10-Q 1 d85089e10-q.txt FORM 10-Q FOR QUARTER ENDED JANUARY 31, 2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JANUARY 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission file number 0-29911 CALDERA SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 87-0617393 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization)
240 West Center Street Orem, Utah 84057 (Address of principal executive office and zip code) (801) 765-4999 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. YES [X] NO [ ] As of March 15, 2001, 39,684,082 shares of the Registrant's common stock were outstanding. 2 CALDERA SYSTEMS, INC. TABLE OF CONTENTS
Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of January 31, 2001 and October 31, 2000........................................................ 3 Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended January 31, 2001 and 2000........................................................... 4 Condensed Consolidated Statements of Cash Flows for the three months ended January 31, 2001 and 2000.................................. 5 Notes to Condensed Consolidated Financial Statements...................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 20 Risk Factors.............................................................. 21 PART II. OTHER INFORMATION Item 1. Legal Proceedings......................................................... 34 Item 2. Changes in Securities and Use of Proceeds................................. 34 Item 3. Defaults Upon Senior Securities........................................... 34 Item 4. Submission of Matters to a Vote of Security Holders....................... 34 Item 5. Other Information......................................................... 34 Item 6. Exhibits and Reports on Form 8-K.......................................... 34 Item 7. Signatures................................................................ 34
- 2 - 3 CALDERA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, October 31, 2001 2000 ------------- ------------- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 28,358,943 $ 36,560,267 Available-for-sale securities 50,294,010 54,179,307 Accounts receivable, net of allowance for doubtful accounts of $224,700 and $312,300, respectively 839,650 1,544,526 Note receivable from The Santa Cruz Operation 7,000,000 -- Inventories 381,969 389,438 Other current assets 738,811 1,310,173 ------------- ------------- Total current assets 87,613,383 93,983,711 ------------- ------------- PROPERTY AND EQUIPMENT: Computer equipment 1,399,861 1,321,806 Furniture and fixtures 1,180,060 1,097,048 Leasehold improvements 343,374 342,015 ------------- ------------- 2,923,295 2,760,869 Less accumulated depreciation and amortization (1,372,943) (1,171,549) ------------- ------------- Net property and equipment 1,550,352 1,589,320 ------------- ------------- INVESTMENTS IN NON-MARKETABLE SECURITIES: Affiliate 1,179,704 1,179,704 Non-affiliates 3,999,497 3,999,497 ------------- ------------- 5,179,201 5,179,201 ------------- ------------- EQUITY INVESTMENT IN AFFILIATE -- 4,957,325 ------------- ------------- OTHER ASSETS, net 2,297,009 1,808,746 ------------- ------------- Total assets $ 96,639,945 $ 107,518,303 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,602,530 $ 2,414,359 Payable to The Santa Cruz Operation -- 898,026 Accrued liabilities 2,551,129 1,664,818 Deferred revenue 408,866 326,330 ------------- ------------- Total current liabilities 5,562,525 5,303,533 ------------- ------------- STOCKHOLDERS' EQUITY: Preferred stock, $0.001 par value; 25,000,000 shares authorized -- -- Common stock, $0.001 par value; 75,000,000 shares authorized, 39,684,082 and 39,444,457 shares outstanding, respectively 39,684 39,444 Additional paid-in capital 155,307,844 155,649,244 Deferred compensation (2,789,786) (3,714,720) Accumulated comprehensive (loss) income (1,578,683) 299,456 Accumulated deficit (59,901,639) (50,058,654) ------------- ------------- Total stockholders' equity 91,077,420 102,214,770 ------------- ------------- Total liabilities and stockholders' equity $ 96,639,945 $ 107,518,303 ============= =============
See accompanying notes to condensed consolidated financial statements. - 3 - 4 CALDERA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended January 31, 2001 2000 ------------ ------------ (unaudited) REVENUE: Software and related products $ 452,356 $ 394,840 Services 601,304 158,359 ------------ ------------ Total revenue 1,053,660 553,199 ------------ ------------ COST OF REVENUE: Software and related products 226,503 294,802 Services 950,331 255,284 ------------ ------------ Total cost of revenue 1,176,834 550,086 ------------ ------------ GROSS (DEFICIT) MARGIN (123,174) 3,113 ------------ ------------ OPERATING EXPENSES: Sales and marketing (exclusive off non-cash compensation of $140,120 and $487,132, respectively) 5,520,108 2,030,556 General and administrative (exclusive of non-cash compensation of $60,630 and $691,776, respectively) 1,747,820 1,078,510 Research and development (exclusive of non-cash compensation of $133,074 and $363,959, respectively) 1,869,177 964,740 Cost-sharing arrangement with The Santa Cruz Operation 601,974 -- Non-cash compensation compensation 333,824 1,542,867 ------------ ------------ Total operating expenses 10,072,903 5,616,673 ------------ ------------ LOSS FROM OPERATIONS (10,196,077) (5,613,560) ------------ ------------ EQUITY IN LOSS OF AFFILIATE (647,689) -- ------------ ------------ OTHER INCOME (EXPENSE): Interest income 1,007,819 113,374 Other income (expense), net 19,662 (547) ------------ ------------ Other income, (expense), net 1,027,481 112,827 ------------ ------------ LOSS BEFORE INCOME TAXES (9,816,285) (5,500,733) PROVISION FOR INCOME TAXES (26,700) (12,650) ------------ ------------ NET LOSS $ (9,842,985) $ (5,513,383) ============ ============ DIVIDENDS RELATED TO CONVERTIBLE PREFERRED STOCK $ -- $(10,000,000) ============ ============ NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (9,842,985) $(15,513,383) ============ ============ BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.25) $ (0.63) ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 39,588,452 24,779,808 ============ ============ OTHER COMPREHENSIVE LOSS: Net loss attributable to common stockholders $ (9,842,985) $(15,513,383) Unrealized loss on available-for-sale securities (1,865,030) -- Foreign currency translation adjustment (13,109) (15,766) ------------ ------------ COMPREHENSIVE LOSS: $(11,721,124) $(15,529,149) ============ ============
See accompanying notes to condensed consolidated financial statements. - 4 - 5 CALDERA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Three Months Ended January 31, 2001 2000 ------------ ------------ (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (9,842,985) $ (5,513,383) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 201,394 93,071 Non-cash compensation 333,824 1,542,867 Equity in loss of affiliate 647,689 -- Issuance of common stock for services -- 134,664 Changes in operating assets and liabilities: Accounts receivable, net 704,876 (153,296) Other receivables -- 375,000 Inventories 7,469 54,994 Other current assets 571,362 (68,719) Other assets (38,427) 4,454 Accounts payable 188,171 31,072 Payable to The Santa Cruz Operation (898,026) -- Accrued liabilities 886,311 274,363 Deferred revenue 82,536 105,455 ------------ ------------ Net cash used in operating activities (7,155,806) (3,119,458) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (162,426) (154,958) Loan to The Santa Cruz Operation (7,000,000) -- Purchase of available-for-sale securities (8,128,152) -- Sale of available-for-sale securities 14,368,676 -- Deferred acquisition costs (449,836) -- Acquisition of investment in non-marketable security -- (2,000,000) ------------ ------------ Net cash used in investing activities (1,371,738) (2,154,958) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings from majority stockholder -- 300,000 Repayment of borrowings from majority stockholder -- (300,000) Repayments of long-term debt -- (9,460) Proceeds from sale of common stock, net of offering costs -- 758,743 Proceeds from sale of Series B convertible preferred stock, net of offering costs -- 29,790,674 Proceeds from exercise of common stock options 249,950 41,143 ------------ ------------ Net cash provided by financing activities 249,950 30,581,100 ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (8,277,594) 25,306,684 EFFECT OF FOREIGN EXCHANGE RATES ON CASH 76,270 (15,766) CASH AND CASH EQUIVALENTS, beginning of period 36,560,267 121,989 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 28,358,943 $ 25,412,907 ============ ============
See accompanying notes to condensed consolidated financial statements. - 5 - 6 CALDERA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three Months Ended January 31, 2001 2000 ------------ ----------- (unaudited) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes $ 4,223 $ -- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of common shares and the acquisition of a license fee for non-marketable securities $ -- $ 1,999,497 Conversion of 6,596,146 shares of common stock to 6,596,146 shares of Series A convertible preferred stock $ -- $ 6,596 Dividends related to Series B convertible preferred stock $ -- $ 10,000,000 Issuance of common shares in exchange for investment in Lineo, Inc. $ -- $ 10,000,000 Distribution to majority stockholder for fair value of shares issued in excess of the carryover basis of the investment in Lineo, Inc. $ -- $ (9,999,999) Reclassification and write-down of equity method investment in marketable security $ 2,309,636 $ --
