Asia Pacific region will be eliminated. The
United States regional facilities and the Watford, United Kingdom leases have
been or will be vacated and restored, and subsequently sub-let or terminated by
the second quarter of 2001. The remaining international offices are expected to
be vacated immediately. Of the facilities closed, the majority relates to the
Server Division while a minor portion relates to the Corporate Division which is
comprised primarily of the finance and general and administrative functions of
the Company's United Kingdom subsidiary. The Company anticipates that the
majority of the payments will be made by the end of fiscal 2001. The majority of
the reduction in force was in the Server Software Division. As of September 30,
2000 a total of 132 positions have been eliminated. Together, these cost saving
measures are expected to result in a total annual savings of $22.1 million
beginning in the next fiscal year.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The future operating results of the server and professional services groups
may be affected by various uncertain trends and factors which are beyond its
control. These include adverse changes in general economic conditions and rapid
or unexpected changes in the technologies affecting its products. The process of
developing new high technology products is complex and uncertain and requires
accurate anticipation of customer needs and technological trends. The industry
has become increasingly competitive and, accordingly, the server and
professional services groups results may also be harmed by the actions of
existing or future competitors, including the development of new technologies,
the introduction of new products, and the reduction of prices by such
competitors to gain or retain market share. The server and professional services
groups' results of operations could be harmed if it were required to lower its
prices significantly.
The server and professional services groups participate in a highly dynamic
industry and future results could be subject to significant volatility,
particularly on a quarterly basis. The server and professional services groups'
revenues and operating results may be unpredictable due to shipment patterns.
The server and professional services groups operate with little backlog of
orders because its products are generally shipped as orders are received. In
general, a substantial portion of revenues of the server and professional
services groups have been booked and shipped in the third month of the quarter,
with a concentration of these revenues in the latter half of that third month.
In addition, the timing of closing of large license contracts and the release of
new products and product upgrades increase the risk of quarter to quarter
fluctuations and the uncertainty of quarterly operating results. Staffing and
operating expense levels of the server and professional services groups are
based on an operating plan and are relatively fixed throughout the quarter. As a
result, if revenues are not realized in the quarter as expected, the expected
operating results and cash balances of the server and professional services
groups could be harmed, and such effect could be substantial and could result in
an operating loss and depletion of the cash balances of the server and
professional services groups.
The server and professional services groups experience seasonality of
revenues for both the European and the U.S. federal government markets. European
revenues during the quarter ending June 30 are historically lower or relatively
flat compared to the prior quarter. This reflects a reduction of customer
purchases in anticipation of reduced selling activity during the summer months.
Sales to the U.S. federal government generally increase during the quarter
ending September 30. This seasonal increase is primarily attributable to
increased purchasing activity by the U.S. federal government prior to the close
of its fiscal year. Additionally, net revenues for the first quarter of the
fiscal year are typically lower or relatively flat compared to net revenues of
the prior quarter.
The overall cost of revenues may be affected by changes in the mix of net
revenue contribution between licenses and services, product families,
geographical regions and channels of distribution, as the
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costs associated with these revenues may have substantially different
characteristics. The server and professional services groups may also experience
a change in margin as net revenues increase or decrease since technology costs,
service costs and production costs are fixed within certain volume ranges.
Substantial portions of the revenues of the server and professional
services groups are derived from sales to customers outside the United States. A
substantial portion of the international revenues of SCO's United Kingdom
subsidiary are denominated in U.S. dollars, and operating results can vary with
changes in the U.S. dollar exchange rate to the United Kingdom pound sterling.
The revenues of the server and professional services groups may be affected by
general economic conditions in the United States, Europe and other international
markets. The server and professional services groups' operating strategy and
pricing take into account changes in exchange rates over time. However, the
results of operations of the server and professional services groups may be
significantly affected in the short term by fluctuations in foreign currency
exchange rates.
The policy of the server and professional services groups is to amortize
purchased software and technology licenses using the straight-line method over
the remaining estimated economic life of the product, or on the ratio of current
revenues to total projected product revenues, whichever is greater. Due to
competitive pressures, it is reasonably possible that those estimates of
anticipated future gross revenues, the remaining estimated economic life of the
product, or both will be reduced significantly in the near future. As a result,
the carrying amount of the server and professional services groups' purchased
software and technology licenses may be reduced materially in the near future
and, therefore, could create an adverse impact on the server and professional
services groups' future reported earnings.
SCO is aware of the issues associated with the new European economic and
monetary union (the "EMU"). One of the changes resulting from this union
required EMU member states to irrevocably fix their respective currencies to a
new currency, the Euro, on January 1, 1999. On that day, the Euro became a
functional legal currency within these countries. During the next two years,
business in the EMU member states will be conducted in both the 25 existing
national currencies, such as the Franc or Deutsche Mark, and the Euro. As a
result, companies operating in or conducting business in EMU member states will
need to ensure that their financial and other software systems are capable of
processing transactions and properly handling these currencies, including the
Euro. SCO has done a preliminary assessment of the impact the EMU formation will
have on both the internal systems and the products of the server and
professional server groups and has commenced appropriate actions. SCO has not
yet determined all of the cost related to addressing this issue, and there can
be no assurance that this issue and its related costs will not harm the server
and professional services groups, business, operating results and financial
condition.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of September 30, 2000 and September 30, 1999
were $511,000 and $2.2 million respectively. Historically, SCO has managed cash
and cash equivalents on a centralized basis. Cash receipts associated with the
server and professional services groups' business except for amounts arising
from specific research and development funding contracts have been transferred
to SCO on a daily basis and SCO has funded the server and professional services
groups' disbursements.
Net cash used in operations during the years ended September 30, 2000, 1999
and 1998 was $54.9 million, $19.1 million and $27.1 million respectively. Cash
used in operations during each of these periods resulted primarily from net
losses of $59.8 million, $40.2 million and $52.3 million offset by depreciation
and amortization of $10.2 million, $11.4 million and $13.9 million respectively.
Net changes in operating assets and liabilities resulted in a net usage of cash
of $15.1 million during the year ended September 30, 2000, cash generated of
$0.9 million during the year ended September 30, 1999 and cash usage of $0.8
million in the year ended September 30, 1998.
Cash used in investing activities during the years ended September 30,
2000, 1999 and 1998 was $1.8 million, $6.3 million and $4.2 million,
respectively. Cash used in investing activities was represented by investment in
fixed assets and the purchase of software and technology licenses for use with
our products.
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Cash provided by financing activities was $55.4 million, $24.8 million and
$34.3 million during the year ended September 30, 2000, 1999 and 1998
respectively. This came from advances from SCO totalling $58.2 million, $28.5
million and $38.1 million offset by payments made under capital leases.
The server and professional services groups has been and will continue to
be dependent upon funding from SCO in order to finance losses incurred in
operations. Management expects to require additional funding from SCO during the
year ended September 30, 2001 and has received a commitment from them to
continue funding until that date. There can be no assurance that SCO will
provide additional funding after this date. In the event that SCO is unwilling
to provide additional funding there can be no assurance that alternative funding
will be available on acceptable terms or at all.
SCO has incurred losses from operations of approximately $57.0 million
during fiscal 2000 and revenues have declined from $223.6 million for the year
ended September 30, 1999 to $148.9 million for the year ended September 30,
2000. SCO has recently announced cost reduction plans in order to reduce
operating expenses to levels consistent with current revenues and is
investigating financing alternatives. There can be no assurance that such cost
reduction measures or such financing will be available, if at all, on terms
acceptable to SCO.
In conjunction with the combination, The Canopy Group, Inc., a major
stockholder of Caldera Systems, Inc., has agreed to loan up to $18.0 million to
SCO. Further, Caldera Systems, Inc. has agreed to loan $7.0 million to SCO in
the form of a short-term note repayable at the consummation of the transaction
between SCO and Caldera Systems, Inc.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments -- Deferral of the Effective Date of SFAS Statement No.
133 and in June 2000, the FASB issued SFAS No. 138, Accounting for Certain
Derivative Instruments -- an amendment of FAS 133, Accounting for Derivative
instruments and Hedging Activities. As a result of SFAS No. 137, SFAS No. 133
and SFAS No. 138 will be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Groups do not expect that the adoption of
these standards will have a material impact on their financial position and
results of operations.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The Groups adopted FIN 44 effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998, or
January 12, 2000. The adoption of FIN 44 did not have a material effect on the
financial position or results of operations of the server and professional
services groups.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financials filed with the SEC. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. SCO must adopt SAB 101 in
the fourth quarter of fiscal 2001. We are in the process of evaluating the
Securities and Exchange Commission's interpretation of SAB 101 but believe that
the implementation of SAB 101 will not have a material effect on the financial
position or results of operations of the server and professional services
groups.
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BUSINESS OF CALDERA
OVERVIEW
Caldera enables the development, deployment and management of Linux
specialized servers and internet access devices that simplify computing. Our
Linux software products and service offerings are specifically designed to meet
the complex needs of eBusiness, or business over the internet. During 1999 and
2000, our OpenLinux technology received many awards and recognitions, including
Linux Magazine's Emperor Award, Internetweek's Best of the Best, Network World's
Blue Ribbon Award, CNET Editors' Choice Award, Highest Rated Linux Distribution
by VarBusines in 2000 Annual Report Card, The Linux Show's Best Distribution of
Millennium, Linux Journal's Product of the Year award at Comdex and Network
Computing's Well-Connected Award for Best Network Operating System. We
facilitate the adoption of Linux by providing educational programs designed to
help our customers to develop, deploy and administer Linux systems. We embrace
the open source model and participate as a key member of many open source,
industry standards and partner initiatives, including Linux Professional
Institute, Linux Standards Base and Linux International Group. We primarily
distribute our products and services through our indirect distribution channel
model. Our customers include AST Computers, Cendant, First International
Computers, Gates/Arrow, IBM, Ingram Micro, MediaGold, MTI Technology
Corporation, Navarre Corporation, Support Net and Tech Data.
Fiscal information relating to each of our geographic areas for the fiscal
years 1998, 1999 and 2000 is presented in Note 12, "Segment Information" of the
Notes to our Consolidated Financial Statements, included in this joint proxy
statement/prospectus.
INDUSTRY BACKGROUND
The internet has accelerated the introduction of processes for managing
information, providing services and solutions and handling customers and has
changed the way software applications are developed and deployed. These
processes enable companies to utilize the internet to extend their businesses
closer to their customers, partners and suppliers and to communicate more
effectively with employees. The internet has also enabled and accelerated a
trend towards distributed software applications. With a distributed application,
instead of installing and running software on an individual desktop, end-users
can access the application from remote locations using the internet. The
internet makes the physical location of a software application or service
irrelevant to the end-user. Rather than individually installing programs on a
number of PCs, businesses can use the internet to allow end users to access a
single server maintaining the software. As a result of this trend, application
service providers, or ASPs, have emerged. An ASP is a service provider that
centrally hosts services and software applications and leases them to companies.
These companies can access these applications for a fee through the internet,
rather than buying and installing the programs. However, operating under
previous computing models, many companies have already invested tremendous
amounts of capital in their existing legacy computer systems and applications.
Therefore, new software applications must be developed to allow seamless
integration between existing legacy systems and applications being offered by
ASPs over the internet.
Another trend in distributed applications is the advent of thin appliance
servers, or specialized servers. These specialized servers perform specific
applications, such as file and print sharing, secure internet services, backup
services and electronic mail services. Companies are realizing that they can
deploy efficient, discrete applications on specialized servers and do not need
to install massive, costly, multi-functional systems merely to install a new
application or add a particular function. Companies have started using
specialized servers to administer the new eBusiness software applications that
are emerging. Having separate servers for each application improves performance
and increases stability, while decreasing overall operating and maintenance
costs.
In addition, the proliferation of information on the internet has driven
the need to customize information for individual use. As a result, manufacturers
have developed ways to separate the visual elements of a standard PC program
from its computing functions, allowing most of the computing function
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to be performed remotely. This has facilitated the creation of alternative
internet access devices for individuals, such as personal digital assistants,
internet-capable cellular telephones and television set-top boxes. These
internet access devices are far less costly than personal computers and allow
more users access to the internet and the ability to participate in eBusiness.
internet devices are becoming popular worldwide as a way of getting businesses
and consumers connected to the new eBusiness economy.
The trend towards distributed software applications and specialized servers
and the proliferation of internet access devices have increased companies'
ability to conduct eBusiness and consumers' access to eBusiness. The dynamic and
fast changing nature of eBusiness requires an operating system, the software
that enables a computer and its various components to interact, that can change
with the accelerated evolution of eBusiness. The optimal operating system must
enable companies to connect specialized servers and internet access devices to
the internet network to conduct eBusiness. It must be customizable to adapt to
the changing software applications environment, shifting hardware
infrastructures and emergence of new internet access devices. It must be
scalable to accommodate the growing number of users and the ways that they
access the internet. The optimal operating system must be highly stable and easy
to maintain to minimize overall operating and maintenance costs. It must allow
for rapid deployment and development and be easily upgradeable to keep pace with
the changing needs of eBusiness. Finally, this operating system must interface
with existing systems and embrace open technical and communications standards
like Java and extensible mark-up language, or XML, to take full advantage of the
internet.
Linux is an operating system well-suited for eBusiness. The term open
source applies to software that has its internal source code open to the public
for viewing, copying, examining and modification. As a result, the Linux source
code is available for download over the internet. Open source code allows
thousands of developers around the world to continually collaborate to improve
and enhance the software. The internet has facilitated and greatly enhanced this
collaborative environment.
- comprehensive internet functionality;
- flexibility and customizability;
- high scalability;
- stability;
- interoperability with multiple systems and networks;
- multi-appliance capability, including internet access devices;
- low acquisition and maintenance costs; and
- compliance with technical and communications standards.
Despite these benefits, Linux as an open source system is not without
drawbacks. Linux has not yet been widely adopted by business due to:
- the absence of Linux products tailored for business;
- the fragmentation of Linux offerings;
- inadequate education and training;
- the lack of proper distribution channels for Linux solutions;
- the lack of technical knowledge and support;
- difficulty in management and deployment; and
- the limited number of applications available for use on Linux.
Historically, business users have lacked a Linux solution that suits their
needs. For Linux to fully support eBusiness, a solution must consist not only of
advanced technology but also should be enhanced and tailored for business. This
solution must promote the benefits of Linux for eBusiness and provide the
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proper education and training to facilitate adoption. Proper distribution
channels are required to facilitate access to the business user. The Linux for
eBusiness solution must be able to accommodate business applications and be able
to interoperate properly with the diverse environment of internal corporate
information systems and the internet. It must have the flexibility to be
maintained centrally or managed remotely. Finally, a solution must adhere and
conform to commercial standards to incorporate the latest technological
advancement and ensure wide acceptance.
THE CALDERA SYSTEMS SOLUTION
We develop and market software based on the Linux operating system and
provide related services that enable the development, deployment and management
of Linux specialized servers and internet access devices that simplify
computing. We believe that our Linux solution is a comprehensive solution for
eBusiness. Key benefits of our solution include:
Focused business framework. We believe we were the first to tailor Linux
open source code from various sources into sound discrete products that are
usable, deployable and manageable for eBusiness. Our development team consists
of experienced Linux engineers and business professionals. We develop our
products by first carefully choosing the Linux features that are the most
relevant and useful for eBusiness. Then we assemble the code so that it is
logically arranged and works together as seamless applications in which source
and binary code match for logic and order. Our products are then tested for
quality and performance. This enhances reliability and reduces the need for
technical support when used under strenuous business conditions. This process,
known as self-hosting, is unique in the Linux community and accounts for the
high levels of stability and performance of our products. Our products are also
designed to be interoperable with multiple platforms to enable businesses to
make efficient use of existing information technology investments.
Effective distribution channel. We provide products and services to the
people who serve the business community. Most of our products that are purchased
by corporate information systems departments are sold through our distribution
channel to electronic solution providers. We define electronic solution
providers to include value added resellers, or VARs, original equipment
manufacturers, or OEMs, internet service providers, or ISPs, corporate
information technology managers and partners, ranging from independent local
technical specialists to large system integrator organizations, that offer
value-added solutions for eBusiness. Business customers often rely on solution
providers to recommend which technology to purchase. We provide solution
providers with products, third-party applications, education, training and tools
to effectively facilitate or offer a Linux solution for eBusiness. Solution
providers benefit from the lower maintenance and support costs necessary to
maintain our Linux solution. We offer our services to solution providers on a
worldwide basis.
Comprehensive product offerings. We believe that our OpenLinux technology
is the most advanced for eBusiness. OpenLinux is the technology foundation on
which we are able to build multiple products that perform different tasks. Each
product has specific components that can be modified. For example, our desktop
product can be modified to perform client specific functions such as running
business automation applications or accessing the internet as an email client on
hand-held appliances. Our server product contains modular components that can be
configured to run specialized servers such as an email server or a web site
server. We continually enhance the OpenLinux technology through our development
centers in Germany and the United States. As a result, we are able to
incorporate the latest Linux enhancements or modifications into our products.
Our business experience enables us to build relevant business enhancements to
Linux through add-on segments of code that connect to the core source code.
These enhancements include web administration applications, the Caldera Systems
open administration system, and an easy-to-use Linux installation wizard. We
also offer our products in multiple language versions.
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Complementary value-added services. In order for businesses to implement
our product offerings, we provide a wide range of valuable services. We believe
that our service offerings provide significant benefits for eBusiness. These
service offerings include:
- Technical Support -- Our technical support provides assistance during
installation and operation of OpenLinux;
- Consulting and Custom Development -- Our consultants have extensive
technological and business knowledge, which allows us to assist our
electronic solution provider customers in implementing Linux solutions;
- Hardware Optimization and Certification -- Our consultants can optimize
OpenLinux for a specific hardware platform and provide a rigorous testing
and certification process; and
- Documentation -- We provide consistent and up-to-date documentation on
Linux that is not readily available in the open source development
community.
Comprehensive, distribution-neutral education and training. Many companies
are delivering different versions of Linux called distributions. We provide a
comprehensive distribution-neutral training program for Linux. Our courses focus
on educating and training the business community on Linux's benefits for
business use. We offer a comprehensive set of courses designed to prepare
students to develop, deploy and manage Linux in a business environment,
including system, network and internet administration and programming. A student
who has successfully completed our courses will be proficient with the leading
distributions of Linux. We offer high-quality instructor-led training through
our own training center at our headquarters and also offer our educational
programs indirectly through our Caldera Open Learning Providers around the
world.
Business community catalyst and open source advocate. We believe we were
the first Linux provider to introduce an open source operating system designed
for the business environment. By demonstrating to key information technology
companies such as Corel and Netscape that open source systems can work well with
proprietary systems, we believe that we have sparked the interest of more
conservative technology adopters and accelerated acceptance of Linux for
business use. We help port, or convert, business applications to the Linux
platform and offer ways to incorporate those products into existing systems. We
are a major driver of Linux standards based initiatives such as Linux
Professional Institute, or LPI, an independent organization dedicated to the
establishment of professional certification standards for Linux professionals,
and Linux Standards Base, or LSB, an initiative that is designed to standardize
application development for the Linux platform. An application that meets all
the criteria for LSB should work on all compliant distributions of Linux. If LSB
is widely adopted, we believe it will significantly reduce the fragmentation of
Linux.
We fully embrace the open source model and continuously contribute tools
and technology to the open source community. We give away CD ROMs containing our
Linux operating system at trade shows and allow it to be freely downloaded from
the internet to encourage interest. We foster multiple development projects over
the internet and help each project progress smoothly.
SOFTWARE PRODUCTS
We develop, market and support Linux products and solutions specifically
designed to meet the complex needs of eBusiness. According to PC Data, during
1999, Caldera was third in sales of Linux operating systems in the United
States, both in terms of units sold and aggregate dollar amount. Our products
and solutions integrate both commercial and open source software products
developed by us and third parties. For example, we have included applications
that we have open sourced, such as LInux wiZARD (LIZARD), our award-winning
graphical Linux step-by-step installation tool. We apply development and testing
procedures to the open source code included in our products similar to those
procedures applied to commercial products. This process known as self-hosting is
unique in the Linux community and accounts for the high levels of stability and
performance of our products. Our rigorous
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development procedures result in a highly consistent product that enables easier
and more rapid customization, integration and support of our solutions. Our
products are designed to work both individually and together to provide a
rapidly expandable platform as enterprises extend their eBusiness
infrastructure.
OpenLinux eDesktop 2.4
We first released our principal product, OpenLinux, a Linux operating
system, in calendar year 1995. In March, 2000, we began shipping our newest
update of OpenLinux, OpenLinux eDesktop 2.4. OpenLinux eDesktop 2.4 is an
integrated and pre-tested collection of approximately 300 business-relevant
third-party software components, which provide for a variety of functions that
can be utilized either on a single desktop computer or in a networked
environment. We have historically developed OpenLinux for the first-time Linux
user, which predominantly has come from a Windows, desktop environment.
OpenLinux eDesktop 2.4 is currently available for the Intel and Sun SPARC
platforms. Examples of some of the key components of OpenLinux eDesktop 2.4 and
the functions they perform include:
<TABLE>
<CAPTION>
OPEN SOURCE COMPONENTS FUNCTION
---------------------- --------
<S> <C>
KDE Graphical desktop
Linux Kernel (Version 2.2.10) Operating system core
LIZARD Installation software
Netscape Communicator 4.61 Web browser
Apache Web server
Sendmail E-mail routing software
</TABLE>
<TABLE>
<CAPTION>
COMMERCIAL COMPONENTS FUNCTION
--------------------- --------
<S> <C>
StarOffice 5.1 (personal edition) Suite of office applications
Corel WordPerfect 8.0 (personal edition) Word processor
PartitionMagic Hard-drive partitioning
BootMagic Boot-up manager
Applixware 4.4.2 office suite (trial Suite of office applications
version)
</TABLE>
OpenLinux eServer 2.3
OpenLinux eServer 2.3 is targeted at solution providers, system integrators
and resellers who provide specialized, thin and high-end servers to their
customers. eServer supports server-oriented hardware. It is a component-based
server operating system designed for OEMs, solution providers, system
integrators and resellers and makes Linux server solutions easy to install,
configure and operate. It is readily customizable and, in particular, has been
developed for use by AST Computers, Fujitsu and Motorola. OpenLinux eServer 2.3
has been shipped to strategic partners such as Fujitsu, IBM and Motorola and
began shipping in late January 2000.
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<TABLE>
<CAPTION>
COMPONENTS FUNCTION
---------- --------
<S> <C>
Webmin Remote administration tool
Linux Kernel (Version 2.2.14) Operating system core
BIND 8 DNS server Domain Name server
DHCP server Configuration Protocol server
Apache Web server
Sendmail E-mail routing software
FTP server FTP Server
INN News Server
Squid Web proxy server
PPP Dial-in server
SAMBA File and print server
Majordomo List management server
MySQL Database software Database software
IBM Visual Age Java Programming language
</TABLE>
SERVICES
Linux Education and Training Services
Our educational programs and products are designed to help our customers
learn to develop, deploy and administer Linux systems. Our courses provide
preparation for Linux certification tests being provided by the Linux
Professional Institute, an independent organization. We provide a comprehensive
training program for Linux.
We provide Linux training through our training center in Orem, Utah and
through 94 Caldera Open Learning Providers located in the United States and
abroad. Caldera Open Learning Providers are independent centers that we have
authorized to provide courses that we have developed. Currently, we offer eight
separate courses relating to Linux training and network administration, which
are categorized by their educational objective. The three categories of courses
we provide allow multiple educational tracks, including:
- Linux certification;
- system administration; and
- Linux developer training.
eBusiness Consulting, Custom Development and Optimization Services
Our eBusiness consulting services stem from our experience testing and
integrating software products to work in a Linux environment. We assist ISVs and
solution providers by helping them in creating customized internet solutions
which they can then pass along as products and solutions for their customers.
Examples of the eBusiness consulting services we provide include:
- Customization and optimization of our products to support a client's
proprietary system or configuration.
- Assessment services relating to the proposed migration of a client's
software for use with Linux.
- Porting services for customers migrating their software to Linux. Fees
are billed on a daily, weekly or monthly basis.
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Technical Support
Customers who purchase OpenLinux products through our distribution channels
are entitled to 90 days or five incidents of e-mail or internet technical
support at no additional charge. We support solution providers with second-tier
support.
Customers seeking additional technical support directly from us may enter
into service agreements that best suit their needs. Examples of our service
plans include:
- yearly unlimited telephone support agreements for $950 per system;
- yearly unlimited e-mail support agreements for $495 per system;
- pay-as-you-go support agreements starting at $150 per incident;
- telephone support for up to 5, 10 or 20 calls ranging in price from $625
to $1,500 per call pack; and
- 7 day, 24 hour telephone support available at a 50% premium to the base
rates.
AWARDS AND RECOGNITIONS
Caldera Systems and its products have received several recognitions and
awards, including:
- Linux Magazine's Emperor Award (May 2000);
- PC ONLiNE Testsieger's (April 2000);
- a listing in Upside Magazine's Millennium 2000 eBusiness 150 (March
2000);
- Andover.net Dave Central's Best of Linux winner (February 2000);
- Linux Magazine's Cool Product Award (February 2000);
- PC Direct (Ziff-Davis) Best Buy 2000 award (January 2000);
- Internetweek's Best of the Best award for best software for 1999
(December 1999);
- The Linux Show's Best Distribution of Millennium (December 1999);
- Linux Journal's Product of the Year award at Comdex (November 1999);
- a listing in PC Magazine's Top 100 Technology Companies That Are Changing
the World (October 1999);
- Linuxworld Editor's Choice Award: Best Client and Distribution (August
1999);
- Network Computing's Well-Connected Award for Best Networked Operating
System (May 1999); and
- MikroPC's Product of the Year Award (1999).
CUSTOMERS
We sell our products primarily through indirect channels. Our customers
include:
<TABLE>
<S> <C>
AST Computers Ingram Micro
Cendant MediaGold
First International Computers MTI Technology Corporation
Frank Kasper & Associates Navarre Corporation
Gates/Arrow Support Net
IBM Tech Data
</TABLE>
Navarre Corporation and Frank Kasper & Associates each accounted for more
than 10% of our revenue in fiscal 1999. Navarre Corporation was the only
customer that accounted for more than 10% of
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our revenue in the year ended October 31, 2000. Substantially all of the revenue
we have received from these two parties reflects revenue from sales of our Linux
products.
STRATEGIC TECHNOLOGY ALLIANCES
We have business alliances with key global industry partners, including
Citrix Systems, Fujitsu, IBM, Intel, Novell, Oracle and Sun Microsystems. These
relationships encompass product integration, two-way technology transfers,
channel partnerships and revenue generating initiatives in areas of product
bundles, training and education, consulting and third-level technical support
for our partners. The objectives of these partnerships include:
- providing complete hardware and software Linux solutions;
- licensing our education materials to be used in our partners' training
centers;
- supporting our partners' Linux engineering efforts as well as their
end-user customers; and
- mutually developing our sales and distribution channel by coordinating
marketing initiatives in creating demand for our products.
These relationships are non-exclusive, leaving us opportunities to explore
other strategic partnerships on a global level. In particular, in January 2000,
we entered into license agreements with Sun Microsystems which allow us to
create and commercially distribute applications developed utilizing Java2
Standard Edition for Linux, Java HotSpot Performance engine, EmbeddedJava and
PersonalJava for use on the Itanium (Merced), PowerPC, Sun x86, and UltraSPARC
processors. These licenses are non-exclusive. In connection with the licenses
relating to the Java2 Standard Edition and the Java HotSpot Performance Engine,
we paid Sun Microsystems $1.3 million.
Furthermore, in November 1999, we entered into a contributor agreement with
Intel to port OpenLinux products, including OpenLinux eServer, to Intel's IA64
platform. In addition we will be porting the Java Development Toolkit and Java
Runtime Environment to the IA64 platform.
INDUSTRY PARTICIPATION
We participate as a key member of many industry standard, partner and open
source initiatives, including the following:
- Linux Professional Institute, an independent organization dedicated to
the establishment of professional certification standards for Linux
professionals;
- Linux Standards Base, a Linux community initiative dedicated to
addressing problems and defining standards associated with the many
versions of Linux distributions currently in the marketplace;
- Linux Internationalization Group, a voluntary Linux community working
group, of which we are one of the founding members, dedicated to
addressing interoperability, internationalization and localization of
Linux applications in the international context;
- IA64 Linux Project, an Intel-sponsored initiative to port the Linux
kernel to the Intel Itanium processor;
- Distributed Management Task Force, an independent organization including
most of the largest software and systems vendors in the world, dedicated
to creating new standards for computer systems management. We are working
with this task force to incorporate into our OpenLinux products
commonality standards already in place among enterprise-level businesses;
and
- Java, Sun Microsystem's proprietary software programming language. We
plan to incorporate standards that will allow the majority of current
Java applications to run on Linux and to provide for developers to create
new applications in Java for use on Linux.
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SALES, MARKETING AND DISTRIBUTION
Our focus on Linux for eBusiness enables us to promote the development,
deployment, and management of Linux appliances and devices that facilitate the
eBusiness infrastructure. Our primary strategy has been to distribute our
products and services through our indirect distribution channel model.
The majority of our revenue comes from distributors. As of October 31,
2000, we had approximately 38 distributors worldwide who purchase directly from
us. These distributors in turn sell to approximately 4,000 retail outlets in the
United States and approximately 900 equivalent sites internationally. On a
worldwide level, we utilize over 700 VARs to promote technology and service
integration of our products and solutions to their end-user business customers.
For the fiscal year ended October 31, 1999, our distributor channel
represented 74% of our total software and related products revenue and included
distributors such as Frank Kasper & Associates, Ingram Micro, Navarre
Corporation and Tech Data, domestically, and MediaGold in Europe. Sales through
this distributor channel represented 85% of our total software and related
products revenue for the year ended October 31, 2000. We plan to continue to
recruit new distributors to introduce OpenLinux technology into new markets,
including into foreign countries with language specific products.
We sell directly to OEM partners, including AST Computers in the United
States and First International Computers in Taiwan. These arrangements are
typically royalty-based and our revenue is determined by volume of OpenLinux
products shipped on our partners' hardware or bundled together in distribution.
Our marketing efforts support our sales and distribution efforts,
promotions and product introductions and include marketing development funds to
push OpenLinux products. Pull marketing, apart from delivering quality products
and services needed in the marketplace, is focused on branding, solutions,
advertising, tradeshows, press releases, white papers and marketing literature.
We focus our marketing on public relations and press relations extensively to
communicate the progress we are making in the business arena. In particular, our
marketing strategy consists of:
- branding "Linux for eBusiness" through public relations announcements and
advertising;
- announcing technology and solution awards;
- creating an effective partner program to generate brand awareness and
promote our products; and
- increasing public awareness through speaking engagements at strategic
tradeshows and conferences worldwide and participating in technology
forums.
Our web site, www.calderasystems.com, is focused on strengthening our Linux
for eBusiness strategy. In addition to allowing visitors to download free
software, our web team is expanding our current web strategy of branding, direct
sales through our online store and linking customers to channel partners.
Through our web site, we plan to join together ISVs, hardware partners,
customers, channel players, developers, ISPs and other Linux players who want to
connect for business reasons and to generate royalties based on introductions,
advertising and transactions.
COMPETITION
The market for eBusiness solutions is emerging rapidly and is therefore
intensely competitive, characterized by rapidly changing technology and evolving
standards. We expect competition to increase both from existing competitors and
new market entrants. We face direct competition in the area of specialized
servers and internet devices from other providers of solutions for specialized
servers. We also face competition from traditional, non-Linux operating systems,
other Linux operating systems, technical support providers and professional
services organizations.
Companies currently offering software solutions for specialized servers or
internet access devices include Berkeley Software Design, Microsoft and a joint
venture involving SCO and Compaq which is
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included in the server and professional services group. Cygnus Solutions, VA
Linux and Wind River provide similar solutions embedded into their hardware
offerings. In addition, Sun Microsystems has announced plans to open source its
Solaris Unix operating system in an attempt to attract more developers to the
platform. Many of these competitors are large, well-established companies with
significantly greater financial resources, more extensive marketing and
distribution capabilities, larger development staffs and more widely recognized
brands and products.
Companies currently offering competitive non-Linux operating systems
include providers of hardware-independent multi-user operating systems for Intel
platforms, such as Microsoft, IBM and Novell. They also include providers of
proprietary versions of the UNIX operating system, such as AT&T, Compaq,
Hewlett-Packard, IBM, Olivetti, Sun Microsystems and Unisys. These competitors
often bundle their operating systems with their hardware products, creating an
additional barrier for us to overcome in penetrating their customer bases. There
are also significantly more user applications available for competing operating
systems, such as Windows NT and UNIX, than there are for Linux operating
systems.
In the Linux operating system market, our competitors include Corel,
MacMillan, Red Hat, SuSE and TurboLinux. Several of these competitors have
established customer bases, strong brand names and continue to attract new
customers. Red Hat, in particular, has had more visibility and a stronger brand.
In addition, this market is not characterized by the traditional barriers to
entry that are found in most other markets, due to the open source nature of our
products. For example, anyone can readily download the Linux kernel and packages
from the internet, optimize and add value to it, and thereafter market their own
version of the Linux operating system. Similarly, anyone can copy, modify and
freely redistribute the open source components of OpenLinux. Accordingly, new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Our product, however, is specifically suited for and
targeted toward the requirements of business. In addition, our education and
training program is more pervasive and our distribution channel is more
developed and mature. We believe that these three key advantages give us a
competitive advantage in the Linux operating system market.
We also compete for service revenue with a number of companies that provide
technical support and other professional services to users of Linux operating
systems, including some original equipment manufacturers with which we have
agreements. Many of these companies have larger and more experienced service
organizations than we do. We also may face competition on this front from
companies with larger customer bases and greater financial resources and name
recognition, such as Corel, Cygnus Solutions and Sun Microsystems, which have
indicated interest in the Linux operating systems market.
Based upon these market factors, we believe that the most significant
criteria affecting the competitive landscape for our products include:
- networking capability;
- distribution strength;
- market perception of vendor;
- education and training;
- ease of customization;
- commercial development process;
- product performance, functionality and price;
- education and training;
- ease of use;
- breadth of hardware compatibility;
- quality of support and customer services;
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- strength of relationships in the open source community; and
- availability of user applications.
We believe that we compete favorably with many of our competitors in a
number of respects, including product performance, functionality and price,
networking capability and breadth of hardware compatibility. To solidify and
improve our competitive ability, our near-term strategy is to strengthen our
existing strategic relationships and enter into new ones in an effort to enhance
our name recognition, expand our distribution capabilities and attract more
attention to the open source movement, which in turn should create additional
incentives for software developers to write more applications for OpenLinux.
Additionally, although the Linux and Unix operating systems have in the
past been competing products, the server and professional services groups will
provide us with an international and domestic, multi-tiered distribution
channel, and an extensive international infrastructure that could accelerate our
ability to market Linux technologies in foreign markets. We believe that these
additional distribution opportunities will provide us with additional markets to
offer Linux domestically and internationally. We believe that these
opportunities will prevent the potential competitive effects of offering both
Linux and Unix from being material to us.
SOFTWARE ENGINEERING AND DEVELOPMENT
We have invested and will continue to invest in the development of
innovative new product features and technologies in response to the evolving
market for Linux solutions and input from key customers. We seek to deliver
consistently strong Linux products targeted at specific usage as opposed to the
more traditional one-size-fits-all Linux distribution in which the customer may
be required to re-build the kernel to attain the proper configuration. This
product segmentation of eServer and eDesktop allows us to tailor the delivery of
the product to work optimally as installed off the CD, yet continue to provide
customization, one of the essential values of Linux.
One of our key strategies has been to focus on identifying and removing the
traditional barriers for mass deployment of Linux operating systems (e.g.,
installation, system configuration and management). The delivery of the
award-winning LIZARD installation system, initially shipped in OpenLinux 2.2 in
April 1999, successfully paved the way for a much broader base of users to
experience Linux with a much lower learning curve. Going forward, we intend to
continue to apply this philosophy as we work toward addressing the broader
issues of system configuration management and administration, specifically as it
pertains to the deployment of eServer-based information appliances and eDesktop
platforms. Our latest component of this architecture, the LUI (Linux Unattended
Install) was developed in cooperation with a large European University to allow
many systems (eServer or eDesktop) to be installed and upgraded without
requiring direct user interaction. We intend to introduce new components with
each subsequent product.
Our major commitment in the area of research is how to extract the
management aspects of individual systems, new and legacy applications to enable
the deployment, management and administration of platforms and applications to
be handled from anywhere on the network. Leveraging Linux, open source and open
standard technologies is a way of providing necessary infrastructure components.
We believe that contributing back to Linux much of our research will facilitate
more of an industry standard as well as industry cooperation.
Our product development process is modeled to standard, commercial software
engineering practices. We apply these practices to both documentation and
procedures to ensure consistent product quality. As a result, we are able to
offer our platform products to OEM customers in several configurations without
significant effort. We are also able to move our platform products efficiently
to new processor platforms as new business opportunities arise.
As of October 31, 2000, we employed an in-house engineering staff of 63 in
addition to maintaining a contract consulting arrangement with a Japanese firm
for product development needs specific to the
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Japanese market. The engineering staff consists of two primary teams, the U.S.
Engineering group located near corporate headquarters in Utah and the European
group located in Erlangen, Germany. Our staff members possess a broad range of
both Linux and other industry experience.
INTELLECTUAL PROPERTY
Our success depends significantly on our ability to protect our trademarks,
trade secrets, and certain proprietary technology. To accomplish this, we rely
primarily on a combination of trademark and copyright laws and trade secrets. We
also require that our employees and consultants sign confidentiality and
nondisclosure agreements. We generally regulate access to and distribution of
our documentation and other proprietary information.
Certain components of OpenLinux have been developed and made available for
licensing under the GNU General Public License and similar licenses, which
generally allow any person or organization to copy, modify and distribute the
software. The only restriction is that any resulting or derivative work must be
made available to the public under the same terms. Therefore, although we retain
the copyrights to the code that we develop ourselves, due to the open source
nature of our software products and the licenses under which we develop and
distribute them, our collection of trademarks constitutes our most important
intellectual property.
We own the registered trademark "CALDERA(R)" and also have license rights
relating to "CALDERA SYSTEMS(TM)", a pending trademark application. In September
1999, the United States Trademark Office, or USTO, rejected our applications for
"OpenLinux(TM)" and "Linux for Business(TM)". We filed our response with respect
to the rejection of the "OpenLinux" trademark on March 28, 2000. Our trademark
application for "Linux for Business" was suspended on April 24, 2000, pending
disposition of prior applications. We have recently been informed by the USTO
that resolution of these applications will remain pending until a determination
has been made by the USTO as to the treatment of LINUX related trademark
applications generally. In Europe, our application for registration of the
trademark "OpenLinux(TM)" has been approved by the European Community Trade
Marks Office.
Despite our efforts to protect our trademark rights, unauthorized third
parties have in the past attempted and in the future may attempt to
misappropriate our trademark rights. We cannot be certain that we will succeed
in preventing the continued misappropriation of our tradename and trademarks in
these circumstances or that we will be able to prevent this type of unauthorized
use in the future. The laws of some foreign countries do not protect our
trademark rights to the same extent as do the laws of the United States. In
addition, policing unauthorized use of our trademark rights is difficult,
expensive and time consuming. The loss of any material trademark or trade name
could have a significant negative effect on our business, operating results and
financial condition.
We do not believe that our products infringe the rights of third parties.
However, our products are comprised of many distinct software components,
developed by many independent parties, and therefore third parties have in the
past asserted, and may in the future assert infringement claims against us which
may result in costly litigation or require us to obtain a license to third-party
intellectual rights. There can be no assurance that such licenses will be
available on reasonable terms or at all, which could have a negative effect on
our business, operating results and financial condition.
GOVERNMENT REGULATION
Our success depends on the Linux operating systems industry, which in turn
depends on increased use of the internet for eBusiness and other commercial and
personal activities. Laws and regulations have been proposed in the United
States and Europe to address privacy and security concerns related to the
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collection and transmission of information over the internet. In the United
States, the Federal Trade Commission, or FTC, is considering regulations that
may require companies to:
- give adequate notice to consumers regarding information collection and
disclosure practices;
- provide consumers with the ability to have personal, identifying
information deleted from a company's database;
- clearly identify affiliations or a lack thereof with third parties which
may collect information or sponsor activities on a company's website; and
- obtain express parental consent prior to collecting and using personal
identifying information obtained from children under 13 years of age.
Under the proposed FTC regulations, businesses that violate the regulations
could face monetary fines. At the international level, the European Union, or
EU, has adopted a directive that imposes restrictions on the collection and use
of personal data from individuals in EU member countries. This EU directive
could affect internet businesses elsewhere that have users in one or more EU
member countries.
The proposed FTC regulations, if adopted, or the EU directive, as adopted,
could adversely affect the ability of internet businesses to collect demographic
and personal information from users, which could have an adverse effect on the
ability of internet businesses to target product offerings and attract
advertisers. Any of these developments could harm the results of operations and
financial condition of internet businesses and impair the growth of the
internet.
In addition to government regulations related to internet privacy concerns,
it is possible that any number of additional laws and regulations may be adopted
with respect to the internet covering issues such as obscenity, freedom of
expression, pricing, content and quality of products and services, copyright and
other intellectual property issues and taxation. As an example, a number of
proposals have been made at the federal and local level and by various foreign
governments to impose taxes on the sale of goods and services and other internet
activities. Recently, the U.S. Internet Tax Information Act was enacted, which
places a three-year moratorium on new state and local taxes on internet
commerce. However, the moratorium does not prevent the U.S. federal government
or foreign governments from adopting laws that impose taxes on internet
commerce. The passage of new laws or changes to existing laws intended to
address use of the internet could create uncertainty in the marketplace,
increase the cost of doing business on the internet, increase legal liabilities
from doing business on the internet or in some other manner have a negative
impact on internet commerce and substantially impair its growth. Since many of
our customers conduct much of their business over the internet, if use of the
internet decreases, our customers may see a decreased demand for their products.
In that event, our customers may purchase fewer licenses for our products, which
would cause our license and services revenue to fall.
EMPLOYEES
As of October 31, 2000, we had a total of 178 employees. Of the total
employees, 63 were in software engineering, 50 in sales and marketing, 19 in
customer service and technical support, 11 in operations and 35 in finance and
administration. From time to time we also employ independent contractors to
support our professional services, product development, sales, marketing and
business development organizations. Our employees are not represented by any
labor union and are not subject to a collective bargaining agreement, and we
have never experienced a work stoppage. We believe our relations with our
employees are good.
FACILITIES
Our principal executive office is currently located in Orem, Utah where we
lease approximately 45,531 square feet of office space. Our annual rental
expense under the lease is approximately $664,080. We also occupy an additional
office facility in Orem, Utah, under a lease that costs $8,990 per month and
occupy 5,544 square feet of warehouse space in Orem, Utah, under an 18 month
lease that costs
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approximately $32,000 per year. Our German subsidiary occupies 3,375 square feet
in Erlangen, Germany under a five-year renewable lease for approximately $4,880
per month. This lease expires September 1, 2004, and additional space is
available under similar terms. We believe that our existing facilities are
adequate for our current requirements and that additional space can be obtained
on commercially reasonable terms to meet our future requirements.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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BUSINESS OF SERVER AND PROFESSIONAL SERVICES GROUPS
OVERVIEW
The server and professional services groups operate as a global leader in
server software for networked business computing, and the world's leading
provider of UNIX server operating systems. The business of the server group
originated over 20 years ago at AT&T and focuses on developing and marketing
proprietary UNIX server software that runs on standard Intel hardware systems.
The server group supplies the system software for approximately 37% of all UNIX
servers for all hardware platforms. The professional services group complements
the server group and provides professional services to implement and maintain
UNIX system software products.
THE SERVER AND PROFESSIONAL SERVICES SOLUTION
The server and professional services groups' mission is to create, market
and support the server software that system builders choose for networked
business computing. The server and professional services groups believe that
server-based network computing enables businesses to improve their customer
information flow and business transaction efficiencies. Key elements of the
groups' strategy are:
- Leverage large global installed base;
- Effective distribution channel;
- Focussed product offerings; and
- Leverage professional services to complement server product line.
The server and professional services groups believe that companies that adopt a
server-based network computing model can understand their customers better,
reach wider potential markets, bring products to market faster and improve their
overall customer satisfaction levels. With server-based computing and products
and services, IT professionals can immediately leverage their existing
investments, deploy applications faster and dramatically cut the cost of the
systems administration and management.
The server products are used by enterprises of all sizes. These enterprises
and their characteristic usage of server products are divided into the following
market segments:
- Small to Medium Enterprise -- Processing which is confined to one or a
few small servers, typically in a single physical location per small or
medium sized enterprise;
- Replicated Site -- Processing which is replicated onto many small servers
within a large enterprise, typically located across hundreds or thousands
of physical sites in a given enterprise; and
- Large Enterprise -- Processing which is shared across one or a few medium
to large sized servers (or clusters of servers) for use by many people
across an entire large enterprise and/or between many people across
several enterprises.
The Server Group's Large Installed Base
The Server Group has a large installed base of over 2 million licensees
worldwide, which include small to medium enterprises, replicated sites, and
large enterprises.
Small to medium enterprises provide the server and professional services
groups with many opportunities to gain a major market share in vertical market
places such as pharmacies, lumber merchants or building access control systems.
Replicated sites produce recurring revenue stream from upgrades and
incremental systems deployment. Once the initial contract is awarded, there are
also incremental opportunities to add new systems to augment capabilities of the
user's network, including e-business applications and other new product
features. Since the sites are dispersed and there is a need for high reliability
with low operator invention, these customers are less inclined to change the
system basis.
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SCO operating systems have also been in-built into many products such as
voice mail systems, telephone switches and badge or ticket readers. A
characteristic of this market is very slow adoption of alternative technologies.
Once development of a product is complete, the systems will often have a
marketing life of many years. These in-built systems continue to provide a
regular source of revenue and potential for new solutions with existing
customers. Examples of these systems include:
- Private telephone exchanges from Siemens and Lucent;
- Voice mail systems from Lucent;
- Voice response systems from Wildfire;
- Cable television controllers from Scientific Atlanta; and
- Automobile testers from BMW.
When SCO acquired the UNIX business from Novell in December, 1995, it also
assumed the legacy of many systems installed over the years by companies such as
Unisys, ICL, Olivetti, NCR and Siemens. Many of these systems were upgraded
during the year 2000 conversion process to SCO Server products and have now
transitioned to become server group customers. The group believes these
customers will continue to provide steady streams of revenue for many years.
SERVER PRODUCTS
The server group is a vendor of UNIX operating systems for Intel-based
computers and serverware, networking software, development tools, and utilities
to be used with SCO UNIX operating systems. Server products are primarily used
on computers, which support the integration of information, communication and
processing from more than one person. These products are used as a system
software environment for the support of application software, whether the
applications are processed on a single computer, within a cluster of computers,
or across a network of computers.
UnixWare 7
The UnixWare 7 operating system is designed to support distributed network
computing on Intel processor-based servers. Running on the new generation of
"enterprise-class" Intel processors, UnixWare 7 delivers power, value and
versatility to businesses of all sizes, permitting companies to simplify and
increase business operations and better understand customers' needs.
PROFESSIONAL SERVICES
The group primarily offers the following services:
- Consulting. These services include assessment services to help a customer
understand and identify its needs and strengths prior to the use of the
Server products, and assisting customers in developing complete solutions
for their needs.
- Custom software development. These services typically involve customizing
the products sold to a customer to support a customer's proprietary
system or configuration.
- Optimization. These services typically involve configuring a customer's
system and the products sold to the customer to reach an optimal
operating efficiency for the customer's system as a whole.
- Technical support. Customers seeking technical support from the group may
enter into service agreements that best suit their needs. These service
agreement plans are designed to give customers to ability to receive
direct support from our teams at pre-determined pricing and service
levels.
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CUSTOMERS
The server group's largest customers purchase their products through
indirect channels. Typical customers include:
<TABLE>
<S> <C>
Agriculture Bank -- China KFC
Abbey National Bank Kmart
BMW Lufthansa
CVS Pep Boys
Daimler-Chrysler Pizza Hut
French Telecom Polish Police
</TABLE>
Many of the professional services projects have been with world class
companies such as the Nasdaq, Kmart and Italian Telecom. None of the server or
professional services groups customers accounts for more than 10% of the groups'
revenues for any fiscal period.
SALES, MARKETING AND DISTRIBUTION
The server group sells to small and medium enterprise purchasers through a
worldwide network of more than 15,000 distributors, resellers, system
integrators and OEMs. The server group sells to replicated site and large
enterprise purchasers through a collaboration between the group's own field
sales and system engineering staff and the corresponding staffs of OEMs, large
value added resellers, or system integrators.
The sales channel is global. In addition to the North American and Western
European countries, the server group also operates in Eastern Europe, India and
China. The management and support of the channel partners is a key core
competence for the server group. The group makes investments in channel
education, information dissemination and lead generation.
The server group also sells to OEMs and has a strong working relationship
with a number of the major Intel system builders such as IBM, Compaq,
ICL/Fujitsu, Siemens and Unisys. Each of these OEMs has their own channels of
distribution. The server group has developed programs that allow the OEMs to
work with the server group to mutually support both distribution channels.
The professional services group sells to customers through a combination of
referral sales from the Server Group and dedicated direct sales effort.
Server marketing supports the sales activity of both the direct SCO sales
team and the sales forces of our channel partners. Activities include product
introductions, promotions, training and distribution of product information, as
well as direct programs that focus on branding, solutions, advertising,
tradeshows, press releases, and marketing literature. Marketing activities are
often collaborative efforts with OEMs, independent hardware vendors, independent
software vendors, distributors, value added resellers, system integrators,
education centers and support centers.
COMPETITION
Throughout its long existence the server group has always had many fierce
competitors. These have included AT&T, Novell, SUN Solaris, Interactive systems
and of course Microsoft. Most recently, the two major competitive alternatives
to SCO's UNIX products have been Microsoft NT and Linux. While SCO believes that
the server groups' products retain a competitive advantage in a number of
targeted application areas, both of these competitors are restricting the
overall market available to SCO products, including some markets where SCO has
been successful in the past.
ENGINEERING AND DEVELOPMENT
The server group has invested and will continue to invest in the
development of new products and new features for existing products. The
development team includes the successors to the original Bell Labs team that
originally developed UNIX over 25 years ago. The development process is modeled
to standard, commercial software engineering practices. These practices are
applied to both documentation and
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procedures. As result, products can be offered on several operating platforms
without significant additional efforts and with relatively quick adaptation
times for new technologies. While most products and features are developed
in-house, some modules, and base technologies are licensed from third parties
and integrated into the final products.
The professional services group maintains strict standards of quality and
procedures by employing industry "best practices." The development teams seek to
deliver their services as modules or productized services that are easily
replicated for different customers in different applications.
As of September 13, 2000, the development team consists primarily of 123
employees, located in Murray Hill, New Jersey and Santa Cruz, California.
INTELLECTUAL PROPERTY
The success of the server group largely depends on the ability to protect
trademarks, trade secrets, and certain proprietary technology. To accomplish
this, the group relies on a combination of trademark and copyright laws and
trade secrets. Both the server and professional services groups also require
their employees and consultants to sign confidentiality and nondisclosure
agreements.
SCO also owns the trademark rights to "OPENSERVER" and "UNIXWARE" in the
United States and other jurisdictions. On or around May 23, 2000, SCO was made
aware that X/Open (the owner of the UNIX trademark) filed a cancellation action
against SCO's UnixWare trademark registration in Japan. On July 4, 2000, SCO,
through its trademark counsel in Japan, Tani & Abe, submitted arguments to the
Japanese Patent Office in response to the cancellation. To date, SCO has not
received any Official Notice or other paper from the Japanese Patent Office. On
or around May 23, 2000, SCO was made aware that a joint opposition action had
been filed by X/Open (the owner of the UNIX trademark) and Novell against our
European Community Trademark Application. The parties requested and received an
extension to the cooling off period, which was extended to November 17, 2000.
X/Open has been granted the opportunity to submit further facts, evidence or
arguments in support of the opposition on or before January 17, 2001. SCO must
submit, through its trademark counsel in the UK, Clifford Chance, its
observations in reply on or before March 17, 2001, which period may be extended
to ensure that SCO has at least two full months to respond to any new material
submitted by X/Open.
Despite efforts to protect trademark rights, unauthorized third parties
have in the past attempted and in the future may attempt to misappropriate these
trademark rights. There is no certainty that the continued misappropriation of
the trademarks can be prevented or enforced. The laws of some foreign countries
do not protect these trademark rights to the same extent as do the laws of the
United States. In addition, policing unauthorized use of these trademark rights
is difficult, expensive and time consuming. The loss of any material trademark
could have a material negative impact on the server and professional services
group business, operating results and financial condition.
The server and professional services groups do not believe that their
products infringe the rights of other third parties. However, these products are
comprised of many distinct software components, developed by many independent
parties, and therefore third parties in the past asserted, and may in the future
assert infringement claims against us which may result in costly litigation or
require the groups to obtain a license to third party intellectual property
rights. There can be no assurance that such licenses can be obtained on
reasonable terms or at all, which could have a material negative impact on the
server and professional services group business, operating results and financial
condition.
EMPLOYEES
As of December 12, 2000, the server group had a total of 464 employees and
the Professional Services Group had a total of 40 employees. Of these totals,
108 were in software engineering, 170 in sales and marketing, 97 in customer
service, and 129 in operation, administrative and other positions. From time to
time, the groups also employ independent contractors to complement and support
the groups' efforts. The employees are not represented by any labor union and
are not subject to a collective bargaining
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agreement, and there has never been any work stoppage. The server and
professional services groups believe that relations with employees are good.
FACILITIES
The server and professional services groups are presently headquartered
with SCO in Santa Cruz, California, where SCO leases administrative, sales and
marketing, product development and distribution facilities. SCO leases
additional facilities for administration, sales and marketing and product
development in Murray Hill, New Jersey and Watford, England. The leases for
SCO's facilities expire at various dates through 2020. SCO has renewal options,
at fair market value, under many of these leases and believes that in any event
additional or alternative space adequate to serve the Server and Professional
Services Groups' foreseeable needs would be available on commercially reasonable
terms. SCO's field operations occupy leased facilities in 12 locations in the
United States. In addition, SCO's subsidiaries and sales and representative
offices in France, Germany, Italy, Spain, Sweden, Denmark, Singapore, Australia,
China, India, Canada, Brazil and Mexico lease space for their operations.
Worldwide, SCO leases property in 38 locations consisting of an aggregate of
approximately 370,000 square feet. SCO believes that these facilities are
adequate for its needs and the needs of the Server and Professional Services
Groups in the foreseeable future.
LEGAL PROCEEDINGS
The server and professional services groups are not a party to any material
proceedings.
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BUSINESS OF NEW CALDERA
New Caldera has not conducted any business activities to date and will not
engage in any business activities until the combination has been completed. New
Caldera currently has no assets or liabilities and no outstanding capital stock.
New Caldera will be the parent company of Caldera and will directly own the
server and professional services group. The business of New Caldera will be
substantially similar to the business currently conducted by Caldera and the
server and professional services groups, as described herein. However, it is
anticipated that New Caldera will seek to integrate product lines from Caldera
and the server and professional services groups to create and market new
business solutions.
MANAGEMENT OF CALDERA AND NEW CALDERA
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table presents information as of November 30, 2000 regarding
persons who are current executive officers, directors and key employees of
Caldera and persons who are expected to serve as executive officers, directors
and key employees of New Caldera:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ransom H. Love(1).................... 41 Chief Executive Officer, Director
Robert K. Bench(1)................... 51 Chief Financial Officer
Drew A. Spencer(1)................... 38 Chief Technology Officer
Benoy Tamang(1)...................... 35 Vice President, Strategic Development
David McCrabb, Jr. .................. 52 President and Chief Operating Officer
Richard Rife(1)...................... 47 General Counsel and Corporate Secretary
Jack Moyer........................... 51 Vice President, Human Resources
Jim Wilt............................. 54 Vice President, Professional Services
Ralph J. Yarro III(1)(3)............. 36 Chairman of the Board of Directors and Director
Steve Cakebread(2)................... 41 Director
John R. Egan(1)(2)(3)................ 42 Director
Edward E. Iacobucci(1)(2)............ 46 Director
Doug Michels......................... 46 Director
Raymond J. Noorda(1)................. 76 Director
Thomas P. Raimondi, Jr.(1)(3)........ 43 Director
</TABLE>
---------------
(1) current executive officer, director or key employee of Caldera
(2) current member of Caldera's Audit Committee, and expected to be member of
New Caldera's Audit Committee
(3) current member of Caldera's Compensation Committee, and expected to be
member of New Caldera's Compensation Committee
Ransom H. Love has served as Caldera's President, Chief Executive Officer,
and member of Caldera's board of directors since August 1998. Prior to that
date, Mr. Love was a founder and served as Vice President of Marketing and
Sales, Vice President of Business Development and General Manager of the
OpenLinux division for Caldera, Inc., from January 1995 to September 1998. Prior
to Caldera, Inc., Mr. Love held senior marketing positions at Novell and Sanyo
Icon. Mr. Love has been in various management positions in sales, marketing,
support, testing and education in the computer industry since 1982. He holds a
BA in international relations and a MBA from Brigham Young University.
Robert K. Bench has served as Caldera's Chief Financial Officer and
Principal Financial and Accounting Officer since November 15, 2000. From April
1992 through April 1996, he was Chief Financial Officer for CerProbe
Corporation, and from April 1996 to May 1999, he was Vice President,
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Chief Financial Officer and a director for Sento Corporation. From May 1999
through April 2000, Mr. Bench was Vice President and Chief Financial Officer for
WebMiles.com Corp., and from April 2000 through November 15, 2000, he was Vice
President and a director for Envirofoam Technologies, Inc. Mr. Bench holds a BS
in accounting from Utah State University.
Drew A. Spencer has served as Caldera's Chief Technology Officer since
April 2000 and served as its Vice President of Development from December 1998 to
April 2000. Prior to joining Caldera, Mr. Spencer spent ten years with Novell,
Inc. in a variety of senior technical and management positions, including
engineering consultant and was a member of the Corporate Architecture Team. He
holds a BS degree in computer science from Westminster College.
Benoy Tamang has served as Caldera's Vice President of Business Development
since April 2000 and served as its Vice President of Marketing from December
1998 to April 2000. From January 1996 through August 1998, Mr. Tamang was
General Manager of Viewpoint Datalabs, a three dimensional software imaging
company, where he coordinated domestic and international sales. Previously, he
served as Sales Director and Program Manager at Novell, Inc. from March 1993
through August 1996. Mr. Tamang holds a BS in computer information systems from
Brigham Young University -- Hawaii and an MBA from the Marriott School of
Management at Brigham Young University.
David McCrabb, upon the closing of the combination, will become President
and Chief Operating Officer of New Caldera. Mr. McCrabb has served as Executive
Vice President, Worldwide Sales and Field Operations of SCO since April 1998.
Between January 1995 and June 1997, he served as Vice President, Marketing and
Channel Sales of SCO, then as Senior Vice President, Market Planning of SCO
between July 1997 and April 1998. Prior to joining SCO, Mr. McCrabb served as
Vice President and General Manger for Applied Digital Data Systems, a wholly
owned subsidiary of NCR, since February 1994. From November 1989 to February
1992, he served as Vice President, Sales and Marketing for Primary Access
Corporation.
Jack Moyer, upon the closing of the combination, will become Vice President
of Human Resources of New Caldera. Mr. Moyer has served as Senior Vice
President, Human Resources of SCO since January 1998. He has served as Vice
President of SCO, Human Resources since August 1995. Prior to jointing SCO, Mr.
Moyer served as Vice President, Human Resources for the following companies: Ore
Ida Foods from 1992 to August 1995; Maspar Computer Corporation from November
1991 until November 1992; Businessland from January 1985 until November 1991.
Mr. Moyer's senior human resources management experience also includes positions
at National Micronetics, Inc. and National Semiconductor Corp.
Jim Wilt, upon the closing of the combination, will become Senior Vice
President and Vice President of Professional Services of New Caldera. Mr. Wilt
has served as Senior Vice President, Products of SCO since April 1998. Since
joining SCO in 1983, Mr. Wilt has held a number of strategic positions both in
the U.S. and in Europe including those of Vice President, Business Development
and Vice President, International. Mr. Wilt formerly held management positions
in sales, marketing, and planning at Xerox, Honeywell and Amdahl. Mr. Wilt holds
a BS degree in mathematics from Case Western Reserve University and an MS degree
in computer science from the University of Wisconsin.
Richard C. Rife has served as Caldera's Chief Legal Officer and Corporate
Secretary since June 2000. Prior to joining Caldera, he spent 12 years with
Novell, Inc. in a variety of positions, including most recently Vice President,
Deputy General Counsel, and Corporate Secretary. Before joining Novell, Mr. Rife
practiced international business law in Korea for five years. Mr. Rife has B.A.
and J.D. degrees from Brigham Young University and is licensed to practice law
before the State and Federal courts of Utah and Nevada.
Ralph J. Yarro III has served as a member of Caldera's board of directors
since August 1998. Mr. Yarro has served as the President and Chief Executive
Officer of The Canopy Group, Inc. since April 1995. Prior to joining The Canopy
Group, Inc., he served as a graphic artist for the Noorda Family Trust. Mr.
Yarro holds a BA from Brigham Young University.
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John R. Egan has served as a member of Caldera's board of directors since
January 2000. He currently serves as a Managing Partner of Egan-Managed Capital,
Venture Capital, a position he has held since September 1998. Mr. Egan has been
with EMC Corporation, a provider of storage-related hardware, software and
service products, serving in various positions, since April 1983. He is a
director of EMC Corporation and holds a BS from Boston College.
Edward E. Iacobucci has served as a member of Caldera's board of directors
since January 2000. In 1989, Mr. Iacobucci co-founded Citrix Systems, Inc., a
supplier of products and technologies that enable enterprise-wide deployment of
software applications, and held the positions of Chief Technical Officer and
Vice President of Strategy and Technology. In September 1991, he also became
Chairman of the Board of Citrix. Mr. Iacobucci holds a BS from the Georgia
Institute of Technology.
Steve Cakebread has served as a member of Caldera's board of directors
since July 2000. He is currently Senior Vice President and Chief Financial
Officer of Autodesk, Inc. since 1997. Autodesk, Inc. is a provider of
two-dimensional and three-dimensional products used across industries and in the
home for architectural design, mechanical design, spatial data management and
mapping, animation, and visual applications. Prior to joining Autodesk, he was
Vice President of Finance with Silicon Graphics, Inc., a provider of computing
and visualization solutions, from 1993 to 1997. Mr. Cakebread holds a BS from
the University of California at Berkeley and an MBA from Indiana University.
Doug Michels, upon the closing of the combination, will be appointed a
member of Caldera's board of directors. Mr. Michels has served as President and
Chief Executive Officer of SCO since April 1998. Mr. Michels is the principal
architect of SCO's technology strategy and served as its head of product
development between June 1997 and April 1998 and as its Chief Technical Officer
between February 1993 and June 1997. Mr. Michels has been a director of SCO
since 1979 and served as its Vice President between 1979, when he co-founded
SCO, and April 1998. Mr. Michels is one of the founders of Uniforum, a UNIX(R)
user consortium, and served as its President from 1989 to 1990.
Raymond J. Noorda has served as a member of Caldera's board of directors
since August 1998. Mr. Noorda currently serves as chairman of the board of
directors of MTI Technology Corporation and The Canopy Group, Inc. Mr. Noorda
previously served as President, Chief Executive Officer and Chairman of Novell,
Inc. from 1983 to 1994 and has served as a trustee of the Noorda Family Trust
since 1994. He holds a BS in electrical engineering from the University of Utah.
Thomas P. Raimondi, Jr. has served as a member of Caldera's board of
directors since September 1999. He has been with MTI Technology Corporation
since 1987, serving as President and Chief Executive Officer since December
1999, as Chief Operating Officer from July 1998 to December 1999, as Senior Vice
President and General Manager from January 1996 to July 1998 and as Vice
President of Marketing from 1987 to December 1995. Mr. Raimondi holds a BS in
communications from the University of Maryland.
COMPOSITION OF THE BOARD
The board of directors of Caldera currently consists of seven directors.
The board of directors of New Caldera will have nine directors, consisting of
Caldera's current directors, as well as Doug Michels and another director to be
named by SCO and approved by Caldera. Directors will be elected by stockholders
at each annual meeting of stockholders to serve until the next annual meeting of
stockholders or until their successors are duly elected and qualified. There are
no family relationships among any of Caldera's directors, officers or key
employees or any of New Caldera's expected directors, officers or key employees.
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BOARD COMMITTEES
The board of directors of Caldera has and New Caldera will have the
following committees.
The compensation committee of the board of directors will recommend, review
and oversee the salaries, benefits and stock option plans for our employees,
consultants, directors and other individuals compensated by us. The compensation
committee will also administer our compensation plans. The members of the
compensation committee will be Messrs. Egan, Raimondi and Yarro, none of whom
will be employees of New Caldera.
The audit committee of the board of directors will review, act on and
report to the board of directors with respect to various auditing and accounting
matters, including the recommendation of New Caldera's auditors, the scope of
the annual audits, fees to be paid to the auditors, the performance of New
Caldera's independent auditors and New Caldera's accounting practices. The
members of the audit committee will be Messrs. Cakebread, Iacobucci and Egan,
none of whom will be employees of New Caldera.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the anticipated members of New Caldera's compensation committee has
at any time been one of Caldera's officers or employees. None of the anticipated
executive officers of New Caldera currently serves or in the past year has
served as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving on Caldera's board or
compensation committee. Prior to the creation of Caldera's compensation
committee, all compensation decisions were made by Caldera's full board. Mr.
Love did not participate in discussions by Caldera's board with respect to his
compensation.
DIRECTOR COMPENSATION
New Caldera's directors will not receive cash compensation for their
services as directors, although members will be reimbursed for expenses in
connection with attendance at board and committee meetings.
In December 1999, the Caldera board of directors granted an option to
Thomas P. Raimondi, Jr., to purchase 100,000 shares of Caldera's common stock at
an exercise price $6.00 per share, which vest over a two-year period. In August
1999, the Caldera board granted options to Ralph J. Yarro III to purchase
100,000 shares of Caldera's common stock, which vest over a four-year period,
and in December 1999, the Caldera board granted Mr. Yarro options to purchase
50,000 shares of Caldera's common stock, which vest over a two-year period, at a
combined average exercise price of $2.67 per share. In March 2000, the Caldera
board granted options to purchase 100,000 shares of Caldera's common stock to
each of John R. Egan, and Edward Iacobucci at an exercise price of $7.00 per
share. In each case, these options vest over a two year period. In August, 2000,
the Caldera board granted options to Steve Cakebread to purchase 79,167 shares
of its common stock, which vest over a two year period at an exercise price of
$6.937. New Caldera may grant its non-employee directors additional options in
the future.
CALDERA EXECUTIVE SEVERANCE AGREEMENTS
During July and August 2000, Caldera entered into a number of executive
severance agreements with several members of senior management, including each
of its executive officers. The agreements provide for certain benefits upon a
change of control, followed by termination or effective termination of
employment with Caldera. Change of control is defined as: (1) any person or
entity who becomes the beneficial owner of 51% or more of common stock, (2) sale
of substantially all of Caldera's assets, (3) approval of a merger or
consolidation in which at least 50% of the voting securities are acquired, and
(4) certain changes in the composition of 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% of
then current annual base salary and insurance benefits for a period up to six
months. Specific provisions for Vice Presidents include but are not limited to
the following: salary and bonus payments equal to 100% of then current annual
base salary and bonuses, 12 months of accelerated vesting on outstanding stock
options and continuation insurance benefits for a period of six months.
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EMPLOYMENT AGREEMENTS
SCO has agreed to encourage the following management employees to enter
into employment agreements with New Caldera:
David McCrabb;
Jack Moyer; and
certain vice presidents and director level employees of the server and
professional services groups.
Terms of the agreements
Under the proposed terms of the employment agreements, these management
employees will be paid a base salary consistent with their current base salary.
A bonus plan comparable to their current bonus plan will be put in place. These
employment agreements would provide for a term of 1-2 years. In addition, each
employment agreement would provide that at the end of its term, the employee
would continue on an at-will basis.
Severance provisions
Generally, if New Caldera were to terminate one of these employment
agreements without cause, the affected employee would be entitled to severance
pay ranging from 75% - 150% of base salary and accelerated vesting ranging from
9 months to 18 months.
The employee would not be entitled to receive severance benefits if the
employee's employment terminates by reason of employee's voluntary resignation,
if New Caldera terminated the employee's employment after the last day of the
employment term or if the termination were for cause.
Noncompetition provisions
The employment agreements would also provide that the employees may not
compete with New Caldera for the duration of the severance period, which ranges
from 9 - 18 months after termination of employment.
Severance payments would cease upon the employee accepting employment or
other position with a direct competitor of New Caldera.
EXECUTIVE COMPENSATION OF NEW CALDERA
It is anticipated that those employees of SCO who become executive officers
of New Caldera will be compensated generally in accordance with the proposed
terms of the employment agreements described above. For employees of Caldera
that become executive officers of New Caldera, New Caldera will assume the terms
of the senior executive severance agreements and will rely on its compensation
committee to recommend any increase in the form and amount of compensation to be
paid above their current compensation levels at Caldera.
It is anticipated that when the compensation committee meets to determine
compensation, the committee will generally adhere to compensation policies which
reflect the belief that:
- New Caldera must attract and retain individuals of outstanding ability
and motivate and reward them for sustained performance;
- a portion of an executive's compensation should be at risk based upon
that executive's and New Caldera's performance; and
- levels of compensation should generally be in line with that offered by
comparable corporations.
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HISTORICAL COMPENSATION OF CALDERA
For information concerning the compensation historically paid to the
executive officers of SCO and who will serve as executive officers or directors
of New Caldera, see "SCO is Incorporating its SEC Filings in this Document by
Reference" on page 31. Information concerning compensation historically paid to
the executive officers and directors of Caldera who will serve as executive
officers or directors of New Caldera is set forth below.
The following table presents compensation information for Caldera's most
recent fiscal year, ended October 31, 2000, paid or accrued by Caldera's Chief
Executive Officer and each of its other executive officers whose salary and
bonus for fiscal 2000 was more than $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION(1) SECURITIES
----------------- UNDERLYING
NAME SALARY BONUS OPTIONS
---- -------- ----- ------------
<S> <C> <C> <C> <C>
Ransom H. Love.............................. 2000 $142,596 -- 879,752
Chief Executive Officer 1999 106,077 --
Alan J. Hansen.............................. 2000 126,756 -- 167,813
Chief Financial Officer(2) 1999 -- --
Benoy Tamang................................ 2000 122,673 -- 162,813
Senior Vice President, Strategic
Development 1999 -- --
Drew A. Spencer............................. 2000 121,846 -- 165,313
Chief Technology Officer 1999 105,333 --
Royce Bybee................................. 2000 111,912 -- 44,625
Senior Vice President, Sales and Marketing 1999 -- --
</TABLE>
---------------
(1) The column for "Other Annual Compensation" has been omitted because there is
no compensation required to be reported in that column. The aggregate amount
of perquisites and other personal benefits provided to each executive
officer listed above is less than the lesser of $50,000 and 10% of his total
annual salary and bonus.
(2)Mr. Hansen resigned as Chief Financial Officer effective November 15, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table presents the grants of stock options under Caldera's
1999 Omnibus Stock Incentive Plan during fiscal 2000, to each of Caldera's
executive officers named in the Summary Compensation Table.
All option grants under the 1999 Omnibus Stock Incentive Plan are
nonqualified stock options. Options expire ten years from the date of grant.
The exercise price of each option granted is equal to the fair market value
of Caldera's common stock, as determined by Caldera's board on the date of
grant. In fiscal 2000, Caldera granted to its employees options to purchase a
total of 4,451,020 shares of Caldera's common stock.
Potential realizable values are computed by
- Multiplying the number of shares of common stock subject to a given
option by the exercise price per share,
- Assuming that the aggregate option exercise price derived from that
calculation compounds at the annual 5% or 10% rates shown in the table
for the entire 10 year term of the option, and
- Subtracting from that result the aggregate option exercise price.
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The 5% and 10% assumed annual rates of stock price appreciation are
required by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future common stock prices.
<TABLE>
<CAPTION>
PERCENT
NUMBER OF OF TOTAL POTENTIAL REALIZABLE VALUE AT ASSUMED
SECURITIES OPTIONS EXERCISE ANNUAL RATES OF STOCK PRICE
UNDERLYING GRANTED TO PRICE PER APPRECIATE FOR OPTION TERM
OPTIONS EMPLOYEES IN SHARE EXPIRATION -------------------------------------
GRANTED FISCAL YEAR ($/ SHARE) DATE 0% 5% 10%
---------- ------------ ---------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Ransom H. Love........ 200,000 8.53% $6.00 12/19/2009 $400,000 $1,406,231 $2,949,988
179,752 $6.00 01/03/2010 359,504 1,263,865 2,651,331
Alan J. Hansen........ 100,000 3.77% $1.13 11/22/2009 487,500 864,837 1,443,745
67,813 $6.00 12/19/2009 135,626 476,804 1,00,238
Benoy Tamang.......... 67,813 1.52% $6.00 12/19/2009 135,626 476,804 1,000,238
Drew A. Spencer....... 67,813 1.52% $6.00 12/19/2009 135,626 476,804 1,000,238
Royce Bybee........... 25,430 0.67% $6.00 12/19/2009 50,860 178,802 375,091
4,196 $9.50 05/18/2010 -- 25,069 63,530
</TABLE>
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED OCTOBER 31, 2000 AND YEAR-END
OPTION VALUES
The following table presents the number of shares of common stock subject
to vested and unvested stock options held as of October 31, 2000 by each of
Caldera's executive officers named in the Summary Compensation Table. Also
presented are values of "in-the-money" options, which represent the positive
difference between the exercise price of each outstanding stock option and the
price per share of Caldera's common stock on October 31, 2000.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE AT OCTOBER 31, 2000 AT OCTOBER 31, 2000
ON EXERCISE REALIZED -------------------- ---------------------
NAME (#) ($) VESTED UNVESTED VESTED UNVESTED
---- --------------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ransom H. Love.............. 60,000 $264,359 577,680 302,072 $949,735 $300,265
Alan J. Hansen.............. -- -- -- 167,813 -- 237,500
Benoy Tamang................ 5,000 22,030 71,914 90,899 102,083 135,417
Drew A. Spencer............. 2,500 11,015 84,901 80,412 123,955 119,795
Royce Bybee................. 22,500 97,354 44,625 -- 35,623 --
</TABLE>
1998 STOCK OPTION PLAN
The 1998 Stock Option Plan was adopted by Caldera's board of directors on
December 29, 1998 and subsequently approved by the stockholders. The plan became
effective upon its adoption by the board and has been amended on various
occasions as Caldera has grown and changed. The 1998 Stock Option Plan was
superseded by the 1999 Omnibus Stock Incentive Plan, and no additional options
may be granted under the 1998 Stock Option Plan (upon the expiration of
previously granted options or otherwise).
5,000,000 shares of common stock were authorized for issuance under the
1998 Stock Option Plan. Options to purchase 3,252,088 shares of common stock
were granted under the 1998 Stock Option Plan of which 813,800 options have been
exercised or cancelled and 2,438,288 of which remain outstanding.
Under the 1998 Stock Option Plan, Caldera may grant eligible individuals in
Caldera's employ or service (including officers, non-employee board members and
consultants) non-qualified options to purchase shares of Caldera's common stock.
The 1998 Stock Option Plan is administered by Caldera's compensation
committee. The compensation committee determines which eligible individuals are
to receive options under the 1999 Stock Option Plan, the time or times when each
option is to be granted, the number of shares subject to each option, the
exercise price of each option and the vesting schedule and the other terms to be
in effect for
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each option. The exercise price for the options granted under the 1998 Stock
Option Plan may be less than the fair market value of a share of common stock on
the date of grant, payment is immediately due and payable upon exercise of an
option and must be paid in cash or with a check made payable to Caldera.
In the event that Caldera is acquired, whether by merger or asset sale,
each outstanding option granted under the 1998 Stock Option Plan that has vested
may, at Caldera's discretion, be cashed out, be converted to options of the
acquiring entity, be assumed by the acquiring entity, or otherwise disposed of
in the manner provided in any shareholder-approved agreement or plan governing
such transaction. In addition, in the absence of any governing provisions in any
shareholder-approved agreement or plan governing such transaction, Caldera may,
on a case-by-case basis, require any vested, exercisable options to be cashed
out and terminated in exchange for a lump sum cash payment, shares of the
acquiring entity or a combination thereof equal in value to the fair market
value of the option.
In the event Caldera is acquired, whether by merger or asset sale, each
outstanding option granted under the 1998 Stock Option Plan that has not vested
shall terminate as of the effective date of such transaction, unless otherwise
provided in the shareholder-approved agreement or plan governing such
transaction or by the compensation committee in its sole discretion on a
case-by-case basis.
If options are assumed by the purchasing or successor corporation, each
option assumed will be adjusted to apply to the number and class of securities
which would have been issuable to the option holder had the option been
exercised immediately prior to the merger or asset sale. Following such merger
or asset sale, appropriate adjustments will also be made to the number and class
of securities available for issuance under the 1998 Stock Option Plan and the
exercise price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain the same.
The board may amend or modify the 1998 Stock Option Plan at any time,
subject to any stockholder approval required by governing laws and exchange
regulations. The 1998 Stock Option Plan will terminate no later than December
29, 2008.
1999 OMNIBUS STOCK INCENTIVE PLAN
The 1999 Omnibus Stock Incentive Plan (the "1999 Plan") is intended to
serve as the successor equity incentive program to Caldera's 1998 Stock Option
Plan. The 1999 Plan became effective upon its adoption by the board of directors
and shareholders on December 1, 1999. It was amended by the board on March 10,
2000 to increase by 500,000 the number of shares authorized for issuance under
the 1999 Plan.
This amendment was approved by the stockholders of Caldera in March 2000.
It was again amended by the board of directors on July 14, 2000 in order to make
the following changes:
- to permit the grant of non-qualified options with an exercise price below
fair market value,
- to permit the exercise of non-qualified options up to 120 days after
termination of service,
- to permit exercise of an option up to 30 days after termination of
service for cause,
- in connection with a sale, change of control or liquidation of Caldera,
to permit Caldera or the acquiring entity to cash out, convert to options
of the acquiring entity, or assume any vested options granted under the
1999 Plan,
- in connection with a sale, change of control or liquidation of Caldera,
to provide that non-vested options shall terminate unless otherwise
provided in the governing agreements or determined by the committee, and
- to permit Caldera to grant shares of restricted stock and phantom stock
that vest without regard to the satisfaction of pre-established
performance goals.
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This amendment was approved by the board on July 14, 2000 and became
effective at the time of such approval.
In addition, the board has approved amendments that will effect the
following changes: (i) increase the maximum number of shares of common stock
authorized for issuance over the term of the 1999 Plan by an additional
2,300,000 shares to 6,405,238 shares, (ii) establish an automatic share increase
feature pursuant to which the number of shares available for issuance under the
1999 Plan will automatically increase, beginning with the 2000 calendar year, as
of November 1 of each year, by 3% of the total number of shares of common stock
outstanding on the previous October 31st, (iii) add a formula awards program
pursuant to which directors of Caldera will automatically be granted options to
purchase shares of common stock at specified times, including an option to
purchase 100,000 shares of common stock on the date of the annual shareholders
meeting during each even numbered calendar year. These amendments are the
subject of Proposal Two. Please see page 151.
The 1999 Plan presently authorizes the grant of incentive awards with
respect to 4,105,238 shares of common stock (subject to increase if the
amendments included in Proposal Two are approved by the stockholders). The 1999
Plan allows for the grant of awards in the form of incentive and non-qualified
stock options, stock appreciation rights, restricted shares, phantom stock and
stock bonuses.
Persons eligible to receive awards under the 1999 Plan include all
employees and directors of Caldera and its subsidiaries and such other persons
whom the committee determines are expected to make a contribution to Caldera. No
one participant in the 1999 Plan may receive option grants or any other awards
for more than 200,000 shares in the aggregate in any tax year of Caldera
Systems, except for grants of options for a total of 379,752 shares to Mr. Love
authorized by our board of directors in December 1999 and January 2000.
The 1999 Plan is administered by Caldera's compensation committee. The
compensation committee determines which eligible individuals are to receive
awards under the 1999 Plan, the type of award to be made, the time or times when
such awards are to be made, the number of shares subject to each such award, and
the vesting schedule and the other terms to be in effect for the award.
The exercise price for the options may be paid in cash, in shares of
Caldera's common stock valued at fair market value on the exercise date or by
having Caldera retain sufficient shares of its common stock from shares which
would be issuable upon the exercise of the option. The option may also be
exercised through a same-day sale program without any cash outlay by the
optionee.
The 1999 Plan also permits grant of the following:
- tandem stock appreciation rights, which provide the holders with the
election to surrender his or her options for a cash appreciation
distribution from Caldera equal to the fair market value of the vested
shares subject to the surrendered option less the aggregate exercise
price payable for such shares;
- stand-alone stock appreciation rights, which entitle the holder to
receive a cash payment from Caldera equal to the fair market value of the
vested shares subject to the right less the base price for such right;
- phantom stock awards, which entitle the holder to receive in cash the
fair market value of a specified number of shares of our common stock on
the vesting date,
- restricted stock awards, which involves the grant of shares of common
stock that are subject to restrictions on transferability during a
vesting period and are forfeited if certain conditions are not met, and
- stock bonus awards, which involve outright grant of shares of common
stock without condition.
In the event that Caldera is acquired (whether by merger, liquidation or
asset sale) or there is a change in who controls Caldera (effected through an
acquisition of 50% or more of Caldera's voting stock
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or by specified change in the composition of Caldera's board), the incentive
awards granted under the 1999 Plan are treated as follows:
- each option and stock appreciation right that has vested may, at
Caldera's discretion, be cashed out, be converted to options of the
acquiring entity, be assumed by the acquiring entity, or otherwise
disposed of in the manner provided in any shareholder-approved agreement
or plan governing such transaction. In addition, in the absence of any
governing provisions in any shareholder-approved agreement or plan
governing such transaction, Caldera may, on a case-by-case basis, require
any vested, exercisable options to be cashed out and terminated in
exchange for a lump sum cash payment, shares of the acquiring entity or a
combination thereof equal in value to the fair market value of the
option,
- each outstanding option and stock appreciation right granted under the
1999 Plan that has not vested shall terminate as of the effective date of
such transaction, unless otherwise provided in the shareholder-approved
agreement or plan governing such transaction or by the compensation
committee in its sole discretion on a case-by-case basis,
- each outstanding phantom stock award that has not vested prior to the
date of a change of control shall immediately expire,
- all restrictions on vested shares of restricted stock shall immediately
lapse, and all unvested shares of restricted stock shall immediately be
canceled, and
- each outstanding stock bonus shall not be affected.
The board may amend or modify the 1999 Plan at any time, subject to
stockholder approval if required by governing exchange regulations or if
necessary to satisfy applicable provisions of governing tax laws.
2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 Employee Stock Purchase Plan was adopted by Caldera's board of
directors on February 15, 2000 and was approved by its stockholders on March 1,
2000. The plan became effective on March 20, 2000. The plan is designed to allow
eligible employees of Caldera Systems, Inc. and its participating subsidiaries
to purchase shares of its common stock, at semi-annual intervals, through their
periodic payroll deductions. A total of 500,000 shares of Caldera's common stock
has been reserved for issuance under the plan. In connection with the
combination, the board has approved an increase by 1.5 million in the number of
shares authorized for issuance under the plan. This increase is being submitted
to the stockholders for approval pursuant to Proposal Three. Please see page
151. The share reserve will increase on the first trading day of each calendar
year beginning with the 2001 calendar year by 1% of the total number of shares
of common stock outstanding on the last day of the immediately preceding year
but no such annual increase will exceed 750,000 shares. In no event, however,
may a participant purchase more than 750 shares, nor may all participants in the
aggregate purchase more than 125,000 shares on any one semi-annual purchase
date.
The plan will have a series of successive offering periods, each with a
maximum duration of 24 months. However, the initial offering period began on
March 20, 2000 and will end on the last business day in April 2002. The next
offering period will begin on the first business day in May 1, 2002, and
subsequent offering periods will be set by Caldera's compensation committee.
Shares will be purchased on semi-annual purchase dates (the last business day of
April and October each year) during the offering period. The first purchase date
was October 31, 2000. Should the fair market value of Caldera's common stock on
any semi-annual purchase date be less than the fair market value on the first
day of the offering period, then the current offering period will automatically
end and a new offering period will begin, based on the lower fair market value.
On October 31, 2000, 61,807 shares of common stock were purchased at a price of
$2.94.
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Individuals who are eligible employees on the start date of any offering
period may enter the plan on that start date or on any subsequent semi-annual
entry date (generally May 1 or November 1 each year). Individuals who become
eligible employees after the start date of the offering period may join the plan
on any subsequent semi-annual entry date within that period.
A participant may contribute up to 10% of his or her cash earnings through
payroll deductions and the accumulated payroll deductions will be applied to the
purchase of shares on the participant's behalf on each semi-annual purchase date
(the last business day in April and October each year). The purchase price per
share will be 85% of the lower of the fair market value of our common stock on
the participant's entry date into the offering period or the fair market value
on the semi-annual purchase date.
The board may at any time amend or modify the plan. The plan will
terminate no later than the last business day in April 2010.
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CERTAIN TRANSACTIONS OF CALDERA AND NEW CALDERA
Other than the transactions described below, since October 31, 1998 there
has not been, nor is there currently proposed, any transaction or series of
similar transactions to which Caldera was or will be a party:
- in which the amount exceeds $60,000; and
- in which any director, executive officer, holder of more than 5% of our
common stock or any member of their immediate family had or will have a
direct or indirect material interest.
RELATIONSHIP WITH CALDERA, INC., A UTAH CORPORATION
Caldera began operations in 1994 as a business unit comprising
substantially all of the operations of Caldera, Inc., a Utah Corporation. In
July 1996, through an asset purchase, Caldera, Inc. acquired an additional
business unit which was not engaged in developing and marketing Linux software.
Caldera, Inc. subsequently made the strategic determination to separate its two
business lines into separate entities. Therefore, pursuant to an Asset Purchase
and Sale Agreement dated as of September 1, 1998, as amended, by and between
Caldera, Inc. and Caldera Systems, Inc., Caldera, Inc. sold to Caldera Systems
certain assets of its Linux software business unit for $19.9 million, $15.0
million of which was paid in the form of a cash payment in fiscal year 1999,
$36,174 of which was in the form of assumption of liabilities and $4.9 million
of which was in the form of forgiveness of a note receivable from Caldera, Inc.
Caldera, Inc. was dissolved in January 2000.
On September 1, 1998, we entered into a sublease with Caldera, Inc. for
office space in Orem, Utah. The sublease provided for annual rent of
approximately $150,000 and was terminated pursuant to its terms on August 31,
2000.
Ralph J. Yarro III, chairman of Caldera's board of directors, and Raymond
J. Noorda, one of Caldera's directors, were directors of Caldera, Inc. Prior to
its dissolution in January 2000, Caldera, Inc. was majority-owned by The Canopy
Group, Inc. which holds more than 5% of our common stock. The Noorda Family
Trust, of which Mr. Noorda and his spouse are co-trustees, is the controlling
stockholder of The Canopy Group, Inc.
RELATIONSHIP WITH THE CANOPY GROUP, INC.
The Canopy Group, formerly NFT Ventures, is a venture capital company that
invests primarily in start-up high technology companies that encourage the
adoption, deployment and promotion of Linux. The Canopy Group currently holds
equity interests in companies in the fields of data storage and protection,
Linux operating systems, data satellites, clustering, universal voice messaging,
Java and eCommerce.
Effective August 31, 1998, Caldera sold 16,000,000 shares of its common
stock to The Canopy Group, Inc. for an aggregate purchase price of $21.0
million. Of this amount, $16.0 million was paid in cash ($519,000 in fiscal year
1998 and $15.5 million -- non-interest bearing -- in fiscal year 1999), and $4.9
million was in the form of a note receivable from Caldera, Inc., which The
Canopy Group transferred to us.
Effective September 1, 1998, Caldera entered into a convertible promissory
note with The Canopy Group. The note, which was secured by all of Caldera's
assets, was due on December 31, 1999. The note accrued interest at the prime
rate, less 1/2%, and was convertible into our common stock at $1.00 per share.
A total of $4.8 million was advanced under the note. The principal balance,
along with approximately $455,000 of accrued interest was converted into
5,273,974 shares of our common stock on August 19, 1999.
Under a secured promissory note dated as of December 29, 1999, Caldera
borrowed $300,000 from The Canopy Group. The note bears interest of 9.5% per
annum and was payable upon demand or on January 14, 2000. Caldera paid the note
in full on January 5, 2000.
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The Canopy Group holds more than 5% of Caldera's common stock. Mr. Noorda,
one of Caldera's directors, and his spouse are co-trustees of the Noorda Family
Trust, which is the controlling stockholder of The Canopy Group.
Until June 2000, Caldera utilized a 401(k) plan sponsored by The Canopy
Group for its employees, under which it made matching contributions from January
1, 2000 through June 2000. In June 2000, Caldera adopted its own 401(k) plan.
As a result of an option agreement between The Canopy Group and Ralph J.
Yarro III, which was subsequently rescinded, Caldera expensed a one-time
compensation charge of approximately $372,000 during the quarter ended April 30,
2000. The option agreement allowed Mr. Yarro to purchase shares of Caldera's
common stock directly from The Canopy Group. No shares were purchased under the
agreement. Mr. Yarro is the president and chief executive officer of The Canopy
Group and the Chairman of Caldera's board of directors.
During May through October 2000, we subleased office space to Canopy on a
month-to-month basis. The rent payments to Caldera from Canopy were
approximately $5,100 per month.
RELATIONSHIP WITH MTI TECHNOLOGY CORPORATION
Effective July 27, 1999, Caldera sold 5,333,333 shares of its common stock
to MTI Technology Corporation for an aggregate purchase price of $6.0 million.
Of this amount, $3.0 million was paid at closing, $1.5 million was due at
January 1, 2000, and $1.5 million was due in July 2000. The $1.5 million due at
January 1, 2000, was paid on November 15, 1999 in return for a waiver by Caldera
of accrued and future interest on the unpaid portions of the purchase price.
Caldera believes that the waiver of interest in consideration for the
acceleration of payment was not more favorable to MTI than the terms Caldera
would have been able to negotiate with an unrelated party. The remaining $1.5
million was paid in full in August 2000.
On August 12, 1999, Caldera entered into a Distribution and License
Agreement with MTI Technology Corporation. Under this agreement, MTI Technology
Corporation includes as available for sale in its price book all of Caldera's
products, technology or services that are commercially available for sale, and
Caldera sells or licenses, as applicable, to MTI Technology Corporation, and
allow MTI Technology Corporation to sell, re-sell, license, reproduce, use,
distribute, sublicense, have made and prepare derivative works of all of
Caldera's products, technology, or services that are commercially available.
This agreement is terminable by either party on 90 days prior written notice.
Caldera uses a computer system provided by MTI Technology Corporation
without charge. The computer system is valued at $105,000.
MTI Technology Corporation owns more than 5% of Caldera's common stock. The
Canopy Group, Inc. holds more than 45% of the outstanding common stock of MTI
Technology Corporation. The Noorda Family Trust, of which Mr. Noorda and his
spouse are co-trustees, is the controlling stockholder of The Canopy Group. Mr.
Noorda is one of Caldera's directors and is chairman of the board of directors
of MTI Technology Corporation. Thomas P. Raimondi, Jr., one of our directors, is
president and chief executive officer of MTI Technology Corporation.
RELATIONSHIP WITH LINEO, INC.
In January 2000, we exchanged with Lineo, Inc. 1,250,000 shares of our
common stock in return for 3,238,437 shares of common stock of Lineo. On May 11,
2000, The Canopy Group transferred 1,761,563 additional shares of Lineo's common
stock held by The Canopy Group to us in the form of a capital contribution.
On August 31, 2000, Caldera and Metrowerks Holdings, Inc., an affiliate of
Motorola, Inc., entered into a Stock Purchase and Sale Agreement whereby Caldera
and The Canopy Group sold 2.0 million and 1.0 million shares of common stock of
Lineo, Inc, respectively, to Metrowerks Holdings at $7.50 per share.
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The sale closed upon the receipt of certain required regulatory approvals and
the completion of other closing conditions.
In conjunction with the sale of the common stock of the common stock of
Lineo, Caldera also entered into a stockholder agreement among The Canopy Group,
Lineo Inc. and certain other stockholders of Lineo, which provide for right of
first refusal for the benefit of Metrowerks Holdings with request to Lineo
shares held by Caldera and the other Lineo stockholders party to the agreement.
Caldera has also agreed to indemnify Metrowerks Holdings for any damage
sustained by Metrowerks Holdings as a result of breaches by Caldera under the
stock purchase and sale agreement and the stockholder agreement or for breaches
by Lineo under a warrant agreement between Lineo and Metrowerks Holdings.
Caldera's indemnification obligation is limited to the amount of proceeds
received by Caldera in its sale to Metrowerks Holdings.
Lineo distributes copies of our OpenLinux products to certain of its
customers. Lineo is majority-owned by The Canopy Group, Inc. The Noorda Family
Trust, of which Mr. Noorda and his spouse are co-trustees, is the controlling
stockholder of The Canopy Group, Inc. Mr. Noorda, John R. Egan and Ralph T.
Yarro III, each of whom is one of Caldera's directors, are directors of Lineo,
Inc.
RELATIONSHIP WITH THE SANTA CRUZ OPERATION
On February 28, 2000, Caldera entered into an agreement for Linux
professional services with SCO, pursuant to which SCO is to provide customer
support and other related services to customers of Caldera from time to time for
specified fees. This agreement is currently being performed by SCO's
professional services group, and will be extinguished upon the closing of the
combination, at which time New Caldera would become the owner of the
professional services group.
On June 27, 2000, Caldera and SCO entered into an OEM Distribution
Agreement. Under the terms of the agreement, Caldera is granted a non-exclusive,
non-transferable, worldwide license certain of SCO's products, including
enhancements and improvements, for distribution and sale to end users and
specified resellers. Caldera pays current list price, less 42% for all SCO
products under the Agreement. The term of the agreement is for one year with
automatic renewals for additional one year periods unless the agreement is
terminated.
On February 1, 2000, Caldera and SCO entered into a Strategic Business
Agreement. The Agreement provides for a number of joint marketing activities
between the parties, including, but not limited to, the following: (i)
participation together in industry shows, (ii) cross recruit and cross match
channel partners for SCO's Tarantella product line and Caldera's OpenLinux
e-Server, (iii) cross-reference each others websites and product solutions and
(iv) discussion of Caldera's channel initiatives. Additionally, Caldera agreed
to provide ten copies of OpenLinux to SCO for its internal use and SCO agrees to
provide three copies of SCO's Tarantella Express product. Caldera and SCO also
agreed to cooperate and work together to port Tarantella Express products to
Caldera's OpenLinux, eServer and eDesktop. The term of the agreement is for one
year with automatic renewals for additional one year periods unless the
agreement is terminated. Caldera has sales to SCO totalling $331,500 during the
year ended October 31, 2000.
PREFERRED STOCK TRANSACTIONS
Effective December 30, 1999, Caldera entered into a conversion agreement
with The Canopy Group and MTI Technology Corporation. Under the conversion
agreement, Caldera issued and exchanged 5,273,974 shares of its Series A
convertible preferred stock for 5,273,974 shares of our common stock held by The
Canopy Group. Caldera also issued and exchanged 1,322,172 shares of its Series A
convertible preferred stock for 1,322,172 shares of its common stock held by MTI
Technology Corporation.
From December 31, 1999 through January 10, 2000, we issued an aggregate of
5,000,000 shares of our Series B convertible preferred stock at a purchase price
of $6.00 per share to various investors including Chicago Venture Partners,
Citrix Systems, Inc., Egan Managed-Capital, Novell, Inc., Sun Microsystems and
The Santa Cruz Operation, Inc. All aspects of the Series B private placement
were
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completed as of January 10, 2000. The Series A convertible preferred stock and
the Series B convertible preferred stock converted automatically into Caldera's
common stock at the closing of Caldera's initial public offering in March 2000.
In connection with the Series B financing, the holders of the Series A
convertible preferred stock and the holders of the Series B convertible
preferred stock also entered into a second amended and restated investors rights
agreement with Caldera, under which:
- Caldera is obligated to provide certain registration rights with respect
to shares of our capital stock held by the other parties to this
agreement. See, "Description of New Caldera Capital Stock -- Registration
Rights."
- Caldera granted the other parties a right of first offer with respect to
any future issuance and sale of shares of our capital stock other than
shares of our common stock to be issued publicly. This right terminated
upon the closing of Caldera's initial public offering in March 2000.
INDEMNIFICATION AGREEMENTS
Caldera has entered into indemnification agreements with each of its
executive officers and directors.
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PRINCIPAL STOCKHOLDERS OF NEW CALDERA
The following table presents information as to the beneficial ownership of
New Caldera's common stock if the combination had occurred on October 31, 2000
by:
- Each beneficial owner of more than 5% of New Caldera's common stock;
- Each of New Caldera's directors;
- Certain executive officers; and
- All directors and executive officers of New Caldera as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless indicated below, to our knowledge, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Shares of common stock subject to options that are currently
exercisable or exercisable within 60 days of October 31, 2000 are deemed to be
outstanding and to be beneficially owned by the person holding the options for
the purpose of computing the percentage ownership of that person but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF SHARES
NAME AND ADDRESS BENEFICIALLY OWNED BENEFICIALLY OWNED
---------------- ------------------ ------------------
<S> <C> <C>
The Canopy Group, Inc. ..................................... 21,273,974(1) 38.1%
MTI Technology Corporation.................................. 5,333,333(2) 9.6
The Santa Cruz Operation.................................... 16,327,323(3) 29.3
Ransom H. Love.............................................. 603,949(4) 1.1
Drew A. Spencer............................................. 91,894(5) *
Alan S. Hansen.............................................. 45,449(6) *
Benoy Tamang................................................ 78,907(7) *
Royce D. Bybee.............................................. 44,625(8) *
Ralph J. Yarro, III......................................... 84,375(9) *
Steve Cakebread............................................. --(10) *
John R. Egan................................................ 833,333(11) 1.5
Edward E. Iacobucci......................................... --(12) *
Doug Michels................................................ 16,327,323(13) 29.3
Raymond J. Noorda........................................... 27,857,307(14) 49.9
Thomas P. Raimondi, Jr. .................................... 50,000(15) *
All directors and executive officers as a group............. 46,017,162(16) 81.1
</TABLE>
---------------
* Less than 1%
(1) The address for The Canopy Group, Inc. is 240 West Center Street, Orem,
Utah 84057.
(2) The address for MTI Technology Corp. is 4905 East La Palma Avenue, Anaheim,
California 92807.
(3)The address for The Santa Cruz Operation is 425 Encinal Street, Santa Cruz,
California 95061.
(4) Consists of options to purchase 603,949 shares of common stock.
(5) Consists of options to purchase 91,894 shares of common stock.
(6)Consists of options to purchase 45,449 shares of common stock. Mr. Hansen
resigned as Chief Financial Officer effective November 15, 2000.
(7)Consists of options to purchase 78,907 shares of common stock.
(8)Consists of options to purchase 44,625 shares of common stock. Mr. Bybee
resigned from Caldera in November 2000.
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(9) Consists of options to purchase 84,375 shares of common stock. Mr. Yarro is
President and Chief Executive Officer of The Canopy Group, Inc.
(10) Does not include options to purchase 79,167 shares of common stock granted
to Mr. Cakebread in August, 2000.
(11) Consists of 833,333 shares of common stock held by Egan-Managed Capital,
L.P. Does not include options to purchase 100,000 shares of common stock
granted to Mr. Egan in March 2000. Mr. Egan is a managing partner of
Egan-Managed Capital, L.P. Mr. Egan disclaims beneficial ownership of the
shares held by Egan-Managed Capital, L.P., except to the extent of his
pecuniary interest therein.
(12) Does not include options to purchase 100,000 shares of common stock granted
to Mr. Iacobucci in March 2000.
(13) Consists of 16,327,323 shares of common stock held by The Santa Cruz
Operation. Mr. Michels is president and chief executive officer of The
Santa Cruz Operation. Mr. Michels disclaims his beneficial ownership of the
shares held by The Santa Cruz Operation.
(14) Includes 21,273,974 shares of common stock held by The Canopy Group, Inc.,
5,333,333 shares of common stock held by MTI Technology Corporation and
1,250,000 shares held by Lineo, Inc. Mr. Noorda is chairman of the boards
of directors of The Canopy Group, Inc. and MTI Technology Corporation, and
is a director of Lineo, Inc. Additionally, the Noorda Family Trust, of
which Mr. Noorda and his spouse serve as co-trustees is the controlling
stockholder of The Canopy Group, Inc. The Canopy Group, Inc. holds more
than 45% of the outstanding common stock of MTI Technology Corporation.
Lineo, Inc. is majority-owned by The Canopy Group. By virtue of his holding
corporate offices, his stock ownership and his service as co-trustee, all
as described above, Mr. Noorda may be deemed to control The Canopy Group,
Inc., MTI Technology Corporation and Lineo, Inc., and Mr. Noorda may be
deemed to possess indirect beneficial ownership of the common stock held by
The Canopy Group, Inc., MTI Technology Corporation and Lineo, Inc. Mr.
Noorda disclaims beneficial ownership of such shares. The address for Mr.
Noorda is c/o MTI Technology Corporation, 4905 East La Palma Avenue,
Anaheim, California 92807.
(15) Consists of 50,000 options to purchase shares of common stock. Mr. Raimondi
is President and Chief Executive Officer of MTI Technology Corporation. Mr.
Raimondi disclaims beneficial ownership of the shares held by MTI
Technology Corporation.
(16) See notes 3 through 16, as applicable. Includes an additional 168,981
shares issuable upon the exercise of options.
