**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

 

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

 

| **(Mark one)**                                                                                                                                                                                                                                       |                                                                                          |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                                                                                           | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|                                                                                                                                                                                                                                                 |                                                                                          |   |
| **For the quarterly period  ended JANUARY 31, 2003**                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                 |
| **OR**                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                 |
| **o**                                                                                                                                                                                                                                                | **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 INTERNATIONAL,INC.**

(Exact name of registrant as specified inits charter)

 

| **Delaware**                                                     |   | **87-0662823**                          |
|------------------------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of   incorporation or organization) |   | (I.R.S. Employer Identification Number) |
|                                                             |   |                                    |
| **355 South 520 West  Suite 100  Lindon, Utah 84042**            |
| (Address of principal executive office  and zip code)            |
|                                                             |   |                                    |
| **(801) 765-4999**                                               |
| (Registrant’s telephone number, including  area code)       |

 

Indicate bycheck mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to filing requirementsfor the past 90 days.

YES ý    NO o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act)

 

YES o    NO ý

 

***As of March 13, 2003, there were 12,192,623shares of the Registrant’s common stock outstanding.***

 

 

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**Caldera International, Inc.**

 

**Table of Contents**

 
| PART I.  | FINANCIAL  INFORMATION                                                                                                        |
|----------|-------------------------------------------------------------------------------------------------------------------------------|
| Item 1.  | Financial Statements                                                                                                          |
|     | Condensed Consolidated Balance Sheets as of  January 31, 2003 and October 31, 2002                                            |
|     | Condensed Consolidated Statements of  Operations and Comprehensive Loss for the three months ended January 31, 2003  and 2002 |
|     | Condensed Consolidated Statements of Cash  Flows for the three months ended January 31, 2003 and 2002                         |
|     | Notes to Condensed Consolidated Financial  Statements                                                                         |
| Item 2.  | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                   |
| Item 3.  | Quantitative and Qualitative Disclosures  About Market Risk                                                                   |
|     | Risk  Factors                                                                                                                 |
| PART II. | OTHER INFORMATION                                                                                                             |
| Item 6.  | Exhibits and Reports on Form 8-K                                                                                              |
| Item 7.  | Signatures                                                                                                                    |
|     | Officer Certification                                                                                                         |

 

2

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**CALDERA INTERNATIONAL, INC. AND SUBSIDIARIES**

** **

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(unaudited, in thousands)**

 
|                                                                                                          |   | **January 31,  2003** |       | **October 31,  2002** |       |
|---------------------------------------------------------------------------------------------------------------|--------|-----------------------|------------|-----------------------|------------|
| **ASSETS**                                                                                                    |   |                  | ** ** |                  | ** ** |
|                                                                                                          |   |                  |       |                  |       |
| CURRENT ASSETS:                                                                                               |   |                  |       |                  |       |
| Cash and cash equivalents                                                                                     |   | $                     | 4,942      |                  | $          | 6,589 |   |
| Restricted cash                                                                                               |   | 1,250                 |       | 1,428                 |       |
| Accounts receivable, net of allowance for doubtful accounts of $238  and $348, respectively                   |   | 9,489                 |       | 8,622                 |       |
| Other current assets                                                                                          |   | 3,902                 |       | 4,483                 |       |
| Total current assets                                                                                          |   | 19,583                |       | 21,122                |       |
|                                                                                                          |   |                  |       |                  |       |
| PROPERTY AND EQUIPMENT:                                                                                       |   |                  |       |                  |       |
| Computer and office equipment                                                                                 |   | 3,644                 |       | 3,884                 |       |
| Leasehold improvements                                                                                        |   | 760                   |       | 724                   |       |
| Furniture and fixtures                                                                                        |   | 203                   |       | 201                   |       |
|                                                                                                          |   | 4,607                 |       | 4,809                 |       |
| Less accumulated depreciation and amortization                                                                |   | (2,865                | )          | (2,788                | )          |
| Net property and equipment                                                                                    |   | 1,742                 |       | 2,021                 |       |
|                                                                                                          |   |                  |       |                  |       |
| OTHER ASSETS:                                                                                                 |   |                  |       |                  |       |
| Intangibles, net                                                                                              |   | 10,473                |       | 11,258                |       |
| Other assets, net                                                                                             |   | 2,064                 |       | 3,005                 |       |
| Total other assets                                                                                            |   | 12,537                |       | 14,263                |       |
|                                                                                                          |   |                  |       |                  |       |
| Total assets                                                                                                  |   | $                     | 33,862     |                  | $          | 37,406 |   |
|                                                                                                          |   |                  |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                |   |                  | ** ** |                  | ** ** |
|                                                                                                          |   |                  |       |                  |       |
| CURRENT LIABILITIES:                                                                                          |   |                  |       |                  |       |
| Accounts payable                                                                                              |   | $                     | 2,051      |                  | $          | 2,467 |   |
| Royalty payable to Novell, Inc.                                                                               |   | 1,250                 |       | 1,428                 |       |
| Accrued payroll and benefits                                                                                  |   | 3,043                 |       | 4,089                 |       |
| Other current liabilities                                                                                     |   | 5,700                 |       | 7,632                 |       |
| Deferred revenue                                                                                              |   | 9,802                 |       | 10,056                |       |
| Taxes payable                                                                                                 |   | 922                   |       | 1,113                 |       |
| Other royalties payable                                                                                       |   | 601                   |       | 669                   |       |
| Total current liabilities                                                                                     |   | 23,369                |       | 27,454                |       |
|                                                                                                          |   |                  |       |                  |       |
| LONG-TERM LIABILITIES:                                                                                        |   |                  |       |                  |       |
| Other long-term liabilities                                                                                   |   | 2,340                 |       | 1,625                 |       |
| Total long-term liabilities                                                                                   |   | 2,340                 |       | 1,625                 |       |
|                                                                                                          |   |                  |       |                  |       |
| COMMITMENTS AND CONTINGENCIES (Notes 1, 8 and 9)                                                              |   |                  |       |                  |       |
|                                                                                                          |   |                  |       |                  |       |
| MINORITY INTEREST                                                                                             |   | 150                   |       | 150                   |       |
|                                                                                                          |   |                  |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                    |   |                  |       |                  |       |
| Preferred stock, $0.001 par value; 5,000 shares authorized, none  outstanding                                 |   | —                |       | —                |       |
| Common stock, $0.001 par value; 45,000 shares authorized, 11,999 and  11,412 shares outstanding, respectively |   | 12                    |       | 11                    |       |
| Additional paid-in capital                                                                                    |   | 215,083               |       | 214,299               |       |
| Warrants outstanding                                                                                          |   | —                |       | 294                   |       |
| Deferred compensation                                                                                         |   | (742                  | )          | (644                  | )          |
| Accumulated other comprehensive income                                                                        |   | 667                   |       | 510                   |       |
| Accumulated deficit                                                                                           |   | (207,017              | )          | (206,293              | )          |
| Total stockholders’ equity                                                                               |   | 8,003                 |       | 8,177                 |       |
|                                                                                                          |   |                  |       |                  |       |
| Total liabilities and stockholders’ equity                                                               |   | $                     | 33,862     |                  | $          | 37,406 |   |

 

See notes to condensed consolidated financial statements.