See accompanying notes to condensed consolidated financial statements. - 6 - 7 CALDERA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) ORGANIZATION AND DESCRIPTION OF BUSINESS Caldera Systems, Inc. ("Caldera"), was incorporated as a Utah corporation on August 21, 1998, and was reincorporated as a Delaware corporation on March 6, 2000. Caldera develops and markets software and provides related services that enable the development, deployment and management of Linux-based specialized servers and Internet devices that extend the eBusiness infrastructure. Caldera sells and distributes its software and related products indirectly through distributors and solutions providers, which include value-added resellers ("VARs"), original equipment manufacturers ("OEMs"), systems integrators, as well as directly to end-user customers. These sales occur throughout the United States and in certain international locations. On August 1, 2000 and as amended on September 13, 2000, December 12, 2000 and February 9, 2001, Caldera Systems, Inc. ("Caldera"), Caldera International, Inc. ("New Caldera"), and The Santa Cruz Operation, Inc. ("SCO") entered into an Agreement and Plan of Reorganization (the "Reorganization Agreement"). As a result of the transactions proposed by the Reorganization Agreement (the "Reorganization"), (i) a newly formed, wholly owned subsidiary of New Caldera will be merged with and into Caldera, with Caldera being the surviving corporation, and all outstanding Caldera securities will be converted, on a share for share basis, into New Caldera securities having identical rights, preferences and privileges, with New Caldera assuming any and all outstanding options and other rights to purchase shares of capital stock of Caldera (with all such New Caldera securities issued to former Caldera security holders initially representing a fully diluted equity interest of approximately 71.9% in New Caldera); (ii) SCO and certain of its subsidiaries will contribute to New Caldera, all of the capital stock held of certain contributed companies as well as certain assets of SCO collectively representing the server and professional services groups of SCO, in consideration for the issuance by New Caldera to SCO of shares of common stock of New Caldera, $0.001 par value ("New Caldera Common Stock"); (iii) New Caldera will assume or replace, as elected by the option holders, all options to acquire common stock of SCO held by SCO employees (other than certain officers of SCO) hired or retained by Caldera and such options will be converted into options to purchase New Caldera Common Stock on a two SCO options in exchange for one New Caldera option basis representing in the aggregate a fully diluted equity interest of approximately 2.8% in New Caldera; (iv) SCO will receive 16,000,000 shares of New Caldera Common Stock representing in the aggregate a fully diluted equity interest of approximately 25.3% in New Caldera; (v) New Caldera will pay to SCO $23 million in cash, of which $7 million was advanced to SCO in January, 2001; (vi) New Caldera will issue to SCO a non-interest bearing, secured promissory note in the amount of $8 million that will be payable in quarterly installments of $2 million beginning on the first day of the fifth - 7 - 8 CALDERA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) fiscal quarter following the closing; and (vii) SCO shall be entitled to receive from New Caldera earn-out provisions during the three-year period following the closing representing 45% of the amount by which OpenServer revenues exceed certain threshold amounts. In conjunction with the Reorganization Agreement, The Canopy Group, Inc., a major stockholder of Caldera has agreed to loan $18 million to SCO. If the Reorganization is not completed, SCO will be obligated to repay the $7 million advance to Caldera. Assets of SCO will secure each of these loans. (2) SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Caldera Systems, Inc. and subsidiary (the "Company") have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures, when read in conjunction with the financial statements and the notes thereto included in the Company's Form 10-K are adequate to make the information presented not misleading. The condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the financial position and results of operations of the Company as of the balance sheet dates and for the periods presented. Operating results for the three months ended January 31, 2001 are not necessarily indicative of the results that may be expected for the year ending October 31, 2001. 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. PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of Caldera and its wholly owned subsidiaries, Caldera Deutschland GmbH ("Caldera GmbH") and Caldera Japan ("Caldera KK"), after elimination of intercompany accounts and transactions. - 8 - 9 CALDERA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with original 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 investments. AVAILABLE-FOR-SALE SECURITIES Available-for-sale securities include investments in debt securities such as commercial paper, treasury notes and bonds and our investment in Ebiz Enterprises, Inc. 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 January 31, 2001, available-for-sale securities with original maturity dates less than one year totaled approximately $15.7 million and available-for-sale securities with original maturity dates greater than one year totaled approximately $34.6 million. INVENTORIES Inventories consist primarily of raw materials and completed products. Inventories are stated at the lower of cost (using the first-in, first-out method) or market value. As of January 31, 2001 and October 31, 2000, inventories consisted of raw materials of approximately $219,300 and $201,800, respectively, and completed products of approximately $162,700 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. REVENUE RECOGNITION The Company generates revenue from software and related products sold indirectly through distributors and solutions providers and directly to end-users. The Company also generates services revenue from training royalties and tuition fees, consulting fees, and customer support fees. Revenue from the sale of software and related products is recognized upon delivery of the product when persuasive evidence of an arrangement exists, the price is fixed or determinable and collection is probable. All sales into the distribution channel or to OEM's and VAR's require a binding purchase order. Prior to November 1, 2000, sales to resellers for which payment was considered to be substantially contingent on the reseller's success in distributing individual units of the product or sales to resellers with which Caldera did not have historical experience were accounted for as consignments and the revenue was recognized once sell-through verification was received and payments from customers became due. Prior to October 31, 1999, Caldera - 9 - 10 CALDERA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) did not have any consignment arrangements. During the year ended October 31, 2000, approximately 22% of product revenue was derived on a sell-through basis. Effective November 1, 2000, the Company began to defer revenue recognition for products sold through the distribution channel until the products have been sold through the channel to the end user. All sales require a binding purchase order. Direct sales to end-users are evidenced by concurrent payment for the product via credit card and are governed by a license agreement. Generally, the only multiple element arrangement of the Company's initial software sales is certain telephone and e-mail technical support services the Company provides at no additional charge. These services do not include product update or upgrade rights. After the initial support period, customers can elect to enter into separate support agreements. The cost of providing the initial support services is not significant; accordingly, the Company accrues the estimated costs of providing the services at the time of revenue recognition. Revenue from the extended support agreements and maintenance contracts are deferred and recognized over the period of the contract or as the services are provided. If other significant post-delivery vendor obligations exist or if a product is subject to customer acceptance, revenue is deferred until no significant obligations remain or acceptance has occurred. To date, the Company has not shipped any software and related products subject to acceptance terms or subject to other post-delivery vendor obligations. Additionally, the Company has not recognized revenue on any contracts with customers that may include customer cancellation or termination clauses that indicate a demonstration period or otherwise incomplete transaction. The Company also offers its customers consulting, training and other services separate from the software sale. The services are not integral to the functionality of the software and are available from other vendors. This services revenue is recognized as the services are performed. NET LOSS PER COMMON SHARE Basic net loss per common share ("Basic EPS") is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share ("Diluted EPS") is computed by dividing net loss by the sum of the weighted average number of common shares and the dilutive potential common share equivalents then outstanding. Potential common share equivalents consist of shares issuable upon the exercise of stock options and shares issuable upon the conversion of Series A and Series B convertible preferred stock for the periods during which they were outstanding. As of January 31, 2000, there were 6,596,146 and 5,000,000 shares of Series A and Series B convertible preferred stock outstanding, respectively, and there were 5,472,649 and 5,848,708 outstanding options to purchase common shares as of January 31, 2000 and 2001, respectively, that were not included in the computation of diluted net loss per common share as their effect would have been anti-dilutive, thereby decreasing the net loss per common share. - 10 - 11 CALDERA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) EQUITY INVESTMENT IN EBIZ ENTERPRISES, INC During the three months ended January 31, 2001, Caldera's ownership interest in Ebiz Enterprises, Inc. ("Ebiz") was diluted to approximately 12 percent as a result of Ebiz issuing new shares in connection with an acquisition and the conversion of convertible securities. As a result of these transactions, on January 5, 2001, Caldera discontinued the use of the equity method of accounting for its investment in Ebiz. Caldera now accounts for the investment as an available-for-sale security in accordance with Statement of Financial Accounting Standards ("SFAS") 115. Under SFAS 115, Caldera carries its investment at fair market value using quoted trading prices and records any unrecognized gains or losses as a component of other comprehensive income (loss). As of January 31, 2001, Caldera reduced the carrying value of its investment to $2.0 million, which was previously recorded at approximately $4.3 million. Ebiz' common stock is currently traded on the Over-the-Counter Bulletin Board. On January 31, 2001, Ebiz common stock closed at $0.50 per share. Caldera's carrying amount per share of Ebiz' common stock on January 31, 2001 was approximately $1.08 per share. Management believes that this decline in market value of the stock is not permanent in nature and resulted primarily from market conditions related to technology stocks and that Caldera's ability to recover the carrying amount of its investment has not been permanently impaired. Caldera will continue to evaluate the carrying amount of its investment in Ebiz on an ongoing basis and will record impairment charges as necessary from permanent impairment of its investment. Caldera has the intent and wherewithal to hold its investment in Ebiz long term in order to recover the current decline in market value. (4) STOCK-BASED COMPENSATION The Company accounts for its stock options issued to directors, officers and employees under Accounting Principles Board Opinion No. 25 and related