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PRINCIPAL STOCKHOLDERS OF CALDERA
The following table presents information as to the beneficial ownership of
Caldera's common stock as of October 31, 2000 by:
- Each stockholder known by Caldera to be the beneficial owner of more than
5% of Caldera's common stock;
- Each of Caldera's directors;
- Each executive officer listed in Caldera's summary compensation table;
and
- All directors and executive officers of Caldera as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless indicated below, to our knowledge, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Shares of common stock subject to options that are currently
exercisable or exercisable within 60 days of October 31, 2000 are deemed to be
outstanding and to be beneficially owned by the person holding the options for
the purpose of computing the percentage ownership of that person but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF SHARES
NAME AND ADDRESS BENEFICIALLY OWNED BENEFICIALLY OWNED
---------------- ------------------ ------------------
<S> <C> <C>
The Canopy Group, Inc. ..................................... 21,273,974(1) 53.9%
MTI Technology Corporation.................................. 5,333,333(2) 13.5
Ransom H. Love.............................................. 603,949(3) 1.5
Drew A. Spencer............................................. 91,894(4) *
Alan J. Hansen.............................................. 45,449(5) *
Benoy Tamang................................................ 78,907(6) *
Royce D. Bybee.............................................. 44,625(7) *
Ralph J. Yarro, III......................................... 84,475(8) *
Steve Cakebread............................................. --(9) *
John R. Egan................................................ 833,333(10) 2.1
Edward E. Iacobucci......................................... --(11) *
Raymond J. Noorda........................................... 27,857,307(12) 70.6
Thomas P. Raimondi, Jr. .................................... 50,000(13) *
All directors and executive officers as a group............. 29,689,839(14) 73.4
</TABLE>
---------------
* Less than 1%
(1) The address for The Canopy Group, Inc. is 240 West Center Street, Orem,
Utah 84057.
(2) The address for MTI Technology Corp. is 4905 East La Palma Avenue, Anaheim,
California 92807.
(3) Consists of options to purchase 603,949 shares of common stock.
(4) Consists of options to purchase 91,894 shares of common stock.
(5)Consists of options to purchase 45,449 shares of common stock. Mr. Hansen
resigned as Chief Financial Officer effective November 15, 2000.
(6)Consists of options to purchase 78,907 shares of common stock.
(7)Consists of options to purchase 44,625 shares of common stock. Mr. Bybee
resigned from Caldera in November 2000.
(8) Consists of options to purchase 84,375 shares of common stock. Mr. Yarro is
President and Chief Executive Officer of The Canopy Group, Inc.
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(9) Does not include options to purchase 79,167 shares of common stock granted
to Mr. Cakebread in August, 2000.
(10) Consists of 833,333 shares of common stock held by Egan-Managed Capital,
L.P. Does not include options to purchase 100,000 shares of common stock
granted to Mr. Egan in March 2000. Mr. Egan is a managing partner of
Egan-Managed Capital, L.P. Mr. Egan disclaims beneficial ownership of the
shares held by Egan-Managed Capital, L.P., except to the extent of his
pecuniary interest therein.
(11) Does not include options to purchase 100,000 shares of common stock granted
to Mr. Iacobucci in March 2000.
(12) Includes 21,273,974 shares of common stock held by The Canopy Group, Inc.,
5,333,333 shares of common stock held by MTI Technology Corporation and
1,250,000 shares held by Lineo, Inc. Mr. Noorda is chairman of the boards
of directors of The Canopy Group, Inc. and MTI Technology Corporation, and
is a director of Lineo, Inc. Additionally, the Noorda Family Trust, of
which Mr. Noorda and his spouse serve as co-trustees is the controlling
stockholder of The Canopy Group, Inc. The Canopy Group, Inc. holds more
than 45% of the outstanding common stock of MTI Technology Corporation.
Lineo, Inc. is majority-owned by The Canopy Group. By virtue of his holding
corporate offices, his stock ownership and his service as co-trustee, all
as described above, Mr. Noorda may be deemed to control The Canopy Group,
Inc., MTI Technology Corporation and Lineo, Inc., and Mr. Noorda may be
deemed to possess indirect beneficial ownership of the common stock held by
The Canopy Group, Inc., MTI Technology Corporation and Lineo, Inc. Mr.
Noorda disclaims beneficial ownership of such shares. The address for Mr.
Noorda is c/o MTI Technology Corporation, 4905 East La Palma Avenue,
Anaheim, California 92807.
(13) Consists of 50,000 options to purchase shares of common stock. Mr. Raimondi
is President and Chief Executive Officer of MTI Technology Corporation. Mr.
Raimondi disclaims beneficial ownership of the shares held by MTI
Technology Corporation.
(14) See notes 3 through 13, as applicable.
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PRINCIPAL SHAREHOLDERS OF SCO
The following table sets forth certain information with respect to the
beneficial ownership of SCO's common stock as of October 31, 2000, by:
- each person known by SCO to beneficially own more than five percent of
SCO's outstanding common stock;
- each of SCO's directors;
- each of the four most highly compensated executive officers in fiscal
2000 besides SCO's chief executive officer; and
- all of SCO's executive officers and directors as a group.
Unless otherwise indicated, the address for each shareholder on this table
is c/o The Santa Cruz Operation, Inc., 425 Encinal Street, Santa Cruz,
California 95061-1900. Except as otherwise noted, and subject to applicable
community property laws, to the best of our knowledge, the persons named in this
table have sole voting and investing power for all of the shares of common stock
held by them.
<TABLE>
<CAPTION>
FIVE PERCENT SHAREHOLDERS, COMMON STOCK PERCENT OWNERSHIP
DIRECTORS AND CERTAIN EXECUTIVE OFFICERS BENEFICIALLY OWNED OF COMMON STOCK(1)
---------------------------------------- ------------------ ------------------
<S> <C> <C>
Douglas L. Michels(2).............................. 4,133,112 10.37%
Alok Mohan(3)...................................... 617,333 1.54%
Robert M. McClure(4)............................... 135,832 *
Gilbert P. Williamson(5)........................... 130,500 *
R. Duff Thompson(5)................................ 22,000 *
Ninian Eadie(5).................................... 97,000 *
Ronald Lachman(6).................................. 151,000 *
James Wilt(7)...................................... 461,015 1.16%
David McCrabb(8)................................... 370,020 *
Steven M. Sabbath(9)............................... 148,225 *
Michael Orr(5)..................................... 53,125 *
All directors and executive officers as a group (15
persons)(10)..................................... 6,572,998 15.68%
</TABLE>
---------------
* Represents less than one percent.
(1) Based on 39,436,263 shares of common stock outstanding as of October 31,
2000. Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options held by that person that
are currently exercisable or exercisable within 60 days of October 31,
2000 are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership of each
other person.
(2) Includes 434,712 shares of common stock issuable pursuant to options
exercisable within 60 days of September 30, 2000.
(3) Includes 557,498 shares of common stock issuable pursuant to options
exercisable within 60 days of September 30, 2000.
(4) Includes 132,500 shares of common stock issuable pursuant to options
exercisable within 60 days of September 30, 2000.
(5) Represents shares of common stock issuable pursuant to options exercisable
within 60 days of September 30, 2000.
(6) Includes 79,000 shares of common stock issuable pursuant to options
exercisable within 60 days of September 30, 2000.
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(7) Includes 249,339 shares of common stock issuable pursuant to options
exercisable within 60 days of September 30, 2000.
(8) Includes 355,811 shares of common stock issuable pursuant to options
exercisable within 60 days of September 30, 2000.
(9) Includes 128,000 shares of common stock issuable pursuant to options
exercisable within 60 days of September 30, 2000.
(10) Includes 2,476,980 shares of common stock issuable pursuant to options
exercisable within 60 days of September 30, 2000.
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<PAGE> 156
DESCRIPTION OF CALDERA AND NEW CALDERA CAPITAL STOCK
GENERAL
The following summary includes all of the material provisions of Caldera
and New Caldera's capital stock. Except where otherwise indicated, they are
identical. However, you should read the New Caldera certificate of incorporation
attached as Appendix D and the New Caldera bylaws attached as Appendix E.
The authorized capital stock of Caldera consists of 100,000,000 shares, of
which 75,000,000 are common stock, par value $0.001 per share, and 25,000,000
are preferred stock, par value $0.001 per share. If proposal four included in
this Proxy Statement is approved by the stockholders, the authorized capital
stock of Caldera and New Caldera will consist of 200,000,000 shares, of which
175,000,000 will be common stock, par value $0.001 per share, and 25,000,000
will be preferred stock, par value $0.001 per share. Based on the shares of
Caldera common stock outstanding on October 31, 2000, immediately following the
combination, there will be outstanding approximately 55.7 million shares of New
Caldera common stock.
COMMON STOCK
Dividend Rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
at the times and in the amounts as the board of New Caldera may from time to
time determine.
Voting Rights. Each common stockholder is entitled to one vote for each
share of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors are not provided for in New
Caldera's articles of incorporation, which means that the holders of a majority
of the shares voted will be able to elect all of the directors then standing for
election.
No Preemptive or Similar Rights. New Caldera's common stock is not
entitled to preemptive rights and is not subject to conversion or redemption.
Right to Receive Liquidation Distributions. Upon a liquidation,
dissolution, or winding up of New Caldera, the assets legally available for
distribution to New Caldera's stockholders are distributable ratably among the
holders of New Caldera's common stock and any participating preferred stock
outstanding at that time after payment of liquidation preferences, if any, on
any outstanding preferred stock and payment of other claims of creditors.
PREFERRED STOCK
Upon the closing of the combination, there will be no shares of preferred
stock outstanding. The board of directors of New Caldera will be authorized,
without further stockholder approval, to issue from time to time up to an
aggregate of 25,000,000 shares of preferred stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each series thereof, including the
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, including sinking fund provisions, redemption price or prices,
liquidation preferences and the number of shares constituting any series or
designation of series. See "-- Anti-Takeover Effects of Various Provisions of
Delaware Law and New Caldera's Certificate of Incorporation and Bylaws."
REGISTRATION RIGHTS
Pursuant to a second amended and restated investors rights agreement, dated
January 7, 2000, which Caldera Systems entered into with holders of 11,596,146
shares of its common stock (assuming conversion of all outstanding shares of
preferred stock), the holders of these shares will be entitled to certain
registration rights regarding the same number of shares of New Caldera to be
owned by them upon the closing of the combination. The registration rights
provide that if New Caldera proposes to register any
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<PAGE> 157
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights, they are
entitled to notice of the registration and are entitled to include shares of
their common stock in the registration. This right is subject to conditions and
limitations, including the right of the underwriters in an offering to limit the
number of shares included in the registration. Beginning on September 20, 2000,
the holders of at least 22 percent of these shares may also require New Caldera
to file up to two registration statements under the Securities Act at its
expense with respect to their shares of common stock. New Caldera is required to
use its best efforts to effect these registrations, subject to conditions and
limitations. Furthermore, the holders of these shares may require New Caldera to
file additional registration statements on Form S-3, subject to conditions and
limitations. These rights terminate on the earlier of March 20, 2003, or when a
holder is able to sell all its shares pursuant to Rule 144 under the Securities
Act in any 90-day period.
Pursuant to the reorganization agreement, New Caldera has agreed to
register shares of New Caldera held by SCO for distribution to SCO's
shareholders. See "The Reorganization Agreement -- Distribution and Registration
of Shares."
DELAWARE ANTI-TAKEOVER LAW AND CHARTER PROVISIONS
The provisions of the Delaware General Corporation Law, New Caldera's
certificate of incorporation and its bylaws described below may have the effect
of delaying, deferring, or discouraging another person from acquiring control of
New Caldera.
New Caldera is subject to the provisions of Section 203 of the Delaware
General Corporation Law regulating corporate takeovers. This section prevents
Delaware corporations from engaging, under limited circumstances, in a business
combination, which includes a merger or sale of more than 10% of the
corporation's assets, with any interested stockholder, which is a stockholder
who owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of stockholders, for three years following the date
that the stockholder became an interested stockholder unless:
- the transaction is approved by the board of directors before the date the
interested stockholder attained that status;
- upon the closing of the transaction that resulted in the stockholder
becoming an interested stockholder, the stockholder owned at least 85% of
the voting stock of the corporation outstanding at the time the
transaction commenced; or
- on or after the date the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders
by at least two-thirds of the outstanding voting stock that is not owned
by the interested stockholder.
A Delaware corporation may opt out of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
However, New Caldera has not opted out of this provision. This provision of the
Delaware General Corporation Law could prohibit or delay mergers or other
takeover or change-in-control attempts and may discourage attempts to acquire
New Caldera.
CHARTER AND BYLAWS
Charter
New Caldera's certificate of incorporation provides that all stockholder
actions must be effected at a duly-called annual or special meeting and not by a
consent in writing. New Caldera's certificate of incorporation also requires the
approval of its board of directors to adopt, amend or repeal its bylaws. In
addition, New Caldera's certificate of incorporation permits the stockholders to
adopt, amend or repeal its bylaws only upon the affirmative vote of the holders
of at least two-thirds of the voting power of all then outstanding shares of
stock entitled to vote.
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<PAGE> 158
Directors are removable for cause only by stockholders holding a majority
of the then-outstanding shares of stock entitled to vote. Vacancies on the board
of directors resulting from death, resignation, removal or other reason may be
filled by a majority of the directors then in office, even if less than a
quorum. Vacancies from newly created directorships must be filled by a majority
of the directors then in office. Lastly, the provisions in the certificate of
incorporation described above and other provisions pertaining to the limitation
of liability and indemnification of directors may be amended or repealed only
with the affirmative vote of the holders of at least two-thirds of the voting
power of all then outstanding shares of stock entitled to vote.
These provisions may have the effect of deterring hostile takeovers or
delaying changes in the control or management of New Caldera, which could have
an adverse effect on the market price of its common stock.
Bylaws
New Caldera's bylaws also contain many of the provisions in its certificate
of incorporation described above. Its bylaws will not permit stockholders to
call a special meeting. In addition, New Caldera's bylaws establish an advance
notice procedure for matters to be brought before an annual or special meeting
of its stockholders, including the election of directors. Business permitted to
be conducted at any annual meeting or special meeting of stockholders is limited
to business properly brought before the meeting.
New Caldera's bylaws also provide that it will indemnify officers and
directors against losses that they may incur in investigations and legal
proceedings resulting from their services to New Caldera, which may include
services in connection with takeover defense measures. These provisions may have
the effect of preventing changes in New Caldera's management.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
New Caldera's certificate of incorporation limits the liability of
directors to the fullest extent permitted by the Delaware General Corporation
Law. In addition, New Caldera's certificate of incorporation and bylaws provide
that it will indemnify its directors and officers to the fullest extent
permitted by the Delaware General Corporation Law. New Caldera will enter into
separate indemnification agreements with its directors and executive officers
that provide them indemnification protection if its certificate of incorporation
is subsequently amended.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for New Caldera's common stock will be
American Securities Transfer and Trust, Inc.
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COMPARISON OF RIGHTS OF HOLDERS OF SCO COMMON STOCK
AND NEW CALDERA COMMON STOCK
The following is a summary of certain differences between the rights of
holders of SCO common stock and holders of New Caldera common stock. While we
believe that this summary covers the material differences, it may not contain
all of the information that is important to holders of SCO common stock. In
order to more completely understand the differences between the rights of
holders of SCO common stock and holders of New Caldera common stock, SCO
shareholders should carefully read all of the original documents and statutes
referenced in this summary.
The rights of holders of SCO common stock with respect to such stock are
governed by the articles of incorporation and bylaws of SCO, each as currently
in effect, and the Corporation Law of the State of California. The shares of New
Caldera common stock that will be acquired by SCO and the options to purchase
shares of New Caldera common stock that will be acquired by certain SCO option
holders as a result of the combination will have rights that are governed by the
certificate of incorporation and bylaws of New Caldera, each as in effect as of
the effective time of the combination, and the General Corporation Law of the
State of Delaware.
APPLICABLE STATE CORPORATE LAW
SCO is incorporated under the laws of the State of California and is
governed by the Corporation Law of the State of California. New Caldera is
incorporated under the laws of the State of Delaware and is governed by the
General Corporation Law of the State of Delaware. As a result of this difference
in governing law, the shares of New Caldera common stock that will be acquired
by SCO and the options to purchase shares of New Caldera common stock that will
be acquired by SCO option holders as a result of the combination may have
statutory rights different than those associated with shares of SCO common
stock.
Important differences between the Corporation Law of the State of
California and the General Corporation Law of the State of Delaware include, but
are not limited to, the following:
- Delaware law allows a corporation to limit directors' liability and
indemnify directors against claims to a greater extent than is permitted
under California law.
- Delaware law allows a corporation to take more extensive anti-takeover
measures than are permitted under California law, including allowing a
Delaware corporation to eliminate special stockholder meetings and to
elect a classified board of directors.
- Delaware law includes a specific anti-takeover statute that prevents
certain business combinations not approved by the incumbent board.
California law has no analogous statute.
In addition, Delaware law and California law differ in their treatment of
appraisal rights, the payment of dividends, and shareholder voting related to
business combinations and combinations.
As a Delaware corporation, New Caldera is subject to the provisions of
Section 203 of the General Corporation Law of the State of Delaware. Under
certain circumstances, the provisions of Section 203 may make the consummation
of various business transactions by "interested stockholders," as defined in
Section 203, with New Caldera more difficult for a three-year period following
the time that a stockholder becomes an "interested stockholder." A corporation
may waive the protective provisions of Section 203 in its certificate of
incorporation or bylaws, but New Caldera has not currently done so.
CERTIFICATES OF INCORPORATION AND BYLAWS
Authorized and Outstanding Capital Stock
SCO has two classes of authorized capital stock, designated "common stock"
and "preferred stock." SCO is authorized to issue 100,000,000 shares of common
stock and, as of August 15, 2000, there were 36,121,982 shares of common stock
outstanding. SCO is authorized to issue 20,000,000 shares of preferred stock,
with such rights, preferences and designations that the board of directors of
SCO may determine. Currently there are no outstanding shares of SCO preferred
stock.
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New Caldera will have two classes of authorized capital stock, designated
"common stock" and "preferred stock," each with a par value of $0.001 per share.
If proposal four described in this proxy is approved, New Caldera will be
authorized to issue 175,000,000 shares of common stock. New Caldera will be
authorized to issue 25,000,000 shares of preferred stock, with such rights,
preferences and designations that the board of directors of New Caldera may
determine. There are currently no outstanding shares of New Caldera preferred
stock.
Voting Rights
Except with respect to the election of directors, holders of SCO common
stock are entitled to one vote on all matters submitted to SCO shareholders for
their approval for each share of common stock held. Under certain circumstances,
holders of SCO common stock are entitled to cumulate votes for the election of
directors. Where votes are cumulated for the election of directors, each holder
of SCO common stock is entitled to that number of votes which is equal to the
total number of shares of SCO common stock held, multiplied by the number of
directors being elected. The cumulative number of votes allotted to each SCO
shareholder using this formula may be allocated by such shareholder in any
manner, including for a single director, or for two or more directors, at the
discretion of such SCO shareholder. Under SCO's bylaws, all matters submitted to
the shareholders (including the election of directors) must be approved by a
majority of the votes cast in a meeting where a quorum is present.
Holders of New Caldera common stock are also entitled to one vote on all
matters submitted to New Caldera stockholders for their approval for each share
held. However, holders of New Caldera common stock are not entitled to cumulate
votes for the election of directors. Pursuant to New Caldera's bylaws, all
matters submitted to the stockholders (including the election of directors) must
be approved by a majority of the votes cast in a meeting where a quorum is
present.
BOARD OF DIRECTORS
Board Size
The bylaws of SCO currently provide that the board of directors of SCO may
consist of between seven and twelve directors, and the exact number of directors
has been fixed at nine by resolution of SCO's board. Pursuant to SCO's bylaws,
the permissible range of size of SCO's board of directors may only be changed by
an amendment to the bylaws approved by the shareholders, but the board may
unilaterally fix the size of the board at any level within the permissible
range. SCO's articles of incorporation do not place any restrictions on the size
of SCO's board of directors.
Pursuant to New Caldera's certificate of incorporation, New Caldera's board
of directors may consist of between five and fifteen directors, as designated in
the bylaws. Within the range permitted by the certificate of incorporation, the
size of New Caldera's board of directors may be changed by resolution of the
board. Pursuant to the reorganization agreement and the stockholders agreement,
the size of the New Caldera board will be fixed at nine.
Board Classification
Neither the board of directors of SCO nor the board of directors of New
Caldera is classified.
Board Vacancies
SCO's bylaws provide that any vacancy on SCO's board of directors may be
filled by the remaining members of the board of directors (even if less than a
quorum), or the sole remaining director, except that any vacancies created by
removal of a director by vote of the shareholders or court order may only be
filled by a vote of the shareholders. In addition, the shareholders may fill any
vacancies not filled by the directors. SCO's bylaws provide that a vacancy in
the board of directors can result from the death, resignation or removal of a
director, a further increase in the size of the board of directors, or a failure
of the shareholders to elect enough directors to fill the board.
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New Caldera's certificate of incorporation provides that any vacancy on New
Caldera's board of directors, whether from the death, resignation or removal of
a director or an increase in the size of the board of directors, may be filled
in a meeting where a quorum exists by a majority of the directors then in
office, even if less than a quorum, or the sole remaining directors.
Removal of Directors
SCO's articles of incorporation and bylaws make no special provisions for
the removal of directors. Under the Corporation Law of the State of California,
any member of SCO's board of directors, or the entire board of directors, may be
removed with or without cause by the holders of a majority of the outstanding
shares of SCO capital stock entitled to vote generally for the election of
directors. Notwithstanding the foregoing, if less than the entire board of
directors is removed, no director may be removed if the votes cast against his
or her removal would be sufficient to elect such director if voted cumulatively.
The removal of New Caldera's directors is governed by the General
Corporation Law of the State of Delaware, which provides that any member of
SCO's board of directors, or the entire board of directors, may be removed with
or without cause by the holders of a majority of the outstanding shares of SCO
capital stock entitled to vote generally for the election of directors.
Shareholder/Stockholder Action by Written Consent
Pursuant to SCO's bylaws, shareholders may take formal action at a meeting
of shareholders duly called and held in accordance with the bylaws and
applicable law or pursuant to a written consent. Where shareholders take action
by written consent, such written consent is effective only if signed by
shareholders holding at least the number of shares of capital stock that would
be required to authorize or take such action at a meeting of shareholders at
which all shares of capital stock entitled to vote on such action were present
and voted, except that in the case of election of directors, a written consent
is effective only if signed by the holders of all outstanding shares entitled to
vote for the election of directors.
Pursuant to New Caldera's bylaws, stockholders may only take formal action
at a duly called stockholder meeting held in accordance with the bylaws and
applicable law. New Caldera's bylaws do not permit stockholders to take action
by written consent.
Ability to Call Special Meetings
Pursuant to SCO's bylaws, a special meeting of SCO shareholders may be
called by the board of directors of SCO, the chairman of the board of directors,
SCO's president, or the holders of at least 10% of the outstanding shares of SCO
capital stock entitled to vote at the meeting. If any person or group of persons
other than the board of directors, chairman, or president desires to call a
special meeting of SCO shareholders, the person or group must give the chairman,
president, vice-president, or secretary of SCO a written notice stating the
general nature of the business proposed to be transacted. Such written notice
must be delivered not less than 35 nor more than 60 days before the date of the
proposed special meeting. SCO's bylaws provide that no business other than that
specified in the notice may be transacted at a special meeting.
Pursuant to New Caldera's bylaws, a special meeting of New Caldera
stockholders may be called only by the chairman of the board or by a majority of
the board. The bylaws of New Caldera further provide that the only business that
may be conducted at a special meeting of New Caldera stockholders is such
business as is set forth in the notice of the special meeting.
Advance Notice Provisions for Shareholder/Stockholder Nominations and Proposals
SCO's bylaws impose no additional notice requirements for shareholder
nominations and proposals beyond those generally necessary for annual and
special meetings.
New Caldera's bylaws provide that stockholder proposals (and nominations of
directors) will not be considered at any annual meeting of New Caldera
stockholders unless timely made. Stockholder proposals
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(and nominations of directors) are timely made only if delivered to the New
Caldera's principal executive offices at least 120 days prior to the date of the
meeting. Both stockholder proposals and stockholder nominations of directors
must include certain information specified in the bylaws.
Amendment of Articles/Certificate of Incorporation And Bylaws
SCO's articles of incorporation may be amended in accordance with the
applicable provisions the Corporation Law of the State of California, which
generally require the affirmative vote of the holders of a majority of
outstanding capital stock entitled to vote. SCO's bylaws may be amended by a
majority of the outstanding capital stock entitled to vote or by action of the
board of directors (except that the board may not amend the bylaws to change the
number or permissible range of numbers of authorized directors).
New Caldera has reserved the right to amend, alter, change or repeal any
provision of its certificate of incorporation in accordance with the applicable
provisions of the General Corporation Law of the State of Delaware, which
generally require the affirmative vote of the holders of a majority of
outstanding capital stock entitled to vote to approve an amendment to a
certificate of incorporation. New Caldera's certificate of incorporation further
requires the affirmative vote of two-thirds the outstanding voting stock to
amend, alter, change or repeal the provisions of the certificate of
incorporation regarding directors, stockholder meetings, limitations of
directors' liability, indemnification, amendment of the bylaws, or amendment of
the certificate of incorporation.
Pursuant to New Caldera's certificate of incorporation and bylaws, New
Caldera's bylaws may be altered, amended, or repealed by a majority vote of the
board of directors taken at any regular meeting or at a special meeting where
notice of the proposed alteration, amendment, or repeal is given. New Caldera's
bylaws may also be altered, amended, or repealed by a vote of 66 2/3% of the
outstanding voting stock.
Limitation of Liability of Directors
SCO's articles of incorporation provide that the personal liability of
SCO's directors to SCO and its shareholders for monetary damages arising out of
a breach of the directors' fiduciary duties has been expressly eliminated to the
fullest extent permitted by the Corporation Law of the State of California.
Currently, the Corporation Law of the State of California permits a corporation
to include a provision in its articles of incorporation or bylaws enabling the
corporation to limit or eliminate the personal liability of its directors to the
corporation for damages arising out of a breach of the directors' fiduciary
duties, subject to certain limitations. The limitation of liability permitted by
California law does not apply to actions brought directly by shareholders (such
as a shareholder class action lawsuit) or to liabilities resulting from "acts or
omissions that show a reckless disregard for the director's duty to the
corporation or its shareholders in circumstances in which the director was
aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of serious injury to the corporation or its
shareholders" or "acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
corporation or its shareholders."
New Caldera's certificate of incorporation provides that the personal
liability of New Caldera's directors to New Caldera and its stockholders for
monetary damages arising out of a breach of the directors' fiduciary duties has
been expressly eliminated to the fullest extent permitted by the General
Corporation Law of the State of Delaware. In addition, New Caldera's certificate
of incorporation provides that if the General Corporation Law of the State of
Delaware is amended to authorize the further elimination or limitation of the
liability of a director, then the liability of New Caldera's directors will be
eliminated or limited to the fullest extent permitted by the General Corporation
Law of the State of Delaware as so amended. Currently, the General Corporation
Law of the State of Delaware permits a corporation to include a provision in its
certificate of incorporation or bylaws enabling the corporation to limit or
eliminate the personal liability of its directors to the corporation or its
stockholders for damages arising out of a breach of the directors' fiduciary
duties, subject to certain limitations.
While these provisions provide the directors of SCO and New Caldera with
protection against awards for monetary damages arising out of a breach of
fiduciary duties, they do not eliminate the duty itself.
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Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based upon a director's
breach of his or her fiduciary duties.
Indemnification of Directors and Officers
SCO's bylaws require SCO to indemnify any person who is or was a director
or officer of SCO (or any predecessor of SCO) for any expenses, judgments and
fines actually incurred and amounts paid in settlement in connection with any
third party action, suit or other proceeding (other than a suit by or in the
right of SCO) to the fullest extent permitted by the Corporation Law of the
State of California. To the extent that SCO is required to indemnify a person
for expenses in accordance with the foregoing, SCO's bylaws require SCO to
advance such expenses to a person entitled to indemnification during a
proceeding if such person provides SCO with an undertaking to repay such
expenses if it is ultimately determined that such person is not entitled to
indemnification under SCO's bylaws. The indemnification provisions of SCO's
bylaws are not exclusive of any other rights that a person may have under any
bylaws, agreements between SCO and such person, or vote of SCO shareholders or
disinterested directors or otherwise.
The Corporation Law of the State of California permits a corporation to
indemnify its directors, officers, employees and agents for any liability
arising out of an action or threatened action, other than an action by or in the
right of the corporation, to which such person is a party due to his or her
service as a director, officer, employee or agent, provided that such person
acted in good faith and in a manner he or she reasonably believed to be in the
best interests of the corporation, and with respect to any criminal action,
which he or she had no reason to believe was unlawful. The Corporation Law of
the State of California permits a corporation to indemnify its directors,
officers, employees and agents for any expenses actually and reasonably occurred
in connection with the defense or settlement of an action threatened action by
or in the right of the corporation to which such person is a party due to his or
her service as a director, officer, employee or agent, provided that such person
acted in good faith and in a manner he or she reasonably believed to be in the
best interests of the corporation, except that there may be no such
indemnification if the person is found liable to the corporation unless, in such
a case, the court determines that such person is entitled to indemnification.
New Caldera's bylaws require New Caldera to indemnify any person who is or
was a director or officer of New Caldera (or any predecessor of New Caldera) for
any expenses, liabilities and losses reasonably incurred in connection with any
action, suit or proceeding to the fullest extent permitted by the General
Corporation Law of the State of Delaware. To the extent that New Caldera is
required to indemnify a person for expenses in accordance with the foregoing,
New Caldera is also required to advance expenses during a proceeding if the
person provides New Caldera with an undertaking to repay such expenses if it is
ultimately determined that such person is not entitled to indemnification under
New Caldera's bylaws. Notwithstanding the foregoing, New Caldera is not required
to advance expenses to any person against whom New Caldera brings a claim
alleging that such person willfully misappropriated corporate assets, disclosed
confidential information, or willfully and in bad faith breached such person's
duty to New Caldera or its stockholders.
The General Corporation Law of the State of Delaware permits a corporation
to indemnify its directors, officers, employees and agents for any liability
arising out of an action or threatened action, other than an action by or in the
right of the corporation, to which such person is a party due to his or her
service as a director, officer, employee or agent, provided that such person
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interests of the corporation, and with respect to any
criminal action, which he or she had no reason to believe was unlawful. The
General Corporation Law of the State of Delaware permits a corporation to
indemnify its directors, officers, employees and agents for any liability
arising out of an action or threatened action by or in the right of the
corporation to which such person is a party due to his or her service as a
director, officer, employee or agent, provided that such person acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed to,
the best interests of the corporation, except that there may be no such
indemnification if the person is found liable to the corporation unless, in such
a case, the court determines that such person is entitled to indemnification.
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ADDITIONAL PROPOSALS TO BE VOTED UPON BY CALDERA STOCKHOLDERS
At the Caldera special meeting of stockholders, you will be asked to
consider the following proposals in addition to Proposal One: Approval and
adoption of the combination:
2. Amendments to the Caldera 1999 Omnibus Stock Incentive Plan to increase
the number of shares reserved for issuance from 4,105,238 to 6,405,238
and to provide for an automated director option grant program.
3. Amendments to the 2000 Employee Stock Purchase Plan to increase the
number of share reserved for issuance from 500,000 to 2,000,000.
4. Amendment to the Caldera certificate of incorporation increasing the
number of authorized shares of common stock of Caldera from 75,000,000
to 175,000,000.
None of the proposals, including Proposal One, is contingent upon the
passage of any other proposal.
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PROPOSAL TWO: APPROVAL OF AMENDMENTS TO THE
STOCK INCENTIVE PLAN
Caldera's stockholders are being asked to approve a series of amendments to
Caldera's 1999 Omnibus Stock Incentive Plan (the "1999 Plan") that will effect
the following changes: (i) increase the maximum number of shares of common stock
authorized for issuance over the term of the 1999 Plan by an additional
2,300,000 shares to 6,405,238 shares, (ii) establish an automatic share increase
feature pursuant to which the number of shares available for issuance under the
1999 Plan will automatically increase, beginning with the 2000 calendar year, as
of November 1 of each year, by 3% of the total number of shares of common stock
outstanding on the previous October 31st, (iii) add a formula awards program
pursuant to which directors of Caldera will automatically be granted options to
purchase shares of common stock at specified times, including an option to
purchase 100,000 shares of common stock on the date of the annual shareholders
meeting during each even numbered calendar year.
The purpose of the proposed share increase and automatic annual share
increase feature is to assure that a sufficient reserve of common stock is
available under the 1999 Plan to attract and retain the services of individuals
essential to Caldera's long-term growth and success. The purpose of establishing
the director formula awards program is to provide directors an inducement for
continued service on the board of directors of the Caldera.
The 1999 Plan became effective on December 1, 1999, subject to the
requisite approval of the shareholders of Caldera, which was received on
December 1, 1999. The 1999 Plan was amended on March 10, 2000 to increase the
number of shares of common stock subject to the 1999 Plan and then again on July
14, 2000 to increase the number of shares subject to the 1999 Plan, add the
formula award program, and make various other changes to the provisions
governing awards granted under the 1999 Plan. Unless earlier terminated by the
Board, the right to grant incentive awards under the 1999 Plan will terminate on
December 1, 2009. Incentive awards outstanding when the 1999 Plan terminates
will remain in effect according to their terms and the provisions of the 1999
Plan.
The following is a summary of the principal features of the 1999 Plan,
including the amendments which will become effective upon stockholder approval
of this Proposal No. Two, together with the applicable tax and accounting
implications for Caldera and the participants. However, the summary does not
purport to be a complete description of all the provisions of the 1999 Plan. Any
stockholder of Caldera who wishes to obtain a copy of the actual plan document
may do so upon written request to Caldera's Chief Financial Officer at its
principal executive office located at 240 West Center Street Orem, Utah 84057.
The telephone number of such office is (801) 765-4999.
You should note that, if the proposed transactions with New Caldera and SCO
are approved and consummated, New Caldera will assume the 1999 Plan, and all
incentive awards granted under the 1999 Plan will apply to shares of common
stock of New Caldera. All references in the following summary to "Caldera"
should be read to include all successors in interest to Caldera, including, if
the proposed transactions are consummated, New Caldera.
GENERAL
The 1999 Plan is intended to promote the interests of Caldera and its
shareholders by providing directors, officers, employees and other persons,
including outside consultants, who are expected to make a long-term contribution
to the success of Caldera with appropriate incentives and rewards to encourage
them to enter into and continue in the employ of Caldera and to acquire a
proprietary interest in the long-term success of Caldera, thereby aligning their
interests more closely to the interests of Caldera's shareholders.
In addition to the 1999 Plan, Caldera has previously adopted the 1998 Stock
Option Plan pursuant to which the Caldera has granted options to purchase
3,252,088 shares of common stock, of which 813,800 options have been exercised
or cancelled and 2,438,288 options remain outstanding. Upon approval of the 1999
Plan, the 1998 Stock Option Plan was terminated. Accordingly, although
previously granted options
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remain outstanding and subject to the terms of the 1998 Stock Option Plan,
Caldera may not grant any new options (upon the expiration of previously granted
options or otherwise) under the 1998 Stock Option Plan.
SHARES COVERED BY THE 1999 PLAN
The 1999 Plan presently authorizes the grant of incentive awards with
respect to an aggregate of 4,105,238 shares of common stock. If the stockholders
approve Proposal Number Two, the number of shares authorized for incentive
awards under the 1999 Plan will increase to 6,405,238, and such number will
automatically increase, as of November 1 of each year beginning in 2000, by 3%
of the total number of shares of common stock outstanding on the previous
October 31st. Notwithstanding a greater increase in the number of shares subject
to the 1999 Plan, the number of shares that may be issued upon the exercise of
incentive stock options under the 1999 Plan shall in no event exceed 6,405,238
shares, increased by 100,000 shares on November 1 of each year between 2000 and
2008.
Shares issued pursuant to the 1999 Plan may be authorized and unissued
shares, treasury shares or shares acquired by Caldera for purposes of the 1999
Plan. Generally, shares subject to an incentive award that remain unissued upon
expiration, cancellation, surrender, exchange, or termination of the incentive
award will be available for other incentive awards under the 1999 Plan.
CHANGES IN CAPITALIZATION
In the event that the committee appointed by the Board to administer the
1999 Plan (the "Committee") determines that any dividend or other distribution,
stock split, reverse stock split, recapitalization, reorganization, merger,
consolidation, spin-off, combination, repurchase, share exchange, or other
similar corporate transaction or event affects the common stock such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
rights of participants under the 1999 Plan, then the Committee will make such
equitable changes or adjustments as it deems necessary to the aggregate number
of shares available under the 1999 Plan, the number and kinds of shares that may
thereafter be used for any incentive award, and the number of shares subject to
and exercise price, grant price, or purchase price of each outstanding award.
ADMINISTRATION
The 1999 Plan is administered by the Committee, which consists of two or
more persons appointed (and removable) by the board of directors in its
discretion, each of whom must be an "outside director" within the meaning of
Section 162(m) of the Code and a "nonemployee director" within the meaning of
Rule 16b-3 promulgated under the Securities Exchange Act 1934, as amended. The
Committee is authorized, among other things, to do the following:
- to construe, interpret and implement the provisions of the 1999 Plan;
- to select the persons to whom incentive awards will be granted;
- to determine when incentive awards will be granted;
- to determine the terms and conditions of such incentive awards;
- to establish the performance criteria under which incentive awards will
be granted;
- to determine when and under what circumstances an incentive award can be
settled, canceled, forfeited, exchanged, or surrendered;
- to make rules with respect to the 1999 Plan;
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- to determine the terms and provisions of award agreements, which are
required to accompany and evidence any incentive award under the Plan
(the terms of which are accepted by any Participant through the act of
accepting the incentive award); and
- to make all other determinations deemed necessary or advisable for the
administration of the 1999 Plan.
The 1999 Plan provides that no member of the Committee shall be liable for
any action, omission or determination relating to the 1999 Plan and that Caldera
shall indemnify and hold harmless each member of the Committee and each other
director or employee of Caldera to whom any duty or power relating to the
administration or interpretation of the 1999 Plan has been delegated against any
cost, expense or liability arising out of any action, omission or determination
relating to the 1999 Plan, if, in either case, such action, omission or
determination was taken or made by such member, director or employee in good
faith and in a manner such member, director or employee reasonably believed to
be in or not opposed to the best interests of Caldera.
ELIGIBILITY
The persons who are eligible to receive awards pursuant to the 1999 Plan
include all employees and directors of Caldera and its subsidiaries and such
other persons, including outside consultants, whom the Committee determines are
expected to make a contribution to Caldera. The Committee may grant incentive
awards to any, all or none of such eligible persons at any time, from time to
time, during the term of the 1999 Plan. "Participants" in the 1999 Plan are
persons who both are eligible to receive an incentive award pursuant to the 1999
Plan and to whom an incentive award is granted pursuant to the 1999 Plan, and,
upon his or her death, his or her successors, heirs, executors and
administrators, as the case may be.
INCENTIVE AWARDS UNDER THE 1999 PLAN
Awards under the 1999 Plan may be made in the form of (i) incentive stock
options, (ii) non-qualified stock options, (iii) tandem or stand-alone stock
appreciation rights, (iv) restricted stock, (v) phantom stock and (vi) stock
bonuses. Each award granted under the 1999 Plan (except an unconditional stock
bonus) shall be evidenced by an award agreement containing such provisions as
the Committee shall deem desirable.
STOCK OPTIONS
General. The Committee determines, and sets forth in the applicable award
agreement, whether an option is an incentive stock option or a non-qualified
stock option, the vesting schedule of each option, and the expiration date of
each option; provided, however, no incentive stock option may be exercisable
more than 10 years after the date of grant. The purchase price per share payable
upon the exercise of an option is established by the Committee. With respect to
non-qualified stock options, the Option Exercise Price may be less than the fair
market value of a share of our common stock on the date such option is granted.
With respect to incentive stock options, the Option Exercise Price may not be
less than the fair market value of a share of common stock on the date the
option is granted. During the period our common stock is traded on the Nasdaq
National Market, the fair market value of a share of common stock is the closing
sales price of a share of our common stock on such market on the most recent
trading day on which there was a sale of our common stock on such market. The
closing sales price of a share of our common stock on October 31, 2000 was
$3.50. Unless the applicable award agreement provides otherwise, an option
becomes cumulatively exercisable as to 25 percent of the shares covered thereby
on each of the first, second, third and fourth anniversaries of the date of
grant. Only individuals who are employees of Caldera or any subsidiary of
Caldera as of the date of the grant are eligible to receive incentive stock
options.
Exercise of Options. An option may be exercised by delivering notice to
Caldera's Secretary no later than one business day in advance of the effective
date of the proposed exercise. Subject to the terms of
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the award agreement, payment for shares of common stock purchased upon the
exercise of an option shall be made on the effective date of such exercise by
one or a combination of the following means:
- in cash, by certified check, bank cashier's check or wire transfer;
- subject to any restrictions imposed by applicable securities laws, by
delivering a properly executed exercise notice to Caldera together with a
copy of irrevocable instructions to a broker to deliver promptly to
Caldera the amount of sale or loan proceeds to pay the full amount of the
purchase price;
- by delivering shares of common stock owned by the Participant with
appropriate stock powers;
- by electing to have Caldera retain shares of common stock which would
otherwise be issued on the exercise of the option; or
- any combination of the foregoing forms, as approved by the Committee.
The options granted under the 1999 Plan to date do not permit exercise by
delivery of common stock owned by the Participant or by electing to have Caldera
retain shares of common stock that would otherwise be issued on exercise.
Certain Limitations on Incentive Stock Options. The total number of shares
of common stock subject to incentive awards awarded to any employee during any
tax year of Caldera shall not exceed 200,000 shares of common stock.
To the extent that the aggregate fair market value of shares of common
stock with respect to which incentive stock options are exercisable for the
first time by a Participant during any calendar year under the 1999 Plan and any
other stock option plan of Caldera (or any subsidiary of Caldera) exceed
$100,000, such options are treated as non-qualified stock options. Fair market
value in this context refers to the fair market value of the common stock
subject to the option on the date on which each such incentive stock option is
granted.
In addition, the 1999 Plan prevents the issuance of any incentive stock
options to an individual if, at the time of such proposed grant, the individual
owns stock that represents more than ten percent (10%) of the total combined
voting power of all classes of stock of Caldera. This limitation does not apply
if the Option Exercise Price per share of the proposed incentive stock option is
at least one hundred ten percent (110%) of the fair market value of a share of
common stock at the time such proposed incentive stock option is granted and it
is not exercisable after five years from the date of grant.
Termination of Employment. In the event that the employment or service as a
director of a Participant with Caldera or a subsidiary of Caldera is terminated
by the employee or by Caldera for cause, unless the applicable award agreement
provides otherwise, (i) options granted to such Participant, to the extent that
they are exercisable at the time of such termination, remain exercisable until
the date that is 30 after such termination, on which date they shall expire, and
(ii) options granted to such Participant, to the extent that they were not
exercisable at the time of such termination, expire at the close of business on
the date of such termination. No option shall be exercisable after the
expiration of its original term.
In the event that the employment or service as a director of a Participant
with Caldera or a subsidiary of Caldera is terminated by Caldera in connection
with a reduction in force or by Caldera for any other reason other than death,
disability or cause, unless the applicable award agreement provides otherwise,
(i) options granted to such Participant, to the extent that they are exercisable
at the time of such termination, remain exercisable until the date that is 90
days (120 days in the case of a non-qualified option) after such termination, on
which date they shall expire, and (ii) options granted to such Participant, to
the extent that they were not exercisable at the time of such termination,
expire at the close of business on the date of such termination. No option shall
be exercisable after the expiration of its original term.
In the event that the employment of a Participant with Caldera or a
subsidiary of Caldera is terminated by reason of death or disability of the
Participant, unless the applicable award agreement
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provides otherwise, (i) options granted to such Participant, to the extent that
they are exercisable at the time of such termination, remain exercisable until
the date that is one year after such termination, on which date they shall
expire, and (ii) options granted to such Participant, to the extent that they
were not exercisable at the time of such termination, expire at the close of
business on the date of such termination. No option shall be exercisable after
the expiration of its original term.
Effect of a Change in Control. Under the 1999 Plan, a "Change in Control"
includes the following:
- acquisition by any person (with certain exceptions), directly or
indirectly, of fifty percent (50%) or more of the combined voting power
of Caldera's then outstanding securities;
- during a period of not more than two consecutive years following the
adoption of the 1999 Plan, individuals who at the beginning of such
period constitute the Board and any new director (with certain
exemptions) whose election by the Board or nomination for election was
approved by 2/3 of the directors then still in office who were either
directors when the 1999 Plan was adopted or approved as provided herein
cease to constitute a majority of the Board,
- Caldera's shareholders approve and Caldera consummates a merger or
consolidation, except for such a merger or consolidation after which the
shareholders prior to such merger or consolidation retain more than fifty
percent (50%) of the combined voting power of the corporation surviving
the merger and except for a merger or consolidation effected to implement
a recapitalization of Caldera in which no person acquired more than fifty
percent (50%) of the combined voting power of Caldera's then outstanding
securities; and
- Caldera's shareholders approve a plan of complete liquidation of Caldera
or an agreement for the sale or disposition by Caldera of all or
substantially all of Caldera's assets.
Upon the occurrence of a Change in Control, each outstanding option granted
under the 1999 Incentive that has vested may be, at Caldera's discretion, (i)
cashed out, (ii) converted to options of the acquiring entity, (iii) assumed by
the acquiring entity, or (iv) or otherwise disposed of in the manner provided in
any shareholder-approved agreement or plan governing such Change in Control. In
the absence of any governing provisions in any shareholder-approved agreement or
plan governing such Change in Control, the Committee may, on a case-by-case
basis, require any vested, exercisable options that remain outstanding following
a Change in Control to be cashed out and terminated in exchange for a lump sum
cash payment, shares of the acquiring entity or a combination thereof equal in
value to the fair market value of the option.
In the event of a Change in Control , each outstanding option granted under
the 1999 Plan that has not vested shall terminate, unless (i) otherwise provided
in the shareholder-approved agreement or plan governing such Change in Control,
or (ii) the Committee in its sole discretion on a case-by-case basis elects in
writing to waive termination.
TANDEM STOCK APPRECIATION RIGHTS
General. The Committee may grant, in connection with any option granted
under the 1999 Plan, tandem stock appreciation rights ("SARs") relating to a
number of shares of common stock less than or equal to the number of shares of
common stock subject to the related option. The exercise of a tandem SAR with
respect to any number of shares of common stock, which occurs through notice to
Caldera's Secretary no less than one business day in advance of the effective
date of the proposed exercise, entitles the Participant to a cash payment, for
each such share, equal to the excess of (i) the fair market value of a share of
common stock on the exercise date over (ii) the Option Exercise Price per share
of the related option.
Term and Exercisability. A tandem SAR is exercisable (i) only if and to the
extent that its related option is exercisable and (ii) only if at the time of
such exercise, the fair market value of a share of common stock exceeds the
Option Exercise Price per share of the related option. The exercise of a tandem
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SAR with respect to a number of shares of common stock causes the immediate and
automatic cancellation of its related option with respect to an equal number of
shares. The exercise of an option, or the cancellation, termination or
expiration of an option with respect to a number of shares of common stock
generally causes the automatic and immediate cancellation of any related tandem
SARs. Such tandem SARs are canceled in the order in which they became
exercisable. The 1999 Plan allows partial exercise of tandem SAR rights,
provided that no such partial exercise is for less than a number of shares
having an aggregate Option Exercise Price of less than $1,000.
STAND-ALONE STOCK APPRECIATION RIGHTS
The Committee may also grant stand-alone SARs independently of any option
granted under the 1999 Plan. The exercise of a stand-alone SAR with respect to
any number of shares of common stock entitles the Participant to a cash payment,
for each such share, equal to the excess of (i) the fair market value of a share
of common stock on the exercise date over (ii) the "Reference Value" per share
of the stand-alone SAR. The "Reference Value" is the greater of the fair market
value per share on the date of grant or the Reference Value set by the
Committee. Unless the applicable award agreement provides otherwise, a
stand-alone SAR becomes cumulatively exercisable as to 25 percent of the shares
covered thereby on each of the first, second, third and fourth anniversaries of
the date of grant. The Committee determines the expiration date of each
stand-alone SAR. The termination of a Participant's employment with Caldera or
the occurrence of an event that constitutes a Change in Control has the same
effect on a stand-alone SAR as on an option. The 1999 Plan allows for the
partial exercise of any stand-alone SAR, provided that no partial exercise shall
be for an aggregate Reference Value of less than $1,000.
RESTRICTED STOCK
General. The Committee may grant restricted shares of common stock to such
persons, in such amounts, and subject to such terms and conditions as the
Committee determines in its discretion. The Committee establishes vesting dates
for restricted stock, and, if awards of restricted stock are intended to be
"performance based compensation" for Section 162(m) of the Code, awards of
restricted stock must be contingent on the attainment by Caldera or a subsidiary
of Caldera of one or more pre-established performance goals (the "Performance
Goals") established by the Committee. The Performance Goals are based on the
attainment by Caldera (and/or its subsidiaries, if applicable) of any one or
more of the following criteria:
- a specified percentage return on total stockholder equity of Caldera;
- a specified percentage increase in earnings per share of common stock;
- a specified percentage increase in net income of Caldera; and/or
- a specified percentage increase in profit before taxation of Caldera.
The Committee in its discretion may require that any dividends paid on shares of
restricted stock be held in escrow until all restrictions on such shares have
lapsed. Performance goals are measured according to generally accepted
accounting principles and must be certified as being achieved by the Committee.
Restrictions on Transfer Prior to Vesting. When shares of restricted stock
are initially granted, the certificates representing such shares bear a legend
stating that the transferability of such shares is subject to the 1999 Plan and
the governing award agreement, and, unless the Committee determines otherwise,
such certificates are retained by Caldera, along with stock powers for the
benefit of Caldera relating to such shares. Prior to the vesting of a share of
restricted stock, no transfer of a Participant's rights with respect to such
share, whether voluntary or involuntary, by operation of law or otherwise, is
permitted. Immediately upon any attempt to transfer such rights, such share, and
all of the rights related thereto, will be forfeited by the Participant. Upon
the vesting of a share of restricted stock pursuant to the terms of the
applicable award agreement, such restrictions on transfer lapse, and Caldera is
required to issue a certificate without restrictive legend (other than any
legend that may be required by law). The Committee
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may impose at the time of granting any restricted stock any vesting conditions
that it, in its absolute discretion, deems appropriate.
Effect of Termination of Employment or Removal from Board. Upon the
termination of a Participant's employment or service with Caldera or any
subsidiary of Caldera for any reason other than cause, any and all non-vested
shares of restricted stock are immediately forfeited by the Participant and
transferred to Caldera, unless the applicable restricted stock Agreement
provides otherwise or, in its sole discretion, the Committee gives notice to the
Participant within thirty (30) days of the termination that the Participant
shall continue to be the owner of the restricted stock. If shares of restricted
stock are so forfeited, Caldera also has the right to require the return of all
dividends paid on such shares, whether by termination of any escrow arrangement
under which such dividends are held or otherwise. In the event of the
termination of a Participant's employment for cause, all shares of restricted
stock granted to such Participant that have not vested as of the date of such
termination shall immediately be returned to Caldera, together with any
dividends paid on such shares.
Effect of Change in Control. Upon the occurrence of an event that
constitutes a Change in Control, all restrictions on outstanding vested shares
of restricted stock immediately lapse and all outstanding shares of restricted
stock that have not vested as of the date the Change in Control occurs
immediately expire and are cancelled.
PHANTOM STOCK
General. The Committee may grant shares of phantom stock to such persons,
in such amounts, and subject to such vesting terms and conditions as the
Committee determines in its discretion. If the vesting requirements specified by
the Committee are met, the grantee of phantom stock will receive, within thirty
(30) days of the day such phantom stock vests, a cash payment equal to the sum
of (i) the fair market value of the shares of common stock on the date on which
such share of phantom stock vests and (ii) the aggregate amount of cash
dividends paid with respect to a share of common stock during the period
commencing on the date on which the share of phantom stock was granted and
terminating on the date on which such share vests. If awards of phantom stock
granted to Executive Officers of Caldera are intended to be "performance based
compensation" for Section 162(m) of the Code, the vesting of such awards of
phantom stock must be contingent on the attainment by Caldera or a subsidiary of
Caldera of any one or more of the Performance Goals noted above in the
discussion of restricted stock awards. Attainment of performance goals will be
measured based upon generally accepted accounting principles and must be
certified by the Committee as having been achieved.
Termination of Employment. Except as provided in the applicable award
agreement, shares of phantom stock that have not vested, together with any
dividends credited on such shares, will be forfeited upon the Participant's
termination of employment for any reason other than cause. Termination for cause
results in the immediate forfeiture of all shares of phantom stock granted to
the terminated Participant, together with any dividends credited on such shares.
Effect of Change in Control. Upon the occurrence of an event that
constitutes a Change in Control, all outstanding shares of phantom stock that
have not yet vested prior to the date constituting the Change in Control shall
immediately expire and be cancelled.
STOCK BONUS
The Committee may grant bonuses comprised of shares of common stock free of
restrictions to such persons, in such amounts, as the Committee determines in
its discretion.
AMENDMENT OR TERMINATION OF THE 1999 PLAN
The Board may suspend, revise, terminate or amend the 1999 Plan at any
time; provided, however, that shareholder approval must be obtained if and to
the extent that the Board deems it appropriate to satisfy Section 162(m) of the
Code, Section 422 of the Code or the rules of any stock exchange on which
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the common stock is listed. No action under the 1999 Plan may, without the
consent of the Participant, reduce the Participant's rights under any
outstanding award.
TRANSFERABILITY OF AWARDS DURING PARTICIPANT'S LIFETIME/FORFEITURE FOR FAILURE
TO COMPLY
During a Participant's lifetime, the Committee may permit or prohibit, in
its discretion, the transfer, assignment or other encumbrance of an outstanding
option or outstanding shares of restricted stock unless such option is an
incentive stock option. To the extent the Committee and respective participant
desire that incentive stock options shall remain incentive stock options,
incentive stock options are nontransferable except upon death. Subject to any
conditions the Committee imposes, options granted under the Plan may be
transferred to an immediate family member, if notice of such transfer is
received in exchange for such transfer to Caldera and no consideration is given
for the transfer. Rights with respect to other incentive awards granted under
the 1999 Plan may not be transferred, assigned or pledged.
Failure by a Participant (or beneficiary or transferee) to comply with any
of the terms and conditions of the 1999 Plan or the applicable award agreement,
unless such failure is remedied by such Participant (or beneficiary or
transferee) within ten days after notice of such failure by the Committee, is
grounds for the cancellation and forfeiture of the respective incentive award,
in whole or in part, as the Committee, in its absolute discretion, may
determine.
PROPOSED DIRECTORS FORMULA AWARD PROGRAM
If Proposal No. Two is approved by the stockholders, the 1999 Plan will be
amended to establish a program providing for the automatic grant of options to
directors of Caldera at specified times. If approved by the stockholders of
Caldera, the proposed formula awards program will have the following features:
GENERAL PROVISIONS OF PROPOSED FORMULA AWARD PROGRAM.
- Grant in 2002 Calendar Year. Each director who is elected to serve or
continues to serve as a director of Caldera following the date of the
regularly scheduled annual meeting of shareholders during the 2002
calendar year will automatically be granted an option to purchase 100,000
shares of common stock at an Option Exercise Price equal to the fair
market value of a share of common stock on the date of such annual
meeting.
- Grant in Subsequent Even-Number Calendar Years. Each director who is
elected to serve or continues to serve as a director of Caldera following
the date of the regularly scheduled annual meeting during each
even-numbered calendar year beginning with 2004 will automatically be
granted an option to purchase 100,000 shares of common stock at an Option
Exercise Price equal to the fair market value of a share of common stock
on the date of such annual meeting.
- Grant to Directors First Elected Between Even-Numbered Calendar
Years. Each director who is first elected or appointed to serve as a
director other than at an annual meeting of shareholders in an
even-number calendar year will automatically be granted, upon the
commencement of such service, an option to purchase a number of shares of
common stock equal to the product of (i) a fraction, the numerator of
which is the number of full calendar months between the date of such
election or appointment and March 1 of the next even-numbered calendar
year, and the denominator of which is 24, multiplied by (ii) 100,000.
Such options shall have an Option Exercise Price equal to the fair market
value of a share of common stock on the date of grant.
- Top-Up Grant For Certain Directors. Each director whose existing options
are all scheduled to vest prior to March 1, 2002 will automatically be
granted, on the date all such options vest, an option to purchase a
number of shares of common stock equal to the product of (i) a fraction,
the numerator of which is the number of full calendar months between the
date all such options vest and March 1, 2002, and the denominator of
which is 24, multiplied by (ii) 100,000. Such options shall have an
Option Exercise Price equal to the fair market value of a share of common
stock on the
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date of grant. All options granted under the director formula awards
program will vest 50% on the first anniversary of the date of grant and
50% on the second anniversary of the date of grant.
Limitations on Options Granted. No option may be granted pursuant to the
formula awards program on a date when the number of shares of common stock
authorized for issuance pursuant to the 1999 Plan is less than the sum of (i)
all shares of common stock issued under the 1999 Plan, (ii) all shares of common
stock subject to outstanding options, and (iii) all options that would, but for
the effect of this limitation, be granted on that date.
Other Provisions. Options granted under the formula awards program are
otherwise generally subject to the same terms and conditions as other options
granted under the 1999 Plan.
WITHHOLDING TAXES
Whenever cash is to be paid pursuant to an award, Caldera has the right to
deduct therefrom an amount sufficient to satisfy any federal, state and local
withholding tax requirements related thereto. Whenever shares of common stock
are to be delivered pursuant to an award, Caldera has the right to require the
Participant to remit to Caldera in cash an amount sufficient to satisfy any
federal, state and local withholding tax requirements related thereto. With the
approval of the Committee, a Participant may satisfy the foregoing requirement
by electing to have Caldera withhold from delivery shares of common stock having
a fair market value equal to the amount of tax to be withheld.
COMPLIANCE WITH TAX LAWS
The 1999 Plan is intended to provide performance-based compensation and
thereby avoid the limitations of Section 162(m) of the Code. Section 162(m)
denies a deduction by an employer for certain compensation in excess of $1
million per year paid by a publicly-traded corporation to the following
individuals who are employed at the end of the employer's taxable year ("Covered
Employees"): the chief executive officer and the four most highly compensated
executive officers (other than the chief executive officer), for whom
compensation disclosure is required under the proxy rules. Certain compensation,
including compensation based on the attainment of performance goals, is excluded
from this deduction limit if certain requirements are met. Among the
requirements for compensation to qualify for "performance based" exception to
Section 162(m) is that the material terms pursuant to which the compensation is
to be paid be disclosed to and approved by the shareholders in a separate vote
prior to the payment. Accordingly, because the 1999 Plan has been approved by
the shareholders of Caldera and the Committee intends to administer the Plan so
that the other conditions of Code Section 162(m) relating to performance-based
compensation are satisfied, compensation paid to Covered Employees pursuant to
the 1999 Plan will not be subject to the deduction limit of Section 162(m).
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a brief summary of the principal United States
Federal income tax consequences relating to incentive awards under the 1999
Plan. This discussion is based on currently existing provisions of the Code,
existing and proposed Treasury Regulations promulgated thereunder and current
administrative rulings and court decisions, all of which are subject to change.
Any such change, which may or may not be retroactive, could alter the tax
consequences to shareholders described herein. Shareholders should be aware that
this discussion does not deal with all United States Federal income tax
considerations that may be relevant to an individual shareholder granted
incentive awards pursuant to the 1999 Plan. ACCORDINGLY, SHAREHOLDERS AND
INCENTIVE AWARD RECIPIENTS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES RELATING TO INCENTIVE AWARDS UNDER THE 1999 PLAN.
Non-Qualified Stock Options. An optionee will not recognize any taxable
income upon the grant of a non-qualified stock option. Caldera will not be
entitled to a tax deduction with respect to the grant of a non-qualified stock
option. Upon exercise of a non-qualified stock option, the excess of the fair
market
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value of the common stock on the exercise date over the Option Exercise Price
will be taxable as compensation income to the optionee and will be subject to
applicable withholding taxes. Caldera will generally be entitled to a tax
deduction at such time in the amount of such compensation income. The optionee's
tax basis for the common stock received pursuant to the exercise of a
non-qualified stock option will equal the sum of the compensation income
recognized and the exercise price.
In the event of a sale of common stock received upon the exercise of a
non-qualified stock option, any appreciation or depreciation after the exercise
date generally will be taxed as capital gain or loss and will be long-term
capital gain or loss if the holding period for such common stock is more than
one year.
The exercise of a non-qualified stock option through the delivery of
previously acquired stock will generally be treated as a non-taxable, like-kind
exchange as to the number of shares surrendered and the identical number of
shares received under the option. That number of shares will take the same basis
and, for capital gains purposes, the same holding period as the shares that are
given up. The value of the shares received upon such an exchange that are in
excess of the number given up will be includible as ordinary income to the
participant at the time of the exercise. The excess shares will have a new
holding period for capital gain purposes and a basis equal to the value of such
shares determined at the time of exercise.
Neither the Participant nor the transferee will realize taxable income at
the time of a non-arm's-length transfer of a non-qualified stock option as a
gift. Upon the subsequent exercise of the option by the transferee, the
Participant will realize ordinary income in an amount equal to the excess of the
fair market value of the shares on the date of exercise over the option price.
Upon a subsequent disposition of the shares by the transferee, the transferee
will generally realize short-term or long-term capital gain or loss, with the
basis for computing such gain or loss equal to the fair market value of the
stock at the time of exercise. If a participant makes a gift of an option, and
surrenders all dominion and control of the option, the gift should be complete
for Federal gift tax purposes at the time of transfer and should be valued at
that time (or, if later, at the time the option becomes vested). For gift and
estate tax purposes, the gift of an option would generally cause the option (and
the stock acquired by exercise) to be excluded from the participant's estate.
Special rules may apply if the participant makes a gift of an award to a charity
or to a "living trust" under which the participant retains the right to revoke
the trust or substantially alter its terms.
Incentive Stock Options. An optionee generally will not recognize any
taxable income at the time of grant or timely exercise of an incentive stock
option for regular U.S. federal income tax purposes, and Caldera will not be
entitled to a tax deduction with respect to such grant or exercise. Exercise of
an incentive stock option may, however, give rise to taxable compensation income
subject to applicable withholding taxes, and a tax deduction to Caldera, if the
optionee subsequently engages in a "disqualifying disposition," as described
below. Additionally, the spread between the fair-market value of shares obtained
upon exercise of an incentive stock option and the exercise price is an
adjustment to alternative minimum taxable income and may result in the option
holder having to pay federal alternative minimum tax for the year of exercise.
A sale or exchange by an optionee of shares acquired through the exercise
of an incentive stock option more than one year after the transfer of the shares
to such optionee and more than two years after the date of grant of the
incentive stock option will result in any difference between the net sale
proceeds and the exercise price paid being treated a long-term capital gain (or
loss) to the optionee. If such sale or exchange (including inter vivos gifts)
takes place within two years after the date of grant of the incentive stock
option or within one year from the date of transfer of the incentive stock
option shares to the optionee, such sale or exchange will generally constitute a
"disqualifying disposition" of such shares. A disqualifying disposition that
will have the following results: any excess of (i) the lesser of (a) the fair
market value of the shares at the time of exercise of the incentive stock option
and (b) the amount realized on such disqualifying disposition of the shares over
(ii) the Option Exercise Price of such shares, will be ordinary income to the
optionee, subject to applicable reporting requirements, and Caldera will be
entitled to a tax deduction in the amount of such income. Any further gain
generally will qualify as capital gain and will not result in any deduction by
Caldera.
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The exercise of an incentive stock option through the exchange of
previously acquired Stock will generally be treated in the same manner as such
an exchange would be treated in connection with the exercise of a non-qualified
stock option; that is, as a non-taxable, like-kind exchange as to the number of
shares given up and the identical number of shares received under the option.
That number of shares will take the same basis and, for capital gain purposes,
the same holding period as the shares that are given up. However, such holding
period will not be credited for purposes of the one-year holding period required
for the new shares to receive incentive stock option treatment. Shares received
in excess of the number of shares given up will have a new holding period and
will have a basis of zero or, if any cash was paid as part of the exercise
price, the excess shares received will have a basis equal to the amount of the
cash. If a disqualifying disposition (a disposition before the end of the
applicable holding period) occurs with respect to any of the shares received
from the exchange, it will be treated as a disqualifying disposition of the
shares with the lowest basis.
If the exercise price of an incentive stock option is paid with shares of
stock of Caldera acquired through a prior exercise of an incentive stock option,
gain will be realized on the shares given up (and will be taxed as ordinary
income) if those shares have not been held for the minimum incentive stock
option holding period (two years form the date of grant and one year from the
date of transfer), but the exchange will not affect the tax treatment, as
described in the immediately preceding paragraph, of the shares received.
Restricted Stock. A grantee of restricted stock will not recognize any
income upon the receipt of restricted stock unless the holder elects under
Section 83(b) of the Code within thirty days of such receipt, to recognize
ordinary income in an amount equal to the fair market value of the restricted
stock at the time of receipt. If the election is made, the holder will not be
allowed a deduction for amounts subsequently required to be returned to Caldera.
Any Section 83(b) election must be filed with the IRS within the applicable
30-day period. If the Section 83(b) election is not made, the holder will
generally recognize ordinary income, on the date that the restrictions to which
the restricted stock are subject are removed, in an amount equal to the fair
market value of such shares on such date, less any amount paid for the shares.
At that time the holder will recognize ordinary income, subject to applicable
reporting and withholding requirements, and Caldera generally will be entitled
to a deduction in the same amount.
Generally, upon a sale or other disposition of restricted stock with
respect to which the holder has recognized ordinary income (i.e., a Section
83(b) election was previously made or the restrictions were previously removed),
the holder will recognize capital gain or loss in an amount equal to the
difference between the amount realized on such sale or other disposition and the
holder's basis in such shares. Such gain or loss will be long-term capital gain
or loss if the holding period for such shares is more than one year.
Other Incentive Awards. The grant of a stock appreciation right or phantom
stock award will not result in taxable income to the grantee or in a tax
deduction for Caldera. Upon the settlement of such a right or award, the grantee
will recognize ordinary income equal to the aggregate value of the payment
received, subject to applicable reporting and withholding requirements, and
Caldera generally will be entitled to a tax deduction in the same amount. A
stock bonus generally will result in compensation income for the grantee and a
tax deduction for Caldera, equal to the fair market value of the shares of
common stock granted.
Withholding of Taxes. Pursuant to the plan, Caldera may deduct, from any
payment or distribution of shares under the plan, the amount of any tax required
by law to be withheld with respect to such payment, or may require the
Participant to pay such amount to Caldera prior to, and as a condition of,
making such payment or distribution. Subject to rules and limitations
established by the Committee, a participant may elect to satisfy the withholding
required, in whole or in part, either by having Caldera withhold shares of
common stock from any payment under the plan or by the Participant delivering
shares of common stock to Caldera. Any election must be made in writing on or
before the date when the amount of taxes to be withheld is determined. The
portion of the withholding that is so satisfied will be
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determined using the fair market value of the common stock on the date when the
amount of taxes to be withheld is determined.
The use of shares of common stock to satisfy any withholding requirement
will be treated, for federal income tax purposes, as a sale of such shares for
an amount equal to the fair market value of the stock on the date when the
amount of taxes to be withheld is determined. If previously-owned shares of
common stock are delivered by a Participant to satisfy a withholding
requirement, the disposition of such shares would result in the recognition of
gain or loss by the participant for tax purposes, depending on whether the basis
in the delivered shares is less than or greater than the fair market value of
the shares at the time of disposition.
Change in Control. Any acceleration of the vesting or payment of awards
under the 1999 Plan in the event of a change in control in Caldera may cause
part or all of the consideration involved to be treated as an "excess parachute
payment" under the Internal Revenue Code, which may subject the participant to a
20% excise tax and which may not be deductible by Caldera.
VALUE OF BENEFITS TO CERTAIN PERSONS
If Proposal No. Two is approved by the stockholders, and the directors
formula award program is adopted, any current or future director of the Company
that is elected to serve or continues to serve as a director of Caldera
following the date of the regularly scheduled annual meeting of stockholders
during the 2002 calendar year and each even number thereafter will, subject to
the availability of a sufficient number of shares under the 1999 Plan, be
granted an option to purchase 100,000 shares of common stock at an Option
Exercise Price equal to the fair market value of a share of common stock on the
date of such annual meeting.
In addition, under the top-up provisions of the director formula award
plan, five of the current non-employee directors of Caldera will receive an
aggregate of options to acquire 195,833 shares (Steve Cakebread, 79,167; Ralph
J. Yarro III, 75,000; Thomas P. Raimondi, Jr., 25,000; John R. Egan, 8,333; and
Edward E. Iacobucci, 8,333) prior to March 1, 2002. Additional directors
appointed to the board of Caldera or New Caldera prior to March 1, 2002 will be
entitled to receive options to acquire a pro rata portion of 100,000 shares
determined by multiplying 100,000 by a fraction, the numerator of which is the
number of full calendar months between the date of appointment and March 1, 2002
and the denominator of which is 24.
On completion of the merger, New Caldera anticipates granting options to
the following individuals: Drew A. Spencer, options to acquire 2,000 shares, the
current executive officers of Caldera as a group, including Mr. Spencer, options
to acquire 6,000 shares, and all other employees, including current officers who
are not executive officers as a group, options to acquire 206,300 shares.
All of the foregoing options have, or will have on grant, an exercise price
equal to the fair market value of a share of common stock on the date of grant.
Except as set forth above, Caldera is unable to determine the amount of benefits
that may be received in the future by participants under the 1999 Plan if the
proposed amendments are approved, as the receipt of incentive awards under the
1999 Plan is generally subject to the discretion of the Committee.
STOCK AWARDS
The table below shows, as to each of Caldera's executive officers named in
the Summary Compensation Table of the Executive Compensation and Related
Information section of this Proxy Statement and the various indicated
individuals and groups, the number of shares of common stock subject to options
granted under the 1999 Plan between December 1, 1999, the effective date of the
1999 Plan and October 31, 2000, together with the weighted average exercise
price per share.
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OPTION TRANSACTIONS
<TABLE>
<CAPTION>
OPTIONS
GRANTED WEIGHTED AVERAGE
(NUMBER EXERCISE PRICE OF
NAME OF SHARES) GRANTED OPTIONS
---- ----------- -----------------
<S> <C> <C>
Ransom H. Love, President and Chief Executive Officer....... 379,752 $6.00
Alan J. Hansen, CFO......................................... 67,813 $6.00
Benoy Tamang, Sr. VP Strategic Development.................. 67,813 $6.00
Drew A. Spencer, CTO........................................ 67,813 $6.00
Royce Bybe, Sr. VP Sales and Marketing...................... 77,813 $6.75
All current executive officers as a group (6 persons)....... 743,504 $6.39
All current non-employee directors as a group (5 persons)... 529,167 $5.57
All employees, including current officers who are not
executive officers, as a group............................ 3,030,642 $6.96
</TABLE>
---------------
(1) To date, no restricted stock, phantom stock, stock bonus, or stock
appreciation right awards have been granted under the 1999 Plan.
As of October 31, 2000, options covering 3,415,954 shares of common stock
were outstanding under the 1999 Plan, 2,652,902 shares remained available for
future option grant or direct issuance (assuming stockholder approval of the
increase which forms part of this Proposal), and 13,882 shares have been issued
pursuant to the exercise of outstanding options under the 1999 Plan.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Caldera anticipates that any compensation deemed paid by it in connection
with the disqualifying disposition of incentive stock option shares or the
exercise of non-statutory options granted with exercise prices equal to the fair
market value of the shares on the grant date will qualify as performance-based
compensation for purposes of Code Section 162(m) and will not have to be taken
into account for purposes of the $1 million limitation per covered individual on
the deductibility of the compensation paid to certain executive officers of
Caldera. Accordingly, all compensation deemed paid under the 1999 Plan will
remain deductible by Caldera without limitation under Code Section 162(m).
ACCOUNTING TREATMENT
Option grants or stock issuances with exercise or issue prices less than
the fair market value of the shares on the grant or issue date will result in a
direct compensation expense to Caldera's earnings equal to the difference
between the exercise or issue price and the fair market value of the shares on
the grant or issue date. Such expense will be recognized by Caldera over the
period that the option shares or issued shares are to vest. Option grants or
stock issuances at 100% or more of fair market value will not result in any
direct charge to Caldera's earnings. However, the fair value of those options is
required to be disclosed in the notes to Caldera's financial statements, and
Caldera must also disclose, in pro-forma statements to Caldera's financial
statements, the impact those options would have upon Caldera's reported earnings
were the value of those options at the time of grant treated as compensation
expense. Whether or not granted at a discount, the number of outstanding options
may be a factor in determining Caldera's earnings per share on a fully-diluted
basis.
SAR or Tandem SAR grants will result in compensation expense to Caldera's
earnings. While an SAR is outstanding, the ultimate amount of compensation
inherent in the right is indeterminate. Accounting Principles Board Opinion No.
25 and FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans, require interim calculations of the
amount of compensation inherent in the SAR (variable plan accounting). Under
variable plan accounting,
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compensation expense can fluctuate significantly from period to period based
upon the fluctuations in the fair market value of the underlying securities. The
measurement of the expense in the financial statements is made at the end of
each reporting period based on the increase in the fair market value since the
date of grant or award multiplied by the total number of shares or rights
outstanding, regardless of exercisable status of the rights. Such expense will
generally be recognized by Caldera at the end of each fiscal quarter.
Restricted stock awards are accounted for in a manner similar to the
granting of non-qualified stock option unless the award contains some type of
performance criteria. Compensation cost is generally measured under restricted
stock plans as the difference between the grant price of the restricted stock
and the fair market value of the unrestricted stock at the grant date. This cost
is recognized ratably over the period that ends when all risks of forfeiture
have passed. Restricted stock may be forfeited (or repurchased by the employer
at the employee's original purchase price) if the employee terminates prior to
the lapsing of restrictions. When restricted stock is forfeited, compensation
cost previously recognized is reversed. Any unrecognized compensation is treated
as part of the purchased treasury stock. To the extent the compensation
originally measured exceeds the market value of the treasury stock acquired, the
excess is charged to paid-in capital.
If restricted stock awards combine performance criteria, measurement of the
ultimate compensation to be recognized occurs at the date the performance
criteria are met. This type of award is classified as a variable plan and
interim estimates of compensation are required based on a combination of the
then-fair market value of the stock as of the end of the reporting period and
the extent or degree of compliance with the performance criteria.
Grants of shares of phantom stock are accounted for similar to SAR grants
as discussed above. Bonuses of stock are recorded as compensation at the fair
market value of the granted shares at the date of the bonus.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-based Compensation, requires that all equity instruments transferred to
non-employees in exchange for goods and services be measured at fair value and
recorded as an expense in the financial statements. As a result, an option to
purchase common stock at an exercise price equal to the fair market value on the
date of the grant to a non-employee consultant would require Caldera to record
compensation based on the fair value of the option as calculated by a valuation
methodology such as the Black-Scholes option pricing model; whereas, the same
option granted at the current fair market value to an employee does not require
the recording of such compensation in the financial statements. As a result, the
Company may incur non-cash charges related to the value of stock awards should
it grant them to non-employee consultants or contractors.
Should one or more optionees be granted stock appreciation rights which
have no conditions upon exercisability other than a service or employment
requirement, then such rights will result in compensation expense to Caldera's
earnings.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares of
Caldera present or represented and entitled to vote at the special meeting is
required for approval of the amendments to the 1999 Plan. Should such
stockholder approval not be obtained, then the 2,300,000 share increase to the
share reserve will not be implemented, and any stock options granted on the
basis of the 2,300,000 share increase to the 1999 Plan will immediately
terminate without becoming exercisable for the shares of common stock subject to
those options, and no additional options will be granted on the basis of such
share increase. The automatic annual share increase feature pursuant to which
the number of shares available for issuance under the 1999 Plan will
automatically increase on November 1 of each calendar year by an amount equal to
3% of the total number of shares outstanding on the previous October 31st will
also not be implemented should such stockholder approval not be obtained. In
addition, the director formula awards program, pursuant to which directors are
automatically granted options to purchase common stock at periodic intervals,
will not become part of the 1999 Plan if stock approval is not obtained. The
1999 Plan will,
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however, continue to remain in effect, and award grants may continue to be made
pursuant to the provisions of the 1999 Plan in effect prior to the amendments
summarized in this Proposal No. Two, until the available reserve of common stock
as last approved by the stockholders has been issued pursuant to award grants
made under the 1999 Plan.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
AMENDMENTS TO THE 1999 PLAN.
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PROPOSAL THREE: APPROVAL OF AMENDMENTS TO THE EMPLOYEE STOCK PURCHASE PLAN
Caldera's stockholders are being asked to approve an amendment to Caldera's
2000 Employee Stock Purchase Plan (the "Purchase Plan") which will increase the
maximum number of shares of Common Stock authorized for issuance over the term
of the Purchase Plan by an additional 1.5 million shares to 2.0 million shares.
The purpose of the amendment is to ensure that Caldera or if the
combination is consummated, New Caldera will continue to have a sufficient
reserve of Common Stock available under the Purchase Plan to provide eligible
employees of Caldera (or New Caldera) and its participating affiliates with the
opportunity to acquire a proprietary interest in Caldera (or New Caldera)
through participation in a payroll-deduction based employee stock purchase plan
under Section 423 of the Internal Revenue Code immediately after the
combination.
The Purchase Plan was originally adopted by the Board of Directors in
February 15, 2000 and approved by the Company's stockholders on March 1, 2000.
The Purchase Plan became effective on March 20, 2000 in connection with the
initial public offering of the Company's Common Stock.
The following is a summary of the principal features of the Purchase Plan,
as amended. The summary, however, does not purport to be a complete description
of all the provisions of the Purchase Plan. Any stockholder who wishes to obtain
a copy of the actual plan document may do so by written request to the Company's
Chief Financial Officer at the Company's executive offices in Orem, Utah.
ADMINISTRATION
The Purchase Plan is currently administered by the Compensation Committee
of the Board. Such committee, as Plan Administrator, has full authority to adopt
administrative rules and procedures and to interpret the provisions of the
Purchase Plan. All costs and expenses incurred in plan administration are paid
by the Company without charge to participants.
SECURITIES SUBJECT TO THE PURCHASE PLAN
Two million shares of Common Stock have been reserved for issuance over the
ten (10)-year term of the Purchase Plan. Such share reserve includes the 1.5
million-share increase for which stockholder approval is sought under this
Proposal No. Three. In addition, the share reserve will increase automatically
on the first trading day of January each calendar year beginning with the
calendar year 2001 by an amount equal to one percent (1%) of the total number of
shares of Common Stock outstanding on the last trading day of December of the
immediately preceding calendar year, but in no event will any such annual
increase exceed 750,000 shares. The shares may be made available from authorized
but unissued shares of the Company's Common Stock or from shares of Common Stock
repurchased by the Company, including shares repurchased on the open market.
As of October 31, 2000, 61,087 shares of Common Stock had been issued under
the Purchase Plan, and 1,938,913 shares were available for future issuance,
assuming approval of this Proposal No. Three.
OFFERING PERIODS AND PURCHASE RIGHTS
Shares of Common Stock will be offered under the Purchase Plan through a
series of successive offering periods, each with a maximum duration of
twenty-four (24) months. The first offering period began on March 20, 2000, in
connection with the initial public offering of the Common Stock, and will end on
the last business day in April 2002. The next offering period will begin on the
first business day in May 2002 and will end on the last business day of April
2004. Subsequent offering periods will begin as designated by the Plan
Administrator.
At the time the participant joins the offering period, he or she will be
granted a purchase right to acquire shares of Common Stock at semi-annual
intervals over the remainder of that offering period. The
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purchase dates will occur on the last business day in October and April each
year, and all payroll deductions collected from the participant for the period
ending with each such semi-annual purchase date will automatically be applied to
the purchase of Common Stock.
Should the fair market value per share of Common Stock on any purchase date
within the twenty-four (24) month offering period be less than the fair market
value per share of Common Stock on the start date of that offering period, then
that offering period will terminate immediately after the purchase of shares of
Common Stock on such purchase date. A new offering period will commence on the
next business day following that purchase date, and all participants in the
terminated offering period will be automatically enrolled in that new offering
period. The new offering period will have a duration of twenty-four (24) months,
unless a shorter duration is established by the Plan Administrator within five
(5) business days following the start date of that offering period,
ELIGIBILITY AND PARTICIPATION
Any individual who is employed on a basis under which he or she is expected
to work for more than 20 hours per week for more than five (5) months per
calendar year in the employ of the Company or any participating parent or
subsidiary corporation (including any corporation which subsequently becomes
such at any time during the term of the Purchase Plan) will be eligible to
participate in the Purchase Plan.
An individual who is an eligible employee on the start date of any offering
period may join that offering period at that time or on any subsequent
semi-annual entry date (the first business day in May or November each year)
within that offering period. An individual who first becomes an eligible
employee after such start date may join the offering period on any semi-annual
entry date within that offering period on which he or she is an eligible
employee.
As of October 31, 2000, the Company estimates that approximately 178
employees, including 6 executive officers, were eligible to participate in the
Purchase Plan.
PURCHASE PRICE
The purchase price of the Common Stock acquired on each semi-annual
purchase date will be equal to 85% of the lower of (i) the fair market value per
share of Common Stock on the participant's entry date into the offering period
or (ii) the fair market value on the semi-annual purchase date.
The fair market value of the Common Stock on any relevant date under the
Purchase Plan will be deemed to be equal to the closing selling price per share
on such date on the Nasdaq National Market. However, the fair market value of
the Common Stock on the start date of the initial offering period was deemed to
be equal to the $14.00 price per share at which the Common Stock was sold in the
initial public offering. On October 31, 2000, the closing selling price per
share of Common Stock on the Nasdaq National Market was $3.50 per share.
PAYROLL DEDUCTIONS AND STOCK PURCHASES
Each participant may authorize periodic payroll deductions in any multiple
of 1% (up to a maximum of 10%) of his or her cash earnings each offering period.
Cash earnings include the participant's regular base salary plus all overtime
payments, bonuses, profit-sharing distributions and other incentive-type
payments. The accumulated payroll deductions of each participant will
automatically be applied on each semi-annual purchase date (the last business
day in October and April of each year) to the purchase of whole shares of Common
Stock at the purchase price in effect for the participant for that purchase
date. The first purchase date under the Purchase Plan will occur on October 31,
2000.
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SPECIAL LIMITATIONS
The Purchase Plan imposes certain limitations upon a participant's right to
acquire Common Stock, including the following:
- Purchase rights may not be granted to any individual who owns stock
(including stock purchasable under any outstanding purchase rights)
possessing 5% or more of the total combined voting power or value of all
classes of stock of the Company or any of its affiliates.
- Purchase rights granted to a participant may not permit such individual
to purchase more than $25,000 worth of Common Stock (valued at the time
each purchase right is granted) for each calendar year those purchase
rights are outstanding at any time.
- No participant may purchase more than 750 shares of Common Stock on any
semi-annual purchase date.
- The aggregate shares of Common Stock purchased on any semi-annual
purchase date may not exceed 125,000 shares.
The Plan Administrator will have the discretionary authority, exercisable
prior to the start of any offering period, to increase or decrease the
limitations to be in effect for the number of shares purchasable per participant
and in total by all participants on each purchase date within that offering
period.
TERMINATION OF PURCHASE RIGHTS
The participant may withdraw from the Purchase Plan at any time, and his or
her accumulated payroll deductions will, at the participant's election, either
be refunded immediately or applied to the purchase of Common Stock on the next
semi-annual purchase date.
The participant's purchase right will immediately terminate upon his or her
cessation of employment or loss of eligible employee status. Any payroll
deductions which the participant may have made for the semi-annual period in
which such cessation of employment or loss of eligibility occurs will be
refunded and will not be applied to the purchase of Common Stock.
STOCKHOLDER RIGHTS
No participant will have any stockholder rights with respect to the shares
covered by his or her purchase rights until the shares are actually purchased on
the participant's behalf. No adjustment will be made for dividends,
distributions or other rights for which the record date is prior to the date of
such purchase.
ASSIGNABILITY
No purchase rights will be assignable or transferable by the participant,
and the purchase rights will be exercisable only by the participant.
CHANGES IN CAPITALIZATION
In the event that any change is made to the Company's outstanding Common
Stock (whether by reason of any recapitalization, stock dividend, stock split,
exchange or combination of shares or other change in corporate structure
effected without the Company's receipt of consideration), appropriate
adjustments will be made to (i) the class and maximum number of securities
issuable over the term of the Purchase Plan, (ii) the class and maximum number
of securities by which the share reserve is to increase automatically each year,
(iii) the class and maximum number of securities purchasable in total by all
participants on any one purchase date, (iv) the class and maximum number of
securities purchasable per participant on any one semi-annual purchase date and
(v) the class and number of securities and the price per share in effect under
each outstanding purchase right.
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CHANGE IN CONTROL
In the event the Company is acquired by merger or asset sale, all
outstanding purchase rights will automatically be exercised immediately prior to
the effective date of such acquisition. The purchase price will be equal to 85%
of the lower of (i) the fair market value per share of Common Stock on the
participant's entry date into the offering period in which such acquisition
occurs or (ii) the fair market value per share of Common Stock immediately prior
to the effective date of such acquisition. The limitation on the maximum number
of shares purchasable in total by all participants on any one purchase date will
not be in effect for the purchase date attributable to such change in control.
SHARE PRO-RATION
Should the total number of shares of Common Stock to be purchased pursuant
to outstanding purchase rights on any particular date exceed the number of
shares at the time available for issuance under the Purchase Plan, then the Plan
Administrator will make a pro-rata allocation of the available shares on a
uniform and nondiscriminatory basis, and the payroll deductions of each
participant, to the extent in excess of the aggregate purchase price payable for
the Common Stock allocated to such individual, will be refunded.
AMENDMENT AND TERMINATION
The Purchase Plan will terminate upon the earliest of (i) the last business
day in April 2010, (ii) the date on which all shares available for issuance
thereunder are sold pursuant to exercised purchase rights or (iii) the date on
which all purchase rights are exercised in connection with a change in control
of the Company.
The Board may at any time alter, suspend or discontinue the Purchase Plan.
However, the Board may not, without stockholder approval, (i) increase the
number of shares issuable under the Purchase Plan or the maximum number of
shares purchasable per participant on any one semi-annual purchase date, except
in connection with certain changes in the Company's capital structure, (ii)
alter the purchase price formula so as to reduce the purchase price or (iii)
modify the requirements for eligibility to participate in the Purchase Plan.
FEDERAL TAX CONSEQUENCES
The Purchase Plan is intended to be an "employee stock purchase plan"
within the meaning of Section 423 of the Internal Revenue Code. Under a plan
which so qualifies, no taxable income will be recognized by a participant, and
no deductions will be allowable to the Company, upon either the grant or the
exercise of the purchase rights. Taxable income will not be recognized until
there is a sale or other disposition of the shares acquired under the Purchase
Plan or in the event the participant should die while still owning the purchased
shares.
If the participant sells or otherwise disposes of the purchased shares
within two (2) years after his or her entry date into the offering period in
which such shares were acquired or within one (1) year after the semi-annual
purchase date on which those shares were actually acquired, then the participant
will recognize ordinary income in the year of sale or disposition equal to the
amount by which the fair market value of the shares on the purchase date
exceeded the purchase price paid for those shares, and the Company will be
entitled to an income tax deduction, for the taxable year in which such
disposition occurs, equal in amount to such excess.
If the participant sells or disposes of the purchased shares more than two
(2) years after his or her entry date into the offering period in which the
shares were acquired and more than one (1) year after the semi-annual purchase
date of those shares, then the participant will recognize ordinary income in the
year of sale or disposition equal to the lower of (i) the amount by which the
fair market value of the shares on the sale or disposition date exceeded the
purchase price paid for those shares or (ii) fifteen percent (15%) of the fair
market value of the shares on the participant's entry date into that offering
period. Any
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<PAGE> 184
additional gain upon the disposition will be taxed as a long-term capital gain.
The Company will not be entitled to an income tax deduction with respect to such
disposition.
If the participant still owns the purchased shares at the time of death,
his or her estate will recognize ordinary income in the year of death equal to
the lower of (i) the amount by which the fair market value of the shares on the
date of death exceeds the purchase price or (ii) fifteen percent (15%) of the
fair market value of the shares on his or her entry date into the offering
period in which those shares were acquired.
ACCOUNTING TREATMENT
The issuance of Common Stock under the Purchase Plan will not result in a
direct compensation expense chargeable against the Company's reported earnings.
However, Caldera must disclose, in pro-forma statements to the Company's
financial statements, the impact the purchase rights granted under the Purchase
Plan would have upon the Company's reported earnings were the fair value of
those purchase rights treated as compensation expense.
STOCK ISSUANCES
The table below shows, as to each of Caldera's executive officers named in
the Summary Compensation Table included in the "Management of Caldera and New
Caldera" section of this joint proxy statement/prospectus and the various
indicated groups, the number of shares of Common Stock purchased under the
Purchase Plan between March 20, 2000 and October 31, 2000, the most recent
purchase date, together with the weighted average purchase price paid per share.
PURCHASE PLAN TRANSACTIONS
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
NAME PURCHASED SHARES PURCHASE PRICE
---- ---------------- ----------------
<S> <C> <C>
Ransom H. Love, Director, Chief Executive Officer........... 750 $2.98
Alan J. Hansen, Chief Financial Officer(1).................. 0 $ --
Drew Spencer, Chief Technology Officer...................... 0 $ --
Benoy Tamang, Vice President, Strategic Development......... 750 $2.98
Royce Bybee, Senior Vice President, Sales and Marketing..... 0 $ --
All current executive officers as a group (6 persons)....... 1,500 $2.98
All employees, including current officers who are not
executive officers, as a group............................ 61,807 $2.98
</TABLE>
---------------
(1) Resigned as Chief Financial Officer of Caldera on November 15, 2000.
NEW PLAN BENEFITS
No purchase rights have been granted, and no shares of Common Stock have
been issued, on the basis of the 1.5 million share increases for which
shareholder approval is sought.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares of
Caldera present or represented and entitled to vote at the 2000 Annual Meeting
is required for approval of the 1.5 million-share increase to the Purchase Plan.
Should such stockholder approval not be obtained, then the 1.5 million-share
increase will not be implemented, and any purchase rights granted on the basis
of the 1.5 million-share increase to the Purchase Plan will immediately
terminate. No additional purchase rights will be granted on
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<PAGE> 185
the basis of such share increase, and the Purchase Plan will terminate once the
existing share reserve has been issued.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors believes that the amendment to the Purchase Plan is
necessary in order to continue to provide equity incentives to attract and
retain the services of high quality employees including through acquisitions.
FOR THIS REASON, THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE
FOR THE AMENDMENT TO THE PURCHASE PLAN.
PROPOSAL FOUR: AMENDMENTS TO CALDERA'S
CERTIFICATE OF INCORPORATION
The present capital structure of Caldera authorizes 75,000,000 shares of
common stock and 25,000,000 shares of preferred stock each having a par value of
$0.001 per share. The board of directors believes this capital structure is
inadequate for the present and future needs of Caldera. Therefore, the board of
directors has unanimously approved the amendment and restatement of Caldera's
Restated Certificate of Incorporation to increase the authorized number of
shares of common stock from 75,000,000 shares to 175,000,000 shares. The board
believes this capital structure more appropriately reflects the present and
future needs of Caldera and recommends such amendment and restatement to
Caldera's stockholders for adoption. The undesignated preferred stock may be
issued from time to time in one or more series with such rights, preferences and
privileges as may be determined by the board of directors. On October 31, 2000,
39,444,457 shares of common stock were outstanding and no shares of preferred
stock were outstanding.
PURPOSE OF AUTHORIZING ADDITIONAL COMMON STOCK
Authorizing an additional 100,000,000 shares of common stock would give the
board of directors the express authority, without further action of the
stockholders, to issue such common stock from time to time as the board of
directors deems necessary. The board of directors believes it is necessary to
have the ability to issue such additional shares of common stock for general
corporate purposes. Potential users of the additional authorized shares may
include acquisition transactions, equity financings, stock dividends or
distributions, issuance of options pursuant to Caldera's 1999 Stock Incentive
Plan and issuances of common stock pursuant to Caldera's Employee Stock Purchase
Plan without further action by the stockholders, unless such action were
specifically required by applicable law or rules of any stock exchange on which
Caldera's securities may then be listed.
The proposed increase in the authorized number of shares of common stock
could have a number of effects on Caldera's stockholders depending upon the
exact nature and circumstances of any actual issuances of authorized but
unissued shares. The increase could have an anti-takeover effect, in that
additional shares could be issued (within the limits imposed by applicable law)
in one or more transactions that could make a change in control or takeover of
Caldera more difficult. For example, additional shares could be issued by
Caldera so as to dilute the stock ownership or voting rights of persons seeking
to obtain control of Caldera. Similarly, the issuance of additional shares of
certain persons allied with Caldera's management could have the effect of making
it more difficult to remove Caldera's current management by diluting the stock
ownership or voting rights of persons seeking to cause such removal. In
addition, an issuance of additional shares by Caldera could have an effect on
the potential realizable value of a stockholders' investment. In the absence of
a proportionate increase in Caldera's earnings and book value, an increase in
the aggregate number of outstanding shares of Caldera caused by the issuance of
the additional shares would dilute the earnings per share and book value per
share of all outstanding shares of Caldera's common stock. If such factors were
reflected in the price per share of common stock, the potential realizable value
of a stockholder's investment could be adversely affected. The common stock
carries no preemptive rights to purchase additional shares.
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The proposed amendment and restate of Caldera's Certificate of
Incorporation was approved by unanimous written consent of the directors of the
Company in August 2000.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of Caldera's outstanding voting shares
is required for approval of the amendment and restatement of Caldera's
Certificate of Incorporation authorizing 100,000,000 additional shares of common
stock.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board of directors recommends a vote FOR the amendment and restatement
of Caldera's Certificate of Incorporation authorizing 100,000,000 additional
shares of common stock.
OTHER ACTION TO BE TAKEN AT THE SCO SPECIAL MEETING
Change in SCO's Corporate Name to Tarantella, Inc.
At the SCO special meeting, SCO's shareholders will also be asked to
approve a proposed amendment to SCO's articles of incorporation, that if
approved, will change SCO's corporate name to "Tarantella, Inc." SCO seeks this
change in the corporate name because, as a result of the combination
contemplated by the reorganization agreement, New Caldera will acquire the SCO
brand and logo. Though SCO will retain usage rights in the SCO brand and logo,
SCO's focus will shift to the Tarantella business.
Tarantella is software that allows centralized deployment and management of
server-based applications. Tarantella is designed for information technology
professionals who need to provide users with instant access to applications and
services, and provides centralized management of application access.
The SCO board of directors believes that the proposed name change is in its
best interest because the proposed new corporate name reflects SCO's principal
line of business after the completion of the combination. The SCO board of
directors believes that, notwithstanding the goodwill associated with the SCO
name, it is necessary to change the corporate name in order to connect the image
of the company among the investment community and among our customers and
potential customers to our products and services and in order to avoid confusion
with SCO's historical business.
SCO's board of directors has unanimously adopted a resolution declaring it
advisable to amend the company's articles of incorporation to change the
corporate name. SCO's board of directors further directed that the proposed name
change be submitted for consideration by shareholders at the special meeting. As
amended, Article I of the articles of incorporation would read in its entirety
as follows:
"Article I
The name of the corporation is Tarantella, Inc."
In the event the proposed name change is approved by shareholders, SCO will
thereafter file a certificate of amendment to its articles of incorporation with
the Secretary of State of the State of California, amending Article I, which
will become effective on the date such filing is accepted by the Secretary of
State. The SCO board of directors, however, reserves the right not to file the
certificate of amendment even if the proposed name change is approved by the
shareholders in the event the shareholders do not approve and adopt the
reorganization agreement or the reorganization agreement is otherwise
terminated.
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LEGAL MATTERS
Certain legal matters in connection with the combination will be passed
upon by Brobeck, Phleger & Harrison LLP on behalf of Caldera and New Caldera,
and by Wilson Sonsini Goodrich & Rosati, Professional Corporation, on behalf of
SCO.
EXPERTS
The financial statements and schedule of Caldera and the financial
statements of Ebiz Enterprises, Inc. included in this joint proxy
statement/prospectus to the extent and for the periods indicated in their
reports have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The consolidated financial statements of The Santa Cruz Operation, Inc. and
subsidiaries incorporated in this joint proxy statement/prospectus by reference
to the Annual Report on Form 10-K of the Santa Cruz Operation, Inc. for the year
ended September 30, 2000 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of The SCO Server and Professional Services Groups
as of September 30, 2000 and 1999 and for each of the three years in the period
ended September 30, 2000 included in this joint proxy statement/prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
Representatives of Arthur Andersen LLP are expected to be present at the
Caldera special meeting, will have the opportunity to make a statement at the
Caldera special meeting if they desire to do so and are expected to be available
to respond to appropriate questions.
Representatives of PricewaterhouseCoopers LLP are expected to be present at
the SCO special meeting, will have the opportunity to make a statement at the
SCO special meeting if they desire to do so and are expected to be available to
respond to appropriate questions.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION
On August 1, 2000 and as amended on September 13 and December 12, 2000,
Caldera Systems, Inc. ("Caldera"), Caldera International, Inc. ("New Caldera"),
and The Santa Cruz Operation, Inc. ("SCO") entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement"). As a result of the transactions
proposed by the Reorganization Agreement (the "Reorganization"), (i) a newly
formed, wholly owned subsidiary of New Caldera will be merged with and into
Caldera, with Caldera being the surviving corporation, and all outstanding
Caldera securities will be converted, on a share for share basis, into New
Caldera securities having identical rights, preferences and privileges, with New
Caldera assuming any and all outstanding options and other rights to purchase
shares of capital stock of Caldera (with all such New Caldera securities issued
to former Caldera security holders initially representing a fully diluted equity
interest of approximately 71.4% 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 as well as certain assets of SCO collectively
representing the server and professional services groups of SCO, in
consideration for the issuance by New Caldera to SCO of shares of common stock
of New Caldera, $0.001 par value ("New Caldera Common Stock"); (iii) New Caldera
will assume or replace, as elected by the option holders, all options to acquire
common stock of SCO held by SCO employees (other than certain officers of SCO)
hired or retained by Caldera and such options will be converted into options to
purchase New Caldera Common Stock on a two SCO options in exchange for one New
Caldera option basis representing in the aggregate a fully diluted equity
interest of approximately 3.1% in New Caldera; and (iv) SCO will receive shares
of New Caldera Common Stock representing in the aggregate a fully diluted equity
interest of approximately 25.5% in New Caldera and $7 million 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 advance the $7 million cash payment to SCO prior to closing. If the
Reorganization is not completed, SCO will be obligated to repay the advance.
Assets of SCO will secure each of these loans.
The SCO server and professional services groups operate as a provider of
server software for networked business computing. The solutions delivered by the
groups are UNIX(R) based server operating systems. The groups' products enable
business and government organizations of all sizes to integrate technologies and
products from different vendors to create cost-effective, powerful, networked
information systems that perform highly complex, mission-critical business
functions. Products are sold via the groups' direct sales force or through
indirect channel partners, which include some of the leading distribution
companies in the United States, Europe and the rest of the world. Caldera is
acquiring the rights, associated technology and assigned license arrangements
for the UnixWare products and other server software products, SCO will retain
the rights and technology of the Open Server products.
The unaudited pro forma condensed combined balance sheet of New Caldera
gives effect to the Reorganization as if it had been completed as of October 31,
2000. The unaudited pro forma condensed combined balance sheet of New Caldera
combines the historical balance sheet of Caldera as of October 31, 2000 and the
historical balance sheet of the server and professional services groups as of
September 30, 2000. The unaudited pro forma condensed combined statement of
operations of New Caldera gives effect to the Reorganization as if it had
occurred on November 1, 1999. The unaudited pro forma condensed combined
statement of operations for the year ended October 31, 2000 combines the
historical statement of operations of Caldera for the year ended October 31,
2000 and the historical statement of operations for the server and professional
services groups for the year ended September 30, 2000. New Caldera does not
currently have any assets, liabilities or outstanding capital stock, nor has it
had any activity in its statement of operations. As a result, no historical
information for New Caldera has been included in the pro forma financial
statements.
The acquisition of the server and professional services groups will be
accounted for using the purchase method of accounting. Under this method, the
total purchase price, including fees and expenses, will be allocated to the
tangible and identifiable intangible assets acquired and the liabilities assumed
based upon their respective fair values as of the effective date of the
acquisition. New Caldera has estimated the fair
P-1
<PAGE> 189
value of the assets acquired and liabilities assumed. The remaining purchase
price over the tangible and identifiable intangible assets will be allocated to
goodwill. Since the acquisition has not yet been completed, the actual
consideration cannot yet be determined. For the purpose of the pro forma
combined financial information included herein, the number of shares of New
Caldera common stock and options to purchase shares of common stock to be issued
in the acquisition has been estimated based upon the number of Caldera's common
shares and options to purchase common shares outstanding at October 31, 2000.
The actual number of New Caldera common shares to be issued will be based on the
actual shares and options outstanding as of the completion of the
Reorganization. Additionally, the actual allocation of the amount of such
consideration may differ from that reflected in these unaudited pro forma
condensed combined financial statements after final valuations and other
procedures have been completed.