 

3

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**CALDERA INTERNATIONAL, INC. AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSAND COMPREHENSIVE LOSS**

**(unaudited)**

** (in thousands, exceptper share data)**

 
|                                                                                               |   | **Three  Months Ended January 31,** |   |
|----------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                               |   | **2003**                            |   | **2002** |   |
| REVENUE:                                                                                           |   |                                |   |   |   |
| Products                                                                                           |   | $                                   | 11,090 |   | $ | 14,906 |   |
| Services                                                                                           |   | 2,450                               |   | 3,007 |   |
| Total revenue                                                                                      |   | 13,540                              |   | 17,913 |   |
|                                                                                               |   |                                |   |   |   |
| COST OF REVENUE:                                                                                   |   |                                |   |   |   |
| Products                                                                                           |   | 1,186                               |   | 2,538 |   |
| Services                                                                                           |   | 1,692                               |   | 3,142 |   |
| Total cost of revenue                                                                              |   | 2,878                               |   | 5,680 |   |
|                                                                                               |   |                                |   |   |   |
| GROSS MARGIN                                                                                       |   | 10,662                              |   | 12,233 |   |
|                                                                                               |   |                                |   |   |   |
| OPERATING EXPENSES:                                                                                |   |                                |   |   |   |
| Sales and marketing (exclusive of stock-based compensation of $34 and  $57, respectively)          |   | 6,440                               |   | 8,371 |   |
| Research and development (exclusive of stock-based compensation of  $23 and $67, respectively)     |   | 2,650                               |   | 5,367 |   |
| General and administrative (exclusive of stock-based compensation of  $155 and $141, respectively) |   | 1,650                               |   | 2,724 |   |
| Restructuring charges                                                                              |   | (252                                | )      | 4,336 |   |
| Amortization of intangibles                                                                        |   | 700                                 |   | 756 |   |
| Loss on disposition and write-down of long-lived assets                                            |   | —                              |   | 1,328 |   |
| Stock-based compensation                                                                           |   | 212                                 |   | 265 |   |
| Total operating expenses                                                                           |   | 11,400                              |   | 23,147 |   |
|                                                                                               |   |                                |   |   |   |
| LOSS FROM OPERATIONS                                                                               |   | (738                                | )      | (10,914 | ) |
|                                                                                               |   |                                |   |   |   |
| EQUITY IN LOSS OF AFFILIATE                                                                        |   | (25                                 | )      | — |   |
|                                                                                               |   |                                |   |   |   |
| OTHER INCOME (EXPENSE):                                                                            |   |                                |   |   |   |
| Interest income                                                                                    |   | 39                                  |   | 150 |   |
| Interest expense                                                                                   |   | —                              |   | (126 | ) |
| Other income (expense), net                                                                        |   | 5                                   |   | 46 |   |
| Total other income, net                                                                            |   | 44                                  |   | 70 |   |
|                                                                                               |   |                                |   |   |   |
| LOSS BEFORE INCOME TAXES                                                                           |   | (719                                | )      | (10,844 | ) |
|                                                                                               |   |                                |   |   |   |
| PROVISION FOR INCOME TAXES                                                                         |   | (5                                  | )      | (162 | ) |
|                                                                                               |   |                                |   |   |   |
| NET LOSS                                                                                           |   | $                                   | (724   | ) | $ | (11,006 | ) |
|                                                                                               |   |                                |   |   |   |
| BASIC AND DILUTED NET LOSS PER COMMON SHARE                                                        |   | $                                   | (0.06  | ) | $ | (0.77 | ) |
|                                                                                               |   |                                |   |   |   |
| WEIGHTED AVERAGE BASIC AND DILUTED COMMON SHARES OUTSTANDING                                       |   | 11,244                              |   | 14,355 |   |
|                                                                                               |   |                                |   |   |   |
| OTHER COMPREHENSIVE LOSS:                                                                          |   |                                |   |   |   |
| Net loss                                                                                           |   | $                                   | (724   | ) | $ | (11,006 | ) |
| Foreign currency translation adjustments                                                           |   | 157                                 |   | (184 | ) |
| COMPREHENSIVE LOSS                                                                                 |   | $                                   | (567   | ) | $ | (11,190 | ) |

 

See notes to condensed consolidated financial statements.

 

4

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**CALDERA INTERNATIONAL, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited, in thousands)**

 
|                                                                                                          |   | **Three  Months Ended January 31,** |   |
|---------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                                          |   | **2003**                            |   | **2002** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                         |   |                                |   |   |   |
| Net loss                                                                                                      |   | $                                   | (724   | ) | $ | (11,006 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities:                                  |   |                                |   |   |   |
| Loss on disposition and write-down of long-lived assets                                                       |   | —                              |   | 1,288 |   |
| Amortization of goodwill and intangibles (including $85 and $84  classified as cost of revenue, respectively) |   | 785                                 |   | 840 |   |
| Depreciation and amortization                                                                                 |   | 341                                 |   | 843 |   |
| Stock-based compensation                                                                                      |   | 157                                 |   | 265 |   |
| Equity in loss of affiliate                                                                                   |   | 25                                  |   | — |   |
| Amortization of debt discount                                                                                 |   | —                              |   | 125 |   |
| Issuance of common stock and options for services                                                             |   | 55                                  |   | 126 |   |
| Changes in operating assets and liabilities:                                                                  |   |                                |   |   |   |
| Accounts receivable, net                                                                                      |   | (867                                | )      | 3,660 |   |
| Other current assets                                                                                          |   | 1,906                               |   | (51 | ) |
| Other assets                                                                                                  |   | (94                                 | )      | 9 |   |
| Accounts payable                                                                                              |   | (416                                | )      | (1,248 | ) |
| Payable to Tarantella, Inc.                                                                                   |   | —                              |   | 224 |   |
| Accrued payroll and benefits                                                                                  |   | (1,046                              | )      | (484 | ) |
| Other current liabilities                                                                                     |   | (1,022                              | )      | 819 |   |
| Deferred revenue                                                                                              |   | (254                                | )      | 586 |   |
| Taxes payable                                                                                                 |   | (191                                | )      | (327 | ) |
| Other royalties payable                                                                                       |   | (68                                 | )      | (249 | ) |
| Other long-term liabilities                                                                                   |   | (195                                | )      | 2,790 |   |
| Net cash used in operating activities                                                                         |   | (1,608                              | )      | (1,790 | ) |
|                                                                                                          |   |                                |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                         |   |                                |   |   |   |
| Purchase of property and equipment                                                                            |   | (17                                 | )      | (4 | ) |
| Proceeds from available-for-sale securities                                                                   |   | —                              |   | 5,943 |   |
| Investment in non-marketable securities                                                                       |   | (350                                | )      | — |   |
| Net cash (used in) provided by investing activities                                                           |   | (367                                | )      | 5,939 |   |
|                                                                                                          |   |                                |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                         |   |                                |   |   |   |
| Proceeds from sale of common stock through ESP program                                                        |   | 57                                  |   | 230 |   |
| Proceeds from exercise of common stock options                                                                |   | 124                                 |   | 74 |   |
| Net cash provided by financing activities                                                                     |   | 181                                 |   | 304 |   |
|                                                                                                          |   |                                |   |   |   |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                          |   | (1,794                              | )      | 4,453 |   |
| EFFECT OF FOREIGN EXCHANGE RATES ON CASH                                                                      |   | 147                                 |   | (184 | ) |
| CASH AND CASH EQUIVALENTS, beginning of period                                                                |   | 6,589                               |   | 20,541 |   |
| CASH AND CASH EQUIVALENTS, end of period                                                                      |   | $                                   | 4,942  |   | $ | 24,810 |   |
|                                                                                                          |   |                                |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                                             |   |                                |   |   |   |
|                                                                                                          |   |                                |   |   |   |
| Cash paid for taxes                                                                                           |   | $                                   | 129    |   | $ | 269 |   |

 

See notes to condensed consolidated financial statements.

 

5

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**CALDERA INTERNATIONAL, INC. AND SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

## **(1)  ORGANIZATION AND DESCRIPTION OF BUSINESS**

 

The Companywas originally incorporated as Caldera Systems, Inc. (“Caldera Systems”), aUtah corporation, on August 21, 1998, and reincorporated as a Delawarecorporation on March 6, 2000.  In March2000, Caldera Systems completed an initial public offering of its common stock.

 

CalderaSystems developed and marketed software and provided services related to thedevelopment, deployment and management of Linux-based specialized servers andinternet devices.  Caldera Systems soldand distributed its software and related products indirectly throughdistributors and solutions providers, which included value-added resellers(“VARs”), original equipment manufacturers (“OEMs”), vertical solutionproviders (“VSPs”) and systems integrators, as well as directly to end-user customers.  These sales occurred throughout the UnitedStates and in certain international locations.

 

On May 7,2001, Caldera International, Inc. (the “Company”) was formed as a holdingcompany to own Caldera Systems and to acquire substantially all of the assets,liabilities and operations of the server and professional services groups ofTarantella, Inc. (“Tarantella”), formerly The Santa Cruz Operation, Inc.,pursuant to an Agreement and Plan of Reorganization (the “ReorganizationAgreement”), dated as of August 1, 2000, as amended.  Under the Reorganization Agreement, the Company acquired thetangible and intangible assets used in the server and professional servicesgroups, including all of the capital stock of certain Tarantellasubsidiaries.  In connection with theformation of Caldera International, Inc., Caldera Systems became a wholly-ownedsubsidiary of Caldera International, Inc. All shares of Caldera Systems’ common stock, as well as options topurchase shares of Caldera Systems’ common stock, were converted into the samenumber of shares of common stock of the Company and options to purchase sharesof common stock of the Company.