interpretations ("APB 25"). Under APB 25, compensation expense is recognized if an option's exercise price on the measurement date is below the fair market value of the Company's common stock. During the three months ended January 31, 2001, the Company granted 507,500 stock options with an average exercise price of $2.10 per share. None of the stock option grants were at prices that were below the estimated fair market value on the date of grant. As of January 31, 2001, there were 5,848,708 stock options outstanding with an average exercise price of $4.40 per share. During the three months ended January 31, 2000, the Company granted approximately 2.6 million stock options with exercise prices that were below the estimated fair market value on the measurement date resulting in approximately $5.5 million in deferred compensation. Amortization of deferred compensation was approximately $334,000 and $1.5 million, respectively, during the three months ended January 31, 2001 and 2000. - 11 - 12 CALDERA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) SEGMENT INFORMATION SFAS 131, "Disclosures about Segments of an Enterprise and Related Information", requires disclosures related to components of a company for which separate financial information is available and evaluated regularly by the Company's chief operating decision makers in deciding how to allocate resources and in assessing performance. It also requires segment disclosures about products and services as well as geographic areas. The Company has determined that it does not have any separately reportable operating segments. However, the Company does sell software and related products in geographic locations outside of the United States. Revenue attributed to individual countries based on the location of sales to unaffiliated customers for the three months ended January 31, 2001 and 2000 is as follows:
Three Months Ended January 31, 2001 2000 ---------- ---------- Revenue: United States $ 711,384 $ 390,710 Asia pacific 284,184 41,923 Europe 40,537 94,325 Other countries 17,555 26,241 ---------- ---------- Total revenue $1,053,660 $ 553,199 ========== ==========
- 12 - 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto, included elsewhere in this quarterly filing as well as our Annual Report on Form 10-K for the year ended October 31, 2000 filed with the Securities and Exchange Commission. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" and elsewhere in this quarterly filing. OVERVIEW We began operations in 1994 as Caldera, Inc. In July 1996, through an asset purchase, Caldera, Inc. acquired an additional business unit that was not engaged in developing and marketing Linux software. Caldera, Inc. subsequently made the strategic determination to separate its two business lines into separate entities and, under an asset purchase agreement dated as of September 1, 1998, as amended, sold the assets relating to its business of developing and marketing Linux software to Caldera Systems, Inc., ("Caldera") a newly formed corporation. Caldera has operated as a separate legal entity engaged in developing and marketing Linux software since September 1, 1998. Since September 1, 1998, we have invested heavily in the expansion of our sales, marketing and professional services organizations to support our long-term growth strategy. As a result, our employee headcount has increased from 28 at September 1, 1998 to 192 at January 31, 2001. We have incurred net losses in each fiscal period since inception and as of January 31, 2001, had an accumulated deficit of $59.9 million. On February 9, 2001, Caldera, Caldera International, or New Caldera, and The Santa Cruz Operation, Inc. or SCO, entered into an amendment to the reorganization agreement that was originally entered into on August 1, 2000 and was subsequently amended on September 13, 2000 and December 12, 2000. The reorganization agreement provides for a combination with the server and professional services groups of SCO. If the combination closes, each share of Caldera common stock will be exchanged for one share of common stock of New Caldera. SCO will receive 16 million shares of New Caldera (representing approximately 25.3% of New Caldera on a fully diluted basis), $23 million in cash (of which $7 million was advanced to SCO on January 26, 2001 in the form of a 10% interest-bearing promissory note) and a non-interest bearing promissory note in the amount of $8 million. In addition, if the OpenServer line of business of the server and professional services groups generates revenue in excess of specified thresholds during the three-year period following the completion of the combination, SCO will have earn-out rights entitling SCO to receive 45% of this excess revenue. SCO employees who join New Caldera will receive options to purchase approximately 1.8 million shares of common stock of New Caldera (representing approximately 2.8% of New Caldera on a fully diluted basis). In the combination, Caldera will become a subsidiary of New Caldera. - 13 - 14 Substantially all of our current revenue is derived from sales of Linux products and related services. We expect that until the closing of the Reorganization, the majority of our revenue will continue to be derived from sales of our eDesktop and eServer products. If the acquisition of the SCO server and professional services groups is completed, the majority of our revenue will be derived from sales of OpenServer and UnixWare products as well as from products resulting from the integration of our Linux products with the OpenServer and UnixWare products and related applications. Historically, we have experienced substantial fluctuations in our revenue from period to period relating to the introduction of new products and new versions of our existing products. Upon our announcement of an expected release date for new products or upgrades, we often experience a significant decrease in sales of our existing products. Additionally, we often experience the strongest sales for a new product during the first 30 days after its introduction as we fill advance orders from our distribution channel partners. We recognize revenue in accordance with the American Institute of Certified Public Accountants, or AICPA, Statement of Position 97-2, or SOP 97-2 and Statement of Position 98-9, or SOP 98-9. Accordingly, revenue from the sale of software and related products is recognized upon delivery of the product when persuasive evidence of an arrangement exists, the price is fixed or determinable and collection is probable. All sales into the distribution channel or to OEM's and VAR's require a binding purchase order. Prior to November 1, 2000, sales to resellers for which payment was considered to be substantially contingent on the reseller's success in distributing individual units of the product or sales to resellers with which Caldera did not have historical experience were accounted for as consignments and the revenue was recognized once sell-through verification was received and payments from customers became due. Prior to October 31, 1999, Caldera did not have any consignment arrangements. During the year ended October 31, 2000, approximately 22% of product revenue was derived on a sell-through basis. Effective November 1, 2000, the Company began to defer revenue recognition for products sold through the distribution channel until the products have been sold through the channel to the end user. All sales require a binding purchase order. Direct sales to end-users are evidenced by concurrent payment for the product via credit card and are governed by a license agreement. Generally, the only multiple element arrangement of our initial software sales is certain telephone and e-mail technical support services we provide at no additional charge. These services do not include product update or upgrade rights. After the initial support period, customers can elect to enter into separate support agreements. The cost of providing the initial support services is not significant; accordingly, we accrue the estimated costs of providing the services at the time of revenue recognition. Revenue from extended support agreements or maintenance contracts is 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, we have not shipped any software and - 14 - 15 related products subject to acceptance terms or subject to other post-delivery vendor obligations. Additionally, we have not recognized revenue on any contracts with customers that may include customer cancellation or termination clauses that indicate a demonstration period or otherwise incomplete transaction. We also offer our customers consulting, training and other services separate from the software sale. The services are not integral to the functionality of the software and are available from other vendors. This services revenue is recognized as the services are performed. Software and related products revenue is comprised of revenue from the sale of software and other products such as shipments of incomplete box units or documentation materials. Services revenue is comprised of training royalties and tuition fees, consulting fees and customer support fees. Cost of software and related products revenue primarily consists of our costs for production, packaging, fulfillment and shipment of our product offerings. Additionally, royalties paid to third parties for inclusion of their software products in our product offerings are included in these costs. Cost of services revenue is primarily comprised of salaries and related costs of support services employees. Included in sales and marketing expenses are the following: advertising, channel promotions, marketing development funds, promotional activities, public relations, trade show and personnel-related expenses such as salaries, benefits, commissions, recruiting fees, travel and entertainment expenses. Research and development expenses consist of payroll and related costs for software engineers, technical writers, quality assurance and research and development management personnel and the costs of materials used by these employees in the development of new or enhanced product offerings. General and administrative expenses are composed of professional fees, salaries and related costs for accounting, administrative, finance, human resources, and legal personnel. RESULTS OF OPERATIONS THREE-MONTH PERIODS ENDED JANUARY 31, 2001 AND 2000 Revenue Our revenue was $1.1 million for the three-month period ended January 31, 2001 and $553,000 for the three-month period ended January 31, 2000. During the three-month period ended January 31, 2001, approximately 43 percent of our revenue was generated from the sale of software and related products. During the three-month period ended January 31, 2000, approximately 71 percent of our revenue was generated from the sale of software and related products. Revenue from international customers was approximately 32 percent of total revenue for the