The fair value of the in-process research and development will be recorded
as an expense in the period in which the acquisition is completed. The valuation
of the in-process research and development was determined using the income
approach method, which includes an analysis of the markets, cash flows and risks
associated with achieving such cash flows. The amount allocated to the
in-process research and development represents the estimated purchased
in-process technology for projects that had not yet reached technological
feasibility and have no alternative future use. Based on preliminary
assessments, the value of these projects was determined by estimating the costs
to develop the purchased in-process technology into commercially viable
products; estimating the resulting net cash flows from the sale of the products
resulting from completion of the projects reduced by the portion of the revenue
attributable to core technology; and discounting the net cash flows back to
their present value.
The unaudited pro forma condensed consolidated balance sheet of SCO gives
effect to the reorganization as if it had been completed as of September 30,
2000. The unaudited pro forma condensed consolidated statements of operations of
SCO for the year ended September 30, 2000 give effect to the reorganization
discussed as if it had occurred on October 1, 1999. SCO will treat this
transaction as a disposal of its server and professional services groups and
record a gain upon completion of the transaction. On an ongoing basis it will
account for its investment in New Caldera using the equity method of accounting.
The unaudited pro forma condensed combined financial statements included in
this joint proxy statement/prospectus are presented for illustrative purposes
only. Such information is not necessarily indicative of the operating results or
financial position that would have taken place if the Reorganization had been
completed at the beginning of the earliest period presented, nor is it
indicative of the results that may be expected for future periods. The pro forma
adjustments are based upon information and assumptions available at the time of
the filing of this joint proxy statement/prospectus. The pro forma information
should be read in conjunction with the accompanying notes thereto and with the
historical financial statements and related notes of Caldera, as well as the
historical financial statements and related notes of SCO and the server and
professional services groups included elsewhere in this joint proxy
statement/prospectus.
P-2
<PAGE> 190
CALDERA SYSTEMS, INC. AND THE SCO SERVER
AND PROFESSIONAL SERVICES GROUPS
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET AS OF OCTOBER 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------
SCO SERVER AND
PROFESSIONAL SERVICES PRO FORMA PRO FORMA
CALDERA GROUPS ADJUSTMENTS COMBINED
------------------ --------------------- ----------- ---------
(OCTOBER 31, 2000) (SEPTEMBER 30, 2000)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 36,560 $ 511 $ (7,000)(a)
(3,350)(b) $ 26,721
Available-for-sale securities.................. 54,179 -- 54,179
Accounts receivable, net....................... 1,545 13,601 (13,601)(c) 1,545
Other current assets........................... 1,700 1,923 (1,802)(c) 1,821
-------- ------- -------- --------
Total current assets..................... 93,984 16,035 (25,753) 84,266
Property and equipment, net...................... 1,589 7,093 8,682
Investments in non-marketable securities......... 5,179 -- 5,179
Equity investment in affiliate................... 4,957 -- 4,957
Goodwill and other intangible assets, net........ -- 5,282 141,512(d) 146,794
Other assets..................................... 1,809 706 2,515
-------- ------- -------- --------
Total assets............................. $107,518 $29,116 $115,759 $252,393
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 3,313 $ 4,130 $ (4,130)(c) $ 3,313
Income and other taxes payable................. 79 549 628
Accrued liabilities............................ 1,586 25,734 (20,324)(c)
500(e) 7,496
Deferred revenue............................... 326 4,064 4,390
-------- ------- -------- --------
Total current liabilities................ 5,304 34,477 (23,954) 15,827
-------- ------- -------- --------
Deferred tax liabilities......................... -- -- 11,768(f) 11,768
-------- ------- -------- --------
Other long-term liabilities...................... -- 1,433 1,433
-------- ------- -------- --------
Stockholders' equity:
Common stock................................... 39 -- 16(a) 55
Additional paid-in capital..................... 155,649 -- 122,135(a) 277,784
Deferred compensation.......................... (3,715) -- (3,715)
Accumulated comprehensive income............... 300 -- 300
Accumulated deficit............................ (50,059) -- (1,000)(g) (51,059)
Divisional deficit............................. -- (6,794) 6,794(h) --
-------- ------- -------- --------
Total stockholders' equity............... 102,214 (6,794) 127,945 223,365
-------- ------- -------- --------
Total liabilities and stockholders'
equity................................. $107,518 $29,116 $115,759 $252,393
======== ======= ======== ========
</TABLE>
P-3
<PAGE> 191
CALDERA SYSTEMS, INC. AND THE SCO SERVER
AND PROFESSIONAL SERVICES GROUPS
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------
SCO SERVER AND
PROFESSIONAL PRO FORMA PRO FORMA
CALDERA SERVICES GROUPS ADJUSTMENTS COMBINED
----------------- ------------------- ----------- ---------
(YEAR ENDED (YEAR ENDED
OCTOBER 31, 2000) SEPTEMBER 30, 2000)
<S> <C> <C> <C> <C>
Revenue............................................. $ 4,274 $ 74,508 $ (381)(j) $ 78,401
Revenue from related party.......................... -- -- 7,237(j)
6,897(k) 14,134
-------- -------- -------- ---------
Total revenue.............................. 4,274 74,508 13,753 92,535
Cost of revenue..................................... 4,021 32,246 (381)(i)
6,270(l) 42,156
-------- -------- -------- ---------
Total cost of revenue...................... 4,021 32,246 5,889 42,156
-------- -------- -------- ---------
Gross margin...................................... 253 42,262 7,864 50,379
-------- -------- -------- ---------
Operating expenses:
Sales and marketing............................... 14,754 55,952 7,237(m) 77,943
Research and development.......................... 4,954 27,430 32,384
General and administrative........................ 6,430 8,540 14,970
SCO cost-sharing arrangement...................... 898 -- 898
Non-cash compensation*............................ 5,216 -- 5,216
Amortization of goodwill and other intangibles.... -- -- 31,129(n) 31,129
Restructuring charge.............................. -- 9,882 9,882
-------- -------- -------- ---------
Total operating expenses................... 32,252 101,804 38,366 172,422
-------- -------- -------- ---------
Loss from operations................................ (31,999) (59,542) (30,502) (122,043)
-------- -------- -------- ---------
Equity in loss of affiliate......................... (387) -- (387)
-------- -------- -------- ---------
Other income (expense), net......................... 5,544 (283) 5,261
-------- -------- -------- ---------
Loss before income taxes............................ (26,842) (59,825) (30,502) (117,169)
Provision for income taxes.......................... (81) -- (81)
-------- -------- -------- ---------
Net loss............................................ $(26,923) $(59,825) $(30,502) $(117,250)
======== ======== ======== =========
Preferred stock dividends........................... $(12,253) $ -- $ (12,253)
======== ======== =========
Net loss attributable to common stockholders........ $(39,176) $(59,825) $(30,502) $(129,503)
======== ======== ======== =========
Basic and diluted net loss per common share......... $ (1.19) $ (2.63)
======== =========
Basic and diluted weighted average shares
outstanding....................................... 32,922 16,243(o) 49,165
======== ======== =========
</TABLE>
---------------
<TABLE>
<S> <C> <C> <C> <C>
* Non-cash compensation has been excluded from the
following expenses:
Sales and marketing............................. $ 1,970 -- $ 1,970
Research and development........................ 1,146 -- 1,146
General and administrative...................... 2,100 -- 2,100
</TABLE>
P-4
<PAGE> 192
CALDERA SYSTEMS, INC. AND THE SCO SERVER
AND PROFESSIONAL SERVICES GROUPS
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The pro forma condensed combined financial statements included herein have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and certain footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations; however, management believes
that the disclosures are adequate to make the information presented not
misleading.
2. REORGANIZATION
For purposes of computing the estimated purchase price, the value of the
common stock was determined by taking the closing price of Caldera's common
stock as quoted on NASDAQ for the two days before, the day of and the two days
following the signing of the Reorganization Agreement. The estimated
consideration to be exchanged in the Reorganization is based on preliminary
estimates and is subject to certain adjustments. The following table sets forth
the estimated consideration to be exchanged for the SCO server and professional
services groups, including estimated direct expenses to be paid in connection
with the Reorganization (dollars in thousands, except per share amounts).
<TABLE>
<S> <C>
Estimated consideration:
Fair value of Caldera common stock (16,242,809 shares at
$6.872 per share)...................................... $111,621
Fair value of options to purchase 1,998,358 shares of
common stock to be issued in exchange for 3,996,716
outstanding SCO options................................ 10,530
Cash...................................................... 7,000
Estimated direct expenses................................. 3,350
--------
Total............................................. $132,501
========
</TABLE>
For purposes of computing the estimated fair value of the New Caldera stock
options to be issued to SCO employees, the Black-Scholes option pricing model
was used with the following assumptions: fair value of Caldera's stock of $6.872
as described above, expected life of 2 1/2 years, risk free interest rate of 6
percent, expected dividend yield of 0 percent, and volatility of 145 percent.
The option holders of SCO may elect to transfer their options to purchase
SCO common stock into options to purchase New Caldera common stock through
either a replacement or an assumption alternative. As of September 30, 2000,
there were 3,996,716 outstanding SCO options with exercise prices ranging from
$1.50 to $32.00 per share and an average exercise price of $7.55 per share. As
of December 6, 2000, Caldera's stock price was $2.063 per share. If Caldera's
stock price on the date of the Reorganization does not increase to a price
higher than $3.00 per share, then none of the outstanding SCO options would
result in a more favorable exercise price to the holders of the options upon
conversion to Caldera options under the assumption alternative versus the
replacement alternative. For purposes of the pro forma presentation, management
of Caldera believes it is highly unlikely that Caldera's stock price will rise
to a level in order for option holders to benefit under the assumption model and
therefore has assumed that all options to be issued to SCO option holders will
be done under the replacement alternative. If Caldera's market price were to
increase to a price of $6.00 per share, only 32,200 options would receive a
favorable exercise price and therefore be more likely to elect the assumption
alternative rather than the replacement alternative. To the extent that New
Caldera assumes unvested options with intrinsic value, New Caldera will be
required to record prepaid compensation for the intrinsic value and amortize it
over
P-5
<PAGE> 193
CALDERA SYSTEMS, INC. AND THE SCO SERVER
AND PROFESSIONAL SERVICES GROUPS
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the future vesting period. Based on the present assumptions from Caldera's
current market price, Caldera will not be required to record prepaid
compensation for unvested shares.
The following table sets forth the allocation of the consideration to the
tangible and intangible assets acquired and liabilities assumed.
<TABLE>
<S> <C>
Purchase price allocation:
Tangible assets acquired net of assumed liabilities....... $ 2,257
Accrual for shut-down of non-essential facilities and
related costs.......................................... (500)
Deferred income taxes associated with non-deductible
intangible assets...................................... (11,768)
Intangible assets acquired:
Distribution/reseller channel.......................... 36,600
Assembled workforce.................................... 19,700
Existing technology (consisting primarily of
UnixWare)............................................. 17,800
Trade name and trademarks.............................. 1,500
Acquired in-process research and development........... 1,000
OpenServer distributor agreement....................... 900
Goodwill............................................... 65,012
--------
Total............................................. $132,501
========
</TABLE>
The value allocated to in-process research and development will be charged
to expense upon consummation of the acquisition. The write-off was necessary
because the acquired in-process research and development had not yet reached
technological feasibility and had no future alternative uses. Management
believes that the acquired in-process research and development will be
successfully developed; however, these technologies may not achieve commercial
viability.
Current engineering efforts are focused on developing the Linux LKP, which
is a compatibility layer of software that enables users of alternative operating
systems to run Linux on their existing systems. Developing and enhancing this
product is time-consuming, costly, and complex. There is a risk that this
development will not be competitive with other products using alternative
technologies that offer comparable functionality.
SCO management expects the development cycle for the Linux LKP product to
continue for another one to three months, with an expected completion date in
the fourth quarter of calendar year 2000. SCO has invested approximately 60
man-months of effort (or approximately $550,000) in the project and anticipates
three man-months of effort (or approximately $30,000) to complete the Linux LKP
product. The Linux LKP product is currently estimated to be approximately 95%
complete.
The valuation of the in-process research and development included, but was
not limited to, an analysis of the market for the acquired products and
technologies, the completion costs for the projects, the expected cash flows
attributed to the projects and the risks associated with achieving such cash
flows. The assumptions used in valuing the in-process research and development
were based upon assumptions management believes to be reasonable, but which are
inherently uncertain and unpredictable. For these reasons, actual results may
vary from the estimated results.
The value assigned to in-process research and development was determined by
estimating the resulting net cash flows from the project when completed and
discounting the net cash flows to their present value. The cash flows have been
discounted at a rate of return of 20%, which has been risk adjusted based on a
weighted average cost of capital of 14.5%. The project's percentage of
completion of 95% has also been
P-6
<PAGE> 194
CALDERA SYSTEMS, INC. AND THE SCO SERVER
AND PROFESSIONAL SERVICES GROUPS
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
applied to the cash flows to recognize the portion of the development completed.
Application of this approach results in an estimated value of the Linux LKP
product of approximately $1,000,000.
New Caldera will not acquire certain assets nor assume certain liabilities
pursuant to the Reorganization Agreement. The excluded assets and liabilities
included in the September 30, 2000 historical carved-out balance sheet of the
server and professional services groups were as follows:
<TABLE>
<S> <C>
Receivables................................................. $ 13,601
Other current assets........................................ 1,802
Accounts payable............................................ (4,130)
Accrued liabilities......................................... (20,324)
--------
Net liabilities of the server and professional services
groups not assumed by New Caldera......................... $ (9,051)
========
</TABLE>
In connection with the Reorganization, SCO has agreed to pay three
executive officers who will become executive officers of New Caldera cash
bonuses amounting to $1,073,000 in aggregate if they have not voluntarily
terminated their employment with SCO or New Caldera for one year following the
closing of the Reorganization. Although these obligations will be settled by
SCO, Caldera will recognize expense in its financial statements for these
amounts over the one-year period since the services performed will benefit New
Caldera. The expense for these payments has not been included in the
accompanying pro forma condensed combined statements of operations as it
represents a non-recurring charge directly related to the acquisition.
3. PRO FORMA COMBINED NET LOSS PER COMMON SHARE
The pro forma combined net loss per common share is based on the weighted
average number of common shares of Caldera and the shares to be issued to SCO
for the year ended October 31, 2000. The dilutive effect of common share
equivalents has not been included since the pro forma combined condensed
statement of operations reflects a net loss for the year ended October 31, 2000.
The pro forma combined basic and diluted net loss per common share for the
year ended October 31, 2000 was determined as follows (in thousands):
<TABLE>
<S> <C>
Caldera basic and diluted shares............................ 32,922
Shares to be issued to SCO.................................. 16,243
------
Pro forma combined basic and diluted shares used for net
loss per share............................................ 49,165
======
</TABLE>
4. SALES REPRESENTATIVE AND SUPPORT AGREEMENT
In connection with the Reorganization, New Caldera and SCO will enter into
a Sales Representative and Support Agreement (the "Sales and Support
Agreement"). Under the terms of the Sales and Support Agreement, New Caldera
will act as the sales representative for the SCO OpenServer products. All rights
related to the SCO OpenServer products and related technology will be retained
by SCO and Caldera will acquire the rights, associated technology and assigned
license arrangements for the UnixWare products and other server software
products. New Caldera has agreed to sell the OpenServer products in accordance
with prices, discounts, warranties, and other terms to be established by SCO.
SCO will retain inventory and credit risk related to OpenServer products as well
as rights to reject any purchase order, approve or disprove any credit extended
outside of SCO guidelines, accept the return of products and make allowances.
SCO will pay to New Caldera commission fees of 11% of net revenue from
OpenServer
P-7
<PAGE> 195
CALDERA SYSTEMS, INC. AND THE SCO SERVER
AND PROFESSIONAL SERVICES GROUPS
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
licenses and 25% of net revenue from sales of media kits, as defined. The
commission fees to be received by New Caldera will be accounted for as services
revenue.
For purposes of the SCO server and professional services groups historical
financial statements, revenue from the OpenServer products and related expenses
have been excluded. Accordingly, pro forma adjustments are required to reflect
New Caldera's commission fees and related expenses pursuant to the Sales and
Support Agreement (see Note 6).
In addition to the commission fee, SCO will reimburse New Caldera for
expenses relating to marketing activities in an amount equal to the lesser of
actual marketing expenses or 15% of net revenue from OpenServer products. The
marketing reimbursements will be reflected as an offset to the actual expenses
incurred and accordingly no pro forma adjustment is necessary.
The Sales and Support Agreement will automatically terminate after a period
of five years. New Caldera may terminate the Sales and Support Agreement after
three years by paying SCO an amount equal to two times the OpenServer product
revenue during the preceding 12-month period.
5. OPENSERVER RESEARCH AND DEVELOPMENT AGREEMENT
In connection with the Reorganization, New Caldera and SCO will enter into
a Research and Development Agreement (the "Development Agreement"). Under the
terms of the Development Agreement, New Caldera will provide independent
contract services for maintaining, testing and supporting the SCO OpenServer
products as directed by SCO. Contract services revenue under the Development
Agreement will be based on all direct and indirect expenses incurred by New
Caldera plus ten percent. Direct and indirect expenses will consist primarily of
payroll and related costs, facilities and equipment.
For purposes of the SCO server and professional services group's historical
financial statements, the estimated research and development expenses related to
the OpenServer Products have been excluded. Accordingly, pro forma adjustments
are required to reflect New Caldera's contract engineering revenue and related
costs pursuant to the Development Agreement (see Note 6).
6. PRO FORMA ADJUSTMENTS
The pro forma condensed combined financial statements give effect to the
following pro forma adjustments in connection with the Reorganization:
PRO FORMA CONDENSED COMBINED BALANCE SHEET
(a) To reflect the estimated consideration to be exchanged as
summarized in Note 2 including the issuance of common stock and options to
purchase common stock amounting to $122,151,000 and the $7,000,000 cash
payment. Under the Reorganization, Caldera has agreed to advance the
$7,000,000 cash payment to SCO prior to closing under a loan arrangement.
(b) To reflect the $3,350,000 of estimated direct expenses related to
the Reorganization including legal, accounting, printing and investment
banking fees.
(c) To remove the net liabilities of the SCO server and professional
services groups of $9,051,000 (see Note 2) which will not be assumed by New
Caldera pursuant to the Reorganization Agreement.
(d) To reflect the identifiable intangible assets and goodwill
amounting to $141,512,000 as summarized in Note 2.
P-8
<PAGE> 196
CALDERA SYSTEMS, INC. AND THE SCO SERVER
AND PROFESSIONAL SERVICES GROUPS
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(e) To reflect an accrual of $500,000 for estimated shut-down of
non-essential facilities and related costs. Certain facilities have been
identified by management of New Caldera that will be closed following
consummation of the Reorganization. The accrual for shut-down and related
costs has not been included in the accompanying pro forma condensed
combined statement of operations as it represents a non-recurring charge
directly related to the acquisition.
(f) To record a deferred tax liability related to book-to-tax basis
differences of acquired identifiable intangible assets using an estimated
effective tax rate of 37.5 percent.
(g) To reflect the impact of the write-off of acquired in-process
research and development. The in-process research and development charge
has not been included in the accompanying pro forma condensed combined
statement of operations as it represents a non-recurring charge directly
related to the acquisition.
(h) To record the elimination of the divisional deficit of the SCO
server and professional services groups.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(i) To eliminate services provided by the SCO server and professional
services groups to Caldera and licensed products sold by Caldera to the
server and professional services groups.
(j) To reflect the commission fees to be received by New Caldera in
accordance with the terms of the Sales and Support Agreement discussed in
Note 4. The commission fees represent 11 percent of the historical net
revenue from OpenServer licenses and 25 percent of net revenue from sales
of media kits. For the year ended September 30, 2000, commission fees for
OpenServer licenses were $6,631,000 and commissions for media kits were
$606,000. SCO's net revenue from sales of OpenServer products were not
included in the SCO server and professional services groups carved-out
historical financial statements. SCO's historical revenue from its
OpenServer products decreased during the year ended September 30, 2000 as
compared to the prior year. Sales of OpenServer products may continue to
decrease in future periods due to technological and other competitive
factors. Accordingly, the pro forma commission fees revenue included in the
accompanying pro forma financial statements may not be indicative of future
results.
(k) To reflect the contract research and development services revenue
in accordance with the Development Agreement discussed in Note 5. Pursuant
to the Development Agreement, New Caldera will be paid for development and
support services related to SCO's retained OpenServer products based on
direct and indirect costs plus 10 percent. The amount of engineering and
support revenues was estimated based on SCO's historical research and
development expenses incurred related to the OpenServer products, which
were excluded from the SCO server and professional services group's
carved-out historical financial statements. The pro forma research and
development services revenue based on SCO's historical results may not be
indicative of future research and development services revenue to be
generated by New Caldera due to the potential decreases in sales of
OpenServer products as discussed above in (j).
(l) To reflect the estimated costs of research and development
activities related to the OpenServer line of products reflected in (k).
(m) To reflect the estimated expenses associated with generating the
OpenServer and media kits commission fees revenue reflected in (j) at an
assumed break-even margin.
P-9
<PAGE> 197
CALDERA SYSTEMS, INC. AND THE SCO SERVER
AND PROFESSIONAL SERVICES GROUPS
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(n) To reflect the amortization of intangible assets and goodwill
related to the acquisition calculated using the straight-line method and
estimated useful lives of five years for the distribution/reseller channel,
existing technology, OpenServer distributor agreement and goodwill and
three years for the assembled workforce and trade name and trademarks.
(o) To reflect the additional shares of common stock to be issued as
discussed in Note 3.
P-10
<PAGE> 198
THE SANTA CRUZ OPERATION, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
LESS SERVER AND
THE SANTA CRUZ PROFESSIONAL PRO FORMA
OPERATION, INC. SERVICES GROUPS ADJUSTMENTS PRO FORMA
--------------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 20,879 $ 511 $ 7,000(a) $ 39,401
(2,949)(a)
18,000(f)
(3,018)(g)
Short-term investments................. 5,567 5,567
Accounts receivable, net............... 24,269 13,601 13,601(b) 24,269
Available-for-sale equity securities... 7,119 7,119
Other current assets................... 4,358 1,923 1,803(b) 4,238
-------- ------- ------- --------
Total current assets........... 62,192 16,035 34,437 80,594
Property and equipment, net.............. 9,012 7,093 1,919
Purchased software and technology
licenses, net.......................... 5,830 5,282 548
Equity investment in New Caldera......... 24,278(a) 24,278
Other assets............................. 5,168 706 -- 4,462
-------- ------- ------- --------
Total assets................... $ 82,202 $29,116 $58,715 $111,801
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 5,521 $ 4,130 $ 4,130(b) $ 5,521
Short term debt........................ 18,000(f) 18,000
Income and other taxes payable......... 1,964 549 10,429(a) 11,844
Restructuring reserve.................. 5,964 5,163 5,163(b) 5,964
Accrued expenses and other current
liabilities......................... 24,755 20,571 15,161(b) 19,345
Deferred revenue....................... 7,334 4,064 3,270
-------- ------- ------- --------
Total current liabilities...... 45,538 34,477 52,883 63,444
-------- ------- ------- --------
Long-term lease obligations.............. 545 477 68
Long-term deferred revenues.............. 1,397 806 591
Other long-term liabilities.............. 3,520 150 3,370
-------- ------- ------- --------
Total long-term liabilities.............. 5,462 1,433 4,029
-------- ------- ------- --------
Stockholders' equity:
Common stock........................... 118,940 97(g) 119,037
Accumulated comprehensive income
(loss).............................. 5,486 (718) 6,204
Accumulated deficit.................... (93,224) 15,644(a) (81,413)
(3,018)(g)
(97)(g)
(718)(a)
Divisional deficit..................... (6,076) (6,076)(b)
-------- ------- ------- --------
Total stockholders' equity..... 31,202 (6,794) 5,832 43,828
-------- ------- ------- --------
Total liabilities and
stockholders' equity......... $ 82,202 $29,116 $58,715 $111,801
======== ======= ======= ========
</TABLE>
P-11
<PAGE> 199
THE SANTA CRUZ OPERATION, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
LESS SERVER AND
THE SANTA CRUZ PROFESSIONAL PRO FORMA
OPERATION, INC. SERVICES GROUPS ADJUSTMENTS PRO FORMA
--------------- ---------------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues................................ $148,923 $ 74,508 $ $ 74,415
Cost of revenues............................ 41,796 32,246 -- 9,550
-------- -------- -------- --------
Gross margin.............................. 107,127 42,262 -- 64,865
-------- -------- -------- --------
Operating expenses:
Sales and marketing....................... 89,313 55,952 16,642(c) 33,701
(16,302)(e)
Research and development.................. 39,673 27,430 6,897(d) 12,870
(6,270)(e)
General and administrative................ 18,691 8,540 -- 10,151
Restructuring............................. 10,683 9,882 -- 801
-------- -------- -------- --------
Total operating expenses.......... 158,360 101,804 967 57,523
-------- -------- -------- --------
Operating income (loss)..................... (51,233) (59,542) (967) 7,342
Equity interest in results of New Caldera... -- -- (25,591)(h) (25,591)
Other income (expense), net................. 2,498 (283) (1,800)(f) 981
-------- -------- -------- --------
Loss before income taxes.................... (48,735) (59,825) (28,358) (17,268)
Provision for income taxes.................. (8,218) -- (8,218)
-------- -------- -------- --------
Net loss.................................... $(56,953) $(59,825) $(28,358) $(25,486)
======== ======== ======== ========
Basic and diluted net loss per share........ $ (1.59) $ (0.71)
-------- --------
Shares used in basic and diluted net loss
per share................................. 35,720 35,720
======== ========
</TABLE>
P-12
<PAGE> 200
THE SANTA CRUZ OPERATION, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited pro forma condensed financial statements included herein have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and certain footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations; however, we believe that the
disclosures are adequate to make the information presented not misleading.
On August 1, 2000 Caldera Systems Inc. ("Caldera"), Caldera Holding, Inc.
("New Caldera") and The Santa Cruz Operation, Inc. ("SCO") entered into an
Agreement and Plan of Reorganization (the "Reorganization"). Under the terms of
the Reorganization, SCO will contribute the capital stock of certain companies
as well as certain assets collectively representing the server and professional
services group. In exchange for this SCO will receive an approximate 25.5% fully
diluted equity interest (with the employees of the server and professional
services groups receiving options equivalent to an additional 3.1% of New
Caldera's fully diluted equity) in New Caldera together with $7,000,000 in cash.
SCO will treat this transaction as a disposal of its server and professional
services groups and record a gain upon completion of the transaction. On an
ongoing basis it will account for its investment in New Caldera using the equity
method of accounting. (See Note 2 for a further explanation of the effects).
The unaudited pro forma condensed balance sheet of SCO gives effect to the
reorganization as if it had been completed as of September 30, 2000. The
unaudited pro forma condensed statements of operations of SCO for the year ended
September 30, 2000 give effect to the Reorganization discussed as if it had
occurred on October 1, 1999.
2. REORGANIZATION
The accompanying pro forma statements reflect the contribution of SCO's
server and professional services groups to New Caldera in exchange for the
issuance of 16,242,809 shares of New Caldera common stock, representing an
approximate 28.6% interest in New Caldera on an outstanding shares basis and an
approximate 25.5% interest on a fully diluted basis, plus $7 million in cash.
SCO currently holds approximately 0.9% of Caldera's Stock. The number of shares
to be received in the exchange is based on the capitalization of SCO and Caldera
as of July 31, 2000 and the gain calculation assumes a fair value for New
Caldera Stock of $2.062. The actual gain calculation is dependent on the fair
value for New Caldera Stock on the closing date of the transaction; for purposes
of the pro forma statements the closing price of New Caldera Stock on December
6, 2000 has been utilized to indicate fair value for New Caldera Stock. The
actual number of shares received by SCO will be based on the capitalization of
SCO and New Caldera on the closing date of the transaction and as a result the
actual gain recorded may be materially different to that detailed below.
As SCO will retain a 29.5% interest in New Caldera, including the server
and professional services group, after the Reorganization it will not recognize
a gain on 100% of the contribution of the server and professional services
group. SCO will record a gain calculated at 70.5% times the fair value of the
New Caldera stock received less 70.5% of SCO's basis in the assets of the server
and professional services
P-13
<PAGE> 201
THE SANTA CRUZ OPERATION, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS -- (CONTINUED)
groups plus net cash consideration received in the transaction as follows
(dollars in thousands except per share amounts):
<TABLE>
<S> <C>
Estimated Consideration:
Adjusted fair value of New Caldera common stock
(16,242,809 at $2.062 per share times 70.5%)........... $ 23,612
Cash Consideration.......................................... 7,000
Estimated Expenses.......................................... (2,949)
--------
27,663
70.5% of Net Assets of Server and Professional
Services Groups to be sold....................... (1,590)
--------
Expected Gain............................................... $ 26,073
========
</TABLE>
Every $1 increase (decrease) in per share value of Caldera Stock would result in
an increase (decrease) in the gain by $11,288,752.
Subsequent to the completion of the Reorganization SCO's operating results
will include 29.5% of the operating results of New Caldera, adjusted to amortize
the excess of New Caldera's net assets acquired over the basis of SCO's
investment in New Caldera. This estimated excess of net assets over the basis of
the investment has been allocated to proportionately reduce non-current assets
acquired and has been determined as follows:
<TABLE>
<S> <C>
Adjusted fair value of New Caldera common stock............. 23,612
Portion of investment in New Caldera with no step up in
basis..................................................... 666
-------
Basis of investment......................................... 24,278
SCO's share in New Caldera's pro forma net assets after
completion of the reorganization (29.5% of New Caldera's
pro forma net assets)..................................... 65,893
-------
Excess of net assets acquired over the value of
investment................................................ 41,615
=======
</TABLE>
The value of the investment has been allocated to SCO's share in New
Caldera's assets as follows:
<TABLE>
<S> <C>
Current assets.............................................. 24,858
Non-current assets.......................................... 7,983
Current liabilities......................................... (4,669)
Long term liabilities....................................... (3,894)
-------
24,278
=======
</TABLE>
To record the investment at the carrying value, non-current assets have
been proportionately reduced as follows:
<TABLE>
<CAPTION>
AMOUNT
ALLOCATED TO
SHARE IN ASSETS PROPORTIONATE NON-CURRENT
ACQUIRED REDUCTION ASSETS
--------------- ------------- ------------
<S> <C> <C> <C>
Property and Equipment, net...................... 2,561 2,149 412
Investment in non-marketable securities.......... 1,528 1,282 246
Investments in associated companies.............. 1,462 1,227 235
Goodwill and other intangible assets, net........ 43,304 36,334 6,970
Other assets..................................... 743 623 120
------- ------- ------
Total.................................. 49,598 41,615 7,983
======= ======= ======
</TABLE>
P-14
<PAGE> 202
THE SANTA CRUZ OPERATION, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS -- (CONTINUED)
After completion of the Reorganization, SCO will account for 29.5% of New
Caldera's net income, adjusted for the amortization of the reduction allocated
to non-current assets. This amortization will be calculated based on the
estimated remaining useful live of the underlying assets and will result in a
credit to SCO's statement of operations of approximately $2,250,000 per quarter.
The above calculation is an estimate based on the gain assumptions
discussed above and using New Caldera's unaudited pro-forma combined condensed
balance sheet as of October 31, 2000. The actual amount of difference recorded
will be calculated based on the balance sheet of Caldera after closing of the
transaction and could be materially different to the amount above.
The pro-forma unaudited condensed statements of operations include a 29.5%
of New Caldera's pro forma operating results minus the effects of the Sales
Representative and Support agreement discussed at note 4 to these unaudited
pro-forma condensed financial statements.
3. BENEFITS TO BE PROVIDED TO SCO EXECUTIVES
On July 31, 2000 the Board of Directors approved the following option
benefits to be provided to five Executive Officers who will remain employed with
SCO after the Reorganization:
a. The full acceleration of vesting provisions of options to purchase
approximately 918,000 shares of common stock.
b. An extension of the term of these 918,000 options and a further 608,000
options which were fully vested and unexercised as of July 31, 2000 until
January 31, 2002, in the event that any of these five officers is
involuntarily terminated or terminated by mutual agreement.
Their benefits are contingent upon the approval and completion of the
Reorganization.
These options were granted at exercise prices ranging from $2.56 to $16.31
and were granted with original terms of 5 and 10 years between December 1993 and
April 2000. The weighted average exercise price of these options is $6.15.
Under the guidance given in FASB Interpretation Number ("FIN") 44
"Accounting for Certain Transactions involving Stock Compensation" SCO
remeasured these options as of the date that the Board of Directors approved
these modifications.
For the options accelerated in a. above SCO measured the intrinsic value of
the award at the date of the modification and will record any intrinsic value
over and above that recorded on the original grant date as compensation if,
absent the acceleration the award would have been forfeited. SCO's estimate of
the compensation expense to be recorded in respect of options, which would have
been forfeited, will be based on historical retention rates and the remaining
vesting period on each of these options.
SCO has estimated that based on an actual stock price of $3.47 at the time
of the modification was made the total excess intrinsic value of the options
accelerated would be approximately $92,000.
SCO estimates that each of the Executive Officers will remain employed with
SCO for the remaining part of the original vesting period and as a result has
estimated that there will be no shares which should have been forfeited. This is
based on the average remaining vesting period of approximately 2 years and the
average period of employment of each of the Executive Officers of 10 years. As a
result no compensation expense is expected to be recorded. However this is an
estimate which could change based on the number of Executive Officers whose
employment is terminated prior to the date that the options would have been
forfeited under the original terms of the option grants. Such changes could be
material to the results of operations of SCO.
P-15
<PAGE> 203
THE SANTA CRUZ OPERATION, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS -- (CONTINUED)
For the 608,000 options discussed in b. above the Board of Directors also
measured the intrinsic value of these options as of the date the modification
was made. Compensation expense, equivalent to the excess of the intrinsic value
of these options at the date of the modification over the intrinsic value
recorded on the original issuance will be recorded as compensation expense in
the event that any of these Executive Officers is involuntarily terminated or is
terminated by mutual consent prior to January 31, 2002.
SCO has estimated that based on the stock price at the date of modification
of $3.47 the total excess intrinsic value of these options would be
approximately $71,000.
SCO expects that these Executive Officers will remain employed by SCO until
after January 2002 and as a result has estimated that the charge to be recorded
is zero. This is based on the factors discussed above. However in the event that
one of the five Executive Officers is involuntarily terminated or is terminated
by mutual consent prior to January 31, 2002, SCO will record a charge as
discussed above. Such charge could be material to the results of operations of
SCO.
In addition to the option modifications discussed above the Board of
Directors approved the following modifications to options held by three
Executive Officers who will be employed by New Caldera after consummation of the
Reorganization:
a.Full acceleration of vesting of options to purchase approximately 799,000
shares of SCO common stock.
b.The term of the approximately 799,000 options in a. above together with
the term of further options to purchase approximately 527,000 shares will
be extended to January 31, 2002. The modifications are also contingent
upon the completion of the Reorganization.
The total number of options subject to modification was approximately
1,326,000. These options had original contractual terms of 10 years, were issued
at dates between December 1991 and September 1999 at exercise prices ranging
between $1.50 and $9.25. The weighted average exercise price of the outstanding
options is $5.35. As a result of these modifications the original contractual
term of options to purchase 5,100 shares at an exercise price of $1.50 will be
extended.
As of the date of modification SCO measured the intrinsic value of these
options and upon consummation of the Reorganization will record a compensation
expense equivalent to the excess of this intrinsic value over the original
intrinsic value recorded. SCO estimated that, based on the stock price of $3.47
as of the date the modifications were made, this compensation expense will be
approximately $97,000. As such a pro forma adjustment has been recorded to
reflect the estimated expense, which SCO expects to record upon consummation of
the Reorganization.
In addition the Board of Directors approved cash payments on the earlier of
(a) one year, provided that such executive officer has not voluntarily
terminated his employment with SCO or New Caldera, or (b) immediately upon an
involuntary termination or a termination by mutual consent, equal to that
individual's current annual salary plus 100% of his target bonus.
SCO expects to record a charge of approximately $1,073,000 to operations
over one year in connection with the expected cash payments to be made to the
executives remaining with SCO and approximately $1,945,000 in respect of
payments to be made to the three executives who will be transferred to New
Caldera as part of the Reorganization. These charges will be recorded to
operations over the service period which will be on the date of consummation of
the Reorganization until January 31, 2002.
P-16
<PAGE> 204
THE SANTA CRUZ OPERATION, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS -- (CONTINUED)
The accompanying unaudited pro forma condensed financial statements include
adjustments for the expenses to be recorded in respect of the option amendment
and the bonus payments which are expected to be made by SCO.
4. SALES REPRESENTATIVE AND SUPPORT AGREEMENT
In connection with the Reorganization, New Caldera and SCO will enter into
a Sales Representative and Support Agreement (the "Sales and Support
Agreement"). Under the terms of the Sales and Support Agreement, New Caldera
will act as the sales representative for the SCO OpenServer products. All rights
related to the SCO OpenServer products and related technology will be retained
by SCO. New Caldera has agreed to sell the OpenServer products in accordance
with prices, discounts, warranties, and other terms to be established by SCO.
SCO will retain inventory risk related to OpenServer products as well as rights
to reject any purchase order, approve or disprove any credit extended outside of
SCO guidelines, accept the return of products and make allowances. Depending
upon the class of revenue, SCO will pay to Caldera a commission fee of 11% or
25% of net revenue, reduced by a provision for bad debts, relating to the sale
of OpenServer products. The commission fees to be paid by SCO will be accounted
for as sales and marketing expenses.
In addition to the commission fee, SCO will reimburse New Caldera for
expenses relating to marketing activities in an amount equal to the lesser of
actual marketing expenses or 15% of revenue from OpenServer products.
The Sales and Support Agreement will automatically terminate after a period
of five years. New Caldera may terminate the Sales and Support Agreement after
three years by paying SCO an amount equal to two times the OpenServer product
revenue during the preceding 12-month period.
5. OPENSERVER RESEARCH AND DEVELOPMENT AGREEMENT
In connection with the Reorganization, New Caldera and SCO will enter into
a Research and Development Agreement (the "Development Agreement"). Under the
terms of the Development Agreement, New Caldera will provide independent
contracting services for maintaining, testing and supporting the SCO OpenServer
products as directed by SCO. Contract services revenue under the Development
Agreement will be based on all direct and indirect expenses incurred by New
Caldera plus ten percent. Direct and indirect expenses will consist primarily of
payroll and related costs, facilities and equipment.
For purposes of the SCO server and professional services group's historical
financial statements, the estimated research and development expenses related to
the OpenServer Products have been excluded. Accordingly, pro forma adjustments
are required to reflect payments to New Caldera for contract engineering costs
pursuant to the Development Agreement (see Note 6).
6. PRO FORMA ADJUSTMENTS
The unaudited pro forma condensed combined financial statements give effect
to the following pro forma adjustments in connection with the Reorganization:
(a) To reflect the gain and related taxation payable on the sale of
the assets and liabilities of the server and professional services groups
and the recognition of the pro rata gain in connection with this
transaction (see Note 2). Taxation payable on the gain has been estimated
at 40%.
P-17
<PAGE> 205
THE SANTA CRUZ OPERATION, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS -- (CONTINUED)
Equity investment in New Caldera is calculated as follows:
<TABLE>
<CAPTION>
000'S
------
<S> <C>
Market value of Caldera Shares (16,242,809 shares at a fair
value of $2.062 per share)................................ 33,493
======
Value of net assets sold.................................... 23,612
Net assets over which significant interest is retained...... 666
Equity investment in Caldera................................ 24,278
======
</TABLE>
(b) To reflect the assets and liabilities of the server and
professional services groups which will not be assumed pursuant to the
reorganization.
(c) To reflect the commission fees and marketing fees to be received
by New Caldera in accordance with the terms of the Sales and Support
Agreement discussed in Note 4. SCO's net revenue from sales of OpenServer
products were not included in the SCO server and professional services
groups' historical financial statements.
(d) To reflect the contract research and development services in
accordance with the Development Agreement discussed in Note 5. Pursuant to
the Development Agreement, New Caldera will be paid for development and
support services related to SCO's retained OpenServer products based on
direct and indirect costs plus ten percent. The amount of engineering and
support revenues was estimated based on SCO's historical research and
development expenses incurred related to the OpenServer products, which
were excluded from the SCO server and professional services groups'
carved-out historical financial statements.
(e) To reverse sales and marketing expenses and research and
development expenses that will now be incurred by New Caldera pursuant to
the Sales Representatives and Support Agreement and the OpenServer Research
and Development Agreement.
(f) To reflect the $18 million loan to be received from the Canopy
Group. As the terms of the loan have not been agreed yet, an interest rate
of 10% has been assumed and the related interest expense has been included
in other expenses. Actual interest charge will vary based on terms finally
agreed upon.
(g) To reflect the recognition of expenses related to the option
modifications and bonus payments discussed in Note 3.
(h) To reflect SCO's equity share of New Caldera's pro forma combined
results of operations for the respective periods. SCO's equity share in New
Caldera's pro forma combined results has been calculated as 29.5% of New
Caldera's net loss adjusted to record the amortization of the excess of the
underlying equity interest in Caldera over the recorded value of the
investment over the estimated remaining useful life of the underlying
assets.
P-18
<PAGE> 206
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CALDERA SYSTEMS, INC., THE CARVED-OUT PORTION OF CALDERA,
INC. AND THEIR SUBSIDIARY
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations and Comprehensive
Loss...................................................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-8
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
Report of Independent Accountants........................... F-34
Consolidated Balance Sheets................................. F-35
Consolidated Statements of Operations and Comprehensive
Loss...................................................... F-36
Consolidated Statements of Divisional Deficit and
Accumulated Other Comprehensive Loss...................... F-37
Consolidated Statements of Cash Flows....................... F-38
Notes to Consolidated Carved-Out Financial Statements....... F-39
EBIZ ENTERPRISES, INC.
Report of Independent Public Accountants.................... F-51
Balance Sheets.............................................. F-52
Statements of Operations.................................... F-53
Statements of Stockholders' Equity.......................... F-54
Statements of Cash Flows.................................... F-55
Notes to Financial Statements............................... F-56
</TABLE>
F-1
<PAGE> 207
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Caldera Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Caldera
Systems, Inc. (a Delaware corporation), the carved-out portion of Caldera, Inc.
(a Utah corporation) and their subsidiary as of October 31, 1999 and 2000, and
the related consolidated statements of operations and comprehensive loss,
stockholders' equity and cash flows for each of the three years in the period
ended October 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Caldera
Systems, Inc., the carved-out portion of Caldera, Inc. and their subsidiary as
of October 31, 1999 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 2000 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
December 5, 2000
F-2
<PAGE> 208
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------------
1999 2000
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 121,989 $ 36,560,267
Available-for-sale securities............................. -- 54,179,307
Accounts receivable, net of allowance for doubtful
accounts of $90,000 and $312,300, respectively.......... 670,043 1,544,526
Stock subscription receivable............................. 1,500,000 --
Other receivables......................................... 375,000 --
Inventories............................................... 169,409 389,438
Other current assets...................................... 33,524 1,310,173
------------ ------------
Total current assets.................................... 2,869,965 93,983,711
------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment........................................ 609,665 1,321,806
Furniture and fixtures.................................... 675,181 1,097,048
Leasehold improvements.................................... 86,973 342,015
------------ ------------
1,371,819 2,760,869
Less accumulated depreciation and amortization............ (652,399) (1,171,549)
------------ ------------
Net property and equipment.............................. 719,420 1,589,320
------------ ------------
INVESTMENTS IN NON-MARKETABLE SECURITIES:
Affiliate................................................. -- 1,179,704
Non-affiliates............................................ -- 3,999,497
------------ ------------
-- 5,179,201
------------ ------------
EQUITY INVESTMENT IN AFFILIATE.............................. -- 4,957,325
------------ ------------
OTHER ASSETS, net........................................... 124,430 1,808,746
------------ ------------
Total assets............................................ $ 3,713,815 $107,518,303
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,309,255 $ 2,414,359
Payable to The Santa Cruz Operation....................... -- 898,026
Accrued liabilities....................................... 623,057 1,300,890
Accrued sales returns and other allowances................ 169,000 363,928
Deferred revenue.......................................... 38,080 326,330
Current portion of long-term debt......................... 3,698 --
Related party payables.................................... 48,933 --
------------ ------------
Total current liabilities............................... 2,192,023 5,303,533
------------ ------------
LONG-TERM DEBT, net of current portion...................... 5,762 --
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 25,000,000 shares
authorized.............................................. -- --
Common stock, $0.001 par value; 75,000,000 shares
authorized, 26,607,329 and 39,444,457 shares
outstanding, respectively............................... 26,607 39,444
Additional paid-in capital................................ 16,160,312 155,649,244
Stock subscription receivable............................. (1,500,000) --
Deferred compensation..................................... (2,734,934) (3,714,720)
Accumulated comprehensive income (loss)................... (4,365) 299,456
Accumulated deficit....................................... (10,431,590) (50,058,654)
------------ ------------
Total stockholders' equity.............................. 1,516,030 102,214,770
------------ ------------
Total liabilities and stockholders' equity.............. $ 3,713,815 $107,518,303
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 209
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------
1998 1999 2000
----------- ----------- ------------
<S> <C> <C> <C>
REVENUE:
Software and related products............................. $ 1,057,088 $ 2,772,878 $ 2,993,489
Services.................................................. -- 277,429 1,280,834
----------- ----------- ------------
Total revenue........................................... 1,057,088 3,050,307 4,274,323
----------- ----------- ------------
COST OF REVENUE:
Software and related products............................. 1,016,682 2,388,601 2,062,724
Services.................................................. -- 537,877 1,958,612
Write-off of prepaid royalties............................ 1,381,695 -- --
----------- ----------- ------------
Total cost of revenue................................... 2,398,377 2,926,478 4,021,336
----------- ----------- ------------
GROSS MARGIN (DEFICIT)...................................... (1,341,289) 123,829 252,987
----------- ----------- ------------
OPERATING EXPENSES:
Sales and marketing (exclusive of non-cash compensation of
$0, $177,050 and $1,969,903, respectively).............. 2,223,814 4,767,508 14,753,756
Research and development (exclusive of non-cash
compensation of $0, $103,070 and $1,146,490,
respectively)........................................... 1,489,041 2,302,302 4,954,354
General and administrative (exclusive of non-cash
compensation of $0, $129,176 and $2,099,623,
respectively)........................................... 1,798,872 1,748,087 6,429,874
SCO cost-sharing arrangement.............................. -- -- 898,026
Non-cash compensation..................................... -- 409,296 5,216,016
----------- ----------- ------------
Total operating expenses................................ 5,511,727 9,227,193 32,252,026
----------- ----------- ------------
LOSS FROM OPERATIONS........................................ (6,853,016) (9,103,364) (31,999,039)
----------- ----------- ------------
EQUITY IN LOSS OF AFFILIATE................................. -- -- (386,995)
----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (1,081,179) (225,657) --
Interest income........................................... -- 2,512 3,237,798
Gain on sale of assets to Ebiz, Inc. ..................... -- -- 2,306,357
Other income (expense).................................... 4,838 (5,304) (478)
----------- ----------- ------------
Other income (expense), net............................. (1,076,341) (228,449) 5,543,677
----------- ----------- ------------
LOSS BEFORE INCOME TAXES.................................... (7,929,357) (9,331,813) (26,842,357)
PROVISION FOR INCOME TAXES.................................. (33,780) (34,775) (81,141)
----------- ----------- ------------
NET LOSS.................................................... $(7,963,137) $(9,366,588) $(26,923,498)
=========== =========== ============
DIVIDENDS RELATED TO CONVERTIBLE PREFERRED STOCK............ $ -- $ -- $(12,252,717)
=========== =========== ============
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS................ $(7,963,137) $(9,366,588) $(39,176,215)
=========== =========== ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE................. $ (0.50) $ (0.51) $ (1.19)
=========== =========== ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 16,000,000 18,457,543 32,922,135
=========== =========== ============
OTHER COMPREHENSIVE LOSS:
Net loss attributable to common stockholders.............. $(7,963,137) $(9,366,588) $(39,176,215)
Unrealized gain on available-for-sale securities.......... -- -- 356,419
Foreign currency translation adjustments.................. 3,991 (8,356) (52,598)
----------- ----------- ------------
COMPREHENSIVE LOSS.......................................... $(7,959,146) $(9,374,944) $(38,872,394)
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 210
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
---------------------- -------------------- PAID-IN SUBSCRIPTION DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
----------- -------- ---------- ------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1997....... -- $ -- -- $ -- $ -- $ -- $ --
Debt funding and related accrued
interest applicable to
carved-out operations of
Caldera, Inc. ................. -- -- -- -- -- -- --
Net loss applicable to
carved-out operations of
Caldera, Inc. through August
31, 1998....................... -- -- -- -- -- -- --
Incorporation of Caldera
Systems, Inc. and issuance of
common shares to majority
stockholder for cash and note
receivable .................... -- -- 16,000,000 16,000 20,912,848 -- --
Distribution to Caldera, Inc.
for amount paid in excess of
the net book value of assets
received in reorganization..... -- -- -- -- (19,160,155) -- --
Cumulative translation
adjustment..................... -- -- -- -- -- -- --
Net loss for the period
subsequent to incorporation.... -- -- -- -- -- -- --
----------- -------- ---------- ------- ------------ ----------- -----------
Balance, October 31, 1998....... -- -- 16,000,000 16,000 1,752,693 -- --
Conversion of promissory note
and accrued interest to common
shares at $1.00 per share...... -- -- 5,273,974 5,274 5,268,700 -- --
Issuance of common shares for
cash and stock subscription
receivable at $1.13 per
share.......................... -- -- 5,333,333 5,333 5,994,667 (1,500,000) --
Issuance of common shares upon
exercise of stock options at
$1.00 per share................ -- -- 22 -- 22 -- --
Cumulative translation
adjustment..................... -- -- -- -- -- -- --
Deferred compensation related to
stock option grants............ -- -- -- -- 3,144,230 -- (3,144,230)
Amortization of deferred
compensation................... -- -- -- -- -- -- 409,296
Net loss........................ -- -- -- -- -- -- --
----------- -------- ---------- ------- ------------ ----------- -----------
Balance, October 31, 1999....... -- -- 26,607,329 26,607 16,160,312 (1,500,000) (2,734,934)
Conversion of common shares to
Series A convertible preferred
shares......................... 6,596,146 6,596 (6,596,146) (6,596) -- -- --
Issuance of Series B convertible
preferred shares for cash at
$6.00 per share, net........... 5,000,000 5,000 -- -- 29,785,674 -- --
Dividend related to Series B
convertible preferred shares... -- -- -- -- 10,000,000 -- --
Dividend related to stock
warrant........................ -- -- -- -- 2,252,717 -- --
Issuance of common shares upon
exercise of stock options at
prices ranging from $1.00 to
$6.00 per share................ -- -- 452,132 452 531,673 -- --
Issuance of common shares under
employee stock purchase program
at $2.98 per
share.......................... -- -- 61,807 62 183,814 -- --
Issuance of common shares in
exchange for investments....... -- -- 306,356 306 2,450,040 -- --
Distribution to majority
stockholder for acquired
license rights................. -- -- -- -- -- -- --
Issuance of common shares in
exchange for investment in
Lineo, Inc. and distribution to
majority stockholder for fair
value of shares issued in
excess of the carryover basis
of investment.................. -- -- 1,250,000 1,250 9,998,750 -- --
Capital contribution from
majority stockholder of Lineo,
Inc., recorded at carryover
basis.......................... -- -- -- -- 1,966,173 -- --
Sale of common shares of Lineo,
Inc. at $7.50 per share........ -- -- -- -- 4,213,531 -- --
Issuance of common shares for
services....................... -- -- 16,833 17 134,647 -- --
Conversion of preferred shares
to common shares............... (11,596,146) (11,596) 11,596,146 11,596 -- -- --
Issuance of common shares for
cash in an initial public
offering at $14.00 per share,
net............................ -- -- 5,750,000 5,750 71,776,111 -- --
Reclassification of stock
subscription receivable due to
subsequent receipt of
cash........................... -- -- -- -- -- 1,500,000 --
Deferred compensation related to
stock option grants............ -- -- -- -- 5,370,605 -- (5,370,605)
Amortization of deferred
compensation................... -- -- -- -- -- -- 4,390,819
Compensation expense for
modifications made to certain
option grants.................. -- -- -- -- 825,197 -- --
Cumulative translation
adjustment..................... -- -- -- -- -- -- --
Unrealized gain on
available-for-sale
securities..................... -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- -- --
----------- -------- ---------- ------- ------------ ----------- -----------
Balance October 31, 2000........ -- $ -- 39,444,457 $39,444 $155,649,244 $ -- $(3,714,720)
=========== ======== ========== ======= ============ =========== ===========
<CAPTION>
CALDERA, INC.'S
ACCUMULATED EQUITY IN
COMPREHENSIVE LICENSE ACCUMULATED CARVED-OUT
INCOME (LOSS) FEE DEFICIT OPERATIONS
------------- --------- ------------ ---------------
<S> <C> <C> <C> <C>
Balance, October 31, 1997....... $ -- $ -- $ -- $ 2,319,393
Debt funding and related accrued
interest applicable to
carved-out operations of
Caldera, Inc. ................. -- -- -- 5,347,435
Net loss applicable to
carved-out operations of
Caldera, Inc. through August
31, 1998....................... -- -- -- (6,898,135)
Incorporation of Caldera
Systems, Inc. and issuance of
common shares to majority
stockholder for cash and note
receivable .................... -- -- -- --
Distribution to Caldera, Inc.
for amount paid in excess of
the net book value of assets
received in reorganization..... -- -- -- (768,693)
Cumulative translation
adjustment..................... 3,991 -- -- --
Net loss for the period
subsequent to incorporation.... -- -- (1,065,002) --
-------- --------- ------------ -----------
Balance, October 31, 1998....... 3,991 -- (1,065,002) --
Conversion of promissory note
and accrued interest to common
shares at $1.00 per share...... -- -- -- --
Issuance of common shares for
cash and stock subscription
receivable at $1.13 per
share.......................... -- -- -- --
Issuance of common shares upon
exercise of stock options at
$1.00 per share................ -- -- -- --
Cumulative translation
adjustment..................... (8,356) -- -- --
Deferred compensation related to
stock option grants............ -- -- -- --
Amortization of deferred
compensation................... -- -- -- --
Net loss........................ -- -- (9,366,588) --
-------- --------- ------------ -----------
Balance, October 31, 1999....... (4,365) -- (10,431,590) --
Conversion of common shares to
Series A convertible preferred
shares......................... -- -- -- --
Issuance of Series B convertible
preferred shares for cash at
$6.00 per share, net........... -- -- -- --
Dividend related to Series B
convertible preferred shares... -- -- (10,000,000) --
Dividend related to stock
warrant........................ -- -- (2,252,717) --
Issuance of common shares upon
exercise of stock options at
prices ranging from $1.00 to
$6.00 per share................ -- -- -- --
Issuance of common shares under
employee stock purchase program
at $2.98 per
share.......................... -- -- -- --
Issuance of common shares in
exchange for investments....... -- (450,849) -- --
Distribution to majority
stockholder for acquired
license rights................. -- 450,849 (450,849) --
Issuance of common shares in
exchange for investment in
Lineo, Inc. and distribution to
majority stockholder for fair
value of shares issued in
excess of the carryover basis
of investment.................. -- -- (9,999,999) --
Capital contribution from
majority stockholder of Lineo,
Inc., recorded at carryover
basis.......................... -- -- -- --
Sale of common shares of Lineo,
Inc. at $7.50 per share........ -- -- 9,999,999 --
Issuance of common shares for
services....................... -- -- -- --
Conversion of preferred shares
to common shares............... -- -- -- --
Issuance of common shares for
cash in an initial public
offering at $14.00 per share,
net............................ -- -- -- --
Reclassification of stock
subscription receivable due to
subsequent receipt of
cash........................... -- -- -- --
Deferred compensation related to
stock option grants............ -- -- -- --
Amortization of deferred
compensation................... -- -- -- --
Compensation expense for
modifications made to certain
option grants.................. -- -- -- --
Cumulative translation
adjustment..................... (52,598) -- -- --
Unrealized gain on
available-for-sale
securities..................... 356,419 -- -- --
Net loss........................ -- -- (26,923,498) --
-------- --------- ------------ -----------
Balance October 31, 2000........ $299,456 $ -- $(50,058,654) $ --
======== ========= ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 211
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------
1998 1999 2000
----------- ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(7,963,137) $ (9,366,588) $ (26,923,498)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 132,221 288,797 579,552
Non-cash compensation................................... -- 409,296 5,216,016
Equity in loss of affiliate............................. -- -- 386,995
Gain on sale of assets to Ebiz, Inc. ................... -- -- (2,306,357)
Issuance of common stock for services................... -- -- 134,664
Accrued interest converted to equity.................... 1,082,260 254,910 --
Changes in operating assets and liabilities:
Accounts receivable, net.............................. 134,075 (518,497) (874,483)
Other receivables..................................... -- (375,000) 375,000
Inventories........................................... 281,936 (119,663) (220,029)
Other current assets.................................. 1,617,138 143,081 (1,276,649)
Other assets.......................................... 625,712 (10,097) 10,356
Accounts payable...................................... (908,994) 1,044,050 1,056,171
Accrued liabilities................................... (59,496) 510,109 677,833
Payable to The Santa Cruz Operation................... -- -- 898,026
Accrued sales returns and other allowances............ (46,000) 115,000 194,928
Deferred revenue...................................... -- 38,080 288,250
----------- ------------ -------------
Net cash used in operating activities............... (5,104,285) (7,586,522) (21,783,225)
----------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash payment to Caldera, Inc. in asset acquisition........ -- (14,963,826) --
Purchase of property and equipment........................ (169,764) (587,375) (1,443,416)
Purchase of other long-lived assets....................... -- (80,000) --
Purchase of available-for-sale securities................. -- -- (101,989,203)
Sale of available-for-sale securities..................... -- -- 48,188,287
Deferred acquisition costs................................ -- -- (1,731,672)
Sale of Lineo, Inc. common stock.......................... -- -- 15,000,000
Acquisition of equity investment in affiliate............. -- -- (3,000,000)
Acquisition of investment in non-marketable security...... -- -- (2,000,000)
----------- ------------ -------------
Net cash used in investing activities............... (169,764) (15,631,201) (46,976,004)
----------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from majority stockholder under convertible
promissory note......................................... -- 4,819,000 --
Borrowings from majority stockholder...................... -- -- 300,000
Repayment of borrowings from majority stockholder......... -- -- (300,000)
Proceeds from long-term debt.............................. -- 11,486 --
Repayments of long-term debt.............................. -- (2,026) (9,460)
Borrowings from majority stockholder prior to
reorganization.......................................... 4,429,065 -- --
Proceeds from common shares upon incorporation............ 519,000 15,481,000 --
Proceeds from sale of common stock, net................... -- 2,963,000 74,781,861
Proceeds from sale of Series B convertible preferred
stock, net.............................................. -- -- 29,790,674
Proceeds from sale of common stock through ESP program.... -- -- 183,876
Proceeds from exercise of common stock options............ -- 22 532,125
----------- ------------ -------------
Net cash provided by financing activities........... 4,948,065 23,272,482 105,279,076
----------- ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (325,984) 54,759 36,519,847
EFFECT OF FOREIGN EXCHANGE RATES ON CASH.................... 3,991 (8,356) (81,569)
CASH AND CASH EQUIVALENTS, beginning of year................ 397,579 75,586 121,989
----------- ------------ -------------
CASH AND CASH EQUIVALENTS, end of year...................... $ 75,586 $ 121,989 $ 36,560,267
=========== ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 212
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------
1998 1999 2000
----------- ---------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION:
Cash paid for income taxes............................... $ -- $ -- $ 41,031
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of common shares upon incorporation for
Subscription receivable................................ $15,481,000 $ -- $ --
Note receivable from Caldera, Inc...................... $ 4,928,848 $ -- $ --
Liabilities assumed in acquisition of assets from
Caldera, Inc. ......................................... $ (36,174) $ -- $ --
Issuance of common shares for a note receivable.......... $ -- $3,000,000 $ --
Issuance of common shares upon conversion of secured
convertible promissory note payable to majority
stockholder and related accrued interest............... $ -- $5,273,974 $ --
Issuance of common shares and the acquisition of license
fee for non-marketable securities...................... $ -- $ -- $ 1,999,497
Conversion of 6,596,146 shares of common stock to
6,596,146 shares of Series A convertible preferred
stock.................................................. $ -- $ -- $ 6,596
Conversion of 6,596,146 shares of Series A convertible
preferred stock and 5,000,000 shares of Series B
convertible preferred stock to 11,596,546 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 carry over basis of the
investment in Lineo, Inc............................... $ -- $ -- $(9,999,999)
Distribution to majority stockholder for license
rights................................................. $ -- $ -- $ (450,849)
Receipt of additional shares of Lineo, Inc. from majority
stockholder............................................ $ -- $ -- $ 1,966,173
Net book value of Electronic Linux Marketplace assets
exchanged for equity investment in Ebiz, Inc........... $ -- $ -- $ (37,963)
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 213
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Caldera Systems, Inc. ("Caldera"), which was incorporated as a Utah
corporation on August 21, 1998, and reincorporated as a Delaware corporation on
March 6, 2000, began operations in 1994 as Caldera, Inc. (the "Predecessor").
The Predecessor developed and marketed Linux operating system software and
related products.
In July 1996, through an asset purchase, the Predecessor acquired an
additional business line which was not engaged in developing and marketing Linux
software and related products. The Predecessor subsequently made the strategic
determination to separate its two business lines into separate entities and,
under an asset purchase agreement, dated as of September 1, 1998, as amended,
sold the assets relating to its business of developing and marketing Linux
software and related products to Caldera for $19,928,848. This amount was based
upon the amount of funding that had been received by the Predecessor related to
the Linux software business. The purchase price was paid as follows: a cash
payment of $14,963,826 (8% interest bearing demand note) in fiscal year 1999,
the assumption of $36,174 of liabilities, and the transfer of a note receivable
due from the Predecessor in the amount of $4,928,848 (see below).
Upon incorporation, Caldera agreed to issue 16,000,000 shares of common
stock to The Canopy Group ("Canopy"), the majority stockholder of the
Predecessor, in exchange for $20,928,848. Of this amount, $16,000,000 was paid
in cash ($519,000 in fiscal year 1998 and $15,481,000 -- non-interest
bearing -- in fiscal year 1999) and Canopy transferred to Caldera a note
receivable from the Predecessor of $4,928,848.
Since Canopy was the majority stockholder of the Predecessor and the sole
stockholder of Caldera, this transaction has been accounted for as a
reorganization of entities under common control with the assets and liabilities
reflected at carry-over basis in a manner similar to pooling of interests. The
accompanying consolidated financial statements include the carved-out operations
of the Predecessor related to the Linux business through September 1, 1998, the
date of the reorganization. The acquired assets and liabilities had a net book
value of $768,693. The excess of the purchase price of $19,928,848 over the net
book value of the assets acquired of $768,693 was charged to equity.
The revenue of the carved-out operations of the Predecessor reflects actual
revenue derived from Linux software sales and the expenses of the carved-out
operations reflect actual expenses associated with the Linux business and an
allocated portion of common expenses. The allocated common expenses consist
primarily of rent, depreciation, interest and personnel benefits. Rent,
depreciation and personnel benefits were allocated based upon headcount.
Interest was allocated based upon borrowings related to the carved-out
operations of the Predecessor. Management believes that the allocation methods
used are reasonable.
Prior to the reorganization, the net losses of the Predecessor were funded
through loans and equity contributions from Canopy. The funding applicable to
the carved-out operations has been reflected as a component of Caldera, Inc.'s
Equity in Carved-out Operations included in the accompanying consolidated
statements of stockholders' equity. This funding has been offset by the
accumulated losses applicable to the carved-out operations.
In connection with the reorganization, Caldera acquired a wholly owned
subsidiary in Germany, Caldera Deutschland, GmbH ("Caldera GmbH"), that performs
research and development activities. Collectively, Caldera, the carved-out
operations of the Predecessor and Caldera GmbH are referred to as the "Company."
The Company develops, markets and supports Linux operating system software
products and related services. The Company's strategy is to provide commercial
products and services that enable the development, deployment and management of
Linux-based specialized servers and Internet devices that
F-8
<PAGE> 214
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
extend the e-Business infrastructure. The Company sells and distributes its
software and related products indirectly through distributors, value added
resellers ("VARs"), original equipment manufacturers ("OEMs") and system
integrators and directly to end-user customers. These sales occur throughout the
United States and in certain international locations.
On August 1, 2000 and as amended on September 13 and December 12, 2000,
Caldera, Caldera International, Inc. ("New Caldera"), and The Santa Cruz
Operation ("SCO") entered into an Agreement and Plan of Reorganization (the
"Reorganization Agreement"). As a result of the transactions proposed by the
Reorganization Agreement (the "Reorganization"), (i) a newly formed, wholly
owned subsidiary of New Caldera will be merged with and into Caldera, with
Caldera being the surviving corporation, and all outstanding Caldera securities
will be converted, on a share for share basis, into New Caldera securities
having identical rights, preferences and privileges, with New Caldera assuming
any and all outstanding options and other rights to purchase shares of capital
stock of Caldera (with all such New Caldera securities issued to former Caldera
security holders initially representing a fully-diluted equity interest in New
Caldera equal to approximately 71.4 percent in New Caldera); (ii) SCO and
certain of its subsidiaries will contribute to New Caldera, all of the capital
stock held of certain contributed companies as well as certain assets of SCO,
collectively representing the Server and Professional Services Groups of SCO, in
consideration for the issuance by New Caldera to SCO of shares of common stock
of New Caldera, $0.001 par value ("New Caldera Common Stock"); (iii) New Caldera
will assume or replace all options to acquire common stock of SCO held by SCO
employees (other than certain officers of SCO) hired or retained by Caldera and
such options will be converted into options to purchase New Caldera Common Stock
on a two SCO option for one New Caldera option basis (the "New Caldera
Options"); and (iv) SCO will receive shares of New Caldera Common Stock
(including shares reserved for New Caldera Options) representing in the
aggregate a fully diluted equity interest in New Caldera equal to approximately
28.6 percent of New Caldera and $7 million in cash. In conjunction with the
Reorganization Agreement, Canopy has agreed to loan $18 million to SCO and
Caldera has agreed to advance the $7 million cash payment to SCO prior to
closing. If the Reorganization is not completed, SCO will be obligated to repay
the advance. Assets of SCO will secure each of these loans.
The Company is subject to certain risks including the uncertainty of market
acceptance and demand for Linux related products and services, competition from
larger, more established companies, short product life cycles, the Company's
ability to develop and bring to market new products on a timely basis,
dependence on key employees, the ability to attract and retain additional
qualified personnel and the ability to obtain adequate financing to support
growth.
(2) SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying consolidated financial
statements for cash, accounts receivable, other receivables and accounts payable
approximate fair values because of the immediate or short-term maturities of
these financial instruments. The carrying amounts of the Company's
F-9
<PAGE> 215
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
debt obligations approximate fair value based on current interest rates. The
fair values of available-for-sale securities are determined using quoted market
prices for these securities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
carved-out operations of the Predecessor prior to Caldera's incorporation,
Caldera, and their wholly owned subsidiary after elimination of intercompany
accounts and transactions.
FOREIGN CURRENCY TRANSLATION
For purposes of consolidating the Caldera GmbH operations, the Company has
determined the functional currency for the Caldera GmbH operations to be the
German Mark. Accordingly, translation gains and losses are included as a
component of comprehensive loss.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with maturities of three or fewer
months to be cash equivalents. Cash equivalents primarily consist of investments
in money market mutual funds, commercial paper or other short-term debt
instruments.
AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities include investments in debt securities such
as commercial paper, treasury notes and bonds. These investments are recorded at
fair market value, based on quoted market prices and unrealized gains and losses
are recorded as a component of comprehensive income (loss). Realized gains and
losses, which are calculated based on the specific identification method, are
recorded in operations as incurred. As of October 31, 2000, debt securities with
maturity dates less than one year totaled approximately $38.2 million and
investments with maturity dates ranging from one year to two years totaled
approximately $16.0 million.
INVENTORIES
Inventories consist primarily of completed products and raw materials.
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market value. As of October 31, 1999 and 2000, inventories consisted
of raw materials of approximately $79,400 and $201,800, respectively, and
finished goods of approximately $90,000 and $187,600, respectively.
Provisions, when required, are made to reduce excess and obsolete
inventories to their estimated net realizable values. Due to competitive
pressures and technological innovation, it is possible that estimates of the net
realizable value could change in the near term.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Computer equipment and furniture and fixtures are depreciated
using the straight-line method over the estimated useful life of the asset,
typically three to five years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful life of the
improvement or the remaining term of the applicable lease.
F-10
<PAGE> 216
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statement of operations.
CAPITALIZED SOFTWARE COSTS
In accordance with Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"), development
costs incurred in the research and development of new software products to be
sold, leased or otherwise marketed are expensed as incurred until technological
feasibility in the form of a working model has been established. Internally
generated capitalizable software development costs have not been material for
the years ended October 31, 1998, 1999 and 2000. The Company has charged its
software development costs to research and development expense in the
accompanying consolidated statements of operations.
OTHER ASSETS
Other assets consist of deposits and purchased technology that is to be
used in the development of the Company's current web-based products. The
purchased technology is being amortized using the straight-line method over a
period of two years. Other non-current assets consist primarily of deferred
acquisition costs related to the pending reorganization with SCO.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the book value of an asset may not be
recoverable. The Company evaluates, at each balance sheet date, whether events
and circumstances have occurred which indicate possible impairment. The Company
uses an estimate of future undiscounted net cash flows of the related asset or
group of assets over the remaining life in measuring whether the assets are
recoverable. As of October 31, 2000, the Company does not consider any of its
long-lived assets to be impaired.
ACCRUED LIABILITIES
As of October 31, 1999 and 2000, accrued liabilities consisted of the
following:
<TABLE>
<CAPTION>
1999 2000
-------- ----------
<S> <C> <C>
Accrued vacation............................................ $ 98,425 $ 319,863
Accrued accounting, legal and annual report fees............ -- 205,000
Accrued payroll and related costs........................... 45,284 200,887
Post contract support....................................... 50,000 145,000
Accrued marketing development funds......................... 172,900 119,993
Foreign income taxes payable................................ 30,139 78,808
Other accrued liabilities................................... 226,309 231,339
-------- ----------
Total accrued liabilities......................... $623,057 $1,300,890
======== ==========
</TABLE>
F-11
<PAGE> 217
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION
The Company generates revenue from software and related products sold
indirectly through distributors and solutions providers and directly to
end-users. The Company also generates services revenue from training royalties
and tuition fees, consulting fees, and customer support fees. During fiscal
1998, all of the Company's revenue was derived from software offerings and
related products such as shipments of incomplete box units or documentation
materials.
Revenue from the sale of software is recognized upon delivery of the
product when persuasive evidence of an arrangement exists, the price is fixed or
determinable and collection is probable. All sales into the distribution channel
or to OEMs and VARs require a binding purchase order. Sales to resellers for
which payment is considered to be substantially contingent on the reseller's
success in distributing individual units of the product or sales to resellers
with which the Company does not have historical experience are accounted for as
consignments and the revenue is recognized once sell-through verification has
been received and payments from customers become due. Direct sales to end users
are evidenced by concurrent payment for the product via credit card and are
governed by a license agreement. Generally, the only multiple element
arrangement of the Company's initial software sales is certain telephone and
e-mail technical support services the Company provides at no additional charge.
These services do not include product update or upgrade rights. After the
initial support period, customers can elect to enter into separate support
agreements. The cost of providing the initial support services are not
significant; accordingly, the Company accrues the estimated costs of providing
the services at the time of revenue recognition. Revenues from the extended
support agreements are deferred and recognized over the period of the contract
or as the services are provided.
If other significant post-delivery vendor obligations exist or if a product
is subject to customer acceptance, revenues are deferred until no significant
obligations remain or acceptance has occurred. To date, the Company has not
shipped any software and related products subject to acceptance terms or subject
to other post-delivery vendor obligations. Additionally, the Company has not
recognized revenue on any contracts with customers that may include customer
cancellation or termination clauses that indicate a demonstration period or
otherwise incomplete transaction.
The Company also offers its customers consulting, training and other
services separate from the software sale. The services are not integral to the
functionality of the software and are available from other vendors. Services
revenue is recognized as the services are performed.
Sales to certain distributors are subject to agreements allowing for rights
of return and price protection. Allowances for estimated future returns, price
protection, stock rotations, as well as anticipated end-user customer rebates
and other customer incentives, are provided at the time of sale based on the
Company's policies and historical experience. At October 31, 1999 and 2000,
allowances for returns, price protection and stock rotations totaled
approximately $169,000 and $363,900, respectively, and are reflected as a
current liability in the accompanying consolidated balance sheets.
ROYALTY COSTS
Royalties paid by the Company on applications licensed from third parties
that are incorporated into the software products sold by the Company are
expensed as cost of revenue on a per unit basis as software products are sold.
Royalties paid in advance of product sales are included in prepaid expenses and
recorded as cost of revenue when the related products are sold.
During the years ended October 31, 1996 and 1997, the Company entered into
royalty agreements with a supplier pursuant to which the Company prepaid
royalties of approximately $2,055,000. During
F-12
<PAGE> 218
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fiscal year 1998, the Company asserted that the supplier breached the terms of
the royalty agreements and management determined that the remaining prepaid
royalties, in the amount of $1,381,700, were impaired and accordingly were
written off and classified as part of cost of revenue in the accompanying
consolidated statement of operations for the year ended October 31, 1998.
Management determined the asset was impaired because its value was tied to the
intellectual property value of the licenses the Company had purchased. The
vendor breached the terms of the contract in management's view, when it open
sourced some of the related software. When the vendor decided to open source the
software, the license the Company had purchased had no value in relation to that
software. Additionally, the Company discontinued the development of a product
related to the licensed software resulting in the complete impairment of the
prepaid asset. Management further determined that any attempt to pursue legal
action against the supplier would be costly and uncertain given the resources
required to pursue such an action and the uncertainties related to interpreting
the provisions of the royalty agreements.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist of the following: advertising, channel
promotions, marketing development funds, promotional activities, public
relations, trade shows and the salaries, commissions and related expenses of all
personnel involved in the sales process. The Company expenses the cost of
advertising the first time the advertising takes place. Advertising expenses
totaled approximately $967,700, $1,228,600 and $1,508,200 for the years ended
October 31, 1998, 1999 and 2000, respectively.
The Company has agreements with certain retailers whereby the Company
issues a credit for certain marketing development activities initiated by the
retailer that directly relate to the promotion of the Company's products. As of
October 31, 1999 and 2000, the Company recorded an accrual of $172,900 and
$120,000, respectively, for these costs.
INCOME TAXES
The Company recognizes a liability or asset for the deferred tax
consequences of all temporary differences between the tax bases of assets and
liabilities and their reported amounts in the consolidated financial statements
that will result in taxable or deductible amounts in future years when the
reported amounts of the assets and liabilities are recovered or settled. These
deferred tax assets or liabilities are measured using the enacted tax rates that
will be in effect when the differences are expected to reverse. Deferred tax
assets are reviewed periodically for recoverability and valuation allowances are
provided as necessary.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company offers credit terms on the sale of its software products to
certain customers. The Company performs ongoing credit evaluations of its
customers' financial condition and requires no collateral from its customers.
The Company maintains an allowance for uncollectable accounts receivable based
upon the expected collectibility of all accounts receivable. As of October 31,
1999, three distributors accounted for approximately 71 percent of the gross
accounts receivable balance. As of October 31, 2000, four distributors accounted
for approximately 35 percent of the gross accounts receivable balance. As of
October 31, 1999 and 2000, the allowance for bad debts was $90,000 and $312,300,
respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 establishes new accounting
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CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and reporting standards for companies to report information about derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
This statement is effective for financial statements issued for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect this statement to have a material impact on the Company's results of
operations, financial position or liquidity.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements." This pronouncement summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. The Company is required to adopt SAB 101 during the first
quarter of fiscal year 2001. 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 FASB issued Interpretation No. 44, ("FIN 44"),
"Accounting for Certain Transactions involving Stock Compensation, an
interpretation of Accounting Principles Board Opinion No. 25 ("APB 25")." This
interpretation clarifies the definition of an employee for purposes of applying
APB 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
interpretation became effective July 1, 2000 at which time it was adopted by the
Company. The adoption of FIN 44 had no impact on the Company's results of
operations, financial position or liquidity at the time of adoption.
COMPREHENSIVE INCOME (LOSS)
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income."
SFAS 130 establishes standards for reporting comprehensive income (loss) and its
components in financial statements and unrealized gains on short-term
investments. Comprehensive income (loss) consists of net loss, foreign currency
translation adjustments and unrealized gain (loss) on available for sale
securities and is presented in the accompanying consolidated statements of
operations and comprehensive loss. The adoption of SFAS 130 had no impact on
total stockholders' equity at the time of adoption.
NET LOSS PER COMMON SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings Per Share," and SAB 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 periods during which they were outstanding. For
the years ended October 31, 1999 and 2000, 1,241,390 and 6,326,247 common share
equivalents, respectively, were not included in the computation of diluted net
loss per common share as their effect would have been anti-dilutive, thereby
decreasing the net loss per common share. For the year ended October 31, 1998,
the 16,000,000 shares of common stock issued in the initial capitalization of
Caldera were treated as outstanding for the entire fiscal year.
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CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INITIAL PUBLIC OFFERING
On March 20, 2000, the Company completed the sale of an aggregate of 5.0
million shares of common stock at a price of $14.00 per share in its initial
public offering. The offering was effected pursuant to a Registration Statement
on Form S-1 (Registration No. 333-94351), which was declared effective on March
20, 2000 by the SEC. On April 17, 2000, the underwriters exercised their over
allotment option for an additional 750,000 shares of common stock at $14.00 per
share,
The Company received approximately $80.5 million in gross proceeds from
this offering, of which approximately $5.6 million was paid to the underwriters
and approximately $3.0 million was paid for direct offering expenses.
(4) OTHER RECEIVABLES
Other receivables as of October 31, 1999 consisted of amounts due from two
strategic partners that participated in a marketing program with the Company.
The amounts received by the Company from the strategic partners have been
applied against actual expenses incurred and have reduced the related sales and
marketing expense of the Company. Aside from the collection of the short-term
receivable balances, there are no other future commitments or consideration
related to these arrangements.
(5) INVESTMENTS IN NON-MARKETABLE SECURITIES
The Company is accounting for each of these investments in non-marketable
securities under the cost method as the Company has no ability to exercise
significant influence over any of the entities. The Company's management
routinely assesses its investments for impairment and adjusts the carrying
amount to estimated realizable values when impairment has occurred. As of
October 31, 2000, the Company does not consider any of its investments to be
impaired.
BUSINESS ALLIANCE WITH EVERGREEN INTERNET, INC.
In January 2000, the Company and Evergreen Internet, Inc. ("Evergreen")
entered into a master agreement which sets forth the terms and conditions of a
business alliance. Evergreen and the Company agreed as follows: (i) Evergreen
granted to the Company an original equipment manufacturer license permitting the
bundling of certain of Evergreen's software products with the Company's software
products in exchange for the Company paying royalties to Evergreen based on
future sales; (ii) the Company and Evergreen will engage in joint development
and integration of their respective software products; (iii) the Company and
Evergreen will cooperate to create educational training courses for the combined
products; (iv) the Company agreed to acquire 370,370 shares of common stock of
Evergreen for $2,000,000 and Evergreen agreed to transfer an additional 222,222
shares of its common stock to the Company in exchange for 200,000 shares of the
Company's common stock; and (v) the parties agreed to work together to identify
new business solution opportunities for their joint products. On January 10,
2000, the Company paid the $2.0 million and issued 200,000 shares of common
stock in exchange for the 592,592 shares of Evergreen's common stock.
The Company and Evergreen have agreed to certain referral fees. If the
Company enters into a support agreement with a customer that has been referred
by Evergreen, the Company will pay a portion of the total contract to Evergreen
as a referral fee. The remaining portion of the support agreement will be
recorded as deferred revenue, and recognized ratably over the term of the
agreement. The referral fees will be recorded as sales and marketing expenses as
earned by Evergreen.
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CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has recorded its investment in Evergreen at cost, based on the
cash consideration paid by the Company and the estimated fair market value of
the Company's common stock on the date of the agreement of $8.00 per share. The
Company determined that the estimated fair value of the Company's common stock
is more clearly evident of the value of the transaction since Evergreen is a
privately owned company. In management's opinion, the consideration exchanged by
the Company for the common shares of Evergreen was equal to the fair value of
the shares acquired. Furthermore, in management's opinion the terms of the OEM
arrangement and joint development and educational efforts are based on strategic
rationales and the related transactions will be at arm's length. The Company
currently intends on holding the shares indefinitely.
The total investment of $3.6 million is included in the caption Investments
in Non-marketable Securities -- Non-affiliates in the accompanying October 31,
2000 consolidated balance sheet.
STOCK EXCHANGE AGREEMENT WITH LINEO
In January 2000, the Company and Lineo entered into a stock purchase and
sale agreement. Lineo is the successor entity to the operations of the
Predecessor which were not acquired by Caldera in the reorganization discussed
in Note 1. As of January 2000, Lineo was majority owned by Canopy. Pursuant to
the stock purchase agreement, the Company agreed to purchase 3,238,437 shares of
common stock of Lineo (approximately 17 percent of Lineo's outstanding voting
stock) in exchange for 1,250,000 shares of the Company's common stock.
Because Lineo was also majority owned by Canopy, the investment in Lineo
was accounted for as a transaction between entities under common control with
the transfer being reflected in the Company's financial statements at Lineo's
carry over basis. At the date of the agreement, Lineo had a stockholders'
deficit, of which approximately $150,000 would be associated with the 17%
interest the Company acquired. Accordingly, the investment was recorded at a
nominal value of $1.00 because the Company does not have any obligation to
provide additional funding to Lineo. The Company has recorded the estimated fair
value of the shares of its common stock issued to Lineo at $10.0 million with
the difference between the $10.0 million and the $1.00 investment recorded as a
distribution to Canopy.
On May 11, 2000, Canopy transferred 1,761,563 shares of Lineo's common
stock held by Canopy to the Company. This transfer has been reflected as a
capital contribution by Canopy at Lineo's carry over basis of $1,966,173. As a
result of this transaction, the Company had a total of 5,000,000 shares of
Lineo's common stock (approximately 14 percent of Lineo's outstanding voting
stock).
On August 31, 2000, the Company, Canopy and Metrowerks Holdings, Inc.
("Metrowerks"), an affiliate of Motorola, Inc., entered into a Stock Purchase
and Sale Agreement whereby the Company and Canopy sold 2.0 million and 1.0
million shares, respectively, of common stock of Lineo to Metrowerks at $7.50
per share. Prior to this transaction, Caldera, Canopy and Lineo had no
relationship with Metrowerks; however, Motorola, Inc. is a preferred stockholder
of Lineo. The Company received the $15.0 million net proceeds of the sale in
October 2000.
In conjunction with the sale of the common stock of Lineo, the Company also
entered into a stockholder agreement by and among Canopy, Lineo and certain
other stockholders of Lineo which provides for a right of first refusal for the
benefit of Metrowerks with respect to Lineo shares held by the Company and other
Lineo stockholders. The Company has also agreed to indemnify Metrowerks for any
damages sustained by Metrowerks as a result of breaches by the Company under the
stock purchase and sale agreement and the stockholder agreement or for breaches
by Lineo under a warrant agreement between Lineo and Metrowerks. The Company's
indemnification obligation is limited to the amount of proceeds received by the
Company in its sale to Metrowerks.
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CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The difference between the $7.50 per share price received from Metrowerks
and the Company's per share carrying value was recorded as a contribution to
equity. The total investment of $1,179,704 is included in the caption
Investments in Non-marketable Securities -- Affiliate in the accompanying
October 31, 2000 consolidated balance sheet.
STOCK EXCHANGE AGREEMENT WITH TROLL TECH AS
In December 1999, the Company and Canopy entered into an agreement with
Troll Tech AS and its stockholders. Pursuant to the agreement, the Company
acquired 159 shares of common stock of Troll Tech (approximately 2 percent of
Troll Tech's outstanding common stock) in exchange for 106,356 shares of the
Company's common stock and Canopy agreed to acquire 398 shares of common stock
of Troll Tech in exchange for $1,000,000, payable in monthly installments of
$100,000. The agreement also grants to Canopy and its affiliates certain license
rights with respect to Troll Tech's software. Royalties will be paid based upon
future sales of products by the Company. To date, the Company has not sold any
products that incorporate Troll Tech's technology and has not paid any royalties
to Troll Tech.
The Company has recorded its investment in Troll Tech's common stock at
$399,999, based on the cash price per share paid by Canopy. The Company
determined that the cash price per share paid by Canopy is the most reliable
evidence of the value of Troll Tech's common stock. The difference between the
estimated fair value of the 106,356 shares of the Company's common stock at
$8.00 per share of $850,848 and the $399,999 investment was recorded as a
license fee. The license fee was classified as contra-equity and was
subsequently reflected as a distribution to Canopy because the license rights
were used by Canopy and its affiliates. The Company currently intends on holding
the shares of Troll Tech indefinitely.
The total investment of $399,999 is included in the caption Investments in
Non-marketable Securities -- Non-affiliates in the accompanying October 31, 2000
consolidated balance sheet.
(6) EQUITY INVESTMENT IN EBIZ ENTERPRISES, INC.
On September 15, 2000, Caldera sold to Ebiz Enterprises, Inc. ("Ebiz") the
rights, title and interest in and to all of the intellectual property and assets
comprising Caldera's Electronic Linux Marketplace concept (the "ELM assets").
Caldera transferred assets with a net book value of $38,000 as well as cash of
$3,000,000 for 4,000,000 shares of Ebiz common stock. Caldera may also receive
up to 4,000,000 additional shares of Ebiz common stock, depending upon the
amount of gross revenue generated by the ELM Business during the twelve-month
period ending December 15, 2001. Immediately after the closing of the
transaction, Caldera owned approximately 31 percent of the outstanding voting
shares of Ebiz. Subsequent to Caldera's investment, additional shares of Ebiz
common stock -- including 2,500,000 shares to Canopy -- were issued that reduced
Caldera's ownership interest to approximately 17 percent.
Caldera is accounting for its interest in Ebiz using the equity method of
accounting due to its ability to exercise influence on Ebiz. Under the equity
method, Caldera recognizes its portion of the net income or net loss of Ebiz in
its consolidated statement of operations. For the year ended October 31, 2000,
Caldera recognized $224,339 in its statement of operations that represented its
portion of Ebiz's net loss. In addition, because Ebiz had a stockholders'
deficit at the time of Caldera's investment, Caldera is
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CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amortizing on a straight-line basis, the difference between its investment and
the amount of underlying equity in the net assets of Ebiz which has been
calculated as follows:
<TABLE>
<S> <C>
Fair value of Ebiz shares received (4,000,000 shares at
$1.60 per share).......................................... $ 6,400,000
Less portion of gain deferred due to Caldera's continuing
ownership interest........................................ (1,055,680)
-----------
Basis of recorded investment................................ 5,344,320
Caldera's portion of Ebiz' deficit.......................... 1,162,000
-----------
$ 6,506,320
===========
</TABLE>
Caldera is treating this difference as goodwill and is amortizing this
amount on a straight-line basis over five years. For the year ended October 31,
2000, Caldera recognized $162,656 in its statement of operations that
represented this amortization. The net investment of $4,957,325 is included in
the caption Equity Investment in Affiliate in the accompanying October 31, 2000
consolidated balance sheet.
Ebiz' common stock is currently traded on the Over-the-Counter Bulletin
Board. On October 31, 2000, Ebiz common stock closed at approximately $0.88 per
share. Caldera's carrying amount per share of Ebiz' common stock on October 31,
2000 was approximately $1.24 per share. Management believes that this decline in
market value of the stock is not permanent in nature and resulted primarily from
market conditions related to technology stocks and that Caldera's ability to
recover the carrying amount of its investment has not been permanently impaired.
Caldera will continue to evaluate the carrying amount of its investment in Ebiz
on an ongoing basis and will record impairment charges as necessary from
permanent impairment of its investment.
(7) BORROWINGS FROM CANOPY
SECURED CONVERTIBLE PROMISSORY NOTE PAYABLE
In connection with the incorporation of Caldera, Caldera and Canopy entered
into a Secured Convertible Promissory Note Agreement (the "Note Agreement")
pursuant to which the Company could borrow up to $2,000,000, or such other
greater amount as determined necessary, to fund ongoing operations. Interest
accrued on borrowings under the Note Agreement at the prime rate, less one-half
percent compounded annually, which was 7.25 percent. Borrowings under the Note
Agreement were convertible to shares of Caldera's common stock at $1.00 per
share, which was deemed to be the estimated fair market value of Caldera's
common stock on September 1, 1998. Under the Note Agreement, the Company
borrowed $4,819,000 during the year ended October 31, 1999. Additionally,
accrued interest of $454,974 was incurred by the Company related to borrowings
under the Note Agreement and the amount payable to the Predecessor for the
assets acquired in the reorganization (see Note 1). On August 19, 1999, the
principal borrowings and accrued interest were converted into 5,273,974 shares
of common stock and the Note Agreement was cancelled.
SECURED PROMISSORY NOTE WITH CANOPY
On December 29, 1999, Caldera entered into a Secured Promissory Note
Agreement with Canopy under which the Company borrowed $300,000. Borrowings
under this note bore interest at 9.5 percent per annum and were repaid in full
during January 2000.
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CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCKHOLDERS' EQUITY
REINCORPORATION AS A DELAWARE CORPORATION
On March 6, 2000, Caldera reincorporated in Delaware. The reincorporation
into Delaware was effected by way of a merger with a newly-formed Delaware
subsidiary, and the associated issuance of one share of common stock of the
subsidiary for each share of common stock of the Company held by the
stockholders of record. Additionally, stockholders of record of Series A and
Series B of the Company received shares of Series A and Series B preferred stock
of the subsidiary. All share and per share amounts in the accompanying
consolidated financial statements have been adjusted to give effect to the
reincorporation.
STOCK SPLIT
On December 29, 1998, Caldera's board of directors approved a two-for-one
stock split for holders of common stock. This stock split has been retroactively
reflected in the accompanying consolidated financial statements for all periods
presented.
PREFERRED STOCK
On December 30, 1999, the stockholders approved articles of amendment to
the Company's articles of incorporation. The amended articles of incorporation
authorized the Company to issue 25,000,000 shares of no par value preferred
stock and 75,000,000 shares of no par value common stock. The Company's board of
directors is authorized, without stockholder approval, to designate and
determine the preferences, limitations and relative rights granted to or imposed
upon each share of preferred stock which are not fixed by the amended articles
of incorporation. The amended articles of incorporation designated 6,596,146
shares as Series A Convertible Preferred Stock ("Series A") and 5,000,000 shares
as Series B Convertible Preferred Stock ("Series B").
The Series A and B shares had initial stated values per share of $4.03 and
$6.00, respectively, and ranked on parity with each other and prior to any other
class or series of capital stock of the Company with respect to dividend rights,
rights upon liquidation, winding up or dissolution, and redemption rights. The
Series A and B shares were entitled to receive, when, as and if declared by the
board of directors, cumulative and accruing preferential dividends at eight
percent per annum, compounded annually, based on the stated value per share;
provided, however, solely for dividend purposes the Series A stated value per
share was deemed to be $6.00. Any holder of Series A or B shares could convert
all or any shares of Series A or B into common shares and each share of Series A
or B automatically converted into common shares immediately prior to the closing
of a firm commitment underwritten public offering of at least $25,000,000, as
defined. Each Series A and B share initially converted into one share of common
stock. The holders of Series A and B shares were entitled to vote on all matters
submitted to the stockholders of the Company, including the election of
directors, together with the holders of common stock voting together as a single
class. Each share of Series A and B was entitled to one vote for each share of
common stock that would be issuable upon conversion of such share.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, each holder of Series A and B then outstanding would
be entitled to receive, on a pari passu basis, out of the assets available for
distribution to stockholders an amount equal to the greater of (i) the sum of
(1) the respective stated value per share plus (2) an amount equal to all unpaid
accruing dividends (whether or not declared) plus (3) any other dividends
declared but unpaid, and (ii) the amount that such holder of Series A or B
shares would hold had all shares of Series A and B been converted to common
immediately prior to the liquidation, dissolution, or winding up.
F-19
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CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the Company's initial public offering, all outstanding
preferred stock was converted to common stock on March 20, 2000.
CONVERSION OF COMMON SHARES INTO SERIES A SHARES
Prior to the offering of Series B shares discussed below, on December 30,
1999 the Company entered into a Conversion Agreement with its two major
stockholders, Canopy and MTI Technology Corporation ("MTI"). These stockholders
held 99 percent of the outstanding shares of the Company's common stock at
December 30, 1999. Pursuant to the Conversion Agreement, the Company converted
6,596,146 shares of outstanding common stock held by Canopy and MTI into
6,596,146 shares of Series A.
ISSUANCE OF SERIES B CONVERTIBLE PREFERRED STOCK AND RELATED AGREEMENTS
On December 30, 1999, the Company's board of directors authorized the
issuance of 5,000,000 shares of Series B convertible preferred stock at $6 per
share with the rights, preferences, privileges and restrictions as described
above. On January 10, 2000, the 5,000,000 shares were sold for net proceeds of
$29,790,674.
Each share of Series B convertible preferred stock was immediately
convertible to one share of common stock upon issuance. During the year ended
October 31, 2000, the Company recorded a dividend related to the Series B
convertible preferred stock in the amount of $10 million representing the value
of the beneficial conversion feature. The beneficial conversion feature was
calculated based on the difference between the conversion price of $6.00 per
share and the estimated fair value of the common stock of $8.00 per share for
financial reporting purposes based on the estimated price range for the
Company's IPO. The Company's board of directors determined that the $6.00 per
share price for the Series B preferred stock represented their estimate of the
fair value of the Series B preferred stock at the time sold and that the Series
B preferred shares were not issued for other consideration or goods and
services.
In connection with the preferred stock purchase agreements, the Company and
the investors entered into a second amended and restated investor rights
agreement (the "Rights Agreement") and a voting agreement. Pursuant to the
voting agreement, the Company and the preferred stockholders established the
composition of the Company's board of directors.
Pursuant to the Rights Agreement, Canopy and MTI, the Series A preferred
stockholders, and the investors in the Series B preferred stock (collectively
the "Preferred Stockholders") have certain rights beginning six months following
the closing of a qualified public offering with respect to registration of the
common shares issued or issuable upon conversion of the Series A and Series B
preferred shares in compliance with the Securities Exchange Act of 1934. The
Preferred Stockholders have certain demand and piggy-back rights that require
the Company to use its best efforts to register the requested shares and/or
permit the Preferred Stockholders to include shares in certain secondary
offerings of the Company's common stock. The Company has agreed to bear all
expenses in connection with any registration, other than underwriting discounts
and commissions.
WARRANT AGREEMENT BETWEEN CANOPY AND SERIES B PREFERRED STOCKHOLDER
In connection with the Series B preferred stock offering, Canopy and
Egan-Managed Capital, L.P. ("EMC"), one of the investors in the Series B
preferred stock offering, entered into an agreement wherein Canopy agreed to
purchase the shares of Series B convertible preferred stock purchased by EMC if
EMC did not receive a warrant in a satisfactory form to EMC to purchase 416,667
shares of the Company's common stock from Canopy. On March 13, 2000, Canopy sold
to EMC a warrant for $10,000 to purchase 416,667 shares of the Company's common
stock held by Canopy at $5.98 per share for a two-year period.
F-20
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CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Upon exercise of the warrant, all proceeds will be paid to Canopy. Since the
sale of this warrant directly related to the issuance of Series B preferred
stock, the Company accounted for this transaction as if the Company had sold the
warrant to EMC with an offsetting contribution to capital. Accordingly, the
Company recorded the fair value of the warrant of $2,252,717, determined using
the Black-Scholes option-pricing model, as a beneficial conversion feature
reflected as a dividend related to the Series B preferred stock during the year
ended October 31, 2000. Assumptions used in the Black-Scholes option-pricing
model were the following: estimated fair value of common stock of $8.00 per
share; risk-free interest rate of 6 percent; expected dividend yield of 0
percent; volatility of 118 percent; and expected exercise life of two years.
COMMON STOCK TRANSACTIONS
Effective September 1, 1998, in connection with the initial capitalization
of Caldera, Canopy purchased 16,000,000 shares of Caldera's common stock for
$20,928,848. Of this amount, $16,000,000 was paid in cash ($519,000 in fiscal
year 1998 and $15,481,000 in fiscal year 1999) and Canopy transferred to Caldera
a note receivable from the Predecessor of $4,928,848. As of October 31, 1998,
the Company had recorded the $15,481,000 to be received from Canopy as a stock
subscription receivable and the purchase price and related accrued interest
totalling $15,163,890 as a payable to Caldera, Inc. (see Note 1).
At the time of incorporation, Canopy agreed to continue to fund the
operations of the Company through a secured convertible promissory note (see
Note 7). The conversion terms of the secured promissory note allowed Canopy to
convert the borrowings and accrued interest into common stock at a price of
$1.00 per share, which was determined by the Company's board of directors to be
the estimated fair market value of the Company's common stock on September 1,
1998, the date of the convertible promissory note agreement. In August 1999,
Canopy elected to convert the outstanding principal borrowings and accrued
interest into 5,273,974 shares of the Company's common stock.
In July 1999, the Company negotiated with MTI, a publicly traded company
which at the time was 50 percent owned by Canopy, to sell 5,333,333 common
shares for $6,000,000, or $1.13 per share. The Company received $3,000,000 in
cash at the time of closing and issued a note receivable for $3,000,000 that
bore interest at the prime rate plus one percent (9 1/4 percent as of October
31, 1999). This note receivable was to be received in two installments of
$1,500,000 due in January and July 2000. The Company negotiated to receive the
initial installment of $1,500,000 in November 1999 in exchange for the Company
agreeing to forego the interest component attached to the note receivable. As a
result of this modification, the Company did not record any accrued interest in
the consolidated balance sheet as of October 31, 1999. The $1,500,000 received
in November 1999 and the $1,500,000 received in August 2000 have been reflected
as current assets and contra-equity in the accompanying consolidated balance
sheets as of October 31, 1999 and October 31, 2000, respectively. In connection
with MTI's investment, the Company entered into an Investors' Rights Agreement
with MTI and Canopy pursuant to which MTI received registration rights
applicable to the stock acquired. This Investors' Rights Agreement was amended
and superceded in connection with the Conversion Agreement and the offering of
Series B preferred shares discussed above.
STOCK OPTION PLANS
During fiscal year 1998, the Company adopted the 1998 Stock Option Plan
(the "1998 Plan") that provided for the granting of nonqualified stock options
to purchase shares of common stock. Under the 1998 Plan, the Company could grant
up to 5,000,000 options to employees, non-employee members of the board of
directors or consultants who provide services to the Company. Options granted
under the 1998 Plan are subject to expiration and vesting terms as determined by
a committee of the Company's board of
F-21
<PAGE> 227
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
directors. No options can expire more than ten years from the date of grant. The
exercise price for the options may be paid in cash or in shares of the Company's
common stock valued at fair market value on the exercise date. The options may
also be exercised through a same-day sale program without any cash outlay by the
optionee. At October 31, 2000, options to purchase 218,202 shares of common
stock were available for future grants under the 1998 Plan.
On December 1, 1999, the Company's board of directors approved the 1999
Omnibus Stock Incentive Plan (the "1999 Plan"), which is intended to serve as
the successor equity incentive program to the 1998 Plan. The 1999 Plan initially
increased the aggregate number of shares available for issuance under both plans
to 6,700,000 and designated that 700,000 shares be used as director incentives.
On March 10, 2000, the Company's board of directors authorized an additional
500,000 shares to be issued under the 1999 Plan and during July 2000 the board
of directors approved an additional 2,300,000 shares to be issued under the 1999
Plan. The 1999 Plan allows for the grant of awards in the form of incentive and
non-qualified stock options, stock appreciation rights, restricted shares,
phantom stock and stock bonuses. Awards may be granted to individuals in the
Company's employ or service.
The 1999 Plan is administered by the compensation committee of the board of
directors. This committee determines which eligible individuals are to receive
awards under the 1999 Plan, the type of award to be made, the time or times when
such awards are to be made, the number of shares subject to each such award, and
the vesting schedule and the other terms to be in effect for the award.
The exercise price for the options may be paid in cash, in shares of the
Company's common stock valued at fair market value on the exercise date or by
having the Company retain sufficient shares of common stock from shares which
would be issuable upon the exercise of the option. The option may also be
exercised through a same-day sale program without any cash outlay by the
optionee. To date, all options granted under the 1998 and 1999 Plans require the
exercise price to be paid in cash. If future grants are made with a cashless
exercise feature, the Company will be required to use variable plan accounting
for those grants.
Tandem stock appreciation rights may be issued under the 1999 Plan which
will provide the holders with the election to surrender their outstanding
options for a cash appreciation distribution from the Company equal to the fair
market value of the vested shares subject to the surrendered option less the
aggregate exercise price payable for such shares. In addition, the Company may
issue stand-alone stock appreciation rights which will entitle the holder to
receive a cash payment from the Company equal to the fair market value of the
vested shares subject to the right less the base price for such right.
Phantom stock awards will entitle the holder to receive in cash the fair
market value of common stock on the vesting date.
If the Company is acquired (whether by merger or asset sale) or there is a
change in control (effected through an acquisition of 50% or more of the
Company's voting stock or by proxy contest for the election of board members),
options and stand-alone stock appreciation rights exercisable at that time will
remain exercisable until their expiration, and options and stand-alone stock
appreciation rights not exercisable at that time will expire. Also, if the
Company is acquired or experiences a change in control, all restrictions on
outstanding vested shares of restricted stock granted under the 1999 Plan will
lapse, and all outstanding, unvested shares of such restricted stock will expire
and be cancelled. Similarly, all outstanding, unvested shares of phantom stock
will expire and be cancelled.