 

The acquiredoperations from Tarantella developed and marketed server software related tonetworked business computing and were one of the leading providers of UNIXserver operating systems.  In addition,these operations provided professional services related to implementing andmaintaining UNIX system software products. The acquisition provided the Company with international offices and adistribution channel with resellers throughout the world.

 

TheCompany’s business has continued to focus on developing and marketing reliable,cost-effective Linux and UNIX software products and related services for thesmall business market.  The Companycontinues to market SCO OpenServer and SCO UnixWare products.  Additionally, the Company recently renamedits Linux product offering SCO Linux, powered by United Linux, to draw on thestrength of the SCO brand.  The Companyis continuing to sell Linux and UNIX products and services to customers throughan indirect, leveraged worldwide channel of partners, which includesdistributors and solution providers. This worldwide distribution channel locally supports customers andresellers with minor modifications that fit their particular country’s needs.

 

Managementbelieves that the Company’s operations will generate positive cash flows duringthe remainder of fiscal year 2003. However there can be no assurance that the Company will be successful inachieving forecasted results.  InDecember 2002, the Company obtained a

 

6

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$2,910,000 line of credit froma commercial bank that bears interest at the prime rate minus one percent (witha floor rate of 3.75 percent) that matures on October 31, 2003.  Borrowings under the line of credit aresecured by a letter of credit from the Company’s principal stockholder.  As of January 31, 2003, there were noborrowings outstanding under the line of credit.  Additionally, if sufficient funds are not availableor are not available on acceptable terms, the Company’s principal stockholderhas confirmed their intent to provide additional financial support in the formof capital, loans, direct or indirect guarantees of loans or other direct orindirect injections of funds to enable the Company to continue as a goingconcern through November 2003.

 

## **(2)  SIGNIFICANT ACCOUNTING POLICIES**

 

### **Basis of Presentation**

 

Theaccompanying unaudited condensed consolidated financial statements of theCompany have been prepared by the Company pursuant to the rules and regulationsof the Securities and Exchange Commission (“SEC”) on a basis consistent withthe Company’s audited annual financial statements, and, in the opinion of management,reflect all adjustments, consisting of normal recurring adjustments, necessaryto present fairly the financial information set forth therein.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to SEC rules and regulations, although theCompany believes that the following disclosures, when read in conjunction withthe audited annual financial statements and the notes thereto included in theCompany’s most recent Annual Report on Form 10-K, are adequate to make theinformation presented not misleading.

 

### **Use of Estimates in thePreparation of Financial Statements**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the reporting period.  Actualresults could differ from these estimates. The Company’s critical accounting policies and estimates, as discussedin the Company’s most recent Annual Report on Form 10-K and related amendments,include, among others, revenue recognition, impairment of long-lived assets andallowances for doubtful accounts and product returns.

 

### **Revenue Recognition**

 

The Company’srevenue is primarily from two sources: (i) product license revenue, primarilyfrom product sales to resellers and end users, and royalty revenue from productsales by source code OEMs; and (ii) service and support revenue, primarily fromproviding software updates, support and education and consulting services toend users.

 

The Companyrecognizes product revenue upon shipment if a signed contract exists, the feeis fixed and determinable, collection of the resulting receivable is probableand product returns are reasonably estimable, except for sales to distributors,which are recognized upon sale by the distributor to resellers or end users.

 

For contractsinvolving multiple elements (i.e., delivered and undelivered products,maintenance and other services), the Company allocates revenue to eachcomponent of the

 

7

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contract based on objectiveevidence of its fair value, which is specific to the Company.  The fair value of each element is based onamounts charged when such elements are sold separately.  The Company recognizes revenue allocated toundelivered products when the criteria for product revenue set forth above havebeen met.

 

The Companyrecognizes revenue from maintenance fees for ongoing customer support andproduct updates ratably over the period of the maintenance contract.  Payments for maintenance fees are generallymade in advance and are non-refundable. For revenue allocated to education and consulting services or derivedfrom the separate sale of such services, the Company recognizes revenue as therelated services are performed.

 

The Companyrecognizes product revenue from royalty payments upon receipt of royaltyreports from OEMs related to their product sales.

 

**Net Loss per Common Share**

 

Basic net lossper common share (“Basic EPS”) is computed by dividing net loss by the weightedaverage number of common shares outstanding. Diluted net loss per common share (“Diluted EPS”) is computed bydividing net loss by the sum of the weighted average number of common sharesoutstanding and the dilutive potential common share equivalents thenoutstanding.  Potential common shareequivalents consist of the weighted average of shares issuable upon the exerciseof outstanding stock options.  There were3,986,000 and 4,338,000 outstanding options to purchase common shares duringthe three months ended January 31, 2003 and 2002, respectively, which were notincluded in the computation of diluted net loss per common share as theireffect would have been anti-dilutive, decreasing the net loss per common share.

 

**(3)  OTHER CURRENT ASSETS**

 

Other currentassets include the following as of January 31, 2003 and October 31, 2002 (inthousands):

 
|                                                       |   | **January 31,  2003** |   | **October 31,  2002** |   |
|------------------------------------------------------------|--------|-----------------------|--------|-----------------------|--------|
|                                                       |   |                  |   |                  |   |
| Notes receivable and accrued interest from  Vista (Note 5) |   | $                     | 1,137  |                  | $      | — |   |
| Prepaid expenses                                           |   | 1,085                 |   | 1,273                 |   |
| VAT receivable                                             |   | 800                   |   | 1,556                 |   |
| Other                                                      |   | 880                   |   | 1,654                 |   |
| Total                                                      |   | $                     | 3,902  |                  | $      | 4,483 |   |

 

**(4)  INTANGIBLE ASSETS**

 

In July 2001,the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.”  Under SFAS No. 142, goodwill and otherintangible assets with indefinite lives are no longer amortized, but rather areassessed annually for impairment.  TheCompany adopted SFAS No. 142 on November 1, 2001, the beginning of fiscal year2002.  All of the Company’s identifiableintangible assets are deemed to have finite lives and are amortized over theirremaining useful lives.

 

Intangibleassets are the result of the acquisition of certain assets and operations fromTarantella and the acquisition of the WhatIfLinux technology from Acrylis,Inc.  Upon adoption

 

8

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of SFAS No. 142, the Companyreassessed the useful lives of its intangible assets and reduced the carryingvalue of its goodwill to $0.

 

The followingtable summarizes the remaining components of amortized intangible assets andtheir useful lives as of January 31, 2003 (in thousands):

 
|                                  |   | **Estimate  Useful Life** |   | **Gross  Carrying  Amount** |   | **Accumulate  Amortization** |   | **Net Book  Value** |   |
|---------------------------------------|--------|---------------------------|--------|-----------------------------|--------|------------------------------|--------|---------------------|--------|
| Amortized intangible assets:          |   |                      |   |                        |   |                         |   |                |   |
| Distribution/reseller channel         |   | 5 years                   |   | $                           | 11,626 |                         | $      | 2,934               |   | $ | 8,692 |   |
| Acquired technology – Tarantella |   | 5 years                   |   | 1,687                       |   | 425                          |   | 1,262               |   |
| Acquired technology – Acrylis    |   | 2 years                   |   | 871                         |   | 547                          |   | 324                 |   |
| Trade name and trademarks             |   | 5 years                   |   | 261                         |   | 66                           |   | 195                 |   |
| Total intangible assets               |   |                      |   | $                           | 14,445 |                         | $      | 3,972               |   | $ | 10,473 |   |

 

**(5) INVESTMENT IN VISTA.COM**

 

During August 2002, the Company entered into a license agreement withCommunity IQ.com d/b/a Vista.com (“Vista”). Under the agreement, the Company acquired an exclusive license fromVista to sell and market Vista’s web services solutions to the Company’schannel partners.  The Company prepaid$100,000 of royalties under the license agreement and advanced $250,000 toVista in connection with a right to purchase 3,313,000 shares of Vista’s SeriesC convertible preferred stock for $500,000 (see below).  Additionally, the Company acquired a$1,000,000 convertible note receivable payable by Vista from Vista’s founder inexchange for 800,000 shares of the Company’s common stock with an estimatedfair market value of $900,000 and $100,000 in cash.  The $1,000,000 note receivable is guaranteed by Vista’s majoritystockholder and is due on August 15, 2003. The note bears interest at 8 percent payable at maturity and isconvertible at the Company’s option into a 20 percent fully diluted interest inVista.  The notes receivable and relatedaccrued interest are included in other current assets (see Note 3).