three-month period ended January 31, 2001, and 29 percent of total revenue for the three-month period ended January 31, 2000. - 15 - 16 Software and Related Products. Our software and related products revenue was $452,000 for the three-month period ended January 31, 2001 and $395,000 for the three-month period ended January 31, 2000, an increase of $57,000, or 15%. The increase during the three-month period ended January 31, 2001 was primarily attributed to the release of Caldera Volution, our second eBusiness product that was released late in January 2001. During the three-month period ended January 31, 2001 revenue from corporate and OEM customers exceeded our revenue from retail sales as Caldera has continued to focus on corporate and OEM accounts while competition and pricing pressures have continued to weaken retail sales. Services. Our services revenue was $601,000 for the three-month period ended January 31, 2001 and $158,000 for the three-month period ended January 31, 2000, an increase of $443,000, or 280%. The increase in services revenue over the same three-month period of the prior year was primarily attributed to our increased education and training-related offerings as well as from promotional fees received from our Linux training program. Cost of Revenue Cost of Software and Related Products Revenue. Our cost of software and related products revenue was $227,000 for the three-month period ended January 31, 2001 and $295,000 for the three-month period ended January 31, 2000, a decrease of $68,000, or 23%. Cost of software and related products revenue as a percentage of software and related products revenue was 50% for the three-month period ended January 31, 2001 and 75% for the three-month period ended January 31, 2000. The decrease as a percentage of software and related products revenue is attributed to the release of Caldera Volution and our focus on corporate and OEM accounts, which have a higher gross margin percentage. In addition, we recorded an inventory reserve of approximately $43,000 during the three-month period ended January 31, 2000. Cost of Services Revenue. Our cost of services revenue was $950,000 for the three-month period ended January 31, 2001 and $255,000 for the three-month period ended January 31, 2000, an increase of $695,000, or 272%. The increase in cost of services revenue was due in part to additional employees and other internal costs to increase our support offerings as well as for costs related to our Linux training program. Cost of services revenue as a percentage of services revenue was 158% for the three-month period ended January 31, 2001 and 161% for the three-month period ended January 31, 2000. Operating Expenses Sales and Marketing. Our sales and marketing expenses were $5.5 million for the three-month period ended January 31, 2001 and $2.0 million for the three-month period ended January 31, 2000, an increase of $3.5 million, or 172%. The increase was primarily attributed to additional marketing expenses in anticipation of our acquisition of the server software and professional services groups of SCO, marketing expenses related to the launch and release of Caldera Volution, attendance at two major Linux tradeshows and increased personnel costs. - 16 - 17 General and Administrative. Our general and administrative expenses were $1.7 million for the three-month period ended January 31, 2001 and $1.1 million for the three-month period ended January 31, 2000, an increase of $669,000, or 62%. The increase in expenses was mainly attributed to increased salaries and benefits for additional general and administrative employees and increased facilities and related costs consistent with our growth in personnel and overall business. Research and Development. Our research and development expenses were $1.9 million for the three-month period ended January 31, 2001 and $1.0 million for the three-month period ended January 31, 2000, an increase of $904,000, or 94%. The increase in research and development expenses was primarily attributed to payroll costs and related benefits for additional employees for software development and quality assurance as our research and development staff increased from 36 as of January 31, 2000 to 62 as of January 31, 2001. Cost-sharing Arrangement with The Santa Cruz Operation. 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. Caldera agreed to reimburse SCO for costs related to certain employees that SCO had identified for termination in a company-wide layoff in September 2000. Caldera viewed these employees as a critical part of the success of the new combined company and SCO agreed to retain the employees if Caldera would reimburse SCO for a portion of their payroll and related costs. At the time Caldera committed to reimburse SCO for these employee costs, the ultimate amount was not determinable and both parties agreed that the amount would be determined prior to the completion of the acquisition. During December 2000, both parties agreed, pursuant to an amendment to the reorganization agreement, that Caldera would reimburse SCO $1.5 million relating to services rendered from August though December 2000. Accordingly, as of October 31, 2000, Caldera accrued $898,026. The Company recorded the remaining $601,974 during the three-month period ended January 31, 2001. Caldera made the $1.5 million payment to SCO on January 26, 2001. Non-cash Compensation. In connection with stock options granted to employees, we amortized approximately $334,000 of deferred compensation during the three-month period ended January 31, 2001. During the three-month period ended January 31, 2000, we amortized $1.5 million of deferred compensation. Equity in Loss of Affiliate Through January 5, 2001, Caldera accounted for its investment in Ebiz Enterprises, Inc. ("Ebiz") using the equity method of accounting. Under the equity method, Caldera recognized its portion of the net income or net loss of Ebiz in its consolidated statement of operations. For the three months ended January 31, 2001, Caldera recognized approximately $431,000 in its statement of operations that represented its portion of Ebiz's net loss for the period from October 31, 2000 through January 5, 2001. Additionally, because Ebiz had a stockholders' deficit at the time of Caldera's investment, Caldera was amortizing, on a straight-line basis, the difference - 17 - 18 between its portion of the Ebiz net stockholders' deficit and Caldera's basis in the Ebiz common stock. For the three months ended January 31, 2001, Caldera recognized approximately $217,000 of amortization in connection with its investment in Ebiz. During the three-month period ended January 31, 2001, Caldera's ownership interest in Ebiz was diluted to approximately 12 percent as a result of Ebiz issuing new shares in connection with an acquisition and the conversion of convertible securities. As a result of these transactions, on January 5, 2001, Caldera discontinued the use of the equity method of accounting for its investment in Ebiz. Subsequent to January 5, 2001, Caldera has accounted for its investment as an available-for-sale security in accordance with SFAS 115. Under SFAS 115, Caldera carries its investment at fair market value using quoted trading prices. As of January 31, 2001 had an unrecognized loss of approximately $2.3 million as a component of other comprehensive loss. Other Income (Expense), net Other income (expense), net consists primarily of interest income received on cash and equivalents. Interest income was $1.0 million during the three-month period ended January 31, 2001, and $113,000 during the three-month period ended January 31, 2000. The increase is related to higher cash balances during the period ended January 31, 2001. Provision for Income Taxes For the three-month periods ended January 31, 2001 and 2000, our subsidiary, Caldera GmbH, incurred income tax expense of $27,000 and $13,000, respectively. LIQUIDITY AND CAPITAL RESOURCES Since inception as a separate legal entity in August 1998, we have funded our operations primarily through loans from our major stockholder and through sales of common and preferred stock. As of January 31, 2001, we had cash and cash equivalents and available-for-sale securities of $78.7 million and working capital of $82.1 million. Decreases in cash and cash equivalents and working capital from October 31, 2000 were the result of cash used in operations of approximately $7.2 million, a cost-sharing payment to SCO of $1.5 million and an advance of $7.0 million to SCO as part of the consideration for the server and professional services groups. Our net cash used in operations during the three-month period ended January 31, 2001 was $7.2 million. Cash used in operations was primarily attributed to the net loss of $9.8 million. The net loss was partially offset by non-cash charges for the amortization of deferred compensation, depreciation and amortization and equity in loss of affiliate. Our investing activities have historically consisted of purchases of property and equipment and certain intangible assets, investing in strategic partners and the purchase of available-for-sale securities. During the three-month period ended January 31, 2001, cash used in investing activities was $1.4 million. The primary uses of cash during the - 18 - 19 three-month period ended January 31, 2001 were for a $7.0 million payment made to SCO as part of the consideration for the Reorganization as well as costs paid for capital expenditures and acquisition costs partially offset by the net proceeds received from the purchase and sale of available-for-sale securities. We anticipate that we will experience an increase in the level of our capital expenditures, lease commitments and investment activities as we grow our operations. In conjunction with the signing of the reorganization agreement, Caldera advanced the $7 million cash portion of the purchase price for the server and professional services groups in the form of a promissory note that matures on either of the closing of the combination or the date of termination of the reorganization agreement. The loan was made on January 26, 2001. If the combination closes, the loan will be treated by Caldera and SCO as part of the cash portion of the consideration to SCO for the server and professional services groups. The loan is secured by a first priority security interest in all of SCO's assets and is convertible at Caldera's option into SCO common stock at a price per share of $2.44, the closing price of SCO's common stock on January 26, 2001. Our financing activities provided approximately $250,000 during the three-month period ended January 31, 2001 as a result of the exercise of vested stock options. As of January 31, 2001, we had no outstanding debt obligations. Caldera's accounts receivable balance decreased from $1.5 million as of October 31, 2000 to $840,000 as of January 31, 2001, a decrease of $705,000. The decrease in accounts receivable relates to collections of customer balances as well as an increase in the Company's reserve for sales returns. The allowance for doubtful accounts decreased from $312,000 as of October 31, 2000 to $225,000 as of January 31, 2001, a decrease of $87,000. As a percentage of total accounts receivable, the allowance increased slightly from 17 percent as of October 31, 2000 to 21 percent as of January 31, 2001, as Caldera increased its general provision for uncollectable accounts as a result of concerns related to certain past due accounts. Management believes that its current cash and cash equivalents and available-for-sale securities will be sufficient to meet capital expenditures and working capital requirements for at least the next twelve months. However, Caldera may need to raise additional funds to support more rapid expansion, respond to competitive pressures, acquire complimentary businesses or technologies, respond to unanticipated requirements or to fund the acquired operations of the server software and professional services groups of SCO if the acquisition is completed. 