On July 14, 2000, Caldera's board of directors approved an amendment to the
1999 Plan. This amendment allows the board to extend the exercise period after
termination of service from 90 days to 120 days. The amendment also permits the
exercise of options for up to 30 days after termination of service for
F-22
<PAGE> 228
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
cause. Through October 31, 2000, the board had granted the extended terms to
line function employees and senior management employees who held a total of
approximately 1.3 million options to purchase common shares. The modified shares
had exercise prices ranging from $1.00-$9.50 per share and the fair market value
of Caldera's common stock ranged from $3.94-$8.50 per share on the dates that
modifications were made. The modifications to the exercise terms constitute a
new measurement date in accordance with FIN 44 on the date the modifications
were made. However, any compensation related to the modifications will only be
recorded to the extent the option holders actually benefit from the
modification. All modifications during fiscal 2000 did benefit the option
holders due to their terminations, accordingly, compensation expense of
approximately $640,000 was recorded during the fourth quarter of fiscal 2000
related to these option modifications.
The July 14, 2000 amendment to the 1999 Plan also provides that in
connection with a sale, change of control or liquidation of Caldera, Caldera or
the acquiring entity may elect to cash out, convert to options of the acquiring
entity or assume any vested options granted under the 1999 Plan. Additionally,
non-vested shares shall terminate unless otherwise provided in the governing
agreements or as determined by the compensation committee of the board of
directors. The amendment also permits Caldera to grant shares of restricted
stock and phantom stock that vest without regard to the satisfaction of
pre-established performance goals.
In addition, the board has approved amendments that will effect the
following changes: (i) establish an automatic share increase feature pursuant to
which the number of shares available for issuance under the 1999 Plan will
automatically increase, beginning with the 2000 calendar year, as of November 1
of each year, by 3% of the total number of shares of common stock outstanding on
the previous October 31st, and (ii) add a formula awards program pursuant to
which directors of the Company will automatically be granted options to purchase
shares of common stock at specified times, including an option to purchase
100,000 shares of common stock on the date of the annual stockholders meeting
during each even numbered calendar year beginning in 2004. All amendments are
subject to approval by the stockholders of Caldera.
During September and October 2000, the Company approved the accelerated
vesting of stock options for certain employees who were terminated as a result
of the sale of the ELM assets to Ebiz or were terminated in preparation for the
SCO acquisition. Each employee received three months of additional vesting on
existing stock option grants on their last day of employment with the Company.
All of the affected employees had ceased employment with the Company prior to
October 31, 2000. The existing option grants had exercise prices ranging from
$1.00-$9.50 per share and the fair market value of Caldera's common stock ranged
from $5.75-$7.09 per share on the dates that employment was terminated. Because
the accelerated vesting for these stock options represented a modification to
the existing stock option, the Company recorded compensation expense on each
option to the extent the difference between the fair market value and the
exercise price was greater than compensation cost previously recorded. The
Company recorded approximately $184,200 in non-cash compensation related to the
accelerated vesting of stock options for the year ended October 31, 2000.
F-23
<PAGE> 229
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of stock option activity under the stock option plans for the
years ended October 31, 1999 and 2000 is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS PRICE RANGE EXERCISE PRICE
--------- -------------- ------------------
<S> <C> <C> <C>
Granted................................. 3,106,566 $1.00 - $1.13 $1.04
Exercised............................... (22) 1.00 1.00
Forfeited............................... (142,304) 1.00 1.00
---------
Balance, October 31, 1999............... 2,964,240 1.00 - 1.13 1.04
Granted................................. 4,451,020 1.13 - 14.75 6.53
Exercised............................... (452,132) 1.00 - 6.00 1.18
Forfeited............................... (786,386) 1.00 - 9.50 4.98
---------
Balance, October 31, 2000............... 6,176,742 $1.00 - $14.75 $4.48
=========
</TABLE>
A summary of stock option grants with exercise prices equal to or less than
the estimated fair market value on the date of grant during the years ended
October 31, 1999 and 2000 is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
WEIGHTED AVERAGE FAIR VALUE OF
OPTIONS GRANTED EXERCISE PRICE OPTIONS
--------------- ---------------- ----------------
<S> <C> <C> <C>
Fiscal 1999
Grants with exercise price equal to estimated
fair market value........................... 645,728 $1.00 $0.20
Grants with exercise price less than estimated
fair market value........................... 2,460,838 1.04 1.54
---------
3,106,566 1.04 1.26
=========
Fiscal 2000
Grants with exercise price equal to
estimated fair market value.............. 592,883 8.57 0.57
Grants with exercise price less than
estimated fair market value.............. 3,858,137 6.22 1.29
---------
4,451,020 $6.53 $1.19
=========
</TABLE>
A summary of the options outstanding and options exercisable under the
Company's stock option plans at October 31, 2000 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
OPTIONS CONTRACTUAL AVERAGE OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.00........................ 1,678,862 8.51 years $1.00 899,029 $1.00
$1.13-$3.99.................. 744,426 8.95 1.13 187,416 1.13
$4.00-$5.99.................. 210,109 9.60 5.21 4,609 4.00
$6.00-$7.99.................. 3,015,274 9.22 6.34 949,507 6.03
$8.00 and above.............. 528,071 9.49 9.37 9,446 9.14
--------- ---------
6,176,742 9.03 $4.48 2,050,007 $3.39
========= =========
</TABLE>
F-24
<PAGE> 230
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for its stock options issued to directors, officers
and employees under APB 25 and related interpretations. Under APB 25,
compensation expense is recognized if an option's exercise price on the
measurement date is below the intrinsic fair value of the Company's common
stock. During the year ended October 31, 1999, the Company granted 2,460,838
stock options with exercise prices that were below the estimated fair market
value on the measurement date resulting in $3,144,230 in deferred compensation.
This deferred compensation has been recorded as a component of stockholders'
equity and will be expensed consistent with the vesting of the underlying stock
options. Amortization of deferred compensation amounted to $409,296 for the year
ended October 31, 1999. During the year ended October 31, 2000, the Company
granted 3,858,137 additional stock options with exercise prices below the fair
market value on the measurement date resulting in $6,790,264 of additional
deferred compensation to be recognized as expense over the vesting period of the
options. Amortization of deferred compensation amounted to $5,216,016 during the
year ended October 31, 2000. During the year ended October 31, 2000, the Company
reversed the cumulative amortization of deferred compensation previously
recorded from unvested options of terminated employees. As a result, $652,875
was recorded as an offset to the non-cash compensation caption in the
accompanying fiscal 2000 statement of operations.
As a result of an option agreement between Canopy and Ralph J. Yarro III,
which was subsequently rescinded, the Company recorded a one-time compensation
charge of $372,000 during the year ended October 31, 2000. The option agreement
allowed Mr. Yarro to purchase shares of the Company's common stock directly from
Canopy. No shares were purchased under the agreement. Mr. Yarro is the president
and chief executive officer of Canopy and the Chairman of the Company's board of
directors.
SFAS No. 123, "Accounting for Stock-Based Compensation" requires pro forma
information regarding net loss as if the Company had accounted for its stock
options granted under the fair value method. The fair market value of the stock
options is estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions for grants during the years ended October
31, 1999 and 2000: risk-free interest rates of 5.5 and 6.1 percent,
respectively; expected dividend yield of 0 percent; volatility of 0 and 132
percent, respectively; and expected exercise lives of five and four years,
respectively. For purposes of the pro forma disclosure, the estimated fair
market value of the stock options is amortized over the vesting periods of the
respective stock options. The following is the pro forma disclosure and the
related impact on net loss for the years ended October 31, 1999 and 2000:
<TABLE>
<CAPTION>
1999 2000
----------- ------------
<S> <C> <C>
Net loss attributable to common stockholders, as
reported..................................... $(9,366,588) $(39,176,215)
Net loss attributable to common stockholders,
pro forma.................................... (9,773,906) (43,291,164)
Per share:
Net loss attributable to common stockholders, as
reported..................................... $ (0.51) $ (1.19)
Net loss attributable to common stockholders,
pro forma.................................... (0.53) (1.31)
</TABLE>
2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 Employee Stock Purchase Plan was adopted by the board of directors
on February 15, 2000 and was approved by the stockholders on March 1, 2000. The
plan became effective upon the closing of the Company's initial public offering.
The plan is designed to allow eligible employees of Caldera and its
participating subsidiaries to purchase shares of Caldera common stock, at
semi-annual intervals, through
F-25
<PAGE> 231
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
periodic payroll deductions. A total of 500,000 shares of common stock has been
reserved for issuance under the plan. The share reserve will increase on the
first trading day of each calendar year beginning with the 2001 calendar year by
1% of the total number of shares of common stock outstanding on the last day of
the immediately preceding year but no such annual increase will exceed 750,000
shares. In no event, however, may a participant purchase more than 750 shares,
nor may all participants in the aggregate purchase more than 125,000 shares on
any semi-annual purchase date.
The plan will have a series of successive offering periods, each with a
maximum duration of 24 months. The initial offering period began on the date of
the Company's initial public offering and will end on the last business day in
April 2002. The next offering period will begin on May 1, 2002. Subsequent
offering periods will be set by the compensation committee. Shares will be
purchased on semi-annual purchase dates (the last business day of April and
October each year) during the offering period. The first purchase date was
October 31, 2000. Should the fair market value of the Company's common stock on
any semi-annual purchase date be less than the fair market value on the first
day of the offering period, the current offering period will automatically end
and a new offering period will begin, based on the lower fair market value.
Individuals who are eligible employees on the start date of any offering
period may enter the Plan on that start date or on any subsequent semi-annual
entry date (generally May 1 or November 1 each year). Individuals who become
eligible employees after the start date of the offering period may join the plan
on any subsequent semi-annual entry date within that period.
A participant may contribute up to 10% of his or her cash earnings through
payroll deductions and the accumulated payroll deductions will be applied to the
purchase of shares on the participant's behalf on each semi-annual purchase date
(the last business day in April and October of each year). The purchase price
per share will be 85% of the lower of the fair market value of our common stock
on the participant's entry date into the offering period or the fair market
value on the semi-annual purchase date.
The board may at any time amend or modify the plan. The plan will terminate
no later than the last business day in April 2010.
In July 2000, the board of directors amended the plan to increase the
maximum number of shares of common stock authorized for issuance over the term
of the plan by an additional 1,500,000 shares.
On October 31, 2000, 61,807 shares of common stock of the Company were
purchased through the plan at a price of $2.98 per share.
(9) INCOME TAXES
As described in Note 1, Caldera became a separate legal entity effective
September 1, 1998. The income tax attributes associated with the carved-out
portion of the Predecessor prior to September 1, 1998 remained with the
Predecessor.
Since incorporation, Caldera has reported for income tax purposes as a
stand-alone taxable entity. For income tax purposes, the reorganization of the
Predecessor and the sale of the Linux software business to Caldera has been
treated as a taxable asset sale. Accordingly, the tax basis of the assets
received from the Predecessor is based on the $19,928,848 purchase price (see
Note 1). The reorganization did not qualify as a tax-free reorganization because
the Predecessor did not transfer substantially all of its assets to Caldera.
F-26
<PAGE> 232
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net loss before income taxes consisted of the following components for
the period from the reorganization (September 1, 1998) through October 31, 1998
and for the years ended October 31, 1999 and 2000:
<TABLE>
<CAPTION>
1998 1999 2000
------------ ----------- ------------
<S> <C> <C> <C>
Domestic U.S. operations...................... $ (1,070,632) $(9,401,363) $(26,980,396)
Operations of foreign subsidiary, Caldera
GmbH........................................ 11,260 69,550 138,039
------------ ----------- ------------
Total....................................... $ (1,059,372) $(9,331,813) $(26,842,357)
============ =========== ============
</TABLE>
The components of the provision for income taxes for the period from the
reorganization (September 1, 1998) through October 31, 1998 and for the years
ended October 31, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
1998 1999 2000
--------- ----------- -----------
<S> <C> <C> <C>
Current:
U.S. Federal................................. $ -- $ -- $ --
U.S. State................................... -- -- --
Non-U.S. .................................... 33,780 34,775 81,141
--------- ----------- -----------
33,780 34,775 81,141
--------- ----------- -----------
Deferred:
U.S. Federal ................................ (368,163) (3,022,242) (3,976,810)
U.S. State .................................. (53,436) (293,335) (385,985)
Change in valuation allowance................ 421,599 3,315,577 4,362,795
--------- ----------- -----------
-- -- --
--------- ----------- -----------
Total provision for income taxes.......... $ 33,780 $ 34,775 $ 81,141
========= =========== ===========
</TABLE>
Deferred tax assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and liabilities. They
are measured by applying the enacted tax rates and laws in effect for the years
in which such differences are expected to reverse. The significant components of
the Company's deferred income tax assets and liabilities at October 31, 1999 and
2000 are as follows:
<TABLE>
<CAPTION>
1999 2000
------------ ------------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards $ 3,967,242 $ 8,029,416
Tax basis in excess of book basis related to assets
acquired by Caldera from Predecessor 6,599,942 6,122,838
Book to tax basis difference in equity investee -- 393,769
Reserves and accrued expenses 268,510 606,389
Book depreciation in excess of tax 62,570 114,002
Foreign tax credit 46,617 101,793
------------ ------------
Total deferred income tax assets 10,944,881 15,368,207
Deferred tax liability -- tax on foreign earnings (51,142) (111,673)
Valuation allowance (10,893,739) (15,256,534)
------------ ------------
Net deferred income tax assets $ -- $ --
============ ============
</TABLE>
The amount of and ultimate realization of the deferred income tax assets is
dependant, in part, upon the tax laws in effect, Caldera's future earnings, and
other future events, the effects of which cannot be
F-27
<PAGE> 233
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
determined. The Company has established a full valuation allowance against its
deferred income tax assets. Management believes that as of October 31, 2000,
based on a number of factors, the available objective evidence creates
sufficient uncertainty regarding the realizability of these deferred income tax
assets.
As of October 31, 2000, the Company had net operating loss carryforwards
for federal income tax reporting purposes totaling approximately $21,527,000
that expire in 2018 to 2020. The net operating loss carryforwards expire as
follows:
The Internal Revenue Code contains provisions that likely could reduce or
limit the availability and utilization of net operating loss carryforwards if
certain changes in ownership have taken place or will take place. As of October
31, 2000, no such ownership changes had occurred.
The differences between the provision for income taxes at the U.S.
statutory rate and the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
Benefit at statutory rate................................... (34.0%) (34.0%) (34.0%)
Non-deductible items........................................ 0.1% 0.1% 21.2%
State income taxes, net of federal effect................... (3.3%) (3.3%) (3.3%)
Foreign income taxes........................................ 0.6% (0.1%) 0.1%
Increase in valuation allowance............................. 39.8% 37.7% 16.3%
----- ----- -----
Total provision for income taxes.......................... 3.2% 0.4% 0.3%
===== ===== =====
</TABLE>
(10) COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a party to certain legal proceedings arising in the ordinary
course of business. Management believes, after consultation with legal counsel,
that the ultimate outcome of such legal proceedings will not have a material
adverse effect on the Company's financial position, liquidity or results of
operations.
SCO COST-SHARING ARRANGEMENT
In connection with the Definitive Agreement with SCO to acquire the server
software and professional services groups (see Note 1), the Company and SCO
agreed that Caldera would reimburse SCO for certain employee payroll and related
costs. The costs to be reimbursed by Caldera related to SCO employees that SCO
had identified for termination in a company-wide layoff in September 2000.
Caldera viewed these employees as critical to the new combined company and SCO
agreed to retain the employees if Caldera would reimburse SCO for a portion of
their payroll and related costs. At the time Caldera committed to reimburse SCO
for these employee costs, the ultimate amount was not determinable and both
parties agreed that the amount would be determined prior to the completion of
the acquisition. During December 2000, both parties agreed that Caldera would
reimburse SCO $1.5 million relating to services rendered from August through
December 2000. Accordingly, as of October 31, 2000 Caldera has accrued $898,026
representing the portion incurred through that time. The Company will record the
remaining $601,974 during the first quarter of fiscal 2001. The actual payment
will be made to SCO during Caldera's first quarter of fiscal 2001.
F-28
<PAGE> 234
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEVERANCE AGREEMENTS
During July and August 2000, the Company entered into severance agreements
with certain members of management. The agreements apply to a change of control
or termination or effective termination of employment with the Company. Change
of control is defined as: (1) any person or entity who becomes the beneficial
owner of 51 percent or more of the Company's common stock, (2) sale of
substantially all of the Company's assets, (3) approval of a merger or
consolidation in which at least 50 percent of the voting securities are
acquired, and (4) during any period of two consecutive years, individuals who at
the beginning of such period constitute the board of directors of the Company
and any new director whose election by the board of directors or nomination for
election by the Company's stockholders was approved by a vote of at least two
thirds of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof.
The acquisition of the SCO server and professional services groups and resulting
addition of two board members does not qualify as a change in control. Specific
provisions for Senior Vice Presidents and Executive Officers include but are not
limited to the following; salary and bonus payments equal to 150 percent of the
then current annual base salary and bonuses, 18 months of accelerated vesting
for outstanding stock options and continuing insurance benefits for a period up
to six months. Specific provisions for Vice-Presidents include but are not
limited to the following; salary and bonus payments equal to 100% of the then
current annual base salary and bonuses, 12 months of accelerated vesting on
outstanding stock options and continuing insurance benefits for a period of six
months.
Because each of the severance agreements allows for the accelerated vesting
of stock options that was not included in each employees' original stock option
grant, a new measurement date has occurred. The total potential compensation
cost associated with the accelerated vesting provisions of the severance
agreements is approximately $1.6 million. The members of the executive
management team who entered into severance agreements hold a total of 1.6
million options to purchase common shares at prices ranging from $1.00 to $9.50
per share. The fair value of Caldera's common stock on the dates the severance
agreements were signed ranged from $5.50 to $9.25 per share. This amount will be
expensed in future financial statements to the extent of unvested shares
outstanding at the date of a change in control based on remaining service period
and employee turnover rates.
OPERATING LEASE AGREEMENTS
The Company had been leasing its corporate office facilities from the
Predecessor. On April 5, 2000, the Company entered into an amended operating
lease agreement whereby the Company leases additional office space adjacent to
its corporate offices. The amended lease agreement requires lease payments of
approximately $55,300 per month, and the lease expires in October 2002. The
lease may be terminated at an earlier date in accordance with the provisions of
the original lease agreement. Rent expense under this arrangement totaled
approximately $19,200, $144,700 and $474,000 for the years ended October 31,
1998, 1999 and 2000, respectively. This lease requires the Company to pay taxes,
maintenance, insurance and certain other operating costs of the leased property.
After entering into the amended operating lease, the Company subleased a portion
of the space to the Predecessor and to another majority owned company of the
Predecessor. These sublease agreements were month-to-month agreements that
required payments of approximately $5,100 per tenant to be paid to the Company.
These subleases terminated in October, 2000.
The Company had also been leasing additional office space from an unrelated
party. The lease requires monthly payments of $8,990 to be made through June
2002. Subsequent to the Company's sale of its Electronic Linux Marketplace
assets to Ebiz, the Company entered into an agreement to sublease this
F-29
<PAGE> 235
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
office space to Ebiz. The sublease is for a period of one year and the Company
is receiving $4,000 per month.
On September 1, 1999, the Company entered into an operating lease
arrangement for its Caldera GmbH facility. The lease requires monthly minimum
payments of 8,750 DM (approximately $3,850 U.S. dollars based on the exchange
rate as of October 31, 2000) and expires five years from the date of
commencement. Caldera GmbH also has the option of extending the agreement for
two consecutive five-year terms. This lease requires the Company to pay taxes,
maintenance, insurance and certain other operating costs of the property.
The Company leases warehouse space from two unrelated parties under
separate operating lease agreements. Each agreement is for a term of eighteen
months and expires in November 2000. Rent expense under the lease is
approximately $37,200 per year.
On March 30, 2000, the Company entered into an operating lease agreement
for its education facilities whereby the Company agreed to lease 5,146 square
feet of office space for $8,255 per month. This lease is for a term of five
years and commenced on June 1, 2000.
Total rent expense for all of the Company's operating leases was $19,200,
$161,200 and $722,000 for the years ended October 31, 1998, 1999 and 2000.
Operating lease commitments for the next five years are $1.0 million for fiscal
2001, $897,000 for fiscal 2002, $158,000 for fiscal 2003, $153,000 for fiscal
2004 and $66,000 for fiscal 2005 and thereafter.
SOFTWARE LOCALIZATION AGREEMENT
On October 1, 1999, the Company entered into an agreement with United
Systems Engineers, Inc. ("USE") to localize certain of the Company's software
products for the Japanese market. As consideration, the Company agreed to pay
$250,000 in cash or issue to the engineering firm shares of the ]Company's
common stock with a market value of $202,000, based on the initial public
offering price per share. On January 4, 2000, the Company and USE amended the
agreement pursuant to which the Company agreed to issue 33,667 shares of common
stock to USE for the services, of which 16,833 were to be issued immediately for
services rendered and the remaining 16,834 are to be issued upon completion of
the services. Should USE not perform under the agreement, USE will not be issued
the remaining 16,834 shares of common stock, and USE has committed to pay
$100,000 to the Company. Based on the performance commitment, the date of the
amended contract has been determined to be the measurement date and the
estimated fair value of the Company's common stock on that date of $269,336, or
$8 per share, will be expensed as the services are rendered. As of October 31,
2000 $134,664 has been expensed.
SOFTWARE LICENSE AGREEMENTS WITH SUN MICROSYSTEMS, INC.
In January 2000, the Company and Sun Microsystems, Inc. ("Sun"), an
investor in the Company's Series B preferred stock, entered into certain
software license agreements. These license agreements are for a term of 18
months and expire in June 2001. Pursuant to one of the software license
agreements, the Company agreed to pay Sun a nonrefundable payment in the amount
of $1,250,000. During the year ended October 31, 2000, the Company made the
required payments to Sun and recorded the payments as prepaid license fees and
marketing expense. Under the agreements, the Company has access to certain of
Sun's technologies and participates with Sun in various marketing activities
such as tradeshow appearances, speaking events and web site advertising. The
value allocated to the marketing activities of $450,000 was determined based
upon management's estimate of the amount the Company would pay for similar
marketing services. The portion of the fee allocated to the marketing activities
is being expensed as the marketing activities occur. The Company is expensing
$800,000 of the fee allocated to the
F-30
<PAGE> 236
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
technology as cost of revenue or research and development expense over the
18-month term of the license agreements. The technology is principally being
used for internal purposes to create and enhance e-commerce applications to be
used in connection with current and future Caldera products. Beginning in the
fourth quarter of fiscal 2000, certain of the technology has been included in
one the Company's products. A portion of the license fee has been allocated to
cost of revenue based on the estimated fair value of the included technology.
For the year ended October 31, 2000, the Company has expensed the total $450,000
of marketing expenses and approximately $314,200 of the total $800,000 in
engineering expenses. As of October 31, 2000, the balance of prepaid fees was
approximately $485,800.
STRATEGIC BUSINESS AGREEMENT WITH THE SANTA CRUZ OPERATION
On February 1, 2000, the Company and The Santa Cruz Operation ("SCO")
entered into a strategic business agreement. The agreement provides for certain
joint marketing activities between the parties, including, but not limited to
participation in tradeshows, cross recruiting and cross matching of partners,
cross-referencing each others' websites and product solutions, and discussing
certain channel initiatives. In addition, the Company agreed to provide ten
copies of OpenLinux to SCO for its internal use and SCO agreed to provide three
copies of SCO's Tarantella Express product to the Company for internal use. The
Company recorded the fair value of the OpenLinux products provided to SCO as an
engineering expense since the products received were used for internal
development purposes. In addition, the Company will record the costs of the
joint initiatives as either marketing or engineering expenses depending on the
nature of the activities conducted.
(11) RELATED PARTY TRANSACTIONS
As of October 31, 2000, the Company did not owe or have any amounts due
from related parties.
CANOPY
As discussed in Note 1, Canopy was the sole stockholder of Caldera upon
incorporation and was the majority stockholder of the Predecessor. Canopy
invested $20,928,848 in Caldera in exchange for 16,000,000 shares of common
stock. In addition to the initial equity investment, Canopy advanced $4,819,000
under a secured convertible promissory note agreement (see Note 7). In August
1999, the principal borrowings and accrued interest of $454,974 were converted
into 5,273,974 shares of common stock. The chairman of the Company's board of
directors is the president and chief executive officer and a director of Canopy.
Additionally, another director of the Company is the chairman of Canopy's board
of directors.
The Company has entered into certain transactions with Canopy and other
entities that are majority-owned by Canopy. These transactions consist mainly of
participating in joint insurance coverage, training and testing services, and
rent. The Company believes that the terms of these related party transactions
are at least as favorable as the terms that could have been obtained from an
unaffiliated third party in similar
F-31
<PAGE> 237
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
transactions. During the years ended October 31, 1998, 1999 and 2000,
transactions with these related parties were as follows:
<TABLE>
<CAPTION>
1998 1999 2000
------- -------- --------
<S> <C> <C> <C>
Revenue............................................. $ -- $ -- $ 46,600
Rent (see Note 10).................................. $19,200 $144,700 $ 94,200
Training, testing and other......................... -- 48,200 82,600
Insurance........................................... 13,200 13,800 6,700
------- -------- --------
Total expenses.................................... $32,400 $206,700 $183,500
======= ======== ========
</TABLE>
LINEO, INC.
As discussed in Note 5, in January 2000, the Company acquired an ownership
interest in Lineo, Inc. ("Lineo"), the successor entity to the operations of the
Predecessor which were not acquired by Caldera in the reorganization discussed
in Note 1. The chairman of the Company's board of directors and two directors
are also directors of Lineo. Sales to Lineo amounted to $1,700 and $34,300
during the years ended October 31, 1999 and 2000, respectively.
MTI
In July 1999, MTI, a company which at the time was 50 percent owned by
Canopy, agreed to purchase 5,333,333 shares of common stock for $6,000,000 of
which $3,000,000 was paid at closing and $3,000,000 was payable through an
interest bearing note receivable. Subsequent to signing the agreement, the
Company agreed to forego the interest component of the note receivable in
exchange for an acceleration of the payment terms (see Note 8). A director of
the Company is the chairman of the board of MTI. Additionally, another Company
director is the current president and chief executive officer of MTI.
The Company is using certain computer equipment provided by MTI without
charge. The equipment is valued at approximately $105,000. Sales to MTI amounted
to $2,985 and $31,350 during the years ended October 31, 1999 and 2000,
respectively.
(12) EMPLOYEE BENEFIT PLAN
Until June 2000, Caldera utilized a 401(k) plan sponsored by Canopy for its
employees, through which Caldera made matching contributions from January 1
through June 2000. In June 2000, Caldera adopted its own 401(k) plan through
which eligible participants can elect to make contributions to the plan, subject
to certain limitations under the Internal Revenue Code. Under the terms of the
new plan, the Company may make discretionary matching contributions to partially
match employee contributions to the plan, up to predetermined limits. During the
year ended October 31, 2000, the Company contributed approximately $145,000 to
the plan for matching contributions.
(13) SIGNIFICANT CUSTOMERS
During the year ended October 31, 1998, the Company had sales to one
customer that accounted for approximately 11 percent of total revenue. During
the year ended October 31, 1999, the Company had sales to two customers that
accounted for approximately 33 percent and 20 percent of total revenue,
respectively. During the year ended October 31, 2000, the Company had sales to
one customer that
F-32
<PAGE> 238
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accounted for approximately 19 percent of total revenue. No other customer
accounted for more than ten percent of total revenue during the years ended
October 31, 1998, 1999 and 2000.
(14) SEGMENT INFORMATION
In June 1998, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes disclosures related to
components of a company for which separate financial information is available
and evaluated regularly by a company's chief operating decision makers in
deciding how to allocate resources and in assessing performance. It also
requires segment disclosures about products and services as well as geographic
areas. The Company has determined that it did not have any separately reportable
operating segments as of October 31, 1998, 1999 and 2000. However, the Company
does sell software and related products in geographic locations outside of the
United States. Revenue attributed to individual countries based on the location
of sales to unaffiliated customers for the years ended October 31, 1998, 1999
and 2000 is as follows:
<TABLE>
<CAPTION>
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
United States.................................. $1,000,943 $2,847,789 $2,982,275
Asia pacific................................... -- 91,133 705,701
Europe......................................... 33,687 81,007 366,682
Other countries................................ 22,458 30,378 219,665
---------- ---------- ----------
Total revenue................................ $1,057,088 $3,050,307 $4,274,323
========== ========== ==========
</TABLE>
F-33
<PAGE> 239
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of The Santa Cruz Operation, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of divisional deficit and accumulated
other comprehensive loss and of cash flows present fairly, in all material
respects, the financial position of the SCO Server and Professional Services
Groups at September 30, 1999 and 2000, and the results of their operations and
their cash flows for each of the three years in the period ended September 30,
2000 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
management of The SCO Server and Professional Services Groups; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to these consolidated financial statements, The SCO
Server and Professional Services Groups are dependent upon financing from The
Santa Cruz Operation Inc. ("SCO"). There can be no assurance that SCO will
provide such funding beyond September 30, 2001.
/s/ Pricewaterhouse Coopers LLP
PricewaterhouseCoopers LLP
San Jose, California
November 17, 2000
F-34
<PAGE> 240
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,223 $ 511
Accounts receivables, net................................. 13,607 13,601
Other current assets...................................... 2,903 1,923
-------- --------
Total current assets.............................. 18,733 16,035
-------- --------
Property and equipment, net................................. 10,560 7,093
Purchased software and technology licenses, net............. 9,690 5,282
Other assets................................................ 2,292 706
-------- --------
Total assets...................................... $ 41,275 $ 29,116
======== ========
LIABILITIES, DIVISIONAL DEFICIT AND OTHER COMPREHENSIVE LOSS
Current liabilities:
Trade accounts payable.................................... $ 6,788 $ 4,130
Royalties payable......................................... 3,899 3,748
Taxes payable............................................. 447 549
Restructuring reserve..................................... -- 5,163
Accrued expenses and other current liabilities............ 29,842 16,823
Deferred revenues......................................... 3,852 4,064
-------- --------
Total current liabilities......................... 44,828 34,477
-------- --------
Long-term lease obligations................................. 2,167 477
Long-term deferred revenues................................. 1,029 806
Other long-term liabilities................................. 2,361 150
-------- --------
Total long-term liabilities....................... 5,557 1,433
-------- --------
Commitments and contingencies (note 9)
DIVISIONAL DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Divisional deficit........................................ (8,704) (6,076)
Accumulated other comprehensive loss...................... (406) (718)
-------- --------
Total divisional deficit and accumulated other
comprehensive loss............................... (9,110) (6,794)
-------- --------
Total liabilities, divisional deficit and
accumulated other comprehensive loss............. $ 41,275 $ 29,116
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE> 241
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues
Licenses.................................................. $ 42,738 $ 62,172 $ 59,807
Services.................................................. 14,440 14,757 14,701
-------- -------- --------
Total net revenues................................ 57,178 76,929 74,508
Cost of revenues
Licenses.................................................. 12,014 13,619 13,736
Services.................................................. 16,792 18,562 18,510
-------- -------- --------
Total cost of revenues............................ 28,806 32,181 32,246
Gross margin.............................................. 28,372 44,748 42,262
-------- -------- --------
Operating expenses:
Research and development.................................. 27,556 23,902 27,430
Sales and marketing....................................... 48,001 55,918 55,952
General and administrative................................ 4,646 4,576 8,540
Non-recurring charges..................................... -- -- 9,882
-------- -------- --------
Total operating expenses............................... 80,203 84,396 101,804
-------- -------- --------
Operating loss.............................................. (51,831) (39,648) (59,542)
Other expenses............................................ (430) (534) (283)
-------- -------- --------
Net loss.......................................... (52,261) (40,182) (59,825)
-------- -------- --------
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment................... 299 (507) (312)
-------- -------- --------
Comprehensive loss................................ $ 51,962 $(40,689) $(60,137)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE> 242
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
CONSOLIDATED STATEMENTS OF DIVISIONAL DEFICIT
AND ACCUMULATED OTHER COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
DIVISIONAL COMPREHENSIVE
DEFICIT LOSS TOTAL
---------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balances, October 1, 1997................................. $ (3,738) $(198) $ (3,936)
Intercompany transfers.................................... 50,388 -- 50,388
Other comprehensive income................................ -- 299 299
Net loss.................................................. (52,261) -- (52,261)
-------- ----- --------
Balances, September 30, 1998.............................. (5,611) 101 (5,510)
Intercompany transfers.................................... 37,089 -- 37,089
Other comprehensive loss.................................. -- (507) (507)
Net loss.................................................. (40,182) -- (40,182)
-------- ----- --------
Balances, September 30, 1999.............................. (8,704) (406) (9,110)
Intercompany transfers.................................... 62,453 -- 62,453
Other comprehensive loss.................................. -- (312) (312)
Net loss.................................................. (59,825) -- (59,825)
-------- ----- --------
Balances, September 30, 2000.............................. $ (6,076) $(718) $ (6,794)
======== ===== ========
</TABLE>
The intercompany transfers are analyzed for each of the years ended
September 30, 1998, 1999 and 2000:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1998 1999 2000
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash transferred from Corporate for operating activities.... $27,142 $19,114 $54,912
Cash transferred from Corporate for purchase of property and
equipment................................................. 1,253 3,577 1,256
Cash transferred from Corporate for purchase of software and
technology licenses....................................... 2,950 2,556 737
Cash funding from Corporate for capital lease payments...... 3,831 3,676 2,838
Net financing of long-term assets........................... 3,242 (679) (7,163)
Non-cash Allocation of Corporate's general and
administrative expenses, and marketing expenses........... 11,970 8,845 9,873
------- ------- -------
Total intercompany transfers................................ $50,388 $37,089 $62,453
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE> 243
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(52,261) $(40,182) $(59,825)
Adjustments to reconcile net loss to net cash used in
operating activities -
Depreciation and amortization............................. 13,912 11,388 10,185
Corporate expense allocations............................. 11,970 8,845 9,873
Exchange (gain) loss...................................... 74 (97) (15)
Changes in operating assets and liabilities-
Receivables............................................ (4,355) (3,229) (9,103)
Other current assets................................... (1,029) 1,066 598
Other assets........................................... (85) (25) 1,057
Trade accounts payable................................. (59) (419) 551
Royalties payable...................................... (277) 1,709 (2,658)
Taxes payable.......................................... (209) 536 103
Restructuring reserve.................................. -- -- 5,163
Accrued expenses and other current liabilities......... (1,305) 3,697 (12,030)
Deferred revenues...................................... 4,104 (327) 3,400
Other long-term liabilities............................ 2,378 (2,076) (2,211)
-------- -------- --------
Net cash used in operating activities............. (27,142) (19,114) (54,912)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (1,253) (3,577) (1,256)
Purchases of software and technology licenses............. (2,950) (2,556) (737)
Changes in other assets................................... 50 (205) 162
-------- -------- --------
Net cash used in investing activities............. (4,153) (6,338) (1,831)
-------- -------- --------
Cash flows from financing activities:
Intercompany cash transfers............................... 38,180 28,491 58,244
Payments on capital leases................................ (3,831) (3,676) (2,838)
-------- -------- --------
Net cash provided by financing activities......... 34,349 24,815 55,406
-------- -------- --------
Effects of exchange rate changes on cash and cash
equivalents............................................... 463 (657) (375)
Change in cash and cash equivalents......................... 3,517 (1,294) (1,712)
Cash and cash equivalents at beginning of period............ -- 3,517 2,223
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 3,517 $ 2,223 $ 511
======== ======== ========
Supplemental disclosure of cash flow information:
Non-cash financing and investing activities -
Property and equipment acquired under capital leases... $ 4,701 $ 1,978 $ 20
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE> 244
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
NOTES TO CONSOLIDATED CARVE OUT FINANCIAL STATEMENTS
(1) INTRODUCTION AND BASIS OF PRESENTATION
On August 1, 2000 The Santa Cruz Operation, Inc. ("SCO") announced that it
had reached an agreement with Caldera Systems, Inc.("Caldera") under which
Caldera would purchase for stock and cash the SCO server and professional
services groups (the "Groups"), including its employees, products and channel
resources. Under the terms of the agreement SCO would retain the rights to its
OpenServer Product with Caldera continuing to act as a sales agent on SCO's
behalf for this product. Under the terms of a Sales and Support Agreement and a
Research and Development Agreement between the parties Caldera will receive a
commission based on the gross margin earned by SCO on each sale. In addition
Caldera will receive reimbursements for product development and selling and
marketing expenses incurred in respect to the OpenServer Product. SCO will
receive a 28.6% ownership interest in Caldera, which is estimated to be an
aggregate of approximately 18.2 million shares of Caldera stock (including
approximately 2 million shares reserved for employee options assumed by Caldera
for options currently held by SCO employees joining Caldera), and $7.0 million
in cash. SCO will retain its Tarentella Division and the SCO OpenServer revenue
stream and intellectual properties.
The SCO server and professional services groups operate as a provider of
server software for networked business computing. The solutions delivered by the
Groups are UNIX(R) based server operating systems. The Groups' products enable
business and government organizations of all sizes to integrate technologies and
products from different vendors to create cost-effective, powerful, networked
information systems that perform highly complex, mission-critical business
functions. Products are sold via the Groups' direct sales force or through
indirect channel partners, which include some of the leading distribution
companies within the United States, Europe and the rest of the world.
The consolidated financial statements include the assets, liabilities,
operating results and cash flows of the SCO server and professional services
groups and have been prepared using SCO's historical bases in the assets and
liabilities and the historical results of the Groups' operations. The historical
results exclude assets and liabilities relating to OpenServer Products as well
as sales and cost of sales relating to OpenServer Product. In addition the
results of the groups exclude operating expenses which have been allocated to
the OpenServer business based on estimates of the expenses associated with this
business line. Changes in divisional deficit represent SCO's funding of the
groups, after giving effect to the net earnings of the Groups plus net cash
transfers to and from SCO. No interdivision interest income or expense has been
allocated to, or included in, the accompanying consolidated financial
statements.
The consolidated financial statements include allocations of certain SCO
corporate expenses, including centralized research and development, legal,
accounting, employee benefits, real estate, insurance services, information
technology services, treasury and other SCO corporate and infrastructure costs.
The expense allocations have been determined on bases deemed appropriate for
each expense item. Such bases include relative headcount, relative space
occupancy and relative sales volume. SCO and management of the Groups consider
these allocations to be a reasonable reflection of the utilization of services
provided or the benefit received by the Groups.
However, the financial information included herein may not reflect the
consolidated financial position, operating results, changes in divisional
deficit and cash flows of the Groups in the future or what they would have been
had the Groups operated as a separate, stand-alone entity during the periods
presented.
DEPENDENCE UPON SCO FUNDING
The Groups have incurred losses from operations in each of the last three
fiscal years and have relied upon SCO to provide adequate financing to fund
these losses. Management of the Groups expect to incur further losses from
operations and have received a commitment from SCO to provide further funding
until September 30, 2001, however, there can be no assurance that SCO will
provide funding beyond this date.
F-39
<PAGE> 245
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
NOTES TO CONSOLIDATED CARVE OUT FINANCIAL STATEMENTS (CONTINUED)
SCO has incurred losses from operations of approximately $57.0 million during
the year ended September 30, 2000 and revenues have declined from $223.6 million
for the year ended September 30, 1999 to $148.9 million for the year ended
September 30, 2000. SCO has recently announced cost reduction plans (see Note
12) in order to reduce operating expenses to levels consistent with current
revenues and is investigating financing alternatives. There can be no assurance
that such cost reduction measures will be adequate or that such financing will
be available, if at all, on terms acceptable to SCO.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the results of the overseas
incorporated entities which form part of the Groups. These entities are wholly
owned subsidiaries of the SCO server and professional services groups. All
significant intradivision transactions and balances have been eliminated.
USE OF ESTIMATES
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, the
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. Such estimates include the allowances for bad debt, product
returns and certain accrued expenses and liabilities, and the valuation
allowance for deferred tax assets. Actual results could differ from those
estimates.
CASH EQUIVALENTS AND INVESTMENTS
Historically, SCO has managed cash and cash equivalents on a centralized
basis. Cash receipts associated with the Groups' business except for amounts
arising from specific research and development funding contracts have been
transferred to SCO on a daily basis and SCO has funded the Groups'
disbursements.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and, except for assets recorded
under capital lease and leasehold improvements, are depreciated using the
straight-line method over the estimated useful lives of the assets, ranging from
three to five years. Leasehold improvements and assets recorded under
capitalized leases are amortized using the straight-line method over the lesser
of the remaining term of the lease or the estimated economic life of the asset,
ranging from one to ten years.
PURCHASED SOFTWARE AND TECHNOLOGY LICENSES
Purchased software consists of core intellectual property rights owned by
SCO but which relate to the Groups' products. Technology licenses represent
payments for the rights to use and integrate third party technology into the
Groups' product offerings. Amounts capitalized are amortized on a straight-line
basis over the estimated product life, ranging from three to ten years, or on
the ratio of current revenues to total projected product revenues, whichever
results in greater amortization .
ACCOUNTING FOR LONG-LIVED ASSETS
The Groups review property and equipment and purchased software and
technology licenses for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability is measured by comparison of its carrying amount to estimated
F-40
<PAGE> 246
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
NOTES TO CONSOLIDATED CARVE OUT FINANCIAL STATEMENTS (CONTINUED)
future net cash flows the assets are expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying value of the asset exceeds the projected discounted
future operating cash flows.
SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standards ("SFAS") No. 86 provides for
the capitalization of certain software development costs once technological
feasibility is established. Capitalized costs are then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater. Through June
30, 2000, Management believes its process for developing software was
essentially completed concurrent with the establishment of technological
feasibility, and accordingly, no software development costs have been
capitalized to date.
REVENUE RECOGNITION
The Groups' revenue is derived primarily from two sources, across many
industries: (i) products license revenue, derived primarily from product sales
to resellers and end users, including large scale enterprises and royalty
revenue, derived primarily from initial license fees and ongoing royalties from
product sales by source code OEMs; and (ii) service and support revenue, derived
primarily from providing software updates, support and education and consulting
services to end users.
The Groups adopted the provisions of Statement of Position 97-2, or SOP
97-2, Software Revenue Recognition, as amended by Statement of Position 98-4,
Deferral of the Effective Date of Certain Provisions of SOP 97-2, effective
October 1, 1998. SOP 97-2 supersedes Statement of Position 91-1, Software
Revenue Recognition, and delineates the accounting for software product and
maintenance revenue. Under SOP 97-2, the Groups recognize product revenue upon
shipment if a signed contract exists, the fee is fixed and determinable,
collection of resulting receivables is probable and product returns are
reasonably estimable, except for sales to distributors, which are recognized
upon sale by the distributor to resellers or end users. Estimated product
returns are recorded upon recognition of revenue from customers having rights of
return, including exchange rights for unsold products and product upgrades. In
1998, the Groups' revenue recognition policy was the same as set forth above.
The Groups have sold Unixware products separately and as a result for
contracts involving the sale of Unixware which contain multiple obligations
(e.g. deliverable and undeliverable products, maintenance and other services),
the Groups allocate revenue to each component of the contract based on objective
evidence of its fair value, which is specific to the Groups. The fair value of
each element is based on the price sold separately. The Groups recognize revenue
allocated to undelivered products when the criteria for product revenue set
forth above are met.
The Groups recognize revenue from maintenance fees and fees for ongoing
customer support and product updates ratably over the period of the maintenance
contract. Payments for maintenance fees and support contracts are generally made
in advance and are non-refundable. For revenue allocated to education and
consulting services or derived from the separate sale of such services, the
Groups recognize revenue as the related services are performed. In 1998, the
revenue recognition policy for maintenance, education and consulting services
was the same as set forth above.
The Groups recognize product revenue from royalty payments upon receipt of
quarterly royalty reports from OEMs related to their product sales.
The Groups perform ongoing credit evaluations of its customers' financial
condition and does not require collateral. The Groups maintain allowances for
potential credit losses and such losses have been within management's
expectations.
F-41
<PAGE> 247
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
NOTES TO CONSOLIDATED CARVE OUT FINANCIAL STATEMENTS (CONTINUED)
COOPERATIVE ADVERTISING
The Groups expense advertising costs as incurred. The Groups reimburse
certain qualified customers for a portion of the advertising costs related to
their promotion of the Groups' products. The Groups' maximum liability for
reimbursement is accrued at the time revenue is recognized as a percentage of
the qualified customer's net revenue derived from Groups' products. For the
years ended September 30, 1998, 1999 and 2000, cooperative advertising expense
totaled approximately $9.2 million, $10.5 million and $7.8 million,
respectively.
INCOME TAXES
The Groups' operating results historically have been included in SCO's
consolidated United States Federal and state income tax returns and in tax
returns of certain SCO foreign subsidiaries. The provision for income taxes in
the Groups' consolidated financial statements has been determined on a United
States consolidated return basis. The Groups record income taxes using an asset
and liability approach that results in the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been recognized in the Groups' consolidated financial statements or tax returns.
In estimating future tax consequences, all expected future events other than
enactment of changes in tax laws are considered. When necessary, a valuation
allowance is recorded to reduce tax assets to an amount whose realization is
more likely than not.
COMPREHENSIVE INCOME
In the first quarter of fiscal 1999, the Groups adopted SFAS No. 130,
Reporting Comprehensive Income. Under SFAS No. 130 the Groups are required to
report comprehensive income, which includes the Groups' net income, as well as
changes in divisional equity from other sources. In the Groups' case, the only
change in equity included in comprehensive income is the foreign currency
cumulative translation adjustment. The adoption of SFAS 130 had no net impact on
the Groups' results of operations, balance sheet or divisional deficit.
SEGMENT INFORMATION
In 1999, the Groups adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. Under the new
standard the Groups are required to use the "management" approach to reporting
their segments. The management approach designates the internal organization
used by management for making operating decisions and assessing performance as
the source of the Groups' segments. The adoption of SFAS No. 131 had no impact
on the Groups' results of operations, balance sheet or divisional deficit.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. In June 1999, the FASB issued SFAS No. 137,
Accounting for Derivative Instruments -- Deferral of the Effective Date of SFAS
Statement No. 133 and in June 2000, the FASB issued SFAS No. 138, Accounting for
Certain Derivative Instruments -- an amendment of FAS 133, Accounting for
Derivative instruments and Hedging Activities. As a result of SFAS No. 137,
SFAS No. 133 and SFAS No. 138 will be effective for all fiscal quarters of all
fiscal years beginning after
F-42
<PAGE> 248
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
NOTES TO CONSOLIDATED CARVE OUT FINANCIAL STATEMENTS (CONTINUED)
June 15, 2000. The Groups do not expect that the adoption of these standards
will have a material impact on their financial position and results of
operations.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation -- an interpretation of APB
Opinion No. 25. FIN 44 clarifies the application of Opinion 25 for (a) the
definition of employee for purposes of applying Opinion 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The Groups adopted FIN 44
effective July 1, 2000. The adoption of the provisions of FIN 44 did not have a
material effect on the Groups' financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Groups
must adopt SAB 101 in the fourth quarter of fiscal 2001. We are in the process
of evaluating the Securities and Exchange Commission's interpretation of SAB 101
but believe that the implementation of SAB 101 will not have a material effect
on the financial position or results of operations of the Groups.
STOCK-BASED COMPENSATION
The Groups account for stock-based compensation plans using the intrinsic
value method. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Groups' foreign subsidiaries is the local
foreign currency. All assets and liabilities denominated in foreign currencies
are translated into U.S. dollars at the exchange rates prevailing on the balance
sheet date. Revenues, costs and expenses are translated at average rates of
exchange prevailing during the period. Translation adjustments resulting from
translation of interdivision accounts are accumulated as a separate component of
divisional deficit. Gains and losses resulting from foreign currency
transactions are included in the consolidated statements of operations and have
not been significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Groups' financial instruments, including
cash and cash equivalents, accrued payroll and other accrued liabilities,
approximate fair value because of their short term maturities.
(3) CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1999 2000
------ -----
(IN THOUSANDS)
<S> <C> <C>
Bank demand deposits........................................ $2,223 $511
====== ====
</TABLE>
F-43
<PAGE> 249
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
NOTES TO CONSOLIDATED CARVE OUT FINANCIAL STATEMENTS (CONTINUED)
(4) RECEIVABLES
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1999 2000
------- -------
(IN THOUSANDS)
<S> <C> <C>
Trade accounts receivable................................... $16,060 $15,200
Less allowance for returns and doubtful accounts............ (2,453) (1,599)
------- -------
$13,607 $13,601
======= =======
</TABLE>
The Groups generate a significant portion of revenues through distributors
of computer software in North America, Europe, South America and the Pacific
Rim. The Groups maintain reserves for potential credit losses. No one customer's
balance exceeded 10% of trade receivables as at September 30, 1999 or accounted
for greater than 10% of the Groups' net revenues for each of the years ended
September 30, 1998, 1999 and 2000. For fiscal 2000, one customer's balance
accounted for 27% of trade receivables.
(5) OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1999 2000
------- -------
(IN THOUSANDS)
<S> <C> <C>
Other receivable............................................ $ 935 $ 660
Prepaid expenses............................................ 1,120 750
Other current assets........................................ 523 393
Inventory................................................... 325 120
------- -------
$ 2,903 $ 1,923
======= =======
</TABLE>
(6) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Computer and office equipment............................... $ 36,003 $ 17,036
Furniture and fixtures...................................... 7,490 4,594
Leasehold improvements...................................... 7,263 6,813
-------- --------
50,756 28,443
Less accumulated depreciation and amortization.............. (40,196) (21,350)
-------- --------
$ 10,560 $ 7,093
======== ========
</TABLE>
Depreciation and amortization expense of property and equipment was $6.0
million, $5.5 million and $4.4 million during the years ended September 30,
1998, 1999, and 2000 respectively.
(7) PURCHASED SOFTWARE AND TECHNOLOGY LICENSES
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Purchased software and technology licenses, at cost......... $ 32,112 $ 28,022
Less accumulated amortization............................... (22,422) (22,740)
-------- --------
$ 9,690 $ 5,282
======== ========
</TABLE>
F-44
<PAGE> 250
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
NOTES TO CONSOLIDATED CARVE OUT FINANCIAL STATEMENTS (CONTINUED)
Amortization expense for this purchased software and technology was $6.1
million, $4.7 million and $3.7 million during the years ended September 30,
1998, 1999 and 2000 respectively.
(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1999 2000
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued wages, commissions, bonuses......................... $11,644 $ 5,490
Accrued advertising......................................... 6,015 3,130
Accrued fringe benefits..................................... 1,669 754
Capital lease obligations................................... 2,743 1,576
Other accrued expenses...................................... 7,771 5,873
------- -------
$29,842 $16,823
======= =======
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
SCO has entered into a number of lease agreements for the rental of office
premises used by the Groups. Rentals and other expenses in respect of these
leases are allocated to the Groups based on relative space occupied.
The Groups also are committed to make payments under noncancelable
operating leases (with initial or remaining lease terms in excess of one year)
and future minimum capital lease payments as of September 30, 2000 which were as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING SEPTEMBER 30: LEASES LEASES
------------------------- ------- ---------
(IN THOUSANDS)
<S> <C> <C>
2001........................................................ $1,679 $ 5,829
2002........................................................ 436 5,034
2003........................................................ 2 3,936
2004........................................................ -- 3,829
2005........................................................ -- 3,132
Later years, through 2020................................... -- 8,808
------ -------
Total minimum lease payments................................ 2,117 $30,568
=======
Less amount representing interest........................... 64
------
Present value of net minimum capital lease payments......... 2,053
Less current installments of obligations under capital
leases.................................................... 1,576
------
Obligations under capital leases, excluding current
installments.............................................. $ 477
======
</TABLE>
The cost of assets recorded under capital leases was $12.1 million and $7.2
million at September 30, 1999 and 2000, respectively. Accumulated amortization
on those dates was $7.3 million and $5.4 million, respectively.
Rent expense amounted to approximately $7.0 million and $7.0 million, and
$6.6 million in the years ended September 30, 1998, 1999 and 2000 respectively.
Included within SCO's operating lease commitments recharged to the Groups
are facilities leased from Encinal Partners, a partnership which includes both
SCO's President and Chief Executive Officer
F-45
<PAGE> 251
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
NOTES TO CONSOLIDATED CARVE OUT FINANCIAL STATEMENTS (CONTINUED)
and a principal shareholder. SCO's Board of Directors has reviewed and approved
the lease agreements and determined that the lease agreements entered into by
SCO are equivalent to agreements that would be negotiated with independent third
parties on an "arms-length" basis. The remaining lease term of these facilities
is between one and six years. Rent expense for these facilities amounted to
approximately $0.4 million in each of the years ended September 30, 1998, 1999,
and 2000.
CONTINGENCIES
In December 1995, SCO acquired from Novell certain assets related to
UnixWare, one of the products currently sold by the Groups. As consideration,
SCO may be required to make cash payments periodically to Novell provided
certain unit volumes of Unixware distribution are achieved, and SCO will be
reimbursed by the Groups. To date, distribution unit volume of Unixware has not
reached levels which have required SCO to make cash payments to Novell. Such
payment obligation will terminate at the end of calendar year 2002.
From time to time, SCO and the Groups may experience claims on behalf of
the Groups in the ordinary course of business, including among others employee
legal actions and alleged trademark infringements. Due to the nature of these
matters, it is not possible to either determine the range of loss that may
result from them or their ultimate resolution.
(10) EMPLOYEE BENEFITS
SAVINGS PLAN
SCO maintains an employee savings plan, which qualifies under section
401(k) of the Internal Revenue Code. Under the plan, participating U.S.
employees may defer up to 20% of their pre-tax salary, up to certain statutory
limits. SCO matches 50% of employee contributions up to the lower of 6% of the
employee's annual salary or $3,000. For the years ended September 30, 1998, 1999
and 2000, the Groups' total contributions towards the 401(k) plan amounted to
$0.8 million, $0.9 million and $0.8 million, respectively.
1993 EMPLOYEE STOCK PURCHASE PLAN
SCO sponsors an Employee Stock Purchase Plan "ESPP" for all eligible
employees which is administered by the Board of Directors. Under the ESPP,
shares of SCO's ESPP stock may be purchased at six-month intervals at 85% of the
fair market value on the first or last day of each six-month period whichever is
lower. Employees may purchase shares through payroll deductions of up to 10% of
gross compensation during an offering period. During the years ended September
30, 1998, 1999 and 2000, employees of the Groups purchased 187,324, 324,482 and
251,477 shares at an average per share price of $3.07, $3.52, and $4.31,
respectively.
1994 INCENTIVE STOCK OPTION PLAN
As of September 30, 2000, SCO had authorized 20,013,665 shares of Common
Stock for issuance under the 1994 Incentive Stock Option Plan (the "Option
Plan"). SCO's Board of Directors administers the Option Plan and determines the
terms of the options granted under the Option Plan, including the exercise
price, number of shares subject to each option and the exercisability thereof.
In addition, the stock option committee of SCO's Board of Directors is
authorized to grant up to 20,000 shares to an individual employee or consultant
under the terms of the Option Plan.
The exercise price of all incentive options granted under the Option Plan
must be at least equal to the fair market value of SCO stock. Options granted
under the Option Plan prior to January 31, 1996
F-46
<PAGE> 252
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
NOTES TO CONSOLIDATED CARVE OUT FINANCIAL STATEMENTS (CONTINUED)
generally become exercisable over a five year period. Effective January 31,
1996, the vesting period for subsequent grants was changed to four years. The
term of each option is ten years.
1993 DIRECTOR OPTION PLAN
SCO's 1993 Director Option Plan (the "Director Plan") provides for the
granting of nonstatutory stock options to non-employee directors of SCO and is
administered by the Board of Directors. In February of 2000, the number of
shares available for issuance under the Director Plan was increased by 250,000
shares from 1,150,000 shares to 1,400,000 shares.
A summary of the status of the options held by the Groups' employees under
SCO's stock option plans as of September 30, 1998, 1999, and 2000 and changes
during the periods then ended is presented below:
<TABLE>
<CAPTION>
1998 1999 2000
------------------ ------------------ ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTION AND DIRECTOR PLANS SHARES PRICE SHARES PRICE SHARES PRICE
------------------------- ------ --------- ------ --------- ------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year... 4,387 $5.25 4,362 $4.69 4,809 $ 4.94
Granted............................ 1,033 3.94 1,682 5.53 2,190 11.51
Exercised.......................... (58) 2.80 (679) 4.47 (668) 4.75
Cancelled.......................... (1,000) 5.52 (556) 5.27 (1,982) 8.26
------ ----- ------
Outstanding at end of year......... 4,362 4.69 4,809 4.94 4,349 7.41
====== ===== ======
Options exercisable at year-end.... 1,542 $ 4.97
Weighted-average fair value of
options granted during the
year............................. $2.19 $3.61 $ 6.18
===== ===== ======
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ ------------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AT 9/30/00 REMAINING EXERCISE AT 9/30/00 EXERCISE
EXERCISE PRICE (000) CONTRACTUAL LIFE PRICE (000) PRICE
-------------- ----------- ---------------- ---------------- ----------- ----------------
<C> <C> <S> <C> <C> <C>
$ 1.25 - 1.50 24 1.1 years $ 1.82 24 $ 1.82
2.56 - 3.75 281 8.4 3.59 163 3.59
3.97 - 5.94 2,498 7.3 4.47 1,090 4.68
6.00 - 9.00 552 7.2 6.55 241 6.68
9.06 - 13.19 95 8.7 10.29 12 9.56
14.94 - 20.75 888 9.2 16.97 12 17.09
25.31 - 32.00 11 9.3 29.20 -- --
----- -----
$ 1.25 - 32.00 4,349 7.7 years $ 7.41 1,542 $ 4.97
===== =====
</TABLE>
PRO FORMA FAIR VALUE ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation, requires pro forma
information regarding net income and earnings per share be determined as if the
Company had accounted for its employee stock options and other stock-based
compensation granted subsequent to September 30, 1996 under the fair value
method of that Statement. The fair value of the options granted to the employees
of the Groups under SCO's Incentive Option Plan and the Director Option Plan was
estimated at the date of grant using
F-47
<PAGE> 253
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
NOTES TO CONSOLIDATED CARVE OUT FINANCIAL STATEMENTS (CONTINUED)
a Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended September 30, 1998, 1999 and 2000: risk-free
interest rate of 5.45% for 1998, 5.27% for 1999 and 6.45% for 2000; dividend
yield of 0%; volatility factor of the expected market price of SCO's common
stock of 65% for the year 1998 and 1999 and 75% for 2000; an average turnover
rate of 15% and a four year and five year expected life for options granted to
employees and executives of the Groups, respectively.
The fair value for the Employee Stock Purchase Plan rights were also
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions for the year ended September 30, 1998, 1999 and 2000:
risk-free interest rates of 5.31% 4.91% and 5.07% respectively; dividend yield
of 0%; volatility factors of 65% for the years ended September 30, 1998 and 1999
and 75% for the year ended September 30, 2000; and six month expected life. The
weighted average fair value of the ESPP rights granted during the year ended
September 30, 1998, 1999 and 2000 was $1.27, $1.31 and $2.80, respectively.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------------------
1998 1999 2000
------- ------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE PRICE)
<S> <C> <C> <C>
Pro forma net loss.................................... $59,185 $49,298 $74,742
======= ======= =======
</TABLE>
During the initial phase-in period, the effects of applying SFAS No. 123
for recognizing compensation expense may not be representative of the effects on
the reported net income or loss for future years because the options granted by
SCO vest over several years and additional awards may be made in the future.
(11) INCOME TAXES
The Groups calculate their income taxes on a United States consolidated
return basis.
Income taxes differ from the amount computed by applying the statutory
federal income tax rate to income (loss) before income taxes for the year ended
September 30, 1998, 1999 and 2000, as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------
1998 1999 2000
------ ------ -------------
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate.................... (34)% (34)% (34)%
Losses and expenses without tax benefit.................... 34% 34% 34%
---- ---- ----
0% 0% 0%
==== ==== ====
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of September
30, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
1999 2000
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals and other.......................................... $ 3,840 $ 2,880
Net operating loss carryforwards............................ 43,820 63,987
Tax credit carryforwards.................................... 4,712 4,843
-------- --------
Total gross deferred tax assets............................. 52,372 71,710
Less valuation allowance.................................... (52,372) (71,710)
-------- --------
Net deferred tax assets..................................... $ -- $ --
======== ========
</TABLE>
F-48
<PAGE> 254
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
NOTES TO CONSOLIDATED CARVE OUT FINANCIAL STATEMENTS (CONTINUED)
The Group's management believes the uncertainty regarding the timing of the
realization of net deferred tax assets requires a full valuation allowance.
At September 30, 2000, the Groups have net operating loss carryforwards of
approximately $102.0 million which expire in fiscal years 2018 through 2020, and
research credit carryforwards of approximately $4.0 million which expire 2018.
(12) RESTRUCTURING CHARGE
Non-recurring charges of $9.9 million were incurred in fiscal year 2000
that related to worldwide restructurings undertaken in the second and fourth
quarters of fiscal 2000, representing 13% of total net revenues for the fiscal
year. The restructurings included a reduction in personnel of 227 employees,
write-off of certain acquired technologies, write-off of certain fixed assets,
and elimination of non-essential facilities. Of the $9.9 million, $8.5 million
related to cash expenditures and $1.4 million related to non-cash charges. The
restructuring charge related to cash expenditures included $6.6 million for
severance costs and $1.9 million for facilities costs. The non-cash charges
related to disposals of fixed assets and write-offs of technology . The disposal
of fixed assets is comprised of computer equipment that will no longer be in use
due to the reduction of personnel. The technology write-offs relates to
technology that will not be used in future product development due to the
reduction in development personnel. The Company has restructured its business
operations into three independent divisions, each with a separate management
team and dedicated development, marketing and sales organizations -- the Server
Division, the Tarantella Division and the Professional Services Division. As a
result of the restructuring plans various regional offices in the United States,
United Kingdom, Latin America and the Asia Pacific region will be eliminated.
The United States regional facilities and the Watford, United Kingdom leases
have been or will be vacated and restored, and subsequently sub-let or
terminated by the second quarter of 2001. The remaining international offices
are expected to be vacated immediately. Of the facilities closed, the majority
relates to the Server Division while a minor portion relates to the Corporate
Division which is comprised primarily of the finance and general and
administrative functions of the Company's United Kingdom subsidiary. The Company
anticipates that the majority of the payments will be made by the end of fiscal
2001. The majority of the reduction in force was in the Server Software
Division. As of September 30, 2000 a total of 132 positions have been
eliminated.
The accrued restructuring charges are summarized as follows:
<TABLE>
<CAPTION>
REDUCTION DISPOSAL OF
IN FORCE FACILITIES TECHNOLOGY FIXED ASSETS TOTAL
--------- ---------- ---------- ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Restructuring charge accrued...... $ 6,630 $1,856 $ 667 $ 729 $ 9,882
Payments/write-offs............... (3,702) (94) (667) (256) (4,719)
------- ------ ----- ----- -------
Accrual at September 30, 2000..... $ 2,928 $1,762 $ -- $ 473 $ 5,163
======= ====== ===== ===== =======
</TABLE>
(13) INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
The Groups have adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Groups' management review the
performance of each group -- the server and professional services groups. Each
segment markets the Group's software products and services to companies in a
number of industries including telecommunications, manufacturing and government
bodies. These products and services are either sold directly by each segment's
sales force or are sold to end users through distributors or OEMs.
F-49
<PAGE> 255
THE SCO SERVER AND PROFESSIONAL SERVICES GROUPS
NOTES TO CONSOLIDATED CARVE OUT FINANCIAL STATEMENTS (CONTINUED)
The following table presents information about reportable segments (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
Server division.................................... $ 51,682 $ 73,799 $ 70,309
Professional Services division..................... 5,496 3,130 4,199
-------- -------- --------
Total net revenues......................... $ 57,178 $ 76,929 $ 74,508
======== ======== ========
Gross margin:
Server division.................................... $ 27,748 $ 47,280 $ 44,161
Professional Services division..................... 624 (2,532) (1,899)
-------- -------- --------
Total gross margin......................... $ 28,372 $ 44,748 $ 42,262
======== ======== ========
Net loss:
Server division.................................... $(51,756) $(36,457) $(55,563)
Professional Services division..................... (505) (3,725) (4,262)
-------- -------- --------
Total net loss............................. $(52,261) $(40,182) $(59,825)
======== ======== ========
</TABLE>
The following table presents revenue and long-lived asset information by
geographic area (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Net Revenues:
Americas.............................................. $33,377 $40,122 $36,909
EMEIA(1).............................................. 19,442 31,548 30,856
Asia Pacific.......................................... 4,359 5,259 6,743
------- ------- -------
Total net revenues.................................... $57,178 $76,929 $74,508
======= ======= =======
Long-lived Assets:
Americas.............................................. $21,555 $18,213 $10,618
EMEIA(1).............................................. 3,834 4,175 2,222
Asia Pacific.......................................... 200 154 241
------- ------- -------
Total long-lived assets............................... $25,589 $22,542 $13,081
======= ======= =======
</TABLE>
---------------
(1) Europe, Middle East, India and Africa
F-50
<PAGE> 256
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EBIZ Enterprises, Inc.:
We have audited the accompanying balance sheets of EBIZ Enterprises, Inc.,
a Nevada corporation, (the "Company") as of June 30, 2000 and 1999, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EBIZ Enterprises, Inc. as of
June 30, 2000 and 1999, and the results of its operations and its cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company incurred net losses and had negative cash
flows from operations in 2000 and 1999, has an accumulated deficit, and does not
have sufficient capital to support its operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
accompanying financial statements do not include any adjustments to
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
ARTHUR ANDERSEN LLP
Phoenix, Arizona
October 5, 2000
F-51
<PAGE> 257
EBIZ ENTERPRISES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
2000 1999
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 50,997 $ 76,366
Accounts receivable, net of allowance for doubtful
accounts of $75,988 and $40,000 in 2000 and 1999,
respectively........................................... 585,846 1,669,816
Inventory, net............................................ 747,545 1,568,148
Prepaid expenses and other current assets................. 28,158 128,184
------------ -----------
Total current assets.............................. 1,412,546 3,442,514
Property and equipment, net................................. 532,896 474,778
Deferred loan fees, net..................................... 131,079 --
Restricted cash............................................. 4,504,164 --
Goodwill.................................................... 629,162 --
------------ -----------
$ 7,209,847 $ 3,917,292
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,880,822 $ 1,423,178
Accrued expenses.......................................... 1,367,135 468,549
Line of credit............................................ 250,000 350,000
Notes payable............................................. 71,928 610,000
------------ -----------
Total current liabilities......................... 3,569,885 2,851,727
Convertible debenture, net of discount...................... 6,140,209 --
------------ -----------
Total liabilities................................. 9,710,094 2,851,727
------------ -----------
Commitments and contingencies
Redeemable common stock..................................... 1,200,000 --
------------ -----------
Stockholders' equity (deficit):
Convertible preferred stock; $.001 par value; 5,000,000
shares authorized; 7,590 and 10,895 shares issued and
outstanding at June 30, 2000 and 1999, respectively;
liquidation value $100 per share....................... 366,737 868,599
Common stock; $.001 par value; 70,000,000 shares
authorized; 8,497,566 and 7,261,715 shares issued and
outstanding at June 30, 2000 and 1999, respectively.... 8,498 7,262
Additional paid-in capital................................ 6,015,132 2,315,832
Accumulated deficit....................................... (10,090,614) (2,126,128)
------------ -----------
Total stockholders' equity (deficit).............. (3,700,247) 1,065,565
------------ -----------
$ 7,209,847 $ 3,917,292
============ ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-52
<PAGE> 258
EBIZ ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net revenue................................................. $11,900,667 $15,290,202
Cost of sales............................................... 10,961,638 14,358,772
Restructuring charge -- inventory........................... 125,430 --
----------- -----------
Gross profit...................................... 813,599 931,430
Selling, general and administrative expense................. 7,312,259 2,425,895
Depreciation and amortization............................... 265,000 68,483
Provision for doubtful accounts............................. 274,074 86,520
Restructuring charge........................................ 26,500 --
----------- -----------
Loss from operations........................................ (7,064,234) (1,649,468)
Other income (expense):
Interest expense.......................................... (1,031,597) (119,291)
Interest & other income................................... 235,434 2,538
Other..................................................... -- (110,903)
----------- -----------
Net loss.......................................... $(7,860,397) $(1,877,124)
=========== ===========
Dividends on Preferred Stock................................ $ (104,089) $ (77,057)
=========== ===========
Net loss attributable to common stockholders................ $(7,964,486) $(1,954,181)
=========== ===========
Net loss per common share, basic and diluted................ $ (1.04) $ (0.29)
=========== ===========
Weighted average common shares, basic and diluted........... 7,685,232 6,821,083
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 259
EBIZ ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------ ------------------ PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------ --------- --------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998............ -- $ -- 6,256,450 $6,256 $ 858,712 $ (171,947) $ 693,021
Sale of common stock, net of
offering costs of $80,000..... -- -- 455,781 457 900,845 -- 901,302
Sale of preferred stock, net of
offering costs of $220,901.... 10,895 868,599 -- -- -- -- 868,599
Common stock issued for services
and inventory................. -- -- 158,528 158 218,593 -- 218,751
Common stock issued for warrants
exercised..................... -- -- 390,956 391 293,057 -- 293,448
Deemed dividend on preferred
stock for beneficial
conversion feature............ -- -- -- -- 44,625 (44,625) --
Accrued dividends on preferred
stock......................... -- -- -- -- -- (32,432) (32,432)
Net loss........................ -- -- -- -- -- (1,877,124) (1,877,124)
------ --------- --------- ------ ---------- ------------ -----------
Balance, June 30, 1999............ 10,895 868,599 7,261,715 7,262 2,315,832 (2,126,128) 1,065,565
Exercise of stock options....... -- -- 101,500 102 101,398 -- 101,500
Warrants issued for consulting
services...................... -- -- -- -- 199,185 -- 199,185
Warrants issued to debenture
holder........................ -- -- -- -- 796,219 -- 796,219
Stock issued for services....... -- -- 30,822 30 98,969 -- 98,999
Stock issuance costs............ -- (171,362) -- -- (3,370) -- (174,732)
Accrued dividends on preferred
stock......................... -- -- -- -- -- (104,089) (104,089)
Preferred stock conversion...... (3,305) (330,500) 55,086 55 330,445 -- --
Conversion of debt and
interest...................... -- -- 264,028 265 577,238 -- 577,503
Stock issued for business
acquisition................... -- -- 200,000 200 699,800 -- 700,000
Private placement of common
stock......................... -- -- 584,415 584 899,416 -- 900,000
Net loss........................ -- -- -- -- -- (7,860,397) (7,860,397)
------ --------- --------- ------ ---------- ------------ -----------
Balance, June 30, 2000............ 7,590 $ 366,737 8,497,566 $8,498 $6,015,132 $(10,090,614) $(3,700,247)
====== ========= ========= ====== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 260
EBIZ ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(7,860,397) $(1,877,124)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 265,000 68,483
Stock exchanged for services, assets and interest...... 1,349,000 80,599
Warrants issued for consulting services................ 199,185 --
Amortization of discounts and loan fees................ 330,940 --
Changes in assets and liabilities, net of effect of
business acquired:
Accounts receivable.................................. 1,083,970 (1,396,987)
Due from officers.................................... -- 3,432
Inventory............................................ 834,244 (1,122,551)
Prepaid expenses and other current assets............ 100,026 (32,919)
Accounts payable..................................... 457,644 898,054
Accrued expenses..................................... 794,495 436,117
----------- -----------
Net cash used in operating activities............. (2,445,893) (2,942,896)
----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment....................... (265,921) (472,738)
----------- -----------
Cash flows from financing activities:
Net (repayments) borrowings under line of credit.......... (100,000) 350,000
Borrowings under notes payable............................ 488,000 871,786
Principle repayments of notes payable..................... (1,026,072) (261,786)
Issuance of convertible debenture, net.................... 6,903,391 --
Increase in restricted cash, net.......................... (4,504,164) --
Sale of stock, net of expenses............................ 925,290 2,063,349
----------- -----------
Net cash provided by financing activities......... 2,686,445 3,023,349
----------- -----------
Net decrease in cash........................................ (25,369) (392,285)
Cash, beginning of year..................................... 76,366 468,651
----------- -----------
Cash, end of year........................................... $ 50,997 $ 76,366
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 251,635 $ 108,765
Supplemental disclosure of noncash financing activities:
Issuance of common stock for services, assets and
interest............................................... $ 1,362,641 $ 218,751
Dividends accrued on preferred stock...................... 104,089 32,432
Deemed dividend on preferred stock for beneficial
conversion feature..................................... -- 44,625
Issuance of warrants for consulting services.............. 199,185 --
Issuance of warrants to debenture holder.................. 796,219 --
Conversion of debt and related interest to common stock... 577,503 --
Issuance of common stock for business acquisition......... 700,000 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE> 261
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
NATURE OF THE BUSINESS
Ebiz Enterprises, Inc. ("Company") is a designer and operator of Internet
e-commerce Web sites and a developer and distributor of computer systems,
components and accessories for personal and business computing. During the
second quarter of fiscal 2000, management decided to concentrate the Company's
strategic focus on the Linux segment of the computer market, which was believed
to offer stronger growth and profitability opportunities than the market for low
price, conventional computer systems. The Company de-emphasized programs for the
mass merchant and brokerage channels of distribution and restructured its
organization to implement Linux development and marketing programs. The results
of operations for the second quarter included restructuring charges for
inventory, collection and other costs resulting from this change in strategic
direction.
On October 3, 2000, the Company completed the acquisition of LinuxMall.com,
Inc. ("LinuxMall") by the merger in LinuxMall into a newly formed wholly owned
subsidiary of the Company. Under the terms of the final transaction, the Company
issued approximately 7.4 million shares of its common stock in exchange for
cancellation of all outstanding common stock and certain preferred securities of
LinuxMall. An additional purchase price of approximately $4.8 million was
recorded for outstanding options and warrants assumed by the Company.
Approximately 2.5 million shares will be issued in January 2001 upon conversion
of the remaining outstanding preferred securities. The fair value of all shares
to be issued to acquire LinuxMall equals approximately $9.2 million or $1.25 per
share. All amendments to the agreement were not significant, except for a change
in the conversion ratio, which triggered a new change in the measurement date
for the purchase price determination. The transaction will be accounted for
under the purchase method of accounting in accordance with APB 16. The Company
is currently in the process of determining the purchase price allocation. The
preliminary allocation is assets acquired of $1.5 million, liabilities assumed
of $7.6 million and $11.2 million of intangible assets.
The Company was originally incorporated in Colorado in May 1984, as VDG
Capital Corporation. Following a reorganization, the Company's name was changed
to Vinculum Incorporated (Vinculum) in August 1994. In June 1998, the Company
acquired the operating assets and liabilities of Genras, Inc. (an Arizona
corporation) and reincorporated in Nevada as CPU Micromart, Inc. In May 1999,
the Company changed its name to Ebiz Enterprises, Inc.
MANAGEMENT PLANS
The Company has directed its primary strategic thrust towards the Linux
operating system segment of the market. Management believes that the demand for
Linux-based products and services represent a rapidly growing business
opportunity for the Company. The completion of the acquisition of LinuxMall was
a major step in the implementation of this strategy.
On August 7, 2000, the Company entered into an Agreement and Plan of Merger
with LinuxMall. The agreement was amended on October 3, 2000 and effective
October 5, 2000. Under the terms of the agreement, the Company acquired all of
the outstanding stock and assumed outstanding convertible debentures of
LinuxMall. The current Ebiz stockholders will own approximately 56% of the
resulting company which will retain the Ebiz Enterprises, Inc. name. The
agreement specifies the conditions for the closing of the merger which included
a fairness opinion evaluation by an independent investment banker. The agreement
identified the principal officers and certain persons to be appointed to the
Company's Board of Directors, which will be headquartered in Scottsdale,
Arizona, and defines the basic steps for combining the operations of the two
companies. The acquisition was effective October 5, 2000.
In addition to anticipated strategic synergies, management believes that
the business logic of the combination and the strength of the proposed business
plan will help attract new investor interest to help
F-56
<PAGE> 262
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
generate the funding required to implement the Company's strategies. The first
such investment was the $4.0 million equity purchase by Caldera Systems, Inc.
(Caldera) that was announced on September 19, 2000. The purchase price included
$3.0 million of cash and a business concept of certain fixed assets valued at
$1.0 million. Under the terms of this agreement, the Company will use the
proceeds to create and fund a new, wholly-owned subsidiary, partnerAxis Inc.,
which will receive the assets and personnel of an existing division of Caldera.
The new subsidiary will be a Web-based B2B entity providing knowledge exchange,
Linux product sales, advertising and a vehicle for facilitating Linux product
development that it believes will strengthen the Company's overall marketing
program. Caldera is based in Utah and is a provider of Linux e-business internet
solutions including its OpenLinux, NetWare for Linux, Linux technical training,
certification and support. Under the agreement, Caldera will have the right to
appoint a member to the Company's Board of Directors.
Management believes that additional funding will likely be available to
meet the Company's growth needs through 2001. In addition, management believes
that the holder of the $7.1 million convertible debenture that was placed in
August 1999 will expand its conversion to common stock and thus provide
additional working capital to the Company (see Note 7). Without additional
capital the Company may not be able to fully implement its business or operating
and development plans. No assurance can be given that any such financing, if
obtained, will be adequate to meet its ultimate capital needs. If adequate
capital cannot be obtained or obtained on satisfactory terms, operations could
be negatively impacted.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred losses and had
negative cash flows from operations in 2000 and 1999 and does not have
sufficient capital needed to support its operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern.
INDUSTRY ENVIRONMENT
Successful future operations are subject to certain risks and uncertainties
including, among others, actual and potential competition by entities with
larger customer bases, greater financial resources, longer operating histories,
greater name recognition and more established relationships in the industry than
the Company. The Company's future success will greatly depend on its ability to
timely and effectively address the rapid changes in the computer product
industry and customers' acceptance of the Linux system in general and the
Company's products and services in particular. As a result, certain of these
competitors may be able to develop and expand their network infrastructures more
quickly, and take advantage of acquisitions more readily than can the Company.
The Company's future operating results will depend substantially on the ability
of its officers and key employees to manage changing business conditions.
Further risks and uncertainties relate to technological advancements, the
regulatory environment and the ability of the Company to generate sufficient
revenue and obtain additional financing to fund current operating losses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, all highly liquid investments
with a maturity of three months or less at the time of purchase are considered
to be cash equivalents.
F-57
<PAGE> 263
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or net
realizable value. Reserves and writedowns are established against Company-owned
inventory for excess, slow-moving, and obsolete items and for items where the
estimated net realizable value is less than cost.
Inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
2000 1999
-------- ----------
<S> <C> <C>
Components.................................................. $578,649 $1,155,981
Work-in-process............................................. 8,008 44,947
Finished goods.............................................. 160,888 367,220
-------- ----------
$747,545 $1,568,148
======== ==========
</TABLE>
FURNITURE AND EQUIPMENT
Furniture and equipment consists primarily of computer equipment and office
furniture. Furniture and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets.
Furniture and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
USEFUL -------------------
LIFE 2000 1999
------- -------- --------
<S> <C> <C> <C>
Furniture, fixtures and office equipment........... 3 years $562,487 $295,566
Software........................................... 3 years 188,981 200,495
Leasehold improvements............................. 2 years 63,807 53,293
-------- --------
815,275 549,354
Less -- accumulated depreciation................... (282,379) (74,576)
-------- --------
$532,896 $474,778
======== ========
</TABLE>
GOODWILL
During March 2000, the Company recorded goodwill as part of the InfoMagic
acquisition (see Note 9). This is being amortized using the straight-line method
over three years and is net of $57,197 of accumulated amortization at June 30,
2000.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of long-lived assets
in accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. Under SFAS No. 121, long-lived assets and certain identifiable
intangible assets to be held and used in operations are reviewed for impairment
whenever events or circumstances indicate that the carrying amount of an asset
may not be fully recoverable. An impairment loss is recognized if the sum of the
expected long-term undiscounted cash flows is less than the carrying amount of
the long-lived assets being evaluated. In management's opinion, no such amounts
or changes in circumstances have occurred.
F-58
<PAGE> 264
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTS PAYABLE
Included in accounts payable is approximately $169,000 of bank overdraft at
June 30, 2000.
ACCRUED EXPENSES
Accrued expenses consist primarily of amounts accrued for employee
compensation, customer deposits, professional fees, interest and advertising.
REVENUE RECOGNITION
Sales revenue is recognized at the date of shipment to customers. Provision
is made for an estimate of doubtful accounts and is based on historical
experience. Revenue from separately priced service and extended warranty
programs is deferred and recognized over the respective service or extended
warranty period. System component and replacement costs are generally covered
under the third-party manufacturer's warranty. The Company had an allowance for
warranty repair costs of approximately $6,000 and $8,000 at June 30, 2000 and
1999, respectively, related to the sales of its M(2) system and Linux computers.
The Securities and Exchange Commission ("SEC") released Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", on
December 3, 1999. On June 26, 2000 the SEC staff announced that they are
delaying the required implementation date for SAB No. 101 with the issuance of
SAB No. 101B. The SAB provides additional guidance on the accounting for revenue
recognition, including both broad conceptual discussions as well as certain
industry-specific guidance. The new guidance concerning customer acceptance and
installation terms may have a significant impact on the timing of the Company's
revenue recognition. The Company does not anticipate any material impact from
the adoption of SAB No. 101 on its future results of operations and financial
position. The SEC guidance will be adopted in the fourth quarter of fiscal year
2001 by recording the effect of any prior revenue transaction affected as a
"cumulative effect of change in accounting principle" as of April 1, 2001.
ADVERTISING COSTS
Advertising costs are expensed as incurred and are included in sales and
marketing expenses in the accompanying statements of operations. Advertising
expense was approximately $1,970,000 and $100,000 for the years ended June 30,
2000 and 1999, respectively. As part of the CNET Agreement, the Company incurred
approximately $1,700,000 of integration and advertising fees to CNET in exchange
for a direct link from CNET's Web site to the Company's Web site.
RESTRUCTURING EXPENSE
In November 1999, the Company implemented a change in its strategic
business plan to concentrate its focus on the Linux market and to de-emphasize
the sales of low-priced Windows-based systems. Consequently, the Company
incurred a restructuring charge of $26,500 for asset revaluation and $125,430
for markdown of inventory that was directly related to the business being
de-emphasized. As of June 30, 2000, approximately $150,200 in charges have been
made against these reserves.
USE OF ESTIMATES
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
F-59
<PAGE> 265
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
LOSS PER SHARE
No outstanding options or warrants were assumed to be exercised for
purposes of calculating diluted earnings per share for the years ended June 30,
2000 and 1999, as their effect was anti-dilutive.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 required a change from the deferred
method of accounting for income taxes to the asset and liability method of
accounting for income taxes. Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by SFAS No. 105, Disclosure of
Information About Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk, consist primarily of
trade accounts receivable.
The Company does not require collateral upon delivery of its products or
services. The Company derives a significant portion of its total revenue from
relatively few customers. The Company's business is moving towards a more
diversified customer base. The percentage of total revenue of customers to whom
sales exceed 10% of total revenue for the years ended June 30 were as follows:
<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE
OUTSTANDING AT JUNE 30, SALES
----------------------- -----------
2000 1999 2000 1999
---------- ---------- ---- ----
<S> <C> <C> <C> <C>
Customer #1.................................... $ -- $441,000 14% 26%
Customer #2.................................... -- -- 2% 19
Customer #3.................................... -- 930,000 2% 15
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 2000 and 1999, the carrying value of cash, accounts receivable,
accounts payable and accrued expenses approximate fair values since they are
short-term in nature or payable upon demand. Notes payable approximate fair
value as they are short-term in nature or have stated interest rates based on
current market rates. It is not practical to estimate fair value of the notes
payable to related parties as the agreements are between related parties.
The Company estimates fair values of financial instruments by using
available market information. Considerable judgment is required in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
may not be indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions or valuation
methodologies could have a material effect on the estimate fair value amounts.
F-60
<PAGE> 266
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT
Effective July 1, 1999, the Company adopted SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, which established revised
standards for the reporting of financial and descriptive information about
operating segments in financial statements. The Company has determined that it
has one reportable operating segment. Accordingly, the Company's financial
statements present its one reportable segment.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, (as amended by SFAS No. 137 and SFAS No. 138), Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
The statement, as amended is effective for the Company's year ending June 30,
2000. The Company does not anticipate any material impact from the adoption of
SFAS No. 133, as amended, on its future results of operations and financial
position.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- An interpretation of APB Opinion No. 25 ("FIN 44")". FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
WEBSITE DEVELOPMENT COSTS
On March 16, 2000 the Emerging Issues Task Force released EITF 00-02
"Accounting for Website Development Costs" effective for website development
costs incurred for fiscal quarters beginning after June 30, 2000, earlier
application is acceptable. The Company adopted EITF 00-2 effective upon its
release. EITF 00-2 requires certain website development costs to be expensed and
others to be capitalized. The Company capitalized website development costs of
$12,000 and $68,000 and expensed $223,000 and $152,000 during the years ended
June 30, 2000 and 1999, respectively, in accordance with EITF 00-2. The Company
amortizes website development costs that have been capitalized over 3 years.
3. RELATED PARTY TRANSACTIONS
CONSULTING SERVICES
During fiscal year 1999, the Company contracted with a consulting company,
controlled by an outside director of the Company, to supply financial consulting
services related to accounting and financial systems. This agreement ended
February 1999 and, as of June 30, 1999, the Company had paid an aggregate of
$22,700 and issued 31,325 common shares of common stock for services rendered.
There were no transactions with this company during fiscal year 2000.
F-61
<PAGE> 267
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EXODUS GROUP, LLC
During 1999, certain of the Company's employees and officers purchased a
total of 65% of the available membership units in The Exodus Group, LLC, a
franchisee that purchases products from the Company. Sales to this customer were
approximately $67,000 and $36,000 for the years ended June 30, 2000 and 1999,
respectively.
4. INCOME TAXES
The Company has cumulative net operating losses as of June 30, 2000, in
excess of $12,400,000. The Company's ability to utilize its net operating losses
to offset future taxable income may be limited under the Internal Revenue Code
Section 382 change in ownership rules. The Company has established a valuation
reserve as it has not determined that it is more likely than not that the
deferred tax asset is realizable.
The components of the provision for (benefit from) income taxes consist of
the following:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Current income taxes:
Federal................................................... $ -- $ --
State..................................................... -- --
Deferred income taxes:
Federal................................................... -- --
Total provision for (benefit from).......................... $ -- $ --
Income taxes..............................................
----------- -----------
</TABLE>
The components of the deferred tax accounts as of June 30, 2000 and 1999,
consist of the following:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Current deferred tax assets (liabilities):
Reserves and other accruals............................... $ 32,809 $ 19,305
Valuation Allowance....................................... (32,809) (19,305)
Total current deferred tax assets (liabilities)... -- --
----------- -----------
Long-term deferred tax assets (liabilities):
Amortization of goodwill.................................. 9,152 --
Net operating loss carryforward........................... 4,960,000 1,400,000
Valuation allowance....................................... (4,969,152) (1,400,000)
----------- -----------
Total non-current deferred tax assets
(liabilities)................................... -- --
----------- -----------
Net deferred tax asset (liability).......................... -- --
=========== ===========
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective
tax rate for the years ended June 30 are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Statutory federal rate...................................... (34)% (34)%
State taxes, net of federal benefit......................... (6)% (6)%
Change in valuation allowance............................... 40% 40%
--- ---
Total............................................. --% --%
=== ===
</TABLE>
F-62
<PAGE> 268
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. BANK LINE OF CREDIT
The Company had borrowings under its line of credit of $350,000 as of June
30, 1999. During August 1999, the Company used proceeds from the $7.1 million
Debenture (see Note 7) to repay the outstanding balance on the line of credit.
In December 1999, the Company obtained a line of credit from a bank for
borrowings up to $250,000. Interest accrues at prime (9.50% at June 30, 2000)
plus 1.5% and is payable monthly. Principal is due at maturity. The line of
credit is guaranteed by the Company's two largest stockholders and is secured by
the Company's accounts receivable and inventory. The line was fully borrowed at
June 30, 2000. The weighted average interest rate on amounts outstanding was
10.6% during the year ended June 30, 2000.
6. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------
2000 1999
------- --------
<S> <C> <C>
Note payable to a stockholder, fixed interest amount, due on
demand, unsecured......................................... $71,928 $ --
Note payable to a stockholder, interest at 10%, due on
demand, unsecured. Paid July, 1999........................ -- 30,000
Note payable to a stockholder, interest at 10%, due on
demand, unsecured. Paid July, 1999........................ -- 30,000
Note payable to related party, interest at 10%, principal
and interest, due April 19, 2000, secured by the Company's
assets, convertible into shares of common stock at a rate
of $6.00 of note principal convert. Paid August, 1999..... -- 500,000
Note payable to an individual, interest at 10%, principal
and interest due September 25, 1999, secured by the
Company's assets. Paid August, 1999....................... 50,000
------- --------
$71,928 $610,000
======= ========
</TABLE>
In connection with the $500,000 note above, the Company issued warrants to
purchase 250,000 common shares, an exercise price substantially in excess of the
then fair market value. The fair value of each warrant as estimated using the
Black-Scholes option pricing model was not significant primarily because the
exercise price was substantially in excess of the then fair value of the common
stock. These warrants are exercisable at any time during the term of the
warrants and expire two years from the note repayment date.
7. CONVERTIBLE DEBENTURE
In August, 1999 the Company completed a private placement of a $7.1 million
convertible debt facility (the "Debenture"). In conjunction with the Debenture,
the Company issued warrants to acquire 245,000 shares of common stock at a
market-based exercise price as defined by the Debenture agreement. The warrants
are exercisable for the purchase of shares of common stock of 60,000 at $7.4723
per share, 60,000 at $8.6219 per share and 125,000 at $6.3227 per share. The
fair value of these warrants, as calculated by using the Black-Scholes pricing
model, was estimated to be approximately $796,000 using the following weighted
average assumptions: stock price of $7.625, risk free interest rate at 5.63%,
expected life of 2 years, a volatility factor of 80% and a dividend yield of 0%
and is recorded as a debt discount in the accompanying financial statements.
Additional issuance costs of approximately $197,000 were paid and
F-63
<PAGE> 269
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
recorded as deferred loan fees in the accompanying financial statements.
Discounts and deferred loan fees are amortized using the straight-line method
which approximates the effective interest method as additional interest expense
over the term of the loan.
The Company received an initial infusion of $2.1 million from the
Debenture, which was utilized to repay the Company's outstanding debt at June
30, 1999 and to provide working capital. The remaining $5.0 million was
deposited with a bank as collateral for the Debenture. In February 2000,
$500,000 of the cash collateral was released by the holder. The net cash
collateral is reflected as restricted cash in the accompanying financial
statements. The Debenture is convertible, at the holder's option, into shares of
the Company's common stock over an 18 month period at approximately $394,000 per
month. The Company's ability to reduce the cash collateral and to have these
amounts available for working capital is contingent upon the holder converting
the Debenture or the Company's ability to pay down the Debenture with cash from
other sources. If the holder, at its discretion, converts the Debenture, the
Company can draw approximately $.70 for each $1 of Debenture principal converted
to fund operations. The unconverted balance, if any, of the Debenture and the
unconverted accrued interest is due February 24, 2002.
The Debenture required that the related shares of the Company's common
stock be registered under the Securities Act of 1933 and the regulations of the
Securities and Exchange Commission ("SEC") before the holder could begin to
convert the Debenture to common stock. The necessary registration was initiated
by the Company in October 1999 and became effective in February 2000. The holder
began accruing rights to convert the Debenture upon its signing and as of June
30, 2000 the holder had accrued the rights to convert approximately $4,334,000
of the principal of the Debenture into shares of the Company's common stock.
Interest payable to the holder has been accrued monthly since September 1999
with approximately $150,000 paid in cash, as required by the terms of the
Debenture, prior to the completion of the registration process. During February
through June 2000, approximately $577,500 of the Debenture's principal and
accrued interest were converted to approximately 264,000 shares of common stock
and as of March 31, 2000 the remaining balance of accrued interest payable was
approximately $236,000.
8. STOCKHOLDERS' EQUITY
REVERSE STOCK SPLIT
Share amounts in the accompanying financial statements and notes to the
financial statements give retroactive effect to a one-for-ten reverse stock
split effective June 1998.
CAPITALIZATION
The Company amended its Articles of Incorporation in 1999 to authorize the
issuance of up to 70,000,000 shares of Class A common stock. In addition, the
Articles of Incorporation authorize the issuance of up to 5,000,000 shares of
preferred stock. The Board of Directors of the Company, at its sole discretion,
may establish par value, divide the shares of preferred stock into series, and
fix and determine the dividend rate, designations, preferences, privileges,
ratify powers, if any, and determine the restrictions and qualifications of the
shares of each series of preferred stock as established.
PREFERRED STOCK
The Board of Directors has designated 100,000 shares of Series A
Convertible Preferred Stock, (Preferred Stock) and during fiscal 1999, the
Company issued 10,895 shares of Preferred Stock, at $100 per share. Net proceeds
from the issuance of Preferred Stock was approximately $869,000. These shares
have a liquidation preference of $100 per share, and are entitled to a $10 per
share cumulative,
F-64
<PAGE> 270
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
annual dividend, accrued quarterly commencing April 1, 1999, and payable at the
discretion of the Company. The Company, at its discretion, may redeem the
Preferred Stock whenever the price of its common stock is equal to or greater
than $9.00 per share 20 out of 30 consecutive trading days. Each share of
Preferred Stock may be converted, at the option of the holder into common stock
at a conversion rate of one share for every $6.00 of principal converted. In
addition, the Preferred Stock automatically converts it to common stock whenever
the price of the Company's common stock is equal to or greater than $13.50 per
share 20 out of 30 consecutive trading days.
During March through May 2000, shareholders converted 3,305 shares of
Preferred Stock to 55,086 shares of the Company's common stock.
WARRANTS TO PURCHASE COMMON STOCK
The Company had outstanding warrants, issued in connection with financing
transactions, to purchase 86,644 shares of common stock through December 2000.
As of June 30, 2000 the following groups of warrants were outstanding:
<TABLE>
<CAPTION>
EXPIRATION DATE EXERCISE PRICE COMMON SHARES
--------------- -------------- -------------
<S> <C> <C>
December 10, 2000.................................. $2.10 -- $3.00 86,664
February 28, 2002.................................. 7.20 9,086
December 1, 2003................................... 3.00 -- 8.25 230,000
August 22, 2004.................................... 6.32 -- 8.62 250,000
</TABLE>
WARRANTS ISSUED FOR CONSULTING SERVICES
The Company records equity instruments that are issued for goods and
services at the fair value of the consideration received or the fair value of
the equity instrument issued, whichever is more readably determinable. The
Company utilizes the Black-Scholes model to determine fair value.
In October, 1999 the Company engaged a consulting firm to assist with its
strategic planning and corporate development programs. In conjunction with the
engagement, the Company issued warrants to purchase 220,000 shares of common
stock at a market-based exercise price. The warrants are exercisable for the
purchase of shares of common stock of 55,000 at $4.54 per share, 55,000 at $5.16
per share, 55,000 at $6.19 per share, and 55,000 at $8.25 per share. The fair
value of these warrants, as calculated by using the Black-Scholes pricing model,
was estimated to be approximately $199,000, using the following weighted average
assumptions: stock price of $4.13, risk free interest rate of 5.49%, expected
life of 4 years, a volatility factor of 80% and a dividend yield of 0%, and is
recorded as an expense in selling, general and administration expenses in the
accompanying financial statements. All warrants are 100% vested.
COMMON STOCK ISSUED FOR ADVERTISING
In January, 2000 the Company entered into a Premier Advertiser Agreement
with CNET, Inc. Under the agreement, the Company became a part of CNET's
"Premier Advertiser" program for CNET's Linux Center and received advertising
for, and links to, the Company's web site, TheLinuxStore.com. The term of the
agreement is through February 2001, subject to earlier termination. The Company
is required to purchase a minimum of $2 million of advertising under the
agreement during its stated term. Additionally, the Company paid an integration
fee equal to $1.2 million by issuing 240,000 shares of its common stock to CNET,
Inc., valued at the fair value of $5.00 per share on the date of the agreement.
This integration fee has been recorded as prepaid advertising and is being
amortized over the term of the agreement. The advertising on the CNET Linux
Center began in February, 2000. The 240,000 shares of common stock
F-65
<PAGE> 271
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
issued are redeemable at the discretion of the holder within one year of the
signing of the agreement which is reflected in the accompanying balance sheet as
redeemable common stock.
In May 2000, the Company negotiated the termination of the agreement. Under
the terms of the termination agreement, CNET is to release the Company from its
liabilities under the agreement upon the Company's registration of the 240,000
shares of common stock. Accordingly, the remaining balance of the integration
fee, $1,050,000, was expensed in the fourth quarter of fiscal 2000 and $501,000
was recorded as a liability for unpaid promotions pending release upon the
registration of the common stock.
PRIVATE PLACEMENT OF COMMON STOCK
On March 31, 2000, the Company entered into a Securities Purchase Agreement
with two partners (the "Purchasers") for the purchase of 2.5 million shares of
the Company's common stock at a price of $2.00 per share (subject to adjustment
as described in the Securities Purchase Agreement). At the closing, the
Purchaser paid $500,000 in cash and executed a promissory note, due May 5, 2000,
for $4.5 million. The due date of the note was later extended to June 23, 2000
and the price of the common stock was adjusted to $1.54. The Note was paid down
to $4.1 million and the remainder was forgiven. No further extensions of the
Note due date have been granted. During May and June 2000, the Purchaser paid an
additional $400,000 in cash for the additional stock issued. The $900,000 cash
received was recorded as common stock and additional paid-in capital.
STOCK OPTION PLAN
In November 1998, the Company adopted the CPU MicroMart 1998 Equity
Incentive Plan ("Plan"). The Plan will terminate 10 years after the effective
date. The Plan authorizes awards of incentive stock options to employees and
non-qualified stock options to officers, directors, employees, and consultants
of the Company. A total of 1,000,000 shares of common stock was reserved for
issuance under the Plan. The Plan is administered by a committee appointed by
the Board who have the exclusive authority to administer and interpret the Plan.
The committee has the power to, among other things, designate participants,
determine types of awards to be granted and the price, timing, terms and
duration of awards.
The Company accounts for its stock option plan under APB Opinion No. 25,
under which no compensation cost has been recognized in fiscal 2000 and 1999,
respectively.
A summary of the status of all the Company's stock options at June 30, 2000
and 1999 and changes during the years then ended is presented in the following
table and narrative below:
<TABLE>
<CAPTION>
2000 1999
--------------------------- ---------------------------
WEIGHTED AVERAGE EXERCISE WEIGHTED AVERAGE EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------------- -------- ---------------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.... 663,000 1.96 -- --
Granted........................... 533,000 2.77 663,000 1.96
Exercised......................... (101,500) 1.00 -- --
Canceled.......................... (347,500) 1.35 -- --
-------- -------
Outstanding at end of year.......... 747,000 $2.94 663,000 $1.96
======== ===== ======= =====
Exercisable at end of year.......... 169,940 $3.59 140,000 $1.28
======== ===== ======= =====
Weighted average fair value per
share of options granted.......... $1.93 $1.29
===== =====
</TABLE>
F-66
<PAGE> 272
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Options outstanding and exercisable by price range as of June 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.25........................... 416,000 9.09 $1.76 78,220 $1.32
$3.00-3.75...................... 298,000 9.33 3.63 61,000 3.69
$4.88-5.50...................... 33,000 8.58 4.93 30,720 4.89
------- -------
747,000 9.16 2.94 169,940 3.57
</TABLE>
The following pro forma disclosures of net loss are made assuming the
Company had accounted for the stock options pursuant to the provision of SFAS
No. 123, Accounting for Stock-Based Compensation.
<TABLE>
<CAPTION>
JUNE 30,
-----------------
2000 1999
------- -------
<S> <C> <C>
Net loss:
As reported............................................... $(7,964) $(1,954)
Pro forma................................................. (8,849) (2,098)
Loss per common and common share equivalent:
As reported -- basic...................................... (1.04) (.29)
As reported -- diluted.................................... (1.04) (.29)
Pro forma -- basic........................................ (1.15) (.31)
Pro forma -- diluted...................................... (1.15) (.31)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes options pricing model with the following weighted average
assumptions used for grants during fiscal 2000: risk-free interest rates of
6.48%, expected lives of five years; and a volatility factor of 80%. The
weighted average assumptions used for grants during fiscal 1999 were as follows:
risk-free interest rates of 5.26%, expected lives of three to five years; and a
volatility factor of 80%. The assumed dividend yield is 0% for 2000 and 1999.
9. ACQUISITION OF INFOMAGIC, INC.
On March 22, 2000, the Company acquired all of the issued and outstanding
common stock of InfoMagic, Inc., which distributes open source and low cost
software products with its principal emphasis in Linux software through its
Website, www.InfoMagic.com and selected distributors. The Company issued 200,000
shares of its common stock valued at fair market value on the date of
acquisition of $3.50 per share to the shareholders of InfoMagic, Inc., for total
consideration of $700,000. In addition to the acquisition of assets and the
assumption of liabilities, the Company acquired InfoMagic's customer base of
clients. This acquisition has been accounted for under the purchase method of
accounting. The purchase price in excess of the fair value of assets acquired
and liabilities assumed of InfoMagic, Inc. of approximately $686,000 has been
recorded as goodwill and is being amortized over three years (see Note 2).
The fair value of the assets acquired was allocated as follows:
<TABLE>
<S> <C>
Net assets acquired......................................... $ 13,641
Goodwill.................................................... 686,359
--------
$700,000
========
</TABLE>
F-67
<PAGE> 273
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table depicts, for the year ended June 30, 2000, unaudited
pro forma consolidated information as if the acquisition of InfoMagic took place
on July 1, 1999.