 

In December 2002, the Company and Vista entered into the Stock PurchaseAgreement, pursuant to which the Company acquired 3,313,000 shares of Vista’sSeries C preferred stock for $500,000. The 3,313,000 shares of Series C preferred stock represent a 10 percentfully diluted interest in Vista.  The$250,000 advance as of October 31, 2002 was applied toward the purchase andduring January 2003 the remaining $250,000 was paid.  Additionally, the Company and Vista entered into an Agreement andPlan of Merger pursuant to which the Company received an option through March31, 2003 for no additional consideration to acquire the remaining 70 percentownership interest of Vista in exchange for 2,500,000 shares of the Company’scommon stock.  The Company also receivedthe right to representation on Vista’s board of directors.

 

In January 2003, the Company advanced Vista $100,000 in the form of apromissory note due on April 14, 2003. This promissory note bears interest at 8 percent payable at maturity andis convertible at the Company’s option into a 5 percent fully diluted interestin Vista.  If the option to convert thepromissory note is exercised by the Company, the option to acquire theremaining equity ownership of Vista as defined above will be decreased by179,000 shares.

 

Because of the Company’s current 10 percent ownership interest and theconvertible features of the notes receivable from Vista, the Company isaccounting for its interest in Vista using the equity method ofaccounting.  Under theequity method, the Company recognizes its

 

9

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portion of the net income ornet loss of Vista in its consolidated statements of operations.  During the first quarter of fiscal year2003, the Company recognized $25,000 in its condensed consolidated statementsof operations as its equity in Vista’s net loss.

 

### **(6)  OTHER CURRENT LIABILITIES**

 

As of January31, 2003 and October 31, 2002, other accrued liabilities consisted of thefollowing (in thousands):

 
|                                         |   | **January 31,  2003** |   | **October 31,  2002** |   |
|----------------------------------------------|--------|-----------------------|--------|-----------------------|--------|
|                                         |   |                  |   |                  |   |
| Co-operative advertising                     |   | $                     | 1,438  |                  | $      | 1,630 |   |
| Accrual for unvouchered payables             |   | 1,362                 |   | 1,824                 |   |
| Restructuring accrual – current portion |   | 447                   |   | 1,113                 |   |
| Other                                        |   | 2,453                 |   | 3,065                 |   |
| Total                                        |   | $                     | 5,700  |                  | $      | 7,632 |   |

 

**(7)  RESTRUCTURING PLANS**

 

The Company’sboard of directors has adopted restructuring plans to reduce facilities andpersonnel.  These restructuring planshave resulted in the Company recording restructuring accruals for the costsassociated with the reduction in facilities and for severance costs of affectedemployees.

 

The followingtable summarizes the activity related to the restructuring accruals during thethree months ended January 31, 2003 (in thousands): 

 
|                                                                |   | **Balance as of  October 31,  2002** |   | **Additions** |   | **Payments** |   | **Adjustments** |   | **Balance as of  January 31,  2003** |   |
|---------------------------------------------------------------------|--------|--------------------------------------|--------|---------------|--------|--------------|--------|-----------------|--------|--------------------------------------|--------|
|                                                                |   |                                 |   |          |   |         |   |            |   |                                 |   |
| Restructuring accrual during quarter ended  Oct. 31, 2001 |   | $                                    | 183    |          | $      | —       |   | $               | (80    | )                                    | $      | (103 | ) | $ | — |   |
| Restructuring accrual during quarter ended  Jan. 31, 2002 |   | 463                                  |   | —        |   | (21          | )      | —          |   | 442                                  |   |
| Restructuring accrual during quarter ended  July 31, 2002 |   | 180                                  |   | —        |   | (178         | )      | (2              | )      | —                               |   |
| Restructuring accrual during quarter ended  Oct. 31, 2002 |   | 961                                  |   | —        |   | (310         | )      | (147            | )      | 504                                  |   |
| Total                                                               |   | $                                    | 1,787  |          | $      | —       |   | $               | (589   | )                                    | $      | (252 | ) | $ | 946 |   |

 

Theadjustments related to the July 31, 2002 and October 31, 2002 accruals totaling$149,000 represent the difference between actual payments made and estimatedaccruals for severance costs for international employees.  The adjustment related to the October 31,2002 accrual of $103,000 represents a facility accrual reversed as the Companywas successful in negotiating a lease termination for one of its facilitiesthat had been vacated in connection with a previous corporaterestructuring.  At the time of therestructurings above, the accruals recorded were management’s best estimate of thefuture costs.  As of January 31, 2003,the remaining accruals relate to future lease payments for vacated facilitiesand will be relieved as the lease payments are made in accordance with thelease terms through 2008.

 

10

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**(8) COMMITMENTS AND CONTINGENCIES**

 

**Litigation**

 

Beginning inJuly 2001, the Company, certain of its officers and directors, and theunderwriters of the Company’s initial public offering were named as defendantsin a series of class action lawsuits filed in the United States District Courtfor the Southern District of New York (the “Actions”) by parties allegingviolations of the securities laws.  Thecomplaints were subsequently amended and consolidated into a singlecomplaint.  The consolidated complaintalleges certain improprieties regarding the circumstances surrounding theunderwriters’ conduct during the Company’s initial public offering and thefailure to disclose such conduct in the registration statement in violation ofthe Securities Act of 1933, as amended. The consolidated complaint also alleges that, whether or not theCompany’s officers or directors were aware of the underwriters’ conduct, theCompany and those officers and directors have statutory liability under thesecurities laws for issuing a registration statement in connection with theCompany’s initial public offering that failed to disclose that conduct.

 

Theconsolidated complaint also alleges claims solely against the underwritersunder the Securities Act of 1933 and the Securities Exchange Act of 1934, asamended.  Over 300 other issuers, andtheir underwriters and officers and directors, have been sued in similar casespending in the same court.  In September2002, the plaintiffs agreed to dismiss the individual defendants, but may electto bring the individual defendants back into the case at a later date.  Management believes that the claims againstthe Company and any of its officers and directors are without legal merit andintend to defend them vigorously.  TheCompany is not aware of any improper conduct by the Company, its officers anddirectors, or its underwriters, and the Company denies any liability relatingthereto.  In addition, the Company’s underwriting agreement with itsunderwriter provides for the indemnification of the Company and its officersand directors for liabilities arising out of misstatements in its registrationstatement attributable to material non-disclosures by the underwriters.  The Company also maintains liabilityinsurance coverage that is expected to substantially cover the costs ofdefending the claims, once the retention amount has been expended.  During the three months ended January 31,2003, the Company has accrued up to the full retention amount.

 

The Company has notified itsunderwriters and insurance companies of the existence of the claims.  The initial round of motions to dismissunder the securities laws were recently denied on the basis that the Plaintiffshad alleged, but not proven, proper causes of action.  The actions will now enter the discovery phase oflitigation.  Management believes, afterconsultation with legal counsel, that the ultimate outcome of this matter willnot have a material adverse effect on the Company’s results of operations orfinancial position.

 

In October 2002, a formerIndian distributor of the Company asserted a claim for $1,428,000.  The distributor claims that the Company isresponsible to repurchase certain software products and to reimburse the distributorfor certain other operating costs. Management does not believe that the Company is responsible to reimbursethe distributor for any operating costs and also believes that the returnrights related to any remaining inventory have lapsed.  In accordance with the Company’s revenuerecognition policy, revenue related to the inventory with the distributor isincluded in deferred revenue as of January 31, 2003.  This matter is in the initial stage of discovery; however,management believes, after consultation with legal counsel, that the ultimateoutcome of this matter will not have a material adverse effect on the Company’sresults of operations or financial position.

 

11

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The Company isa party to certain other legal proceedings arising in the ordinary course ofbusiness.  Management believes, afterconsultation with legal counsel, that the ultimate outcome of such legalproceedings will not have a material adverse effect on the Company’s results ofoperations or financial position.

 

**OperatingLease Guarantee**

 

In connectionwith the acquisition of the server and professional services groups fromTarantella, the Company acquired Tarantella’s subsidiary in the UnitedKingdom.  The United Kingdom subsidiarycontinued as the lessee under certain operating leases for facilities retainedand used by Tarantella.  The Company andTarantella have completed assignment agreements with the respective lessors toassign the leases to Tarantella. However, the Company’s United Kingdom subsidiary remained on these operatingleases as a second guarantor and may be liable under these obligations in theevent that Tarantella defaults.  Futureminimum operating lease payments under these leases extend through 2020 andtotal $10,366,000.  Tarantella hasestablished an escrow account of $500,000 as collateral in the event theydefault under the agreement.  As ofJanuary 31, 2003, the Company believes that it will not be required to make anypayments under this guarantee, and therefore, no liability has been recorded.