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. - 19 - 20 RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", or SFAS 133. SFAS 133 establishes new accounting and reporting standards for companies to report information about derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. This statement, as amended, became effective for the Company beginning November 1, 2000. The adoption of this statement did not have a material impact on our results of operations, financial position or liquidity. In December 1999, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". This pronouncement summarizes certain of the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company adopted SAB 101 during the quarter ended January 31, 2001. The adoption of SAB 101 did not have a material impact on our results of operations, financial position or liquidity. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Caldera's products and services are primarily developed in the United States and marketed in North America, and to a lesser extent in Europe and Asia/Pacific regions. As a result, financial results could be affected by changes in foreign currency exchange rates or weak economic conditions in foreign markets. Because all of the Caldera's revenue is currently denominated in U.S. dollars, a strengthening of the dollar could make its Linux products less competitive in foreign markets. FOREIGN CURRENCY RISK Caldera's German subsidiary, Caldera Deutschland, GmbH, performs research and development activities. To date, foreign currency fluctuations have had little effect on Caldera's business because only its German subsidiary's contracts, payables and receivables are denominated in a foreign currency. As of January 31, 2001, the assets of Caldera Deutschland were approximately $953,000. All other transactions of Caldera's business are denominated in the U.S. dollar. As time passes and as management sees fit, more transactions in Europe and Asia may be denominated in local currencies. As Caldera expands operations in Europe and Asia, management will continue to evaluate its foreign currency exposures and risks and develop appropriate hedging or other strategies to manage those risks. Management has not revised its current business practices to conform to Europe's conversion to the euro. Caldera has not modified any of its products to address Europe's conversion to the euro. Additionally, Caldera has not engaged in any foreign currency hedging activities. 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 - 20 - 21 states will have been conducted in both the 25 existing national currencies, such as the Franc or Deutsche Mark, and the Euro. As a result, companies operating in or conducting business in EMU member states will need to ensure that their financial and other software systems are capable of processing transactions and properly handling these currencies, including the Euro. Caldera has not yet determined all of the costs related to addressing this issue, and there can be no assurance that this issue and its related costs will not have a materially adverse affect on Caldera's business, operating results and financial condition. Because the EMU member states fixed the value of their respective national currencies to the Euro, the dispositive exchange rate for determining the effects of foreign currency fluctuation on the results of operations of a U.S. company earning significant revenues from Europe is the U.S. dollar-Euro exchange rate. The overall trend since the adoption of the Euro in January 1999 has been a devaluation compared to the U.S. dollar. Historically, Caldera has not been materially effected by fluctuations in the U.S. dollar-Euro exchange rates because the level of activity denominated in Euros has not been significant. INTEREST RATE RISK The primary objective of Caldera's cash management strategy is to invest available funds in a manner that assures maximum safety and liquidity and maximizes yield within such constraints. A portion of the securities in which Caldera invests may be subject to market risk, which means that a change in prevailing rates or market conditions may adversely affect the principal amount of the investment. To minimize this risk, Caldera will invest in a broad range of short-term fixed income securities with varying maturities. As of January 31, 2001, available-for-sale securities included money market instruments, tax-exempt municipal funds, notes, and bonds, US government security backed instruments and our investment in Ebiz. Caldera does not borrow money for short-term investment purposes. INVESTMENT RISK Caldera has invested in equity instruments of privately held and public companies for business and strategic purposes. Investments in privately held companies are included under the caption Investments in the consolidated balance sheet and are accounted for under the cost method as Caldera's ownership is less than 20 percent and Caldera is not able to exercise influence over operations. Caldera's only investment to date in a public Company is in Ebiz Enterprises, Inc., which is included in the caption available-for-sale securities in the condensed consolidated balance sheet as of January 31, 2001. 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. RISK FACTORS WE ARE A NEW COMPANY WITH A LIMITED OPERATING HISTORY, WHICH MAY MAKE IT DIFFICULT FOR YOU TO ASSESS THE RISKS RELATED TO OUR BUSINESS - 21 - 22 Although we began operations in 1994, during the past 24 months we have substantially revised our business plan to focus on Linux for eBusiness, made additions to our product line and hired a significant number of new employees, including key members of our management team. In January 2000, we released our server product, eServer. In January 2001, we released our management product, Volution. Our historical sales have been primarily from our OpenLinux products, including OpenLinux 2.3 (renamed eDesktop because of its focus on the desktop environment), which were historically developed for first-time Linux users who predominantly have experience using Windows desktop environments. As a company in a new and rapidly evolving industry, we face risks and uncertainties relating to our ability to successfully implement our strategy. You must consider the risks, expenses and uncertainties that a company like ours, operating with an unproven business model, faces in a new and rapidly evolving market such as the market for Linux software. These risks also include our ability to: - broaden awareness of the Caldera Systems brand; - maintain our current, and develop new, strategic relationships with technology partners and solutions providers; - attract, integrate and retain qualified management personnel; - attract, integrate and retain qualified personnel for the expansion of our sales, professional services, engineering, marketing and customer support organizations; - continue to develop and upgrade product offerings tailored for business; - respond effectively to competitive pressures; and - generate revenues from the sale of our software products, services, education programs and training. If we cannot address these risks and uncertainties or are unable to execute our strategy, we may not be successful. WE HAVE NOT BEEN PROFITABLE AND WE EXPECT OUR LOSSES TO CONTINUE We have never been profitable and do not expect to achieve profitability until at least fiscal year 2002. If our revenue declines or grows at a slower rate than we anticipate, or if our spending levels exceed our expectations or cannot be adjusted to reflect slower revenue growth, we may not generate sufficient revenue to achieve or sustain profitability or generate positive cash flow. For the three months ended January 31, 2001, we incurred a net loss of approximately $9.8 million. As of January 31, 2001, we had incurred total net losses of approximately $66.3 million since the inception of our business in 1994. We expect to continue to incur net losses because we anticipate incurring significant expenses in connection with developing our products, hiring and training employees, expanding our market reach and building awareness of our brand. We forecast our future expense levels based on our operating plans and our estimates of future revenue. We may find it necessary to accelerate expenditures relating to product development and support and our sales and marketing efforts beyond our current - 22 - 23 expectations or otherwise increase our financial commitment to creating and maintaining brand awareness among potential customers. YOU SHOULD NOT RELY ON OUR QUARTERLY OPERATING RESULTS AS AN INDICATION OF OUR FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. FLUCTUATIONS IN OUR OPERATING RESULTS OR THE FAILURE OF OUR OPERATING RESULTS TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS MAY NEGATIVELY IMPACT OUR STOCK PRICE Our quarterly operating results have varied in the past and we expect them to fluctuate significantly in the future due to a variety of factors that could affect our revenue or our expenses in any particular quarter. Historically, we have experienced substantial fluctuations in our software and related products revenue from period to period relating to the introduction of new products and new versions of our existing products. For example, revenue from software and related products for the quarter ended April 30, 1999 was approximately $482,000 and increased to approximately $1.0 million during the quarter ended July 31, 1999. Software and related products revenue decreased to approximately $775,000 during the quarter ended October 31, 1999, further decreased to approximately $395,000 during the quarter ended January 31, 2000 and then increased to approximately $1.1 million for the quarter ending April 30, 2000. Software and related products revenue then decreased to approximately $631,000 during the quarter ended July 31, 2000. Software and related products revenue increased to approximately $845,000 for the quarter ended October 31, 2000 and most recently has decreased to approximately $452,000 during the quarter ended January 31, 2001. These quarterly revenue fluctuations were primarily due to the fluctuation of sales of our OpenLinux products, and these fluctuations in revenue can be expected to continue as a result of fluctuating sales of all of our products, including our new product offerings. Upon our announcement of an expected release date for a new product or upgrade, we often experience a significant decrease in sales of our existing products. Additionally, we often experience the strongest sales for a new product during the first 30 days after its introduction as we fill advance orders from our distribution channel partners. Fluctuations in our quarterly operating results could cause our stock price to decline. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. Factors that may affect our quarterly results include: - the interest level of electronic solutions providers in recommending our Linux business solutions to end users; - the introduction, development, timing, competitive pricing and market acceptance of our products and services and those of our competitors; - changes in general economic conditions, such as recessions, that could affect capital expenditures and recruiting efforts in the software industry in general and in the Linux environment in particular; - the magnitude and timing of marketing initiatives; - 23 - 24 - changing business attitudes toward Linux as a viable operating system alternative to other competing systems; - the maintenance and development of our strategic relationships with technology partners and solution providers; - the attraction, retention and training of key personnel; and - our ability to manage our anticipated growth and expansion. As a result of the factors listed above and elsewhere, it is possible that in some future periods our results of operations may be below the expectations of public market analysts and investors. This could cause our stock price to decline. In addition, we plan to increase our operating expenses to expand our sales and marketing, administration, consulting and training, maintenance and technical support and research and development groups. If revenue falls below our expectations in any quarter and we are unable to quickly reduce our spending in response, our operating results would be lower than expected and our stock price may fall. WE RELY ON OUR INDIRECT SALES CHANNEL FOR DISTRIBUTION OF OUR PRODUCTS, AND ANY DISRUPTION OF OUR CHANNEL AT ANY LEVEL COULD ADVERSELY AFFECT THE SALES OF OUR PRODUCTS We have a two-tiered distribution channel through which the majority of our sales occur. These relationships allow us to offer our products and services to a much larger customer base than we would otherwise be able to reach through our direct sales and marketing efforts. Some electronic solutions providers also purchase eBusiness solutions through our distributors, and we anticipate they will continue to do so as we expand our product offerings for eBusiness. Because we usually sell indirectly through distributors to electronic solutions providers, we cannot control the relationships through which they purchase our products. In turn we do not control the presentation of our products by electronic solutions providers to end-users. Therefore, our distribution channel could be affected by disruptions in the relationships between our distributors and electronic solutions providers or between electronic solutions providers and end users. Also, distributors and electronic solutions providers may choose not to emphasize use of our products to their customers. Any of these occurrences could diminish the effectiveness of our distribution channel and lead to decreased sales. However, to our knowledge, none of our international distributors engages in discounting or other business practices unique to their respective geographic regions that materially affects or could materially affect our results of operations, although they could do so in the future. In particular, we are highly dependent on our relationships with our distribution partners, such as Ingram Micro, Navarre Corporation and Tech Data, domestically, and MediaGold in Europe, for the distribution of our products. Sales to all distributors accounted for approximately 12 percent of our total revenue for the three-month period ended January 31, 2001. We plan to continue to develop relationships with new distributors to introduce product and service offerings into new markets, including into foreign countries. If any of these distribution partners do not provide opportunities for growth or become closed to us, or if we are unable to create new distribution channels - 24 - 25 for new markets, we will be required to seek alternative channels of distribution for our products and services. We may be unable to do so, in which case our business would suffer. OUR BUSINESS MODEL, WHICH RELIES ON A COMBINATION OF OPEN SOURCE SOFTWARE AND PROPRIETARY TECHNOLOGY, IS UNPROVEN Our business model incorporates as integral elements of our product offerings both commercial products and open source software. We know of no company that has built a profitable business based in whole or in part on open source software. By incorporating open source components in our product offerings, we face many of the same risks that other open source company's experience, including the inability to offer warranties and indemnities on products and services. In addition, by developing products based on proprietary technology that is not freely downloadable we may run counter to the perception of Linux as an open source model and alienate the Linux community. Negative reaction such as this, if widely shared by our customers, developers or the open source community, could harm our reputation, diminish our brand and decrease our revenue. Our business will fail if we are unable to successfully implement our business model. Our business model also depends upon incorporating contributions from the open source community into products that we open source. The viability of our product offerings depends in large measure upon the efforts of the open source community in enhancing products and making them compatible for use across multiple software and hardware platforms. There are no guarantees that these products will be embraced by the open source community such that programmers will contribute sufficient resources for their development. If the open source community does not embrace products that we view as integral to providing eBusiness solutions, we will be required to devote significant resources to develop these products on our own. THE SALES CYCLE FOR OUR PRODUCTS IS LONG AND WE MAY INCUR SUBSTANTIAL NON-RECOVERABLE EXPENSES; WE DEVOTE SIGNIFICANT RESOURCES TO SALES THAT MAY NOT OCCUR WHEN ANTICIPATED OR AT ALL The length of time between initial contact with a potential customer and sale of a product, or our sales cycle, outside the retail channel is typically complex and lengthy, lasting from three to nine months. These direct sales also represent our largest orders. Therefore, our revenue for a period is likely to be affected by the timing of larger orders, which makes the related revenue difficult to predict. Our revenue for a quarter could be reduced if large orders forecasted for a certain quarter are delayed or are not realized. The cycle factors that could delay or defer an order, include: - time needed for technical evaluations of our software by customers; - customer budget restrictions; - customer internal review and testing procedures; and - engineering work needed to integrate our software with the customer's systems. - 25 - 26 BECAUSE OUR PRODUCTS HAVE RELATIVELY SHORT LIFE CYCLES, WE MUST DEVELOP AND INTRODUCE NEW PRODUCTS TO SUSTAIN OUR LEVEL OF SALES Our software products have a limited life cycle and it is difficult to estimate when they will become obsolete. If we do not develop and introduce new products before our existing products have completed their life cycles, we will not be able to sustain our level of sales. In addition, to succeed, many customers must adopt our new products early in the product's life cycle. Therefore, if we do not attract sufficient customers early in a product's life, we may not realize the amount of revenue that we anticipate for the product. We cannot be sure that we will continue to be successful in marketing our key products. WE RELY ON INDEPENDENT DEVELOPERS IN THE OPEN SOURCE COMMUNITY, SUCH AS LINUS TORVALDS, IN ORDER TO RELEASE UPGRADES OF OUR LINUX-BASED PRODUCTS Many of the components of our software products, including the Linux kernel, the core of the Linux operating system, are developed by independent developers in the open source community and are available for inclusion in our products without cost. Linus Torvalds, the original developer of the Linux kernel, and a small group of independent engineers have in the past developed and upgraded the Linux kernel. Neither Mr. Torvalds nor any significant contributor to the Linux kernel is an employee of ours, and none of these individuals are required to further update the Linux kernel. If these independent developers and others in the open source community do not further develop the Linux kernel and other open source software included in our products on a timely basis, or at all, our ability to enhance our product offerings will suffer. As a consequence, we will be forced to rely to a greater extent on our own development efforts or license commercial software products as replacements, which would increase our expenses and delay enhancements to our products. For example, in the past we have sometimes been unable to upgrade all open source components of a product in connection with a proposed release because enhancements had not yet been made by these independent developers. Any failure on the part of the kernel developers to further develop and enhance the kernel could also stifle the development of additional Linux applications. OUR RELIANCE ON INDEPENDENT THIRD PARTIES WHO DEVELOP MOST OF THE SOFTWARE INCLUDED IN OUR PRODUCTS COULD RESULT IN DELAYS OR UNRELIABLE PRODUCTS AND DAMAGE TO OUR REPUTATION. Our products consist of many different software components and applications, most of which are developed by independent third parties over whom we have limited or no control. While we use rigid engineering standards in testing the products or applications that we integrate in our products, we cannot guarantee that we have selected or will select in the future the most reliable components available in the market or that we will successfully integrate the many components of our products. In addition, if any of these third-party products are not reliable or available, we may have to develop them ourselves, which