<TABLE>
<S> <C>
Net sales................................................... $12,888,966
Net income.................................................. (7,939,516)
Income per basic and diluted share.......................... (1.01)
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company entered into a two-year lease in May, 1999 for its office and
warehouse facility in Scottsdale, Arizona. Rental expense related to this lease,
and the terminated lease for it previous facility amounted to approximately
$292,000 and $165,000 for the years ended June 30, 2000 and 1999, respectively.
Future minimum payments under the Company's current lease which expires in
April, 2001 are approximately $157,000.
LITIGATION
In the normal course of its business, the Company is subject to certain
contractual obligations and litigation. In management's opinion, upon
consultation with legal counsel, there is no current litigation which will
materially affect the Company's financial position or results of operations.
SUBSEQUENT EVENT
The company entered into an "exclusive marketing alliance" with
UserFriendly on September 20, 2000 for a period of twelve months. Under the
terms of the agreement, UserFriendly provides advertising services on its web
site and a direct link to Ebiz's web site, TheLinuxStore.com, where all purchase
transactions are made by customers. Under the terms of the agreement, Ebiz is to
pay UserFriendly a fixed monthly advertising fee and a percentage of the gross
margin recorded by Ebiz for sales to customers coming through the direct
connection between the web sites. These payments will be recorded as advertising
and commission expenses, respectively. No revenue generating transactions or
advertising had occurred under the terms of the Agreement as of September 30,
2000.
F-68
<PAGE> 274
INDEX TO APPENDICES
<TABLE>
<C> <S>
A. Agreement and Plan of Reorganization by and among Caldera
Systems, Inc., Caldera International, Inc. and The Santa
Cruz Operation, Inc., including Amendment No. 1 to the
Agreement and Plan of Reorganization.
B. Broadview International LLC fairness opinion.
C. Chase H&Q fairness opinion.
D. Form of Caldera International, Inc.'s Amended and Restated
Certificate of Incorporation to be in effect upon the
closing of the combination.
E. Form of Caldera International, Inc.'s Amended and Restated
Bylaws to be in effect upon the closing of the combination.
F. Caldera 1999 Omnibus Stock Incentive Plan.
G. Amendment No. 1 to Caldera 1999 Omnibus Stock Incentive
Plan.
H. Amendment No. 2 to Caldera 1999 Omnibus Stock Incentive
Plan.
I. Amendment No. 3 to Caldera 1999 Omnibus Stock Incentive
Plan.
J. Amendment No. 4 to Caldera 1999 Omnibus Stock Incentive
Plan.
K. Caldera 2000 Employee Stock Purchase Plan, as amended.
L. Form of Caldera Systems, Inc. Amended and Restated
Certificate of Incorporation.
M. Notice of Election to Exchange Options.
N. Chapter 13 of the California Corporations Code, Dissenters'
Rights.
</TABLE>
IA-1
<PAGE> 275
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
CALDERA SYSTEMS, INC.,
A DELAWARE CORPORATION
CALDERA INTERNATIONAL, INC.,
A DELAWARE CORPORATION
AND
THE SANTA CRUZ OPERATION, INC.
A CALIFORNIA CORPORATION
AUGUST 1, 2000
<PAGE> 276
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. PLAN OF REORGANIZATION.............................................. A-1
1.1 The Organization of Newco and Merger Sub.................... A-1
1.2 The Merger.................................................. A-2
1.3 SCO Transaction............................................. A-2
1.4 Contribution and Transfer of Contributed Stock and
Contributed Assets.......................................... A-3
1.5 Closing Matters............................................. A-6
1.6 Dissenter's Rights.......................................... A-6
1.7 Newco Plans................................................. A-6
1.8 Registration on Form S-8.................................... A-6
1.9 Effects of the Caldera Merger............................... A-6
1.10 Tax-Free Reorganization..................................... A-6
1.11 Tax-Free Section 351 Transaction............................ A-7
1.12 HSR Filings................................................. A-7
1.13 Board of Directors and Officers of Newco; Newco Certificate
of Incorporation
and Bylaws.................................................. A-7
1.14 Registration on Form S-4.................................... A-8
2. REPRESENTATIONS AND WARRANTIES OF SCO............................... A-8
2.1 Organization; Good Standing; Qualification and Power........ A-8
2.2 Capital Structure........................................... A-8
2.3 Authority................................................... A-9
2.4 SEC Documents............................................... A-10
2.5 Disclosure; Information Supplied............................ A-11
2.6 Compliance with Applicable Laws............................. A-12
2.7 Litigation.................................................. A-12
2.8 ERISA and Other Compliance.................................. A-13
2.9 Absence of Certain Changes or Events........................ A-15
2.10 Full Force and Effect....................................... A-17
2.11 Agreements.................................................. A-17
2.12 No Defaults................................................. A-18
2.13 Certain Agreements.......................................... A-18
2.14 Taxes....................................................... A-18
2.15 Intellectual Property....................................... A-19
2.16 Fees and Expenses........................................... A-21
2.17 Insurance................................................... A-21
2.18 Ownership of Property....................................... A-21
2.19 Environmental Matters....................................... A-21
2.20 Interested Party Transactions............................... A-22
2.21 Fairness Opinion............................................ A-22
2.22 Title to and Condition and Sufficiency of Group Assets...... A-22
2.23 No Restrictive Agreements................................... A-22
2.24 Supplier and Customer Relationships......................... A-22
2.25 Product and Inventory Status................................ A-23
2.26 Affirmative Vote............................................ A-23
2.27 State Takeover Statutes..................................... A-23
2.28 Competition and Fair Trading Laws........................... A-23
2.29 Grants...................................................... A-23
3. REPRESENTATIONS AND WARRANTIES OF CALDERA AND NEWCO................. A-24
3.1 Organization; Good Standing; Qualification and Power........ A-24
3.2 Capital Structure........................................... A-24
</TABLE>
A-i
<PAGE> 277
TABLE OF CONTENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.3 Authority................................................... A-25
3.4 SEC Documents............................................... A-26
3.5 Disclosure; Information Supplied............................ A-26
3.6 Vote Required............................................... A-27
3.7 Litigation.................................................. A-27
3.8 Valid Issuance.............................................. A-27
3.9 Absence of Certain Changes or Events........................ A-27
3.10 Taxes....................................................... A-29
3.11 Intellectual Property....................................... A-29
3.12 Fees and Expenses........................................... A-29
3.13 Environmental Matters....................................... A-30
3.14 Fairness Opinion............................................ A-30
3.15 Tax Representations......................................... A-30
4. SCO COVENANTS....................................................... A-30
4.1 Advice of Changes........................................... A-30
4.2 Maintenance of Business..................................... A-31
4.3 Conduct of Business......................................... A-31
4.4 SCO Corporate Approvals..................................... A-32
4.5 Letter of SCO's Accountants................................. A-32
4.6 Prospectus/Proxy Statement.................................. A-32
4.7 Regulatory Approvals........................................ A-33
4.8 Necessary Consents.......................................... A-33
4.9 Access to Information....................................... A-33
4.10 Satisfaction of Conditions Precedent........................ A-33
4.11 Voting Agreement............................................ A-33
4.12 Sales Representative and Support Agreement.................. A-34
4.13 Stockholders Agreement...................................... A-34
4.14 No Other Negotiations....................................... A-34
4.15 Books and Records........................................... A-35
4.16 [Intentionally Omitted.].................................... A-35
4.17 Modification of Joint Contributed Agreements and Shared
Contributed Assets.......................................... A-35
4.18 Key Employee Employment Agreements.......................... A-35
4.19 SCO IP Rights............................................... A-35
4.20 Directors' and Officers' Liability Insurance................ A-36
4.21 Closing Group Account....................................... A-36
4.22 SCO Retained Business....................................... A-36
4.23 Taking of Necessary Action; Further Action.................. A-36
4.24 Accounting Treatments....................................... A-36
5. CALDERA AND NEWCO COVENANTS......................................... A-36
5.1 Advice of Changes........................................... A-36
5.2 Maintenance of Business..................................... A-37
5.3 Conduct of Business......................................... A-37
5.4 Stockholder Approval........................................ A-37
5.5 Letter of Caldera's Accountants............................. A-37
5.6 Prospectus/Proxy Statement.................................. A-38
5.7 State Securities Law Compliance............................. A-38
5.8 Regulatory Approvals........................................ A-38
5.9 Necessary Consents.......................................... A-39
5.10 Access to Information....................................... A-39
</TABLE>
A-ii
<PAGE> 278
TABLE OF CONTENTS -- (Continued)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
5.11 Books and Records........................................... A-39
5.12 Satisfaction of Conditions Precedent........................ A-39
5.13 Voting Agreement............................................ A-39
5.14 Sales Representative and Support Agreement.................. A-39
5.15 Stockholders Agreement...................................... A-39
5.16 Caldera Employee Plans...................................... A-39
5.17 Indemnification and Insurance -- Caldera.................... A-40
5.18 Indemnification and Insurance -- Employees.................. A-41
5.19 Distribution to SCO Shareholders............................ A-42
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF SCO.......................... A-43
6.1 Accuracy of Representations and Warranties.................. A-43
6.2 Covenants................................................... A-43
6.3 Compliance with Law......................................... A-43
6.4 Form S-4.................................................... A-43
6.5 Opinion of Caldera and Newco's Counsel...................... A-43
6.6 Stockholder Approval........................................ A-43
6.7 Tax Opinion................................................. A-43
6.8 Designees to the Board of Directors of Newco................ A-43
6.9 Nasdaq Listing.............................................. A-44
6.10 HSR Act..................................................... A-44
6.11 Ancillary Agreements........................................ A-44
6.12 Delivery of Newco Shares.................................... A-44
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF CALDERA AND NEWCO............ A-44
7.1 Accuracy of Representations and Warranties.................. A-44
7.2 Covenants................................................... A-44
7.3 Compliance with Law......................................... A-44
7.4 Consents.................................................... A-44
7.5 Form S-4.................................................... A-44
7.6 Opinion of Counsel to SCO................................... A-44
7.7 Caldera Stockholder Approval................................ A-44
7.8 Tax Opinion................................................. A-44
7.9 HSR Act..................................................... A-45
7.10 Ancillary Agreements........................................ A-45
7.11 Key Employee Term Sheets.................................... A-45
8. TERMINATION OF AGREEMENT............................................ A-45
8.1 Termination................................................. A-45
8.2 Notice of Termination....................................... A-46
8.3 Liability................................................... A-46
8.4 Termination Fee............................................. A-47
9. SURVIVAL OF REPRESENTATIONS......................................... A-47
9.1 Survival of Representations................................. A-47
10. ESCROW AND INDEMNIFICATION......................................... A-47
10.1 Escrow Fund................................................. A-47
10.2 Indemnification by SCO...................................... A-48
10.4 Limitations on Indemnification.............................. A-48
10.5 Indemnification Procedures.................................. A-48
</TABLE>
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TABLE OF CONTENTS -- (Continued)
<TABLE>
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PAGE
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11. EMPLOYEE MATTERS................................................... A-50
11.1 Right to Offer Employment................................... A-50
11.2 Termination of Employment................................... A-51
11.3 Cooperation................................................. A-52
12. TAX MATTERS........................................................ A-52
12.1 Transaction Taxes; Representation; Transaction Tax
Indemnity................................................... A-52
12.2 Treatment of Indemnity Payments............................. A-52
12.3 Indemnity for Taxes......................................... A-52
12.4 Other Tax Matters........................................... A-54
12.5 Tax Representations......................................... A-56
13. MISCELLANEOUS...................................................... A-57
13.1 Governing Law; Venue........................................ A-57
13.2 Assignment; Binding upon Successors and Assigns............. A-57
13.3 Severability................................................ A-57
13.4 Counterparts................................................ A-57
13.5 Other Remedies.............................................. A-57
13.6 Amendment and Waivers....................................... A-57
13.7 Expenses.................................................... A-57
13.8 Attorneys' Fees............................................. A-58
13.9 Notices..................................................... A-58
13.10 Construction of Agreement................................... A-58
13.11 No Joint Venture............................................ A-58
13.12 Further Assurances.......................................... A-59
13.13 Absence of Third Party Beneficiary Rights................... A-59
13.14 Public Announcement......................................... A-59
13.15 Certain Defined Terms....................................... A-59
13.16 Entire Agreement............................................ A-68
</TABLE>
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TABLE OF CONTENTS -- (CONTINUED)
<TABLE>
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EXHIBITS
Exhibit A -- Certificate of Merger
Exhibit A-1 -- Certificate of Incorporation
Exhibit 1.4(b) -- Excluded Assets
Exhibit 1.4(c)(i)(B) -- Assumed Liabilities
Exhibit 1.3(b) -- Escrow Agreement
Exhibit 1.13(b) -- Officers
Exhibit 1.13(c)A -- Form of Newco Amended and Restated Certificate of
Incorporation
Exhibit 1.13(c)B -- Form of Newco Amended and Restated Bylaws
Exhibit 1.4(a)(i) -- Non US-Contributed Companies and Contributed Assets
Exhibit 4.11A -- Form of Voting Agreement
Exhibit 4.11B -- SCO Affiliates Who Executed Voting Agreements
Exhibit 4.12 -- Sales Representative and Support Agreement
Exhibit 4.13B -- Stockholder Agreement
Exhibit 4.18A -- SCO Key Employees
Exhibit 4.18B -- Form of Key Employee Term Sheet
Exhibit 5.13B -- Caldera Affiliates Who Executed Voting Agreements
Exhibit 6.5 -- Opinion of Counsel of Caldera and Newco
Exhibit 7.6 -- Opinion of Counsel of SCO and Contributing Companies
Exhibit 13.15A -- Contributed Assets
Exhibit 13.15B -- Contributed Contracts
Exhibit 13.15C -- Contributed Subsidiaries
Exhibit 13.15D -- Group Products
Exhibit 13.15E -- Permitted Encumbrances
SCHEDULES
-- Caldera Disclosure Letter
-- SCO Disclosure Letter
</TABLE>
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is entered
into as of August 1, 2000, by and among Caldera Systems, Inc., a Delaware
corporation including for all purposes Caldera Surviving Corporation,
("Caldera"), Caldera International, Inc., a Delaware corporation ("Newco") and
The Santa Cruz Operation, Inc., a California corporation ("SCO"). The terms
defined in Section 13.15 of this Agreement shall have the meanings therein
specified in this Agreement.
RECITALS
A. The parties intend that, subject to the terms and conditions of this
Agreement, (i) a new Delaware corporation referred to herein as Newco has been
formed by Caldera solely for the purpose of the transactions contemplated
hereunder; (ii) a newly formed, wholly owned subsidiary of Newco ("Merger Sub")
will be merged with and into Caldera, with Caldera being the surviving
corporation of such merger (the "Merger"), and all outstanding Caldera
securities will be converted, on a share for share basis, into Newco securities
having identical rights, preferences and privileges, with Newco assuming any and
all outstanding options and other rights to purchase shares of capital stock of
Caldera (with all such Newco securities issued to former Caldera security
holders initially representing the Caldera Percentage Interest in Newco), all on
the terms set out in this Agreement and in the Certificate of Merger
substantially in the form of Exhibit A hereto (the "Certificate of Merger") and
the applicable provisions of Delaware Law; (iii) SCO and certain of its
subsidiaries as herein specified will contribute to Newco, all on the terms
herein specified, all of the Contributed Stock of the Contributed Companies
(with each of the Contributed Companies thereby becoming a wholly owned
subsidiary of Newco) and the Contributed Assets in consideration for the
issuance by Newco to SCO of shares of Common Stock of Newco, $0.001 par value
("Newco Common Stock"), and (iv) Newco will assume all options to acquire common
stock of SCO held by the Employees (other than David McCrabb, Jack Moyer and Jim
Wilt) hired or retained by Caldera (the "Optionees") and such options will be
converted into options to purchase Newco Common Stock ("Newco Options") as set
forth herein, which Newco Common Stock issued to SCO and Newco Options will
represent in the aggregate a fully diluted equity interest in Newco equal to the
difference between 100% and the Caldera Percentage Interest. The transactions
described in subpart (iii) and (iv) of the foregoing sentence are collectively
the "SCO Transaction."
B. The Newco Common Stock and the Newco Options issued in the Merger and in
the SCO Transaction will be registered under the Securities Act, pursuant to a
Newco registration statement on Form S-4 or Form S-8, as set forth herein.
C. For federal income tax purposes, it is intended that (i) the Merger
qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code and (ii) that the Merger and the portion of the SCO
Transaction described in Recital A (iii) above qualify as an exchange under the
provisions of Section 351 of the Internal Revenue Code.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Plan of Reorganization.
1.1 The Organization of Newco and Merger Sub. Caldera has formed Newco
under the laws of the State of Delaware for the purposes of the transactions
contemplated by the Merger and in accordance with the terms of this Agreement.
Newco currently has no outstanding securities and has conducted no business and,
prior to the Effective Time, will not issue any securities, will conduct no
business or operations, will have no assets and will enter into no agreements
nor incur any obligations or Liabilities, except as required or contemplated by
this Agreement or necessary to perform its obligations hereunder. As soon as
practicable after the date hereof, Newco shall form the Merger Sub as a wholly
owned subsidiary, which will conduct no business prior to Closing except as
expressly contemplated hereunder.
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1.2 The Merger. At the Closing, subject to the terms and conditions of
this Agreement, Caldera will execute and deliver and will file with the
Secretary of State of the State of Delaware in accordance with relevant
provisions of the Delaware Law, a Certificate of Merger providing for the Merger
of Merger Sub with and into Caldera, with Caldera being the surviving
corporation upon the effectiveness of the Merger and thereby becoming a wholly
owned subsidiary of Newco, pursuant to this Agreement, the Certificate of Merger
and in accordance with applicable provisions of the Delaware Law as follows:
(a) Conversion of Caldera Common Stock. Each share of the Common
Stock of Caldera ("Caldera Common Stock") that is issued and outstanding
immediately prior to the Effective Time will by virtue of the Merger and at
the Effective Time, and without any further action on the part of Caldera,
Newco or any holder of Caldera Common Stock, be converted into one share
(the "Caldera Ratio") of validly issued, fully paid and nonassessable Newco
Common Stock.
(b) Conversion of Caldera Options.
(i) Conversion. At the Effective Time, each of the then
outstanding options to purchase shares of Caldera Common Stock
(collectively, the "Caldera Options") (consisting of all outstanding
options granted under the stock option plans of Caldera or the Caldera
Subsidiaries, including but not limited to its 1998 Stock Option Plan
and its 1999 Omnibus Stock Incentive Plan (collectively, the "Caldera
Plans"), and any individual non-Plan options), will, by virtue of the
Merger, and without any further action on the part of any holder
thereof, be assumed by Newco and converted into an option to purchase an
equivalent number of shares of Newco Common Stock, at an exercise price
per share equal to the per share exercise price of such Caldera Option
in effect at the Effective Time. The term, exercisability, vesting
schedule, status as an "incentive stock option" under Section 422 of the
Internal Revenue Code, if applicable, and all other terms and conditions
of the Caldera Options will be unchanged and all references in any
option agreement governing such option to Caldera shall be deemed to
refer to Newco, where appropriate. Continuous service as an employee or
consultant with Caldera or any of the Caldera Subsidiaries will be
credited to an optionee of Caldera for purposes of determining the
number of shares of Newco Common Stock vested and exercisable under the
assumed Caldera Option after the Closing.
(ii) Stock Rights. At the Effective Time, Newco will assume all of
Caldera's obligations under Caldera's 2000 Employee Stock Purchase Plan
(the "Caldera Stock Purchase Plan") and each of the then outstanding
rights to purchase shares of Caldera Common Stock under such plan
(collectively, the "Caldera Stock Purchase Plan Rights"), will by virtue
of the Merger, and without any further action on the part of any holder
thereof, be assumed and converted into a right to purchase the same
number of shares of Newco Common Stock on the next "purchase date" (as
such term is defined in the Caldera Stock Purchase Plan) following the
Effective Time at a purchase price per share determined in accordance
with the Caldera Stock Purchase Plan.
(c) Cancellation of Caldera-Owned Shares. Each share of Caldera
Common Stock held in the treasury of Caldera or any of which are owned by
Newco, Caldera, or any direct or indirect wholly owned subsidiary of Newco
or Caldera immediately prior to the Effective Time shall be cancelled and
extinguished without any conversion thereof.
1.3 SCO Transaction.
(a) Issuance of Newco Common Stock. At the Effective Time and subject
to the terms and conditions of this Agreement, Newco will, in consideration
for the contribution and transfer of the Contributed Stock and Contributed
Assets to Newco as contemplated by this Agreement, perform the following:
(i) Consideration. Issue to SCO that number of issued, fully paid
and nonassessable shares of Newco Common Stock equal to The SCO
Percentage Interest, less (a) the number of shares of Newco Common Stock
issuable upon exercise of the Newco Options pursuant to
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Section 1.3(a)(iii) below and (b) the Escrow Shares issued to SCO and
placed directly into escrow by Caldera pursuant to Section 1.3(b) below,
with such number of shares to be appropriately adjusted in the event of
any Caldera stock split, stock combination, reclassification or other
similar capital change (the "First SCO Certificate") and pay SCO cash
consideration equal to seven million dollars ($7,000,000) (the "Cash
Consideration"), by wire transfer of immediately available funds or upon
the cancellation of SCO's outstanding indebtedness to Caldera.
(ii) [Intentionally Omitted.]
(iii) Assumption and Conversion of SCO Options. At the Effective
Time, each of the then outstanding options to purchase shares of SCO
Common Stock held by the Optionees (collectively, the "SCO Options")
(consisting of all outstanding options granted under the stock option
plans of SCO or the SCO Subsidiaries, and any individual non-plan
options held by the Optionees), will, by virtue of the Merger, and
without any further action on the part of any holder thereof, be assumed
by Newco and converted into an option to purchase one share of Newco
Common Stock for each two shares of SCO Common Stock subject to a SCO
Option at the Effective Time (the "SCO Ratio") at an exercise price per
share of Newco Common Stock equal to the exercise price per share of
such assumed SCO Option immediately prior to the Effective Time divided
by the SCO Ratio, rounded up to the nearest cent. Except as set forth in
the preceding sentence, the term, exercisability, vesting schedule, and
all other terms and conditions of the SCO Options will be unchanged and
all references in any option agreement governing such option to SCO
shall be deemed to refer to Newco, where appropriate; provided, however,
that the outstanding SCO Options previously designated as "incentive
stock options" under Section 422 of the Internal Revenue Code may, as a
result of the foregoing adjustments, be converted into non-statutory
stock options. Continuous service as an employee or consultant with SCO
or any of the SCO Subsidiaries will be credited to the Optionee for
purposes of determining the number of shares of Newco Common Stock
vested and exercisable under the assumed SCO Option after the Closing.
If the foregoing calculation results in a Newco Option, which is issued
for a SCO Option, being exercisable for a fraction of a share of Newco
Common Stock, then the number of shares of Newco Common Stock subject to
such option will be rounded down to the nearest whole number of shares,
with no cash being payable for such resulting fractional share.
(b) Escrow. As soon as practicable after the Effective Time, and
subject to and in accordance with the provisions of Section 10 and the
Escrow Agreement, a form of which is attached as Exhibit 1.3(b) (the
"Escrow Agreement"), Caldera shall deliver to the Escrow Agent on behalf of
SCO a certificate representing ten percent (10%) of the SCO Percentage
Interest (the "Escrow Shares"). The Escrow Shares distributed to the Escrow
Agent shall be held in escrow and shall be available to transfer to Caldera
for certain damages as provided in Section 10. To the extent not
transferred to Caldera for such damages, the Escrow Shares shall be
released to SCO, all as provided in Section 10 and the Escrow Agreement.
(c) Termination of Newco Options. All shares of Common Stock
underlying Newco Options assumed pursuant to Section 1.3(a)(iii) which
terminate without being exercised by the Optionees shall be issued by
Caldera to SCO on a quarterly basis.
1.4 Contribution and Transfer of Contributed Stock and Contributed Assets.
(a) Contribution and Transfer. Subject to the terms and conditions of
this Agreement and in consideration for the issuance by Newco of Newco
Common Stock as provided above, the Contributing Companies shall at the
Effective Time, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged on behalf of each of the
Contributing Companies, contribute and transfer and deliver to Newco or
cause to be contributed, transferred and delivered to Newco, and at the
Effective Time Newco shall accept the contribution and transfer from the
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Contributing Companies of all right, title and interest in and to the
Contributed Stock and Contributed Assets. Notwithstanding the preceding,
the Contributed Assets and Contributed Companies which are located outside
of the United States shall be purchased and sold by and among the Newco and
SCO entities located in such countries in exchange for stock or cash
consideration as the parties shall agree before the Effective Time. Such
payment shall be included within and shall not change the total amount of
The SCO Percentage Interest and the Cash Consideration. The parties shall
execute, or cause to be executed, Bills of Transfer relevant to their
particular jurisdiction reflecting the transfer of any such Contributed
Assets which shall reflect the purchase price allocation as agreed. Such
amounts shall be reported as the purchase price for all foreign Tax
reporting purposes in each relevant jurisdiction and no party shall have a
position inconsistent therewith.
(b) Excluded Assets.
(i) Excluded Assets. SCO is not selling and Caldera shall not
acquire from SCO any of the following assets or any interest therein
(collectively, the "Excluded Assets"):
(A) any assets related solely to the SCO Retained Business;
(B) any cash and cash equivalents and any accounts receivable
(the "Cash Equivalents") of the Contributing Companies and the
Contributed Companies;
(C) those assets set forth on Exhibit 1.4(b).
(ii) Net Cash Equivalents. "Net Cash Equivalent" shall mean the
net book value of any cash and cash equivalents held by any of the
Contributed Companies, including but not limited to accounts receivable,
accounts payable and third party debt obligations. To the extent the Net
Cash Equivalents of any Contributed Company are or are expected to be
positive as of the Effective Time, either SCO will withdraw that value
from the Contributed Company at or before the Effective Time or Caldera
will cause that value to be paid or credited to SCO at or promptly after
the Effective Time. To the extent the Net Cash Equivalents of any
Contributed Company are negative as of the Effective Time, SCO will pay
or credit such amount to Caldera at or promptly after the Effective
Time. The payment or credits will be treated as either a dividend by the
Contributed Company or as an adjustment to the Cash Consideration as the
parties may agree.
(c) Assumption and Exclusion of Liabilities.
(i) Assumed Liabilities. As a result of the transfer to Newco of
the Contributed Stock, Newco will as a matter of law own all of the
outstanding equity capital of the Contributed Companies, which
Contributed Companies and their respective Contributed Subsidiaries
(collectively, the "Contributed Company Group") in turn shall remain
liable for their respective Liabilities. In addition, subject to the
terms and conditions of this Agreement, Newco (or a subsidiary of Newco
designated by Newco and acceptable to SCO) shall, at the Effective Time,
assume, and thereafter pay, perform and discharge when due those (and
only those) Liabilities of the Contributing Companies and/or their
direct and indirect subsidiaries (excluding the Liabilities of the
Contributed Company Group, which are governed by the first sentence of
this Section 1.4(c)(i)) that are expressly listed in the following
subparagraphs of this Section 1.4(c)(i) (collectively, the "Assumed
Liabilities") and no other Liabilities of the Contributing Companies
whatsoever:
(A) all Liabilities of the Contributing Companies under all
Contributed Contracts;
(B) all Liabilities of the Contributing Companies that are
included in the Closing Group Account or that are listed on Exhibit
1.4(c)(i)(B) attached hereto; and
(C) those Tax liabilities for which Newco is responsible
pursuant to Section 12 below.
(ii) Excluded Liabilities Not Assumed. Except for the Liabilities
of the Contributed Company Group (which will remain the sole
responsibility of the applicable member of the
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Contributed Company Group) and except for the Assumed Liabilities
expressly described above in Section 1.4(c), Newco shall not assume,
pay, perform or discharge, or otherwise have any obligation,
responsibility or liability whatsoever for, any and all Liabilities of
SCO or its direct and indirect subsidiaries (whether now existing or
hereafter arising), and said companies shall retain, and shall be solely
responsible and liable for paying, performing and discharging when due,
all such Liabilities (collectively, the "Excluded Liabilities").
(iii) Intercompany Accounts. One or more Contributed Companies is
likely to owe intercompany debt to SCO. The amount of any such
intercompany debt remaining after payment by Newco to SCO of any Net
Cash Equivalents will be treated as an Excluded Liability and will be
cancelled by SCO.
(d) Asset Contribution. The SCO will, and will cause each of the
other Contributing Companies to, take all actions and sign and deliver any
and all instruments and documents (including Bills of Transfer for each
relevant jurisdiction) reasonably necessary or appropriate to fully effect
and perfect the transfer to Newco of any and all of the Contributed Stock
and Contributed Assets held by either of them and any Contributed Contracts
to which they are a party.
(e) Unassignable Assets. Notwithstanding any other provision of this
Agreement or any of the Ancillary Agreements, to the extent that any of the
Contributed Assets are not assignable or otherwise transferable by the
Contributing Companies to Newco without the consent, approval or waiver of
another party thereto or any third party (including any governmental
agency), or if such assignment or transfer would constitute a breach
thereof or of any other material contract binding upon the transferor or
any of its Affiliates, or a violation of any applicable law, then neither
this Agreement nor such Ancillary Agreements shall constitute an assignment
or transfer (or an attempted assignment or transfer) thereof until such
consent, approval or waiver of such party or parties has been duly
obtained.
With respect to each such Contributed Asset whose assignment or transfer to
Newco requires the consent, approval or waiver of another party thereto or any
third party, Newco and SCO shall cooperate and use their mutual reasonable,
commercial efforts to obtain such consent, approval or waiver of such other
party or parties or such third party to such assignment or transfer as promptly
as practicable prior to the Effective Time; and each agrees to supply relevant
information to such party or parties or such third party in order to facilitate
such objective. Notwithstanding the foregoing, nothing contained herein shall
obligate Newco or any Contributing Company to expend or pay any amount to third
parties to obtain any consents, approvals or waivers, or to make alternative
arrangements available; provided that where the Contributing Companies are
unable to effectively assign or otherwise transfer to Newco nor any Contributed
Asset without constituting a breach due to such lack of third party consent, the
Contributing Companies shall make available to Newco the net economic benefits
(such as inbound royalty payments, net of actual costs), if any, received by the
Contributing Companies from and after the Effective Time with respect to any
such Contributed Asset.
(f) No Fraudulent Conveyance. The Contributing Companies are not
entering into this Agreement or any Ancillary Agreement with the intent to
defraud, delay or hinder their respective creditors and the consummation of
the transactions contemplated by this Agreement, and the Ancillary
Agreements referenced in this Agreement will not have any such effect.
Except for the Assumed Liabilities, the transfer of the Contributed Stock
and Contributed Assets pursuant hereto will not give rise to any right of
any creditor of the Contributing Companies to assert any claim whatsoever
against Newco or any of the Contributed Stock and Contributed Assets in the
hands of Newco or any of Newco's respective successors and assigns
following the Effective Time which would have a Material Adverse Effect on
Newco. SCO and its consolidated subsidiaries, taken as a group are Solvent,
and will continue to be Solvent immediately following the transfer of the
Contributed Stock and Contributed Assets pursuant to this Agreement.
Neither SCO nor any of its consolidated subsidiaries nor any of the
Contributed Stock and Contributed Assets is subject to, or the subject of,
any Insolvency Proceeding or Insolvency Action. No writ of attachment,
execution or similar process
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has been ordered, executed or filed against any of the Contributed Stock
and Contributed Assets. There is not any reason to expect that any of the
aforementioned actions, or any similar action, will take place or be taken,
and there are no grounds for any of the aforementioned actions or like
action. The parties agree that the securities issued by Newco to SCO and
the Optionees and the other obligations on Newco's part to be performed
under the terms of this Agreement and the Ancillary Agreements constitute
full and fair equivalent consideration for the Contributed Stock and
Contributing Assets exchanged therefor and the covenants, agreements and
performances of the Contributing Companies under this Agreement and the
Ancillary Agreements.
1.5 Closing Matters. Unless this Agreement has been terminated as
provided in Section 8 below, the closing of the transactions contemplated by
this Agreement (the "Closing") (i) will take place at the offices of Brobeck,
Phleger & Harrison LLP at Two Embarcadero Place, 2200 Geng Road, Palo Alto,
California 94303 on a date (the "Closing Date") and at a time to be mutually
agreed upon by the parties, which date shall be as soon as practicable after the
Caldera Stockholders Meeting and SCO Stockholders Meeting and, in any event, no
later than the third business day after all conditions to Closing set forth
herein shall have been satisfied or waived, unless another place, time and date
is mutually selected by SCO and Caldera and (ii) will take place concurrently
with the Effective Time.
1.6 Dissenter's Rights. It shall be the sole responsibility of SCO to
disclose any dissenter's rights which SCO stockholders have with respect to the
SCO Transaction; these rights shall be disclosed to Caldera in writing no later
than the date of filing the Proxy/Prospectus.
1.7 Newco Plans. Newco shall assume, effective as of the Closing, the
Caldera Plans, Caldera Stock Purchase Plan and non-plan grants and awards, as
amended through the Effective Time (collectively, the "Newco Plans"). Newco
shall also reserve a sufficient number of shares of Newco Common Stock for
issuance pursuant to the SCO Options assumed by Newco pursuant to Section
1.3(a)(ii) herein.
1.8 Registration on Form S-8. Newco will cause the Newco Common Stock
issuable upon exercise of outstanding awards under the Newco Plans or upon
exercise of the SCO Options assumed by Newco (collectively, the "Stock Rights")
and the shares reserved for issuance pursuant to future awards under the Newco
Plans to be registered on Form S-8 (the "Form S-8") promulgated by the SEC prior
to, but in no event later than, 10 days after the Effective Time and Newco will
use its reasonable best efforts to maintain the effectiveness of such
registration statement or registration statements for so long as any such Stock
Rights shall remain outstanding.
1.9 Effects of the Caldera Merger. At the Effective Time: (a) the
separate existence of Merger Sub will cease and Merger Sub will be merged with
and into Caldera, with Caldera being the surviving corporation of the Merger
(the "Caldera Surviving Corporation"), pursuant to the terms of this Agreement
and the Certificate of Merger; (b) the Certificate of Incorporation of the
Caldera Surviving Corporation shall be in the form attached as Exhibit A-1 to
the Certificate of Merger; (c) the Bylaws of Caldera immediately prior to the
Effective Time will be the Bylaws of the Caldera Surviving Corporation; (d) the
directors and officers of Caldera immediately prior to the Effective Time will
be the directors and officers of the Caldera Surviving Corporation; (e) each
share of the Common Stock of Merger Sub outstanding immediately prior to the
Effective Time will be converted into one share of Common Stock of the Caldera
Surviving Corporation; (f) each share of Caldera Common Stock, each Caldera
Option, and each Caldera Stock Purchase Plan Right outstanding immediately prior
to the Effective Time will be converted, as provided above in this Section
1.2(b). The Merger will, from and after the Effective Time, have all of the
effects provided by applicable law, including, without limitation, the Delaware
Law.
1.10 Tax-Free Reorganization. The parties adopt this Agreement (to the
extent it relates to the Merger) as a plan of reorganization and intend the
Merger to be a tax-free reorganization under Section 368(a)(1)(A) of the
Internal Revenue Code by virtue of the provisions of Section 368(a)(2)(E) of the
Internal Revenue Code. The Newco Common Stock issued in the Merger will be
issued solely in exchange for the Caldera Common Stock, and no other transaction
other than the Merger represents,
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provides for or is intended to be an adjustment to the consideration paid for
the Caldera Common Stock. No consideration that could constitute "other
property" within the meaning of Section 356(b) of the Internal Revenue Code is
being transferred by Newco for the Caldera Common Stock in the Merger. The
parties shall not take a position on any tax return inconsistent with this
Section 1.10. In addition, Newco hereby represents, and will represent as of the
Effective Time, that it intends to continue Caldera's historic businesses or use
a significant portion of Caldera's business assets in a trade or business. None
of the parties shall cause a transaction, without offsetting compensation to the
other party, that would result in income to SCO under the Subpart F provisions
of the Internal Revenue Code.
1.11 Tax-Free Section 351 Transaction. The contribution and transfer of
the Contributed Stock and Contributed Assets to Newco in exchange for Newco
Common Stock, together with the Merger, are intended to constitute an exchange
within the meaning of Section 351 of the Internal Revenue Code. The Newco Common
Stock issued to SCO therein will be issued solely in exchange for the
Contributed Stock and Contributed Assets transferred in the SCO Transaction and
no consideration (other than the cash consideration) that could constitute other
property within the meaning of Internal Revenue Code Section 351(b) is being
transferred by Newco to SCO. The parties shall not take a position on any tax
return inconsistent with this Section 1.11.
1.12 HSR Filings. Caldera, SCO and Newco will as promptly as practicable
prepare and file the applicable notices and forms (if any) required to be filed
by them under the HSR Act or comparable laws of non-U.S. governmental entities,
and comply promptly with any appropriate requests from the Federal Trade
Commission, the United States Department of Justice or any other Governmental
Antitrust Authority for additional information and documentary material. The
parties hereto will not take any action that will have the effect of delaying,
impairing or impeding the termination of any waiting period or the receipt of
any required approvals of a Government Antitrust Authority. Without limiting the
generality of the parties' undertakings pursuant to this Section 1.12, the
parties shall use their reasonable best efforts to prevent the entry in a
judicial or administrative proceeding brought under any antitrust law by any
Governmental Antitrust Authority or any other party of any permanent or
preliminary injunction or other order that would make consummation of the SCO
Transaction or the Merger in accordance with the terms of this Agreement
unlawful under appropriate anti-trust laws or that would prevent or delay such
consummation as a consequence of such laws. Each party hereto shall promptly
inform the other of any material communication between such party and the
Federal Trade Commission, the Department of Justice or any other Governmental
Antitrust Authority regarding any of the transactions contemplated hereby. If
any party or any Affiliate of such party receives a request for additional
information or for documents or any material from any such Governmental
Antitrust Authority with respect to the transactions contemplated hereby, then
such party shall endeavor in good faith to make or cause to be made, as soon as
reasonably practicable and after consultation with the other parties, an
appropriate response in compliance with such request. Further, no written
materials shall be submitted by any party to the Federal Trade Commission, the
Department of Justice or any other Governmental Antitrust Authority in
connection with HSR Act compliance or the merger control regulations of any
other state or country, nor shall any oral communications be initiated with such
governmental entities by any party, without prior disclosure to and coordination
with the other parties and its counsel. Each party hereto will cooperate in
connection with reaching any understandings, undertakings or agreements (oral or
written) involving the Federal Trade Commission, the Department of Justice or
any other Governmental Antitrust Authority in connection with the transactions
contemplated hereby.
1.13 Board of Directors and Officers of Newco; Newco Certificate of
Incorporation and Bylaws.
(a) Board of Directors. At the Effective Time, Newco will have a
Board of Directors consisting of nine directors. At the Effective Time, the
directors of Newco shall consist of the current Caldera directors plus Doug
Michels and one other individual to be named by SCO, nominees of SCO. At
the Effective Time, Ralph J. Yarro shall be the Chairman of the Board of
Newco.
(b) Officers. At the Effective Time, the officers of Newco shall be
as set forth on Exhibit 1.13(b).
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(c) Certificate of Incorporation and Bylaws. Attached hereto as
Exhibits 1.13(c)A and 1.13(c)B are the respective forms of Amended and
Restated Certificate of Incorporation and Bylaws of Newco to be in effect
at the Effective Time.
1.14 Registration on Form S-4. The Newco Common Stock to be issued in the
Merger to Caldera stockholders and the Newco Common Stock to be issued in the
SCO Transaction to SCO and pursuant to the assumption of SCO Options shall be
registered under the Securities Act on Form S-4. As promptly as practicable
after the date hereof, Newco, with the cooperation of Caldera and SCO, shall
prepare and file with the SEC a Form S-4 registration statement (the "Form
S-4"), together with the prospectus/joint proxy statement to be included therein
(the "Prospectus/Proxy Statement") and any other documents required by the
Securities Act or the Exchange Act in connection with the Merger and the SCO
Transaction.
2. Representations and Warranties of SCO.
Except as set forth in the respectively referenced provisions of the SCO
Disclosure Letter delivered by SCO on behalf of itself and any other
Contributing Companies (collectively, "Representing SCO Entities") to Caldera
concurrently herewith and certified by an officer of SCO, on behalf of all of
the Representing SCO Entities, respectively, to be true, accurate and complete
to the best of his/her knowledge (the "SCO Disclosure Letter"), SCO on behalf of
each and all of the Representing SCO Entities, hereby represents and warrants to
Caldera that as of the date hereof:
2.1 Organization; Good Standing; Qualification and Power. The Contributed
Subsidiaries are all of the subsidiaries of the Contributed Companies or any of
their direct or indirect subsidiaries. Each of the Contributed Companies, and
the Contributed Subsidiaries and each of the Contributing Companies is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its formation, has all requisite corporate power and
authority to own, lease and operate any and all of the Group Assets held by such
company and for the Conduct of the Group Business as now being conducted by such
company, and is duly qualified and in good standing to do business in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification necessary, other than in such
jurisdictions where the failure so to qualify would not have a Material Adverse
Effect on the Group Business. SCO has delivered to Caldera or its counsel
complete and correct copies of the charter documents of the Contributed
Companies and the Contributed Subsidiaries. Except for the Contributed
Subsidiaries, none of the Contributed Companies nor any of the Contributed
Subsidiaries owns, directly or indirectly, any capital stock or other equity
interest of any corporation or has any direct or indirect equity or ownership
interest in any other business, whether organized as a corporation, partnership,
joint venture or otherwise.
2.2 Capital Structure.
(a) Stock and Options. The authorized, issued and as of the date of
July 28, 2000, the outstanding capital stock of the Contributed Companies
and the Contributed Subsidiaries is set forth in Section 2.2(a) of the SCO
Disclosure Letter. Except as specified in Section 2.2(a) of the SCO
Disclosure Letter, no shares of the capital stock of the Contributed
Companies or of any of the Contributed Subsidiaries are held by any of them
in its treasury or reserved for issuance upon the exercise of options or
warrants. Except as specified in Section 2.2(a) of the SCO Disclosure
Letter, all outstanding shares of the capital stock of the Contributed
Companies on July 28, 2000 are set forth in Section 2.2(a) of the SCO
Disclosure Letter and are validly issued, fully paid and nonassessable and
free and clear of any Encumbrances and not subject to preemptive rights
under any statute, pursuant to the Certificate of Incorporation or Bylaws
or Memorandum and Articles of Incorporation (or similar governing documents
in each relevant jurisdiction) of the Contributed Companies, or pursuant to
any agreement or document to which any of them is a party or by which any
of them is bound. All outstanding shares of the capital stock of each of
the Contributed Subsidiaries are validly issued, fully paid and
nonassessable and are owned by a Contributed Company, or one of the
Contributed Subsidiaries, free and clear of any Encumbrances. SCO has
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provided Caldera with a correct and complete list of each of the SCO
Options as of July 28, 2000, including the name of the Optionees, the plan
pursuant to which such SCO Options were issued (if applicable), the number
of shares covered by such SCO Options, the per share exercise price of such
SCO Options, and the vesting schedule applicable to such SCO Options,
including the number of shares vested as of such date and will provide a
final list of such information on the Closing Date. All the outstanding SCO
Options have been issued in compliance with all applicable federal and
state securities laws. Doug Michels owns and has the right to vote shares
representing approximately 10% of the capital stock of SCO as of the date
of this Agreement.
(b) No Other Commitments. Except as set forth in Section 2.2(b) of
the SCO Disclosure Letter there are no options, warrants, calls, rights,
commitments, conversion rights or agreements of any character to which the
Contributed Companies is a party or by which any of them is bound
obligating them to issue, deliver or sell, or cause to be issued, delivered
or sold, any shares of its capital stock, or securities convertible into or
exchangeable for shares of its capital stock, or obligating any of them to
grant, extend or enter into any such option, warrant, call, right,
commitment, conversion right or agreement. There is no voting trust, proxy
or other agreement or understanding to which SCO or any of its respective
direct or indirect subsidiaries is a party with respect to the voting of
the capital stock of any member of the Contributed Company Group. All
shares of capital stock of any member of the Contributed Company Group are
held free and clear of any Encumbrances.
(c) Registration Rights. Neither the Contributed Companies nor the
Contributing Companies is under any obligation to register under the
Securities Act (or equivalent or similar legislation in each relevant
jurisdiction) any of the presently outstanding securities of the
Contributed Companies or any securities of the Contributed Companies that
may be subsequently issued.
(d) Caldera Ownership. Except as set forth in Section 2.2(d) of the
SCO Disclosure Letter, none of SCO or any of its direct or indirect
subsidiaries owns, or will own immediately prior to the Effective Time, any
Caldera Common Stock.
2.3 Authority.
(a) Corporate Action. Subject to approval of this Agreement and the
Ancillary Agreements by SCO's stockholders, SCO and each of the
Contributing Companies have all requisite corporate power and authority to
enter into this Agreement and the Ancillary Agreements, to perform its
obligations hereunder and thereunder, and to consummate the transactions
contemplated by this Agreement and the Ancillary Agreements. The Board of
Directors of SCO has, as of the date of this Agreement, unanimously (i)
approved and declared advisable this Agreement and the Ancillary Agreements
and has approved the SCO Transaction and the other transactions
contemplated hereby, (ii) determined that the SCO Transaction is consistent
with and in furtherance of the long-term business strategy of SCO and fair
to, and in the best interests of, SCO and its stockholders and (iii)
determined to recommend that the stockholders of SCO adopt and approve this
Agreement and approve the SCO Transaction. Prior to the Effective Time,
this Agreement and the Ancillary Agreements will be approved by the Board
of Directors of each of the other Contributing Companies. This Agreement
has been and, prior to the Effective Time, the Ancillary Agreements will
be, duly executed and delivered by the Contributing Company party to such
agreement. Subject to receiving such stockholder approval, this Agreement
is, or, in the case of each of the Ancillary Agreements will be, a valid
and binding obligation of the Contributing Company party to such agreement,
each enforceable against the Contributing Company party to such agreement
in accordance with its terms, except as enforceability may be limited by
bankruptcy and other similar laws and general principles of equity.
(b) No Conflict. Neither the execution, delivery and performance of
this Agreement and the Ancillary Agreements nor the consummation of the
transactions contemplated hereby or thereby, nor compliance with the
provisions hereof, will (i) conflict with, or result in any violations of,
or cause a default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, amendment, cancellation or
acceleration of any obligation contained in, or the loss of any material
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benefit under, or result in the creation of any Encumbrance upon any of the
Group Assets or Contributed Stock under, any term, condition or provision
of (x) the Certificate of Incorporation or Bylaws or equivalent
organizational documents of any of the Contributing Companies or the
Contributed Companies or any of the Contributed Subsidiaries or (y) any of
the Contributed Contracts or any other loan or credit agreement, note,
bond, mortgage, indenture, lease or other material agreement, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
the Contributed Companies, the Contributed Companies' Property, the
Contributed Stock or the Contributed Assets, other than any such conflicts,
violations, defaults, rights or Encumbrances which, individually or in the
aggregate, would not have a Material Adverse Effect on the Group Business;
or (ii) require the affirmative vote of the holders of greater than a
majority of the issued and outstanding capital stock of any member of the
Contributing Companies or any member of the Contributed Company Group.
(c) Governmental Consents. Except (i) as set forth in Section 2.3(c)
of the SCO Disclosure Letter; (ii) such filings, authorizations, orders and
approvals as may be required under state takeover laws; (iii) such filings
and notifications as may be necessary under the HSR Act; (iv) the filings,
authorizations, orders, notifications, and approvals contemplated by this
Agreement or the Ancillary Agreements; and (v) such other governmental or
third party consents, filings, authorizations, orders and approvals which,
if not obtained or made, would not have a Material Adverse Effect on Newco
or have a material adverse effect on the ability of the Contributing
Companies to consummate the transactions contemplated by this Agreement or
the Ancillary Agreements, no consent, approval, order or authorization of,
or registration, declaration or filing with, any governmental entity is
required to be obtained by the Contributing Companies or any member of the
Contributed Company Group in connection with the execution and delivery of
this Agreement or the Ancillary Agreements by SCO or the performance of the
Contributing Companies and the Contributed Companies of the respective
obligations herein pertaining to such company.
2.4 SEC Documents.
(a) SEC Reports. SCO has delivered to Caldera or its counsel correct
and complete copies of the final version of each report, schedule,
registration statement and definitive proxy statement filed by SCO with the
SEC on or after July 1, 1995 with respect to the Group Business or the
Group Assets (the "SCO SEC Documents"), which are the material documents
(other than preliminary proxy material) that SCO was required to file with
the SEC on or after July 1, 1995 with respect to the Group Business or the
Group Assets. As of their respective dates or, in the case of registration
statements, their effective dates, none of the SCO SEC Documents (including
all exhibits and schedules thereto and documents incorporated by reference
therein) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading as of such time of filing, and there is no
requirement under the Securities Act or the Exchange Act, as the case may
be, to have amended any such filing, except for such requirements as were
fulfilled by the filing of such SCO SEC Documents, the SCO SEC Documents
complied, when filed, in all material respects with the then applicable
requirements of the Securities Act or the Exchange Act, as the case may be,
and the rules and regulations promulgated by the SEC thereunder, and SCO
has filed in all material respects all documents and agreements that were
required to be filed as exhibits to the SCO SEC Documents.
(b) SCO Financial Statements; Absence of Undisclosed Liabilities. The
audited consolidated financial statements dated as of and for the period
ending September 30, 1999 and the unaudited consolidated financial
statements dated as of and for the period ending June 30, 2000 of SCO and
its consolidated subsidiaries (the "SCO Consolidated Financial Statements")
complied as to form in all material respects with the then applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto, were prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may have been
indicated in the notes thereto)
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and fairly present (subject, in the case of the unaudited statements, to
normal year-end audit adjustments) the consolidated financial position of
SCO and its respective consolidated subsidiaries as at the respective dates
thereof and the consolidated results of its operations and cash flows for
the respective periods then ended. SCO has no liabilities or obligations of
any nature (matured or unmatured, fixed or contingent) which are,
individually or in the aggregate, of a nature required to be disclosed on
the face of a consolidated balance sheet for SCO and its consolidated
subsidiaries prepared in accordance with GAAP and which would have a
Material Adverse Effect on the Group Business, except for such liabilities
or obligations as (i) were accrued or provided for in the consolidated
balance sheet at June 30, 2000 included in the SCO Consolidated Financial
Statements as of the date thereof (the "SCO Consolidated Financial
Statements Balance Sheet Date") or (ii) are of a normally recurring nature
and were incurred after the SCO Consolidated Financial Statements Balance
Sheet Date in the ordinary course of business consistent with past
practice. All liabilities and valuation accounts established and reflected
in the SCO Consolidated Financial Statements are, to SCO's Knowledge,
reasonably adequate. At the SCO Consolidated Financial Statements Balance
Sheet Date, there were no material loss contingencies arising from the
conduct of the business of SCO and its consolidated subsidiaries which are
required to be provided for or disclosed, but are not provided for or
disclosed, in the SCO Consolidated Financial Statements.
(c) Group Financial Statements; Absence of Undisclosed
Liabilities. Attached as Schedule 2.4(c)(1) to the SCO Disclosure Letter
are the audited combined financial statements of the Group Business dated
as of and for the period ended June 30, 2000 including a combined balance
sheets as of June 30, 2000 (the "2000 Group Balance Sheet") and a combined
balance sheet for September 30, 1999 and 1998, together with combined
statements of operations, cash flows, and Group Business equity for the two
years and nine months in the period ended September 30, 1999 (collectively
the "Group Financial Statements"). The Group Financial Statements comply in
all material respects with the then applicable accounting requirements and
rules and regulations of the SEC with respect thereto, and present fairly,
in all material respects, the combined financial position of the Group
Business as of September 30, 1999 and June 30, 2000, and the combined
results of its operations and its cash flows for each of the two years and
nine months in the period ended September 30, 1999, in conformity with
GAAP. The Contributed Company Group and the Contributing Companies (with
respect to the Group Business) have no Liabilities of any nature (matured
or unmatured, fixed or contingent) which (i) are related to or arose in
connection with the Group Business; (ii) individually or in the aggregate,
are of a nature required to be recorded on the face of or disclosed in the
notes to the Group Financial Statements; and (iii) are material to the
Group Business taken as a whole, except for such Liabilities as (A) were
accrued, provided for or disclosed in the Group Financial Statements or (B)
are of a normally recurring nature and were incurred after June 30, 2000
(the "Group Financial Statements Balance Sheet Date"), in the ordinary
course of business consistent with past practice. All liabilities and
valuation accounts established and reflected in the Group Financial
Statements are, to SCO's Knowledge, reasonably adequate. To SCO's
Knowledge, at the Group Financial Statements Balance Sheet Date, there were
no material loss contingencies which are not properly provided for or
disclosed in the Group Financial Statements.
2.5 Disclosure; Information Supplied. No representation or warranty made
by SCO in this Agreement, nor any final financial statement, certificate or
exhibit prepared and furnished or to be prepared and furnished by it, or its
representatives pursuant hereto or in connection with the transactions
contemplated hereby, contains any untrue statement of a material fact, or omits
to state a material fact necessary to make the statements or facts contained
herein or therein, taken as a whole, not misleading in light of the
circumstances under which they were furnished. None of the information supplied
or to be supplied by SCO for inclusion or incorporation by reference in the Form
S-4 and Prospectus/Proxy Statement will, at the time the information is supplied
contain, after giving effect to any supplement or amendment thereto, any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein in light of the
circumstances under which they are made, not materially misleading.
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2.6 Compliance with Applicable Laws. Except as disclosed in the SCO SEC
Documents filed prior to the date hereof, the Group Business is not being
conducted and no Contributed Company is in violation of any law, ordinance,
regulation, rule or order of any governmental entity where such violation would
have a Material Adverse Effect on the Group Business. Except as disclosed in the
SCO SEC Documents filed prior to the date hereof, neither SCO, any Contributing
Company, nor any member of the Contributed Company Group has been notified in
writing by any governmental entity that any investigation or review with respect
to the Contributed Companies or any of the Contributed Subsidiaries, any of the
Group Assets or the Group Business is pending or threatened, nor has any
governmental entity notified any of them in writing of its intention to conduct
the same. The Group Assets include all permits, licenses and franchises from
governmental entities required for the Conduct of the Group Business, except for
those whose absence would not have a Material Adverse Effect on the Group
Business and those which would terminate as a consequence of the SCO
Transaction.
2.7 Litigation. Except as would not reasonably be expected to have a
Material Adverse Effect on the Group Business or as set forth in Section 2.7 of
the SCO Disclosure Letter or as disclosed in the SCO SEC Documents, there is no
suit, action, arbitration, demand, investigation, claim or proceeding pending
or, to SCO's Knowledge, threatened against the Contributed Company Group, any of
the Contributing Companies or the Group Assets; nor is there any judgment,
decree, injunction, ruling or order of any governmental entity, statutory body
or arbitrator or settlement or compromise agreement outstanding against the
Contributed Company Group or any of the Contributing Companies or the Group
Assets. SCO has delivered or made available to Caldera or its counsel correct
and complete copies of all material correspondence prepared by its counsel for
SCO auditors in connection with the last two completed audits of SCO's Financial
Statements and the audit of the Group Financial Statements and any such
correspondence since the date of the last such audit. No member of the
Contributed Company Group and none of the Contributing Companies is a party to
any decree, judgment, order or arbitration award (or agreement entered into in
any administrative, judicial, investigative or arbitration proceeding with any
governmental authority) with respect to the Group Assets, Employees, or Group
Business that could reasonably be expected to have a Material Adverse Effect on
the Group Business. Except for violations as would not have a Material Adverse
Effect on the Group Business, none of the Contributing Companies nor any member
of the Contributed Company Group is in violation of any decree, judgement, order
or arbitration award that names such company, or any of such companies, as a
party or that otherwise, to SCO's Knowledge, involves such company or any of the
Group Assets, or in violation of any law, ordinance, statute, regulation or EU
directive or decree, order, judgment or ruling of any governmental authority to
which the Group Assets or the Contributed Stock are subject, including, without
limitation, laws, rules and regulations relating to occupational health and
safety, equal employment opportunities, fair employment practices, and sex,
race, religious, disability and age discrimination. To SCO's Knowledge, there is
no claim, action, suit, arbitration, mediation, investigation or other
proceeding of any nature pending or, threatened, at law or in equity, by way of
arbitration or before any court, tribunal, governmental department, statutory
body, commission, board or agency that: (i) may adversely affect, contest or
challenge any party's authority, right or ability to perform its obligations
under this Agreement or any of the Ancillary Agreements; (ii) challenges or
contests the Contributing Companies' or the Contributed Companies' right, title
or ownership of any of the Group Assets or the Contributed Stock or seeks to
impose an Encumbrance (other than a Group Permitted Encumbrance) on, or a
transfer of title or ownership of, any of the Group Assets or the Contributed
Stock; (iii) asserts that any action taken by any employee, consultant or
contractor of the Contributed Companies or Contributing Companies in connection
with the Group Business infringes or misappropriates any Intellectual Property
Rights of any third party; (iv) seeks to enjoin, prevent or hinder operation of
the Group Business; (v) seeks to enjoin, prevent, or hinder the consummation of
any of the transactions contemplated by this Agreement or any of the Ancillary
Agreements; (vi) would impair or have an adverse affect on Newco's right or
ability to use or exploit any of the Group Assets; (vii) involves or relates to
any potentially material claim against Contributing Companies or the Group
Assets by any creditor thereof; or (viii) involves any claim of fraudulent
conveyance or any similar claim, except in cases (ii), (iii), (iv), (vi) and
(vii) where such proceeding could not reasonably be expected to have a Material
Adverse Effect on Newco.
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2.8 ERISA and Other Compliance.
(a) Section 2.8 of the SCO Disclosure Letter lists each employment,
severance, compensation or other similar contract, arrangement or policy
and each plan or arrangement (written or oral, contractual or
discretionary) providing for insurance coverage (including any self-insured
arrangements), workers' benefits, vacation benefits, severance benefits,
disability or permanent health insurance benefits, death benefits,
hospitalization or other medical benefits, retirement benefits, deferred
compensation, profit-sharing, bonuses, commissions, stock options, stock
purchase, phantom stock, stock appreciation, save as you earn or other
forms of incentive compensation or post-retirement insurance, compensation
or benefits for employees, consultants or directors (other than workers
compensation, unemployment compensation and other government mandated
programs) which both (A) is entered into, maintained or contributed to, as
the case may be, by any member of the Contributed Company Group or any of
the Contributing Companies, and (B) covers any Employee (collectively as
the "Group Benefit Arrangements"). Each Group Benefit Arrangement
maintained by any member of the Contributed Company Group has been
maintained in compliance with its terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations which are
applicable to such Group Benefit Arrangement except as would not have a
Material Adverse Effect on the Group Business. Section 2.8(a) of the SCO
Disclosure Letter also identifies each "employee benefit plan," as defined
in Section 3(3) of ERISA ("Employee Benefit Plan"), in which any of the
Employees participate (collectively, the "Group Employee Plans"). Copies of
all Group Benefit Arrangements have been made available to Caldera or its
counsel. All contributions or premiums currently due and payable with
respect to any of the Group Employee Plans have been made as required under
ERISA or have been accrued on the 2000 Group Balance Sheet or will be made
prior to the Effective Time. Any Contributed Company Employee Plan intended
to be qualified under Section 401(a) of the Code has either obtained from
the Internal Revenue Service a favorable determination letter as to its
qualified status under the Code, including all amendments to the Code
effected by the Tax Reform Act of 1986, or has applied to the Internal
Revenue Service for such a determination letter prior to the expiration of
the requisite period under applicable Treasury Regulations or Internal
Revenue Service pronouncements in which to apply for such determination
letter and to make any amendments necessary to obtain a favorable
determination or has been established under a standardized prototype plan
for which an Internal Revenue Service opinion letter has been obtained by
the plan sponsor and is valid as to the adopting employer. Each Contributed
Company has made available upon Newco's request the most recent Internal
Revenue Service determination or opinion letter issued with respect to each
such Contributed Company Employee Plan, and nothing has occurred since the
issuance of each such letter which could reasonably be expected to cause
the loss of the tax-qualified status of any Contributed Company Employee
Plan subject to Code Section 401(a).
(b) None of the Group Employee Plans maintained by any of the
Contributing Companies or any member of the Contributed Company Group (i)
is a multiemployer plan, within the meaning of Section 3(37) or 4001(a)(3)
of ERISA (a "Multiemployer Plan"), or a single employer pension plan,
within the meaning of Section 4001(a)(15) of ERISA, for which Newco could
incur liability under Section 4063 or 4064 of ERISA (a "Multiple Employer
Plan"), or (ii) provides or promises to provide retiree medical or life
insurance benefits except in connection with (a) benefit coverage mandated
by applicable law, including without limitation, coverage provided pursuant
to Section 4980B of the Code; (b) death or disability benefits under any of
the Group Benefit Arrangements; (c) benefits arising in connection with a
separation or severance program, plan or arrangement; and (d) life
insurance benefits for any employee who dies while in service with any of
the Contributing Companies or any member of the Contributed Company Group.
None of the Contributing Companies or any member of the Contributed Company
Group has incurred or will incur prior to or as of the Effective Time any
material liability under, arising out of or by operation of Title IV of
ERISA (other than liability for premiums to the Pension Benefit Guaranty
Corporation arising in the ordinary course), including any liability in
connection with (i) the termination or
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reorganization of any employee pension benefit plan subject to Title IV of
ERISA or (ii) with withdrawal from any Multiemployer Plan or Multiple
Employer Plan.
(c) The appropriate Contributing Company or Contributed Company has
timely provided, or will have provided prior to the Effective Time, to
Employees entitled thereto all required notices and made coverage available
pursuant to Section 4980B of the Internal Revenue Code and the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), with
respect to any "qualifying event" (as defined in Section 4980B(f)(3) of the
Internal Revenue Code). The appropriate Contributing Company or Contributed
Company will timely provide to Employees entitled thereto all required
notices and make coverage available pursuant to Internal Revenue Code
Section 4980B and COBRA with respect to any "qualifying event" (as defined
in Section 4980B(f)(3) of the Internal Revenue Code) occurring prior to and
including the Effective Time. No material Tax payable on account of Section
4980B of the Internal Revenue Code has been incurred by the Contributing
Companies or any of the Contributed Companies with respect to any current
Employees (or its beneficiaries).
(d) The consummation of the transactions contemplated by this
Agreement will not (i) entitle any current or former employee or other
service provider of the Contributed Companies or the Contributing Companies
to severance benefits or any other payment or (ii) accelerate the time of
payment or vesting (including any SCO Option or unvested shares of SCO
Common Stock), or increase the amount of compensation due any such employee
or other service provider. No payment or benefit payable or which may
become payable by any of the Contributed Companies or by any of the
Contributing Companies with respect to any current or former employee, or
other current or former service provider shall constitute a "parachute
payment" (as defined in Section 280G(b)(2) of the Internal Revenue Code).
Within five (5) business days following the date of this Agreement, SCO
shall identity in Section 2.8 of the SCO Disclosure Letter all persons on
the Section 11.1 Schedule who SCO reasonably believes are, as of the date
of this Agreement, "disqualified individuals" (within the meaning of
Section 280G of the Code and the regulations promulgated thereunder) with
respect to the Contributing Companies or the Contributed Companies. Within
five (5) business days prior to the expected Closing Date, SCO shall revise
Section 2.8 of the SCO Disclosure Letter to reflect any additional
information which SCO reasonably believes would impact the determination of
persons who are of such date "disqualified individuals" (within the meaning
of Section 280G of the Code and the regulations promulgated thereunder).
(e) To SCO's Knowledge, no Employee who is a key developer of a Group
Product is subject to any agreement, obligation, order or other legal
hindrance that impedes or might impede such Employee from devoting his or
her full business time to the affairs of Newco after the Effective Time.
(f) None of the Contributed Companies are indebted to any executive
officer or director of any such Contributed Company, whether by loan,
advance or otherwise, other than for salaries accrued but not yet payable
and reimbursable out-of-pocket expenses incurred in the ordinary course of
business consistent with past practice and not yet payable, nor, except as
described in Section 2.8(f) to the SCO Disclosure Letter or except as
disclosed in the 2000 Group Balance Sheet or the SCO SEC Documents, is any
officer, director, employee or shareholder so indebted to any of SCO or any
of the Contributed Companies, nor does any Employee have any right to force
SCO or any Contributing Company to repurchase any stock.
(g) The Contributed Company Group and the Contributing Companies are
in compliance in all material respects with all currently applicable laws
and regulations, domestic or foreign, respecting employment, discrimination
in employment, terms and conditions of employment, wages, hours,
governmental and administrative contribution requirements and occupational
safety and health and employment practices, and is not engaged in any
unfair labor practice with respect to the Employees in each of the
countries where the Contributed Company Group and the Contributing
Companies have employees. The Contributed Company Group and the
Contributing Companies have withheld all amounts required by law or by
agreement to be withheld from the wages, salaries, and other payments
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to Employees; and is not liable for any arrears of wages or any taxes or
any penalty for failure to comply with any of the foregoing. The
Contributing Company Group and the Contributing Companies are not liable
for any payment to any trust or other fund or to any governmental or
administrative authority, with respect to unemployment compensation
benefits, social security or other benefits or obligations for Employees
(other than routine payments to be made in the normal course of business
and consistent with past practice). There are no pending claims against the
Contributed Company Group and the Contributing Companies under any workers
compensation plan, policy, statute or regulation or any other plan or
policy to which the Contributed Company Group and/or any Contributing
Company are parties or for long term disability. There are no controversies
or disputes pending or, to the knowledge of the Contributed Company Group
and the Contributing Companies, threatened, between the Contributed Company
Group and the Contributing Companies and any of their respective employees,
which controversies have or could reasonably be expected to result in an
action, suit, proceeding, claim, arbitration or investigation before any
agency, court or tribunal, foreign or domestic. None of the Contributed
Company Group or the Contributing Companies is a party to any collective
bargaining agreement or other labor union contract nor does the Contributed
Company Group and the Contributing Companies know of any activities or
proceedings of any labor union to organize any such Employees. To SCO's
knowledge, no Employees of the Contributed Company Group and the
Contributing Companies are in violation of any term of any employment
contract, patent disclosure agreement, enforceable noncompetition
agreement, or any enforceable restrictive covenant to a former employer
relating to the right of any such Employee to be employed by SCO because of
the nature of the business conducted or presently proposed to be conducted
by SCO or to the use of trade secrets or proprietary information of others.
(h) Section 2.8(h) of the SCO Disclosure Letter lists, with respect to
any member of the Contributed Company Group or any of the Contributing
Companies, all employee benefit plans, programs or arrangements for
employees who work outside the United States ("Foreign Employee Plans").
Except as disclosed in Section 2.8(h) of the SCO Disclosure Letter, no
member of the Contributed Company Group or any of the Contributing
Companies maintains any Foreign Employee Plans other than those required by
applicable law. SCO has furnished or made available to Caldera a copy of
each of the Foreign Employee Plans. Each Foreign Employee Plan has been
operated and administered in accordance with its terms and applicable laws,
rules and regulations.
2.9 Absence of Certain Changes or Events. Except as disclosed in Section
2.9 of the SCO Disclosure Letter, since the Group Financial Statements Balance
Sheet Date there has not occurred:
(a) any change or event which could reasonably be expected to have a
Material Adverse Effect on the Group Business;
(b) any amendments or changes in the Certificate of Incorporation or
Bylaws (or similar or equivalent governing documents on each relevant
jurisdiction) of any member of the Contributed Company Group;
(c) any damage, destruction or loss to or of the Group Assets not
covered by insurance, which would have a Material Adverse Effect on the
Group Business;
(d) any redemption, repurchase or other acquisition of shares of any
member of the Contributed Company Group, or any declaration, setting aside
or payment of any dividend or other distribution by any Contributing
Company or any member of the Contributed Company Group to any entity other
than a member of the Contributed Company Group (whether in cash, stock or
property) of the Group Assets or any proceeds generated by the conduct of
the Group Business;
(e) any material increase in or modification of the compensation or
benefits payable, or to become payable, by the Contributed Companies to the
Employees, except in the ordinary course of the business, consistent with
past practice or except as necessary to respond to third party solicitation
of Employees,
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(f) other than as required by applicable statute or governmental
regulation, any material increase in or modification of any Group Benefit
Arrangement (including, but not limited to, the granting of stock options,
the acceleration of the vesting schedules in effect for outstanding stock
options, restricted stock awards or stock appreciation rights) that will
become binding upon Newco upon consummation of the transactions
contemplated herein, for or with respect to any of the Employees, other
than increases or modifications occurring after the date hereof, which are
authorized pursuant to Section 4.3 below;
(g) any sale of a material amount of the Group Assets, or any
acquisition by any member of the Contributed Company Group of a material
amount of assets;
(h) any stock/share capital being allotted or issued or agreed to be
allotted or issued or any alteration in any term of any outstanding capital
stock or rights to acquire capital stock, share or loan capital of any
member of the Contributed Company Group, including, but not limited to,
acceleration of the vesting or any change in the terms of any outstanding
stock options;
(i) (A) any incurrence, assumption or guarantee by any member of the
Contributed Company Group of any debt of any person, other than any member
of the Contributed Company Group, for borrowed money in an amount exceeding
$250,000 in the aggregate; (B) issuance or sale by any member of the
Contributed Company Group of any securities convertible into or
exchangeable for their respective debt securities; or (C) issuance or sale
of options or other rights to acquire from SCO or the Contributed Company
Group, directly or indirectly, debt securities of any member of the
Contributed Company Group, or any securities convertible into or
exchangeable for any such debt securities;
(j) any creation or assumption by a Contributing Company or a member
of the Contributed Company Group of any Encumbrance (other than Group
Permitted Encumbrances) on any Group Asset in excess of $250,000
individually or in the aggregate, other than to refinance a liability
reflected in the SCO Financial Statements or the Group Financial Statements
in the ordinary course of business;
(k) any making by any member of the Contributed Company Group of any
loan, advance or capital contribution to or investment in any person other
than to refinance a liability reflected in the SCO Financial Statements or
the Group Financial Statements and other than (i) loans, advances or
capital contributions made in the ordinary course of the business, and (ii)
other loans and advances, where the aggregate amount of any such items
outstanding at any time does not exceed $250,000;
(l) any amendment of, relinquishment, termination or non-renewal by
the Contributing Companies or the Contributed Company Group of any
Contributed Contract, other than in the ordinary course of business
consistent with past practice;
(m) any transfer or grant of a right under Intellectual Property
Rights included in the Group Assets, except in the ordinary course of
business, consistent with past practice,
(n) any labor dispute with, or charge of unfair labor practice by, SCO
(relating to Employees) or any member of the Contributed Company Group
(other than routine individual grievances), any activity or proceeding by a
labor union or representative thereof to organize any Employees or, to
SCO's Knowledge, any campaign being conducted to solicit authorization from
Employees to be represented by such labor union, where such dispute,
practice, activity, proceeding, or campaign would have a Material Adverse
Effect on the Group Business;
(o) any change in accounting methods;
(p) any agreement by any member of the Contributed Company Group to
take any of the actions described in the preceding clauses (a) through (o)
(other than the transactions contemplated by this Agreement or the
Ancillary Agreements).
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2.10 Full Force and Effect. Each of the Contributed Contracts and Group
Governmental Permits is in full force and effect and is not subject to any
breach or default thereunder by any Contributing Company or any member of the
Contributed Company Group or, to SCO's Knowledge, any other party thereto,
except for those Contributed Contracts and Group Governmental Permits, the
absence of which would not have a Material Adverse Effect on the Group Business.
2.11 Agreements. Section 2.11 of the SCO Disclosure Letter lists all the
contracts as of the date hereof of the type described below to which any member
of the Contributed Company Group is a party and which is material to the Group
Business (herein, the "Material Contributed Contracts") (and copies of all such
Material Contributed Contracts have been identified to and made available for
review by Caldera or its counsel):
(a) contract with or commitment to any labor union which would have a
Material Adverse Effect on the Group Business;
(b) continuing contract for the future purchase, sale or manufacture
of products, material, supplies, equipment or services requiring payment to
or from any member of the Contributed Company Group or any Contributing
Company, the non-continuance of which would have a Material Adverse Effect
on the Group Business, or in which any member of the Contributed Company
Group or any Contributing Company has granted or received manufacturing
rights, most favored nations pricing provisions or exclusive marketing
rights relating to the Group Products, other than purchase contracts with
vendors who are not the top ten (10) vendors of any member of the
Contributed Company Group or of any Contributing Companies (as measured by
purchases from them in the most recently ended fiscal year);
(c) contract providing for the development of technology used or
incorporated in any Group Products currently distributed in connection with
the Group Business or which requires any member of the Contributed Company
Group to perform specified development work for a third party, the non-
continuance of which would have a Material Adverse Effect on the Group
Business;
(d) joint venture contract or agreement or other agreement which is
reasonably expected to involve a sharing of profits or losses in any one
year in excess of $100,000 individually or in the aggregate from any joint
enterprise with any party (other than any member of the Contributed Company
Group);
(e) indenture, mortgage, promissory note, loan agreement, guarantee or
other agreement or commitment for the borrowing of money, for a line of
credit or for a leasing transaction of a type required to be capitalized
(other than those reflected in the SCO Financial Statements or the Group
Financial Statements, or those pursuant to which payments by any member of
the Contributed Company Group will not exceed $50,000 individually or
$250,000 in the aggregate);
(f) agreement or arrangement for the sale of any Group Assets having a
value individually or in the aggregate exceeding $100,000 (other than those
entered into in the ordinary course of business consistent with past
practice);
(g) agreement which would restrict Newco from engaging in any material
aspect of the Group Business or from selling any of the material Group
Products in any material geographic area (including any agreement pursuant
to which any of them has granted exclusive rights in the Group Products to
a third party);
(h) SCO IP Rights Agreement (as defined in Section 2.15 below), other
than agreements entered into with customers in the ordinary course of
business; or
(i) agreement between or among SCO and any member of the Contributed
Company Group regarding inter-company loans, revenue or cost or Tax
sharing, ownership or license of SCO IP Rights for Group Products, or
intercompany royalties or dividends.
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2.12 No Defaults. Notwithstanding Section 1.4(c), there exists no event
(including closing of the transactions contemplated by this Agreement),
condition or occurrence which, after notice or lapse of time, or both, would
constitute a default by the Contributing Companies who are parties thereto under
any Contributed Contract in any manner which would have a Material Adverse
Effect on the Group Business.
2.13 Certain Agreements. Neither the execution and delivery of this
Agreement or the Ancillary Agreements, nor the consummation of the transactions
contemplated hereby and thereby, will, (i) result in any payment in an amount
exceeding $50,000 individually or $250,000 in the aggregate (including, without
limitation, severance, unemployment compensation, golden parachute, bonus or
otherwise) becoming due by any member of the Contributed Company Group (or by
any Contributing Company, with respect to the Group Business) or to any
Employee(s) or other current or former service provider under any Group Benefit
Arrangement or otherwise, (ii) increase any benefits otherwise payable by Newco
under any Group Benefit Arrangement by more than $50,000 individually or
$250,000 in the aggregate, or (iii) result in the acceleration of the time of
payment or vesting of any such benefits.
2.14 Taxes. SCO and each of its subsidiaries have properly completed and
timely filed, or caused to be properly completed and timely filed, all Tax
returns required to be filed by them and have paid, or caused to be paid, all
Taxes that are shown on such Tax returns as due and payable. All Taxes of SCO
and its subsidiaries for all periods through June 30, 2000, have been fully paid
(except for Taxes that are adequately provided for or reflected in the SCO
Consolidated Financial Statements). Since June 30, 2000, no material Tax
liability has been assessed, or is, to SCO's Knowledge, proposed to be assessed,
incurred or accrued (other than liabilities for Taxes arising in the ordinary
course of business) against SCO or any of its subsidiaries. To SCO's Knowledge,
neither SCO nor any of its subsidiaries has received any notification that any
material issues have been raised (or are currently pending) by the Internal
Revenue Service or any other taxing authority, including, without limitation,
any sales tax authority, in connection with any of the Tax returns referred to
in the first sentence of this Section 2.14, and no unexpired waivers of statutes
of limitations have been given or requested with respect to Tax returns or Taxes
of SCO and its consolidated subsidiaries. No taxing authority is currently
conducting an audit or investigation of any of the aforesaid Tax returns or to
SCO's Knowledge is about to conduct such an audit or investigation with respect
to such Tax returns. Any deficiencies asserted or assessments (including
interest and penalties) made as a result of any examination by the Internal
Revenue Service or by appropriate national, state, provincial or departmental
authorities of the Tax returns with respect to SCO and any of its subsidiaries
have been paid or adequately provided for in the SCO Consolidated Financial
Statements, and, to SCO's Knowledge, no proposed (but unassessed) additional
Taxes have been asserted and no Tax liens have been filed against SCO or any of
its subsidiaries other than for Taxes not yet due and payable. Neither SCO nor
any member of the Contributed Company Group (i) has made an election to be
treated as a "consenting corporation" under Section 341(f) of the Internal
Revenue Code or (ii) is a "personal holding company" within the meaning of
Section 542 of the Internal Revenue Code;
(b) If any of the capital assets of the UK Contributed Companies were
disposed of for a consideration equal to the book value of that asset in or
adopted for the purposes of the SCO Consolidated Financial Statements, no
liability to corporation tax on chargeable gains or balancing charge under
the Capital Allowances Act 1990 would arise (for this purpose there shall
be disregarded any relief or allowance available to the UK Contributed
Companies (other than amounts falling to be deducted from the consideration
receivable under section 38 of the TCGA)). No chargeable gain or balancing
charge would arise on the disposal by the Contributing Company of any asset
acquired since the SCO Consolidated Financial Statements Date for a
consideration equal to the consideration actually given for the acquisition
of such asset (disregarding any indexation relief);
(c) The UK Contributed Companies have not entered into any
transaction, contract or arrangement, whether verbal or written and whether
made within or outside the UK, under which it has or may become liable to
pay or to account for stamp duty or stamp duty reserve tax and which
liability remains unsatisfied;
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(d) The UK Contributed Companies have not entered into any indemnity,
guarantee, covenant, charge or other agreement under which they have agreed
to, or can be procured to pay a sum equivalent to or by reference to
another person's liability to Tax, nor do any other circumstances exist
whereby the Contributed Companies would have to make such a payment;
(e) All reliefs assumed as an asset or otherwise taken into account in
the SCO Consolidated Financial Statements are available to be utilized by
the UK Contributed Companies at Closing;
(f) The UK Contributing Companies have never been members of a group
of companies for UK tax purposes other than a group comprising only the UK
Contributing Companies;
(g) The provisions of Part XV of the UK Value Added Tax Regulations
1995 (capital goods scheme) do not apply to any of the UK Contributed
Assets;
(h) No election has been nor will before Closing be made pursuant to
paragraph 2 of Schedule 10 to the Value Added Tax Act 1994 ("VATA 1994") in
relation to any of the UK Properties or any part of any of them;
(i) All UK value added tax payable upon the importation of goods, and
all excise duties payable to HM Customs and Excise payable in respect of
the UK Contributed Assets have been paid in full, and none of the UK
Contributed Assets is liable to confiscation, forfeiture or distress;
(j) All documents (other than those which have ceased to have any
legal effect) to which the UK Contributed Companies or any member of the UK
Contributed Companies group of companies is a party and which are material
to the title of the UK Contributed Assets have been duly stamped and no
such documents which are outside the UK would attract stamp duty if they
were bought into the UK;
(k) All National Insurance and sums payable by the UK Contributed
Companies to the UK Inland Revenue under the PAYE system have been duly and
properly paid. Proper records have been maintained in respect of all such
matters.
(l) There is no unsatisfied liability to capital transfer tax or
inheritance tax attached or attributable to any of the UK Contributed
Assets and none of the UK Contributed Assets are, or are likely to be,
subject to an Inland Revenue charge as mentioned in Section 237 of the
Inheritance Tax Act 1984; and
(m) No person is liable to capital transfer tax or inheritance tax
attributable to the value of any of the UK Contributed Assets in
consequence no person has the power under Section 212 of the Inheritance
Tax Act 1984 to raise the amount of such tax by the sale or mortgage of or
by a charge on any of the UK Contributed Assets.
2.15 Intellectual Property.
(a) The Contributed Companies and, insofar as it relates to the Group
Business, the Contributing Companies own, or have the right to use, sell or
license such Intellectual Property Rights as are necessary or required for
the Conduct of the Group Business (such Intellectual Property Rights being
hereinafter collectively referred to as the "SCO IP Rights") and such
ownership or rights to use, sell or license are reasonably sufficient for
the Conduct of the Group Business, except for any failure to own or have
the right to use, sell or license that would not have a Material Adverse
Effect on the Group Business.
(b) All SCO IP Rights are owned free and clear of any Encumbrances
(other than Group Permitted Encumbrances).
(c) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
material breach of any material instrument or material agreement in respect
of any SCO IP Rights licensed by or to any Contributing Company or
Contributed Company (the "SCO IP Rights Agreements"), will not cause the
forfeiture or termination
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or give rise to a right of forfeiture or termination of any SCO IP Right or
materially impair the right of Newco to use, sell or license any SCO IP
Right or portion thereof (except where such breach, forfeiture, termination
or impairment would not have a Material Adverse Effect on the Group
Business).
(d) There are no royalties, honoraria, fees or other payments payable
by any member of the Contributed Company Group or any Contributing Company
to any person by reason of the ownership, use, license, purchase, sale or
disposition or acquisition of any of the SCO IP Rights in an amount
exceeding $100,000 in any one year.
(e) To SCO's Knowledge, no third party is infringing or
misappropriating any of the SCO IP Rights.
(f) To SCO's Knowledge, (i) neither the manufacture, marketing,
license, sale or intended use of any Group Product violates any license or
agreement relating thereto or infringes any Intellectual Property Right of
any other party, (ii) there is no pending or threatened claim or litigation
contesting the validity, ownership or right to use, sell, license or
dispose of any SCO IP Right, and (iii) no third party has notified the
Contributing Companies or the Contributed Company Group that any SCO IP
Right, or the proposed use, sale, license or disposition thereof, conflicts
or will conflict with the rights of any other party, nor is there any basis
therefor, except for any violations, infringements, claims or litigation
that would not have a Material Adverse Effect on the Group Business.
(g) The Contributing Companies and the Contributed Company Group have
taken reasonable and practicable steps designed to safeguard and maintain
the secrecy and confidentiality of, and its proprietary rights in, all
material trade secrets or other confidential information constituting SCO
IP Rights. To SCO's Knowledge, no current or prior officers, employees or
consultants of the Contributing Companies or the Contributed Company Group
claim an ownership interest in or have a lien on any SCO IP Rights or any
form of compensation out of the ordinary course of business as a result of
having been involved in the development of such property while so employed,
or retained, or otherwise. To SCO's Knowledge, all development employees of
the SCO IP Rights, and all other officers, employees and consultants of the
Contributed Company Group have executed and delivered an agreement
regarding the protection of proprietary information and the assignment to
his/her employer or principal of the SCO IP Rights arising from the
services performed by such persons, except where this absence of such
agreement would not have a Material Adverse Effect on the Group Business.
(h) Section 2.15(h) of the SCO Disclosure Letter lists each license,
sublicense, agreement or other permission pursuant to which SCO or the
Contributed Business Group is entitled to use third party IP Rights
(excluding shrink wrap licenses to commercially available software sold at
retail) as of the date hereof, the absence of which would have a Material
Adverse Effect on the Group Business that a third party owns and that SCO
or the Contributed Business Group uses pursuant to a license, sublicense,
agreement or other permission, and describes and identifies such license,
sublicense, agreement or other permission (excluding shrink wrap licenses
to commercially available software sold at retail). Such license,
sublicense, agreement or permission covering the item is legal, valid,
binding, enforceable and in full force and effect and will continue to be
legal, valid, binding, enforceable and in full force and effect on
identical terms to Newco's benefit immediately following the Effective
Time, except where it would not have a Material Adverse Effect on Newco,
and such license, sublicense, agreement or permission does not restrict the
ability to market any material Group Product in any material jurisdiction
or with respect to any material market or industry, and neither SCO nor the
Contributed Company Group is in breach or default of any such license,
sublicense, agreement or permission in a manner which would have a Material
Adverse Effect on the Group Business. No person other than the Contributing
Companies holds any license or other right to manufacture, modify, or
create derivative works of any of the Group Products, other than OEM
agreements that would not have a Material Adverse Effect on the Group
Business. No person (other than Newco) will be or become entitled to
receive a copy of source code of any software included among the Group
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Assets as a result of this Agreement, any Ancillary Agreement or any other
agreement or transaction contemplated by this Agreement. Except as
disclosed in Section 2.15(h) of the SCO Disclosure Letter, to SCO's
Knowledge, no person holds or has been granted access to any copy of source
code of any software included among the Group Assets unless such person has
agreed in writing (i) to hold such source code in confidence and take
reasonable steps to preserve the secrecy of such source code, and (ii) not
to use such source code for any purpose except (A) to support such person's
internal use of such source code or (B) to modify such source code solely
for the purpose of internally using such modifications. None of SCO or the
Contributed Companies have knowingly taken or knowingly failed to take any
action that, directly or indirectly, has caused any Intellectual Property
Rights in source code of material Group Products to enter the public
domain, such as would have a Material Adverse Effect on the Group Business.
2.16 Fees and Expenses. Except for the fees and expenses set forth in
SCO's engagement letter with Chase HQ, a copy of which has been provided to
Caldera, no member of the Contributed Company Group and none of the Contributing
Companies has paid or become obligated to pay any fee or commission to any
broker, finder or intermediary in connection with the transactions contemplated
by this Agreement and the Ancillary Agreements.
2.17 Insurance. The members of the Contributed Company Group maintain
fire and casualty, general liability, business interruption, directors and
officers, product liability and sprinkler and water damage insurance that they
believe to be reasonable for its respective businesses.
2.18 Ownership of Property. Except for Group Permitted Encumbrances, the
Contributed Company Group and the Contributing Companies own, or at the
Effective Time will own, the Contributed Company Assets, free and clear of all
Encumbrances. All real and personal property included in the Group Assets is in
good working condition and suitable for its intended use, subject to ordinary
wear and tear. To SCO's Knowledge, no member of the Contributed Company Group is
in violation in any material respect with any zoning, building or safety
ordinance, regulation or requirement or other law or regulation applicable to
the operation of its respective owned or leased properties.
2.19 Environmental Matters.
(a) During the period that the Contributed Companies and the
Contributing Companies (with respect to the Group Assets or any real estate
leased thereunder) have leased or owned its respective properties or owned
or operated its respective facilities, there have been, to SCO's Knowledge,
no disposals, releases or threatened releases of Hazardous Materials on,
from, under or about such properties or facilities which would cause a
Material Adverse Effect on Newco. To SCO's Knowledge there is no presence,
disposals, releases or threatened releases of Hazardous Materials on, from,
under or about any of such properties or facilities, which may have
occurred prior to said Member of the Contributed Company Group or the
Contributing Companies (with respect to the Group Assets or any real estate
leased thereunder) having taken possession of any of such properties or
facilities, where such Hazardous Materials would cause a Material Adverse
Effect on Newco.
(b) None of the properties or facilities which are Group Assets is or
has been the subject of an Environmental Violation, which would cause a
Material Adverse Effect on Newco. During the time that a Member of the
Contributed Company Group or the Contributing Companies (with respect to
the Group Assets or any real estate leased thereunder) owned or leased its
respective properties and facilities, none of said companies and, to SCO's
Knowledge, no third party, used, generated, manufactured or stored on,
under or about such properties or facilities or transported to or from such
properties or facilities any Hazardous Materials (except those Hazardous
Materials associated with general office use or janitorial supplies) in a
manner which would result in a Material Adverse Effect on Newco.
(c) During the time that any member of the Contributed Company Group
and the Contributing Companies (with respect to the Group Assets or any
real estate leased thereunder) owned or leased its respective properties
and facilities, to SCO's Knowledge, there has been no litigation brought or
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threatened against any such Company, or any settlement reached by any such
Company with, any party or parties concerning the presence, disposal,
release or threatened release of any Hazardous Materials on, from or under
any of such properties or facilities or relating to any alleged
Environmental Violation, except for litigation or settlement which would
not have a Material Adverse Effect on Newco.
2.20 Interested Party Transactions. Except as disclosed in the SCO SEC
Documents, no officer or director of a Contributing Company, or any "affiliate"
or "associate" (as those terms are defined in Rule 405 promulgated under the
Securities Act) of a Contributing Company has, either directly or indirectly, a
material interest in: (i) any person or entity which purchases from or sells,
licenses or furnishes to the Contributed Company Group in connection with the
Group Business, any goods, property, technology or intellectual or other
property rights or services; or (ii) any Contributed Contract; which, in the
case of either subpart (i) or (ii) would have a Material Adverse Effect on the
Group Business.
2.21 Fairness Opinion. SCO's Board of Directors has received an opinion
dated as of the date hereof from Chase HQ to the effect that, as of the date
hereof, the terms of the transactions contemplated by this Agreement and the
Ancillary Agreements are fair to SCO from a financial point of view.
2.22 Title to and Condition and Sufficiency of Group Assets. A member of
the Contributed Company Group and/or a Contributing Company owns or at the
Closing will own the Group Assets and have good and marketable title thereto,
free and clear of all Encumbrances whatsoever, other than the Group Permitted
Encumbrances. The Group Assets transferred to Newco constitute all assets,
properties, rights, contracts and Intellectual Property Rights that are
necessary or required for the Conduct of the Group Business as currently
conducted, without (i) the need to purchase, license or acquire any other
material asset or property; (ii) violating any contractual rights of any third
party; or (iii) infringing, misappropriating or misusing any software or
Intellectual Property Rights of any third party, except for such assets,
properties, rights, contracts, software and Intellectual Property Rights, the
absence of which, individually or in the aggregate, would not have a Material
Adverse Effect on the Group Business. Title to all Group Assets is freely
transferable to and, with respect to the Contributed Assets and Contributed
Stock, will be transferred to Newco free and clear of all Encumbrances, other
than Group Permitted Encumbrances. Such transfer of the Contributed Assets and
Contributed Stock can occur without obtaining the consent or approval of any
person, except where the failure to transfer the Group Asset would not have a
Material Adverse Effect on Newco. At the Closing, the Contributing Companies
will contribute, transfer and deliver to Newco all right, title and interest in
and to all Contributed Assets and Contributed Stock, free and clear of all
Encumbrances, other than Group Permitted Encumbrances.
2.23 No Restrictive Agreements. Other than this Agreement and the
Ancillary Agreements, neither any Member of the Contributed Company Group nor
SCO nor any of the Group Assets is bound, or materially and adversely affected
by, any judgment, injunction, order, decree, contract, covenant or agreement
(noncompete or otherwise) that restricts or prohibits (or purports to restrict
or prohibit) the Conduct of the Group Business or from competing for the sale of
the Group Products anywhere in the world (including without limitation any
contracts, covenants or agreements restricting the geographic area in which the
Group Business may sell, license, market, distribute or support any Group
Products) or restricting the markets, customers or industries that Newco may
address after the Closing in the Conduct of the Group Business (collectively,
"Group Restrictive Agreements"), in a manner, in any of the foregoing cases,
which will have a Material Adverse Effect on Newco.
2.24 Supplier and Customer Relationships. To SCO's Knowledge, (i) the
Contributed Company Group has good commercial working relationships with the
customers for the Group Business, and (ii) since January 1, 2000 no customer of,
or supplier to the Group Business has cancelled or otherwise terminated any
material relationship concerning the Group Business with the Contributed Company
Group or SCO (with respect to the Group), or materially decreased or limited its
purchases or provision of materials supplied to the Group Business or under any
Material Contributed Contract from the corresponding period in 1999, where any
of the foregoing actions would cause a Material Adverse Effect
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on the Group Business, and to SCO's Knowledge, no such customer or supplier has
threatened to take any such action.
2.25 Product and Inventory Status.
(a) Product Quality, Warranty Claims. All Group Products
manufactured, sold, licensed, leased or delivered in connection with the
Group Business conform in all material respects to applicable contractual
commitments, express and implied warranties, and, to SCO's Knowledge, there
is no material Liability (nor any basis for any present or future action,
suit, proceeding, hearing, investigation, charge, complaint, claim or
demand giving rise to any material Liability) for replacement or repair
thereof or other damages in connection therewith, except for such
conformance as would not have a Material Adverse Effect on Newco.
(b) Inventory. To SCO's Knowledge, its inventories recorded on the
2000 Group Balance Sheet consist primarily of materials used in operating
system software products, related supplies and packaging materials, all of
which are merchantable, fit for the purpose for which they were procured or
manufactured, and are in a condition and quantity usable in the ordinary
course of business and to SCO's Knowledge, none of these inventories are
obsolete, damaged or defective, except in each case where the failure of
these inventories to be so would not have a Material Adverse Effect on
Newco or where a sufficient provision with respect to the possibility of
such failure is included in the 2000 Group Balance Sheet.
2.26 Affirmative Vote.
The affirmative vote of a majority of the votes that holders of the
outstanding shares of SCO's common stock are entitled to vote with respect to
the SCO Transaction is the only vote of the holders of any class or series of
SCO's capital stock necessary to approve this Agreement and the transactions
contemplated hereby.
2.27 State Takeover Statutes.
To SCO's knowledge, no state takeover statute or similar statute or
regulation applies to or purports to apply to the SCO Transaction, the
Agreement, the Ancillary Agreements, or the transactions contemplated hereby and
thereby.
2.28 Competition and Fair Trading Laws. No Contributed Company or, in
relation to the Group Business, Contributing Company is a party to (or concerned
in) any agreement, arrangement, concerted practice or course of conduct which:
(i) is registrable under applicable laws in any relevant jurisdictions; or (ii)
contravenes any such laws; or (iii) falls within Article 81 and/or Articles 82
of the EC Treaty; or (iv) falls within Article 53 and/or Article 54 of the
Agreement on the European Economic Area; or (v) contravenes, or is likely to
contravene, the prohibitions of the Competition Act 1998; or (vi) otherwise
infringes the competition legislation or practice of any other jurisdiction.
No Contributed Company and, in relation to the Group Business, no
Contributing Company has received or is likely to receive any process, notice or
other communication (formal or informal) by or on behalf of the Commission of
the European Communities, the EFTA Surveillance Authority or any other authority
having jurisdiction in competition matters in relation to any aspect of the
Group Business or any agreement, arrangement, concerted practice or course of
conduct to which any of them is, or is alleged to be, a party in relation to the
Group Business.
No Contributed Company and, in relation to the Group Business, no
Contributing Company is subject to any order or judgment given by any court or
governmental or regulatory authority, or party to any undertaking or assurance
given to any such court or authority, in relation to competition matters which
is still in force.
2.29 Grants. None of the Contributed Companies have taken any action,
agreed to take any action or failed to take any action as a result of which any
investment or other grant paid for use in the
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Contributed Companies is liable to be refunded in whole or in part (whether as a
result of the transaction contemplated by this Agreement or the Ancillary
Agreements).
3. Representations and Warranties of Caldera and Newco.
Except as set forth in the respectively referenced provisions of the
Caldera Disclosure Letter, delivered by Caldera on behalf of Caldera and each
Caldera Subsidiary (collectively, the "Caldera Group"), to SCO concurrently
herewith and certified by an officer of Caldera, on behalf of the Caldera Group,
respectively, to be true, accurate and complete to the best of his knowledge
(the "Caldera Disclosure Letter"), Caldera, on behalf of the Caldera Group,
hereby represents and warrants to SCO that as of the date hereof:
3.1 Organization; Good Standing; Qualification and Power. The Caldera
Subsidiaries are all of the subsidiaries of Caldera or any of its direct or
indirect subsidiaries. Caldera and each of the Caldera Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its formation, has all requisite corporate power and
authority to own, lease and operate any and all of the Caldera Assets held by
such company and for the Conduct of the Caldera Business as now being conducted,
and is duly qualified and in good standing to do business in each jurisdiction
in which the nature of its business or the ownership or leasing of its
properties makes such qualification necessary, other than in such jurisdictions
where the failure so to qualify would not have a Material Adverse Effect on
Caldera. Caldera has delivered to SCO or its counsel complete and correct copies
of the Certificate of Incorporation and Bylaws of Caldera as amended to the date
hereof and will deliver to SCO or its counsel prior to the Effective Time the
equivalent charter documents of Caldera and each of its Subsidiaries as amended
to the Closing. Except for the Caldera Subsidiaries, neither Caldera nor any of
the Caldera Subsidiaries owns, directly or indirectly, any capital stock or
other equity interest of any corporation or has any direct or indirect equity or
ownership interest in any other business, whether organized as a corporation,
partnership, joint venture or otherwise.
3.2 Capital Structure.
(a) Stock and Options. The authorized and issued and as of the date
of July 28, 2000 the outstanding capital stock of Caldera, the Caldera
Subsidiaries and Newco is set forth in Section 3.2(a) of the Caldera
Disclosure Letter. Except as specified in Section 3.2(a) of the Caldera
Disclosure Letter, no shares of the capital stock of Caldera or of any of
the Caldera Subsidiaries are held by any of them in its treasury or
reserved for issuance upon the exercise of options or warrants. All
outstanding shares of the capital stock of Caldera on July 28, 2000 are set
forth in Section 3.2(a) of the Caldera Disclosure Letter and are validly
issued, fully paid and nonassessable free and clear of any Encumbrances and
not subject to preemptive rights pursuant to any statute, pursuant to the
Certificate of Incorporation or Bylaws of Caldera, or pursuant to any
agreement or document to which any of them is a party or by which any of
them is bound. All outstanding shares of the capital stock of each of the
Caldera Subsidiaries are validly issued, fully paid and nonassessable and
are owned by Caldera, or one of the Caldera Subsidiaries, free and clear of
any Encumbrances. The Caldera Significant Stockholders who will execute
Voting Agreements collectively own and have the right to vote shares
representing approximately 70% of the capital stock of Caldera as of the
date of this Agreement.
(b) No Other Commitments. Except as set forth in Section 3.2(b) of
the Caldera Disclosure Letter, there are no options, warrants, calls,
rights, commitments, conversion rights or agreements of any character to
which Caldera or any of its respective direct and indirect subsidiaries, is
a party or by which any of them is bound obligating them to issue, deliver
or sell, or cause to be issued, delivered or sold, any shares of its
capital stock, or securities convertible into or exchangeable for shares of
its capital stock, or obligating any of them to grant, extend or enter into
any such option, warrant, call, right, commitment, conversion right or
agreement. There is no voting trust, proxy or other agreement or
understanding to which Caldera or any of its respective direct or indirect
subsidiaries is a party with respect to the voting of the capital stock of
any member of the Caldera Group. All shares of capital stock of any member
of the Caldera Group are held free and clear of any Encumbrances.
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(c) Registration Rights. Except as disclosed in the Caldera SEC
Documents, neither Caldera nor any of its respective subsidiaries is under
any obligation to register under the Securities Act any of its presently
outstanding securities or any securities that may be subsequently issued
which offering would have a Material Adverse Effect on Newco.
3.3 Authority.
(a) Corporate Action. Subject to approval of this Agreement and the
Ancillary Agreements by the stockholders of Caldera, Caldera has all
requisite corporate power and authority to enter into this Agreement and
the Ancillary Agreements, to perform its obligations hereunder and
thereunder, and to consummate the transactions contemplated by this
Agreement and the Ancillary Agreements. The Board of Directors of Newco and
Caldera have, as of the date of this Agreement, unanimously (i) determined
that the Merger is consistent with and in furtherance of the long-term
business strategy of Caldera and is fair to, and in the best interests of,
Caldera and its stockholders; (ii) has approved this Agreement, the
Ancillary Agreements, the Merger, the SCO Transactions and other
transactions contemplated hereby and thereby; and (iii) has determined to
recommend that the stockholders of Caldera approve the SCO Transaction.
This Agreement and the Voting Agreements have been, and prior to the
Effective Time, the other Ancillary Agreements will be, duly executed and
delivered by Newco and Caldera. Subject to receiving such stockholder
approval, this Agreement and the Voting Agreements are, and at the Closing
the other Ancillary Agreements will be, valid and binding obligations of
Newco and Caldera, enforceable against Newco and Caldera in accordance with
their respective terms, except as enforceability may be limited by
bankruptcy and other similar laws and general principles of equity.
(b) No Conflict. Neither the execution, delivery and performance of
this Agreement and the Ancillary Agreements nor the consummation of the
transactions contemplated hereby or thereby nor compliance with the
provisions hereof will (i) conflict with, or result in any violations of,
or cause a default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, amendment, cancellation or
acceleration of any obligation contained in, or the loss of any material
benefit under, or result in the creation of any Encumbrance upon the any of
the Caldera Assets under, any term, condition or provision of (x) the
Certificate of Incorporation or Bylaws of Caldera or the equivalent
organizational documents of any of the Caldera Subsidiaries or (y) any loan
or credit agreement, note, bond, mortgage, indenture, lease or other
material agreement, judgment, order, decree, statute, law, ordinance, rule
or regulation applicable to Caldera, Caldera's property or the Caldera
Assets, other than any such conflicts, violations, defaults, rights or
Encumbrances which, individually or in the aggregate, would not have a
Material Adverse Effect on Caldera; or (ii) require the affirmative vote of
the holders of greater than a majority of the issued and outstanding
capital stock of Caldera.
(c) Governmental Consents. Except (i) as set forth in Section 3.3(c)
of the Caldera Disclosure Letter; (ii) such filings, authorizations, orders
and approvals as may be required under state takeover laws; (iii) such
filings and notifications as may be necessary under the HSR Act; (iv) the
filings, authorizations, orders, notifications, and approvals contemplated
by this Agreement or the Ancillary Agreements; and (v) such other
governmental or third party consents, filings, authorizations, orders and
approvals which, if not obtained or made, would not have a Material Adverse
Effect on Newco or have a material adverse effect on the ability of Caldera
to consummate the transactions contemplated by this Agreement or the
Ancillary Agreements, no consent, approval, order or authorization of, or
registration, declaration or filing with, any governmental entity is
required to be obtained by the Caldera Group in connection with the
execution and delivery of this Agreement or the Ancillary Agreements by
Caldera, Newco, and the Merger Sub or the performance by them of its
respective obligations hereunder or thereunder.