 

**(9)  STOCKHOLDERS’ EQUITY**

 

**Stock-Based Compensation**

 

During thequarter ended January 31, 2003, the Company granted 339,000 stock options withan average exercise price of $1.52 per share. None of these stock options were granted at prices that were below thequoted market price on the date of grant. During the quarter ended January 31, 2003, 130,000 options to purchaseshares of common stock were exercised with an average exercise price of $0.95per share.  As of January 31, 2003,there were 3,780,000 stock options outstanding with a weighted average exerciseprice of $2.17 per share.

 

During the quarter endedJanuary 31, 2003, the Company issued a ten-year option to acquire 100,000shares of the Company’s common stock at $1.52 per share to a consultant for services.  The option vests as follows, (i) options topurchase 50,000 shares vest on a monthly basis over a 12-month period, and (ii)the remaining options to purchase 50,000 shares vest upon the achievement ofcertain milestones. The fair value of the options will be determined andrecorded as expense in the periods the services are performed and themilestones are achieved.  During thequarter ended January 31, 2003 the Company recorded $20,000 of expense relatedto this option.  Assumptions used todetermine the fair value of the options vested during the quarter ended January31, 2003 using the Black-Scholes option-pricing model were the following:  estimated fair value of common stock $1.38per share; risk-free interest rate of three percent; expected dividend yield of0 percent; volatility of 93 percent; and exercise term of ten years.

Amortization of deferredcompensation was $182,000 during the quarter ended January 31, 2003 and$216,000 during the quarter ended January 31, 2002.

During thequarter ended January 31, 2003, the Company issued 170,000 shares of restrictedstock to certain key employees.  Therestrictions related to the restricted stock awards lapse over a period of 24months.  The fair value of therestricted stock awards granted of $255,000 was recorded as a component ofdeferred compensation and is amortized to stock-based compensation as therestrictions lapse.  During the quarterended January 31, 2003, the Company amortized $32,000 as stock-basedcompensation related to these restricted stock grants which is included as acomponent of the $210,000 described above.

 

12

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During thequarter ended January 31, 2002, the Company agreed to extend the exerciseperiod for options held by certain employees that were terminated.  The Company recorded $49,000 of compensationexpense related to these modifications.

 

**Warrant Agreement with Morgan Keegan**

 

In August 2002, the Company entered into an agreement with MorganKeegan & Company (“Morgan Keegan”) to act as an exclusive financial advisorto assist the Company in its analysis, consideration and if appropriate,execution of various financial and strategic alternatives available to itincluding, but not limited to, securing additional equity and/or debt capitaland potential strategic transactions including mergers, acquisitions and jointventures.

 

In consideration for the services provided, the Company issued toMorgan Keegan a warrant to purchase 200,000 shares of the Company’s commonstock at an exercise price of $0.01 per share. Morgan Keegan was granted demand registration rights to have the Companyuse its best efforts to register the shares upon exercise of the warrant.  In the event that the Company is successfulin raising equity, it will have a contingent fee owed to Morgan Keegan for sixpercent of the principal amount of the financing.  If the Company is successful in raising mezzanine financing(convertible debt) and/or senior debt, it will have a contingent fee owed toMorgan Keegan of three percent and one percent, respectively, of the amountsborrowed.  In the event that the Companyis successful in completing an acquisition, it will have a contingent fee owedto Morgan Keegan for the greater of two percent of the transaction value or $250,000.

 

During August 2002, the Company and Morgan Keegan executed the warrantagreement.  Upon execution of thewarrant agreement, the Company recorded the fair value of thewarrant of $294,000 as stock-based compensation, determined using the Black-Scholesoption-pricing model.  Assumptions used inthe Black-Scholes option-pricing model were the following: estimated fair valueof common stock of $1.47 per share; risk-free interest rate of three percent;expected dividend yield of 0 percent; volatility of 145 percent; and expectedexercise life of three months.  Duringthe quarter ended January 31, 2003, Morgan Keegan exercised the warrantagreement.

 

**EmployeeStock Purchase Plan**

 

On November30, 2002, employees participating in the Company’s employee stock purchase planacquired 87,500 shares of the Company’s common stock at a price of $0.66 pershare.

 

**(10) SEGMENT INFORMATION**

 

The Company’sresources are allocated and operating results managed to the operating income(loss) level for each of the Company’s three geographic units.  The geographic units consist of theAmericas, EMEA (Europe, Middle East and Africa) and Asia.  Revenue, cost of revenue and direct salesand marketing expenses are tracked for each geographic unit.  Costs of corporate marketing, research anddevelopment and general and administration are allocated to each geographicunit based on the geographic unit’s percentage of total revenue.

 

13

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Segmentdisclosures for the Company’s operating divisions are as follows for the threemonths ended January 31, 2003 and 2002 (in thousands):

 
|                       |   | **Three Months Ended January 31, 2003** |   |
|----------------------------|--------|-----------------------------------------|--------|
|                       |   | **Americas**                            |   | **EMEA** |   | **Asia** |   | **Corporate** |   | **Total** |   |
|                       |   |                                    |   |   |   |   |   |   |   |   |   |
| Revenue                    |   | $                                       | 7,264  |   | $ | 4,969 |   | $ | 1,221 |   | $ | 86 |   | $ | 13,540 |   |
| Cost of revenue            |   | 1,359                                   |   | 1,198 |   | 207 |   | 114 |   | 2,878 |   |
| Gross margin               |   | 5,905                                   |   | 3,771 |   | 1,014 |   | (28 | ) | 10,662 |   |
| Sales and marketing        |   | 2,634                                   |   | 2,926 |   | 875 |   | 5 |   | 6,440 |   |
| Research and development   |   | 1,422                                   |   | 973 |   | 239 |   | 16 |   | 2,650 |   |
| General and administrative |   | 885                                     |   | 606 |   | 149 |   | 10 |   | 1,650 |   |
| Other                      |   | —                                  |   | — |   | — |   | 660 |   | 660 |   |
| Total operating expenses   |   | 4,941                                   |   | 4,505 |   | 1,263 |   | 691 |   | 11,400 |   |
| Loss from operations       |   | $                                       | 964    |   | $ | (734 | ) | $ | (249 | ) | $ | (719 | ) | $ | (738 | ) |

 
|                       |   | **Three Months Ended January 31, 2002** |   |
|----------------------------|--------|-----------------------------------------|--------|
|                       |   | **Americas**                            |   | **EMEA** |   | **Asia** |   | **Corporate** |   | **Total** |   |
|                       |   |                                    |   |   |   |   |   |   |   |   |   |
| Revenue                    |   | $                                       | 9,058  |   | $ | 7,005 |   | $ | 1,850 |   | $ | — |   | $ | 17,913 |   |
| Cost of revenue            |   | 3,936                                   |   | 1,466 |   | 278 |   | — |   | 5,680 |   |
| Gross margin               |   | 5,122                                   |   | 5,539 |   | 1,572 |   | — |   | 12,233 |   |
| Sales and marketing        |   | 3,986                                   |   | 3,167 |   | 1,218 |   | — |   | 8,371 |   |
| Research and development   |   | 2,714                                   |   | 2,099 |   | 554 |   | — |   | 5,367 |   |
| General and administrative |   | 1,377                                   |   | 1,066 |   | 281 |   | — |   | 2,724 |   |
| Other                      |   | —                                  |   | — |   | — |   | 6,685 |   | 6,685 |   |
| Total operating expenses   |   | 8,077                                   |   | 6,332 |   | 2,053 |   | 6,685 |   | 23,147 |   |
| Loss from operations       |   | $                                       | (2,955 | ) | $ | (793 | ) | $ | (481 | ) | $ | (6,685 | ) | $ | (10,914 | ) |

 

Long-livedassets, which include property and equipment as well as intangible assets, bylocation consists of the following as of January 31, 2003 and October 31, 2002(in thousands):

 
|                    |   | **January 31,  2003** |   | **October 31,  2002** |   |
|-------------------------|--------|-----------------------|--------|-----------------------|--------|
| Long-lived assets:      |   |                  |   |                  |   |
| United States           |   | $                     | 11,830 |                  | $      | 12,866 |   |
| International           |   | 385                   |   | 413                   |   |
| Total long-lived assets |   | $                     | 12,215 |                  | $      | 13,279 |   |

 

**(11) SUBSEQUENT EVENT**

 

On March 7,2003, the Company announced that it had filed legal action against IBM in theState Court of Utah, for misappropriation of trade secrets, tortuousinterference, unfair competition and breach of contract.  The complaint alleges that IBM madeconcerted efforts to improperly destroy the economic value of UNIX, particularlyUNIX on Intel, to benefit IBM’s new Linux services business.  As a result of IBM’s unfair competition andthe marketplace injury

 

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sustained by the Company, theCompany is requesting damages in an amount to be proven at trial, but no lessthan $1 billion, together with additional damages through and after the time oftrial.  The Company is also demandingthat IBM cease these anti-competitive practices based on specific requirementsin a notification letter sent to IBM. If these requirements are not met, the Company will have the authorityto revoke IBM’s AIX license 100 days following the receipt of the letter.