would significantly increase our development expenses and delay our time to market. Our customers could be dissatisfied if any of - 26 - 27 these products fail to work as designed or if adequate support is not provided, which could damage our reputation and lead to potential litigation. IF THE MARKET FOR LINUX BUSINESS SOLUTIONS DOES NOT GROW AS WE ANTICIPATE, WE MAY NOT BE ABLE TO CONTINUE OUR BUSINESS PLAN AND GROW OUR BUSINESS Our strategy for marketing Linux solutions to businesses depends in part upon our belief that many businesses will follow a trend away from the use of networked computers linked by centralized servers and move toward the use of distributed applications through thin appliance servers, or specialized servers, Internet access devices and application service providers. We also are relying on electronic solutions providers making these technologies available on Linux and on Linux then becoming a desirable operating system under these circumstances. We also plan to market our Linux products for use on these specialized servers and Internet access devices, which we believe will become widely used for eBusiness. However, if businesses, which at present favor Microsoft and other non-Linux operating systems, do not adopt these trends in the near future, or if Linux is not viewed as a desirable operating system in connection with these trends, a significant market for our products may not develop. Factors that may keep businesses from adopting these trends include: - costs of installing and implementing new hardware devices; - costs of porting legacy systems into new platforms; - security concerns regarding manipulation of data through application service providers; - limited adoption of Linux among businesses generally; - previous significant investments in competing systems; - lack of adequate Linux-trained professionals and support services; - lack of standards among Linux products and applications; and - lack of acceptance of the Internet as a medium for distributing business applications. Even if these trends toward distributed applications are adopted, if the development of Linux products and Linux applications is not sufficient to meet the needs of eBusiness, a significant market for Linux business solutions such as ours may not materialize. WE COULD BE PREVENTED FROM SELLING OR DEVELOPING OUR PRODUCTS IF THE GNU GENERAL PUBLIC LICENSE AND SIMILAR LICENSES UNDER WHICH ARE PRODUCTS ARE DEVELOPED AND LICENSED ARE NOT ENFORCEABLE The Linux kernel and certain other components of our products have been developed and licensed under the GNU General Public License and similar licenses. These licenses state that any program licensed under them may be liberally copied, used, modified and distributed freely, so long as all modifications are also freely made - 27 - 28 available and licensed under the same conditions. We know of no instance in which a party has challenged the validity of these licenses or in which these licenses have been interpreted in a legal proceeding. To date, all compliance with these licenses has been voluntary. It is possible that a court would hold one or more of these licenses to be unenforceable in the event that someone were to file a claim asserting proprietary rights in a program developed and distributed under them. Any ruling by a court that these licenses are not enforceable, or that Linux operating systems, or significant portions of them, may not be liberally copied, modified or distributed freely, would have the effect of preventing us from selling or developing our products, unless we are able to negotiate a license to use the software or replace the affected portions. These licenses could be expensive, which could impair our ability to price our products competitively. WE ARE VULNERABLE TO CLAIMS THAT OUR PRODUCTS INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS, PARTICULARLY BECAUSE OUR PRODUCTS ARE COMPRISED OF MANY DISTINCT SOFTWARE COMPONENTS DEVELOPED BY THOUSANDS OF INDEPENDENT PARTIES We may be exposed to future litigation based on claims that our products infringe the intellectual property rights of others. This risk is exacerbated by the fact that most of the code in our products is developed by independent parties over whom we exercise no supervision or control and who, themselves, might not have the same financial resources as us to pay damages to a successful litigant. Claims of infringement could require us to re-engineer our products or seek to obtain licenses from third parties in order to continue offering our products. In addition, an adverse legal decision affecting our intellectual property, or the use of significant resources to defend against this type of claim could place a significant strain on our financial resources and harm our reputation. FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS ADEQUATELY WOULD RESULT IN SIGNIFICANT HARM TO OUR BUSINESS While much of the code for our products is open source, our success depends significantly on our ability to protect our trademarks, trade secrets and certain proprietary technology contained in our products. We rely on a combination of copyright and trademark laws, and on trade secrets and confidentiality provisions and other contractual provisions to protect our proprietary rights. These measures afford only limited protection. Some trademarks that have been registered in the United States have been licensed to us, and we have other trademark applications pending in the United States. Effective trademark protection may not be available in every country in which we intend to offer our products and services. Our means of protecting our proprietary rights in the United States or abroad may not be adequate and competitors may independently develop similar technologies. Our future success will depend in part on our ability to protect our proprietary rights. Despite our efforts to protect our proprietary rights and technologies, unauthorized parties may attempt to copy aspects of our products or to obtain and use trade secrets or other information that we regard as proprietary. Legal proceedings to enforce our intellectual property rights could be burdensome and expensive and could involve a high degree of uncertainty. These legal proceedings may also divert management's attention from growing our business. In addition, the laws of some foreign countries do not protect our proprietary rights as - 28 - 29 fully as do the laws of the United States. If we do not enforce and protect our intellectual property, our business may suffer substantial harm. WE MAY FACE POTENTIAL LIABILITY FOR MATERIAL PUBLISHED OR MADE AVAILABLE ON OUR WEB SITE AND OTHER SITES LINKED TO IT We may be sued for defamation, civil rights infringement, negligence, copyright or trademark infringement, personal injury, product liability or other legal claims relating to information that is published or made available on our Web site and the other sites linked to it. These types of claims have been brought, sometimes successfully, against providers of online services in the past. We could also be sued for the content that is accessible from our web site and through links to other Internet sites or through content and materials that may be posted by members in chat rooms or on bulletin boards. Our insurance does not specifically provide for coverage of these types of claims and therefore may not adequately protect us against these types of claims. In addition, we could incur significant costs in investigating and defending such claims, even if we ultimately are not liable. If any of these events occur, our revenue and the value of your investment could be materially adversely affected. WE MUST ACHIEVE RAPID MARKET PENETRATION OF OUR PRODUCTS IN ORDER TO COMPETE SUCCESSFULLY Because the Linux and eBusiness markets are new and emerging, companies that are early in providing products and solutions for these markets will have an advantage in building awareness and consumer loyalty. Therefore, in order for us to successfully market our products on a wide scale, we must rapidly achieve market penetration. For example, if we are unable to demonstrate the viability of our products through rapid growth: - software developers will be less likely to develop applications for our products; - we will be unable to achieve economies of scale; - we will be less able to negotiate favorable terms with distributors and other partners; and - customers will be less likely to devote resources to purchasing and implementing our products if they are not seen as an industry standard. We may lack the economic and managerial resources necessary to promote this growth. Also, the fact that we rely almost entirely on the success of a few principal products affects our ability to penetrate diversified markets. In addition, while we believe our process of self-hosting results in superior products, it requires time and resources that may delay new product releases and upgrades. These delays could affect our ability to take advantage of market opportunities on a timely basis. OUR BRAND MAY NOT ACHIEVE THE BROAD RECOGNITION NECESSARY TO SUCCEED We believe that broad recognition and a favorable audience perception of the Caldera Systems brand will be essential to our success. If our brand does not achieve - 29 - 30 broad recognition as the leading provider of Linux solutions for eBusiness, our success will be limited. We intend to build brand recognition through advertising our products and services and by marketing www.calderasystems.com as a premier online resource for eBusiness solutions. During the three months ended January 31, 2001, we spent approximately $907,000 for advertising. We expect to significantly increase our advertising expenses in future periods as we build the Caldera Systems brand and awareness of our products and services. We may lack the resources necessary to accomplish these initiatives. Even if the resources are available, we cannot be certain that our brand enhancement strategy will deliver the brand recognition and favorable audience perception that we seek. If our strategy is unsuccessful, these expenses may never be recovered and we may be unable to increase future revenues. Even if we achieve greater recognition of our brand, competitors with greater resources or a more recognizable brand could reduce our market share of the emerging Linux market, as well as the broader market for the provision of eBusiness solutions. OUR STRATEGY TO PROVIDE SOLUTIONS FOR eBUSINESS DEPENDS UPON OUR ABILITY TO SUCCESSFULLY INTRODUCE PRODUCTS TAILORED FOR eBUSINESS To date, practically all of our sales revenue has come from retail sales of OpenLinux, which is designed to assist the first-time Linux user who may be familiar with a Windows, desktop environment. However, our business model is targeted toward using Linux solutions to facilitate eBusiness. In order for our strategy of providing Linux solutions for eBusiness to be successful, we