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3.4 SEC Documents.
(a) SEC Reports. Caldera has delivered to SCO or its counsel correct
and complete copies of the final version of each report, schedule,
registration statement and definitive proxy statement filed by Caldera with
the SEC on or after March 20, 2000 (the "Caldera SEC Documents"), which are
the material documents (other than preliminary material) that Caldera was
required to file with the SEC on or after March 20, 2000 with respect, in
whole or in part, to Caldera or the Caldera Assets. As of their respective
dates or, in the case of registration statements, their effective dates,
none of the Caldera SEC Documents (including all exhibits and schedules
thereto and documents incorporated by reference therein) contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and there is no requirement under the Securities Act or the
Exchange Act, as the case may be, to have amended any such filing. The
Caldera SEC Documents complied, when filed, in all material respects with
the then applicable requirements of the Securities Act or the Exchange Act,
as the case may be, and the rules and regulations promulgated by the SEC
thereunder. Caldera has filed all documents and agreements that were
required to be filed as exhibits to the Caldera SEC Documents.
(b) Caldera Financial Statements; Absence of Undisclosed
Liabilities. The audited consolidated financial statements, dated as of
and for the period ended, October 31, 1999, and the unaudited consolidated
financial statements, dated as of and for the period ending April 30, 2000,
of Caldera and its consolidated subsidiaries ("Caldera Financial
Statements") complied as to form in all material respects with the then
applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, were prepared in accordance with GAAP
applied on a consistent basis during the periods involved (except as may
have been indicated in the notes thereto) and fairly present (subject, in
the case of the unaudited statements, to normal year-end audit adjustments)
the consolidated financial position of the Caldera Group as at the
respective dates thereof and the consolidated results of its operations and
cash flows for the respective periods then ended. Caldera has no
liabilities or obligations of any nature (matured or unmatured, fixed or
contingent) which are, individually or in the aggregate, of a nature
required to be disclosed on the face of a consolidated balance sheet for
Caldera and its consolidated subsidiaries prepared in accordance with GAAP
and which are material to the Caldera Business, except for such liabilities
or obligations as (i) were accrued or were provided for in the consolidated
balance sheet dated April 30, 2000 included in the Caldera Financial
Statements as of the date thereof (the "Caldera Financial Statements
Balance Sheet Date") or (ii) are of a normally recurring nature and were
incurred after the Caldera Financial Statements Balance Sheet Date in the
ordinary course of business consistent with past practice. All liabilities
and valuation accounts established and reflected in the Caldera Financial
Statements are to Caldera's Knowledge reasonably adequate. At the Caldera
Financial Statements Balance Sheet Date, there were no material loss
contingencies which are not adequately provided for in the Caldera
Financial Statements.
3.5 Disclosure; Information Supplied. No representation or warranty made
by Caldera in this Agreement, nor any financial statement, certificate or
exhibit prepared and furnished or to be prepared and furnished by Caldera or its
respective representatives pursuant hereto or in connection with the
transactions contemplated hereby, when taken together, contains any untrue
statement of a material fact, or omits to state a material fact necessary to
make the statements or facts contained herein or therein, taken as a whole not
misleading in light of the circumstances under which they were furnished. None
of the information supplied or to be supplied by Caldera for inclusion or
incorporation by reference in the Form S-4 and Prospectus/Proxy Statement will,
at the time the information is supplied contain, after giving effect to any
supplement or amendment thereto, no untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they are made,
not materially misleading. The Prospectus/Proxy Statement will in all material
respects comply as to form with the provisions of the Exchange Act and the rules
and regulations promulgated by the SEC thereunder.
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3.6 Vote Required. The affirmative vote of a majority of the shares of
Caldera Common Stock that cast votes regarding the Merger and the SCO
Transaction in person or by proxy at the Caldera Stockholders Meeting is the
only vote of the holders of any class or series of Caldera's capital stock
necessary to approve this Agreement and the transactions contemplated hereby.
3.7 Litigation. Except as disclosed in the Caldera SEC Documents filed
prior to the date hereof, or as would not reasonably be expected to have a
Material Adverse Effect on Caldera, there is no suit, action, arbitration,
demand, claim or proceeding pending or, to Caldera's Knowledge, threatened
against Caldera or the Caldera Assets; nor is there any judgment, decree,
injunction, ruling or order of any governmental entity or arbitrator or
settlement agreement outstanding against Caldera or any of the Caldera Assets.
Caldera has delivered or made available to SCO or its counsel correct and
complete copies of all material correspondence prepared by its counsel for
Caldera's auditors in connection with the last two completed audits of Caldera's
financial statements and any such correspondence since the date of the last such
audit. No member of the Caldera Group is a party to any decree, order or
arbitration award (or agreement entered into in any administrative, judicial or
arbitration proceeding with any governmental authority) with respect to the
Caldera Assets, Caldera Employees, or the Caldera Business that could reasonably
be expected to have a Material Adverse Effect on Caldera. Except for violations
as would not have a Material Adverse Effect on Caldera, none of the members of
the Caldera Group is in violation of any decree, order or arbitration award that
names such company, or any of such companies, as a party or that otherwise, to
Caldera's Knowledge, involves such company or any of such company's assets, or
of any law, ordinance, statute, or governmental authority to which the Caldera
Assets are subject, including, without limitation, laws, rules and regulations
relating to occupational health and safety, equal employment opportunities, fair
employment practices, and sex, race, religious and age discrimination. There is
no claim, action, suit, arbitration, mediation, investigation or other
proceeding of any nature pending or, to Caldera's Knowledge, threatened, at law
or in equity, by way of arbitration or before any court, governmental
department, commission, board or agency that: (i) may adversely affect, contest
or challenge any party's authority, right or ability to perform its obligations
under this Agreement or any of the Ancillary Agreements; (ii) challenges or
contests Caldera's right, title or ownership of any of the Caldera Assets or
seeks to impose an Encumbrance (other than a Caldera Permitted Encumbrance) on,
or a transfer of title or ownership of, any of the Caldera Assets; (iii) asserts
that any action taken by any employee, consultant or contractor of Caldera in
connection with the Group Business infringes or misappropriates any Intellectual
Property Rights of any third party; (iv) seeks to enjoin, prevent or hinder
operation of the Caldera Business or the consummation of any of the transactions
contemplated by this Agreement or any of the Ancillary Agreements; (v) would
impair or have an adverse affect on Newco's right or ability to use or exploit
any of the Caldera Assets; or (vi) involves or relates to any potentially
material claim against Caldera by any creditor of Caldera or involves any claim
of fraudulent conveyance or any similar claim, except in cases (ii), (iii) and
(v) where such proceeding could not reasonably be expected to have a Material
Adverse Effect on Newco.
3.8 Valid Issuance. The Newco Common Stock that is being issued hereunder
in connection with the SCO Transaction, when issued and delivered in accordance
with the terms of this Agreement for the consideration expressed herein, will be
duly authorized and validly issued, fully paid, and nonassessable.
3.9 Absence of Certain Changes or Events. Except as disclosed on Section
3.9 of the Caldera Disclosure Letter, since the Caldera Financial Statements
Balance Sheet Date there has not occurred:
(a) any change or event which could reasonably be expected to have a
Material Adverse Effect on Caldera; provided, however, that in no event
will a change in the trading price of Caldera Common Stock be deemed a
Material Adverse Effect on Caldera;
(b) any amendments or changes in the Certificate of Incorporation or
Bylaws (or equivalent governing documents in each relevant jurisdiction) of
any member of the Caldera Group;
(c) any damage, destruction to or loss of Caldera assets not covered
by insurance, which would have a Material Adverse Effect on Caldera;
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(d) any redemption, repurchase or other acquisition of shares of any
member of the Caldera Group (other than pursuant to arrangements with
terminated employees or consultants in the ordinary course of business,
consistent with past practice), or any declaration, setting aside or
payment of any dividend or other distribution (whether in cash, stock or
property) with respect to the capital stock of any member of the Caldera
Group or, with respect to dividends or other distributions of cash or
property arising from the Caldera Business;
(e) any material increase in or modification of the compensation or
benefits payable or to become payable by Caldera to the Caldera employees,
except in the ordinary course of the business, consistent with past
practice and except as necessary to respond to third party solicitation of
Caldera employees;
(f) other than as required by applicable statute or governmental
regulation, any material increase in or modification of any Caldera Group
Benefit Arrangement (including, but not limited to, the granting of stock
options, the acceleration of the vesting schedule in effect for any
outstanding stock options, restricted stock awards or stock appreciation
rights) that will become binding upon Newco upon consummation of the
transactions contemplated herein, for or with respect to any of the Caldera
Employees, other than (i) in the ordinary course of the business,
consistent with past practice, or to respond to third party solicitation of
Caldera Employees, and (ii) if occurring after the date hereof, which is
authorized pursuant to Section 5.3 below;
(g) any sale of a material amount of the Caldera Assets, or any
acquisition by any member of the Caldera Group of a material amount of
assets, other than in the ordinary course of the business, consistent with
past practice;
(h) any alteration in any term of any outstanding capital stock or
rights to acquire capital stock of any member of the Caldera Group,
including, but not limited to, acceleration of the vesting or any change in
the terms of any outstanding stock options;
(i) other than in the ordinary course of business, consistent with
past practice, (A) any incurrence, assumption or guarantee by any member of
the Caldera Group of any debt of any person, other than any member of the
Caldera Group, for borrowed money in an amount exceeding $250,000 in the
aggregate; (B) issuance or sale by any member of the Caldera Group of any
securities convertible into or exchangeable for its respective debt
securities; or (C) issuance or sale of options or other rights to acquire
from the Caldera Group, directly or indirectly, debt securities of any
member of the Caldera Group, or any securities convertible into or
exchangeable for any such debt securities;
(j) any creation or assumption by any member of the Caldera Group of
any Encumbrance (other than Caldera Permitted Encumbrances) on any Caldera
Asset in excess of $250,000 individually or in the aggregate, other than to
refinance a liability reflected in the Caldera Financial Statements in the
ordinary course of business;
(k) any making by any member of the Caldera Group of any loan, advance
or capital contribution to or investment in any person other than to
refinance a liability reflected in the Caldera Financial Statements and
other than (i) loans, advances or capital contributions made in the
ordinary course of the business, and (ii) other loans and advances, where
the aggregate amount of all such items outstanding at any time does not
exceed $250,000;
(l) any amendment of, relinquishment, termination or non-renewal by
Caldera of any of the Caldera Contracts, other than in the ordinary course
of business consistent with past practice;
(m) any transfer or grant of a right under the Caldera IP Rights,
other than those transferred or granted in the ordinary course of business,
consistent with past practice;
(n) any labor dispute with, or charge of unfair labor practice by, any
member of the Caldera Group (other than routine individual grievances), any
activity or proceeding by a labor union or representative thereof to
organize any Caldera employees or, to Caldera's Knowledge, any campaign
being conducted to solicit authorization from Caldera employees to be
represented by such labor
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union, where such dispute, practice, activity, proceeding, or campaign
would have a Material Adverse Effect on Caldera;
(o) any change to accounting methods; or
(p) any agreement by any member of the Caldera Group to take any of
the actions described in the preceding clauses (a) through (o) (other than
the transactions contemplated by this Agreement or the Ancillary
Agreements).
3.10 Taxes. The Caldera Group has properly completed and filed, or caused
to be properly completed and filed, all Tax returns required to be filed by the
Caldera Group and has paid, or caused to be paid, all Taxes that are shown on
such Tax returns as due and payable. All Taxes of the Caldera Group for all
periods through June 30, 2000, have been fully paid (except for Taxes that are
adequately provided for or reflected in the Caldera Financial Statements). Since
June 30, 2000, no material Tax liability has been assessed, or is, to Caldera's
Knowledge, proposed to be assessed, incurred or accrued (other than liabilities
for Taxes arising in the ordinary course of business) against any member of the
Caldera Group. To Caldera's Knowledge, no member of the Caldera Group has
received notification that any material issues have been raised (or are
currently pending) by the Internal Revenue Service or any other taxing
authority, including, without limitation, any sales tax authority, in connection
with any of the Tax returns referred to in the first sentence of this Section
3.10, and no unexpired waivers of statutes of limitations have been given or
requested with respect to Tax returns or Taxes of any member of the Caldera
Group. No taxing authority is currently conducting an audit or investigation of
any of the aforesaid Tax returns or, to Caldera's Knowledge, is about to conduct
such an audit with respect to such Tax returns. Any deficiencies asserted or
assessments (including interest and penalties) made as a result of any
examination by the Internal Revenue Service or by appropriate national, state or
departmental authorities of the Tax returns with respect to SCO and any of its
subsidiaries have been paid or adequately provided for in the Caldera Financial
Statements, and to Caldera's Knowledge no proposed (but unassessed) additional
Taxes have been asserted and no Tax liens have been filed against Caldera or any
of the Caldera Assets other than for Taxes not yet due and payable. Neither
Caldera, nor any member of the Caldera Group (i) has made an election to be
treated as a "consenting corporation" under Section 341(f) of the Internal
Revenue Code or (ii) is a "personal holding company" within the meaning of
Section 542 of the Internal Revenue Code.
3.11 Intellectual Property.
(a) Caldera owns, or has the right to use, sell or license such
Intellectual Property Rights as are necessary or required for the Conduct
of the Caldera Business (such Intellectual Property Rights being
hereinafter collectively referred to as the "Caldera IP Rights") and such
ownership or rights to use, sell or license are reasonably sufficient for
the Conduct of the Caldera Business, except for any failure to own or have
the right to use, sell or license that would not have a Material Adverse
Effect on Caldera.
(b) All Caldera IP Rights are owned free and clear of any
Encumbrances.
(c) To Caldera's Knowledge, (i) neither the manufacture, marketing,
license, sale or intended use of any product currently licensed or sold by
Caldera or any of the Caldera Subsidiaries or currently under development
by Caldera or any of the Caldera Subsidiaries violates any license or
agreement relating thereto or infringes any Intellectual Property Right of
any other party, (ii) there is no pending or threatened claim or litigation
contesting the validity, ownership or right to use, sell, license or
dispose of any Caldera IP Right and (iii) no third party has notified
Caldera that any Caldera IP Right or the proposed use, sale, license or
disposition thereof, conflicts or will conflict with the rights of any
other party, nor is there any basis therefor except for any violations,
infringements, claims or litigation that would not have a Material Adverse
Effect on Caldera.
3.12 Fees and Expenses. Except for the fees and expenses set forth in
Caldera's engagement letter with Broadview, a copy of which has been provided to
SCO, neither Caldera, Newco nor any of the
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Caldera Subsidiaries has paid or become obligated to pay any fee or commission
to any broker, finder or intermediary in connection with the transactions
contemplated by this Agreement and the Ancillary Agreements.
3.13 Environmental Matters.
(a) During the period that Caldera has leased or owned its respective
properties or owned or operated its respective facilities, there have been,
to Caldera's Knowledge, no disposals, releases or threatened releases of
Hazardous Materials on, from, under or about such properties or facilities
which would cause a Material Adverse Effect on Newco. To Caldera's
Knowledge there is no presence, disposals, releases or threatened releases
of Hazardous Materials on, from, under or about any of such properties or
facilities, which may have occurred prior to Caldera having taken
possession of any of such properties or facilities where such Hazardous
Materials would cause a Material Adverse Effect on Newco.
(b) None of the properties or facilities of Caldera is or has been the
subject of an Environmental Damage, which would cause a Material Adverse
Effect on Newco. During the time that Caldera has owned or leased its
respective properties and facilities, none of Caldera nor, to Caldera's
Knowledge, any third party, has used, generated, manufactured or stored on,
under or about such properties or facilities or transported to or from such
properties or facilities any Hazardous Materials (except those Hazardous
Materials associated with general office use or janitorial supplies) in a
manner which would result in a Material Adverse Effect on Newco.
(c) During the time that any members of the Caldera Group have owned
or leased its respective properties and facilities, to Caldera's Knowledge,
there has been no litigation brought or threatened against any of them by,
or any settlement reached by any of them with, any party or parties
concerning the presence, disposal, release or threatened release of any
Hazardous Materials on, from or under any of such properties or facilities
or relating to any alleged Environmental Violation, except for litigation
or settlement which would not have a Material Adverse Effect on Newco.
3.14 Fairness Opinion. Caldera's Board of Directors has received an
opinion dated as of the date hereof from Broadview to the effect that, as of the
date hereof, the Caldera Ratio is fair to Caldera from a financial point of
view.
3.15 Tax Representations. Caldera, Newco and the Caldera Significant
Stockholders are aware of no plan or intention by Caldera or Newco or any
corporation related to Caldera immediately after the Effective Time to
repurchase any Newco capital stock issued pursuant to this Agreement from any
person or entity that is or will become a Newco stockholder by reason of the
transactions contemplated by this Agreement. Caldera has not redeemed any shares
of its capital stock or paid any extraordinary dividend in contemplation of the
Merger.
4. SCO Covenants.
4.1 Advice of Changes.
During the period from the date hereof until the earlier of the Effective
Time or the termination of this Agreement in accordance with its terms, SCO will
promptly advise Caldera in writing, (i) of any event occurring subsequent to the
date hereof that would reasonably be likely to render any representation or
warranty contained in Section 2 of this Agreement, if made on or as of the date
of such event or the Effective Time, untrue or inaccurate, (ii) of any event
that would reasonably be likely to have a Material Adverse Effect on the Group
Business, and (iii) of any material breach by SCO of any covenant or agreement
contained in this Agreement; provided, however, that the delivery of, or failure
to deliver, any notice pursuant to this Section 4.1 shall not limit or otherwise
affect the remedies available hereunder. Prior to the Effective Date, the SCO
Board of Directors shall take all requisite action under each of the SCO stock
plans to preclude the accelerated vesting of any outstanding SCO Options or
unvested shares of SCO Common Stock for all Designated Employees; provided,
however that such actions shall not be
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required with respect to SCO Options granted to Employees whose options are
subject to acceleration pursuant to existing severance or change of control
agreements.
4.2 Maintenance of Business. During the period from the date hereof until
the earlier of the Effective Time or the termination of this Agreement in
accordance with its terms, the Contributed Company Group and the Contributing
Companies will use reasonable efforts to carry on and preserve the Group
Business and relationships with customers, suppliers, employees and others
related to Group Business in substantially the same manner as it has prior to
the date hereof.
4.3 Conduct of Business. During the period from the date hereof until the
earlier of the Effective Time or the termination of this Agreement in accordance
with its terms, the Contributed Company Group and SCO will continue to conduct
the Group Business and maintain business relationships related to the Group
Business in the ordinary and usual course consistent with past practice and,
except as otherwise disclosed herein or in the SCO Disclosure Letter, they will
not, without the prior written consent of Caldera, which consent shall not be
unreasonably withheld, take any of the following actions where it would cause a
Material Adverse Effect on the Group Business:
(a) cause any of the Contributed Companies to borrow any money except
for amounts that are not in the aggregate material to the financial
condition of the Group Business, taken as a whole;
(b) cause any of the Group Assets to become subject to any
Encumbrance, except for Group Permitted Encumbrances;
(c) dispose of any of Group Assets except immaterial amounts of Group
Assets in the ordinary course of business, consistent with past practice;
(d) grant any exclusive license to any of the SCO IP Rights or grant
any other license to SCO IP Rights except in the ordinary course of
business, consistent with past practice;
(e) materially amend or terminate any of the Material Contributed
Contracts;
(f) cause any of the Contributed Companies to declare, set aside or
pay any cash or stock dividend or other distribution in respect of capital
stock, or redeem or otherwise acquire any of its capital stock;
(g) permit any of the Contributed Companies to issue or allot or agree
to issue or allot capital stock, shares or loan capital;
(h) cause any of the Contributed Companies to make any loans or grant
any guarantees, except (A) advances that are not material in amount or (B)
loans pursuant to any Section 401(a) Plan;
(i) waive or release any material claim against a third party;
(j) cause any member of the Contributed Company Group to merge,
consolidate or reorganize with or acquire any entity that is not a member
of the Contributed Company Group, except as set forth in the SCO Disclosure
Letter and except as otherwise set forth in the last sentence of Section
4.14(a) or Section 1.4(a) hereof;
(k) amend the Certificate of Incorporation or Bylaws (or equivalent
governing documents in each relevant jurisdiction) of any of the
Contributed Companies;
(l) implement any layoffs or reductions in the work force;
(m) fail to pay or withhold any material Tax related to the Group
Business when due to be paid or withheld;
(n) change accounting methods;
(o) agree to take, or permit any of its subsidiaries to take or agree
to take, or enter into negotiations with respect to, any of the actions
described in the preceding clauses in this Section 4.3.
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Notwithstanding the foregoing, nothing in this Section 4.3 hereof shall
restrict or limit the conduct of any business of SCO or its direct or indirect
subsidiaries other than the Group Business and other than with respect to the
Group Assets and nothing herein shall restrict or limit the conduct of any
business of the Contributed Company Group or with respect to the Group Assets
other than as set forth in this Section 4.3.
4.4 SCO Corporate Approvals. SCO will call the SCO Stockholders Meeting
to be held within 40 days after the Form S-4 shall have been declared effective
by the SEC, to submit the SCO Transaction and related matters for the
consideration and approval of the SCO stockholders. Subject to Section 8.1(i)
and (j), the Prospectus/Proxy Statement will include a statement to the effect
that SCO's Board of Directors is recommending that SCO stockholders vote in
favor of the SCO Transaction. The Board of Directors of SCO shall submit this
Agreement and the SCO Transaction to SCO's stockholders whether or not at any
time subsequent to the date hereof such Board determines that it can no longer
make such recommendation. Such meeting will be called, held and conducted, and
any proxies will be solicited, in compliance with applicable law. SCO agrees to
vote in favor of the contribution to Newco of the Contributed Stock and
Contributing Assets at each meeting of stockholders, or written consent in lieu
thereof, of the Contributing Companies. Without limiting the foregoing, SCO
shall vote in favor of the SCO Transaction at each and every stockholders
meeting, or with respect to any written consent in lieu thereof, at which any
proposal regarding any such transactions, including the contribution and
transfer of the Contributed Stock and Contributed Assets, is considered. The
Boards of Directors of each the Contributing Companies (including SCO) and the
Contributed Company Group have approved the SCO Transaction and this Agreement.
4.5 Letter of SCO's Accountants. SCO shall use its reasonable best
efforts to cause to be delivered to Caldera a letter of PriceWaterhouseCoopers
LLP, dated a date within two business days before the date on which the Form S-4
shall become effective and addressed to Caldera, in form and substance
reasonably satisfactory to Caldera and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the Form S-4.
4.6 Prospectus/Proxy Statement. SCO will mail to its stockholders in a
timely manner, for the purpose of considering and voting upon the SCO
Transaction at the SCO Stockholders Meeting, the Prospectus/Proxy Statement.
SCO, Caldera and Newco will prepare and file the Prospectus/Proxy Statement with
the SEC as promptly as practicable, and each will use its respective best
reasonable efforts to cause the Form S-4 to become effective as soon after such
filing as practicable. In this regard, SCO, Caldera and Newco will advise each
other promptly as to the time at which the Form S-4 becomes effective and of the
issuance by the SEC of any stop order suspending the effectiveness of the Form
S-4 or the initiation of any proceedings for such purpose and each will use its
respective reasonable best efforts to prevent the issuance of any stop order and
to obtain as soon as possible the lifting thereof, if issued. Until the
Effective Time, SCO will advise Caldera and Newco promptly of any requirement of
the SEC for any amendment or supplement of the Form S-4 or for additional
information, and will not at any time file any amendment of or supplement to the
prospectus contained therein (or to the prospectus filed pursuant to Rule 424(b)
of the SEC) (the "Prospectus") which shall not have been previously submitted to
Caldera in reasonable time prior to the proposed filing thereof or to which
Caldera shall reasonably object or which is not in compliance in all material
respects with the Securities Act and the rules and regulations issued by the SEC
thereunder. None of the information relating to SCO (or, to SCO's Knowledge, any
other person, contained in any document, certificate or other writing furnished
or to be furnished by SCO) included in (i) the Prospectus/Proxy Statement at the
time the Prospectus/Proxy Statement is mailed, at the time of the SCO
Stockholders Meeting or at the Effective Time, as then amended or supplemented,
or (ii) the Form S-4 at the time the Form S-4 becomes effective or at the
Effective Time, as then amended or supplemented, will contain any untrue
statement of a material fact or will omit to state any material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading or necessary to correct
any statement which has become false or misleading in any earlier communication.
From and after the date the Form S-4 becomes effective and until the Effective
Time, if any event known to SCO occurs as a result of which the
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Prospectus/Proxy Statement or Form S-4 would include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or if it is necessary
at any time to amend the Form S-4 or the Prospectus/Proxy Statement to comply
with the Securities Act, SCO will promptly notify Caldera and Newco and an
amended or supplemented Form S-4 or Prospectus/Proxy Statement will be prepared
by SCO, Caldera and Newco which will correct such statement or omission and will
use its reasonable best efforts to cause any such amendment to become effective
as promptly as possible. The Prospectus/Proxy Statement, as it relates to SCO
and information relating to the Group Business, will comply as to form in all
material respects with the requirements of the Exchange Act and the rules and
regulations thereunder in effect at the time the Prospectus/Proxy Statement is
mailed.
4.7 Regulatory Approvals. As promptly as reasonably practicable, SCO will
itself, and will cause each member of the Contributed Company Group, to execute
and file, or join in the execution and filing, of any application or other
document that may be necessary in order to obtain the authorization, approval or
consent of any governmental body, federal, state, provincial, local or foreign,
which may be reasonably required, or which Caldera or Newco may reasonably
request, in connection with the consummation of the transactions contemplated by
this Agreement. SCO will itself, and will cause each member of the Contributed
Company Group, to use its reasonable efforts to promptly obtain all such
authorizations, approvals and consents and will cooperate fully with the other
parties in promptly seeking to obtain such authorizations, approvals and
consents.
4.8 Necessary Consents. SCO will itself, and will cause each Contributing
Company and each member of the Contributed Company Group to, use its reasonable
efforts to obtain the consents required in connection with the Material
Contributed Contracts, and to take such other actions as may be necessary or
appropriate for the consummation of the transactions contemplated hereby and to
allow Newco to Conduct the Group Business after the Effective Time.
4.9 Access to Information. From the date hereof until the Effective Time,
SCO will itself, and will cause the Contributed Company Group, to allow Caldera
and its agents reasonable access to the files, books, records, technology and
offices of SCO and the Contributed Company Group reasonably requested by
Caldera, but only to the extent necessary and relating to the Group Business,
including, without limitation, any and all information relating to Contributed
Company Group's Taxes, commitments, contracts, leases, licenses and real,
personal, intellectual and intangible property and financial condition. SCO
shall use its reasonable efforts to cause its accountants to cooperate with
Caldera and its agents in making available to Caldera all financial information
reasonably requested, including, without limitation, the right to examine all
working papers pertaining to all Tax returns and financial statements prepared
or audited by such accountants. No information or knowledge obtained by any
party hereto in any investigation pursuant to this Section 4.9 will affect or be
deemed to modify any representation or warranty contained herein or the
conditions to the obligations of the parties to consummate the Merger and the
SCO Transaction. All information obtained by Caldera and its agents pursuant to
this Section 4.9 shall be kept confidential in accordance with the
confidentiality agreement, between Caldera and SCO (the "Nondisclosure
Agreement").
4.10 Satisfaction of Conditions Precedent. SCO will itself, and will
cause the Contributing Companies and the Contributed Company Group, to use
reasonable efforts to satisfy or cause to be satisfied all the conditions
precedent that are set forth in Section 8 and to cause the Merger, the SCO
Transaction and the other transactions contemplated by this Agreement to be
consummated. Without limiting the foregoing, in connection with the agreements
to be reached by the parties subsequent to the date hereof and prior to the
Effective Time, the parties agree to negotiate in good faith to reach agreement
on all matters to be included in such agreements promptly after the signing of
this Agreement.
4.11 Voting Agreement. SCO will use its reasonable best efforts to obtain
Voting Agreements in the form attached as Exhibit 4.11A (the "Voting
Agreement"), executed by the SCO affiliates listed on Exhibit 4.11B.
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4.12 Sales Representative and Support Agreement. The Sales Representative
and Support Agreement in the form attached as Exhibit 4.12 (the "Sales
Representative and Support Agreement") shall be executed as of the Effective
Time.
4.13 Stockholders Agreement. The Stockholders Agreement in the form
attached as Exhibit 4.13 (the "Stockholders Agreement") shall be executed as of
the Effective Time.
4.14 No Other Negotiations.
(a) SCO shall, and shall cause each Contributing Company and each
member of the Contributed Company Group and their respective officers,
directors or employees and any investment bankers, attorneys or other
advisors and representatives retained by any of them to, cease any and all
existing activities, discussions and negotiations with any parties
conducted heretofore with respect to any SCO Alternative Proposal (as
defined below). From and after the date hereof until the earlier of the
Effective Time or the termination of this Agreement in accordance with its
terms, SCO shall not authorize or permit any Contributing Company or any
member of the Contributed Company Group (or any of their respective
officers, directors or employees or any investment bankers, attorneys or
other advisors or representatives retained by any of them), directly or
indirectly, (i) to solicit, initiate or encourage the submission of any SCO
Alternative Proposal, (ii) to engage in discussions or negotiations
regarding, provide non-public information with respect to, or to take any
other action intended, designed or reasonably likely to facilitate any
inquiries or the making of any proposal or offer that constitutes, or would
reasonably be expected to lead to, any SCO Alternative Proposal, (iii) to
enter into any letter of intent, agreement in principle, agreement
involving a business combination or other similar agreement with any person
with respect to any SCO Alternative Proposal, or (iv) to make or authorize
any statement, recommendation or solicitation in support of any SCO
Alternative Proposal. For purposes of this Agreement, "SCO Alternative
Proposal" means any proposal or offer from any person or "group" (as
defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) for any direct or indirect (a) acquisition,
purchase, sale or other disposition of a material amount of the Group
Assets (other than in the ordinary course and disposal of worn or obsolete
items consistent with past practice), (b) acquisition, purchase, sale or
other disposition of any of the outstanding voting securities of any member
of the Contributed Company Group (other than pursuant to the exercise of
outstanding stock options), or (c) merger, consolidation, business
combination, sale of any of the assets, recapitalization, liquidation,
dissolution or similar transaction involving any member of the Contributed
Company Group, other than the transactions contemplated by this Agreement.
Notwithstanding the foregoing or any other provision of this Agreement,
other than actions relating to the Contributed Company Group, the Group
Assets or the Group Business, SCO shall not be restricted or limited in any
way from entering into discussions, negotiations or agreements of any kind
or from taking any other actions of any kind, including, without
limitation, transactions relating to the sale of any of its or its direct
or indirect subsidiaries (other than any member(s) of the Contributed
Company Group), equity securities (other than the Contributed Stock), or
assets (other than Group Assets), or the merger, consolidation, business
combination, recapitalization, liquidation, dissolution or similar
transaction involving the Retained SCO Business.
(b) Notwithstanding Section 4.14(a), prior to obtaining the approval
of the stockholders of SCO of this Agreement and the SCO Transaction by the
requisite vote under applicable law (the "SCO Stockholder Approval"), SCO
may in response to an unsolicited bona fide SCO Alternative Proposal,
participate in discussions or negotiations with, furnish information to a
third party making such proposal (provided that SCO shall have entered into
a confidentiality agreement with such third party with terms no less
favorable than in the letter with Caldera), make or authorize a statement
or recommendation in support of such proposal, if all of the following
events shall have occurred: (i) such third party has made a bona fide
written offer or proposal to the Board of Directors of SCO to consummate a
SCO Alternative Proposal which offer or proposal identifies a price or
range of values to be paid for the outstanding securities or assets of SCO,
the Contributing Companies or the Contributed Company Group, (ii) if
consummated, based on the written advice of investment bankers
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of nationally recognized reputation, such Board of Directors has determined
that it is financially more favorable to the stockholders of SCO than the
terms of the transactions contemplated by this Agreement, (iii) such Board
of Directors has determined, after consultation with investment bankers of
nationally recognized reputation, that such third party is financially
capable of consummating such SCO Alternative Proposal (if the SCO
Alternative Proposal is for cash); (iv) such Board of Directors has
determined, after consultation with outside legal counsel, that failure to
take such action would be inconsistent with the fiduciary duties of the
Board of Directors to SCO stockholders under applicable law; and (v)
Caldera shall have been notified by SCO in writing of such SCO Alternative
Proposal, including its principal financial and other material terms and
conditions, including the identity of the person making such proposal (it
being understood that any amendment to the price exchange ratio, identity
or principal financial or other material terms shall require an additional
notice).
(c) In addition to the obligations set forth in Section 4.14(a), SCO,
as promptly as practicable, shall advise Caldera orally and in writing of
any request for non-public information which SCO reasonably believes could
lead to a SCO Alternative Proposal, or of any SCO Alternative Proposal, the
principal financial and other material terms and conditions of such SCO
Alternative Proposal, and the identity of the person making any such
request or SCO Alternative Proposal. SCO will keep Caldera informed in all
material respects of the status and details (including material amendments)
of any such SCO Alternative Proposal.
4.15 Books and Records. If, in order to properly prepare documents
required to be filed with governmental authorities (including taxing
authorities) or its financial statements, it is necessary that any party hereto
be furnished with additional information relating to the Group Assets or any
member of the Contributed Company Group, and such information is in the
possession of a Contributing Company, then SCO, for itself and the other
Contributing Companies, agree to use its good faith efforts to promptly furnish
such information to the party needing such information. This Section 4.15 shall
survive Closing for two years except for records relating to preparation or
audit of tax returns, for which this Section 4.15 will survive until the
expiration of the applicable Tax statute of limitations.
4.16 [Intentionally Omitted.].
4.17 Modification of Joint Contributed Agreements and Shared Contributed
Assets. SCO will provide to Caldera a list of the Contributed Contracts and the
contracts to which the Contributed Companies are a party which create rights or
obligations of both the Group Business and the SCO Retained Business (the "Joint
Contributed Agreements"). As soon as feasible after the date hereof, SCO and
Caldera will negotiate to agree upon a mutually acceptable arrangement between
SCO and Newco and, if required, other parties with respect to the treatment of
such contracts. SCO will provide a list of the Contributed Assets which would be
impracticable to operate separately by either SCO or Caldera (the "Shared
Contributed Assets"). As soon as feasible after the date hereof, SCO and Caldera
will negotiate to agree upon a mutually acceptable arrangement, which shall
allocate costs in proportion to the benefits received, between SCO and Newco
with respect to such Shared Contributed Contracts.
4.18 Key Employee Employment Agreements. SCO will use its best efforts to
cause (without having to incur any cost) each of the Key Employees listed on
Exhibit 4.18A to execute employment agreements which reflect the terms set forth
in the Key Employee Term Sheet, a form of which is attached hereto as Exhibit
4.18B.
4.19 SCO IP Rights. As soon as feasible after the date hereof SCO and
Caldera shall confirm whether the Intellectual Property Rights and Intangible
Assets required for the production, development, marketing and support of the
Group Products are included in the Intellectual Property Rights included in the
Group Assets duly transferred to Newco pursuant hereto. If additional items not
so transferred are discovered, then the Group Assets shall be expanded to
include, and there shall be duly assigned to Newco by the appropriate
Contributing Company, all such additional Intellectual Property Rights and
Intangible Assets required for the production of the Group Products. If the
Intellectual Property Rights and Intangible Assets included or added to the
Group Assets are also required for the production of the
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products produced by SCO and its subsidiaries (other than the Group Products)
then Newco (or its subsidiary, which receives said Intellectual Property Rights
and Intangible Assets constituting Group Assets) shall provide SCO, or its
designated subsidiary, with a fully paid, non-exclusive, perpetual, irrevocable
license to use such Intellectual Property Rights and Intangible Assets for the
purpose of producing such other products. SCO agrees that if Caldera determines,
in its sole judgment to register the copyrights assigned to it pursuant to the
Copyright Assignments, then SCO shall take all reasonable actions to assist
Caldera to register such copyrights.
4.20 Directors' and Officers' Liability Insurance. SCO shall use its
commercially reasonable efforts to maintain directors' and officers' liability
insurance as SCO shall have in effect from time to time, covering the acts or
omissions on or before the Effective Time of those Employees who are or have
been directors and officers of SCO or its subsidiaries and who become employees
of Newco as of the Effective Time. SCO will not voluntarily seek to increase the
deductible nor decrease the limits under such insurance, provided however such
action shall be governed by the insurance marketplace on commercially reasonable
and available terms, and SCO will endeavor to give written notice to Caldera
prior to any cancellation or non-renewal of the SCO coverage.
4.21 Closing Group Account. SCO shall deliver to Newco the assets and
liabilities section of a balance sheet of the Group Business as of the Closing
Date (the "Closing Group Account") within thirty days following the Closing
Date. Newco shall cooperate by providing access to data and personnel, as
reasonably required by SCO to prepare the Closing Group Account. The Closing
Group Account shall be prepared in the same manner as the 2000 Group Balance
Sheet and in compliance with the representations and warranties contained in
Section 2.4(c) hereof.
4.22 SCO Retained Business. SCO shall use its reasonable best efforts to
transfer or sell all of the Excluded Assets from the Contributed Companies prior
to the Effective Time or as soon as practicable thereafter; provided, however,
that to the extent that any Excluded Assets pursuant to Section 1.4(b)(ii) are
included as assets on the Closing Group Account, Caldera shall pay to SCO an
amount, in cash, equal to amount of such assets or transfer the assets after the
Effective Time, as the parties may agree.
4.23 Taking of Necessary Action; Further Action. If, at any time after
the Closing Date, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest Caldera with full right, title and
possession to the Contributed Assets and Contributed Companies, the officers and
directors of SCO are fully authorized in the name SCO or otherwise to take, and
will take, all such lawful and necessary and/or desirable action.
4.24 Accounting Treatments. SCO and Caldera shall use their reasonable
best efforts to gain favorable accounting treatment for the Sales Representative
and Support Agreement, including, if necessary, revising the terms of such
agreement set forth in Exhibit 4.12.
5. Caldera and Newco Covenants.
5.1 Advice of Changes.
(a) During the period from the date hereof until the earlier of the
Effective Time or the termination of this Agreement in accordance with its
terms, Caldera will promptly advise SCO in writing (i) of any event
occurring subsequent to the date hereof that would reasonably be likely to
render any representation or warranty of Caldera or Newco contained in
Section 3 of this Agreement, if made on or as of the date of such event or
the Effective Time, untrue or inaccurate, (ii) of any event that would
reasonably be likely to have a Material Adverse Effect on Caldera, and
(iii) of any material breach by Caldera or Newco of any covenant or
agreement contained in this Agreement; provided, however, that the delivery
of, or failure to deliver, any notice pursuant to this Section 5.1(a) shall
not limit or otherwise affect the remedies available hereunder.
(b) Ten days prior to the Effective Time, Caldera will deliver to SCO
a certificate from Caldera's transfer agent indicating the number of shares
of Common Stock outstanding at the end of business on the eleventh day
preceding the Effective Time and a certificate from Caldera's Secretary
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indicating the number of shares of Caldera Common Stock issuable upon
exercise or conversion of any outstanding options, warrants or convertible
debentures outstanding on such date. Caldera will deliver to SCO by the
fifteenth business day after the Effective Time a certificate from
Caldera's transfer agent indicating the number of shares of Common Stock
outstanding at the end of business on the day of the Closing (calculated
without regard to the shares of Common Stock issued with respect to the
First SCO Certificate) and a certificate from Caldera's Secretary
indicating the number of shares of Caldera Common Stock issuable upon
exercise or conversion of any outstanding options at the end of business on
the day of the Closing.
5.2 Maintenance of Business. During the period from the date hereof until
the earlier of the Effective Time or the termination of this Agreement in
accordance with its terms, Caldera will use its best efforts to carry on and
preserve its business and its relationships with customers, suppliers, employees
and others in substantially the same manner as it has prior to the date hereof.
5.3 Conduct of Business. During the period from the date hereof until the
earlier of the Effective Time or the termination of this Agreement in accordance
with its terms, Caldera will continue to conduct its business and maintain its
business relationships in the ordinary and usual course and consistent with past
practice and, except as otherwise disclosed herein or in the Caldera Disclosure
Letter, it will not, without the prior written consent of SCO, which consent
shall not be unreasonably withheld or delayed, take any of the following actions
where it would cause a Material Adverse Effect on Caldera:
(a) borrow any money except for (A) amounts that are not in the
aggregate material to the financial condition of Caldera and its
subsidiaries, taken as a whole or (B) pursuant to existing credit
facilities;
(b) cause any of the material Caldera Assets to become subject to any
Encumbrance, except for Caldera Permitted Encumbrances and except for
Caldera Encumbrances arising under credit facilities existing as of the
date hereof;
(c) dispose of any of Caldera Assets which are material to the Caldera
Business;
(d) issue capital stock representing more than a 10% interest in the
total outstanding securities of Caldera;
(e) merge, consolidate or reorganize with, or acquire any entity,
except for transactions in which the aggregate consideration is below $15
million;
(f) amend the Certificate of Incorporation or Bylaws of Caldera or any
of its subsidiaries or as otherwise expressly contemplated by this
Agreement);
(g) agree to take, or permit any Caldera entity to take or agree to
take, or enter into negotiations with respect to, any of the actions
described in the preceding clauses in this Section 5.3(g).
Notwithstanding the foregoing, nothing in this Section 5.3 shall restrict
or limit the conduct of any business of Caldera or its direct or indirect
subsidiaries or the use or disposition of the Caldera Assets, other than as set
forth in this Section 5.3.
5.4 Stockholder Approval. Caldera will call the Caldera Stockholders
Meeting, to be held within 40 days after the Form S-4 shall have been declared
effective by the SEC, to submit the Merger, the SCO Transaction and any related
matters for the consideration and approval of the Caldera stockholders. The
Prospectus/Proxy Statement will include a statement to the effect that Caldera's
Board of Directors is recommending that Caldera stockholders vote in favor of
the Merger and the SCO Transaction. Such meeting will be called, held and
conducted, and any proxies will be solicited, in compliance with applicable law.
5.5 Letter of Caldera's Accountants. Caldera shall use its reasonable
best efforts to cause to be delivered to SCO a letter of Arthur Andersen LLP,
dated a date within two business days before the date
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on which the Form S-4 shall become effective and addressed to each of the
Contributing Companies, in form and substance reasonably satisfactory to SCO and
customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the Form S-4.
5.6 Prospectus/Proxy Statement. Caldera will mail to its stockholders in
a timely manner, for the purpose of considering and voting upon the Merger and
the SCO Transaction at the Caldera Stockholders Meeting, the Prospectus/Proxy
Statement. SCO, Caldera and Newco will prepare and file the Prospectus/ Proxy
Statement with the SEC as promptly as practicable, and each will use its
respective best reasonable efforts to cause the Form S-4 to become effective as
soon after such filing as practicable. In this regard, SCO, Caldera and Newco
will advise each other promptly as to the time at which the Form S-4 becomes
effective and of the issuance by the SEC of any stop order suspending the
effectiveness of the Form S-4 or the initiation of any proceedings for such
purpose and each will use its respective reasonable best efforts to prevent the
issuance of any stop order and to obtain as soon as possible the lifting
thereof, if issued. Until the Effective Time, Caldera and Newco will advise SCO
promptly of any requirement of the SEC for any amendment or supplement of the
Form S-4 or for additional information, and will not at any time file any
amendment of or supplement to the prospectus contained therein (or to the
prospectus filled pursuant to Rule 424(b) of the SEC) which shall not have been
previously submitted to SCO in reasonable time prior to the proposed filing
thereof or to which SCO shall reasonably object or which is not in compliance in
all material respects with the Securities Act and the rules and regulations
issued by the SEC thereunder. None of the information relating to Caldera or
Newco (or, to Caldera's or Newco's knowledge, any other person, contained in any
document, certificate or other writing furnished or to be furnished by Caldera)
included in (i) the Prospectus/Proxy Statement by Newco and/or Caldera at the
time the Prospectus/ Proxy Statement is mailed, at the time of the Caldera
Stockholders Meeting to vote on the Merger and the SCO Transaction or at the
Effective Time, as then amended or supplemented, or (ii) the Form S-4 at the
time the Form S-4 becomes effective, as then amended or supplemented, will
contain any untrue statement of a material fact or will omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading
or necessary to correct any statement which has become false or misleading in
any earlier communication with respect to the solicitation of proxies for the
Caldera Stockholder Meeting. From and after the date the Form S-4 becomes
effective and until the Effective Time, if any event known to Caldera or Newco
occurs as a result of which the Prospectus/Proxy Statement or Form S-4 would
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or if it is necessary at any time to amend the Form S-4 or the
Prospectus/Proxy Statement to comply with the Securities Act, Caldera and Newco
will promptly notify SCO and SCO, Caldera and Newco will prepare an amended or
supplemented Form S-4 or Prospectus/Proxy Statement which will correct such
statement or omission and will use its reasonable best efforts to cause any such
amendment to become effective as promptly as possible. The Prospectus/ Proxy
Statement, as it relates to Caldera and Newco, will comply as to form in all
material respects with the requirements of the Exchange Act and the rules and
regulations thereunder in effect at the time the Prospectus/Proxy Statement is
mailed.
5.7 State Securities Law Compliance. Caldera and Newco shall use their
respective reasonable best efforts to qualify the Newco Options to be granted
upon cancellation of the Cancelled SCO Options to be assumed by Caldera pursuant
hereto under the state securities or "blue sky" laws of every jurisdiction of
the United States in which (a) the records of Caldera or SCO as of the Effective
Time, indicate that a holder of such options resides and (b) a Nasdaq Stock
Market or other exemption from the qualification requirements under such laws is
unavailable.
5.8 Regulatory Approvals. As promptly as reasonably practicable, Caldera
and Newco will execute and file, or join in the execution and filing, of any
application or other document that may be necessary in order to obtain the
authorization, approval or consent of any governmental body, federal, state,
provincial, local or foreign which may be reasonably required, or which SCO may
reasonably request, in connection with the consummation of the transactions
contemplated by this Agreement. Caldera and Newco will each
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use its respective reasonable efforts to promptly obtain all such
authorizations, approvals and consents and will cooperate fully with the other
parties in promptly seeking to obtain all such authorizations, approvals, and
consents.
5.9 Necessary Consents. Caldera and Newco will each use its respective
reasonable efforts to obtain the written consents under the Material Caldera
Contracts and to take such other actions as may be necessary or appropriate to
allow the consummation of the transactions contemplated hereby and to allow
Caldera and Newco to carry on Caldera's business and the Group Business after
the Effective Time.
5.10 Access to Information. From the date hereof until the Effective
Time, Caldera and Newco will allow the Contributing Companies and its agents
reasonable access to the files, books, records, technology and offices of
Caldera or Newco reasonably requested by the Contributing Companies including,
without limitation, any and all information relating to Taxes, commitments,
contracts, leases, licenses and real, personal, intellectual and intangible
property and financial condition. Caldera will use its reasonable efforts to
cause its accountants to cooperate with the Contributing Companies and its
agents in making available to such parties all financial information reasonably
requested, including, without limitation, the right to examine all working
papers pertaining to all Tax returns and financial statements prepared or
audited by such accountants. No information or knowledge obtained by any party
hereto in any investigation pursuant to this Section will affect or be deemed to
modify any representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Merger and the SCO Transaction. All
information obtained by the Contributing Companies or its agents pursuant to
this Section shall be kept confidential in accordance with the Nondisclosure
Agreement.
5.11 Books and Records. If, in order properly to prepare documents
required to be filed with governmental authorities (including taxing
authorities) or its financial statements, it is necessary that any party hereto
be furnished with additional information relating to the Group Assets, and such
information is in the possession of Newco or Caldera, then Caldera and Newco on
behalf of themselves and each member of the Caldera Group (including the
Contributed Companies) agree to use its good faith efforts to promptly furnish
such information to the party needing such information. This Section 5.11 shall
survive Closing for two years except for records relating to preparation of and
audit of tax returns, for which this Section 5.11 will survive until the
expiration of the applicable Tax statute of limitations.
5.12 Satisfaction of Conditions Precedent. Caldera and Newco will each
use their respective reasonable best efforts to satisfy or cause to be satisfied
all the conditions precedent that are set forth in Section 7 and to cause the
Merger, the SCO Transaction and the other transactions contemplated by this
Agreement to be consummated. Without limiting the foregoing, in connection with
the agreements to be reached by the parties subsequent to the date hereof and
prior to the Effective Time, the parties agree to negotiate in good faith to
reach agreement on all matters to be included in such agreements promptly after
the signing of this Agreement.
5.13 Voting Agreement. Caldera will use its reasonable best efforts to
obtain Voting Agreements in the form attached as Exhibit 4.11A executed by the
Caldera affiliates listed on Exhibit 5.13B.
5.14 Sales Representative and Support Agreement. The Sales Representative
and Support Agreement shall be executed as of the Effective Time.
5.15 Stockholders Agreement. The Stockholders Agreement shall be executed
as of the Effective Time.
5.16 Caldera Employee Plans.
(a) Newco will adopt the employee benefit plans maintained by Caldera
(the "Caldera Employee Plans") and will use reasonable efforts to provide
the Caldera Employee Plans to the transferring Employees as is provided to
Caldera's employees who are similarly situated as soon as practicable. To
the extent that Newco does not have Caldera Employee Plans in effect in a
jurisdiction where there are transferring Employees, Newco shall adopt
plans providing comparable benefits to the Caldera Employee Plans for said
transferring Employees. From and after the Effective
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Time Newco shall provide all transferring Employees with the opportunity to
participate in any employee stock option or other incentive compensation
plan of Newco and its affiliates on substantially the same terms and
subject to substantially the same conditions as are available to similarly
situated employees of Caldera or Newco. Prior to the Effective Time,
Caldera, Newco and SCO shall mutually agree upon an integration plan
relating to the Merger and the SCO Transaction which shall include, among
other things, provisions relating to compensation and other equity
incentives for Employees. In addition, at the Effective Time, Newco shall
use its best efforts to enter into employment agreements which reflect the
terms set forth in the Key Employee Term Sheets (the form of which is
attached hereto as Exhibit 4.18B) with the Key Employees who are identified
on Exhibit 4.18A attached hereto.
(b) Waiting Periods, Premiums and Deductibles. Newco shall take all
steps necessary to cause each Caldera Employee Plan to waive any "waiting
period" or other requirement with respect to duration of employment with
Newco which would prevent a transferring Employee or beneficiary thereof
who is otherwise eligible to participate in such Caldera Employee Plan from
participating in such Caldera Employee Plan immediately following the
Effective Time. Newco shall credit each transferring Employee with all
deductible payments and co-payments paid by such transferring Employee
under any Group Employee Plan prior to the Effective Time during the
current plan year for purposes of determining the extent to which any such
transferring Employee has satisfied any deductible or maximum out-of-pocket
limitation under any Caldera Employee Plan for such plan year.
(c) Recognition of Prior Service. Newco shall take all steps
necessary to cause each Caldera Employee Plan to recognize each
transferring Employee's length of service under comparable employee benefit
plans maintained by SCO for purposes of eligibility, participation, vesting
and benefit accrual in such Caldera Employee Plan as if such transferring
Employee had been employed by Newco for such period.
(d) Waiver of Restrictions. Newco shall take all steps necessary to
cause each Caldera Employee Plan which is an "employee welfare benefit
plan" under Section 3(1) of ERISA to waive any restrictions or limitations
with respect to "pre-existing conditions" or prior medical history which
would apply to transferring Employee or beneficiary thereof who is
otherwise eligible to participate in such Caldera Employee Plan from
participating in such Caldera Employee Plan without restriction or
limitation.
5.17 Indemnification and Insurance -- Caldera.
(a) The Certificate of Incorporation and Bylaws of Newco and Caldera
shall contain the provisions with respect to indemnification and limitation
of liability for monetary damages set forth in the Certificate of
Incorporation and Bylaws of Caldera on the date hereof.
(b) From and after the Effective Time, Newco and Caldera shall honor,
in all respects, all of the indemnity agreements entered into prior to the
date hereof by Caldera, with its respective officers and directors, whether
or not such persons continue in their positions with Newco or Caldera
following the Effective Time. Following the Effective Time, Caldera's form
of indemnification agreement shall be adopted as the form of
indemnification agreement for Newco and the Caldera Surviving Corporation
shall be afforded the opportunity to enter into such indemnification
agreement, and shall be covered by such directors' and officers' liability
insurance policies as Newco shall have in effect from time to time.
(c) After the Effective Time, Newco and Caldera will, jointly and
severally, to the fullest extent permitted under applicable law, indemnify
and hold harmless, each present and former director or officer of Caldera
or any of its subsidiaries (collectively, the "Indemnified Parties")
against any costs or expenses (including attorneys' fees), judgments,
fines, losses, claims, damages, liabilities and amounts paid in settlement
in connection with any claim, action, suit, proceeding or investigation,
whether civil, criminal administrative or investigative, to the extent
arising out of or pertaining to any
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action or omission in his or her capacity as a director or officer of
Caldera arising out of or pertaining to the transactions contemplated by
this Agreement or the transactions contemplated hereby for a period of six
years after the date of this Agreement. In the event of any such claim,
action, suit, proceeding or investigation (whether arising before or after
the Effective Time), (a) any counsel retained for the defense of the
Indemnified Parties for any period after the Effective Time will be
reasonably satisfactory to the Indemnified Parties, (b) after the Effective
Time, Caldera will pay the reasonable fees and expenses of such counsel,
promptly after statements therefor are received, and (c) Caldera will
cooperate in the defense of any such matter; provided, however, that
Caldera will not be liable for any settlement effected without its written
consent (which consent will not be unreasonably withheld); and provided,
further, that, in the event that any claim or claims for indemnification
are asserted or made within such six-year period, all rights to
indemnification in respect of any such claim or claims will continue until
the disposition of any and all such claims. The Indemnified Parties as a
group may be defended by only one law firm (in addition to local counsel)
with respect to any single action, unless there is, under applicable
standards of professional conduct, a conflict on any significant issue
between the positions of any two or more Indemnified Parties.
(d) For the entire period from and after the Effective Time until at
least six years after the Effective Time, Newco will cause Caldera to use
its commercially reasonable efforts to maintain in effect directors' and
officers' liability insurance covering those persons who are currently
covered by Caldera's directors' and officers' liability insurance policy (a
copy of which has been heretofore delivered or made available to SCO) of at
least the same coverage and amounts, containing terms that are no less
advantageous with respect to claims arising at or before the Effective Time
than Caldera's policies in effect immediately prior to the Effective Time
to those applicable to the then current directors and officers of Newco and
Caldera; provided, however, that in no event shall Newco or Caldera be
required to expend in excess of 150% of the annual premium currently paid
by Caldera for such coverage in which event Newco shall purchase such
coverage as is available for such 150% of such annual premium.
(e) Newco and Caldera shall pay all expenses, including attorneys'
fees, that may be incurred by any Indemnified Parties in enforcing the
indemnity and other obligations provided for in this Section 5.17.
(f) In the event Newco or Caldera or any of its respective successors
or assigns (a) consolidates with or merges into any other person or entity
and shall not be the continuing or surviving corporation or entity of such
consolidation or merger, or (b) transfers or conveys all or a substantial
portion of its properties or assets to any person or entity, then, and in
each such case, to the extent necessary to effectuate the purposes of this
Section 5.17, proper provision shall be made so that the successors and the
assigns of Newco and Caldera assume the obligations set forth in this
Section 5.17.
(g) The provisions of this Section 5.17 shall survive the Effective
Time and are intended to be for the benefit of, and shall be enforceable
by, each officer and director of Caldera SCO and the Contributed Company
Group described in Sections 5.17 and his or her heirs and representatives.
5.18 Indemnification and Insurance -- Employees.
(a) The Certificate of Incorporation and Bylaws of Newco shall contain
the provisions with respect to indemnification and limitation of liability
for monetary damages set forth in the Certificate of Incorporation and
Bylaws of Caldera as of the date hereof which provisions shall not be
amended, repealed or otherwise modified for a period of ten years from the
Effective Time in any manner that would adversely affect the rights
thereunder of individuals who at the Effective Time were directors,
officers, employees or agents of (i) the Contributed Companies or (ii) of
SCO (A) to the extent involved in the Group Business and (B) provided they
become Employees, officers or directors of Newco ("Group Persons"), unless
such modification is required by law.
(b) From and after the Effective Time, Newco shall honor, in all
respects, all of the indemnity agreements entered into prior to the date
hereof by SCO or any member of the Contributed Company
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Group with any Group Persons, whether or not such persons continue in its
positions with Newco following the Effective Time. Following the Effective
Time, Caldera's form of indemnification agreement shall be adopted as the
form of indemnification agreement for Newco and all continuing officers and
directors of Newco shall be afforded the opportunity to enter into such
indemnification agreement, and shall be covered by such directors' and
officers' liability insurance policies as Newco shall have in effect from
time to time.
(c) After the Effective Time, Newco will, jointly and severally, to
the fullest extent permitted under applicable law, indemnify and hold
harmless, subject to Section 5.18(g), each of the Group Persons against any
costs or expenses (including attorneys' fees), judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement in connection
with any claim, action, suit, proceeding or investigation, whether civil,
criminal administrative or investigative, to the extent arising out of or
pertaining to any action or omission in his or her capacity as a director
or officer of SCO or any of the Contributed Companies arising out of or
pertaining to the transactions contemplated by this Agreement for a period
of six years after the Closing Date. Notwithstanding the foregoing, the
parties agree that claims against the Group Persons shall first be made
against any directors' and officers' liability insurance, if any, then
maintained by SCO or any of the Contributed Companies that provides
coverage for such Group Persons. In the event of any such claim, action,
suit, proceeding or investigation (whether arising before or after the
Effective Time), (a) any counsel retained for the defense of the Group
Persons for any period after the Effective Time will be reasonably
satisfactory to the Group Persons, (b) after the Effective Time, Newco
will, subject to Section 5.18(g), pay the reasonable fees and expenses of
such counsel, promptly after statements therefor are received, and (c)
Newco will cooperate in the defense of any such matter; provided, however,
that Newco will not be liable for any settlement effected without its
written consent (which consent will not be unreasonably withheld); and
provided, further, that, in the event that any claim or claims for
indemnification are asserted or made within such six-year period, all
rights to indemnification in respect of any such claim or claims will
continue until the disposition of any and all such claims. The Group
Persons as a group may be defended by only one law firm (in addition to
local counsel) with respect to any single action unless there is, under
applicable standards of professional conduct, a conflict on any significant
issue between the positions of any two or more Group Persons.
(d) Newco shall pay all expenses, including attorneys' fees, that may
be incurred by any Group Persons in enforcing the indemnity and other
obligations provided for its benefit in this Section 5.18.
(e) In the event Newco or any of its respective successors or assigns
(i) consolidates with or merges into any other person or entity and shall
not be the continuing or surviving corporation or entity of such
consolidation or merger, or (ii) transfers or conveys all or a substantial
portion of its properties or assets to any person or entity, then, and in
each such case, to the extent necessary to effectuate the purposes of this
Section 5.18 proper provision shall be made so that the successors and the
assigns of Newco assume the obligations set forth in this Section 5.18.
(f) The provisions of this Section 5.18 shall survive the Effective
Time and are intended to be for the benefit of, and shall be enforceable
by, each of the Group Persons and his or her heirs and representatives.
(g) Notwithstanding any provision of this Section 5.18 to the
contrary, Newco shall not assume and shall have no Liability relating to
claims made by SCO optionees arising out of the repurchase, sale, exchange
or cancellation of SCO capital stock or options in connection with the SCO
Transaction (other than its obligations under Section 1.3(a)(ii)) or
specifically relating to matters arising out of the SCO Retained Business.
5.19 Distribution to SCO Shareholders.
Caldera and Newco acknowledge that SCO may wish to distribute to the
shareholders of SCO all or part of its Newco Common Stock. Six (6) months from
the Closing Date, SCO shall be entitled to make such a distribution; provided,
however, that after such six (6) month period, SCO will not distribute to its
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shareholders more than 25% of the shares of Newco Common Stock acquired by SCO
pursuant to this agreement during a six (6) month period. Newco will facilitate
such distribution by using its reasonable best efforts to take such actions as
may be required under the federal securities laws and regulations in order for
such shares of Newco Common Stock being distributed to the SCO Shareholders to
be registered with the Securities and Exchange Commission. At the time of such
registrations, Newco and SCO will enter into an agreement containing customary
indemnification provisions which shall be substantially equivalent to the
indemnification provisions in the promissory note issued by SCO to Caldera as of
the date hereof.
6. Conditions Precedent to Obligations of SCO.
The obligations of SCO and the other Contributing Companies hereunder are
subject to the fulfillment or satisfaction on or before the Closing of each of
the following conditions (any one or more of which may be waived by SCO on
behalf of all said entities, but only in a writing signed by SCO):
6.1 Accuracy of Representations and Warranties. The representations and
warranties of Caldera and Newco contained in this Agreement (i) shall have been
true and correct as of the date of this Agreement and (ii) on and as of the
Closing Date with the same force and effect as if they had been made on the
Closing Date, except (A) in each case and in the aggregate does not constitute a
Material Adverse Effect on Caldera and (B) for those representations and
warranties that address matters only as of a particular date (which shall remain
true and correct as of such particular date), and SCO shall receive a
certificate to such effect executed on behalf of Caldera and Newco by a duly
authorized officer of Caldera and of Newco.
6.2 Covenants. Caldera and Newco shall have performed and complied in all
material respects with all of its respective covenants in this Agreement
required to be complied with prior to the Effective Time; and SCO shall receive
a certificate to such effect executed by a duly authorized officer of Caldera
and of Newco at the Effective Time.
6.3 Compliance with Law. There shall be no order, decree or ruling by any
governmental agency which would prohibit or render illegal the transactions
contemplated by this Agreement.
6.4 Form S-4. The Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop-order and the
Prospectus/Proxy Statement shall on the Effective Time not be subject to any
proceedings commenced seeking a stop-order or overtly threatened by the SEC.
6.5 Opinion of Caldera and Newco's Counsel. SCO shall have received from
Brobeck, Phleger & Harrison LLP, counsel to Caldera and Newco, an opinion in the
form of Exhibit 6.5 attached hereto, with such assumptions and qualifications as
are customary for such opinions.
6.6 Stockholder Approval. The principal terms of this Agreement, the
Merger and the SCO Transaction shall have been approved and adopted by the
Caldera stockholders and the principal terms of this Agreement and the SCO
Transaction shall have been approved and adopted by the SCO stockholders, in
accordance with California law and its Articles of Incorporation and Bylaws.
6.7 Tax Opinion. SCO shall have received an opinion in form and substance
satisfactory to SCO, from its counsel, to the effect that the SCO Transaction
will be treated as a transfer of property to Newco by the Contributing Companies
governed by Section 351 of the Internal Revenue Code. In rendering such opinion,
counsel shall be entitled to rely on representations of the parties and of
Caldera stockholders as reasonably requested by counsel in connection with such
tax opinion, and the opinion may contain such assumptions and qualifications as
are customary for such opinions. The parties agree to cooperate with counsel by
providing the representations referred to above and Caldera shall use its best
efforts to obtain the requested stockholder representations.
6.8 Designees to the Board of Directors of Newco. The Board of Directors
of Newco shall have taken appropriate action to elect Doug Michels and another
individual designated by SCO to the Board of Directors of Newco, effective upon
the Effective Time.
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6.9 Nasdaq Listing. The Newco Common Stock to be issued in the Merger and
in the SCO Transaction shall have been approved for quotation on the Nasdaq
Stock Market, subject to notice of issuance.
6.10 HSR Act. All waiting periods (and any extensions thereof) under the
HSR Act applicable to transactions contemplated hereby shall have expired or
shall have been terminated.
6.11 Ancillary Agreements. Caldera and Newco shall have executed and
delivered counterparts of each of the Ancillary Agreements to which they are a
party.
6.12 Delivery of Newco Shares. Newco shall have delivered the First SCO
Certificate to SCO.
7. Conditions Precedent to Obligations of Caldera and Newco.
The obligations of Caldera, Merger Sub and Newco hereunder are subject to
the fulfillment or satisfaction on or before the Closing of each of the
following conditions (any one or more of which may be waived by Caldera on
behalf of all such parties, but only in a writing signed by Caldera):
7.1 Accuracy of Representations and Warranties. The representations and
warranties of SCO contained in this Agreement (i) shall have been true and
correct as of the date of this Agreement and (ii) shall be true and correct as
of the Closing Date with the same force and effect as if they had been made on
the Closing Date, except (A) in each case and in the aggregate as does not
constitute a Material Adverse Effect on the Group Business and (B) for those
representations and warranties that address matters only as of a particular date
(which shall remain true and correct as of such particular date), and Caldera
shall receive a certificate to such effect executed on behalf of SCO by a duly
authorized officer of SCO.
7.2 Covenants. SCO and the Contributing Companies shall have performed
and complied in all material respects with all of its respective covenants in
this Agreement required to be complied with prior to the Effective Time; and
Caldera shall receive a certificate to such effect signed on behalf of SCO by a
duly authorized officer of SCO.
7.3 Compliance with Law. There shall be no order, decree or ruling by any
court or governmental agency which would prohibit or render illegal the
transactions contemplated by this Agreement.
7.4 Consents. There shall have been obtained on or before the Effective
Time all permits, consents and authorizations as set forth on Section 7.4 of the
SCO Disclosure Letter, where the failure to obtain same has resulted, or
reasonably would be expected to result, in a Material Adverse Effect on the
Group Business.
7.5 Form S-4. The Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop-order or proceedings
seeking a stop-order and the Prospectus/Proxy Statement shall at the Effective
Time not be subject to any proceedings seeking a stop-order commenced or overtly
threatened by the SEC.
7.6 Opinion of Counsel to SCO. Caldera shall have received from Wilson
Sonsini Goodrich & Rosati, Professional Corporation, counsel to SCO and the
Contributing Companies, an opinion in the form of Exhibit 7.6 attached hereto,
with such assumptions and qualifications as are customary for such opinions.
7.7 Caldera Stockholder Approval. The principal terms of this Agreement,
the Merger and the SCO Transaction shall have been approved and adopted by the
Caldera stockholders and the principal terms of this Agreement and the SCO
Transaction (including the contribution and transfer of the Contributed Assets)
shall have been approved and adopted by the SCO Stockholders each in accordance
with Delaware Law and their respective Certificates of Incorporation and Bylaws.
7.8 Tax Opinion. Caldera and Newco shall have received an opinion in form
and substance satisfactory to them from their counsel, to the effect that the
Merger will be treated for federal income tax purposes as a tax-free
reorganization within the meaning of Section 368 of the Internal Revenue Code.
In
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rendering such opinion, counsel shall be entitled to rely on representations of
the parties and of Caldera stockholders as reasonably requested by counsel in
connection with such tax opinion, and the opinion may contain such assumptions
and qualifications as are customary for such opinions. The parties agree to
cooperate with counsel by providing the representations referred to above and
Caldera shall use its best efforts to obtain the requested stockholder
representations.
7.9 HSR Act. All waiting periods (and any extensions thereof) under the
HSR Act applicable to the transactions contemplated hereby shall have expired or
shall have been terminated.
7.10 Ancillary Agreements. The Contributing Companies shall have executed
and delivered counterparts of each of the Ancillary Agreements to which they are
a party.
7.11 Key Employee Term Sheets. Each of the Key Employees set forth on
Exhibit 4.18A shall have executed their respective Key Employee Term Sheet.
8. Termination of Agreement.
8.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of the Merger by the
stockholders of Caldera or SCO:
(a) by mutual written agreement of SCO and Caldera;
(b) by SCO, if there has been a material breach by Caldera or Newco of
any representation or warranty set forth in this Agreement on the part of
Caldera or Newco, and, as a result of such breach the conditions set forth
in Section 6.1 would not then be satisfied and such breach is not cured
within thirty (30) days after notice thereof from SCO to Caldera (except
that no cure period shall be provided for a breach by Caldera or Newco
which by its nature cannot be cured);
(c) by SCO, if there has been a material breach by Caldera or Newco of
any covenant or agreement set forth in this Agreement to be performed by
Caldera or Newco or a material breach by the Caldera Significant
Stockholders of any covenant or agreement set forth in the Voting Agreement
and as a result of such breach, the conditions set forth in Section 6.2
would not then be satisfied and such breach is not cured within thirty (30)
days after written notice thereof from SCO to Caldera (except that no cure
period shall be provided for a breach by Caldera or Newco which by its
nature cannot be cured);
(d) by Caldera, if there has been a material breach by SCO of any
representation or warranty set forth in this Agreement on its part, and as
a result of such breach the conditions set forth in Section 7.1 would not
then be satisfied and such breach is not cured within thirty (30) days
after written notice thereof from Caldera to SCO (except that no cure
period shall be provided for a breach by SCO which by its nature cannot be
cured);
(e) by Caldera, if there has been a material breach by SCO of any
covenant or agreement set forth in this Agreement to be performed by SCO,
and as a result of such breach, the conditions set forth in Section 7.2
would not then be satisfied and such breach is not cured within thirty (30)
days after written notice thereof from Caldera to SCO (except that no cure
period shall be provided for a breach by SCO or SCO which by its nature
cannot be cured);
(f) by Caldera or SCO, if the Merger and the SCO Transaction shall not
have been consummated on or before the Final Date for any reason, provided
that, the right to terminate this Agreement under this Section 8.1(f) shall
not be available to any party whose wrongful action or failure to act or
whose breach of this Agreement or any Ancillary Document, is the cause of
such non-consummation;
(g) by Caldera or SCO, if a permanent injunction or other order by any
federal or state court would make illegal or otherwise restrain or prohibit
the consummation of the Merger and/or the SCO Transaction shall have been
issued and shall have become final and nonappealable;
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(h) by Caldera or SCO, if the stockholders of SCO do not approve the
SCO Transaction at a duly convened SCO Stockholders Meeting or any
adjournment thereof by reason of the failure to obtain the required vote (a
"SCO Stockholder Rejection"); provided, that the right to terminate this
Agreement under this Subsection (h) shall not be available to SCO where the
failure to obtain SCO stockholder approval shall have been caused by any
breach of this Agreement or any Ancillary Document by SCO;
(i) by Caldera, if (a) the Board of Directors of SCO shall have
withdrawn (or modified in a manner adverse to the SCO Stockholder Approval
or the consummation of the SCO Transaction) its approval or recommendation
of the SCO Transaction or this Agreement, (b) SCO shall have failed to
include in the Proxy Statement/Prospectus the recommendation of the Board
of Directors of SCO in favor of approval of the SCO Transaction or this
Agreement, (c) the Board of Directors of SCO shall have recommended any SCO
Alternative Proposal, which meets the criteria of 4.14(b)(i)-(v), or (d)
the Board of Directors of SCO shall have resolved to do any of the
foregoing (collectively, a "Change in SCO Board Recommendation");
(j) by Caldera or SCO at any time prior to the SCO Stockholder
Approval, if the Board of Directors of SCO shall have recommended or
accepted a SCO Alternative Proposal provided that SCO is not in breach of
Section 4.14;
(k) by Caldera or SCO, if the stockholders of Caldera do not approve
the SCO Transaction at a duly convened Caldera Stockholders Meeting or any
adjournment thereof by reason of the failure to obtain the required vote;
provided, that the right to terminate this Agreement under this Subsection
(k) shall not be available to Caldera where the failure to obtain Caldera
Stockholder Approval shall have been caused by any breach of this Agreement
or any Ancillary Document by Caldera; or
(l) by SCO, if (a) the Board of Directors of Caldera shall have
withdrawn (or modified in a manner adverse to the Caldera Stockholder
Approval) its approval or recommendation of the SCO Transaction, the Merger
or this Agreement, (b) Caldera shall have failed to include in the Proxy
Statement/Prospectus the recommendation of the Board of Directors of
Caldera in favor of approval of the SCO Transaction, the Merger or this
Agreement, (c) the Board of Directors of SCO shall have resolved to do any
of the foregoing.
As used herein, the "Final Date" shall be February 28, 2001; and except
that if a temporary, preliminary or permanent injunction or other order by any
Federal or state court which would prohibit or otherwise restrain consummation
of the Merger and/or the SCO Transaction shall have been issued and shall remain
in effect on February 28, 2001, and such injunction shall not have become final
and non-appealable, either party, by giving the other written notice thereof on
or prior to February 28, 2001, may extend the time for consummation of the
Merger and/or the SCO Transaction up to and including the earlier of the date
such injunction shall become final and non-appealable or March 31, 2001, so long
as such party shall, at its own expense, use its reasonable best efforts to have
such injunction dissolved.
8.2 Notice of Termination. Any termination of this Agreement under
Section 8.1 above will be effected by the delivery of notice of the terminating
party to the other party hereto of such termination, specifying the grounds
therefore.
8.3 Liability. If this Agreement is terminated pursuant to Section 8.1,
the parties shall have no further obligation or liability to each other except
that the parties will remain liable for: (i) the payment of the Termination Fee,
if any, payable under Section 8.4 below; (ii) damages resulting from their
intentional fraud or willful breach of this Agreement (which will not be limited
by Section 8.4); and (iii) obligations under the parties' nondisclosure
agreement. Sections 13.1 -- 13.13 of this Agreement will survive any termination
of this Agreement.
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8.4 Termination Fee.
(a) Termination Fee.
(i) If this Agreement is terminated by Caldera pursuant to Section
8.1(i), then SCO shall promptly pay to Caldera (by wire transfer or
cashier's check) a nonrefundable fee equal to 3 1/2% of the number of
shares of Newco Common Stock equal to the SCO Percentage Interest
multiplied by the average closing price of the Caldera Common Stock for
the ten (10) days following the public announcement of this Agreement
(the "Termination Fee") within two (2) business days following delivery
of the notice of termination by Caldera pursuant to Section 8.2;
(ii) If this Agreement is terminated by SCO pursuant to Section
8.1(l), then Caldera shall promptly pay to SCO (by wire transfer or
cashier's check) the Termination Fee within two (2) business days
following delivery of the notice of termination by SCO pursuant to
Section 8.2; and
(iii) If (A) this Agreement is terminated by SCO or Caldera
pursuant to Section 8.1(h) after a SCO Alternative Proposal has been
publicly disclosed or by Caldera pursuant to Section 8.1(c) as the
result of a breach by SCO of Section 4.14 and (B) within 6 months of
termination of this Agreement SCO shall enter into an agreement for a
SCO Alternative Proposal which is subsequently consummated or within 12
months of termination of this Agreement SCO shall consummate a SCO
Alternative Proposal, then SCO shall pay to Caldera (by wire transfer or
cashier's check) the Termination Fee within two (2) business days upon
the consummation of such SCO Alternative Proposal.
(b) SCO and Caldera acknowledge that the agreements contained in this
Section 8.4 are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, neither SCO nor Caldera
would enter into this Agreement; accordingly, if either Caldera or SCO fail
to timely pay the amounts due pursuant to this Section 8.4, and, in order
to obtain such payment, the other party commences a suit which results in a
judgment against SCO or Caldera, as the case may be for the amounts set
forth in this Section 8.4 and such judgment is not set aside or reversed,
such party shall pay the other party's reasonable costs and expenses
(including attorneys' fees and expenses) in connection with such suit,
together with interest on the amounts set forth in this Section 8.4 at the
prime rate as published in The Wall Street Journal on the date such payment
was required to be made.
9. Survival of Representations.
9.1 Survival of Representations. Except as otherwise expressly provided
herein, all representations, warranties and covenants of the parties contained
in this Agreement will remain operative and in full force and effect, regardless
of any investigation made by or on behalf of the parties to this Agreement,
until the second anniversary of the Effective Time, whereupon such
representations, warranties and covenants will expire (except for covenants and
other provisions hereof that by its express terms survive for a longer period);
provided however that all representations and warranties and covenants relating
to Tax matters shall survive for the period of the applicable statute of
limitations.
10. Escrow and Indemnification.
10.1 Escrow Fund. In accordance with Section 1.3(b) hereof, Caldera shall
deliver to the Escrow Agent Shares of Newco Common Stock equal to an aggregate
of ten percent (10%) of the SCO Percentage Interest (the "Escrow Fund"). The
Escrow Fund shall be held by the Escrow Agent for a period of one year from the
Effective Time pursuant to the terms set forth in the Escrow Agreement. The
Escrow Fund shall be available to compensate Caldera Surviving Corporation and
Newco pursuant to the Indemnification obligations of SCO.
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10.2 Indemnification by SCO. SCO agrees, notwithstanding any provision of
Section 1.4 hereof to the contrary, to indemnify Newco and Caldera against, and
to hold Newco and Caldera harmless from, all Loss arising out of any of the
following (even if included in the Assumed Liabilities as otherwise being or
allegedly being a Liability of one of the Contributed Companies or of the
Contributed Subsidiaries):
(a) any of the Excluded Liabilities, except as may be provided in
Section 12;
(b) any demand, claim, debt, suit, cause of action, arbitration,
investigation or other proceeding made or asserted by any Contributing
Company or any stockholder, creditor, or Affiliate of any Contributing
Company or by any receiver or trustee in bankruptcy of any Contributing
Company of the property or assets of any Contributing Company, asserting
that the transfer of the Contributed Stock and Contributed Assets to Newco
hereunder constitutes a fraudulent conveyance, fraudulent transfer or a
preference under any applicable foreign, state or federal law, including
but not limited to the United States Bankruptcy Code, or any breach by any
Contributing Company of its representations and covenants in Section 1.4(e)
hereof or any Liabilities related to non-compliance with bulk transfer laws
in connection with the SCO Transaction;
(c) the SCO Retained Business;
(d) any material Liability omitted from the Group Financial Statements
that was required by GAAP to be included or reflected therein
(collectively, the "Omitted Balance Sheet Liabilities");
(e) any claim or cause of action brought by any SCO employee relating
in any way to the terms and conditions of the employee's employment with
SCO or the termination thereof, which arises prior to the Closing Date,
regardless of when such claim or cause of action may be discovered or
brought;
(f) any breach of the representations and warranties in Section 2
hereof.
10.3 Notwithstanding Section 10.2, all liabilities for Taxes shall be
subject only to the separate tax indemnification provisions of Section 12.
10.4 Limitations on Indemnification. SCO shall not have any liability
under this Section 10 unless the aggregate amount of Loss attributable exceeds
$1,000,000, and, in such event, SCO shall be required to pay the entire amount
of such Loss from the first dollar thereof. SCO shall not have liability for any
Loss in excess of the amount determined by multiplying (i) the number of shares
of Newco Common Stock equal to ten percent (10%) of the SCO Percentage Interest
by (ii) the Caldera Closing Price, except that as such Losses relate to the SCO
IP Rights, SCO shall not have liability for any Loss in excess of the amount
determined by multiplying (i) the number of Shares of Newco Common Stock equal
to fifty percent (50%) of the SCO Percentage Interest by (ii) the Caldera
Closing Price. Notwithstanding the preceding sentence, there shall be no
limitations on liability pursuant to this Section 10 relating to intentional
fraud or misrepresentation by SCO.
10.5 Indemnification Procedures.
(a) Claim Procedure. If Caldera or Newco has or claims to have
incurred or suffered Losses for which it is or may be entitled to
indemnification, compensation or reimbursement under this Section 10 (the
"Indemnitee"), such Indemnitee may, on or prior to the first anniversary of
the Effective Time, deliver a claim notice (a "Claim Notice") to SCO. Each
Claim Notice shall (i) state that such Indemnitee believes that it is
entitled to indemnification, compensation or reimbursement under this
Section 10, (ii) contain a brief description of the circumstances
supporting such Indemnitee's belief that such Indemnitee is so entitled to
indemnification, compensation or reimbursement and (iii) contain a
non-binding, preliminary estimate of the amount of Loss such Indemnitee
claims to have so incurred or suffered (the "Claimed Amount").
(b) Response Notice. Within twenty (20) business days after receipt
by SCO of a Claim Notice, SCO may deliver to the Indemnitee who delivered
the Claim Notice a written response (the "Response Notice") in which SCO:
(i) agrees that the full Claimed Amount is to be paid to the Indemnitee;
(ii) agrees that a part, but not all, of the Claimed Amount is to be paid
to the
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Indemnitee; or (iii) indicates that no part of the Claimed Amount is to be
paid to the Indemnitee. Any part of the Claimed Amount that SCO does not
agree should be paid to the Indemnitee shall be the "Contested Amount." If
a Response Notice is not delivered to Caldera within such twenty (20)
business day period, then SCO shall be deemed to have agreed that the full
Claimed Amount is to be paid to the Indemnitee.
(c) Payment of Claimed Amount. If SCO delivers a Response Notice
agreeing that some or all of the Claimed Amount is to be paid to the
Indemnitee (the "Agreed Amount"), SCO shall pay the Indemnitee in cash,
within twenty (20) business days from the date of the Response Notice, any
portion of the Agreed Amount that is not satisfied by delivery of Escrow
Shares pursuant to the terms of the Escrow Agreement. Such payment shall be
deemed to be made in full satisfaction of the claim described in such Claim
Notice, provided, however, that if such claim involves ongoing Losses, then
such payment shall be deemed to be made in full satisfaction only of the
Losses incurred as of the date specified in such Claim Notice.
(d) Settlement. If SCO delivers a Response Notice indicating that
there is a Contested Amount, SCO and the Indemnitee shall attempt in good
faith for a period of thirty (30) days from the date of the Response Notice
to resolve the dispute related to the Contested Amount. If the Indemnitee
and SCO resolve such dispute, such resolution shall be binding on SCO and
all of the Indemnitees and a settlement agreement shall be signed by the
Indemnitee and SCO containing the terms of such resolution.
(e) Third Party Claims.
(i) Within fifteen (15) days after receipt of notice of
commencement of any action by any third party evidenced by service of
process or other legal pleading, or with reasonable promptness after the
assertion in writing of any claim by a third party, Caldera shall give
SCO written notice thereof together with a copy of such claim, process
or other legal pleading, and SCO shall have the right to undertake the
defense, thereof through a legal representative of SCO's own choosing.
(ii) In the event that SCO, by the thirtieth day after receipt of
notice of any such claim (or, if earlier, by the tenth day preceding the
day on which an answer or other pleading must be served in order to
prevent judgment by default in favor of the person asserting such
claim), does not elect to defend against such claim, Caldera (upon
further notice to SCO) will have the right to undertake the defense,
compromise or settlement of such claim on behalf of and for the account
and risk of SCO subject to the right of SCO to assume the defense of
such claims at any time prior to settlement, compromise or final
determination thereof. The reasonable costs of defense of any third
party action or claim by Caldera shall be paid from the Escrow Shares.
(iii) Notwithstanding Sections 11.5(e)(i) and (ii), Caldera shall
have the right to retain control of the defense of any third party
action or claim described in Section 11.5(e)(i) which involves potential
Losses in excess of the value of the Escrow Shares remaining in the
Escrow Account or could reasonably be expected to materially affect
Caldera's on-going operations. In such event, SCO shall have the right
to be present at the negotiation, defense and settlement of such action
or claim. Caldera shall not agree to any settlement of any such action
or claim without the consent of SCO, which shall not be unreasonably
withheld.
(f) Satisfaction. In the event SCO incurs liability for Losses which
is not satisfied by delivery of shares from the Escrow Fund, SCO may elect
to pay the amount due either in cash or by delivering shares of Newco
Common Stock. For this purpose, the Newco Common Stock will be valued at
the average closing price of the Caldera Common Stock for the ten days
following the public announcement of this Agreement, as adjusted for stock
splits, stock dividends, changes in the Caldera Ratio and other
recapitalizations.
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11. Employee Matters.
11.1 Right to Offer Employment.
(a) Employees. Schedule 11.1 of the SCO Disclosure Letter contains a
preliminary list (the "Preliminary List") of each Contributed Company
employee or consultant and each other employee or consultant of SCO or the
Group Business who works in, or provides services in connection with or is
assigned to the Group Business or any of the Group Assets (each a
"Potential Employee"). Within five (5) days after the date hereof, SCO
shall deliver to Newco a final list of the Potential Employees (the "Final
List"), which list shall identify those Potential Employees who are active
employees of the Group Business as of that date, including those on
vacation, sick leave, maternity or parental leave, disability leave, family
leave or personal leave of absence, who work full or part time, and which
shall separately identify those employees who are on a workers'
compensation-related or disability leave or long-term sick leave. The Final
List shall contain, with respect to each Potential Employee, a true and
accurate list of all locations at which Potential Employees are working as
of such date, together with the date of hire, location of employment, years
of employment or service, current annual base salary or base wage, and of
all other compensation arrangements for such Potential Employees, including
bonuses, commissions or other compensation arrangements or benefit plans
whether oral or written, contractual or discretionary. Within sixteen (16)
days of receipt of the Final List, Caldera shall deliver to SCO a list that
identifies: (i) those Potential Employees of the Group Business to whom it
shall make offers of employment and (ii) those Potential Employees of the
Contributed Companies that it expects to retain, each pursuant to Section
11.1(e) (the "Designated Employees"). For purposes of this Agreement,
"Employees" means only those Designated Employees given offers of
employment or retained by Newco pursuant to Section 11.1(e). For a period
of two years from the Closing Date, neither Newco, any of its subsidiaries
nor their employees (including former employees of SCO) may employ, make
offers of employment to or otherwise solicit any employees of SCO as of the
date hereof who are not Designated Employees.
(b) The parties acknowledge and agree that in those jurisdictions in
which the EC Directive 77/187 (the Acquired Rights Directive) (the
"Employment Regulations") apply, the contracts of employment of the
Designated Employees designated as "Employees" pursuant to Section 11.1(e)
will have effect from the Effective Time (which shall be the "time of
transfer" for the purposes of the Employment Regulations) as if originally
made between Newco and each such Employee. If any contract of employment is
not disclosed by SCO in the Final List or any other contract of employment
of any employee other than an Employee is in effect as if originally made
between Newco and the employee concerned as a result of the Employment
Regulations: (i) Newco may, upon becoming aware of any such contract,
terminate it forthwith; and (ii) SCO and each Group Business shall
indemnify and hold harmless Newco against any costs, claims, liabilities
and expenses of any nature (including legal expenses on an indemnity basis)
arising out of such termination and against sums payable to or on behalf of
such employee in respect of his employment whether arising before or after
the Closing.
(c) Newco shall credit Employees with their then current accrued
vacation with SCO or the Contributed Companies. All other emoluments and
outgoings (including and without limitation, wages, salaries, bonuses,
commissions, withholding taxes, social security contributions, pension
contributions) and other costs and expenses of, and all other obligations
in respect of, the Employees in respect of the period to, and including,
the Closing shall be discharged by SCO and any relevant Group Business. SCO
and each Group Business shall indemnify and keep indemnified Newco against
all liabilities arising from any failure by SCO and any Group Business so
to discharge.
(d) SCO and each Group Business shall indemnify and hold harmless
Newco from and against all losses, costs, claims, demands, actions, fines,
penalties, awards, liabilities and expenses (including legal expenses on an
indemnity basis) (i) which are attributable to any act, omission, breach or
default by SCO or any Group Business prior to the Closing in respect of any
of the obligations of SCO or any Group Business (in either case, whether
arising under common law, statute, custom or
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otherwise) to or in relation to any of its employees or former employees
(including but not limited to any liability arising out of the termination
or dismissal of any Potential Employee or former employee and which Newco
may incur or suffer as a result of succeeding to SCO or any Group Business
as the employer of any Potential Employee); or (ii) in connection or as a
result of any claim or demand by a Potential Employee on the grounds that
the Potential Employee has suffered any loss, harm or damage in relation to
pension rights caused by the transactions set forth in this Agreement
(including without limitation the calculation of any transfer value of
accrued rights on transfer) to the Potential Employees; or (iii) in
connection or as a result of any claim or demand by a Potential Employee
that the identity of Newco is to the Potential Employee's detriment,
whether or not such claim or claims arises or arise prior to, on or after
the Closing.
(e) Offers of Employment. Effective at the Effective Time, Newco
shall offer to employ any of the Designated Employees of the Group Business
(other than Designated Employees of the Contributed Companies) subject to
Newco's standard terms, conditions and policies of employment and the terms
of this Agreement, and shall offer such Designated Employees as it
determines, in its sole discretion, to hire (i) salary consistent with the
salary earned by such Potential Employees prior to the Effective Time but
only to the extent such salary is not in excess of industry norms (taking
into account the geographic location of the Employees); and (ii)
participation in incentive compensation arrangements consistent with the
incentive compensation arrangements of employees of Caldera in comparable
positions. This Section 11.1(b) shall not be construed to create any third
party beneficiary rights or any other rights of any kind in any Designated
Employee and no Designated Employee shall have any cause of action as a
third party beneficiary. Such offers of employment that will be extended by
Newco to Employees will be on the same basis of time commitment (full or
part time) as such Employee was employed immediately prior to the Effective
Time. In addition, SCO shall cause the termination of any Potential
Employees of the Contributed Companies who are not Designated Employees
prior to the Effective Time. Unless the parties otherwise agree, on the
date of the Closing, SCO shall notify each Employee who accepts an offer of
employment extended by Newco as of the Effective Time, in a writing
reasonably satisfactory to Newco, that such Employee's employment with SCO
or any of its direct or indirect subsidiaries is then terminated. For a
period of two years from the Closing Date, neither SCO nor any of its
subsidiaries nor any of its employees may employ, make offers of employment
to or otherwise solicit any of the employees of Newco or any of its
subsidiaries as of the date hereof or any of the Designated Employees.
(f) Severance. SCO shall be responsible for any and all severance
that may become due as a result of the transaction contemplated by this
Agreement for all employees except for those Employees hired by Newco
pursuant to Section 11.1(b); provided, however, that if Caldera does not
make a reasonable offer of employment to a Designated Employee then Caldera
shall be responsible for any and all severance that may become due as a
result of the transaction or the termination of such employee.
11.2 Termination of Employment.
(a) SCO agrees to comply with the provisions of the WARN Act and any
other federal, state, provincial or local or foreign statute or regulation
or EU Directive regulation regarding termination of employment, plant
closing or layoffs and to perform all obligations required of SCO with
respect to the cessation of any operations of the Group Business or any
other business of SCO or its subsidiaries, or the termination,
re-assignment, re-location or change in position as terms and conditions of
employment of any Employee (or other employee of them) who does not accept
Newco's offer of employment.
(b) In the United States, SCO shall (i) provide continuation health
care coverage to all employees of the Group Business and their qualified
beneficiaries who incur a qualifying event prior to the Effective Time, who
are not given offers of employment by Newco or who do not accept Newco's
offer of employment pursuant to Section 11.1(b) in accordance with the
continuation health care coverage requirements of COBRA and (ii) provide
COBRA continuation coverage to any former
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employee of the Contributed Company Group who was previously employed in
the Group Business (collectively, the "Former Employees") and its qualified
beneficiaries to whom, at the Effective Time, such continuation coverage
was being provided or to whom SCO was under an obligation to provide such
continuation coverage at the election of such Former Employee or qualified
beneficiary.
11.3 Cooperation. SCO, Caldera and Newco agree, for themselves and its
affected subsidiaries, to cooperate fully with respect to the actions which are
necessary or reasonably desirable to accomplish the transactions contemplated
hereunder, including, without limitation, the provision of records and
information as each may reasonably request and in order to meet the notification
and consultation requirements of the Acquired Rights Directive in accordance
with the relevant regulations or laws adopting such directive in all relevant
jurisdictions, or any other similar notification and consultation obligation the
making of all appropriate filings under ERISA and the Internal Revenue Code.
12. Tax Matters.
12.1 Transaction Taxes; Representation; Transaction Tax Indemnity. SCO
and Caldera shall bear equally any and all sales, use, excise, value added,
registration, stamp, property, documentary, transfer, withholding and similar
taxes, levies and duties (including all real estate transfer taxes, but not any
real estate transfer taxes that would be triggered as a result of a change in
control of a corporation) incurred, or that may be payable to any taxing
authority, with respect to the sale, transfer, or delivery of the Contributed
Stock and Assets and the assumption of the Assumed Liabilities, including any
such taxes, levies and duties imposed in connection with such transactions
(collectively, "Transaction Taxes"); provided, however, that Caldera shall not
be responsible for any Transaction Taxes in excess of $300,000. Newco and SCO
agree to cooperate in minimizing the amount of any Transaction Taxes and in the
filing of all necessary documentation and all Tax returns, reports and forms
("Returns") with respect to all Transaction Taxes, including any available
pre-sale filing procedures.
Notwithstanding any other provision of this Agreement, the Unixware source
code, object code and related documentation ("Unixware Software") or other
software shall remain the property of SCO until (i) expeditiously delivered to
Newco at SCO's facility in Murray Hill, New Jersey, (ii) transferred by remote
telecommunication from SCO's place of business, to or through Newco's computer
with no tangible personal property transferred to Newco, such as storage media,
except for user manuals, or (iii) installed by SCO on Newco's computer without
the transfer of title or possession of storage media or any tangible personal
property other than user manuals. Newco agrees that it will not transfer the
Unixware Software or other software on tangible media into California.
12.2 Treatment of Indemnity Payments. All payments made by SCO or Newco,
as the case may be, to or for the benefit of the other party pursuant to any
indemnification obligations under this Agreement shall, to the extent
appropriate under applicable Tax law, be treated for Tax purposes as adjustments
to the value of the Contributed Stock and Contributed Assets.
12.3 Indemnity for Taxes.
(a) Except as otherwise provided in this Section 12.3, from and after
the Closing, SCO shall timely pay and indemnify and save Newco and its
Affiliates and Caldera harmless from any liability for, or arising out of
or based upon, or relating to any Tax (including, without limitation, any
obligation to contribute to the payment of a Tax determined on a
consolidated basis or otherwise with respect to a group of corporations
that includes or included SCO) (i) of SCO or any member of the affiliated
group of corporation (as defined in Section 1504 of the Code or otherwise)
of which SCO is a member (other than any member of the Contributed Company
Group or with respect to any Tax relating to the income, business, assets,
property or operations of the Group Business) for any taxable period; (ii)
relating to the income, business, assets, property or operations of the
Group Business or of the Contributed Company Group to the extent that such
liability for Tax is not reflected in the SCO Disclosure Letter or the
Group Financial Statements and is either (A) in respect of any taxable
period that ends prior to the Closing Date or in respect of any taxable
period that includes, but does not end on the Closing Date, the portion of
such period ending on the Closing Date or (B) with
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respect to an excess loss account in the stock of any Contributed Company
or from a deferred intercompany transaction (including any such transaction
resulting from a distribution or deemed distribution of Newco Common Stock
by any Contributing Company) entered into on or prior to the Closing Date
and is triggered as a result of the Contributed Company Group ceasing to be
affiliated with SCO; (iii) under Subpart F of the Code attributable to
transactions undertaken by SCO or any of its affiliates before or after the
Effective Time; or (iv) as a result of a breach of any representation,
warranty, covenant or agreement made herein by SCO.
(b) Notwithstanding anything contained in this Section 12.3(b), SCO
shall not be obligated to indemnify Newco for any Tax (including, without
limitation, any obligation to contribute to the payment of a Tax determined
on a consolidated basis with respect to a group of corporations that
includes or included SCO) by reason of an election or deemed election
(including any protective election) with respect to transactions described
in this Agreement made or filed post-Closing by Newco or any member of the
Contributed Companies under Section 338 of the Internal Revenue Code.
Further, no Section 338 election shall be made with respect to any of the
transactions described in this Agreement.
(c) Except to the extent otherwise provided in this Section 12.3(c),
Newco shall timely pay and indemnify and save SCO and its Affiliates
harmless from any liability for, or arising out of or based upon or
relating to any Tax (including, without limitation, any obligation to
contribute to the payment of a Tax determined on a consolidated basis with
respect to a group of corporations that includes or included SCO) (i)
relating to the income, business, assets, property or operations of the
Group Business by Newco and its Affiliates or any member of the Contributed
Company Group in respect of all taxable periods beginning after the Closing
Date, or, in the case of any taxable period that includes but does not end
on the Closing Date, the portion of such period commencing on the day
following the Closing Date; (ii) to the extent such liability for Tax is
reflected in the Group Financial Statements or the SCO Disclosure Letter
and such liability is for Tax relating to the income, business, assets,
property or operations of the Group Business or of any member of the
Contributed Company Group; (iii) under Subpart F of the Code attributable
to transactions undertaken by Newco or Caldera or any of their Affiliates
after the Effective Time; or (iv) as a result of a breach of any
representation, warranty, covenant or agreement made herein by Newco,
Caldera or Merger Sub.
(d) If, as a result of any action, suit, investigation, audit, claim,
assessment or amended Tax Return, there is any change after the Closing
Date in an item of income, gain, loss, deduction or credit that results in
an increase in a Tax liability for which SCO would otherwise be liable
pursuant to paragraph (a) of this Section 12.3, and such change results in
a decrease in the Tax liability of Newco or any Affiliate or successor
thereof for any taxable year or period beginning after the Closing Date or
for the portion of any Straddle Period beginning after the Closing Date
(assuming for purposes of this sentence that Newco and its Affiliates are
liable for income tax at the highest applicable corporate federal, state,
local and/or foreign rates), SCO shall not be liable pursuant to such
paragraph (a) with respect to such increase to the extent of such decrease.
If, as a result of any action, suit, investigation, audit, claim,
assessment or amended Tax Return, there is any change after the Closing
Date in an increase in an item of income, gain, loss, deduction, or credit
that results in an increase in a Tax liability for which Newco would
otherwise be liable pursuant to paragraph (c) of this Section 12.3, and
such change results in a decrease in the Tax liability of SCO or any
Affiliate or successor thereof (other than Newco) for any taxable year or
period ending on or before the Closing Date or for the portion of any
Straddle Period ending on the Closing date (other than by reason of a
carryback of losses or deductions), Newco shall not be liable pursuant to
such paragraph (c) with respect to such increase to the extent of such
decrease.
(e) For purposes of this Section 12.3, it shall be assumed that SCO
and its Affiliates are liable for income tax at the highest applicable
corporate federal, state, local and/or foreign rates, without reduction on
account of net operating losses or other tax attributes.
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12.4 Other Tax Matters.
(a) SCO, Newco and Caldera will cooperate fully with each other in
connection with the preparation of all returns and reports of Taxes,
information returns, and all audit examinations of, or claims or assertions
against, any member of the Contributed Company Group, in each case
including but not limited to the furnishing or making available of records,
books of account or other materials and appropriate personnel necessary or
helpful to the defense against the assertions of any taxing authority. SCO
shall, within ninety days after the Effective Time, deliver to Newco a
schedule listing the tax basis of each of the Contributed Stock and Assets,
along with copies of supporting calculations, information and records.
(b) Except as provided in Section 12.4(c), in the event and to the
extent that SCO or any member of an affiliated group of corporations (as
defined in Section 1504 of the Internal Revenue Code or otherwise) of which
SCO is a member (other than any member of the Contributed Company Group)
receives a refund or credit of Taxes for any taxable period that ends prior
to the Effective Time or in respect of any period that includes, but does
not end on, the Effective Time, the portion of such period ending on the
Effective Time (the "Pre-Closing Period") which is attributable to the
carry back of losses, credits or similar items from any Tax return of any
member of the Contributed Company Group, and in any case, in respect of any
taxable period that begins after the Effective Time or in respect of any
period that includes, but does not end on the Effective Time, the portion
of such period commencing on the day following the Effective Time (the
"Post-Closing Period"), SCO shall pay to Newco, net of any additional Tax
payable by SCO or its Affiliates by reason of such carryback, the amount of
such refund or credit (including any interest received thereon) or Tax
reduction. In the event that any refund or credit of Taxes or Tax
reductions for which a payment has been made pursuant to this Section
12.4(b) subsequently is reduced or disallowed, the Contributed Companies
and Newco shall indemnify and hold harmless SCO and its Affiliates for any
Tax liability, including interest and penalties, assessed by reason of such
reduction or disallowance.
(c) In the event that an indemnified party receives a refund or credit
relating to Taxes for which the other party is required to indemnify the
first party pursuant to Section 12.3 of this Agreement (including, but not
limited to VAT refunds), such indemnified party agrees to pay to the
indemnifying party the amount of such refund or credit (including any
interest received thereon). In the event that any refund or credit of Taxes
for which a payment has been made pursuant to this Section 12.4(c)
subsequently is reduced or disallowed, the indemnifying party shall
indemnify and hold harmless the indemnified party for any Tax liability,
including interest and penalties, assessed by reason of such reduction or
disallowance.
(d) If any claim for Tax relating to the Group Business or the
Contributed Company Group is asserted against SCO or any Affiliate for any
Pre-Closing Period, SCO shall promptly notify Newco in writing of such
fact. SCO and its duly appointed representatives shall have the sole right
to negotiate, resolve, settle or contest any such claim for Tax; provided,
however, that they shall deal fairly and in good faith with respect to any
claim for Tax which would require a payment by Newco to SCO or its
Affiliates under Section 12.3(c) or this Section 12.4 and provided further,
that with respect to any claim which would require a payment by Newco or
have a Material Adverse Effect on the Group Business, no settlement will be
agreed to without Newco's prior written consent. Such consent shall not be
unreasonably withheld. Newco shall bear the legal and accounting costs and
expenses incurred in contesting a matter for which it has withheld its
consent. If any claim for Tax relating to the Contributed Company Group for
any Post-Closing Period comes to the attention of SCO, SCO will notify
Newco promptly of such claims and will cooperate fully with Newco and the
Contributed Company Group in the resolution of such claim. A failure to
promptly notify pursuant to this Section 12.4(d) shall not preclude another
party's indemnification obligation.