 

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**ITEM 2.**                                                  **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

The followingdiscussion should be read in conjunction with our condensed consolidatedfinancial statements and notes thereto, included elsewhere in this quarterlyfiling and our annual report on Form 10-K for the year ended October 31, 2002filed with the Securities and Exchange Commission, including the auditedfinancial statements and management’s discussion and analysis containedtherein.  This discussion containsforward-looking statements that involve risks and uncertainties often indicatedby such words as “estimates”, “anticipates”, “continue”, “expects”, “intends”,“believes” and similar expressions.  Ouractual results could differ materially from those anticipated in theseforward-looking statements as a result of various factors, including those setforth below under “Risk Factors” and elsewhere in this quarterly filing.

 

**Overview**

 

We originallyincorporated as Caldera Systems, Inc. (“Caldera Systems”), a Utah corporationon August 21, 1998, and reincorporated as a Delaware corporation on March 6,2000.  In March 2000, we completed aninitial public offering of our common stock. On May 7, 2001, we formed the Company as a new holding companyunder the name of Caldera International, Inc., to acquire substantially all ofthe assets and operations of the server and professional services groups ofTarantella Inc., formerly known as The Santa Cruz Operation, Inc., pursuant toan Agreement and Plan of Reorganization, dated August 1, 2000 and as subsequentlyamended (the “Tarantella Acquisition”). In connection with this acquisition, Caldera Systems became awholly-owned subsidiary of the Company. Former holders of shares and options to purchase shares ofCaldera Systems received an equal number of shares and options to purchaseshares in the Company.

 

On August 26, 2002, Caldera International, Inc. announced that it willchange its name to The SCO Group, Inc. (“SCO”), pending shareholder approval atthe annual stockholders’ meeting to be held later in fiscal year 2003.  The name change is in response to thecontinuing brand recognition related to the SCO OpenServer and SCO UNIXWareproduct lines.

 

Currently,over 95 percent of our current revenue is derived from UNIX related productsand services.  Revenue from our UNIXrelated products and services has decreased in each of the quarters since theacquisition from Tarantella, as a combined result of worldwide economicconditions, the slow-down in information technology spending and from intensecompetition from suppliers of competitive operating systems.

 

RESULTS OF OPERATIONS

 

We havereduced the number of our employees from 664 at the time of the TarantellaAcquisition to 339 as of January 31, 2003. During the quarters subsequent to the Tarantella Acquisition, we haveexperienced a decline in our revenue primarily attributed to the worldwideeconomic slowdown, lower information technology spending and increasedcompetition in the operating system market, and as a result we have implementedcost reduction measures to decrease personnel and excess facilities and havesignificantly reduced overall operating expenses.  We anticipate we will continue to make cost-reductions in ourefforts to achieve profitability.

 

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The followingtable summarizes the decline in our revenue and our reduction of ongoingoperating expenses (excluding non-cash charges for intangibles amortization andstock-based compensation, restructuring charges and  losses on dispositions and write-downs of long-lived assets) during the past five quarters (inthousands):

 
|                       |   | **January 31,  2003** |   | **October 31,  2002** |   | **July 31,  2002** |   | **April 30,  2002** |   | **January 31,  2002** |   |
|----------------------------|--------|-----------------------|--------|-----------------------|--------|--------------------|--------|---------------------|--------|-----------------------|--------|
|                       |   |                  |   |                  |   |               |   |                |   |                  |   |
| Revenue                    |   | $                     | 13,540 |                  | $      | 15,468             |   | $                   | 15,384 |                  | $      | 15,476 |   | $ | 17,913 |   |
|                       |   |                  |   |                  |   |               |   |                |   |                  |   |
| Sales and marketing        |   | 6,440                 |   | 6,610                 |   | 6,908              |   | 7,665               |   | 8,371                 |   |
| Research and development   |   | 2,650                 |   | 3,748                 |   | 4,284              |   | 4,159               |   | 5,367                 |   |
| General and administrative |   | 1,650                 |   | 1,913                 |   | 2,260              |   | 2,523               |   | 2,724                 |   |
| Total                      |   | $                     | 10,740 |                  | $      | 12,271             |   | $                   | 13,452 |                  | $      | 14,347 |   | $ | 16,462 |   |

 

THREE MONTHS ENDED JANUARY 31,2003 AND 2002

* *

*Revenue*

 

Revenuewas $13,540,000 for the first quarter of fiscal year 2003, and $17,913,000 forthe first quarter of fiscal year 2002, representing a decrease of $4,373,000,or 24 percent.  This decrease wasattributable to the continuing worldwide economic slowdown and from the relateddecrease in information technology spending, as well as from increasedcompetition from other operating system products.  During the first quarter of fiscal year 2003, 82 percent of ourrevenue was generated from the sale of products and 18 percent of our revenuewas generated from services.  During thefirst quarter of fiscal year 2002, 83 percent of our revenue was generated fromthe sale of products and 17 percent of our revenue was generated fromservices.  Revenue from internationalcustomers accounted for 46 percent of total revenue for the first quarter offiscal year 2003 and 49 percent for the first quarter of fiscal year 2002.

* *

*Products.*  Products revenue was $11,090,000 for thefirst quarter of fiscal year 2003 and $14,906,000 for the first quarter offiscal year 2002, representing a decrease of $3,816,000, or 26 percent.  The decrease in products revenueduring the first quarter of fiscal year 2003 from the first quarter of fiscalyear 2002 was attributable to decreased sales of OpenServer and UnixWareproducts resulting from a decrease in information technology spending caused bythe worldwide economic slowdown.  Thisimpact was largely felt in our distribution channel in the Americas andEurope.  Our UNIX-based products revenuehas also declined due to increased competition in the operating system marketfrom other software offerings. OpenServer and UnixWare products continue to be the largest componentsof the Company’s products revenue.  Forthe first quarter of fiscal year 2003, OpenServer revenue was $4,741,000, or 43percent of total products revenue and UnixWare revenue was $4,164,000, or 38percent of total products revenue. Products revenue derived from Linux products and integrated Linux andUNIX products was less than five percent of total products revenue during thefirst quarter of fiscal year 2003.

* *

*Services.*  Services revenue was $2,450,000 for thefirst quarter of fiscal year 2003 and $3,007,000 for the first quarter offiscal year 2002, representing a decrease of $557,000, or 19 percent.  The decrease in services revenue isprimarily related to our decrease in products revenue as a portion of ourservices revenue is dependent on products revenue.  We also experienced a decrease in professional services revenueas we have seen a decrease in the demand for custom enterprise-levelprojects.  The majority of ourservices revenue continues to be derived from customers currently using UNIX-basedoperating systems.

### ** **

17

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### ***Cost of Revenue***

* *

*Cost of Products Revenue.*  Cost of products revenue was $1,186,000 forthe first quarter of fiscal year 2003 and $2,538,000 for the first quarter offiscal year 2002, representing a decrease of $1,352,000, or 53 percent.  Cost of products revenue as a percentage ofproducts revenue was 11 percent for the first quarter of fiscal year 2003 and17 percent for the first quarter of fiscal year 2002.  The decrease in the cost of products revenue percentage for thefirst quarter of fiscal year 2003 compared to the first quarter of fiscal year2002 was attributable primarily to reduced overhead and manufacturing costs anddecreased royalty obligations to third party vendors.

 

Forthe remainder of fiscal year 2003, we expect the cost of products revenue as apercentage of products revenue to be consistent with the first quarter offiscal year 2003.