must provide products that meet the needs of solutions providers and their eBusiness customers. In January 2000, we released our server product, OpenLinux eServer. In January 2001, we released Volution, our second eBusiness product. These new products, our primary eBusiness products, may not be adopted by solutions providers and their customers for any number of reasons, including lack of customer awareness of our company and our products, malfunction of the products and failure to meet needs of eBusiness. If our eBusiness products are not successful, we will fail to execute our strategy and our sales may not grow. WE COULD LOSE REVENUE AS A RESULT OF SOFTWARE ERRORS OR DEFECTS Software programs frequently contain errors or defects, especially when first introduced or when new versions are released. We could, in the future, lose revenue as a result of errors or defects in our software products. We cannot assure you that errors will not be found in new products or releases. Although we have both product liability and errors and omissions insurance, we might incur losses in excess of the dollar limits or beyond the scope of coverage of our policies. While we test our products prior to release, the fact that most of the components of our software offerings are developed by independent parties over whom we exercise no supervision or control makes it particularly difficult to identify and remedy any errors or defects that could exist. Any errors could result in loss of revenue, or delay in market introduction or acceptance, diversion of development resources, damage to our reputation or increased service costs. - 30 - 31 THE NETWORK SOLUTIONS AND OPERATING SYSTEMS INDUSTRIES ARE INTENSELY COMPETITIVE AND WE MAY BE UNABLE TO COMPETE EFFECTIVELY WITH PROVIDERS OF SOLUTIONS FOR MODULAR COMPUTING, PROVIDERS OF LINUX OPERATING SYSTEMS AND OTHER MORE ESTABLISHED OPERATING SYSTEMS We face direct competition in the area of software for specialized servers. VA Linux and Wind River provide similar solutions embedded into their hardware offerings. In addition, Sun Microsystems has announced plans to open source its Solaris Unix operating system in an attempt to attract more developers to that platform. Many of these competitors are large, well-established companies that have significantly greater financial resources, more extensive marketing and distribution capabilities, larger development staffs and more widely recognized brands and products than we have. We also compete with other providers of Linux operating systems, particularly, Corel, MacMillan, Red Hat, SuSE and TurboLinux. In addition, IBM and Sun Microsystems have announced plans to invest significant resources into the development of Linux. Many of these competitors, such as Red Hat, have more established customer bases and stronger brand names than we do. Also, due to the open source nature of Linux, anyone can freely download Linux and many Linux applications and modify and re-distribute them with few restrictions. For example, solution providers upon whom we depend for the distribution of our eBusiness products could instead create their own Linux solutions to provide to their customers. Also, established companies and other institutions could easily produce competing versions of Linux. In particular, distributors of UNIX operating systems could leverage their existing service organizations, due to the fact that Linux and UNIX operating systems share many common features. We compete with providers of other, more established operating systems. AT&T, Compaq, Hewlett-Packard, IBM, Microsoft, Novell, Olivetti, Sun Microsystems, and Unisys are each providers of competing operating systems, which, in most cases, are more established among business users. We also compete for services revenue with a number of companies that provide technical support and other professional services to users of Linux operating systems, including some original equipment manufacturers with which we have agreements. Many of these companies have larger and more experienced service organizations than we have, and have the benefit of being earlier market entrants. OUR COMPETITIVE POSITION COULD DECLINE IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING TO ACQUIRE BUSINESSES OR TECHNOLOGIES THAT ARE STRATEGIC FOR OUR SUCCESS, OR OTHERWISE EXECUTE OUR BUSINESS STRATEGY, OR IF WE FAIL TO SUCCESSFULLY INTEGRATE ANY ACQUISITIONS WITH OUR CURRENT BUSINESS We believe that our current cash and cash equivalents will be sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. However, we may need to raise additional funds to support more rapid expansion, respond to competitive pressures, acquire complementary businesses or technologies or respond to unanticipated requirements. We cannot assure you that - 31 - 32 additional funding will be available to us in amounts or on terms acceptable to us. If sufficient funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of acquisition opportunities, develop or enhance our services or products, or otherwise respond to competitive pressures would be significantly limited. If appropriate opportunities arise, we intend to acquire businesses, technologies, services or products that we believe are strategic for our success. The market for eBusiness solutions such as Linux products is new and is rapidly evolving and our competitive position could decline if we are unable to identify and acquire businesses or technologies that are strategic for our success in this market. THE ACQUISITION OF SCO'S SERVER SOFTWARE AND PROFESSIONAL SERVICES GROUPS MAY NOT CLOSE, IN WHICH CASE SIGNIFICANT RESOURCES WILL HAVE BEEN WASTED The combination is subject to various closing conditions, including approval by SCO shareholders and approval by our stockholders. If the combination does not close, our business may suffer from the significant time and resources expended in negotiating and preparing to execute the combination. The lost time and resources would detrimentally affect our competitive position, perhaps materially. OUR SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY MANAGE GROWTH We have recently experienced a period of rapid growth. In order to execute our business plan, we must continue to grow. We had 28 employees when we began operations as a separate legal entity in September 1998. As of January 31, 2001, the number had increased to 192. We expect that the number of our employees will continue to increase for the foreseeable future. Our planned growth entails risk. If we do not expand our operations in an efficient manner, our expenses could grow disproportionately to revenue or our revenue could decline or grow more slowly than expected, either of which could negatively affect the value of your investment. Our current and anticipated future growth, combined with the requirements we will face as a public company, will place a significant strain on our management, systems and resources. Our key personnel have limited experience managing this type of growth. We also need to improve our financial and managerial controls and reporting systems and procedures and to continue to expand and maintain close coordination among our technical, accounting, finance and sales and marketing organizations. If we do not succeed in these efforts, it could reduce our revenue and the value of your investment. OUR CURRENT AND POTENTIAL CUSTOMERS MAY FIND IT DIFFICULT TO HIRE AND TRAIN QUALIFIED EMPLOYEES TO HANDLE INSTALLATION AND IMPLEMENTATION OF OUR PRODUCTS, WHICH COULD NEGATIVELY AFFECT SALES OF OUR PRODUCTS TO NEW CUSTOMERS AND LEAD TO DISSATISFACTION AMONG CURRENT CUSTOMERS There are limited numbers of individuals that are trained and qualified to manage Linux systems, including OpenLinux and our other products. End users and our distribution partners may lack the resources to hire or train such qualified personnel - 32 - 33 to install and implement our products, which could lead to dissatisfaction with our product among end users and deter potential end users from purchasing our product. THE GROWTH OF OUR BUSINESS WILL BE DIMINISHED IF THE INTERNET IS NOT ACCEPTED AS A MEDIUM FOR COMMERCE AND BUSINESS NETWORKING APPLICATIONS. An important part of our business strategy is to develop and market our products for the support of secure business networks hosted on the internet. In addition, we plan to sell our products and provide a significant amount of technical support and education via our web site. If the internet is not accepted as a medium for commerce and business networking applications, demand for our products and services will be diminished. A number of factors may inhibit internet usage, including: - inadequate network infrastructure; - lack of knowledge and training on Internet use and benefits; - consumer concerns for internet privacy and security; - lack of availability of cost-effective, high-speed service; - interruptions in internet commerce caused by unauthorized users; - changes in government regulation relating to the internet; and - internet taxation. If internet usage grows, the infrastructure may not be able to support the demands placed on it by that growth and its performance and reliability may decline. web sites have experienced interruptions as a result of delays or outages throughout the internet infrastructure. If these interruptions continue, internet usage may decline. LOSS OF ANY OF OUR KEY MANAGEMENT PERSONNEL COULD NEGATIVELY IMPACT OUR BUSINESS The loss or departure of any of our officers or key employees could harm our ability to implement our business plan and could lower our revenue. Our future success depends to a significant extent on the continued service and coordination of our management team, particularly Ransom H. Love, our President and Chief Executive Officer. We do not maintain key person insurance for any member of our management team, but may elect to do so in future periods. FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, or the perception that such sales could occur. We will have a large number of shares of common stock outstanding and available for resale beginning at various points in time in the future. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. The shares of our common stock currently outstanding will become eligible for sale without registration pursuant to Rule 144 under the Securities Act, subject to certain conditions of Rule 144. Certain holders of - 33 - 34 our common stock also have certain demand and piggyback registration rights enabling them to register their shares under the Securities Act for sale. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Caldera Systems, Inc. did not file any reports on Form 8-K during the three months ended January 31, 2001: ITEM 7. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: March 16, 2001 CALDERA SYSTEMS, INC. By: /s/ Robert K. Bench ---------------------------- Robert K. Bench Chief Financial Officer (Principal Financial Officer) -34-