(e) SCO shall prepare any Tax returns (including any amendments
thereto) of the members of the Contributed Company Group for all taxable
periods that end, with respect to the Contributed
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Company Group, on or before the Effective Time (including any short period
ending on the Effective Time) and which are due either before or after the
Effective Time and shall deliver to Newco for signing by the appropriate
party and filing, any Tax returns of the members of the Contributed Company
Group (including any amendments thereto) with respect to any such period
that have not been filed prior to the Effective Time. SCO shall deliver any
such tax return or the portion thereof relating to the Group Business to
Newco at least fifteen days prior to the date such tax return is due to be
filed (taking into account any applicable extensions). SCO shall report for
federal income tax purposes the operations of the Group Business and the
Contributed Company Group for any short period ending on the Effective
Time, and shall be responsible for the filing of, the consolidated tax
returns of SCO's consolidated group which will include the income of the
Group Business and the Contributed Company Group through the Effective Time
and Newco will pay to SCO any amounts relating to such tax returns required
by Section 12.3(c) prior to the filing of such tax returns. In order
appropriately to apportion any taxes relating to a period that includes
(but that would not, but for this Section 12.4(e) end on the Effective
Time), the parties hereto will, to the extent permitted by applicable law,
elect with the relevant taxing authority to treat for all purposes the
Effective Time as the last day of a taxable period of any member of the
Contributed Company Group. SCO shall, in respect of such returns, and Newco
and the Contributed Company Group for returns with respect to the
Post-Closing Period shall determine the income, gain, expenses, losses,
deductions and credits of the Group Business and the Contributed Company
Group in a manner (i) consistent with prior practice and actual operations
in a manner that apportions such income, gain, expenses, loss, deductions
and credits equitably from period to period and (ii) consistent with prior
years.
(f) The provisions of this Section 12 with respect to the consolidated
groups or consolidated returns that include SCO or its Affiliates other
than a Contributed Company shall apply mutatis mutandis with respect to
combined or unitary groups or returns thereof.
(g) Newco and SCO shall make (or indemnify the payor against) payments
of estimated taxes (including amounts due with extensions) for which they
are responsible under this Agreement in a timely manner. A payment or
indemnity obligation under this Section 12 which is not made or satisfied
when due shall accrue interest at the rate applicable to late payments of
the pertinent Tax. Notwithstanding anything in this Section 12 to the
contrary, a party shall not have to bear the cost of a Tax liability more
than once (e.g., a payment of an estimated tax shall be credited against
any payment due when the return is filed).
(h) Except as provided in paragraph 12.4(e), for purposes of
allocating a Tax for which a party is otherwise responsible under Section
12.3 or this Section 12.4, the portion of those Taxes that are attributable
to the operations of the Group Business or of any member of the Contributed
Company Group for a relevant period (the "Interim Period") shall be (i) in
the case of a Tax that is not based on a net income, the total amount of
such Tax for the Interim Period in question multiplied by a fraction, the
numerator of which is the number of days in the Interim Period and the
denominator of which is the total number of days in such period, and (ii)
in the case of a Tax that is based on net income, the Tax that is due shall
be an amount as equitably determined by the parties based upon a
hypothetical closing of the books.
(i) If Newco, a Contributed Company or any of its respective
Affiliates receive any notice of the assertion of any Tax liability
relating to a member of the Contributed Company Group for which SCO may be
liable under this Agreement, Newco shall give prompt written notice thereof
to SCO.
(j) After the Closing, Newco and the Contributed Companies will
provide reasonable access to all relevant Newco and Contributed Company
Group books, records, agreements and memoranda, and provide such assistance
to SCO as SCO and its Affiliates shall reasonably request, with respect to
any federal, foreign, state, provincial or local Tax matters pertaining to
the members of the Contributed Company Group for taxable periods or
transactions on or prior to the Effective Time. Newco will notify SCO prior
to disposition of such Tax records, if such disposition will take place
within ten years after the Effective Time. After the Closing, the parties
will provide reasonable access to all relevant
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SCO and Contributed Companies' books, records, agreements, memoranda and
tax returns, and provide copies of such information and such assistance to
the other party as it shall reasonably request, with respect to any
federal, foreign, state, provincial or local Tax matters pertaining to the
Contributed Assets and the Contributed Company Group for taxable periods or
transactions on or prior to the Effective Time.
(k) Notwithstanding anything in this Agreement to the contrary, SCO
and Newco covenant and agree (unless there has been a final determination
as defined in Section 1313(a) of the Code or any other event which
conclusively establishes a contrary position) for all Tax purposes,
including all Tax Returns and any Tax examinations, proceedings or
controversies, to (and to cause any Affiliate or successor to its assets or
businesses to) take each of the positions set forth below (and not to take
any position inconsistent therewith) and to use good faith and reasonable
best efforts to defend such positions:
(i) The Merger (A) will qualify as a tax-free reorganization
described in Section 368(a) of the Code and (B) when taken together with
the SCO Transaction, will qualify as a tax free transfer of the stock of
Caldera to Newco governed by Section 351(a) of the Code.
(ii) The SCO Transaction will, when taken together with the Merger,
qualify as a transfer of the Contributed Stock and Contributed Assets to
Newco governed by Section 351 of the Code.
(l) SCO and Newco agree to report to the other any communication from
or with the Internal Revenue Service or any other Taxing Authority which
relates in any way to the characterization of the transactions governed by
this Agreement. Each of SCO and Newco will file with its Federal income tax
return for the taxable year in which the Merger and SCO Transaction occurs
(which tax return shall be timely filed) the information required by Treas.
Reg. sec. 1.351-3 and 1.368-3 and to provide each other upon request with a
statement to the effect that such party has complied with this requirement
after filing. SCO, the Contributed Companies, and Newco also will maintain
such permanent records as are required by Treas. Reg. sec. 1.351-3(c) and
1.368-3.
(m) Neither Caldera nor Newco has any plan or intention to terminate
the existence of Newco; to dispose of the assets contributed to Newco,
except in the ordinary course of business or in a contribution to the
capital of a wholly-owned subsidiary of Newco; to reacquire any stock to be
issued in the transactions contemplated by this Agreement; or to take any
other action that would reasonably be expected to cause the Merger and the
SCO Transaction not to be treated as a tax-free exchange under Section 351
of the Code. Neither Caldera nor Newco knows of any plan or intention of
any Caldera Significant Stockholder to dispose of any Newco shares issued
in the transactions contemplated by this Agreement. SCO knows of no plan or
intention to terminate the existence of Newco or to dispose of the assets
contributed to Newco, except in the ordinary course of business or in a
contribution to the capital of a wholly-owned subsidiary of Newco. SCO has
no plan or intention to dispose of any Newco shares issued in the
transactions contemplated by this Agreement, except for distributions of
Newco stock to SCO's shareholders, or to take any other action that would
reasonably be expected to cause the merger and the SCO Transaction not to
be treated as an exchange under Section 351 of the Code.
12.5 Tax Representations. Newco, Caldera and the Caldera Significant
Stockholder covenant and represent that Caldera, Newco and the Caldera
Significant Stockholder shall make such representations and covenants as their
respective counsel shall reasonably request prior to the closing for purposes of
establishing the qualification under Section 351 of the SCO Transaction and the
qualification of the Merger as a Section 368 transaction. Any such
representations shall be considered to be part of this Section 12.5(a).
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13. Miscellaneous.
13.1 Governing Law; Venue.
(a) Governing Law. The internal laws of the State of New York
(irrespective of its choice of law principles) will govern the validity of
this Agreement, the construction of its terms and the interpretation and
enforcement of the rights and duties of the parties hereto, except that the
fiduciary duties of the directors and managers of parties hereto and its
Affiliates shall be governed by the law of the jurisdiction of such
company's formation.
(b) Venue. The parties agree that any dispute regarding the
interpretation or validity of, or otherwise arising out of this Agreement,
shall be subject to the exclusive jurisdiction of the California State
Courts in and for Santa Clara County, California or, in the event of
federal jurisdiction, the United States District Court for the Northern
District of California sitting in Santa Clara County, California, and each
party hereby agrees to submit to the personal and exclusive jurisdiction
and venue of such courts and not to seek the transfer of any case or
proceeding out of such courts.
13.2 Assignment; Binding upon Successors and Assigns. None of the parties
hereto may assign any of its rights or obligations hereunder without the prior
written consent of the other parties hereto; provided, however, that the sale or
other transfer of the stock of any Contributing Company shall not be deemed an
assignment provided that this Agreement remains enforceable against the
Contributing Company after such stock sale or transfer. Subject to the preceding
sentence, this Agreement will be binding upon and inure to the benefit of the
parties hereto and its respective successors and permitted assigns.
13.3 Severability. If any provision of this Agreement, or the application
thereof, will for any reason and to any extent be invalid or unenforceable, the
remainder of this Agreement and application of such provision to other persons
or circumstances will be interpreted so as reasonably to effect the intent of
the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the greatest extent possible, the economic, business and
other purposes of the void or unenforceable provision.
13.4 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be an original as regards any party whose
signature appears thereon and all of which together will constitute one and the
same instrument. This Agreement will become binding when one or more
counterparts hereof, individually or taken together, will bear the signatures of
all the parties reflected hereon as signatories.
13.5 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby or by law on such party,
and the exercise of any one remedy will not preclude the exercise of any other.
The parties agree that specific performance is an appropriate remedy for a
breach of its respective obligations under this Agreement.
13.6 Amendment and Waivers. Any term or provision of this Agreement may
be amended by the parties hereto at anytime by execution of an instrument in
writing signed on behalf of each of SCO and Caldera. At any time prior to the
Closing, the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or prospectively)
only by a writing signed by the party or parties to be bound thereby. The waiver
by a party of any breach hereof or default in the performance hereof will not be
deemed to constitute a waiver of any other default or any succeeding breach or
default. Delay in exercising any right under this Agreement shall not constitute
a waiver of such right. This Agreement may be amended by the parties hereto at
any time before or after approval of such party's stockholders, but, after such
approval, no amendment will be made which by applicable law requires the further
approval of a party's stockholders without obtaining such further approval.
13.7 Expenses. Except as herein expressly provided to the contrary in
this Agreement or the Ancillary Agreements, each party will bear its respective
fees and expenses incurred with respect to the negotiation, preparation and
performance of this Agreement and the transactions contemplated hereby.
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13.8 Attorneys' Fees. Should suit be brought to enforce or interpret any
part of this Agreement, the prevailing party will be entitled to recover, as an
element of the costs of suit and not as damages, reasonable attorneys' fees to
be fixed by the court (including, without limitation, costs, expenses and fees
on any appeal). The prevailing party will be entitled to recover its costs of
suit, regardless of whether such suit proceeds to final judgment.
13.9 Notices. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following address (or at such other address for a party as shall
be specified by like notice):
If to SCO to: The SCO, Inc.
425 Encinal
Santa Cruz, California
Attention: Chief Executive Officer
and Law and Corporate Affairs
Telecopier: (831) 427-5454
With a copy to: Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attention: Michael Danaher
Telecopier: (650) 493-6811
And if to Caldera or Newco to: Caldera Systems, Inc.
240 West Center Street
Orem, Utah 84057
Attention: Chief Executive Officer
Telecopier: (801) 765-1313
With a copy to: Brobeck, Phleger & Harrison LLP
370 Interlocken Boulevard, Suite 500
Broomfield, Colorado 80021
Attention: John E. Hayes, III
Telecopier: (303) 410-2199
All such notices and other communications shall be deemed to have been
received (a) in the case of personal delivery, on the date of such delivery, (b)
in the case of a telecopy, when the party receiving such copy shall have
confirmed receipt of the communication, (c) in the case of delivery by
nationally-recognized overnight courier, on the business day following dispatch,
and (d) in the case of mailing, on the third business day following such
mailing.
13.10 Construction of Agreement. This Agreement has been negotiated by
the respective parties hereto and its attorneys and the language hereof will not
be construed for or against either party. A reference to a Section or an exhibit
will mean a Section in, or exhibit to, this Agreement unless otherwise
explicitly set forth. The titles and headings herein are for reference purposes
only and will not in any manner limit the construction of this Agreement which
will be considered as a whole.
13.11 No Joint Venture. Nothing contained in this Agreement will be
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party will have
the power to control the activities and operations of any other and its status
is, and at all times, will continue to be, that of independent contractors with
respect to each other. No party will have any power or authority to bind or
commit any other. No party will hold itself out as having any authority or
relationship in contravention of this Section.
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13.12 Further Assurances. Each party agrees to cooperate fully with the
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances as may be reasonably requested by
any other party to evidence and reflect the transactions described herein and
contemplated hereby and to carry into effect the intents and purposes of this
Agreement and the Ancillary Agreements.
13.13 Absence of Third Party Beneficiary Rights. Except as provided in
Sections 5.17 and 5.18, no provisions of this Agreement are intended, nor will
be interpreted, to provide or create any third party beneficiary rights of any
kind in any holder of the stock of Caldera, Newco, any Contributing Company or a
member of the Contributed Company Group or any Employee, client, customer,
Affiliate, stockholder, partner or any party hereto or any other person or
entity, and, except as so provided, all provisions hereof will be personal
solely between the parties to this Agreement and no other person or entity shall
have any cause of action as a third party beneficiary of this Agreement.
13.14 Public Announcement. Upon execution of this Agreement, Caldera and
SCO promptly will issue a joint press release approved by both parties
announcing the Merger and the SCO Transaction. Thereafter, Caldera or SCO may
issue such press releases, and make such other disclosures regarding the Merger
and the SCO Transaction, as they may each determine (after consultation with
legal counsel) to be required under applicable securities laws or the rules of
the Nasdaq Stock Market; Caldera and SCO shall confer with the other party prior
to any press release or disclosure relating to the Merger or SCO Transaction.
13.15 Certain Defined Terms. As used in this Agreement, the following
terms shall have the following meanings.
"2000 Group Balance Sheet" is defined in Section 2.4(c).
"Affiliate" means, with respect to a specified person, any other person
that directly or indirectly controls, is controlled by, or is under common
control with, such specified person or which hold at least a 10% ownership
interest in said person.
"Agreed Amount" is defined in Section 10.5(c).
"Ancillary Agreements" means, collectively, the Stockholder Agreement, the
Escrow Agreement, the Bills of Transfer, the Sales Representative and Support
Agreement, the agreements relating to the Patent Assignment, the Copyright
Assignment and the Trademark Assignment, the Web-Top Sublicense and the Voting
Agreements.
"Assumed Liabilities" is defined in Section 1.4(c)(i).
"Bills of Transfer" means each of the Bills of Transfer for each respective
jurisdiction for the Contributed Assets and Contributed Companies (or other
documents of transfer) to be executed and delivered by the holders of such
Contributed Assets and Newco or its subsidiaries at the Effective Time in the
forms reasonably acceptable to SCO and Newco.
"CERCLA" is the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. Sec. 9601 et seq., as amended.
"Certificate of Merger" is defined in Recital A.
"Claim Notice" is defined in Section 10.5(a).
"Claimed Amount" is defined in Section 10.5(a).
"Closing" has the meaning specified for such term in Section 1.5.
"Closing Date" is defined in Section 1.5.
"Closing Group Account" is defined in Section 4.21.
"COBRA" is defined in Section 2.8(c).
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"Conduct of the Group Business" means the conduct in all material respects
of the Group Business as conducted on the date hereof and at Closing.
"Contested Amount" is defined in Section 10.5(b).
"Contributed Assets" shall mean those assets, including real property
assets, that are owned, leased or licensed by the Contributing Companies that
are (a) listed on Exhibit 13.15A attached hereto, (b) Intellectual Property
Rights used in the production, development, support or marketing of the Group
Products, or (c) used in the Group Business, and (d) all Contributed Contracts
to which any of the Contributing Companies is a party, but in all cases
excluding the Excluded Assets.
"Contributed Companies" means The Santa Cruz Operation Limited; The Santa
Cruz Operation (France) SARL; The Santa Cruz Operation (Deutschland) GmbH; The
Santa Cruz Operation (Italia) Srl; The Santa Cruz Operation Pty. Limited; SCO
Canada, Co.; The Santa Cruz Operation de Mexico, S. De R.L. De C. V.; The Santa
Cruz Operation (Asia) Ltd.; SCO Foreign Sales Corporation; SCO, Kabushiki
Kaisha; The Santa Cruz Operation Latin America, Inc.; Nihon SCO Limited; SCO do
Brazil Limitada; SCO Software (China) Company, Ltd.; and Unix System
Technologies China Company, Ltd. (USTC).
"Contributed Company Group" has the meaning in Section 1.4(c)(i).
"Contributed Company Property" shall mean all of the assets, real,
personal, tangible and intangible, owned, leased, licensed or otherwise held by
any member of the Contributed Company Group.
"Contributed Contracts" means all agreements, contracts, understandings,
arrangements, commitments, mortgages, indentures, leases, licenses, permits,
franchises, instruments, notes, bonds, indemnities, guarantees, loan agreements,
credit agreements, representations, warranties, deeds, assignments, powers of
attorney, certificates, purchase orders, work orders, insurance policies,
benefit plans, covenants, assurances or undertakings of any nature which are
used in the Group Business including but not limited to those listed on Exhibit
13.15B attached hereto subject in the case of Joint Contributed Agreements to
the provisions of Section 4.17, excluding the Excluded Assets.
"Contributed Stock" means all of the capital stock of the Contributed
Companies.
"Contributed Subsidiaries" means the direct or indirect subsidiaries of the
Contributed Companies identified in Exhibit 13.15C attached hereto.
"Contributing Companies" means SCO and any subsidiary of SCO (other than
the Contributed Companies) which may own any interest in the Contributed Stock
and Assets to be conveyed to Newco or that is liable for any Assumed Liability
to be assumed by Newco under the term of this Agreement.
"Copyright Assignment" means a form of assignment mutually acceptable to
Caldera and SCO assigning all copyrights included in the Contributed Assets.
"Caldera Assets" are the tangible and intangible, real and personal assets
owned, leased or licensed by Caldera.
"Caldera Balance Sheet" is defined in Section 3.14.
"Caldera Business" is the business of Caldera as carried on immediately
prior to the SCO Transaction, including without limitation Caldera's business of
developing, manufacturing, marketing, licensing, distributing, using, operating,
installing, servicing, supporting, maintaining, repairing or otherwise using or
commercially exploiting all or any aspect of any or all of the Caldera Products
or Caldera Assets.
"Caldera Closing Price" means the average closing price that Caldera Common
Stock for the five day period ending on the trading day prior to the Closing.
"Caldera Common Stock" is defined in Section 1.2(a).
"Caldera Contracts" means all agreements, contracts, understandings,
arrangements, commitments, mortgages, indentures, leases, licenses, permits,
franchises, instruments, notes, bonds, indemnities,
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guarantees, loan agreements, credit agreements, representations, warranties,
deeds, assignments, powers of attorney, certificates, purchase orders, work
orders, insurance policies, benefit plans, covenants, assurances or undertakings
of any nature to which Caldera or the Caldera Subsidiaries are a party.
"Caldera Disclosure Letter" is defined in the preamble of Section 3.
"Caldera Employees" are the employees of Caldera.
"Caldera Employee Plans" is defined in Section 5.16(a).
"Caldera Financial Statements" is defined in Section 3.4(b).
"Caldera Financial Statements Balance Sheet Date" is defined in Section
3.4(b).
"Caldera Group" is defined in the Preamble of Section 3.
"Caldera IP Rights" is defined in Section 3.15(a).
"Caldera IP Rights Agreements" is defined in Section 3.15(c).
"Caldera's Knowledge" or "Known to Caldera." A particular fact or other
matter shall be deemed to be within "Caldera's Knowledge" or "Known to Caldera"
if any officer of Caldera has current actual knowledge of such fact or other
matter.
"Caldera Options" is defined in Section 1.2(b)(i).
"Caldera Percentage Interest" means 72% of the fully diluted equity
interest in Newco (taking into account all options, warrants and convertible
debentures on an as-converted basis).
"Caldera Permitted Encumbrance" means Encumbrances (a) as disclosed as an
Encumbrance in the Caldera Disclosure Schedule (b) Encumbrances for liabilities
reflected in the Caldera Financial Statements, (c) liens for current taxes not
yet delinquent, (d) liens imposed by law and incurred in the ordinary course of
business to carriers, warehousemen, laborers, material men and the like not yet
due, (e) immaterial imperfections of title set forth in the Caldera Disclosure
Letter (f) Encumbrances which are not material in amount or which will not
materially interfere with the use of the Caldera Assets for the Conduct of the
Caldera Business.
"Caldera Plans" is defined in Section 1.2(b)(i).
"Caldera Products" means the operating system software and other products
marketed or sold by Caldera and all of software products currently under
development by or for Caldera or for use or sale or license by Caldera (in each
case together with all of the software, products, and other items listed on
Caldera's products price list) and all derivative works, upgrades,
modifications, enhancements and configurations of any of the foregoing and all
software and components included in any configuration of any of the foregoing,
and all development tools, utilities and diagnostics used to develop any of the
foregoing in each case (whether or not ever commercially offered or
price-listed, and whether or not in development).
"Caldera Ratio" is defined in Section 1.2(a).
"Caldera Restrictive Agreements" is defined in Section 3.23.
"Caldera SEC Documents" is defined in Section 3.4(a).
"Caldera Significant Stockholder" means Ray Noorda, The Canopy Group, Inc.
And MTI Technology Corporation.
"Caldera Stock Purchase Plan" is defined in Section 1.2(b)(ii).
"Caldera Stock Purchase Plan Rights" is defined in Section 1.2(b)(ii).
"Caldera Stockholder Approval" is defined in Section 5.20(b).
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"Caldera Subsidiary" shall mean any direct or indirect subsidiary of
Caldera listed on Exhibit 13.15G attached hereto.
"Caldera Surviving Corporation" is defined in Section 1.9.
"Delaware Law" means the Delaware General Corporation Law, as in effect
from time to time.
"Disposal," "release," and "threatened release" shall have the definitions
assigned thereto by the CERCLA.
"Dollars" or "$" means U.S. dollars.
"Effective Time" shall mean the effective time and date that the
Certificate of Merger is deemed filed with the Secretary of State of the State
of Delaware in accordance with the relevant provisions of the Delaware Law.
"Employee" and "Employees" is defined in Section 11.1(a).
"Employee Benefit Plan" is defined in Section 2.8(a).
"Encumbrance" means any pledge, lien, collateral assignment, security
interest, mortgage, deed of trust, title retention, conditional sale or other
security arrangement, or any charge, adverse claim of title, ownership or use,
or any other encumbrance of any kind.
"Environmental Damage" means any actual or alleged Liability (including
without limitation Liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries or penalties) arising out of, based on or relating to (i) the
presence, discharge, emission or release into the environment of any Hazardous
Substance or (ii) facts or circumstances forming the basis of any violation, or
alleged violation, of any Environmental Law.
"Environmental Laws" means all federal, state, provincial, local and
international laws and regulations relating to pollution, the protection of
human health or the environment (including without limitation ambient air,
surface water, ground water, land surface or subsurface strata), including
without limitation laws and regulations relating to emissions, discharges,
releases or threatened releases of Hazardous Substances, or otherwise relating
to the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Substances.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rulings and regulations promulgated thereunder.
"Escrow Agreement" is defined in Section 1.3(b).
"Escrow Shares" is defined in Section 1.3(b).
"Exchange Act" is the Security Exchange Act of 1934, as amended.
"Excluded Assets" is defined in Section 1.4(b).
"Excluded Liabilities" is defined in Section 1.4(c)(ii).
"Final Date" is defined in the last paragraph of Section 8.1.
"Final List" is defined in Section 12.1(a).
"First SCO Certificate" is defined in Section 1.3(a)(i).
"Foreign Employee Plans" is defined in Section 2.8(h).
"Form S-4" is defined in Section 1.14.
"Form S-8" is defined in Section 1.7.
"Former Employees" is defined in Section 11.2(b).
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"GAAP" means United States generally accepted accounting principles and
practices as in effect from time to time and applied consistently throughout the
periods involved.
"Governmental Antitrust Authority" means any federal, state, local or
non-U.S. governmental or quasi-governmental authority charged with the
administration or enforcement of antitrust, competition or merger control laws
or regulations.
"Governmental Permits" means all municipal, state, local, federal and other
governmental franchises, permits, licenses, agreements, waivers and
authorizations from, issued or granted by, any jurisdiction.
"Group Assets" shall mean the Contributed Assets and all Contributed
Company Property, considered collectively.
"Group Benefit Arrangements" is defined in Section 2.8(a).
"Group Business" means the business of SCO and its direct and indirect
subsidiaries with respect to (i) the Group Products, as reflected in the 2000
Group Balance Sheet, including without limitation the business of developing,
manufacturing, marketing, licensing, distributing, using, operating, installing,
servicing, supporting, maintaining, repairing or otherwise using or commercially
exploiting all or any aspect of any or all of the Group Products or of any
Intangible Assets or Intellectual Property Rights related to any of the Group
Products, and (ii) the professional services division, but excluding the SCO
Retained Business.
"Group Employee Plans" is defined in Section 2.8(a).
"Group Financial Statements" has the meaning given in Section 2.4(c).
"Group Financial Statements Balance Sheet Date" is defined in Section
2.4(c).
"Group Governmental Permits" means those Governmental Permits required for
the Conduct of the Group Business (including without limitation the manufacture
or sale of the Group Products) that are held by any member of the Contributed
Company Group or held, in whole or in part, primarily by a Contributing Company
and required for the Conduct of the Group Business, or necessary for the use or
operation of any of the Group Assets (including without limitation the Real
Property Assets) or the manufacture or sale of any of the Group Products, to the
extent legally transferable in accordance with this Agreement.
"Group Permitted Encumbrance" means Encumbrances (a) as disclosed as an
encumbrance in Exhibit 13.15E attached hereto (b) Encumbrances for Liabilities
reflected in the Group Financial Statements, (c) liens for taxes not yet
delinquent, (d) liens imposed by law and incurred in the ordinary course of
business to carriers, warehousemen, laborers, material men and the like not yet
due and payable, (e) immaterial imperfections of title set forth in the SCO
Disclosure Letter (f) Encumbrances which are not material in amount or which
will not materially interfere with the use of the Group Assets for the Conduct
of the Group Business.
"Group Persons" is defined in Section 5.18(a).
"Group Products" means the operating system software and other products
listed in the Group product list attached hereto as Exhibit 13.15D marketed or
sold by any member of the Contributed Company Group or the Contributing
Companies and all software under development for or licensed by the Group
Business (together with all derivative works, upgrades, modifications,
enhancements and configurations of any of the foregoing now existing or under
development and all software and components included in any configuration of any
of the foregoing, and all development and QA tools, utilities and diagnostics
used to develop any of the foregoing, in each case whether or not ever
commercially offered or price-listed, and whether or not in development).
"Group Restrictive Agreements" is defined in Section 2.23.
"Hazardous Materials" means: (i) any pollutant, contaminant, toxic,
hazardous or noxious substance or waste which is regulated by the laws of any
state, local, provincial, federal or other governmental
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authority or jurisdiction, and includes but is not limited to (a) any oil or
petroleum compounds, flammable substances, explosives, radioactive materials, or
any other materials or pollutants which pose a hazard to persons or cause any
real property to be in violation of any Environmental Laws, (b) to the extent so
regulated, asbestos or any asbestos-containing material of any kind or
character, (c) polychlorinated biphenyls, as regulated by the Toxic Substances
Control Act, 15 U.S.C. sec. 2601 et seq., (or equivalent or similar legislation
in other relevant jurisdictions) (d) any material or substances designated as
"hazardous substances" pursuant to (1) Section 311 of the Clean Water Act, 33
U.S.C. sec. 1251 et seq., (or equivalent or similar legislation in other
relevant jurisdictions) or (2) Section 101 of CERCLA, (or equivalent or similar
legislation in other relevant jurisdictions) (e) "chemical substance," "new
chemical substance," or "hazardous chemical substance or mixture" pursuant to
Sections 3, 6 and 7 of the Toxic Substances Control Act, 15 U.S.C. sec. 2601 et
seq., (or equivalent or similar legislation in other relevant jurisdictions) and
(f) any "hazardous waste" pursuant to Section 1004 of the Resource Conservation
and Recovery Act, 42 U.S.C. sec. 6901 et seq. (or equivalent or similar
legislation in other relevant jurisdictions)
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations promulgated thereunder.
"Indemnified Parties" is defined in Section 5.17(c).
"Indemnitee" is defined in Section 10.5(a).
"Insolvency Action" means, with respect to a person, any or all of the
following: (i) the voluntary or involuntary filing, with respect to such person,
of a petition for relief, or any other effort to seek relief, under any
Insolvency Proceeding; (ii) such person or any of its assets otherwise becoming
the subject of an Insolvency Proceeding; (iii) the formal or informal
dissolution, liquidation or winding up of such person, or any efforts to
initiate or carry out such dissolution, liquidation or winding up; (iv) the
appointment of (or efforts or attempts to appoint) a receiver, liquidator,
sequestrator, trustee, custodian or other similar officer with respect to such
person or any part of its assets or properties; or (v) any composition of the
indebtedness of such person or any assignment for the benefit of such person's
creditors.
"Insolvency Proceeding" means any or all of the following actions, events
or proceedings: (i) any voluntary or involuntary case, contested matter or other
proceeding under the United States Bankruptcy Code, as amended, and any
successor law or laws thereto; or (ii) any case, action or other proceeding
under any bankruptcy, insolvency, debt reorganization or similar law (whether
now or hereafter in effect) of any state, country or other jurisdiction.
"Intangible Assets" means, collectively, all intangible assets, properties
and rights required for the development of the Group Products, constituting
software (in both source code and binary code form), technology, works of
authorship, manuals, logbooks, notebooks, user's guides, programmers' notes,
documentation, know-how, trade secrets and training materials (for both training
of customers and of service personnel).
"Intellectual Property Rights" means, collectively, all of the following
worldwide intangible legal rights including those existing or acquired by
ownership, license or other legal operation, whether or not filed, perfected,
registered or recorded and whether now or hereafter existing, filed, issued or
acquired: (i) patents, patent applications, and patent rights, including any and
all continuations, continuations-in-part, divisions, reissues, reexaminations or
extensions thereof; (ii) inventions (whether patentable or not in any country),
invention disclosures, industrial designs, improvements, trade secrets,
proprietary information, know-how, technology and technical data; (iii) rights
associated with works of authorship (including without limitation audiovisual
works), including without limitation copyrights, copyright applications and
copyright registrations, moral rights, database rights, mask work rights, mask
work applications and mask work registrations; (iv) rights in trade secrets
(including without limitation rights in industrial property, customer, vendor
and prospect lists and all associated information or databases and other
confidential or proprietary information), and all rights relating to the
protection of the same including without limitation
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rights under nondisclosure agreements; (v) any other proprietary rights in
technology, including software, all source and object code, algorithms,
architecture, structure, display screens, layouts, inventions, development tools
and all documentation and media constituting, describing or relating to the
above, including, without limitation, manuals, memoranda, records, business
information, or trade marks, trade dress or names, anywhere in the world; (vi)
any rights analogous to those set forth in the preceding clauses and any other
proprietary rights relating to intangible property, including without limitation
brand names, trademarks, service marks, domain names, trademark and service mark
registrations and applications therefor, trade names, rights in trade dress and
packaging and all goodwill associated with the same; and (vii) all rights to sue
or make any claims for any past, present or future infringement,
misappropriation or unauthorized use of any of the foregoing rights and the
right to all income, royalties, damages and other payments that are now or may
hereafter become due or payable with respect to any of the foregoing rights,
including without limitation damages for past, present or future infringement,
misappropriation or unauthorized use thereof; and (viii) rights under license
agreements for the foregoing.
"Intercompany Accounts" means the net amounts payable by or owing to the
Group Business as of the Effective Time as a consequence of the Conduct of the
Group Business, in the ordinary course, (i) pursuant any general services
agreement between the Contributed Company Group, on the one hand, and SCO and
its direct or indirect subsidiaries (other than the Contributed Company Group)
on the other hand, or (ii) as a consequence of reimbursements by SCO of amounts
paid by it for the Conduct of the Business in the ordinary course; provided,
however that in no event shall the Group Business be responsible for amounts
attributable to the SCO Retained Business.
"Interim Period" is defined in Section 12.5(h).
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended, and the rulings and regulations promulgated thereunder.
"Joint Contributed Agreements" is defined in Section 4.17.
"Key Employees" means those individuals identified in Exhibit 4.18A
attached hereto.
"Key Employee Term Sheets" means the Key Employee Term Sheets in the form
attached hereto as Exhibit 4.18B.
"Liabilities" (or when used with reference to a single item described
below, "Liability") means debts, liabilities and obligations (whether pecuniary
or not, including without limitation obligations to perform or forbear from
performing acts or services), fines or penalties, whether accrued or fixed,
absolute or contingent, matured or unmatured, determined or determinable, known
or unknown, including without limitation those arising under any law, action or
governmental order, liabilities for Taxes and those arising under any contract,
agreement, arrangement, commitment or undertaking of any kind whatsoever
(whether written or oral, express or implied), including, without limitation,
those arising under any Contributed Contract.
"Loss" means and includes any and all Liability, loss, damage, claim,
expense, cost, fine, fee, penalty, obligation, or injury, including, without
limitation, those resulting from any and all claims, actions, suits, demands,
assessments, investigations, judgments, orders, awards, arbitrations,
settlements or other proceedings, together with reasonable costs and expenses,
including the reasonable attorneys' and experts' fees, court costs, arbitration
costs, filing fees and other legal costs and expenses relating thereto, together
with interest accrued on each of the foregoing amounts from the date the same
was incurred at the lower of (i) the prime rate as published by The Wall Street
Journal or (ii) the highest rate of interest permitted under applicable law;
provided, however, that in determining the amount of any Loss, there shall be
deducted any Tax overlaps attributable to the events giving rise to the Loss.
"Material Adverse Effect on Caldera" means any event, change or effect
would have a material adverse effect on the business, tangible and intangible
assets, financial condition, and results of operations of Caldera and the
Caldera Subsidiaries, Caldera together with the Caldera Subsidiaries, as a
whole, or prevent in any material respect the performance by Caldera and its
subsidiaries of the actions anticipated
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by this Agreement and the Ancillary Agreements to be taken by them on or before
the Closing; provided however that none of the following shall be deemed to be a
Material Adverse Effect on Caldera: (i) changes in market price or trading
volume of Caldera common stock or (b) changes attributable to the public
announcement or pendency of the transactions contemplated hereby.
"Material Adverse Effect on Newco" means any event, change or effect would
have a material adverse effect on the business, tangible and intangible assets,
financial condition, and future operations of Newco and its subsidiaries, Newco
together with its subsidiaries as a whole, after the Effective Time or prevent
in any material respect Newco from taking the actions anticipated by this
Agreement and the Ancillary Agreements to be taken by Newco and its subsidiaries
on and after the Effective Time.
"Material Adverse Effect on the Group Business" means any event, change or
effect which would have a material adverse effect on the business, tangible and
intangible assets, financial condition, and results of operations of the Group
Business, taking such Group Business as a whole, or prevent in any material
respect the performance by SCO and its subsidiaries of the actions anticipated
by this Agreement and the Ancillary Agreements to be taken by them on or before
the Closing; provided however that none of the following shall be deemed to be a
Material Adverse Effect on the Group Business: (i) changes in market price or
trading volume of SCO common stock or (b) changes attributable to the public
announcement or pendency of the transactions contemplated hereby.
"Material Contributed Contracts" is defined in the Preamble of Section
2.11.
"Material Caldera Contracts" is defined in Section 3.11.
"Merger" is defined in Recital A.
"Merger Sub" is defined in Recital A.
"Multiemployer Plan" is defined in Section 2.8(b).
"Multiple Employer Plan" is defined in Section 2.8(b).
"Newco" means Caldera International Inc., a Delaware corporation.
"Newco Common Stock" is defined in Recital A.
"Newco Offer" is defined in Recital A.
"Newco Options" is defined in Recital A.
"Newco Plans" is defined in Section 1.6.
"Newco Rights Agreement" is defined in Section 1.12.
"Nondisclosure Agreement" is defined in Section 4.9.
"Omitted Balance Sheet Liabilities" is defined in Section 10.1(e).
"Optionees" is defined in Recital A.
"Patent Assignment" is defined in Section 7.15.
"Person" means any individual, partnership, limited liability company,
firm, corporation, association, trust, unincorporated organization or other
entity, as well as any syndicate or group that would be deemed to be a person
under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
"Post-Closing Period" is defined in Section 12.5(b).
"Potential Employee" is defined in Section 11.1.
"Pre-Closing Period" is defined in Section 12.5(b).
"Preliminary List" is defined in Section 11.1(a).
"Prospectus" is defined in Section 5.6.
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"Prospectus/Proxy Statement" is defined in Section 1.14.
"Real Property Assets" shall mean all real property assets required for the
Conduct of the Group Business.
"Representing SCO Entities" is defined in the Preamble of Section 2.
"Response Notice" is defined in Section 10.5(b).
"Returns" is defined in Section 12.1.
"SEC" is the Securities and Exchange Commission.
"Securities Act" is the Securities Act of 1933, as amended.
"Shared Contributed Contracts" is defined in Section 4.17.
"Solvent" shall mean, with respect to any person on a particular date, that
on such date (a) the fair value of the property of such person is greater than
the total amount of liabilities, including contingent liabilities, of such
person; (b) the present fair salable value of the assets of such person is not
less than the amount that will be required to pay the probable liability of such
person on its debts as they become absolute and matured; (c) such person does
not intend to, and does not believe that it will, incur debts or liabilities
beyond such person's ability to pay as such debts and liabilities mature; and
(d) such person is not engaged in a business or transaction, and is not about to
engage in a business or transaction, for which such person's property would
constitute an unreasonably small capital. The amount of contingent liabilities
(such as litigation, guarantees and pension plan liabilities) at any time shall
be computed as the amount that, in light of all the facts and circumstances
existing at the time, represents the amount that can reasonably be expected to
become an actual or matured liability.
"Stock Rights" is defined in Section 1.7.
"Stockholder Agreement" is defined in Section 4.18.
"SCO" means The SCO, Inc., a Delaware corporation.
"SCO Alternative Proposal" is defined in Section 4.14(a).
"SCO Closing Price" means the average closing price of SCO Common Stock for
the five day period ending on the trading day prior to the Closing.
"SCO Consolidated Financial Statements" is defined in Section 2.4(b).
"SCO Consolidated Financial Statements Balance Sheet" is defined in Section
2.4(b).
"SCO Disclosure Letter" is defined in Section 2.
"SCO IP Rights" is defined in Section 2.15(a).
"SCO IP Rights Agreements" is defined in Section 2.15(c).
"SCO's Knowledge" or "Known to SCO." A particular fact or other matter
shall be deemed to be within "SCO's Knowledge" or "Known to SCO" if any
executive officer of SCO or a Contributed Company or any executive officer of
SCO responsible for the Group Business has current actual knowledge of such fact
or other matter after reasonable investigation.
"SCO Options" is defined in Section 1.3(ii).
"SCO Per Share Value" is defined in Section 1.3(a)(ii).
"SCO Percentage Interest" means a fully diluted equity interest in Newco
(taking into account all options, warrants and convertible debentures on an
as-converted basis) equal to 100% less the Caldera Percentage Interest.
"SCO Ratio" is defined in Section 1.3(a)(ii).
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"SCO Retained Business" means the business of SCO that does not constitute
the Group Business consisting of the Tarantella business.
"SCO SEC Documents is defined in Section 2.4(a).
"SCO Stockholder Rejection" is defined in Section 8.1(h).
"SCO Transaction" shall have the meaning described in Recital A hereto.
"Tax" or "Taxes" means all taxes of any kind whatsoever (whether payable
directly or by withholding), including without limitation franchise, income,
gross receipts, personal property, real property, ad valorem, value added,
sales, use, documentary, stamp, intangible personal property, withholding or
other taxes, together with any interest and penalties, additions to tax or
additional amounts with respect thereto imposed by any taxing authority.
"Termination Fee" is defined in Section 8.4(a)(i).
"Threshold Amount" is defined in Section 10.1(e).
"Trademark Assignment" is defined in Section 7.15.
"Transaction Taxes" is defined in Section 12.1.
"UK" means the United Kingdom of Great Britain and Northern Ireland.
"Unforeseen Tax Liabilities" is defined in Section 10.1(e).
"Voting Agreement" is defined in Section 5.15.
"WebTop Sublicense" means a mutually agreeable license agreement between
SCO and Caldera providing for the license of the WebTop Product from Caldera to
SCO.
13.16 Entire Agreement. This Agreement and the exhibits hereto constitute
the entire understanding and agreement of the parties hereto with respect to the
subject matter hereof and supersede all prior and contemporaneous agreements or
understandings, inducements or conditions, express or implied, written or oral,
between the parties with respect hereto other than the Nondisclosure Agreement,
which shall remain in full force and effect. The express terms hereof control
and supersede any course of performance or usage of the trade inconsistent with
any of the terms hereof.
[REMAINDER OF PAGE LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
Plan of Reorganization as of the date first above written.
THE SANTA CRUZ OPERATION, INC.
a California corporation
By: /s/ DOUGLAS MICHELS
----------------------------------
Douglas Michels
President and Chief Executive
Officer
CALDERA SYSTEMS, INC.
a Delaware corporation
By: /s/ RANSOM LOVE
----------------------------------
Ransom Love
President and Chief Executive
Officer
CALDERA INTERNATIONAL INC.
a Delaware corporation
By: /s/ RANSOM LOVE
----------------------------------
Ransom Love
President and Chief Executive
Officer
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION]
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AMENDMENT TO
AGREEMENT AND PLAN OF REORGANIZATION
THIS AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION (this "Amendment")
is entered into as of September 13, 2000, by and among Caldera Systems, Inc., a
Delaware corporation including for all purposes Caldera Surviving Corporation,
("Caldera"), Caldera International, Inc., a Delaware corporation ("Newco") and
The Santa Cruz Operation, Inc., a California corporation ("SCO").
RECITALS
A. On August 1, 2000, Caldera, Newco and SCO entered into an Agreement and
Plan of Reorganization (the "Agreement") which all parties to the Agreement wish
to amend pursuant to the terms and conditions of this Amendment.
B. All terms not otherwise defined herein shall have the meanings set forth
in Section 13.15 of the Agreement.
NOW, THEREFORE, the parties hereby agree to amend the Agreement as follows:
1. Section 1.3(a)(i) and (iii) of the Agreement are amended in their
entirety as follows:
1.3 SCO Transaction.
(a) Issuance of Newco Common Stock.
(i) Consideration. Issue to SCO that number of issued, fully paid and
nonassessable shares of Newco Common Stock equal to The SCO Percentage
Interest, less (a) the number of shares of Newco Common Stock issuable upon
exercise of the Replacement Options pursuant to Section 1.3(a)(iii) below
multiplied by .75, (b) the number of shares of Newco Common Stock issuable
upon exercise of the SCO Options assumed by Newco pursuant to Section
1.3(a)(iii) below multiplied by .75 and (c) the Escrow Shares issued to SCO
and placed directly into escrow by Caldera pursuant to Section 1.3(b)
below, with such number of shares to be appropriately adjusted in the event
of any Caldera stock split, stock combination, reclassification or other
similar capital change (the "First SCO Certificate") and pay SCO cash
consideration equal to seven million dollars ($7,000,000) (the "Cash
Consideration"), by wire transfer of immediately available funds or upon
the cancellation of SCO's outstanding indebtedness to Caldera.
(iii) Assumption or Replacement of SCO Options. Prior to the Effective
Time, each employee or consultant of SCO who is offered and accepts
employment or a consulting position with New Caldera and who has then
outstanding options to purchase shares of SCO Common Stock held by such
Optionee (collectively, the "SCO Options")(consisting of all outstanding
options granted under the stock option plans of SCO or the SCO
Subsidiaries, and any individual non-plan options held by the Optionees)
shall elect one of the following alternatives with respect to each grant of
options held by such employee or consultant:
(A) Each of the then outstanding SCO Options held by such employee
or consultant may be cancelled and replaced with an option to purchase
one share of Newco Common Stock for each two shares of SCO Common Stock
("Replacement Options") subject to an SCO Option at the Effective Time
with an exercise price per share of Newco Common Stock equal to the fair
market value of Newco Common Stock immediately after the Effective Time,
rounded up to the nearest cent. The vesting schedule of employees and
consultants electing this alternative shall be determined as follows:
(i) the number of vested shares of common stock under the Replacement
Option grant will equal the number of vested shares of common stock
subject to the cancelled SCO option grant immediately prior to the
Effective Time multiplied by 0.25 and (ii) the remaining unvested
Replacement Options will vest over a period of months determined by the
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following equation: 48 months less the product of the number of months
vested under the SCO option grant multiplied by 0.5; or
(B) Each of the then outstanding SCO Options held by such employee
or consultant may be assumed by Newco and converted into an option to
purchase one share of Newco Common Stock for each two shares of SCO
Common Stock subject to an SCO Option at the Effective Time (the "SCO
Ratio") at an exercise price per share of Newco Common Stock equal to
the exercise price per share of such assumed SCO Option immediately
prior to the Effective Time divided by the SCO Ratio, rounded up to the
nearest cent. Except as set forth in the preceding sentence, the term,
exercisability, vesting schedule, and all other terms and conditions of
the SCO Options will be unchanged and all references in any option
agreement governing such option to SCO shall be deemed to refer to
Newco, where appropriate; provided, however, that the outstanding SCO
Options previously designated as "incentive stock options" under Section
422 of the Internal Revenue Code may, as a result of the foregoing
adjustments, be converted into non-statutory stock options. Continuous
service as an employee or consultant with SCO or any of the SCO
Subsidiaries will be credited to the Optionee for purposes of
determining the number of shares of Newco Common Stock vested and
exercisable under the assumed SCO Option after the Closing. If the
foregoing calculation results in a Newco Option, which is issued for an
SCO Option, being exercisable for a fraction of a share of Newco Common
Stock, then the number of shares of Newco Common Stock subject to such
option will be rounded down to the nearest whole number of shares, with
no cash being payable for such resulting fractional share.
2. Section 1.3(c) of the Agreement is hereby deleted in its entirety.
3. Section 13.15 of the Agreement is hereby amended as follows:
(a) The following definition is hereby amended in its entirety:
"Caldera Percentage Interest" means 72% of the fully diluted equity
interest in Newco (taking into account all options, warrants and
convertible debentures on an as-converted basis except for any Replacement
Options issued or SCO Options assumed pursuant to Section 1.3(a)(iii)).
(b) The following definition is hereby added in its entirety:
"Replacement Options" is defined in Section 1.3(a)(iii)(A).
(c) The following definition is hereby amended in its entirety: "SCO
Ratio" is defined in Section 1.3(a)(iii)(B).
4. All references to the form of Sales Representative and Support
Agreement, attached as Exhibit 4.12 of the Agreement shall hereby be replaced by
references to the form of Sales Representative and Support Agreement attached
hereto as Exhibit 4.12A (the "Sales Representative Agreement") and the form of
Open Server Research and Development Agreement attached hereto as Exhibit 4.12B
(the "Open Server Agreement"). The Sales Representative Agreement and Open
Server Agreement shall be executed at the Effective Time.
[SIGNATURE PAGE TO FOLLOW]
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Agreement and Plan of Reorganization as of the date first above written.
THE SANTA CRUZ OPERATION, INC.
a California corporation
By: /s/ DOUGLAS MICHELS
----------------------------------
Douglas Michels
President and Chief Executive
Officer
CALDERA SYSTEMS, INC.
a Delaware corporation
By: /s/ RANSOM LOVE
----------------------------------
Ransom Love
Chief Executive Officer
CALDERA INTERNATIONAL, INC.
a Delaware corporation
By: /s/ RANSOM LOVE
----------------------------------
Ransom Love
Chief Executive Officer
[SIGNATURE PAGE TO AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION]
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SECOND AMENDMENT TO
AGREEMENT AND PLAN OF REORGANIZATION
THIS SECOND AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION (this "Second
Amendment") is entered into as of December 12, 2000, by and among Caldera
Systems, Inc., a Delaware corporation including for all purposes Caldera
Surviving Corporation, ("Caldera"), Caldera International, Inc., a Delaware
corporation ("Newco") and The Santa Cruz Operation, Inc., a California
corporation ("SCO").
RECITALS
A. On August 1, 2000, Caldera, Newco and SCO entered into an Agreement and
Plan of Reorganization (the "Agreement") which all parties to the Agreement wish
to amend pursuant to the terms and conditions of this Amendment.
B. All terms not otherwise defined herein shall have the meanings set forth
in Section 13.15 of the Agreement.
NOW, THEREFORE, the parties hereby agree to amend the Agreement as follows:
1. Section 1.3(a)(iii)(A) of the Agreement is amended in its entirety as
follows:
(A) Each of the then outstanding SCO Options held by such employee or
consultant may be cancelled and replaced with an option to purchase one
share of Newco Common Stock for each two shares of SCO Common Stock
("Replacement Options") subject to an SCO Option at the Effective Time with
an exercise price per share of Newco Common Stock equal to the fair market
value of Newco Common Stock immediately prior to the Effective Time,
rounded up to the nearest cent. The vesting schedule of employees and
consultants electing the Replacement Option alternative will remain the
same.
2. Section 1.15 is hereby added to the Agreement as follows:
1.15 Transition Cost Sharing. Caldera and SCO agree to share transition
costs relating to the SCO Transaction from the date of the Agreement to the
Closing Date as set forth in the Transition Costs Memorandum attached hereto as
Exhibit 1.15.
[SIGNATURE PAGE TO FOLLOW]
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<PAGE> 354
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Agreement and Plan of Reorganization as of the date first above written.
THE SANTA CRUZ OPERATION, INC.
a California corporation
By: /s/ DOUGLAS MICHELS
----------------------------------
Douglas Michels
President and Chief Executive
Officer
CALDERA SYSTEMS, INC.
a Delaware corporation
By: /s/ RANSOM LOVE
----------------------------------
Ransom Love
Chief Executive Officer
CALDERA INTERNATIONAL, INC.
a Delaware corporation
By: /s/ RANSOM LOVE
----------------------------------
Ransom Love
Chief Executive Officer
[SIGNATURE PAGE TO AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION]
A-74
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EXHIBIT 1.15
TRANSITION COSTS MEMORANDUM
The purpose of this Memorandum is to memorialize the agreement of The Santa
Cruz Operation ("SCO") and Caldera Systems, Inc. ("Caldera") with respect to the
sharing of transition costs relating to the planned acquisition by Caldera of
the SCO Server and Professional Services Divisions ("Acquisition").
1. Background. The parties understand that, even if the Acquisition had
not occurred, SCO would have undergone a reduction in its workforce. The parties
further understand that, if SCO had restructured to remain a standalone company,
it would have terminated 150 more employees than it did in anticipation of the
Acquisition, at an estimated cost to SCO of approximately $3,200,000.
The carrying costs for these additional 150 employees are approximately
$4,200,000 per quarter. As SCO would have terminated them in August, they will
have been on the SCO payroll an additional four months as of December 31, 2000,
at a total cost to SCO of approximately $5,600,000.
In addition, stay-on bonuses of $600,000 have been promised to transition
employees, resulting in a total cost to SCO of $6,200,000.
Therefore, the net incremental cost being borne by SCO as a result of the
Acquisition is approximately $3 million ($6,200,000 that SCO bore minus the
$3,200,000 that SCO saved by not terminating the 150 employees in August).
2. Agreement to Share Transition Costs. After some discussion, the parties
have agreed to split the net incremental costs on a 50:50 basis. Caldera,
therefore, agrees to pay SCO the sum of $1,500,000, which is intended to
reimburse SCO for a 50 percent portion of the costs from August 2000 through
December 2000.
3. One-Time-Only Basis. The parties agree that this cost sharing
arrangement is being done on a one-time-only basis and that Caldera is not
agreeing to pay or share transition or termination costs that SCO may incur
hereafter, regardless of how long it takes to obtain SEC and shareholder
approval and to consummate the Acquisition.
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APPENDIX B
July 31, 2000
CONFIDENTIAL
Board of Directors
Caldera Systems, Inc.
240 West Center Street
Orem, UT 84057
Dear Members of the Board:
We understand that Caldera Systems, Inc. ("Caldera"), Caldera
International, Inc. ("Newco") and The Santa Cruz Operation, Inc. ("SCO") propose
to enter into an Agreement and Plan of Reorganization (the "Agreement") pursuant
to which (i) a newly-formed, wholly-owned subsidiary of Newco will be merged
with and into Caldera, with each share of Caldera common stock ("Caldera Common
Stock") being converted into one share (the "Caldera Ratio") of Newco common
stock ("Newco Common Stock") and (ii) SCO and certain of its subsidiaries will
contribute certain of their assets and liabilities and all of the capital stock
of the Contributed Companies (as defined in the Agreement) to Newco in exchange
for A) a 28% equity interest in Newco (on a fully-diluted basis, including Newco
options to be issued pursuant to the Agreement) and B) seven million dollars in
cash or the cancellation of SCO's outstanding indebtedness to Caldera under the
convertible promissory note in the amount of seven million dollars issued by SCO
to Caldera as to the date of the agreement. The transaction described in (ii)
above is referred to herein as the "SCO Transaction." It is intended that the
merger and exchange referred to above qualify as a reorganization and tax-free
exchange under the provisions of Section 368(a) and Section 351(a) of the
Internal Revenue Code, as applicable. The terms and conditions of the above-
described transaction (the "Transaction") are more fully detailed in the
Agreement.
You have requested our opinion as to whether the Caldera Ratio is fair,
from a financial point of view, to holders of Caldera Common Stock.
Broadview International LLC ("Broadview") focuses on providing merger and
acquisition advisory services to information technology ("IT"), communications
and media companies. In this capacity, we are continually engaged in valuing
such businesses, and we maintain an extensive database of IT, communications and
media mergers and acquisitions for comparative purposes. We are currently acting
as financial advisor to Caldera's Board of Directors and will receive a fee from
Caldera upon the successful conclusion of the Transaction.
In rendering our opinion, we have, among other things:
(1) reviewed the terms of a draft of the Agreement dated July 30, 2000
furnished to us by Caldera's counsel on July 30, 2000 (which, for the
purposes of this opinion, we have assumed, with your permission, to be
identical in all material respects to the Agreement to be executed except
that, we have assumed with your permission that the Group Business (as
defined in the Agreement) includes, among other things, the professional
services business of SCO and its subsidiaries);
(2) reviewed the balance sheet relating to the Group Business as of
March 31, 2000 prepared by SCO management and provided to us by Caldera
management;
(3) reviewed annual financial projections through October 31, 2001 for
Newco assuming completion of the Transaction prepared and provided to us by
Caldera management;
(4) reviewed certain internal financial and operating information
concerning the Group Business (without giving effect to the Transaction),
including income statement projections through October 31, 2001 jointly
prepared and provided to us by Caldera and SCO managements;
(5) participated in discussions with SCO management concerning the
operations, business strategy, financial performance and prospects for the
Group Business;
<PAGE> 357
Caldera Systems, Inc. Board of Directors July 31, 2000
Page 2
(6) discussed with SCO management its view of the strategic rationale
for the Transaction;
(7) compared certain aspects of the financial performance of the Group
Business with public companies we deemed comparable;
(8) analyzed available information, both public and private,
concerning other mergers and acquisitions we believe to be comparable in
whole or in part to the SCO Transaction;
(9) reviewed i) Caldera's Prospectus on Form 424B4, including the
audited financial statements of Caldera for its fiscal years ended October
31, 1997, 1998, and 1999 included therein, and ii) Caldera's Form 10-Q for
the period ended April 30, 2000, including the unaudited financial
statements included therein;
(10) reviewed certain internal financial and operating information
concerning Caldera (without giving effect to the Transaction), including
quarterly projections through October 31, 2001, relating to Caldera,
prepared and furnished to us by Caldera management;
(11) participated in discussions with Caldera management concerning
the operations, business strategy, current financial performance and
prospects for Caldera;
(12) discussed with Caldera management its view of the strategic
rationale for the Transaction;
(13) reviewed the recent reported closing prices and trading activity
for Caldera Common Stock;
(14) compared certain aspects of the financial performance of Caldera
with public companies we deemed comparable;
(15) reviewed recent equity research analyst reports covering Caldera;
(16) analyzed the anticipated effect of the Transaction on the future
financial performance of Newco;
(17) participated in discussions related to the Transaction with
Caldera, SCO and their respective advisors; and
(18) conducted other financial studies, analyses and investigations as
we deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied, without independent verification,
on the accuracy and completeness of all the financial and other information
(including without limitation the representations and warranties contained in
the Agreement) that was publicly available or furnished to us by Caldera or SCO.
With respect to the financial projections examined by us, we have assumed that
they were reasonably prepared and reflected the best available estimates and
good faith judgments of (i) management of Caldera as to the future performance
of Caldera and Newco and (ii) management of Caldera and SCO as to the future
performance of the Group Business.
Based upon and subject to the foregoing, we are of the opinion that the
Caldera Ratio is fair, from a financial point of view, to holders of Caldera
Common Stock.
For purposes of this opinion, we have assumed that neither Caldera nor SCO
is currently involved in any material transaction other than the Transaction,
other publicly announced transactions, other preliminary discussed transactions
confidentially disclosed to us, and those activities undertaken in the ordinary
course of conducting their respective businesses. Our opinion is necessarily
based upon market, economic, financial and other conditions as they exist and
can be evaluated as of the date of this opinion, and any change in such
conditions would require a reevaluation of this opinion. We express no opinion
as
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Caldera Systems, Inc. Board of Directors July 31, 2000
Page 3
to the price at which Caldera Common Stock or Newco Common Stock will trade at
any time in the future.
This opinion speaks only as of the date hereof. It is understood that this
opinion is for the information of the Board of Directors of Caldera in
connection with its consideration of the Agreement and does not constitute a
recommendation to any Caldera stockholder as to how such stockholder should vote
on the Agreement. This opinion may not be published or referred to, in whole or
part, without our prior written permission, which shall not be unreasonably
withheld. Broadview hereby consents to references to and the inclusion of this
opinion in its entirety in the Prospectus/Proxy Statement to be distributed to
Caldera stockholders in connection with the Transaction.
Sincerely,
Broadview International LLC
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APPENDIX C
[CHASE HEAD LOGO]
August 1, 2000
Confidential
The Board of Directors
The Santa Cruz Operation, Inc.
400 Encinal Street
Santa Cruz, CA 95060
Gentlemen:
The Santa Cruz Operation, Inc., a California corporation ("SCO" or the
"Company") proposes to enter into an Agreement and Plan of Reorganization dated
as of August 1, 2000, among Caldera Systems, Inc., a Delaware corporation
("Caldera"), Caldera International, Inc., a Delaware corporation ("Newco") and
SCO (the "Agreement") pursuant to which, among other things, (i) a newly formed
wholly owned subsidiary of Newco will be merged with and into Caldera, with
Caldera being the surviving corporation in such merger (the "Merger"), and all
outstanding Caldera securities will be converted, on a share-for-share basis,
into Newco securities having identical rights, preferences and privileges as
such Caldera securities had immediately prior to the Merger, and with Newco
assuming any and all outstanding options and other rights to purchase shares of
capital stock of Caldera (ii) the Company and certain of its subsidiaries will
contribute (the "Contribution") to Newco (x) all of the capital stock of certain
subsidiaries of the Company (the "Contributed Companies") and (y) certain assets
of the Contributed Companies set forth in the Agreement in consideration for the
issuance by Newco to the Company of shares of common stock, $0.001 par value per
share, of Newco, (iii) Newco will assume all options to acquire capital stock of
the Company and (iv) Caldera, Newco and the Company will enter into the Sale
Representative and Support Agreement (the transactions described in clauses (i),
(ii), (iii) and (iv) being referred to herein as (the "Proposed Transaction").
As a result of the Proposed Transaction, upon completion thereof, the Company
will hold 28% of the capital stock of Newco on a fully diluted basis.
You have requested our opinion as to the fairness from a financial point of
view to SCO of the consideration to be received by SCO in connection with the
Proposed Transaction. For purposes of this opinion, we have assumed that (i) the
Merger will qualify as a tax-free reorganization for Newco and Caldera under the
United States Internal Revenue Code of 1986, as amended (the "Code"), (ii) the
Contribution will qualify as a nonrecognition transfer for SCO and Newco under
the Code and (iii) the Proposed Transaction will be accounted for as a purchase.
Chase Securities Inc. ("Chase"), as part of its investment banking
services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a
[CHASE FOOT LOGO]
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Caldera Systems, Inc. Board of Directors July 31, 2000
Page 2
financial advisor to the Board of Directors of SCO in connection with the
Proposed Transaction, and we will receive a fee for our services, which include
the rendering of this opinion.
In the past, we have provided investment banking and other financial
advisory services to SCO and have received fees for rendering these services. In
the ordinary course of business, Chase acts as a market maker and broker in the
publicly traded securities of SCO and receives customary compensation in
connection therewith, and also provides research coverage for SCO. In the
ordinary course of business, Chase actively trades in the equity and derivative
securities of SCO for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Chase may in the future provide additional investment banking or other financial
advisory services to SCO.
In connection with our review of the Proposed Transaction, and in arriving
at our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements
of Caldera for recent years and interim periods to date and certain other
relevant financial and operating data of Caldera (including its capital
structure) made available to us from published sources;
(ii) reviewed certain publicly available projected financial and
operating information relating to Caldera;
(iii) discussed the business, financial condition and prospects of
Caldera with certain members of senior management;
(iv) reviewed the internal unaudited financial statements of the
Contributed Companies for recent years and interim periods to date and
certain other relevant financial data of the Contributed Companies made
available to us from the internal records of SCO;
(v) reviewed certain internal projected financial and operating
information relating to the Contributed Companies prepared by the senior
management of SCO;
(vi) discussed the business, financial condition and prospects of the
Contributed Companies with certain members of senior management;
(vii) reviewed the recent reported prices and trading activity for the
common stocks of Caldera and compared such information and certain
financial information for Caldera and the Contributed Companies with
similar information for certain other companies engaged in businesses we
consider comparable;
(viii) reviewed the financial terms, to the extent publicly available,
of certain comparable merger and acquisition transactions;
(ix) reviewed the Agreement dated August 1, 2000;
(x) discussed the tax and accounting treatment of the Proposed
Transaction with Caldera and Caldera's counsel and independent accountants;
and
(xi) performed such other analyses and examinations and considered
such other information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning Caldera or the Contributed
Companies considered in connection with our review of the Proposed Transaction,
and we have not assumed any responsibility for independent verification of such
information. We have not prepared any independent valuation or appraisal of any
of
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Caldera Systems, Inc. Board of Directors July 31, 2000
Page 3
the assets or liabilities of Caldera or the Contributed Companies, nor have we
conducted a physical inspection of the properties and facilities of either
company. With respect to the financial forecasts and projections made available
to us and used in our analysis, we have assumed that they reflect the best
currently available estimates and judgments of the expected future financial
performance of Caldera and the Contributed Companies. For purposes of this
opinion, we have assumed that neither Caldera nor the Contributed Companies is a
party to any pending transactions, including external financings,
recapitalizations or material merger discussions, other than the Proposed
Transaction and those activities undertaken in the ordinary course of conducting
their respective businesses. Our opinion is necessarily based upon market,
economic, financial and other conditions as they exist and can be evaluated as
of the date of this letter and any change in such conditions would require a
reevaluation of this opinion. We express no opinion as to the price at which
Newco common stock will trade subsequent to the Effective Time (as defined in
the Agreement). In rendering this opinion, we have assumed that the proposed
merger will be consummated substantially on the terms discussed in the
Agreement, without any waiver of any material terms or conditions by any party
thereto.
It is understood that this letter is for the information of the Board of
Directors and may not be used for any other purpose without our prior written
consent; provided, however, that this letter may be reproduced in full in the
Proxy Statement/Prospectus. This letter does not constitute a recommendation to
any stockholder as to how such stockholder should vote on the Proposed
Transaction.
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that, as of the date hereof,
the consideration to be received by SCO in the Proposed Transaction is fair to
SCO from a financial point of view. We express no opinion, however, as to the
adequacy of any consideration received in the Proposed Transaction by Caldera or
any of its affiliates.
Very truly yours,
CHASE SECURITIES INC.
By: /s/ DAVID G. GOLDEN
----------------------------------
David G. Golden
Managing Director
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APPENDIX D
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF CALDERA INTERNATIONAL, INC.
(Pursuant to Sections 228, 242 and 245 of the General Corporation Law of the
State of Delaware)
Caldera International, Inc. (the "Corporation"), a corporation organized
and existing under the General Corporation Law of the State of Delaware (the
"General Corporation Law"),
DOES HEREBY CERTIFY:
FIRST: That the Corporation filed its original Certificate of
Incorporation with the Secretary of State of Delaware on July 28, 2000, under
the name Caldera Holdings, Inc. The Corporation filed a Certificate of Amendment
with the Secretary of State of Delaware on September 12, 2000, changing its
corporate name to "Caldera, Inc." The Corporation filed a Certificate of
Amendment with the Secretary of State of Delaware on September 26, 2000.
SECOND: That the Board of Directors duly adopted resolutions proposing to
amend and restate the Certificate of Incorporation of the Corporation, declaring
said amendment and restatement to be advisable and in the best interests of the
Corporation and its stockholders, and authorizing the appropriate officers of
the Corporation to solicit the consent of the stockholders of the issued and
outstanding Common Stock, $0.001 par value, and Preferred Stock, $0.001 par
value, voting as a single class and as separate classes, all in accordance with
the applicable provisions of Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware;
THIRD: That the resolution setting forth the proposed amendment and
restatement is as follows:
"RESOLVED, that the Amended and Restated Certificate of Incorporation of
the Corporation be amended and restated in its entirety as follows:
ARTICLE I
NAME
The name of the Corporation is "Caldera International, Inc."
ARTICLE II
REGISTERED OFFICE
The address of the registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington,
County of New Castle, and the name of the registered agent at such address is
The Corporation Trust Company.
ARTICLE III
POWERS/TERM
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law. The
Corporation is to have perpetual existence.
<PAGE> 363
ARTICLE IV
CAPITAL STOCK
A. Classes of Stock. The Corporation is authorized to issue two classes of
stock to be designated, respectively, "Common Stock" and "Preferred Stock." The
total number of shares which the Corporation is authorized to issue is
200,000,000 shares. 175,000,000 shares, par value $0.001 per share, shall be
Common Stock and 25,000,000 shares, par value $0.001 per share, shall be
Preferred Stock. The consideration for the issuance of the shares shall be paid
to or received by the Corporation in full before their issuance and shall not be
less than the par value per share. The number of authorized shares of Common
Stock may be increased or decreased (but not below the number of shares there of
then outstanding) by the affirmative vote of the holders of a majority of the
stock of the Corporation entitled to vote, irrespective of the provisions of
Section 242(b)(2) of the General Corporation Law of Delaware.
B. Common Stock.
(1) General. All shares of Common Stock will be identical and will
entitle the holders thereof to the same rights, powers and privileges. The
rights, powers and privileges of the holders of the Common Stock are
subject to and qualified by the rights of holders of any then outstanding
Preferred Stock.
(2) Dividends. Dividends may be declared and paid on the Common Stock
from funds lawfully available therefor as and when determined by the Board
of Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
(3) Dissolution, Liquidation or Winding Up. In the event of any
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, each issued and outstanding share of
Common Stock shall entitle the holder thereof to receive an equal portion
of the net assets of the Corporation available for distribution to the
holders of Common Stock, subject to any preferential rights of any then
outstanding Preferred Stock.
(4) Voting Rights. Except as otherwise required by law or this
Amended and Restated Certificate of Incorporation, each holder of Common
Stock shall have one vote in respect of each share of stock held of record
by such holder on the books of the Corporation for the election of
directors and on all matters submitted to a vote of stockholders of the
Corporation. Except as otherwise required by law or provided herein,
holders of Preferred Stock shall vote together with holders of Common Stock
as a single class, subject to any special or preferential voting rights of
any then outstanding Preferred Stock. There shall be no cumulative voting.
(5) Redemption. The Common Stock is not redeemable.
C. Preferred Stock. The Board of Directors is authorized, subject to
limitations prescribed by law, by the rules of a national securities exchange,
if applicable, and by the provisions of this ARTICLE IV, to provide for the
issuance of the shares of Preferred Stock in series, and by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designation, powers, preferences, and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
The authority of the Board with respect to each series shall include, but
not be limited to, determination of the following:
(1) The number of shares constituting that series and the distinctive
designation of that series;
(2) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that
series;
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(3) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(4) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(5) Whether or not the shares of that series shall be redeemable, and,
if so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(6) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of
such sinking fund;
(7) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation,
and the relative rights or priority, if any, of payment of shares of that
series; and
(8) Any other relative rights, preferences and limitations of that
series.
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividends shall be paid or
declared and set apart for payment on the Common Stock with respect to the same
dividend period.
If upon any voluntary or involuntary liquidation, dissolution or winding up
of the Corporation, the assets available for distribution to holders of shares
of Preferred Stock of all series shall be insufficient to pay such holders the
full preferential amount to which they are entitled, then such assets shall be
distributed ratably among the shares of all series of Preferred Stock in
accordance with the respective preferential amounts (including unpaid cumulative
dividends, if any) payable with respect thereto.
D. Preemptive Rights. No holder of any of the shares of any class or
series of stock or of options, warrants or other rights to purchase shares of
any class or series of stock or of other securities of the Corporation shall
have any preemptive right to purchase or subscribe for any unissued stock of any
class or series, or any unissued bonds, certificates of indebtedness, debentures
or other securities convertible into or exchangeable for stock of any class or
series or carrying any right to purchase stock of any class or series; but any
such unissued stock, bonds, certificates or indebtedness, debentures or other
securities convertible into or exchangeable for stock or carrying any right to
purchase stock may be issued pursuant to resolution of the Board of Directors of
the Corporation to such persons, firms, corporations or associations, whether or
not holders thereof, and upon such terms as may be deemed advisable by the Board
of Directors in the exercise of its sole discretion.
ARTICLE V
DIRECTORS
A. Number. The number of directors of the Corporation shall be such
number, not less than five (5) nor more than fifteen (15) (exclusive of
directors, if any, to be elected by holders of preferred stock of the
Corporation, voting separately as a class), as shall be set forth from time to
time in the Bylaws. Vacancies in the Board of Directors of the Corporation,
however caused, and newly created directorships shall be filled by a vote of a
majority of the directors then in office, whether or not a quorum, and any
director so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of the class to which the director has been
chosen expires and when the director's successor is elected and qualified.
B. Removal of Directors. Notwithstanding any other provisions of this
Certificate or the Bylaws of the Corporation, any director or the entire Board
of Directors of the Corporation may be removed, at any
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time, but only for cause and only by the affirmative vote of the holders of not
less than a majority of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors (considered
for this purpose as one class) cast at a meeting of the stockholders called for
that purpose. Notwithstanding the foregoing, whenever the holders of any one or
more series of preferred stock of the Corporation shall have the right, voting
separately as a class, to elect one or more directors of the Corporation, the
preceding provisions of this ARTICLE V shall not apply with respect to the
director or directors elected by such holders of Preferred Stock.
ARTICLE VI
STOCKHOLDER MEETINGS
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation. The stockholders of the
Corporation may not take any action by written consent in lieu of a meeting.
ARTICLE VII
LIMITATION OF DIRECTORS' LIABILITY
Except to the extent that the General Corporation Law of Delaware prohibits
the elimination or limitation of liability of directors for breaches of
fiduciary duty, no director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, notwithstanding any provision of law imposing such
liability. If the General Corporation Law is amended after approval by the
stockholders of this ARTICLE VII to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the General Corporation Law of the State of Delaware, as so
amended. No amendment to or repeal of this provision shall apply to or have any
effect on the liability or alleged liability of any director of the Corporation
for or with respect to any acts or omissions of such director occurring prior to
such amendment.
ARTICLE VIII
INDEMNIFICATION
The Corporation may, to the fullest extent permitted by Section 145 of the
General Corporation Law of Delaware, as amended from time to time, indemnify
each person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was, or has agreed to become, a director or officer of the Corporation, or is or
was serving, or has agreed to serve, at the request of the Corporation, as a
director, officer or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust or other enterprise (including
any employee benefit plan) (all such persons being referred to hereafter as an
"Indemnitee"), or by reason of any action alleged to have been taken or omitted
in such capacity, against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him or
on his behalf in connection with such action, suit or proceeding and any appeal
therefrom.
Indemnification may include payment by the Corporation of expenses in
defending an action or proceeding in advance of the final disposition of such
action or proceeding upon receipt of an undertaking by the Indemnitee to repay
such payment if it is ultimately determined that such person is not entitled to
indemnification under this ARTICLE VIII, which undertaking may be accepted
without reference to the financial ability of such person to make such
repayment.
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The Corporation shall not indemnify any such person seeking indemnification
in connection with a proceeding (or part thereof) initiated by such person
unless the initiation thereof was approved by the Board of Directors of the
Corporation.
The indemnification rights provided in this ARTICLE VIII (i) shall not be
deemed exclusive of any other rights to which Indemnitees may be entitled under
any law, agreement or vote of stockholders or disinterested directors or
otherwise, and (ii) shall inure to the benefit of the heirs, executors and
administrators of such persons. The Corporation may, to the extent authorized
from time to time by its Board of Directors, grant indemnification rights to
other employees or agents of the Corporation or other persons serving the
Corporation and such rights may be equivalent to, or greater or less than, those
set forth in this ARTICLE VIII.
ARTICLE IX
AMENDMENT OF BYLAWS
In furtherance of and not in limitation of powers conferred by statute, the
Board of Directors of the Corporation is expressly authorized to adopt, repeal,
alter, amend and rescind the Bylaws of the Corporation by vote of a majority of
the Board of Directors. In addition, the Bylaws may be amended by the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of voting stock of the Corporation entitled to vote at an election of directors.
ARTICLE X
AMENDMENT OF CERTIFICATE
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute and this Amended and
Restated Certificate of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation. Notwithstanding the
foregoing, the provisions set forth in ARTICLES V, VI, VII, VIII, IX and this
ARTICLE X may not be repealed, altered, amended or rescinded in any respect
unless the same is approved by the affirmative vote of the holders of not less
than two-thirds of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered for this
purpose as a single class) cast at a meeting of the stockholders called for that
purpose (provided that notice of such proposed repeal, alteration, amendment or
rescission is included in the notice of such meeting)."
FOURTH: That said amendments were duly adopted in accordance with the
provisions of Section 242 and 245 of the General Corporation Law.
IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation
has been signed by the Chief Executive Officer and the Secretary of the
Corporation this day of 2000.
------------------------------------
Ransom H. Love
Chief Executive Officer
------------------------------------
Alan J. Hansen
Secretary
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APPENDIX E
AMENDED AND RESTATED
BYLAWS
OF
CALDERA INTERNATIONAL, INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of New Castle, State
of Delaware.
Section 2. The corporation may also have offices at such other places both
within and without the State of Delaware as the Board of Directors may from time
to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of directors
shall be held at such place as may be fixed from time to time by the Board of
Directors, or at such other place either within or without the State of Delaware
as shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting. Meetings of stockholders for any other purpose may be
held at such time and place, within or without the State of Delaware, as shall
be stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2. Annual meetings of stockholders shall be held at such date and
time as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. At each annual meeting, the stockholders
shall elect directors to succeed those directors whose terms expire in that year
and shall transact such other business as may properly be brought before the
meeting.
Section 3. Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote at
such meeting not less than ten (10) nor more than sixty (60) days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make available, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any purpose or
purposes, may only be called by the Chairman of the Board or a majority of the
Board.
Section 6. Written notice of a special meeting stating the place, date and
hour of the meeting and the purpose or purposes for which the meeting is called,
shall be given not fewer than ten (10) nor more than sixty (60) days before the
date of the meeting, to each stockholder entitled to vote at such meeting.
Section 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
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Section 8. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, either the Chairman of the Board, or the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted that might have been transacted at
the meeting as originally notified. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of applicable statute
or of the certificate of incorporation, a different vote is required, in which
case such express provision shall govern and control the decision of such
question.
Section 10. Unless otherwise provided in the certificate of incorporation
each stockholder shall at every meeting of the stockholders be entitled to one
vote in person or by proxy for each share of the capital stock having voting
power held by such stockholder, but no proxy shall be voted on after three (3)
years from its date, unless the proxy provides for a longer period.
Section 11. Nominations for election to the Board of Directors must be
made by the Board of Directors or by a committee appointed by the Board of
Directors for such purpose or by any stockholder of any outstanding class of
capital stock of the corporation entitled to vote for the election of directors.
Nominations by stockholders must be preceded by notification in writing received
by the secretary of the corporation not less than one-hundred twenty (120) days
prior to any meeting of stockholders called for the election of directors. Such
notification shall contain the written consent of each proposed nominee to serve
as a director if so elected and the following information as to each proposed
nominee and as to each person, acting alone or in conjunction with one or more
other persons as a partnership, limited partnership, syndicate or other group,
who participates or is expected to participate in making such nomination or in
organizing, directing or financing such nomination or solicitation of proxies to
vote for the nominee:
(a) the name, age, residence, address, and business address of each
proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of business
and address of the corporation or other organization in which such
employment is carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned beneficially, either
directly or indirectly, by each proposed nominee and each such person; and
(d) a description of any arrangement or understanding of each proposed
nominee and of each such person with each other or any other person
regarding future employment or any future transaction to which the
corporation will or may be a party.
The presiding officer of the meeting shall have the authority to
determine and declare to the meeting that a nomination not preceded by
notification made in accordance with the foregoing procedure shall be
disregarded.
Section 12. At any meeting of the stockholders, only such business shall
be conducted as shall have been brought before the meeting (a) pursuant to the
corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in this Bylaw, who shall
be entitled to vote at such meeting and who complies with the notice procedures
set forth in this Bylaw.
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For business to be properly brought before any meeting by a stockholder
pursuant to clause (c) above of this Section 12, the stockholder must have given
timely notice thereof in writing to the secretary of the corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not less than one hundred
twenty (120) days prior to the date of the meeting. A stockholder's notice to
the secretary shall set forth as to each matter the stockholder proposes to
bring before the meeting (a) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting, (b) the name and address, as they appear on the corporation's books, of
the stockholder proposing such business, and the name and address of the
beneficial owner, if any, on whose behalf the proposal is made, (c) the class
and number of shares of the corporation which are owned beneficially and of
record by such stockholder of record and by the beneficial owner, if any, on
whose behalf of the proposal is made and (d) any material interest of such
stockholder of record and the beneficial owner, if any, on whose behalf the
proposal is made in such business.
Notwithstanding anything in these Bylaws to the contrary, no business shall
be conducted at a meeting except in accordance with the procedures set forth in
this Section 12. The presiding officer of the meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting and in accordance with the procedures prescribed by
this Section 12, and if such person should so determine, such person shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted. Notwithstanding the foregoing provisions of
this Section 12, a stockholder shall also comply with all applicable
requirements of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder with respect to the matters set forth in this Section
12.
Section 13. Effective upon the closing of the corporation's initial public
offering of securities pursuant to a registration statement filed under the
Securities Act of 1933, as amended, the stockholders of the Corporation may not
take action by written consent without a meeting but must take any such actions
at a duly called annual or special meeting in accordance with these Bylaws and
the Certificate of Incorporation.
ARTICLE III
DIRECTORS
Section 1. The number of directors of this corporation that shall
constitute the whole board shall be determined by resolution of the Board of
Directors; provided, however, that no decrease in the number of directors shall
have the effect of shortening the term of an incumbent director.
Section 2. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, even if less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next election
of the class for which such directors were chosen and until their successors are
duly elected and qualified or until earlier resignation or removal. If there are
no directors in office, then an election of directors may be held in the manner
provided by statute.
Section 3. The business of the corporation shall be managed by or under
the direction of its Board of Directors which may exercise all such powers of
the corporation and do all such lawful acts and things as are not by statute or
by the certificate of incorporation or by these bylaws directed or required to
be exercised or done by the stockholders.
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MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 5. The first meeting of each newly elected Board of Directors
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the board.
Section 7. Special meetings of the board may be called by the Chairman of
the Board or the president on twelve (12) hours' notice to each director by
phone, fax or electronic mail; special meetings shall be called by the Chairman
of the Board, the president or secretary in like manner and on like notice on
the written request of a majority of the Board unless the Board consists of only
one director, in which case special meetings shall be called by the Chairman of
the Board, the president or secretary in like manner and on like notice on the
written request of the sole director.
Section 8. At all meetings of the board a majority of the directors shall
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors, except as may be otherwise specifically provided by
statute or by the certificate of incorporation. If a quorum shall not be present
at any meeting of the Board of Directors, the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of incorporation
or these bylaws, any action required or permitted to be taken at any meeting of
the Board of Directors or of any committee thereof may be taken without a
meeting, if all members of the board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a majority
of the whole board, designate one (1) or more committees, each committee to
consist of one (1) or more of the directors of the corporation. The board may
designate one (1) or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of the committee.
In the absence of disqualification of a member of a committee, the member
or members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member.
Any such committee, to the extent provided in the resolution of the Board
of Directors, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the
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business and affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers that may require it; but no such
committee shall have the power or authority in reference to amending the
certificate of incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to the
stockholders a dissolution of the corporation or a revocation of a dissolution,
or amending the bylaws of the corporation; and, unless the resolution or the
certificate of incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
Section 12. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice (except as provided in Section 7 of Article III of these Bylaws), but
such notice may be given in writing, by mail, addressed to such director or
stockholder, at his address as it appears on the records of the corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Notice to
directors may also be given by telephone, telegram or facsimile.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the Board of
Directors and shall be a president, a chief financial officer and a secretary.
The Board of Directors may elect from among its members a Chairman of the Board.
The Board of Directors may also choose one or more vice-presidents, assistant
secretaries and assistant treasurers. Any number of offices may be held by the
same person, unless the certificate of incorporation or these bylaws otherwise
provide.
Section 2. The Board of Directors at its first meeting after each annual
meeting of stockholders shall choose a president, a chief financial officer, and
a secretary and may choose vice presidents.
Section 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
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Section 4. The salaries of all officers of the corporation shall be fixed
by the Board of Directors or any committee established by the Board of Directors
for such purpose. The salaries of agents of the corporation shall, unless fixed
by the Board of Directors, be fixed by the president or any vice-president of
the corporation.
Section 5. The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the Board
of Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors. Any vacancy occurring in any office of the corporation
shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at all
meetings of the Board of Directors and of the stockholders at which he/she shall
be present. He/she shall have and may exercise such powers as are, from time to
time, assigned to him/her by the Board and as may be provided by law.
Section 7. In the absence of the Chairman of the Board, the president,
shall preside at all meetings of the Board of Directors and of the stockholders
at which he shall be present. He shall have and may exercise such powers as are,
from time to time, assigned to him by the Board and as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The president shall be the chief executive officer of the
corporation and in the absence of the Chairman of the Board, he/she shall
preside at all meetings of the stockholders and the Board of Directors; he/she
shall have general and active management of the business of the corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect.
Section 9. The president or any vice president shall execute bonds,
mortgages and other contracts requiring a seal, under the seal of the
corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation.
Section 10. In the absence of the president or in the event of his
inability or refusal to act, the vice-president, if any, (or in the event there
be more than one vice-president, the vice-presidents in the order designated by
the directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He/she shall give, or cause to be given, notice of all meetings
of the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
president, under whose supervision he/she shall be. He/she shall have custody of
the corporate seal of the corporation and he/she, or an assistant secretary,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by his signature or by the signature of such
assistant secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing by
his signature.
Section 12. The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of
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their election) shall, in the absence of the secretary or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
secretary and shall perform such other duties and have such other powers as the
board of directors may from time to time prescribe.
THE CHIEF FINANCIAL OFFICER
Section 13. The chief financial officer shall be the chief financial
officer of the corporation, shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 14. He/she shall disburse the funds of the corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Chief Financial Officer and of the financial condition
of the corporation.
Section 15. If required by the Board of Directors, he/she shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his/her office and for the restoration
to the corporation, in case of his/her death, resignation, retirement or removal
from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his/her control belonging to the
corporation.
Section 16. The treasurer or an assistant treasurer, in the order
determined by the Board of Directors (or if there be no such determination, then
in the order of their election) shall, in the absence of the Chief Financial
Officer or in the event of his inability or refusal to act, perform the duties
and exercise the powers of the Chief Financial Officer and shall perform such
other duties and have such other powers as the Board of Directors may from time
to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled to
have a certificate, signed by, or in the name of the corporation by, the
Chairman of the Board of Directors, or the president or a vice-president and the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of the corporation, certifying the number of shares owned by him/her in the
corporation.
Certificates may be issued for partly paid shares and in such case upon the
face or back of the certificates issued to represent any such partly paid
shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate that the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
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Any of or all the signatures on the certificate may be facsimile. In case
any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if he/she were such
officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 2. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his/her
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 3. Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 4. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 5. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
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ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation, subject to
the provisions of the certificate of incorporation, if any, may be declared by
the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by resolution
of the Board of Directors.
SEAL
Section 5. The Board of Directors may adopt a corporate seal having
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 6. The corporation shall, to the fullest extent authorized under
the laws of the State of Delaware, as those laws may be amended and supplemented
from time to time, indemnify any director made, or threatened to be made, a
party to an action or proceeding, whether criminal, civil, administrative or
investigative, by reason of being a director of the corporation or a predecessor
corporation or, at the corporation's request, a director or officer of another
corporation, provided, however, that the corporation shall indemnify any such
agent in connection with a proceeding initiated by such agent only if such
proceeding was authorized by the Board of Directors of the corporation. The
indemnification provided for in this Section 6 shall: (i) not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any bylaw, agreement or vote of stockholders or disinterested directors or
otherwise, both as to action in their official capacities and as to action in
another capacity while holding such office, (ii) continue as to a person who has
ceased to be a director, and (iii) inure to the benefit of the heirs, executors
and administrators of such a person. The corporation's obligation to provide
indemnification under this Section 6 shall be offset to the extent of any other
source of indemnification or any otherwise applicable insurance coverage under a
policy maintained by the corporation or any other person.
Expenses incurred by a director of the corporation in defending a civil or
criminal action, suit or proceeding by reason of the fact that he is or was a
director of the corporation (or was serving at the corporation's request as a
director or officer of another corporation) shall be paid by the corporation in
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advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
corporation as authorized by relevant sections of the General Corporation Law of
Delaware. Notwithstanding the foregoing, the corporation shall not be required
to advance such expenses to an agent who is a party to an action, suit or
proceeding brought by the corporation and approved by a majority of the Board of
Directors of the corporation which alleges willful misappropriation of corporate
assets by such agent, disclosure of confidential information in violation of
such agent's fiduciary or contractual obligations to the corporation or any
other willful and deliberate breach in bad faith of such agent's duty to the
corporation or its stockholders.
The foregoing provisions of this Section 6 shall be deemed to be a contract
between the corporation and each director who serves in such capacity at any
time while this bylaw is in effect, and any repeal or modification thereof shall
not affect any rights or obligations then existing with respect to any state of
facts then or theretofore existing or any action, suit or proceeding theretofore
or thereafter brought based in whole or in part upon any such state of facts.
The Board of Directors in its discretion shall have power on behalf of the
corporation to indemnify any person, other than a director, made a party to any
action, suit or proceeding by reason of the fact that he, his testator or
intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 6 of all directors, officers
and employees who are determined by the corporation or otherwise to be or to
have been "fiduciaries" of any employee benefit plan of the corporation which
may exist from time to time, Section 145 of the General Corporation Law of
Delaware shall, for the purposes of this Section 6, be interpreted as follows:
an "other enterprise" shall be deemed to include such an employee benefit plan,
including without limitation, any plan of the corporation which is governed by
the Act of Congress entitled "Employee Retirement Income Security Act of 1974,"
as amended from time to time; the corporation shall be deemed to have requested
a person to serve an employee benefit plan where the performance by such person
of his duties to the corporation also imposes duties on, or otherwise involves
services by, such person to the plan or participants or beneficiaries of the
plan; excise taxes assessed on a person with respect to an employee benefit plan
pursuant to such Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new bylaws
may be adopted by the affirmative vote of holders of at least 66 2/3% vote of
the outstanding voting stock of the corporation. These bylaws may also be
altered, amended or repealed or new bylaws may be adopted by the Board of
Directors, when such power is conferred upon the Board of Directors by the
certificate of incorporation. The foregoing may occur at any regular meeting of
the stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal bylaws is conferred upon
the Board of Directors by the certificate of incorporation it shall not divest
or limit the power of the stockholders to adopt, amend or repeal bylaws.
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APPENDIX F
CALDERA SYSTEMS, INC
1999 OMNIBUS STOCK INCENTIVE PLAN
1. ESTABLISHMENT AND PURPOSE.
There is hereby adopted the Caldera Systems, Inc. 1999 Omnibus Stock
Incentive Plan (the "Plan"). The Plan shall be the successor to the Caldera
Systems, Inc. 1998 Stock Option Plan (the "Predecessor Plan"). Upon adoption of
the Plan by the Board of Directors and approval of the Plan by the stockholders
of Caldera Systems, Inc. (the "Company"), no further awards shall be made under
the Predecessor Plan. If the Plan is not approved by the stockholders of the
Company, the Predecessor Plan shall remain in full force and effect. The Plan is
intended to promote the interests of the Company and the stockholders of the
Company by providing officers, other employees of the Company, directors who are
not employees of the Company, and other persons who are expected to make a
long-term contribution to the success of the Company with appropriate incentives
and rewards to encourage them to enter into and continue in the employ of the
Company and/or to acquire a proprietary interest in the long-term success of the
Company, thereby aligning their interest more closely to the interest of
stockholders.
2. DEFINITIONS.
As used in the Plan, the following definitions apply to the terms indicated
below:
(a) "Award Agreement" shall mean the written agreement between the
Company and a Participant evidencing an Incentive Award.
(b) "Board of Directors" shall mean the Board of Directors of the
Company.
(c) "Cause," when used in connection with the termination of a
Participant's employment by the Company, shall mean (i) the willful and
continued failure by the Participant substantially to perform his duties
and obligations to the Company (other than any such failure resulting from
his incapacity due to physical or mental illness) or (ii) the willful
engaging by the Participant in misconduct which is materially injurious to
the Company. For purposes of this Section 2(c), no act, or failure to act,
on a Participant's part shall be considered "willful" unless done, or
omitted to be done, by the Participant in bad faith and without reasonable
belief that his action or omission was in the best interest of the Company.
The Committee shall determine whether a termination of employment is for
Cause.
(d) "Change in Control" shall mean any of the following occurrences:
(i) any "person," as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Company, any trustee or
other fiduciary holding securities under an employee benefit plan of
the Company or any corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as
their ownership of stock of the Company), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 50%
or more of the combined voting power of the Company's then
outstanding securities;
(ii) during any period of not more than two consecutive years
(not including any period prior to the adoption of the Plan),
individuals who at the beginning of such period constitute the Board
of Directors and any new director (other than a director designated
by a person who has entered into an agreement with the Company to
effect a transaction described in clause (i), (iii) or (iv) of this
Section) whose election by the Board of Directors or nomination for
election was approved by a vote of at least two-thirds ( 2/3) of the
directors then still in office who either were directors at the
beginning of the period or whose election
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or nomination for election was previously so approved, cease for any
reason to constitute at least a majority thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
(A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than
50% of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such
merger or consolidation or (B) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction)
in which no "person" (as herein above defined) acquires more than 50%
of the combined voting power of the Company's then outstanding
securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(f) "Committee" shall mean the Compensation Committee of the Board of
Directors. The Committee shall consist of two or more persons each of whom
is an "outside director" within the meaning of Section 162(m) of the Code
and a "Non-Employee Director" within the meaning of Rule 16b-3 under the
Exchange Act (or who satisfies any other criteria for administering
employee benefit plans as may be specified by the Securities and Exchange
Commission in order for transactions under such plan to be exempt from the
provisions of Section 16(b) of the Exchange Act).
(g) "Company" shall mean, Caldera Systems, Inc., a Utah corporation.
(h) "Common Stock" shall mean the common stock of the Company, no par
value per share.
(i) "Disability" shall mean: (1) any physical or mental condition that
would qualify a Participant for a disability benefit under the long-term
disability plan maintained by the Company or a Subsidiary of the Company
and applicable to such Participant; or (2) when used in connection with the
exercise of an Incentive Stock Option following termination of employment,
disability within the meaning of Section 22(e)(3) of the Code.
(j) "Effective Date" shall mean the date upon which this Plan is
adopted by the Board of Directors.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(l) "Executive Officer" shall have the meaning set forth in Rule 3b-7
promulgated under the Exchange Act.
(m) "Exercise Date" shall mean the date on which a Participant may
exercise an Incentive Award.
(n) "Fair Market Value" of a share of Common Stock, as of a date of
determination, shall mean (i) the closing sales price per share of Common
Stock on the national securities exchange on which such stock is
principally traded for the last preceding date on which there was a sale of
such stock on such exchange, or (ii) if the shares of Common Stock are not
listed or admitted to trading on any such exchange, the closing price as
reported by the Nasdaq Stock Market for the last preceding date on which
there was a sale of such stock on such exchange, or (iii) if the shares of
Common Stock are not then listed on the Nasdaq Stock Market, the average of
the highest reported bid and lowest reported asked prices for the shares of
Common Stock as reported by the National Association of Securities Dealers,
Inc. Automated Quotations System for the last preceding date on
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which there was a sale of such stock in such market, or (iv) if the shares
of Common Stock are not then listed on a national securities exchange or
traded in an over-the-counter market, such value as determined by the
Committee in good faith.
(o) "Incentive Award" shall mean an Option, Tandem SAR, Stand-Alone
SAR, Restricted Stock grant, Phantom Stock grant or Stock Bonus granted
pursuant to the terms of the Plan.
(p) "Incentive Stock Option" shall mean an Option that is an
"incentive stock option" within the meaning of Section 422 of the Code.
(q) "Issue Date" shall mean the date established by the Company on
which certificates representing shares of Restricted Stock shall be issued
by the Company pursuant to the terms of Section 10(e)of the Plan.
(r) "Non-Qualified Stock Option" shall mean an Option that is not an
Incentive Stock Option.
(s) "Option" shall mean an option to purchase shares of Common Stock
granted pursuant to Section 7 of the Plan.
(t) "Participant" shall mean an employee of the Company or a
subsidiary of the Company to whom an Incentive Award is granted pursuant to
the Plan, and, upon his death, his successors, heirs, executors and
administrators, as the case may be.
(u) "Phantom Stock" shall mean the right, granted pursuant to Section
11 of the Plan, to receive in cash the Fair Market Value of a share of
Common Stock.
(v) "Plan" shall mean this 1999 Omnibus Stock Incentive Plan, as
amended from time to time.
(w) "Reference Value" shall mean, with respect to Stand-Alone SARs,
the greater of the Fair Market Value or the value given by the Compensation
Committee.
(x) "Restricted Stock" shall mean a share of Common Stock which is
granted pursuant to the terms of Section 10 hereof and which is subject to
the restrictions set forth in Section 10 of the Plan.
(y) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Exchange
Act.
(z) "Section 162(m)" shall mean Section 162(m) of the Code and the
regulations promulgated thereunder.
(aa) "Securities Act" shall mean the Securities Act of 1933, as
amended from time to time.
(ab) "Stand-Alone SAR" shall mean a stock appreciation right granted
pursuant to Section 9 of the Plan which is not related to any Option.
(ac) "Stock Bonus" shall mean a bonus payable in shares of Common
Stock granted pursuant to Section 12 of the Plan.
(ad) "Subsidiary" shall mean a "subsidiary corporation" within the
meaning of Section 424(f) of the Code.
(ae) "Tandem SAR" shall mean a stock appreciation right granted
pursuant to Section 8 of the Plan which is related to an Option.
(af) "Vesting Date" shall mean the date established by the Committee
on which a share of Restricted Stock or Phantom Stock may vest.
3. STOCK SUBJECT TO THE PLAN.
(a) Shares Available for Awards. The maximum number of shares of Common
Stock reserved for issuance under the Plan shall be 3,705,238 shares (subject to
adjustment as provided herein), which shall include 2,705,238 shares authorized
but unissued under the Predecessor Plan. The total number of shares reserved for
issuance hereunder may be authorized but unissued Common Stock or authorized and
issued
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Common Stock held in the Company's treasury or acquired by the Company for the
purposes of the Plan. The Committee may direct that any stock certificate
evidencing shares issued pursuant to the Plan shall bear a legend setting forth
such restrictions on transferability as may apply to such shares pursuant to the
Plan. The grant of a Tandem SAR shall not reduce the number of shares of Common
Stock with respect to which Incentive Awards may be granted pursuant to the
Plan. Upon the exercise of any Tandem SAR, the related Option shall be canceled
to the extent of the number of shares of Common Stock as to which the Tandem SAR
is exercised and, notwithstanding the foregoing, such number of shares shall no
longer be available for Incentive Awards under the Plan.
(b) Individual Limitation. The total number of shares of Common Stock
subject to Incentive Awards (including Incentive Awards payable in cash but
denominated as shares of Common Stock, i.e., Stand-Alone SARs and Phantom
Stock), awarded to any employee during any tax year of the Company, shall not
exceed 200,000 shares. Determinations under the preceding sentence shall be made
in a manner that is consistent with Section 162(m) of the Code.
(c) Adjustment for Change in Capitalization. In the event that the
Committee shall determine that any dividend or other distribution (whether in
the form of cash, Common Stock, or other property), recapitalization, stock
split, reverse stock split, reorganization, merger, consolidation, spin-off,
combination, repurchase, or share exchange, or other similar corporate
transaction or event, affects the Common Stock such that an adjustment is
appropriate in order to prevent dilution or enlargement of the rights of
Participants under the Plan, then the Committee shall make such equitable
changes or adjustments as it deems necessary or appropriate to any or all of (i)
the number and kind of shares of stock which may thereafter be issued in
connection with Incentive Awards, (ii) the number and kind of shares of stock
issued or issuable in respect of outstanding Incentive Awards, and (iii) the
exercise price, grant price, or purchase price relating to any Incentive Award;
provided that, with respect to Incentive Stock Options, such adjustment shall be
made in accordance with Section 424 of the Code.
(d) Re-Use of Shares. The following shares of Common Stock shall again
become available for Incentive Awards: any shares subject to an Incentive Award
that remain unissued upon the cancellation, surrender, exchange or termination
of such award for any reason whatsoever; any shares of Restricted Stock
forfeited; and any shares in respect of which a stock appreciation right is
settled for cash.
4. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Committee. The Committee shall have
the authority in its sole discretion, subject to and not inconsistent with the
express provisions of the Plan, to administer the Plan and to exercise all the
powers and authorities either specifically granted to it under the Plan or
necessary or advisable in the administration of the Plan, including, without
limitation, the authority to grant Incentive Awards; to determine the persons to
whom and the time or times at which Incentive Awards shall be granted; to
determine the type and number of Incentive Awards to be granted, the number of
shares of Stock to which an Award may relate and the terms, conditions,
restrictions and performance criteria relating to any Incentive Award; to
determine whether, to what extent, and under what circumstances an Incentive
Award may be settled, canceled, forfeited, exchanged, or surrendered; to subject
shares of Stock to which an Award may relate to rights of repurchase or rights
of refusal in favor of the Company under the circumstances and upon the terms
set forth in an Award Agreement; to make adjustments in the performance goals in
recognition of unusual or non-recurring events affecting the Company or the
financial statements of the Company (to the extent in accordance with Section
162(m) of the Code, if applicable), or in response to changes in applicable
laws, regulations, or accounting principles; to construe and interpret the Plan
and any Incentive Award; to prescribe, amend and rescind rules and regulations
relating to the Plan; to determine the terms and provisions of Award Agreements;
and to make all other determinations deemed necessary or advisable for the
administration of the Plan.
The Committee may, in its absolute discretion, without amendment to the
Plan, (i) accelerate the date on which any Tandem SAR or Stand-Alone SAR or
Incentive Award relating to Phantom Stock granted under the Plan becomes
exercisable, waive or amend the operation of Plan provisions respecting
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exercise after termination of employment or otherwise adjust any of the terms of
such Option or Stand-Alone SAR, and (ii) accelerate the Exercise Date or Issue
Date, or waive any condition imposed hereunder, with respect to any share of
Restricted Stock or Phantom Stock or otherwise adjust any of the terms
applicable to such share.
No member of the Committee shall be liable for any action, omission or
determination relating to the Plan, and the Company shall indemnify and hold
harmless each member of the Committee and each other director or employee of the
Company to whom any duty or power relating to the administration or
interpretation of the Plan has been delegated against any cost or expense
(including counsel fees) or liability (including any sum paid in settlement of a
claim with the approval of the Committee) arising out of any action, omission or
determination relating to the Plan, if, in either case, such action, omission or
determination was taken or made by such member, director or employee in good
faith and in a manner such member, director or employee reasonably believed to
be in or not opposed to the best interests of the Company.
5. ELIGIBILITY.
The persons who shall be eligible to receive Incentive Awards pursuant to
the Plan shall be such employees of the Company or its Subsidiaries (including
officers of the Company or its Subsidiaries, whether or not they are directors
of the Company or its Subsidiaries) as the Committee shall select from time to
time. Directors and others who are not employees or officers of the Company,
including persons who may be expected to make a contribution to the Company's
future success, shall also be eligible to receive Incentive Awards under the
Plan.
6. AWARDS UNDER THE PLAN; AWARD AGREEMENT.
The Committee may grant Options, Tandem SARs, Stand-Alone SARs, shares of
Restricted Stock, shares of Phantom Stock and Stock Bonuses, in such amounts and
with such terms and conditions as the Committee shall determine, subject to the
provisions of the Plan.
Each Incentive Award granted under the Plan (except an unconditional Stock
Bonus) shall be evidenced by an Award Agreement which shall contain such
provisions as the Committee may in its sole discretion deem necessary or
desirable. By accepting an Incentive Award, a Participant thereby agrees that
the award shall be subject to all of the terms and provisions of the Plan and
the applicable Award Agreement.
7. OPTIONS.
(a) Identification of Options. Each Option shall be clearly identified in
the applicable Award Agreement as either an Incentive Stock Option or a
Non-Qualified Stock Option.
(b) Exercise Price. Each Award Agreement with respect to an Option shall
set forth the amount (the "option exercise price") payable by the grantee to the
Company upon exercise of the Option. The option exercise price per share shall
be determined by the Committee but shall in no event be less than the Fair
Market Value of a share of Common Stock on the date the Option is granted.
(c) Term and Exercise of Options.