* *

*Cost of Services Revenue.*  Cost of services revenue was $1,692,000 forthe first quarter of fiscal year 2003 and $3,142,000 for the first quarter offiscal year 2002, representing a decrease of $1,450,000, or 46 percent.  Cost of services revenue as apercentage of services revenue was 69 percent for the first quarter of fiscalyear 2003 and 104 percent for the first quarter of fiscal year 2002.  The decrease in cost of services revenue asa percentage of services revenue for the first quarter of fiscal year 2003compared to the first quarter of fiscal year 2002 was attributable to decreasedemployee and related costs in our support services and professional servicesorganization as well as from the elimination of certain third party supportcontracts.

 

For theremainder of fiscal year 2003, we expect cost of services revenue as apercentage of services revenue to be consistent with the first quarter offiscal year 2003.

### *** ***

### ***OperatingExpenses***

* *

*Sales and Marketing.*  Sales and marketing expenses were $6,440,000for the first quarter of fiscal year 2003 and $8,371,000 for the first quarterof fiscal year 2002, representing a decrease of $1,931,000, or 23 percent.  Sales and marketing expenses represented 48percent of total revenue for the first quarter of fiscal year 2003 and were 47percent of total revenue for the first quarter of fiscal year 2002.  The decrease in the dollar amount ofsales and marketing expense in the first quarter of fiscal year 2003 comparedto the first quarter of fiscal year 2002 was attributable to a reduction insales and marketing employees, reduced travel expenses, and less commissionsand lower co-operative advertising costs as a result of lower revenue.  For the remainder of fiscal year 2003, weanticipate that sales and marketing expenses will remain consistent in absolutedollars from the first quarter of fiscal year 2003.

* *

*Research and Development.*  Research and development expenses were$2,650,000 for the first quarter of fiscal year 2003 and $5,367,000 for thefirst quarter of fiscal year 2002, representing a decrease of $2,717,000, or 51percent.  Research and development costsrepresented 20 percent of total revenue for the first quarter of fiscal year2003 and 30 percent of total revenue for the first quarter of fiscal year2002.  The decrease in the dollar amountof research and development expenses in the first quarter of fiscal year 2003compared to the first quarter of fiscal year 2002 was attributable tofewer employees and related costs and reduced outside consulting and contractservices.  We have also eliminateddevelopment efforts on engineering projects that were not core to the Company’sbusiness and reduced Linux-related development costs as a result of ourinvolvement in the United Linux consortium. For the remainder of fiscal year 2003, we anticipate that research anddevelopment expenses will remain consistent in absolute dollars from the firstquarter of fiscal year 2003.

* *

*General andAdministrative.* General and administrative expenses were $1,650,000 for the firstquarter of fiscal year 2003 and $2,724,000 for the first quarter of fiscal year2002, representing a decrease of $1,074,000, or 39 percent.  General and administrative expensesrepresented 12 

 

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percent of total revenue forthe first quarter of fiscal year 2003 and 15 percent of total revenue for thefirst quarter of fiscal year 2002.  Thedecrease in general and administrative expenses in the first quarter of fiscalyear 2003 compared to the first quarter of fiscal year 2002 was primarilyattributable to fewer employees and related costs and reduced costs for outsideprofessional services.  For theremainder of fiscal year 2003, we anticipate that general and administrativeexpenses will increase in absolute dollars from the first quarter of fiscalyear 2003, as a result of costs incurred for legal fees and related services inconnection with our SCOsource initiative.

* *

*Net RestructuringCharges. *Duringthe first quarter of fiscal year 2003, we recorded a reversal of a previouslyrecorded restructuring charge of $(252,000). The net restructuring charge for the first quarter of fiscal year 2003was comprised of adjustments to previously recorded restructuring charges foractual payments made.  During the firstquarter of fiscal year 2002, the Company incurred a restructuring charge of$4,336,000 that was related to the elimination of certain positions and theclosure of certain facilities.

 

*Amortization ofIntangibles. *The Company recorded $700,000 of amortizationin the first quarter of fiscal year 2003 and $756,000 during the first quarterof fiscal year 2002 related to the amortization of intangible assets inconnection with the acquisition of technology and other assets from Tarantellaand the WhatIfLinux technology from Acrylis, Inc.

* *

*Loss on Disposition andWrite-down of Long-lived Assets. *During thefirst quarter of fiscal year 2002, we recorded a write down oflong-lived assets of $1,328,000, which primarily related to the restructuringin the first quarter of fiscal year 2002. No such losses or write-downs were incurred in the first quarter offiscal year 2003.

* *

*Stock-based Compensation. *In connection withstock options and shares granted to employees and others, we recordedstock-based compensation of $212,000 in the first quarter of fiscal year 2003and $265,000 for the first quarter of fiscal year 2002.

* *

*Equity in Loss of Affiliate*

 

Because of the Company’s existing ownership interest in Vista.com(“Vista”) and the convertible features of the notes receivable from Vista, theCompany is accounting for its investment in Vista using the equity method ofaccounting.  Under theequity method, the Company recognizes its portion of the net income or net lossof Vista in its consolidated statements of operations.  During the first quarter of fiscal year2003, the Company recognized $25,000 in its statement of operations thatrepresented the Company’s portion of Vista’s net loss.

### *** ***

### ***Other Income(Expense), net***

 

Otherincome (expense), net, which consists principally of interest expense, interestincome and other income, was $44,000 for the first quarter of fiscal year 2003and $70,000 for the first quarter of fiscal year 2002.

### *** ***

### ***Provision forIncome Taxes***

 

Theprovision for income taxes was $5,000 for the first quarter of fiscal year 2003and $162,000 for the first quarter of fiscal year 2002.  The provision for income taxes was relatedto earnings of foreign subsidiaries.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Sinceinception, we have funded our operations primarily through loans from our majorstockholder and through sales of common and preferred stock.

 

19

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As of January31, 2003, we had cash and cash equivalents of $4,942,000 and a working capitaldeficit of $3,786,000, which includes $9,802,000 of deferred revenue which willnot require dollar for dollar of cash to settle, but will be recognized asrevenue in future periods, subject to any appropriate write-downs orallowances.  Our total cash and cashequivalents decreased by $1,647,000 from October 31, 2002.  This decrease resulted primarily from cashused in operations.

 

Our net cash used inoperations during the three months ended January 31, 2003 was $1,608,000.  Cash used in operations was primarilyattributable to the net loss of $724,000 offset by non-cash expenses of$1,363,000 and cash used by changes in operating assets and liabilities of$2,247,000.  Cash used in operations hasdeclined in recent quarters primarily due to our recent cost-cutting actions.

 

Our investing activitieshave historically consisted of equipment purchases, investing in strategicpartners and the purchase and sale of available-for-sale securities.  During the three months ended January 31,2003, cash used in investing activities was $367,000, which was primarily aresult of minor equipment purchases and our further investment in Vista.

 

Our financingactivities provided $181,000 during the three months ended January 31, 2003 andconsisted primarily of proceeds received from the exercise of stock options andthe purchase of shares of common stock by our employees through our employeestock purchase program.

 

Our netaccounts receivable balance increased from $8,622,000 as of October 31, 2002 to$9,489,000 as of January 31, 2003.  Theallowance for doubtful accounts was $238,000 as of January 31, 2003, whichrepresented approximately two percent of our gross accounts receivablebalance.  Our write-offs ofuncollectable accounts have not been material.

 

We generaterevenue in Central and South America. Historically, revenue and expenses in this region have not beensignificant.  In recent quarters, theeconomies of the countries of this region, Argentina in particular, haveexperienced significant volatility.  Wehave reviewed our sales to customers and our accounts receivable from customersin this region and have established reserves for potential bad debts as webelieve appropriate.  We believe ouroverall exposure related to transactions in this region is not material.

 

We haveentered into operating leases for our corporate offices located in the UnitedStates and our international sales offices. We have commitments under these leases that extend through fiscal2008.  In recent corporate restructuringactivities, we have partially vacated some of these facilities, but still havecontractual obligations to continue to make ongoing lease payments that willuse available cash.  We have pursued andwill continue to pursue sublease opportunities, as available, to minimize thisuse of cash; however, there can be no assurance that we will be successful ineliminating or reducing cash expenditures for these leases.