(1) Unless the applicable Award Agreement provides otherwise, an
Option shall become cumulatively exercisable as to 25 percent of the
shares covered thereby on each of the first, second, third and fourth
anniversaries of the date of grant. The Committee shall determine the
expiration date of each Option; provided, however, that no Incentive
Stock Option shall be exercisable more than 10 years after the date of
grant. Unless the applicable Award Agreement provides otherwise, no
Option shall be exercisable prior to the first anniversary of the date
of grant.
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(2) An Option may be exercised for all or any portion of the shares
as to which it is exercisable, provided, that no partial exercise of an
Option shall be for an aggregate exercise price of less than $1,000. The
partial exercise of an Option shall not cause the expiration,
termination or cancellation of the remaining portion thereof.
(3) An Option shall be exercised by delivering notice to the
Company's principal office, to the attention of its Secretary, no less
than one business day in advance of the effective date of the proposed
exercise. Such notice shall specify the number of shares of Common Stock
with respect to which the Option is being exercised and the effective
date of the proposed exercise and shall be signed by the Participant or
other person then having the right to exercise the Option. Such notice
may be withdrawn at any time prior to the close of business on the
business day immediately preceding the effective date of the proposed
exercise. Payment for shares of Common Stock purchased upon the exercise
of an Option shall be made on the effective date of such exercise by one
or a combination of the following means: (i) in cash, by certified
check, bank cashier's check or wire transfer; (ii) by delivering a
properly executed exercise notice to the Company together with a copy of
irrevocable instructions to a broker to deliver promptly to the Company
the amount of sale or loan proceeds to pay the full amount of the
Purchase Price, (iii) by delivering shares of Common Stock owned by the
Participant with appropriate stock powers, (iv) by electing to have the
Company retain shares of Common Stock which would otherwise be issued on
the exercise of the Option, or (v) any combination of the foregoing
forms. In determining the number of shares of Common Stock necessary to
be delivered to or retained by the Company, such shares shall be valued
at their Fair Market Value as of the exercise date.
(4) Certificates for shares of Common Stock purchased upon the
exercise of an Option shall be issued in the name of the Participant or
other person entitled to receive such shares, and delivered to the
Participant or such other person as soon as practicable following the
effective date on which the Option is exercised.
(d) Limitations on Incentive Stock Options.
(1) To the extent that the aggregate Fair Market Value of shares of
Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by a Participant during any calendar year
under the Plan and any other stock option plan of the Company (or any
Subsidiary of the Company) shall exceed $100,000, or such higher value
as may be permitted under Section 422 of the Code, such Options shall be
treated as Non-Qualified Stock Options. Such Fair Market Value shall be
determined as of the date on which each such Incentive Stock Option is
granted.
(2) No Incentive Stock Option may be granted to an individual if,
at the time of the grant, such individual owns stock possessing more
than ten percent of the total combined voting power of all classes of
stock of the Company unless (i) the exercise price per share of such
Incentive Stock Option is at least 110 percent of the Fair Market Value
of a share of Common Stock at the time such Incentive Stock Option is
granted and (ii) such Incentive Stock Option is not exercisable after
the expiration of five years from the date such Incentive Stock Option
is granted.
(e) Effect of Termination of Employment.
(1) Unless the applicable Award Agreement provides otherwise, in
the event that the employment of a Participant with the Company or a
Subsidiary of the Company shall terminate for any reason other than
death, Disability or Cause, (i) Options granted to such Participant, to
the extent that they are exercisable at the time of such termination,
shall remain exercisable until the date that is ninety (90) days after
such termination, on which date they shall expire, and (ii) Options
granted to such Participant, to the extent that they were not
exercisable at the time of such termination, shall expire at the close
of business on the date of such termination. Notwithstanding the
foregoing, no Option shall be exercisable after the expiration of its
term.
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(2) Unless the applicable Award Agreement provides otherwise, in
the event that the employment of a Participant with the Company or a
Subsidiary of the Company shall terminate on account of the Disability
or death of the Participant (i) Options granted to such Participant, to
the extent that they were exercisable at the time of such termination,
shall remain exercisable until the first anniversary of such
termination, on which date they shall expire, and (ii) Options granted
to such Participant, to the extent that they were not exercisable at the
time of such termination, shall expire at the close of business on the
date of such termination. Notwithstanding the foregoing, no Option shall
be exercisable after the expiration of its term.
(3) If a Participant's employment with the Company or a Subsidiary
of the Company is terminated for Cause, all outstanding options granted
to such Participant shall expire at the commencement of business on the
date of such termination.
(f) Effect of Change in Control.
Upon the occurrence of a Change in Control, (i) Options granted to a
Participant, to the extent that they were exercisable at the time of a
Change in Control, shall remain exercisable until their expiration
notwithstanding the provisions of Section 7(e)(1) and (2) of the Plan,
and (ii) Options granted to such Participant, to the extent they were
not exercisable at the time of a Change in Control, shall expire at the
close of business on the date of such Change in Control. Notwithstanding
the foregoing, no Option shall be exercisable after the expiration of
its term.
8. TANDEM SARS.
The Committee may grant in connection with any Option granted hereunder one
or more Tandem SARs relating to a number of shares of Common Stock less than or
equal to the number of shares of Common Stock subject to the related Option. A
Tandem SAR may be granted at the same time as, or, in the case of a
Non-Qualified Stock Option, subsequent to the time that, its related Option is
granted.
(a) Benefit Upon Exercise. The exercise of a Tandem SAR with respect to any
number of shares of Common Stock shall entitle the Participant to a cash
payment, for each such share, equal to the excess of (i) the Fair Market Value
of a share of Common Stock on the exercise date over (ii) the option exercise
price per share of the related Option. Such payment shall be made as soon as
practicable after the effective date of such exercise.
(b) Term and Exercise of Tandem SAR.
(1) A Tandem SAR shall be exercisable only if and to the extent that
its related Option is exercisable.
(2) The exercise of a Tandem SAR with respect to a number of shares of
Common Stock shall cause the immediate and automatic cancellation of its
related Option with respect to an equal number of shares. The exercise of
an Option, or the cancellation, termination or expiration of an Option
(other than pursuant to this Section 8(b)(2)), with respect to a number of
shares of Common Stock shall cause the automatic and immediate cancellation
of any related Tandem SARs to the extent that the number of shares of
Common Stock remaining subject to such Option is less than the number of
shares then subject to such Tandem SAR.
Such Tandem SARs shall be canceled in the order in which they become
exercisable.
(3) A Tandem SAR may be exercised for all or any portion of the shares
as to which the related Option is exercisable; provided, that no partial
exercise of a Tandem SAR shall be for less than a number of shares having
an aggregate option exercise price of less than $1,000. The partial
exercise of a Tandem SAR shall not cause the expiration, termination or
cancellation of the remaining portion thereof.
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(4) No Tandem SAR shall be assignable or transferable otherwise than
together with its related Option, and any such transfer or assignment will
be subject to the provisions of Section 20 of the Plan.
(5) A Tandem SAR shall be exercisable by delivering notice to the
Company's principal office, to the attention of its Secretary, no less than
one business day in advance of the effective date of the proposed exercise.
Such notice shall specify the number of shares of Common Stock with respect
to which the Tandem SAR is being exercised and the effective date of the
proposed exercise and shall be signed by the Participant or other person
then having the right to exercise the Option to which the Tandem SAR is
related. Such notice may be withdrawn at any time prior to the close of
business on the business day immediately preceding the effective date of
the proposed exercise.
9. STAND-ALONE SARS.
(a) Benefit Upon Exercise.
The exercise of a Stand-Alone SAR with respect to any number of shares
of Common Stock shall entitle the Participant to a cash payment, for
each such share, equal to the excess of (i) the Fair Market Value of a
share of Common Stock on the exercise date over (ii) the Reference Value
of the Stand-Alone SAR. Such payments shall be made as soon as
practicable after the effective date of such exercise.
(b) Term and Exercise of Stand-Alone SARs.
(1) Unless the applicable Award Agreement provides otherwise, a
Stand-Alone SAR shall become cumulatively exercisable as to 25 percent
of the shares covered thereby on each of the first, second, third and
fourth anniversaries of the date of grant. The Committee shall determine
the expiration date of each Stand-Alone SAR. Unless the applicable Award
Agreement provides otherwise, no Stand-Alone SAR shall be exercisable
prior to the first anniversary of the date of grant.
(2) A Stand-Alone SAR may be exercised for all or any portion of
the shares as to which it is exercisable; provided, that no partial
exercise of a Stand-Alone SAR shall be for an aggregate Reference Value
of less than $1,000. The partial exercise of a Stand-Alone SAR shall not
cause the expiration, termination or cancellation of the remaining
portion thereof.
(3) A Stand-Alone SAR shall be exercised by delivering notice to
the Company's principal office, to the attention of its Secretary, no
less than one business day in advance of the effective date of the
proposed exercise. Such notice shall specify the number of shares of
Common Stock with respect to which the Stand-Alone SAR is being
exercised, and the effective date of the proposed exercise, and shall be
signed by the Participant. The Participant may withdraw such notice at
any time prior to the close of business on the business day immediately
preceding the effective date of the proposed exercise.
(c) Effect of Termination of Employment. The provisions set forth in
Section 7(e) with respect to the exercise of Options following termination of
employment shall apply as well to the exercise of Stand-Alone SARs.
(d) Effect of Change in Control. Upon the occurrence of a Change in
Control, (i) Stand-Alone SARs granted under the Plan, to the extent exercisable
at the time of a Change of Control, shall remain exercisable until their
expiration notwithstanding the provisions of Section 7(e) of the Plan which are
incorporated into this Section 9, and (ii) Stand-Alone SARs not exercisable at
the time of a Change in Control shall expire at the close of business on the
date of such Change in Control.
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10. RESTRICTED STOCK.
(a) Issue Date and Vesting Date. At the time of the grant of shares of
Restricted Stock, the Committee shall establish an Issue Date or Issue Dates and
a Vesting Date or Vesting Dates with respect to such shares. The Committee may
divide such shares into classes and assign a different Issue Date and/or Vesting
Date for each class. If the grantee is employed by the Company or a Subsidiary
of the Company on an Issue Date (which may be the date of grant), the specified
number of shares of Restricted Stock shall be issued in accordance with the
provisions of Section 10(e) of the Plan. Provided that all conditions to the
vesting of a share of Restricted Stock imposed pursuant to Section 10(b) of the
plan are satisfied, and except as provided in Section 10(g) of the Plan, upon
the occurrence of the Vesting Date with respect to a share of Restricted Stock,
such share shall vest and the restrictions of Section 10(c) of the Plan shall
lapse.
(b) Conditions to Vesting. At the time of the grant of shares of Restricted
Stock, the Committee may impose such restrictions or conditions to the vesting
of such shares as it, in its absolute discretion, deems appropriate.
(c) Restrictions on Transfer Prior to Vesting. Prior to the vesting of a
share of Restricted Stock, no transfer of a Participant's rights with respect to
such share, whether voluntary or involuntary, by operation of law or otherwise,
shall be permitted. Immediately upon any attempt to transfer such rights, such
share, and all of the rights related thereto, shall be forfeited by the
Participant.
(d) Dividends on Restricted Stock. The Committee in its discretion may
require that any dividends paid on shares of Restricted Stock shall be held in
escrow until all restrictions on such shares have lapsed.
(e) Issuance of Certificates.
(1) Reasonably promptly after the Issue Date with respect to shares of
Restricted Stock, the Company shall cause to be issued a stock certificate,
registered in the name of the Participant to whom such shares were granted,
evidencing such shares; provided, that the Company shall not cause such a
stock certificate to be issued unless it has received a stock power duly
endorsed in blank with respect to such shares. Each such stock certificate
shall bear the following legend: The transferability of this certificate
and the shares of stock represented hereby are subject to the restrictions,
terms and conditions (including forfeiture provisions and restrictions
against transfer) contained in the 1999 Omnibus Stock Incentive Plan of
Caldera Systems, Inc. and an Award Agreement entered into between the
registered owner of such shares and Caldera Systems, Inc. A copy of such
Plan and Award Agreement is on file in the office of the Secretary of
Caldera Systems, Inc., 240 West Center Street, Orem, Utah 84057. Such
legend shall not be removed until such shares vest pursuant to the terms of
the applicable Award Agreement.
(2) Each certificate issued pursuant to this Section 10(e), together
with the stock powers relating to the shares of Restricted Stock evidenced
by such certificate, shall be held by the Company unless the Committee
determines otherwise.
(f) Consequences of Vesting. Upon the vesting of a share of Restricted
Stock pursuant to the terms of the applicable Award Agreement, the restrictions
of Section 10(c) of the Plan shall lapse, except as otherwise provided in the
Award Agreement. Reasonably promptly after a share of Restricted Stock vests,
the Company shall cause to be delivered to the Participant to whom such shares
were granted, a certificate evidencing such share, free of the legend set forth
in Section 10(e) of the Plan.
(g) Effect of Termination of Employment.
(1) Subject to such other provision as the Committee may set forth in
the applicable Award Agreement, and to the Committee's amendment authority
pursuant to Section 4 of the Plan, upon the termination of a Participant's
employment by the Company or any Subsidiary of the Company for any reason
other than Cause, any and all shares to which restrictions on
transferability apply shall be immediately forfeited by the Participant and
transferred to the Company, provided that if the
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Committee, in its sole discretion and within thirty (30) days after such
termination of employment notifies the Participant in writing of its
decision not to terminate the Participant's rights in such shares, then the
Participant shall continue to be the owner of such shares subject to such
continuing restrictions as the Committee may prescribe in such notice. If
shares of Restricted Stock are forfeited in accordance with the provision
of this Section 10, the Company shall also have the right to require the
return of all dividends paid on such shares, whether by termination of any
escrow arrangement under which such dividends are held or otherwise.
(2) In the event of the termination of a Participant's employment for
Cause, all shares of Restricted Stock granted to such Participant which
have not vested as of the date of such termination shall immediately be
returned to the Company, together with any dividends paid on such shares.
(h) Effect of Change in Control. Upon the occurrence of a Change in
Control, all restrictions on outstanding vested shares shall immediately lapse
and all outstanding shares of Restricted Stock which have not theretofore vested
shall immediately expire and be cancelled.
(i) Special Provisions Regarding Restricted Stock Awards. Notwithstanding
anything to the contrary contained herein, Restricted Stock granted pursuant to
this Section 10 shall be based on the attainment by the Company (or a Subsidiary
or division of the Company if applicable) of performance goals pre-established
by the Committee, based on one or more of the following criteria: (i) the
attainment of a specified percentage return on total stockholder equity of the
Company; (ii) the attainment of a specified percentage increase in earnings per
share of Common Stock; (iii) the attainment of a specified percentage increase
in net income of the Company; and (iv) the attainment of a specified percentage
increase in profit before taxation of the Company (or a Subsidiary or division
of the Company if applicable). Attainment of any such performance criteria shall
be determined in accordance with generally accepted accounting principles as in
effect from time to time. Such shares of Restricted Stock shall be released from
restrictions only after the attainment of such performance measures have been
certified by the Committee.
11. PHANTOM STOCK.
(a) Vesting Date. At the time of the grant of shares of Phantom Stock, the
Committee shall establish a Vesting Date or Vesting Dates with respect to such
shares. The Committee may divide such shares into classes and assign a different
Vesting Date for each class. Provided that all conditions to the vesting of a
share of Phantom Stock imposed pursuant to Section 11(c) of the Plan are
satisfied, and except as provided in Section 11(d) of the Plan, upon the
occurrence of the Vesting Date with respect to a share of Phantom Stock, such
share shall vest.
(b) Benefit Upon Vesting. Upon the vesting of a share of Phantom Stock, the
Participant shall be entitled to receive in cash, within 30 days of the date on
which such share vests, an amount equal to the sum of (i) the Fair Market Value
of a share of Common Stock on the date on which such share of Phantom Stock
vests and (ii) the aggregate amount of cash dividends paid with respect to a
share of Common Stock during the period commencing on the date on which the
share of Phantom Stock was granted and terminating on the date on which such
share vests.
(c) Conditions to Vesting. At the time of the grant of shares of Phantom
Stock, the Committee may impose such restrictions or conditions to the vesting
of such shares as it, in its absolute discretion, deems appropriate.
(d) Effect of Termination of Employment.
(1) Subject to such other provisions as the Committee may set forth in
the applicable Award Agreement, and to the Committee's amendment authority
pursuant to Section 4 of the Plan, shares of Phantom Stock that have not
vested, together with any dividends credited on such shares, shall be
forfeited upon the Participant's termination of employment for any reason
other than Cause.
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(2) In the event of the termination of a Participant's employment for
Cause, all shares of Phantom Stock granted to such Participant which have
not vested as of the date of such termination shall immediately be
forfeited, together with any dividends credited on such shares.
(e) Effect of Change in Control. Upon the occurrence of a Change in
Control, all outstanding shares of Phantom Stock which have not theretofore
vested shall immediately expire and be cancelled.
(f) Special Provisions Regarding Phantom Stock Awards. Notwithstanding
anything to the contrary contained herein, Phantom Stock granted pursuant to
this Section 11 to Executive Officers shall be based on the attainment by the
Company (or a Subsidiary or division of the Company if applicable) of
performance goals pre-established by the Committee, based on one or more of the
following criteria: (i) the attainment of a specified percentage return on total
stockholder equity of the Company; (ii) the attainment of a specified percentage
increase in earnings per share of Common Stock from continuing operations; (iii)
the attainment of a specified percentage increase in net income of the Company;
and (iv) the attainment of a specified percentage increase in profit before
taxation of the Company (or a Subsidiary or division of the Company if
applicable). Attainment of any such performance criteria shall be determined in
accordance with generally accepted accounting principles as in effect from time
to time. No cash payment in respect of any Phantom Stock award will be paid to
an Executive Officer until the attainment of the respective performance measures
have been certified by the Committee.
12. STOCK BONUSES.
In the event that the Committee grants a Stock Bonus, a certificate for the
shares of Common Stock comprising such Stock Bonus shall be issued in the name
of the Participant to whom such grant was made and delivered to such Participant
as soon as practicable after the date on which such Stock Bonus is payable.
13. RIGHTS AS A STOCKHOLDER.
No person shall have any rights as a stockholder with respect to any shares
of Common Stock covered by or relating to any Incentive Award until the date of
issuance of a stock certificate with respect to such shares. Except as otherwise
expressly provided in Section 3(c) of the Plan, no adjustment to any Incentive
Award shall be made for dividends or other rights for which the record date
occurs prior to the date such stock certificate is issued.
14. NO SPECIAL EMPLOYMENT RIGHTS; NO RIGHT TO INCENTIVE AWARD.
Nothing contained in the Plan or any Award Agreement shall confer upon any
Participant any right with respect to the continuation of employment by the
Company or any Subsidiary of the Company or interfere in any way with the right
of the Company or any Subsidiary of the Company, subject to the terms of any
separate employment agreement to the contrary, at any time to terminate such
employment or to increase or decrease the compensation of the Participant. No
person shall have any claim or right to receive an Incentive Award hereunder.
The Committee's granting of an Incentive Award to a Participant at any time
shall neither require the Committee to grant any other Incentive Award to such
Participant or other person at any time or preclude the Committee from making
subsequent grants to such Participant or any other person.
15. SECURITIES MATTERS.
(a) The Company shall be under no obligation to effect the registration
pursuant to the Securities Act of any interests in the Plan or any shares of
Common Stock to be issued hereunder or to effect similar compliance under any
state laws. Notwithstanding anything herein to the contrary, the Company shall
not be obligated to cause to be issued or delivered any certificates evidencing
shares of Common Stock pursuant to the Plan unless and until the Company is
advised by its counsel that the issuance and delivery of such certificates is in
compliance with all applicable laws, regulations of governmental authority and
the
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requirements of any securities exchange on which shares of Common Stock are
traded. The Committee may require, as a condition of the issuance and delivery
of certificates evidencing shares of Common Stock pursuant to the terms hereof
and of the applicable Award Agreement, that the recipient of such shares make
such covenants, agreements and representations, and that such certificates bear
such legends, as the Committee, in its sole discretion, deems necessary or
desirable.
(b) The transfer of any shares of Common Stock hereunder shall be effective
only at such time as counsel to the Company shall have determined that the
issuance and delivery of such shares is in compliance with all applicable laws,
regulations of governmental authority and the requirements of any securities
exchange on which shares of Common Stock are traded. The Committee may, in its
sole discretion, defer the effectiveness of any transfer of shares of Common
Stock hereunder in order to allow the issuance of such shares to be made
pursuant to registration or an exemption from registration or other methods for
compliance available under federal or state securities laws. The Committee shall
inform the Participant in writing of its decision to defer the effectiveness of
a transfer. During the period of such deferral in connection with the exercise
of an Option, the Participant may, by written notice, withdraw such exercise and
obtain the refund of any amount paid with respect thereto.
16. WITHHOLDING TAXES.
Whenever cash is to be paid pursuant to an Incentive Award, the Company
shall have the right to deduct therefrom an amount sufficient to satisfy any
federal, state and local withholding tax requirements related thereto. Whenever
shares of Common Stock are to be delivered pursuant to an Incentive Award, the
Company shall have the right to require the Participant to remit to the Company
in cash an amount sufficient to satisfy any federal, state and local withholding
tax requirements related thereto. With the approval of the Committee, a
Participant may satisfy the foregoing requirement by electing to have the
Company withhold from delivery shares of Common Stock having a fair market value
equal to the amount of tax to be withheld. Such shares shall be valued at their
Fair Market Value on the date on which the amount of tax to be withheld is
determined (the "Tax Date"). Fractional share amounts shall be settled in cash.
Such a withholding election may be made with respect to all or any portion of
the shares to be delivered pursuant to an Incentive Award.
17. NOTIFICATION OF ELECTION UNDER SECTION 83(B) OF THE CODE.
If any Participant shall, in connection with the acquisition of shares of
Common Stock under the Plan, make the election permitted under Section 83(b) of
the Code (i.e., an election to include in gross income in the year of transfer
the amounts specified in Section 83(b)), such Participant shall notify the
Company of such election within 10 days of filing notice of the election with
the Internal Revenue Service, in addition to any filing and a notification
required pursuant to regulation issued under the authority of Code Section
83(b).
18. NOTIFICATION UPON DISQUALIFYING DISPOSITION UNDER SECTION 421(B) OF THE
CODE.
Each Award Agreement with respect to an Incentive Stock Option shall
require the Participant to notify the Company of any disposition of shares of
Common Stock issued pursuant to the exercise of such Option under the
circumstances described in Section 421(b) of the Code (relating to certain
disqualifying dispositions), within 10 days of such disposition.
19. AMENDMENT OR TERMINATION OF THE PLAN.
The Board of Directors may, at any time, suspend or terminate the Plan or
revise or amend it in any respect whatsoever; provided, however, that
stockholder approval shall be required if and to the extent the Board of
Directors determines that such approval is appropriate for purposes of
satisfying Section 162(m) or 422 of the Code or to the extent such approval is
required by the rules of any stock exchange on which the Common Stock is listed.
Nothing herein shall restrict the Committee's ability to exercise its
discretionary authority pursuant to Section 4 of the Plan, which discretion may
be exercised without
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amendment to the Plan. No action hereunder may, without the consent of a
Participant, reduce the Participant's rights under any outstanding Incentive
Award.
20. TRANSFERS UPON DEATH; NON-ASSIGNABILITY.
Upon the death of a Participant, outstanding Incentive Awards granted to
such Participant may be exercised only by the executor or administrator of the
Participant's estate or by a person who shall have acquired the right to such
exercise by will or by the laws of descent and distribution. No transfer of an
Incentive Award by will or the laws of descent and distribution shall be
effective to bind the Company unless the Committee shall have been furnished
with (a) written notice thereof and with a copy of the will and/or such evidence
as the Committee may deem necessary to establish the validity of the transfer
and (b) an agreement by the transferee to comply with all the terms and
conditions of the Incentive Award that are or would have been applicable to the
Participant and to be bound by the acknowledgments made by the Participant in
connection with the grant of the Incentive Award.
During a Participant's lifetime, the Committee may permit the transfer,
assignment or other encumbrance of an outstanding Option or outstanding shares
of Restricted Stock unless such Option is an Incentive Stock Option and the
Committee and the Participant intend that it shall retain such status.
Notwithstanding the foregoing, subject to any conditions as the Committee may
prescribe, a Participant may, upon providing written notice to the Secretary of
the Company, elect to transfer any or all Options granted to such Participant
pursuant to the Plan to members of his or her immediate family, including, but
not limited to, children, grandchildren and spouse or to trusts for the benefit
of such immediate family members or to partnerships in which such family members
are the only partners; provided, however, that no such transfer by any
Participant may be made in exchange for consideration.
21. EXPENSES AND RECEIPTS.
The expenses of the Plan shall be paid by the Company. Any proceeds
received by the Company in connection with any Incentive Award will be used for
general corporate purposes.
22. FAILURE TO COMPLY.
In addition to the remedies of the Company elsewhere provided for herein,
failure by a Participant (or beneficiary or transferee) to comply with any of
the terms and conditions of the Plan or the applicable Award Agreement, unless
such failure is remedied by such Participant (or beneficiary or transferee)
within ten days after notice of such failure by the Committee, shall be grounds
for the cancellation and forfeiture of such Incentive Award, in whole or in
part, as the Committee, in its absolute discretion, may determine.
23. EFFECTIVE DATE AND TERM OF PLAN.
The Plan became effective on the Effective Date, but the Plan (and any
grants of Incentive Awards made prior to stockholder approval of the Plan) shall
be subject to the requisite approval of the stockholders of the Company. In the
absence of such approval, such Incentive Awards shall be null and void. Unless
earlier terminated by the Board of Directors, the right to grant Incentive
Awards under the Plan will terminate on the tenth anniversary of the Effective
Date. Incentive Awards outstanding at Plan termination will remain in effect
according to their terms and the provisions of the Plan.
24. APPLICABLE LAW.
Except to the extent preempted by any applicable federal law, the Plan will
be construed and administered in accordance with the laws of the State of Utah,
without reference to the principles of conflicts of law.
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25. PARTICIPANT RIGHTS.
No Participant shall have any claim to be granted any Incentive Award under
the Plan, and there is no obligation for uniformity of treatment for
Participants. Except as provided specifically herein, a Participant or a
transferee of an Incentive Award shall have no rights as a stockholder with
respect to any shares covered by any award until the date of the issuance of a
Common Stock certificate to him for such shares.
26. UNFUNDED STATUS OF AWARDS.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
Participant pursuant to an Incentive Award, nothing contained in the Plan or any
Award Agreement shall give any such Participant any rights that are greater than
those of a general creditor of the Company.
27. NO FRACTIONAL SHARES.
No fractional shares of Common Stock shall be issued or delivered pursuant
to the Plan. The Committee shall determine whether cash, other Incentive Awards,
or other property shall be issued or paid in lieu of such fractional shares or
whether such fractional shares or any rights thereto shall be forfeited or
otherwise eliminated.
28. BENEFICIARY.
A Participant may file with the Committee a written designation of a
beneficiary on such form as may be prescribed by the Committee and may, from
time to time, amend or revoke such designation. If no designated beneficiary
survives the Participant, the executor or administrator of the Participant's
estate shall be deemed to be the Participant's beneficiary.
29. INTERPRETATION.
The Plan is designed and intended to comply with Rule 16b-3 promulgated
under the Exchange Act and, with Section 162(m) of the Code, and all provisions
hereof shall be construed in a manner to so comply.
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APPENDIX G
AMENDMENT NO. 1
TO
1999 OMNIBUS STOCK INCENTIVE PLAN
This Amendment No. 1 to the 1999 Omnibus Stock Incentive Plan (this
"Amendment") is executed by the undersigned, by and on behalf of Caldera
Systems, Inc., a Delaware corporation (the "Company").
BACKGROUND
A. The Company has adopted the Caldera Systems, Inc. 1999 Omnibus Stock
Incentive Plan (the "1999 Plan") pursuant to which the Company may grant Options
and other Incentive Awards to employees, directors and certain consultants of
the Company and its subsidiaries. Capitalized terms used in this Amendment but
not defined herein have the meaning set forth in the 1999 Plan.
B. The Company desires to amend the 1999 Plan in order to increase the
number of shares of Common Stock reserved for issuance under the 1999 Plan.
AMENDMENT
NOW, THEREFORE, the 1999 Plan is hereby amended as follows:
1. INCREASE IN NUMBER OF SHARES SUBJECT TO THE PLAN AND INDIVIDUAL
LIMITATION.
The first sentence of Section 3(a) of the Plan is hereby deleted in
its entirety, and the following is hereby inserted in its stead:
Subject to adjustment under Section 3(c) below, the maximum number
of shares of Common Stock that may be issued under the Plan shall be
4,105,238 shares.
2. RATIFICATION. Except as specifically modified hereby, the Plan is
hereby ratified and reaffirmed by the Company.
The undersigned, who is the duly elected Secretary of the Company, hereby
certifies that (i) the Board of Directors of the Company approved this Amendment
on March 10, 2000, and (ii) that the shareholders of the Company approved this
Amendment on March 22, 2000, at which time this Amendment became effective.
CALDERA SYSTEMS, INC.,
a Delaware corporation
By: /s/ RICHARD RIFE
----------------------------------
Secretary
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APPENDIX H
AMENDMENT NO. 2
TO
1999 OMNIBUS STOCK INCENTIVE PLAN
This Amendment No. 2 to the 1999 Omnibus Stock Incentive Plan (this
"Amendment") is executed by the undersigned, by and on behalf of Caldera
Systems, Inc., a Delaware corporation (the "Company").
BACKGROUND
The Company has adopted the Caldera Systems, Inc. 1999 Omnibus Stock
Incentive Plan (the "1999 Plan"). The Company desires to amend the 1999 Plan in
order to increase the number of shares of Common Stock reserved for issuance
under the 1999 Plan. Capitalized terms used in this Amendment but not defined
herein have the meaning set forth in the 1999 Plan.
AMENDMENT
Effective as of July 14 2000, the Board of Directors unanimously adopted
the Amendment in the form given below, subject to approval of the Amendment by
the Company's Stockholders.
NOW, THEREFORE, the 1999 Plan is hereby amended as follows:
1. Increase in Number of Shares Subject to the Plan and Individual
Limitation. The first sentence of Section 3(a) of the Plan is hereby
deleted in its entirety, and the following is inserted in its stead:
Subject to adjustment under Section 3(c) below, the maximum number
of shares of Common Stock that may be issued under the Plan shall be
6,405,238 shares, increased as of November 1 each year, beginning
November 1, 2000, by three percent (3%) of the total number of shares of
Common Stock that are issued and outstanding on the immediately
preceding October 31st. Notwithstanding the foregoing, subject to
adjustment under Section 3(c) below the number of shares of Common Stock
that may be issued upon the exercise of Incentive Stock Options under
the Plan shall in no event exceed 6,405,238 shares, increased as of
November 1 each year, beginning November 1, 2000 and continuing through
November 1, 2008, by 100,000 shares per year
2. Ratification. Except as specifically modified hereby, the Plan is
hereby ratified and reaffirmed by the Company.
3. Effectiveness. No shares of Common Stock shall be issued or other
Incentive Awards shall be permitted to be exercised in reliance upon this
Amendment unless and until the shareholders have approved this Amendment
and any waiting periods required by governing laws or regulations have
passed..
The undersigned, Richard Rife, Secretary, hereby certifies that the Board
of Directors of the Company adopted the foregoing Amendment as stated in
Background above.
Executed as of the 14th day of July 2000.
CALDERA SYSTEMS, INC.,
a Delaware corporation
By: /s/ RICHARD RIFE
----------------------------------
Secretary
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APPENDIX I
AMENDMENT NO. 3
TO
1999 OMNIBUS STOCK INCENTIVE PLAN
This Amendment No. 3 to the 1999 Omnibus Stock Incentive Plan (this
"Amendment") is executed by the undersigned, by and on behalf of Caldera
Systems, Inc., a Delaware corporation (the "Company").
BACKGROUND
A. The Company has adopted the Caldera Systems, Inc. 1999 Omnibus Stock
Incentive Plan (the "1999 Plan") pursuant to which the Company may grant Options
and other Incentive Awards to employees, directors and certain consultants of
the Company and its subsidiaries. Capitalized terms used in this Amendment but
not defined herein have the meaning set forth in the 1999 Plan.
B. The Company desires to amend the 1999 Plan in order to incorporate a
formula award program pursuant to which directors of the Company will
automatically be granted 100,000 Non-Qualified Stock Options (vesting 50% on the
first anniversary of the date of grant and 50% on the second anniversary of the
date of grant) every two years.
AMENDMENT
NOW, THEREFORE, the 1999 Plan is hereby amended as follows:
1. Director Formula Award Program. A new Section 30 is hereby added to
the 1999 Plan, the content of which is as follows:
SECTION 30. FORMULA AWARDS.
30.1 General. The provisions of this Section 30 are applicable
only to Options granted to directors of the Company ("Directors")
pursuant to 30.2 below.
30.2 Grants.
(a) Initial Bi-Annual Grant. Subject to the limitations set
forth in Section 30.8 and prior approval of this Amendment by the
shareholders of the Company, Options to purchase 100,000 shares of
Common Stock shall automatically be granted to each individual who is
elected to serve or continues to serve as a Director following the
date of the regularly scheduled annual meeting of shareholders of the
Company (an "Annual Meeting") during the 2002 calendar year. Such
Options shall be granted as of the date of such Annual Meeting, and
the option exercise price for such Options shall be the Fair Market
Value of a share of Common Stock on the date of grant. Such Options
shall be exercisable 50% on the first anniversary of the date of
grant and 50% on the second anniversary of the date of grant. No
Options shall be granted under this provision if an Annual Meeting is
not held during the 2002 calendar year.
(b) Subsequent Bi-Annual Grants. Subject to the limitations set
forth in Section 30.8 and prior approval of this Amendment by the
shareholders of the Company, as of the date of each Annual Meeting
held during any even-numbered calendar year beginning in 2004,
Options to purchase 100,000 shares of Common Stock shall
automatically be granted to each individual who is elected to serve
or continues to serve as a Director following such Annual Meeting.
The option exercise price for such Options shall be the Fair Market
Value of a share of Common Stock on the date of grant. Such Options
shall become exercisable 50% on the first anniversary of the date of
grant and 50% on the second anniversary of the
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date of grant. No Options shall be granted under this provision if an
Annual Meeting is not held during the respective even numbered year.
(c) New Directors. Subject to the limitations set forth in
Section 30.8 and prior approval of this Amendment by the shareholders
of the Company, persons who are first elected or appointed to serve
as a Director after the effective date of this Amendment shall
automatically be granted Options to purchase a number of shares of
Common Stock determined using the following formula:
<TABLE>
<S> <C>
Months X 100,000
Number of Options = ----------------
24
</TABLE>
Months -- the number of full calendar months between the date
the Director's service as a Director commences and March 1 of the
next even numbered year.
Such Options shall be granted as of the date of commencement of
the Director's service as a director, and the option exercise price
for such Options shall be the Fair Market Value of a share of Common
Stock on the date of grant. Any such Options shall become exercisable
50% on the first anniversary of the date of date of grant and 50% on
the second anniversary of the date of grant.
(d) Top-Up Grant for Existing Directors. This subsection (d)
applies to any directors whose Options are scheduled to vest
completely prior to March 1, 2002. Subject to the limitations set
forth in Section 30.8 and prior approval of this Section 30 by the
shareholders of the Company, each such director shall automatically
be granted Options to purchase a number of shares of Common Stock
using the formula stated in subsection (c) above. Such Options shall
be granted as of the first day of the month following the date on
which the director's Options are schedule to fully vest, and the
option exercise price for such Options shall be the Fair Market Value
of a share of Common Stock on the date of grant. Any such options
shall become exercisable 50% on the first anniversary of the date of
grant and 50% on the second anniversary of the date of grant.
30.3 Option Agreement. Each Option granted under this Section 30
shall be evidenced by an Award Agreement duly executed on behalf of the
Company and by the Director to whom such Option is granted and dated as
of the applicable date of grant. All Options granted under this Section
30 shall be Non-Qualified Stock Options unless, with respect to
Directors who are also employees of the Company, the Committee
determines, in its discretion before the date of grant, that some or all
such Options shall be Incentive Stock Options.
30.5 Method of Exercise And Payment. The method of exercise and
payment of the exercise price for Options granted under this Section
shall be as set forth in Section 7(c)(2)(3), and (4).
30.6 Term of Formula Awards. Each Formula Award shall expire ten
(10) years from its date of grant, but shall be subject to earlier
termination as provided in Section 7(f) and Section 7(e), provided that
references to termination of "employment" shall be deemed to refer to
termination of "service as a director."
30.7 Limitation as to Directorship. Neither this Section 30, nor
the granting of a Formula Award, nor any other action taken pursuant to
this Section 30, shall constitute or be evidence of any agreement or
understanding, express or implied, that a Director has a right to
continue as a Director for any period of time or at any particular rate
of compensation. No Director shall have any right to be granted any
Option under this Section 30 until such Option is deemed to have been
granted under this Section 30, and the Board of Directors may amend or
eliminate this Section 30 at any time for any reason.
30.8 Termination of Formula Awards. Notwithstanding any provision
to the contrary, no Option shall be granted pursuant to Section 30.2 on
a date when the number of shares of
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Common Stock authorized for issuance pursuant to the Plan is less than
the sum of (a) all shares of Common Stock issued upon the exercise of
all Options granted under the Plan to date, (b) all shares of Common
Stock subject to outstanding, unexpired Options, and (c) all Options
that would, but for the effect of this provision, be granted pursuant to
Section 30 on that date. In the event Options are not granted as a
result of the application of this Section 30.8, no Options shall
thereafter be granted pursuant to this Section 30 until the shareholders
of the Company approve an amendment to the Plan increasing the number of
shares of Common Stock available hereunder.
30.9 Other Plan Provisions. All provisions of the Plan not
inconsistent with this Section 30 shall apply to Options granted to
Directors under this Section 30. In the event of any conflict between a
provision of this Section 30 and a provision in any other Section of the
Plan, such provision of this Section 30 shall be deemed to control with
respect to Options granted under this Section 30.
2. Ratification. Except as specifically modified hereby, the Plan is
hereby ratified and reaffirmed by the Company.
3. Effectiveness. This Amendment shall be effective on the date it is
approved by the shareholders of the Company.
The undersigned, who is the duly elected Secretary of the Company, hereby
certifies that, following approval of this Amendment by the Board of Directors
of the Company, the shareholders approved this amendment at a duly convened
meeting of the shareholders on , 2000.
CALDERA SYSTEMS, INC.,
a Delaware Corporation
By:
----------------------------------
Richard C. Rife,
its Corporate Secretary
I-3
<PAGE> 396
APPENDIX J
AMENDMENT NO. 4
TO
1999 OMNIBUS STOCK INCENTIVE PLAN
This Amendment No. 4 to the 1999 Omnibus Stock Incentive Plan (this
"Amendment") is executed by the undersigned, by and on behalf of Caldera
Systems, Inc., a Delaware corporation (the "Company").
BACKGROUND
A. The Company has adopted the Caldera Systems, Inc. 1999 Omnibus Stock
Incentive Plan (the "1999 Plan") pursuant to which the Company may grant Options
and other Incentive Awards to employees, directors and certain consultants of
the Company and its subsidiaries. Capitalized terms used in this Amendment but
not defined herein have the meaning set forth in the 1999 Plan.
B. The Company desires to amend the 1999 Plan in order to make certain
changes and administrative clarifications to the 1999 Plan.
AMENDMENT
NOW, THEREFORE, the 1999 Plan is hereby amended as follows:
1. Allow Grant of Non-Qualified Options with Exercise Price Below
FMV. The second sentence of Section 7(b) of the 1999 Plan is amended to
read as follows:
The Option exercise price per share shall be set by the Committee
in its discretion on a case by case basis, but in the case of an
Incentive Stock Option shall not be less than the Fair Market Value of a
share of Common Stock on the date of grant.
2. Allow Exercise of Non-Qualified Options Up to 120 Days After
Termination of Service. Clause (i) of Section 7(e)(1) of the 1999 Plan is
amended to read as follows:
(i) Options granted to such Participant, to the extent they are
exercisable at the time of such termination, shall remain exercisable
until the date which is 90 days (or 120 days in the case of a
"Non-Qualified Stock Option")after the date of such termination, on
which date they shall expire, and ...
3. Allow Exercise of Options Up to 30 Days After Termination for
Cause. Section 7(e)(3) of the 1999 Plan is amended to read as follows:
(3) Unless an applicable Award Agreement issued after the date
hereof provides otherwise, if a Participant's employment with the
Company or a Subsidiary of the Company is terminated for Cause, Options
granted to the Participant, to the extent they are then exercisable,
shall remain exercisable for 30 days following the date of termination
of employment, on which date they shall expire. Notwithstanding the
foregoing, no Option shall be exercisable after expiration of its term.
4. Allow Cash Out, Conversion or Other Disposition of Vested Options
and SARS Upon Change in Control.
(a) Section 7(f) of the 1999 Plan is amended to add the following
sentences at the end thereof:
Any vested, exercisable Options outstanding at the time of a
Change in Control shall be cashed out, converted to options of the
acquiring entity, assumed by the acquiring entity or otherwise
disposed of in the manner provided in any shareholder-approved
agreement or plan governing or providing for such Change in Control
("Change in Control Agreement");
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<PAGE> 397
provided that any such cash-out, conversion, assumption or
disposition of the Options shall not deprive the Option holder of the
inherent value of his Options, measured solely by the excess of the
Fair Market Value of the underlying Option shares immediately prior
to the Change in Control over the Option exercise price, without the
holder's consent. In the absence of such governing provisions in a
Change in Control Agreement, the Committee in its sole discretion may
on a case by case basis require any vested, exercisable Options that
remain outstanding upon a Change in Control to be cashed out and
terminated in exchange for a lump sum cash payment, shares of the
acquiring entity or a combination thereof equal in value to the fair
market value of the Option, measured in the manner described above,
immediately prior to the Change in Control. Any non-vested Options
shall terminate upon a Change in Control unless: (i) otherwise
provided in the Change in Control Agreement or in a written agreement
, such as a severance agreement, between the Company and the
Participant; or (ii) the Committee in its sole discretion on a case
by case basis elects in writing to waive termination
(b) Section 9(d) of the 1999 Plan is amended to add the following
sentence at the end thereof:
Any vested, exercisable Non-Tandem SARs shall, upon a Change in
Control, be cashed out, converted, assumed or otherwise disposed of
in the same manner as applies to Options under Section 7(f).
5. Provide Flexibility to Grant Restricted Stock and Phantom Stock
Without Performance Guidelines.
(a) Section 10(i) of the 1999 Plan is amended to read as follows:
The Committee may designate on a case-by-case basis whether
Restricted Stock Awards are intended to be "performance based
compensation" within the meaning of Code Section 162(m). The grant of
Restricted Stock so designated shall be based on the attainment by
the Company (or a Subsidiary or division of the Company if
applicable) of performance goals pre-established by the Committee,
based on one or more of the following criteria: (i) the attainment of
a specified percentage return on total stockholder equity of the
Company; (ii) the attainment of a specified percentage increase in
earnings per share of Common Stock; (iii) the attainment of a
specified percentage increase in net income of the Company; and (iv)
the attainment of a specified percentage increase in profit before
taxation of the Company (or a Subsidiary or division of the Company
if applicable). Attainment of any such performance criteria shall be
determined in accordance with generally accepted accounting
principles as in effect from time to time. Such shares shall be
released from restrictions only after the attainment of such
performance measures have been certified by the Committee.
(b) Section 11(f) of the 1999 Plan is amended to read as follows:
The Committee may designate on a case by case basis whether
Phantom Stock Awards are intended to be "performance based
compensation" within the meaning of Code Section 162(m). The grant of
Phantom Stock so designated shall be based on the attainment by the
Company (or a Subsidiary or division of the Company if applicable) of
performance goals pre-established by the Committee, based on one or
more of the following criteria: (i) the attainment of a specified
percentage return on total stockholder equity of the Company; (ii)
the attainment of a specified percentage increase in earnings per
share of Common Stock; (iii) the attainment of a specified percentage
increase in net income of the Company; and (iv) the attainment of a
specified percentage increase in profit before taxation of the
Company (or a Subsidiary or division of the Company if applicable).
Attainment of any such performance criteria shall be determined in
accordance with generally accepted accounting principles as in effect
from time to time. Such shares shall be released from
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restrictions only after the attainment of such performance measures
have been certified by the Committee.
6. Technical Amendments.
(a) The definition of "Participant" in Section 2(t) is hereby deleted,
and the following is inserted in its stead:
"Participant" means any person who is both eligible to receive an
Incentive Award pursuant to the Plan (as set forth in Section 5) and to
whom an Incentive Award is granted pursuant to the Plan, and, upon his
or her death, his or her successors, heirs, executors and
administrators, as the case may be.
(b) Section 5 of the 1999 Plan is hereby deleted, and the following is
inserted in its stead:
5. Eligibility. The persons who shall be eligible to receive
Incentive Awards pursuant to the Plan shall be all employees and
directors of the Company and its Subsidiaries and such other persons
whom the Committee determines are expected to make a contribution to the
Company. The Committee may grant Incentive Awards to any, all or none of
such eligible persons at any time, from time to time, during the term of
the Plan.
(c) Section 7(c) of the 1999 Plan is amended as follows: The phrase
"Unless the applicable Award Agreement provides otherwise," which currently
exists at the beginning of subsection (1), is moved to appear at the
beginning of Section 7(c), prior to subsection (1), so that it qualifies
all four of the subsections of Section 7(c).
(d) A new Section 31 is hereby added to the 1999 Plan, the content of
which is as follows:
Any reference to "termination of employment," or words of similar
import, in the Plan shall be deemed, (i) when applied to non-employee
Directors, to mean "termination of service as a director," and (ii) when
applied to employee-Directors, to mean "termination of service as an
employee and a director." Reference to "termination of employment," or
words of similar import, in the Plan shall not be deemed to apply to
persons who were not employees or a director of the Company or a
Subsidiary of the Company.
7. Ratification. Except as specifically modified hereby, the Plan is hereby
ratified and reaffirmed by the Company.
The undersigned, who is the duly elected Secretary of the Company, hereby
certifies that the Board of Directors of the Company approved this Amendment on
July 14, 2000, at which time this Amendment became effective.
CALDERA SYSTEMS, INC.,
a Delaware Corporation
By: /s/ RICHARD C. RIFE
----------------------------------
Richard C. Rife,
its Corporate Secretary
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<PAGE> 399
APPENDIX K
CALDERA SYSTEMS, INC.
EMPLOYEE STOCK PURCHASE PLAN
(AS AMENDED AND RESTATED EFFECTIVE AS OF , 2000)
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the interests of
Caldera Systems, Inc., a Delaware corporation, by providing eligible employees
with the opportunity to acquire a proprietary interest in the Corporation
through participation in a payroll-deduction based employee stock purchase plan
designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such terms in
the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and construe
any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Section 423 of the Code. Decisions of the Plan Administrator
shall be final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares of Common Stock purchased
on the open market. The maximum number of shares of Common Stock which may be
issued in the aggregate under the Plan shall not exceed two million (2,000,000)
shares. Such share reserve includes (i) the 500,000 shares initially reserved
for issuance under the Plan plus (ii) the one million five hundred thousand
(1,500,000)-share increase authorized by the Board on October 2, 2000 and
subject to stockholder approval at the Special Meeting to be held on
, 2000.
B. The number of shares of Common Stock available for issuance under the
Plan shall automatically increase on the first trading day of each calendar year
during the term of the Plan, beginning with the 2001 calendar year, by an amount
equal to one percent (1%) of the shares of Common Stock outstanding on the last
trading day of the immediately preceding calendar year, but in no event shall
such annual increase exceed Seven Hundred Fifty Thousand (750,000) shares.
C. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and class of securities issuable under the Plan,
(ii) the maximum number and class of securities purchasable per Participant on
any one Purchase Date, (iii) the maximum number and class of securities
purchasable in total by all Participants on any one Purchase Date, (iv) the
maximum number and class of securities and the price per share in effect under
each outstanding purchase right in order to prevent the dilution or enlargement
of benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the Plan
through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial
<PAGE> 400
offering period commenced at the Effective Time (March 20, 2000) and will
terminate on the last business day in April 2002. Subsequent offering periods
shall commence as designated by the Plan Administrator.
C. Each offering period shall be comprised of a series of one or more
successive Purchase Intervals. Purchase Intervals shall run from the first
business day in May each year to the last business day in October of the same
year and from the first business day in November each year to the last business
day in April of the following year. However, the first Purchase Interval in
effect under the initial offering period commenced at the Effective Time and
will terminate on the last business day in October 2000.
D. Should the Fair Market Value per share of Common Stock on any Purchase
Date within an offering period be less than the Fair Market Value per share of
Common Stock on the start date of that offering period, then that offering
period shall automatically terminate immediately after the purchase of shares of
Common Stock on such Purchase Date, and a new offering period shall commence on
the next business day following such Purchase Date. The new offering period
shall have a duration of twenty-four (24) months, unless a shorter duration is
established by the Plan Administrator within five (5) business days following
the start date of that offering period.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of an
offering period under the Plan may enter that offering period on such start date
or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after the start
date of an offering period may enter that offering period on any subsequent
Semi-Annual Entry Date within that offering period on which he or she is an
Eligible Employee.
C. The date an individual enters an offering period shall be designated his
or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes of
acquiring shares of Common Stock during an offering period may be any multiple
of one percent (1%) of the Cash Earnings paid to the Participant during each
Purchase Interval within that offering period, up to a maximum of ten percent
(10%). The deduction rate so authorized shall continue in effect throughout the
offering period, except to the extent such rate is changed in accordance with
the following guidelines:
(i) The Participant may, at any time during the offering period,
reduce his or her rate of payroll deduction to become effective as soon as
possible after filing the appropriate form with the Plan Administrator. The
Participant may not, however, effect more than one (1) such reduction per
Purchase Interval.
(ii) The Participant may, prior to the commencement of any new
Purchase Interval within the offering period, increase the rate of his or
her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the ten percent (10%)
maximum) shall become effective on the start date of the first Purchase
Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day following the
Participant's Entry Date into the offering period and shall (unless sooner
terminated by the Participant) continue through the pay day ending with or
immediately prior to the last day of that offering period. The amounts so
collected shall be
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<PAGE> 401
credited to the Participant's book account under the Plan, but no interest shall
be paid on the balance from time to time outstanding in such account. The
amounts collected from the Participant shall not be required to be held in any
segregated account or trust fund and may be commingled with the general assets
of the Corporation and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination of the
Participant's purchase right in accordance with the provisions of the Plan.
D. The Participant's acquisition of Common Stock under the Plan on any
Purchase Date shall neither limit nor require the Participant's acquisition of
Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
VII. PURCHASE RIGHTS
A. Grant of Purchase Right. A Participant shall be granted a separate
purchase right for each offering period in which he or she participates. The
purchase right shall be granted on the Participant's Entry Date into the
offering period and shall provide the Participant with the right to purchase
shares of Common Stock, in a series of successive installments over the
remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.
Under no circumstances shall purchase rights be granted under the Plan to
any Eligible Employee if such individual would, immediately after the grant, own
(within the meaning of Code Section 424(d)) or hold outstanding options or other
rights to purchase, stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Corporation or any
Corporate Affiliate.
B. Exercise of the Purchase Right. Each purchase right shall be
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant (other than Participants whose payroll deductions
have previously been refunded pursuant to the Termination of Purchase Right
provisions below) on each such Purchase Date. The purchase shall be effected by
applying the Participant's payroll deductions for the Purchase Interval ending
on such Purchase Date to the purchase of whole shares of Common Stock at the
purchase price in effect for the Participant for that Purchase Date.
C. Purchase Price. The purchase price per share at which Common Stock will
be purchased on the Participant's behalf on each Purchase Date within the
offering period shall be equal to eighty-five percent (85%) of the lower of (i)
the Fair Market Value per share of Common Stock on the Participant's Entry Date
into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.
D. Number of Purchasable Shares. The number of shares of Common Stock
purchasable by a Participant on each Purchase Date during the offering period
shall be the number of whole shares obtained by dividing the amount collected
from the Participant through payroll deductions during the Purchase Interval
ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed Seven Hundred Fifty (750) shares, subject to periodic adjustments in the
event of certain changes in the Corporation's capitalization. In addition, the
maximum number of shares of Common Stock purchasable in total by all
Participants on any one Purchase Date under the Plan shall not exceed One
Hundred Twenty-Five Thousand (125,000) shares, subject to periodic adjustments
in the event of certain changes in the corporation's capitalization. However,
the Plan Administrator shall have the discretionary authority, exercisable prior
to the start of any offering period under the Plan, to increase or decrease the
limitations to be in effect for the number of shares purchasable per Participant
and in total by all Participants on each Purchase Date during that offering
period.
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<PAGE> 402
E. Excess Payroll Deductions. Any payroll deductions not applied to the
purchase of shares of Common Stock on any Purchase Date because they are not
sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable on the Purchase Date
shall be promptly refunded.
F. Termination of Purchase Right. The following provisions shall govern
the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next scheduled
Purchase Date in the offering period, terminate his or her outstanding
purchase right by filing the appropriate form with the Plan Administrator
(or its designate), and no further payroll deductions shall be collected
from the Participant with respect to the terminated purchase right. Any
payroll deductions collected during the Purchase Interval in which such
termination occurs shall, at the Participant's election, be immediately
refunded or held for the purchase of shares on the next Purchase Date. If
no such election is made at the time such purchase right is terminated,
then the payroll deductions collected with respect to the terminated right
shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be irrevocable, and
the Participant may not subsequently rejoin the offering period for which
the terminated purchase right was granted. In order to resume participation
in any subsequent offering period, such individual must re-enroll in the
Plan (by making a timely filing of the prescribed enrollment forms) on or
before his or her scheduled Entry Date into that offering period.
(iii) Should the Participant cease to remain an Eligible Employee for
any reason (including death, disability or change in status) while his or
her purchase right remains outstanding, then that purchase right shall
immediately terminate, and all of the Participant's payroll deductions for
the Purchase Interval in which the purchase right so terminates shall be
immediately refunded. However, should the Participant cease to remain in
active service by reason of an approved unpaid leave of absence, then the
Participant shall have the right, exercisable up until the last business
day of the Purchase Interval in which such leave commences, to (a) withdraw
all the payroll deductions collected to date on his or her behalf for that
Purchase Interval or (b) have such funds held for the purchase of shares on
his or her behalf on the next scheduled Purchase Date. In no event,
however, shall any further payroll deductions be collected on the
Participant's behalf during such leave. Upon the Participant's return to
active service (x) within ninety (90) days following the commencement of
such leave or (y) prior to the expiration of any longer period for which
such Participant's right to reemployment with the Corporation is guaranteed
by either statute or contract, his or her payroll deductions under the Plan
shall automatically resume at the rate in effect at the time the leave
began, unless the Participant withdraws from the Plan prior to his or her
return. An individual who returns to active employment following a leave of
absence which exceeds in duration the applicable (x) or (y) time period
will be treated as a new Employee for purposes of the Plan and must, in
order to resume participation in the Plan, re-enroll in the Plan (by making
a timely filing of the prescribed enrollment forms) on or before his or her
scheduled Entry Date into the offering period.
G. Change of Control. Each outstanding purchase right shall automatically
be exercised, immediately prior to the effective date of any Change of Control,
by applying the payroll deductions of each Participant for the Purchase Interval
in which such Change of Control occurs to the purchase of whole shares of Common
Stock at a purchase price per share equal to eighty-five percent (85%) of the
lower of (i) the Fair Market Value per share of Common Stock on the
Participant's Entry Date into the offering period in which such Change of
Control occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Change of Control. However, the
applicable limitation on the number of shares of Common Stock purchasable per
Participant shall continue to apply to any such purchase, but not the limitation
on the number of shares of Common Stock purchasable in total by all Participants
on any one Purchase Date.
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<PAGE> 403
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Change of Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change of Control.
H. Proration of Purchase Rights. Should the total number of shares of
Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. Assignability. The purchase right shall be exercisable only by the
Participant and shall not be assignable or transferable by the Participant.
J. Stockholder Rights. A Participant shall have no stockholder rights with
respect to the shares subject to his or her outstanding purchase right until the
shares are purchased on the Participant's behalf in accordance with the
provisions of the Plan and the Participant has become a holder of record of the
purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire Common
Stock pursuant to any purchase right outstanding under this Plan if and to the
extent such accrual, when aggregated with (i) rights to purchase Common Stock
accrued under any other purchase right granted under this Plan and (ii) similar
rights accrued under other employee stock purchase plans (within the meaning of
Code Section 423) of the Corporation or any Corporate Affiliate, would otherwise
permit such Participant to purchase more than Twenty-Five Thousand Dollars
($25,000) worth of stock of the Corporation or any Corporate Affiliate
(determined on the basis of the Fair Market Value per share on the date or dates
such rights are granted) for each calendar year such rights are at any time
outstanding.
B. For purposes of applying such accrual limitations to the purchase rights
granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding purchase
right shall accrue in a series of installments on each successive Purchase
Date during the offering period on which such right remains outstanding.
(ii) No right to acquire Common Stock under any outstanding purchase
right shall accrue to the extent the Participant has already accrued in the
same calendar year the right to acquire Common Stock under one (1) or more
other purchase rights at a rate equal to Twenty-Five Thousand Dollars
($25,000) worth of Common Stock (determined on the basis of the Fair Market
Value per share on the date or dates of grant) for each calendar year such
rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on February 15, 2000 and became
effective at the Effective Time, provided no purchase rights granted under the
Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8
K-5
<PAGE> 404
registration statement filed with the Securities and Exchange Commission), all
applicable listing requirements of any stock exchange (or the Nasdaq National
Market, if applicable) on which the Common Stock is listed for trading and all
other applicable requirements established by law or regulation. In the event
such stockholder approval is not obtained, or such compliance is not effected,
within twelve (12) months after the date on which the Plan is adopted by the
Board, the Plan shall terminate and have no further force or effect, and all
sums collected from Participants during the initial offering period hereunder
shall be refunded.
B. Unless sooner terminated by the Board, the Plan shall terminate upon the
earliest of (i) the last business day in April 2010, (ii) the date on which all
shares available for issuance under the Plan shall have been sold pursuant to
purchase rights exercised under the Plan or (iii) the date on which all purchase
rights are exercised in connection with a Corporate Transaction. No further
purchase rights shall be granted or exercised, and no further payroll deductions
shall be collected, under the Plan following such termination.
X. AMENDMENT/TERMINATION OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any time to
become effective immediately following the close of any Purchase Interval.
However, the Plan may be amended or terminated immediately upon Board action, if
and to the extent necessary to assure that the Corporation will not recognize,
for financial reporting purposes, any compensation expense in connection with
the shares of Common Stock offered for purchase under the Plan, should the
financial accounting rules applicable to the Plan at the Effective Time be
subsequently revised so as to require the Corporation to recognize compensation
expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments or
revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan,
except for permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify eligibility requirements for participation in the
Plan.
XI. GENERAL PROVISIONS
A. Nothing in the Plan shall confer upon the Participant any right to
continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
B. All costs and expenses incurred in the administration of the Plan shall
be paid by the Corporation; however, each Plan Participant shall bear all costs
and expenses incurred by such individual in the sale or other disposition of any
shares purchased under the Plan.
C. The provisions of the Plan shall be governed by the laws of the State of
Colorado without regard to that State's conflict-of-laws rules.
K-6
<PAGE> 405
SCHEDULE A
CORPORATIONS PARTICIPATING IN
EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME
CALDERA SYSTEMS, INC.
CALDERA INTERNATIONAL, INC.
K-7
<PAGE> 406
APPENDIX
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
B. Cash Earnings shall mean the (i) base salary payable to a Participant by
one or more Participating Corporations during such individual's period of
participation in one or more offering periods under the Plan plus (ii) all
overtime payments, bonuses, commissions, current profit-sharing distributions
and other incentive-type payments. Such Cash Earnings shall be calculated before
deduction of (A) any income or employment tax withholdings or (B) any pre-tax
contributions made by the Participant to any Code Section 401(k) salary deferral
plan or any Code Section 125 cafeteria benefit program now or hereafter
established by the Corporation or any Corporate Affiliate. However, Cash
Earnings shall not include any contributions (other than Code Section 401(k) or
Code Section 125 contributions) made by the Corporation or any Corporate
Affiliate on the Participant's behalf to any employee benefit or welfare plan
now or hereafter established (other than Code Section 401(k) or Code Section 125
contributions deducted from such Cash Earnings).
C. Change of Control shall mean a change of ownership of the Corporation
pursuant to any of the following transactions:
(i) a merger or consolidation in which securities possessing more than
fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or substantially
all of the assets of the Corporation in complete liquidation or dissolution
of the Corporation, or
(iii) the acquisition, directly or indirectly, by a person or related
group of persons (other than the Corporation or a person that directly or
indirectly controls, is controlled by or is under common control with the
Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of
the 1934 Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation's outstanding securities
pursuant to a tender or exchange offer made directly to the Corporation's
stockholders.
D. Code shall mean the Internal Revenue Code of 1986, as amended.
E. Common Stock shall mean the Corporation's common stock.
F. Corporate Affiliate shall mean any parent or subsidiary corporation of
the Corporation (as determined in accordance with Code Section 424), whether now
existing or subsequently established.
G. Corporation shall mean Caldera Systems, Inc., a Delaware corporation,
and any corporate successor to all or substantially all of the assets or voting
stock of Caldera Systems, Inc. which shall by appropriate action adopt the Plan.
H. Effective Time shall mean March 20, 2000, the date on which the
Underwriting Agreement was executed. Any Corporate Affiliate which becomes a
Participating Corporation after such Effective Time shall designate a subsequent
Effective Time with respect to its employee-Participants.
I. Eligible Employee shall mean any person who is employed by a
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).
J. Entry Date shall mean the date an Eligible Employee first commences
participation in the offering period in effect under the Plan. The earliest
Entry Date under the Plan shall be the Effective Time.
K-8
<PAGE> 407
K. Fair Market Value per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq National
Market, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question, as such price is reported by
the National Association of Securities Dealers on the Nasdaq National
Market and published in The Wall Street Journal. If there is no closing
selling price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding date
for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock Exchange,
then the Fair Market Value shall be the closing selling price per share of
Common Stock on the date in question on the Stock Exchange determined by
the Plan Administrator to be the primary market for the Common Stock, as
such price is officially quoted in the composite tape of transactions on
such exchange and published in The Wall Street Journal. If there is no
closing selling price for the Common Stock on the date in question, then
the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) For purposes of the initial offering period which begins at the
Effective Time, the Fair Market Value shall be deemed to be equal to the
price per share at which the Common Stock is sold in the initial public
offering pursuant to the Underwriting Agreement.
L. 1933 Act shall mean the Securities Act of 1933, as amended.
M. Participant shall mean any Eligible Employee of a Participating
Corporation who is actively participating in the Plan.
N. Participating Corporation shall mean the Corporation and such Corporate
Affiliate or Affiliates as may be authorized from time to time by the Board to
extend the benefits of the Plan to their Eligible Employees. The Participating
Corporations in the Plan are listed in attached Schedule A.
O. Plan shall mean the Corporation's Employee Stock Purchase Plan, as set
forth in this document.
P. Plan Administrator shall mean the committee of two (2) or more Board
members appointed by the Board to administer the Plan.
Q. Purchase Date shall mean the last business day of each Purchase
Interval. The initial Purchase Date shall be October 31, 2000.
R. Purchase Interval shall mean each successive six (6)-month period within
the offering period at the end of which there shall be purchased shares of
Common Stock on behalf of each Participant.
S. Semi-Annual Entry Date shall mean the first business day in May and
November each year on which an Eligible Employee may first enter an offering
period.
T. Stock Exchange shall mean either the American Stock Exchange or the New
York Stock Exchange.
U. Underwriting Agreement shall mean the agreement between the Corporation
and the underwriter or underwriters managing the Corporation's initial public
offering of its Common Stock.
K-9
<PAGE> 408
APPENDIX L
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF CALDERA SYSTEMS, INC.
(PURSUANT TO SECTIONS 228, 242 AND 245 OF THE GENERAL CORPORATION LAW OF THE
STATE OF DELAWARE)
Caldera Systems, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"General Corporation Law"),
DOES HEREBY CERTIFY:
FIRST: That the Corporation filed its original Certificate of Incorporation
with the Secretary of State of Delaware on March 6, 2000, under the name Caldera
Systems, Inc.
SECOND: That the Board of Directors duly adopted resolutions proposing to
amend and restate the Certificate of Incorporation of the Corporation, declaring
said amendment and restatement to be advisable and in the best interests of the
Corporation and its stockholders, and authorizing the appropriate officers of
the Corporation to solicit the consent of the stockholders of the issued and
outstanding Common Stock, $0.001 par value, and Preferred Stock, $0.001 par
value, voting as a single class and as separate classes, all in accordance with
the applicable provisions of Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware;
THIRD: That the resolution setting forth the proposed amendment and
restatement is as follows:
"RESOLVED, that the Amended and Restated Certificate of Incorporation of
the Corporation be amended and restated in its entirety as follows:
ARTICLE I
NAME
The name of the Corporation is Caldera Systems, Inc.
ARTICLE II
REGISTERED OFFICE
The address of the registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington,
County of New Castle, and the name of the registered agent at such address is
The Corporation Trust Company.
ARTICLE III
POWERS/TERM
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law. The
Corporation is to have perpetual existence.
ARTICLE IV
CAPITAL STOCK
A. Classes of Stock. The Corporation is authorized to issue two classes of
stock to be designated, respectively, "Common Stock" and "Preferred Stock." The
total number of shares which the Corporation is authorized to issue is two
hundred million (200,000,000) shares. one hundred seventy-five million
<PAGE> 409
(175,000,000) shares, par value $0.001 per share, shall be Common Stock and
twenty-five million (25,000,000) shares, par value $0.001 per share, shall be
Preferred Stock. The consideration for the issuance of the shares shall be paid
to or received by the Corporation in full before their issuance and shall not be
less than the par value per share. The number of authorized shares of Common
Stock may be increased or decreased (but not below the number of shares there of
then outstanding) by the affirmative vote of the holders of a majority of the
stock of the Corporation entitled to vote, irrespective of the provisions of
Section 242(b)(2) of the General Corporation Law of Delaware.
B. Common Stock.
(1) General. All shares of Common Stock will be identical and will
entitle the holders thereof to the same rights, powers and privileges. The
rights, powers and privileges of the holders of the Common Stock are
subject to and qualified by the rights of holders of any then outstanding
Preferred Stock.
(2) Dividends. Dividends may be declared and paid on the Common Stock
from funds lawfully available therefor as and when determined by the Board
of Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
(3) Dissolution, Liquidation or Winding Up. In the event of any
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, each issued and outstanding share of
Common Stock shall entitle the holder thereof to receive an equal portion
of the net assets of the Corporation available for distribution to the
holders of Common Stock, subject to any preferential rights of any then
outstanding Preferred Stock.
(4) Voting Rights. Except as otherwise required by law or this Amended
and Restated Certificate of Incorporation, each holder of Common Stock
shall have one vote in respect of each share of stock held of record by
such holder on the books of the Corporation for the election of directors
and on all matters submitted to a vote of stockholders of the Corporation.
Except as otherwise required by law or provided herein, holders of
Preferred Stock shall vote together with holders of Common Stock as a
single class, subject to any special or preferential voting rights of any
then outstanding Preferred Stock. There shall be no cumulative voting.
(5) Redemption. The Common Stock is not redeemable.
C. Preferred Stock. The Board of Directors is authorized, subject to
limitations prescribed by law, by the rules of a national securities exchange,
if applicable, and by the provisions of this ARTICLE IV, to provide for the
issuance of the shares of Preferred Stock in series, and by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designation, powers, preferences, and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
The authority of the Board with respect to each series shall include, but
not be limited to, determination of the following:
(1) The number of shares constituting that series and the distinctive
designation of that series;
(2) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that
series;
(3) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(4) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
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(5) Whether or not the shares of that series shall be redeemable, and,
if so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(6) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of
such sinking fund;
(7) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation,
and the relative rights or priority, if any, of payment of shares of that
series; and
(8) Any other relative rights, preferences and limitations of that
series.
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividends shall be paid or
declared and set apart for payment on the Common Stock with respect to the same
dividend period.
If upon any voluntary or involuntary liquidation, dissolution or winding up
of the Corporation, the assets available for distribution to holders of shares
of Preferred Stock of all series shall be insufficient to pay such holders the
full preferential amount to which they are entitled, then such assets shall be
distributed ratably among the shares of all series of Preferred Stock in
accordance with the respective preferential amounts (including unpaid cumulative
dividends, if any) payable with respect thereto.
D. Preemptive Rights. No holder of any of the shares of any class or series
of stock or of options, warrants or other rights to purchase shares of any class
or series of stock or of other securities of the Corporation shall have any
preemptive right to purchase or subscribe for any unissued stock of any class or
series, or any unissued bonds, certificates of indebtedness, debentures or other
securities convertible into or exchangeable for stock of any class or series or
carrying any right to purchase stock of any class or series; but any such
unissued stock, bonds, certificates or indebtedness, debentures or other
securities convertible into or exchangeable for stock or carrying any right to
purchase stock may be issued pursuant to resolution of the Board of Directors of
the Corporation to such persons, firms, corporations or associations, whether or
not holders thereof, and upon such terms as may be deemed advisable by the Board
of Directors in the exercise of its sole discretion.
ARTICLE V
DIRECTORS
A. Number. The number of directors of the Corporation shall be such number,
not less than five (5) nor more than fifteen (15) (exclusive of directors, if
any, to be elected by holders of preferred stock of the Corporation, voting
separately as a class), as shall be set forth from time to time in the bylaws.
Vacancies in the Board of Directors of the Corporation, however caused, and
newly created directorships shall be filled by a vote of a majority of the
directors then in office, whether or not a quorum, and any director so chosen
shall hold office for a term expiring at the annual meeting of stockholders at
which the term of the class to which the director has been chosen expires and
when the director's successor is elected and qualified.
B. Removal of Directors. Notwithstanding any other provisions of this
Certificate or the bylaws of the Corporation, any director or the entire Board
of Directors of the Corporation may be removed, at any time, but only for cause
and only by the affirmative vote of the holders of not less than a majority of
the outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the stockholders called for that purpose.
Notwithstanding the foregoing, whenever the holders of any one or more series of
preferred stock of the Corporation shall have the right, voting separately as a
class, to elect one or more directors of the
L-3
<PAGE> 411
Corporation, the preceding provisions of this ARTICLE V shall not apply with
respect to the director or directors elected by such holders of preferred stock.
ARTICLE VI
STOCKHOLDER MEETINGS
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be
kept(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation. The stockholders of the
Corporation may not take any action by written consent in lieu of a meeting.
ARTICLE VII
LIMITATION OF DIRECTORS' LIABILITY
Except to the extent that the General Corporation Law of Delaware prohibits
the elimination or limitation of liability of directors for breaches of
fiduciary duty, no director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, notwithstanding any provision of law imposing such
liability. If the General Corporation Law is amended after approval by the
stockholders of this ARTICLE VII to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the General Corporation Law of the State of Delaware, as so
amended. No amendment to or repeal of this provision shall apply to or have any
effect on the liability or alleged liability of any director of the Corporation
for or with respect to any acts or omissions of such director occurring prior to
such amendment.
ARTICLE VIII
INDEMNIFICATION
The Corporation may, to the fullest extent permitted by Section 145 of the
General Corporation Law of Delaware, as amended from time to time, indemnify
each person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was, or has agreed to become, a director or officer of the Corporation, or is or
was serving, or has agreed to serve, at the request of the Corporation, as a
director, officer or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust or other enterprise (including
any employee benefit plan) (all such persons being referred to hereafter as an
"Indemnitee"), or by reason of any action alleged to have been taken or omitted
in such capacity, against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him or
on his behalf in connection with such action, suit or proceeding and any appeal
therefrom.
Indemnification may include payment by the Corporation of expenses in
defending an action or proceeding in advance of the final disposition of such
action or proceeding upon receipt of an undertaking by the Indemnitee to repay
such payment if it is ultimately determined that such person is not entitled to
indemnification under this ARTICLE VIII, which undertaking may be accepted
without reference to the financial ability of such person to make such
repayment.
The Corporation shall not indemnify any such person seeking indemnification
in connection with a proceeding (or part thereof) initiated by such person
unless the initiation thereof was approved by the Board of Directors of the
Corporation.
The indemnification rights provided in this ARTICLE VIII (i) shall not be
deemed exclusive of any other rights to which Indemnitees may be entitled under
any law, agreement or vote of stockholders or
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<PAGE> 412
disinterested directors or otherwise, and (ii) shall inure to the benefit of the
heirs, executors and administrators of such persons. The Corporation may, to the
extent authorized from time to time by its Board of Directors, grant
indemnification rights to other employees or agents of the Corporation or other
persons serving the Corporation and such rights may be equivalent to, or greater
or less than, those set forth in this ARTICLE VIII.
ARTICLE IX
AMENDMENT OF BYLAWS
In furtherance of and not in limitation of powers conferred by statute, the
Board of Directors of the Corporation is expressly authorized to adopt, repeal,
alter, amend and rescind the bylaws of the Corporation by vote of a majority of
the Board of Directors. In addition, the bylaws may be amended by the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of voting stock of the Corporation entitled to vote at an election of directors.
ARTICLE X
AMENDMENT OF CERTIFICATE
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute and this Amended and
Restated Certificate of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation. Notwithstanding the
foregoing, the provisions set forth in ARTICLES V, VI, VII, VIII, IX and this
ARTICLE X may not be repealed, altered, amended or rescinded in any respect
unless the same is approved by the affirmative vote of the holders of not less
than two-thirds of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered for this
purpose as a single class) cast at a meeting of the stockholders called for that
purpose (provided that notice of such proposed repeal, alteration, amendment or
rescission is included in the notice of such meeting)."
FOURTH: That said amendments were duly adopted in accordance with the
provisions of Section 242 and 245 of the General Corporation Law.
IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation
has been signed by the President and the Secretary of the Corporation as of this
day of 2000.
------------------------------------
Ransom H. Love
Chief Executive Officer
------------------------------------
Alan J. Hansen
Secretary
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<PAGE> 413
APPENDIX M
NOTICE OF ELECTION
TO ASSUME OR REPLACE OPTIONS
Please complete the information requested below for each outstanding SCO
option grant to be assumed or exchanged for a New Caldera option. The terms set
forth in this letter are defined in the joint prospectus/proxy statement.
MY NAME(S) AND ADDRESS(ES) (PLEASE PROVIDE) MY CONTACT INFORMATION
Office Telephone:
Home Telephone:
Email Address:
Tax ID Number:
<PAGE> 414
I hereby elect to have my SCO stock options assumed or replaced as
indicated below, and understand that surrendered SCO stock options will be
cancelled, in exchange for new options to purchase shares of New Caldera common
stock pursuant to the terms set forth in the joint prospectus/proxy statement in
the amounts set forth below:
I elect to exchange only the following SCO options:
<TABLE>
<CAPTION>
OPTION # OPTION # OPTION #
<S> <C> <C> <C>
Option Grant Date:
------- ------- -------
Number of Unexercised Shares:
------- ------- -------
Exercise Price:
------- ------- -------
ISO or NSO:
------- ------- -------
</TABLE>
I elect to have only the following options assumed:
<TABLE>
<CAPTION>
OPTION # OPTION # OPTION #
<S> <C> <C> <C>
Option Grant Date:
------- ------- -------
Number of Unexercised Shares:
------- ------- -------
Exercise Price:
------- ------- -------
ISO or NSO:
------- ------- -------
</TABLE>
I ACKNOWLEDGE RECEIPT OF CALDERA'S JOINT PROSPECTUS/PROXY STATEMENT AND THE
ENCLOSURES REFERENCED THEREIN AND CONTAINED THEREWITH (THE "EXCHANGE OFFER
MATERIALS"). BY SIGNING THIS NOTICE, I AGREE TO BE BOUND BY ALL OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER AS DESCRIBED IN CALDERA'S LETTER AND THE
ASSUMPTION AND REPLACEMENT OFFER MATERIALS.
(Print Your Name)
Signature
Date Signed
THIS NOTICE OF ELECTION MUST BE POSTMARKED NO LATER THAN , 2000.
<PAGE> 415
APPENDIX N
CHAPTER 13 OF THE CALIFORNIA CORPORATIONS CODE
CHAPTER 13.
DISSENTERS' RIGHTS
SECTION 1300. RIGHTS TO REQUIRE PURCHASE -- "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation is a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the National Market Systems of the NASDAQ
Stock Market, and the notice of meeting of shareholders to act upon the
reorganization summarizes this section and Sections 1301, 1302, 1303 and
1304; provided, however, that this provision does not apply to any shares
with respect to which there exists any restriction on transfer imposed by
the corporation or by any law or regulation; and provided, further, that
this provision does not apply to any class of shares described in
subparagraph (A) or (B) if demands for payment are filed with respect to 5
percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor or the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
SECTION 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of Section
1300, 1302, 1303, 1304 and this section, a statement
<PAGE> 416
of the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision (b)
of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization of short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303. AGREED PRICE -- TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306; payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
SECTION 1304. DISSENTERS ACTIONS TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market values of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to
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subdivision (i) of Section 1110 was mailed to the shareholder, but not
thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiff, or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. APPRAISERS REPORT -- PAYMENT -- COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SECTION 1306. DISSENTING SHAREHOLDERS STATUS AS CREDITORS.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
N-3
<PAGE> 418
SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
SECTION 1309. TERMINATING OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceeding under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SECTION 1311. EXEMPT SHARES.
This chapter, EXCEPT SECTION 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
SECTION 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger
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<PAGE> 419
set aside or rescinded, the shareholder shall not thereafter have any right to
demand payment of cash for the shareholder's shares pursuant to this chapter.
The court in any action attacking the validity of the reorganization or
short-form merger or to have the reorganization or short-form merger set aside
or rescinded shall not restrain or enjoin the consummation of the transaction
except upon 10 days, prior notice to the corporation and upon a determination by
the court that clearly no other remedy will adequately protect the complaining
shareholder or the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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[CALDERA LOGO]
<PAGE> 421
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Registrant's certificate of incorporation in effect as of the date
hereof (the "Certificate") provides that, except to the extent prohibited by the
Delaware General Corporation Law, as amended (the "DGCL"), the registrant's
directors shall not be personally liable to the registrant or its stockholders
for monetary damages for any breach of fiduciary duty as directors of the
registrant. Under the DGCL, the directors have a fiduciary duty to the
registrant which is not eliminated by this provision of the Certificate and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to the registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by DGCL. This provision
also does not affect the directors' responsibilities under any other laws, such
as the Federal securities laws or state or Federal environmental laws.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL, or (iv)
for any transaction form which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. The Certificate eliminates the personal liability
of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL
and provides that the registrant shall fully indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was a director or
officer of the registrant, or is or was serving at the request of the registrant
as a director or officer of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding.
Article VII Section 6 of the registrant's Amended and Restated Bylaws
provides that the registrant shall indemnify its directors and officers to the
fullest extent not prohibited by the Delaware General Corporation Law. The
rights to indemnify thereunder continue as to a person who has ceased to be a
director, officer, employee or agent and inure to the benefit of the heirs,
executors and administrators of the person. In addition, expenses incurred by a
director or officer in defending any civil or criminal action, suite or
proceeding by reason of the fact that he or she is or was a director or officer
of the registrant (or was serving at the registrant's request as a director or
officer of another corporation) shall be paid by the registrant in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he or she is not entitled to be
indemnified by the registrant as authorized by the relevant sections of the
Delaware General Corporation Law.
Caldera has entered into indemnification agreements with each of its
outside directors. Generally, the indemnification agreements attempt to provide
the maximum protection permitted by Delaware law as it may be amended from time
to time. Moreover, the indemnification agreements provide for certain additional
indemnification. Under such additional indemnification provisions, however, an
individual will not receive indemnification for judgments, settlements or
expenses if he or she is found liable to Caldera
II-1
<PAGE> 422
(except to the extent the court determines he or she is fairly and reasonable
entitled to indemnity for expenses), for settlements not approved by Caldera.
The indemnification agreements provide for Caldera to advance to the individual
any and all reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding. Upon the closing
of the combination, the registrant will assume the indemnification agreements of
Caldera and will enter into similar indemnification agreements with
newly-appointed outside directors.
Caldera has an insurance policy covering its directors and officers with
respect to certain liabilities, including liabilities arising under the
Securities Act or otherwise. Upon the closing of the combination, the registrant
will assume this insurance policy.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
The following exhibits are filed herewith or incorporated by reference
herein:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization by and among Caldera
Systems, Inc., Caldera International, Inc. ("registrant")
and The Santa Cruz Operation, Inc., including Amendment No.
1 to the Agreement and Plan of Reorganization (included as
Appendix A to the prospectus).
3.1 Form of Caldera International, Inc.'s Amended and Restated
Certificate of Incorporation to be in effect upon the
closing of the combination (included as Appendix D to the
prospectus).
3.2 Form of Caldera International, Inc.'s Amended and Restated
Bylaws to be in effect upon the closing of the combination
(included as Appendix E to the prospectus).
**4.1 Form of certificate of common stock.
**5.1 Opinion of Brobeck Phleger & Harrison, LLP.
**8.1 Tax Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation.
**8.2 Tax Opinion of Brobeck Phleger & Harrison, LLP.
10.1 Conversion Agreement, dated December 30, 1999, between
Caldera, The Canopy Group, Inc. and MTI Technology
Corporation (incorporated by reference to Exhibit 10.1 to
Caldera's Registration Statement on Form S-1 (File No.
333-94351)).
10.2 Form of Series B Preferred Stock Purchase Agreement between
the Registrant and the Series B investors (incorporated by
reference to Exhibit 10.2 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351)).
10.3 Caldera 1988 Stock Option Plan (incorporated by reference to
Exhibit 10.3 to Caldera's Registration Statement on Form S-1
(File No. 333-94351)).
10.4 Caldera 1999 Omnibus Stock Incentive Plan (Included as
Appendix F to the prospectus).
10.5 Amendment No. 1 to Caldera 1999 Omnibus Stock Incentive Plan
(Included as Appendix G to the prospectus).
10.6 Amendment No. 2 to Caldera 1999 Omnibus Stock Incentive Plan
(Included as Appendix H to the prospectus).
10.7 Amendment No. 3 to Caldera 1999 Omnibus Stock Incentive Plan
(Included as Appendix I to the prospectus).
10.8 Amendment No. 4 to Caldera 1999 Omnibus Stock Incentive Plan
(Included as Appendix J to the prospectus).
10.9 Caldera 2000 Employee Stock Purchase Plan, as amended
(Included as Appendix K to the prospectus).
</TABLE>
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<PAGE> 423
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.10 Secured Convertible Promissory Note, dated September 1,
1998, by Caldera in favor of The Canopy Group, Inc.
(incorporated by reference to Exhibit 10.6 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351)).
10.11 Security Agreement, dated September 1, 1998, between the
Registrant and The Canopy Group, Inc. (incorporated by
reference to Exhibit 10.7 to the Registrant's Registration
Statement on Form S-1 (File No. 333-94351)).
10.12 Asset Purchase and Sale Agreement, dated September 1, 1998,
between Caldera, Inc., a Utah corporation and Caldera
(incorporated by reference to Exhibit 10.8 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351)).
10.13 Amended and Restated Asset Purchase Agreement, dated as of
September 1, 1998, between Caldera, Inc., a Utah
corporation, and Caldera (incorporated by reference to
Exhibit 10.9 to Caldera's Registration Statement on Form S-1
(File No. 333-94351)).
10.14 Stock Purchase Agreement, dated January 27, 1999, by and
among Caldera, the Canopy Group, Inc. and MTI Technology
Corporation (incorporated by reference to Exhibit 10.10 to
Caldera's Registration Statement on Form S-1 (File No.
333-94351)).
10.15 Stock Purchase Agreement, dated January 6, 2000, between
Caldera and Lineo, Inc. (incorporated by reference to
Exhibit 10.11 to Caldera's Registration Statement on Form
S-1 (File No. 333-94351)).
10.16 Form of Second Amended and Restated Investors Rights
Agreement by and among Caldera and the holders of the Series
A and Series B convertible preferred stock named therein
(incorporated by reference to Exhibit 10.12 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351)).
10.17 GNU General Public License (incorporated by reference to
Exhibit 10.14 to the Registrant's Registration Statement on
Form S-1 (File No. 333-94351)).
+10.18 Computer Software Distribution Agreement, dated December 14,
1998, between Caldera and Navarre Corporation (incorporated
by reference to Exhibit 10.15 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351)).
+10.19 OEM Reciprocal License Agreement, dated January 6, 2000,
between Caldera and Evergreen Internet, Inc. (incorporated
by reference to Exhibit 10.16 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351)).
+10.20 Sun Community Source License version 2.3 dated January 7,
2000, between Caldera and Sun Microsystems, Inc.
(incorporated by reference to Exhibit 10.17 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351)).
+10.21 Sun Community Source License version 2.7, dated January 7,
2000, between Caldera and Sun Microsystems, Inc.
(incorporated by reference to Exhibit 10.18 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351)).
10.22 Lease Agreement, dated September 1, 1998, between Caldera
and Caldera, Inc., a Utah corporation (incorporated by
reference to Exhibit 10.19 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351)).
10.23 Assignment and Extension of Lease, dated October 6, 1999, be
Caldera and Voxel, Inc. (incorporated by reference to
Exhibit 10.20 to Caldera's Registration Statement of Form
S-1 (file No. 333-94351)).
10.24 Secured Promissory Note, dated December 29, 1999, by Caldera
in favor of The Canopy Group (incorporated by reference to
Exhibit 10.22 to Caldera's Statement on Form S-1 (File No.
333-94351)).
10.25 Assignment of Lease, dated January 21, 2000, between Caldera
and Nextpage L.C. (incorporated by reference to Exhibit
10.23 to Caldera's Registration Statement on Form S-1 (File
No. 333-94351)).
</TABLE>
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<PAGE> 424
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.26 Form of Indemnification Agreement by and between Caldera and
its executive officers and directors (incorporated by
reference to Exhibit 10.24 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351)).
10.27 Distribution Agreement, dated February 8, 2000, between
Caldera and Frank Kasper & Associates, Inc. (incorporated by
reference to Exhibit 10.1 to Caldera's quarterly report on
Form 10-Q for the quarter ended April 30, 2000).
10.28 Second Amendment to Lease Agreement, dated April 5, 2000,
between Caldera and EsNet Properties, L.C. (incorporated by
reference to Exhibit 10.2 to Caldera's quarterly report on
Form 10-Q for the quarter ended April 30, 2000).
10.29 Lease Agreement, dated October 9, 1997, between Caldera,
Inc., a Utah corporation, and EsNet Properties, L.C.
(incorporated by reference to Exhibit 10.3 to Caldera's
quarterly report on Form 10-Q for the quarter ended April
30, 2000).
10.30 Master Lease, dated March 30, 2000, between Caldera and
106th South Business Park, L.C. (incorporated by reference
to Exhibit 10.4 to Caldera's quarterly report on Form 10Q
for the quarter ended April 20, 2000).
**10.31 Form of Senior Executive Severance Agreement.
**10.32 Form of Voting Agreement between the Registrant and Doug
Michels.
**10.33 Form of Voting Agreement between The Santa Cruz Operation,
Inc. and The Canopy Group, Inc. and MTI Technology
Corporation.
**10.34 Form of Stockholder Agreement, among the Registrant,
Caldera, The Santa Cruz Operation, Inc., MTI Technology
Corporation and The Canopy Group, Inc.
**10.35 Form of Sales Representative and Support Agreement, between
the Registrant and The Santa Cruz Operation, Inc.
**10.36 Form of Open Server Research & Development Agreement between
the registrant and The Santa Cruz Operation, Inc.
**10.37 OEM Distribution Agreement, dated June 27, 2000, between
Caldera and The Santa Cruz Operation, Inc.
**10.38 Agreement for Linux Professional Consulting Services between
The Santa Cruz Operation, Inc. and Caldera Systems, Inc.
**10.39 Strategic Business Agreement between The Santa Cruz
Operation, Inc. and Caldera Systems, Inc.
**10.40 Stock Purchase and Sale Agreement between The Canopy Group,
Inc., Caldera Systems, Inc. and Metrowerks Holding, Inc.
**10.41 Stockholder Agreement between Lineo, Inc., Bryan Sparks, Dry
Canyon Holding Company LLC and Metrowerks Holdings, Inc.
**10.42 Warrant Purchase Agreement between Lineo, Inc. and
Metrowerks Holdings, Inc.
10.43 Form of Secured Convertible Promissory Note between The
Santa Cruz Operation, Inc. and Caldera Systems, Inc.
10.44 Form of Security Agreement between The Santa Cruz Operation,
Inc. and Caldera Systems, Inc.
10.45 Form of Intercreditor Agreement among The Canopy Group,
Inc., The Santa Cruz Operation, Inc. and Caldera Systems,
Inc.
10.46 Form of Loan Agreement between The Canopy Group, Inc. and
The Santa Cruz Operation, Inc.
10.47 Form of Security Agreement between The Canopy Group, Inc.
and The Santa Cruz Operation, Inc.
10.48 Form of Secured Convertible Promissory Note between The
Canopy Group, Inc. and The Santa Cruz Operation, Inc.
**21.1 Subsidiaries of the Registrant.
</TABLE>
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<PAGE> 425
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants of Caldera and the Registrant.
23.1.2 Consent of Arthur Andersen LLP, Independent Public
Accountants of Ebiz Enterprises, Inc.
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants of SCO.
23.2.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants of SCO regarding the financial statements of The
Server and Professional Services Groups.
23.4 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 8.1).
23.5 Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibits 5.1 and 8.2).
**99.1 Form of Proxy Card of Caldera.
**99.2 Form of Proxy Card of The Santa Cruz Operation, Inc.
</TABLE>
---------------
** Filed Previously
+ Confidential treatment was granted by the Commission for certain provisions.
Omitted material for which confidential treatment has been granted has been
filed separately with the Commission.
(b) Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or the notes thereto.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial BONA FIDE offering thereof;
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<PAGE> 426
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(4) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date
of the registration statement through the date of responding to the
request.
(5) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.
(6) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form;
(7) that every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, Delaware Corporation law, the
Underwriting Agreement or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefor, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the successful defense of
any action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered hereunder,
the registrant will, unless in the opinion of its counsel the question has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-6
<PAGE> 427
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Orem, State
of Utah, on the 18th day of December 2000.
CALDERA INTERNATIONAL, INC.
By: /s/ RANSOM H. LOVE
----------------------------------
Ransom H. Love
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RANSOM H. LOVE Director, Chief Executive Officer December 18, 2000
-----------------------------------------------------
Ransom H. Love
/s/ ROBERT K. BENCH Chief Financial Officer (Principal December 18, 2000
----------------------------------------------------- Accounting Officer)
Robert K. Bench
</TABLE>
II-7
<PAGE> 428
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To Caldera Systems, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Caldera Systems,
Inc, the carved-out portion of Caldera, Inc. and their subsidiary included in
this registration statement and have issued our report thereon dated December 5,
2000. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II -- Valuation and Qualifying
Accounts is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
December 5, 2000
<PAGE> 429
CALDERA SYSTEMS, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended October 31, 1998............... $ 112,000 $ 265,000 $(362,000)(a) $ 15,000
Year ended October 31, 1999............... 15,000 222,000 (147,000)(a) 90,000
Year ended October 31, 2000............... 90,000 325,000 (103,000) 312,000
Inventory reserves:
Year ended October 31, 1998............... 157,000 28,000 (122,000)(b) 63,000
Year ended October 31, 1999............... 63,000 356,000 (65,000)(b) 354,000
Year ended October 31, 2000............... 354,000 43,000 (113,000) 284,000
Allowance for sales returns:
Year ended October 31, 1998............... 100,000 97,000 (143,000)(c) 54,000
Year ended October 31, 1999............... 54,000 350,000 (235,000)(c) 169,000
Year ended October 31, 2000............... 169,000 680,000 (485,000) 364,000
Deferred tax assets valuation allowance:
Year ended October 31, 1998............... -- 422,000 7,156,000(d) 7,578,000
Year ended October 31, 1999............... 7,578,000 3,316,000 -- 10,894,000
Year ended October 31, 2000............... 10,894,000 4,363,000 -- 15,257,000
</TABLE>
-------------------------
(a) Represents write-offs of uncollectable accounts receivable
(b) Represents inventory destroyed or scrapped
(c) Represents product returns
(d) Represents allowance recorded in connection with the purchase of assets from
Caldera, Inc.
<PAGE> 430
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization by and among Caldera
Systems, Inc., Caldera International, Inc. ("registrant")
and The Santa Cruz Operation, Inc., including Amendment No.
1 to the Agreement and Plan of Reorganization (included as
Appendix A to the prospectus).
3.1 Form of Caldera International, Inc.'s Amended and Restated
Certificate of Incorporation to be in effect upon the
closing of the combination (included as Appendix D to the
prospectus).
3.2 Form of Caldera International, Inc.'s Amended and Restated
Bylaws to be in effect upon the closing of the combination
(included as Appendix E to the prospectus).
**4.1 Form of certificate of common stock.
**5.1 Opinion of Brobeck Phleger & Harrison, LLP.
**8.1 Tax Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation.
**8.2 Tax Opinion of Brobeck Phleger & Harrison, LLP.
10.1 Conversion Agreement, dated December 30, 1999, between
Caldera, The Canopy Group, Inc. and MTI Technology
Corporation (incorporated by reference to Exhibit 10.1 to
Caldera's Registration Statement on Form S-1 (File No.
333-94351)).
10.2 Form of Series B Preferred Stock Purchase Agreement between
the Registrant and the Series B investors (incorporated by
reference to Exhibit 10.2 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351)).
10.3 Caldera 1988 Stock Option Plan (incorporated by reference to
Exhibit 10.3 to Caldera's Registration Statement on Form S-1
(File No. 333-94351)).
10.4 Caldera 1999 Omnibus Stock Incentive Plan (Included as
Appendix F to the prospectus).
10.5 Amendment No. 1 to Caldera 1999 Omnibus Stock Incentive Plan
(Included as Appendix G to the prospectus).
10.6 Amendment No. 2 to Caldera 1999 Omnibus Stock Incentive Plan
(Included as Appendix H to the prospectus).
10.7 Amendment No. 3 to Caldera 1999 Omnibus Stock Incentive Plan
(Included as Appendix I to the prospectus).
10.8 Amendment No. 4 to Caldera 1999 Omnibus Stock Incentive Plan
(Included as Appendix J to the prospectus).
10.9 Caldera 2000 Employee Stock Purchase Plan, as amended
(Included as Appendix K to the prospectus).
10.10 Secured Convertible Promissory Note, dated September 1,
1998, by Caldera in favor of The Canopy Group, Inc.
(incorporated by reference to Exhibit 10.6 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351)).
10.11 Security Agreement, dated September 1, 1998, between the
Registrant and The Canopy Group, Inc. (incorporated by
reference to Exhibit 10.7 to the Registrant's Registration
Statement on Form S-1 (File No. 333-94351)).
10.12 Asset Purchase and Sale Agreement, dated September 1, 1998,
between Caldera, Inc., a Utah corporation and Caldera
(incorporated by reference to Exhibit 10.8 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351)).
10.13 Amended and Restated Asset Purchase Agreement, dated as of
September 1, 1998, between Caldera, Inc., a Utah
corporation, and Caldera (incorporated by reference to
Exhibit 10.9 to Caldera's Registration Statement on Form S-1
(File No. 333-94351)).
</TABLE>
<PAGE> 431
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.14 Stock Purchase Agreement, dated January 27, 1999, by and
among Caldera, the Canopy Group, Inc. and MTI Technology
Corporation (incorporated by reference to Exhibit 10.10 to
Caldera's Registration Statement on Form S-1 (File No.
333-94351)).
10.15 Stock Purchase Agreement, dated January 6, 2000, between
Caldera and Lineo, Inc. (incorporated by reference to
Exhibit 10.11 to Caldera's Registration Statement on Form
S-1 (File No. 333-94351)).
10.16 Form of Second Amended and Restated Investors Rights
Agreement by and among Caldera and the holders of the Series
A and Series B convertible preferred stock named therein
(incorporated by reference to Exhibit 10.12 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351)).
10.17 GNU General Public License (incorporated by reference to
Exhibit 10.14 to the Registrant's Registration Statement on
Form S-1 (File No. 333-94351)).
+10.18 Computer Software Distribution Agreement, dated December 14,
1998, between Caldera and Navarre Corporation (incorporated
by reference to Exhibit 10.15 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351)).
+10.19 OEM Reciprocal License Agreement, dated January 6, 2000,
between Caldera and Evergreen Internet, Inc. (incorporated
by reference to Exhibit 10.16 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351)).
+10.20 Sun Community Source License version 2.3 dated January 7,
2000, between Caldera and Sun Microsystems, Inc.
(incorporated by reference to Exhibit 10.17 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351)).
+10.21 Sun Community Source License version 2.7, dated January 7,
2000, between Caldera and Sun Microsystems, Inc.
(incorporated by reference to Exhibit 10.18 to Caldera's
Registration Statement on Form S-1 (File No. 333-94351)).
10.22 Lease Agreement, dated September 1, 1998, between Caldera
and Caldera, Inc., a Utah corporation (incorporated by
reference to Exhibit 10.19 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351)).
10.23 Assignment and Extension of Lease, dated October 6, 1999, be
Caldera and Voxel, Inc. (incorporated by reference to
Exhibit 10.20 to Caldera's Registration Statement of Form
S-1 (file No. 333-94351)).
10.24 Secured Promissory Note, dated December 29, 1999, by Caldera
in favor of The Canopy Group (incorporated by reference to
Exhibit 10.22 to Caldera's Statement on Form S-1 (File No.
333-94351)).
10.25 Assignment of Lease, dated January 21, 2000, between Caldera
and Nextpage L.C. (incorporated by reference to Exhibit
10.23 to Caldera's Registration Statement on Form S-1 (File
No. 333-94351)).
10.26 Form of Indemnification Agreement by and between Caldera and
its executive officers and directors (incorporated by
reference to Exhibit 10.24 to Caldera's Registration
Statement on Form S-1 (File No. 333-94351)).
10.27 Distribution Agreement, dated February 8, 2000, between
Caldera and Frank Kasper & Associates, Inc. (incorporated by
reference to Exhibit 10.1 to Caldera's quarterly report on
Form 10-Q for the quarter ended April 30, 2000).
10.28 Second Amendment to Lease Agreement, dated April 5, 2000,
between Caldera and EsNet Properties, L.C. (incorporated by
reference to Exhibit 10.2 to Caldera's quarterly report on
Form 10-Q for the quarter ended April 30, 2000).
10.29 Lease Agreement, dated October 9, 1997, between Caldera,
Inc., a Utah corporation, and EsNet Properties, L.C.
(incorporated by reference to Exhibit 10.3 to Caldera's
quarterly report on Form 10-Q for the quarter ended April
30, 2000).
10.30 Master Lease, dated March 30, 2000, between Caldera and
106th South Business Park, L.C. (incorporated by reference
to Exhibit 10.4 to Caldera's quarterly report on Form 10Q
for the quarter ended April 20, 2000).
**10.31 Form of Senior Executive Severance Agreement.
</TABLE>
<PAGE> 432
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
**10.32 Form of Voting Agreement between the Registrant and Doug
Michels.
**10.33 Form of Voting Agreement between The Santa Cruz Operation,
Inc. and The Canopy Group, Inc. and MTI Technology
Corporation.
**10.34 Form of Stockholder Agreement, among the Registrant,
Caldera, The Santa Cruz Operation, Inc., MTI Technology
Corporation and The Canopy Group, Inc.
**10.35 Form of Sales Representative and Support Agreement, between
the Registrant and The Santa Cruz Operation, Inc.
**10.36 Form of Open Server Research & Development Agreement between
the registrant and The Santa Cruz Operation, Inc.
**10.37 OEM Distribution Agreement, dated June 27, 2000, between
Caldera and The Santa Cruz Operation, Inc.
**10.38 Agreement for Linux Professional Consulting Services between
The Santa Cruz Operation, Inc. and Caldera Systems, Inc.
**10.39 Strategic Business Agreement between The Santa Cruz
Operation, Inc. and Caldera Systems, Inc.
**10.40 Stock Purchase and Sale Agreement between The Canopy Group,
Inc., Caldera Systems, Inc. and Metrowerks Holding, Inc.
**10.41 Stockholder Agreement between Lineo, Inc., Bryan Sparks, Dry
Canyon Holding Company LLC and Metrowerks Holdings, Inc.
**10.42 Warrant Purchase Agreement between Lineo, Inc. and
Metrowerks Holdings, Inc.
10.43 Form of Secured Convertible Promissory Note between The
Santa Cruz Operation, Inc. and Caldera Systems, Inc.
10.44 Form of Security Agreement between The Santa Cruz Operation,
Inc. and Caldera Systems, Inc.
10.45 Form of Intercreditor Agreement among The Canopy Group,
Inc., The Santa Cruz Operation, Inc. and Caldera Systems,
Inc.
10.46 Form of Loan Agreement between The Canopy Group, Inc. and
The Santa Cruz Operation, Inc.
10.47 Form of Security Agreement between The Canopy Group, Inc.
and The Santa Cruz Operation, Inc.
10.48 Form of Secured Convertible Promissory Note between The
Canopy Group, Inc. and The Santa Cruz Operation, Inc.
**21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants of Caldera and the Registrant.
23.1.2 Consent of Arthur Andersen LLP, Independent Public
Accountants of Ebiz Enterprises, Inc.
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants of SCO.
23.2.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants of SCO regarding the financial statements of The
Server and Professional Services Groups.
23.4 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 8.1).
23.5 Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibits 5.1 and 8.2).
**99.1 Form of Proxy Card of Caldera.
**99.2 Form of Proxy Card of The Santa Cruz Operation, Inc.
</TABLE>
---------------
** Filed previously.
+ Confidential treatment was granted by the Commission for certain provisions.
Omitted material for which confidential treatment has been granted has been
filed separately with the Commission.