 

The followingtable summarizes our contractual lease obligations as of January 31, 2003 (inthousands):

 
|                |   | **Operating  Leases** |   |
|---------------------|--------|-----------------------|--------|
|                |   |                  |   |
| Less than one year  |   | $                     | 3,219  |   |
| One to three years  |   | 7,480                 |   |
| Three or more years |   | 1,548                 |   |
| Total payments      |   | $                     | 12,247 |   |

 

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In connectionwith the acquisition of the server and professional services groups fromTarantella, Tarantella agreed to continue as the lessee for certain facilitiesin the United Kingdom that it would retain and use.  The Company and Tarantella have completed assignment agreementsfor these leases and Tarantella will be the lease tenant and will havefinancial responsibility for these leases. However, our United Kingdom subsidiary has been named as a secondguarantor on these operating leases, and may be liable under these leaseobligations in the event that Tarantella defaults.  Future operating lease payments under these leases extend through2020 and total $10,366,000.  Tarantellahas established an escrow account of $500,000 as collateral in the event theydefault under the agreement.  As ofJanuary 31, 2003, the Company believes that it will not be required to make anypayments under this guarantee, and therefore, no liability has beenrecorded.  This potential obligation isnot included in the above table.

 

Weare continuing to implement cost reduction measures in our efforts to achieveprofitability and expect that revenue for the second quarter of fiscal year2003, which ends April 30, 2003, will be in the range of $23,000,000 to$25,000,000.  We also believe our cashprovided from operations, our cash and cash equivalents as of January 31, 2003,and cash available under our line of credit will provide sufficient cash tofund our current level of operations through October 31, 2003.  However, there can be no assurance that wewill be successful in achieving our revenue and operating expense projections.  Accordingly, we may be required to obtainadditional funding to finance our operations. If sufficient funds are not available or are not available on acceptableterms, our operations could be adversely impacted.

 

We do notengage in any off balance sheet financing arrangements.

 

CRITICAL ACCOUNTING POLICIES

 

Our critical accountingpolicies include the following:

 

•                          Revenuerecognition;

•                          Incometaxes and related valuation allowances;

•                          Impairmentof long-lived assets; and

•                          Allowancesfor doubtful accounts and product returns.

 

We recognizerevenue in accordance with Statement of Accounting Position (“SOP”) 97-2, asamended, and Staff Accounting Bulletin (“SAB”) 101.  Revenue recognition in accordance with these pronouncements canbe complex due to the nature and variability of our sales transactions.  We recognize product revenue upon shipmentif a signed contract exists, the fee is fixed and determinable, collection ofthe resulting receivable is probable and product returns are reasonablyestimable, except for sales to distributors, which are recognized upon sale bythe distributor to resellers or end users. For contracts involving multiple elements (i.e. delivered andundelivered products, maintenance and other services), we allocate revenue toeach component of the contract based on objective evidence of its fair value,which is specific to us.  The fair valueof each element is based on amounts charged when such elements are soldseparately.  We recognize revenueallocated to undelivered products when the criteria for product revenue setforth above have been met.

 

We recognizerevenue from maintenance fees for ongoing customer support and product updatesratably over the period of the maintenance contract.  Payments for maintenance fees are generally made in advance andare non-refundable.  For revenueallocated to education and consulting services or derived from the separatesale of such services, we recognize revenue as the related services areperformed.  We recognize product revenuefrom royalty payments upon receipt of quarterly royalty reports from OEMsrelated to their product sales.

 

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Furtherimplementation guidelines relating to SOP 97-2 and related modifications mayresult in unanticipated changes in our revenue recognition practices and suchchanges could significantly affect our future revenue and results ofoperations.

 

We haveprovided a valuation allowance of $48,644,000 against our entire net deferredtax asset as of October 31, 2002.  Thevaluation allowance was recorded because of our history of net operating lossesand the uncertainties regarding our future operating profitability and taxableincome.  Had different assumptions beenused regarding the valuation allowance and our net deferred tax asset, ourincome tax provision (benefit) could have been materially different than thatreported.

 

We review ourlong-lived assets for impairment when events or changes in circumstancesindicate that the book value of an asset may not be recoverable.  We evaluate, at each balance sheet date, whetherevents and circumstances have occurred which indicate possible impairment.  The carrying value of a long-lived asset isconsidered impaired when the anticipated cumulative undiscounted cash flows ofthe related asset or group of assets is less than the carrying value.  In that event, a loss is recognized based onthe amount by which the carrying value exceeds the estimated fair market valueof the long-lived asset.

 

We performed avaluation of our intangible assets as of January 31, 2003 in accordance withSFAS No. 142, “Goodwill and Other Intangible Assets” and determined that theintangible assets reported in the accompanying consolidated balance sheets arenot impaired.  Write-downs of intangibleassets may be necessary if the future fair value of these assets is less thancarrying value.

 

We offer credit terms on the sale of our products to a significantmajority of our customers and require no collateral from these customers.  We perform ongoing credit evaluations of ourcustomers’ financial condition and maintain an allowance for doubtful accountsreceivable based upon our historical collection experience and expectedcollectibility of all accounts receivable. We also maintain an allowance for estimated returns based on ourhistorical experience.  Our actual baddebts and returns may differ from our estimates and the differences may bematerial.

 

ITEM 3.                                         QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

FOREIGNCURRENCY RISK

 

We have foreign offices and operations primarily in Europe andAsia.  As a result, a substantialportion of our revenue is derived from sales to customers outside the UnitedStates.  Most of this internationalrevenue is denominated in U.S. dollars. However, most of the operating expenses related to the foreign-basedoperations are denominated in foreign currencies and therefore operatingresults are affected by changes in the U.S. dollar exchange rate in relation toforeign currencies such as the U.K. pound sterling and the Euro, among others.  If the U.S. dollar weakens compared to theU.K. pound sterling and the Euro, our operating expenses of foreign operationswill be higher when translated back into U.S. dollars and additional funds maybe required to meet these obligations, which we experienced in the past twoquarters.  Our revenue can also beaffected by general economic conditions in the United States, Europe and otherinternational markets.  Our results ofoperations may be affected in the short term by fluctuations in foreigncurrency exchange rates.  Historically,these amounts have not been significant.

 

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INTERESTRATE RISK

 

The primary objective of our cash management strategy is to investavailable funds in a manner that assures maximum safety and liquidity andmaximizes yield within such constraints. We do not borrow money for short-term investment purposes.

 

INVESTMENTRISK

 

We have invested in equity instruments of privately held and publiccompanies in the high-technology industry for business and strategicpurposes.  Investments are accounted forunder the cost method if our ownership is less than 20 percent and we are notable to exercise influence over operations. Our investment policy is to regularly review the assumptions andoperating performance of these companies and to record impairment losses whenevents and circumstances indicate that these investments may be impaired.  As of January 31, 2003, our investmentsbalance was approximately $876,000.

 

The stock market in general, and the market for shares of technologycompanies in particular, has experienced extreme price fluctuations.  In addition, factors such as new productintroductions by our competitors and us may have a significant impact on the marketprice of our common stock.  These conditionscould cause the price of our stock to fluctuate substantially over shortperiods of time.

 

#### ***Risk Factors***

* *

*We have not been profitable.*

 

We have notbeen profitable.  If our revenuecontinues to decline or we are unable to efficiently further reduce operatingexpenses, we may not achieve profitability or generate positive cash flow.  For the three months ended January 31, 2003,we incurred a net loss of $724,000 and had a net decrease in cash and cashequivalents of $1,647,000.  If we areunable to achieve positive cash flow from operations, we will not be able toimplement our business plan without additional funding, which may not beavailable to us.

* *

*Our competitive position could decline if we are unable to obtainadditional financing.*

 

We may need toraise additional funds to expand our business, support operations, respond tocompetitive pressures, acquire complementary businesses or technologies orrespond to unanticipated requirements. We cannot assure you that additional funding will be available to us inamounts or on terms acceptable to us.

* *

*If our SCO branding effort is not accepted or causes market confusion,our business may be adversely affected.*

 

We recentlylaunched a rebranding effort for our products and services as well as our corporateimage.  On August 26, 2002, we announcedthat, subject to stockholder approval, we would change our corporate name toThe SCO Group, Inc.  In connection withthis announcement, we have renamed our UNIX products and services using the SCOtrademark to draw on this strong brand recognition.  We acquired the rights to use this trademark in May 2001 fromTarantella in connection with our acquisition of certain Tarantella assets andoperations.  If the rebranding effort isnot accepted by our resellers or customers of our products and services, if therebranding efforts cause confusion, or if there are negative connotationsassociated with the trademark that we cannot successfully address, our businessmay be adversely affected.

* *

23

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*If our recently launched products and services are not accepted in themarketplace, our business may be adversely affected.*

 

We recentlylaunched two strategic initiatives.  InMay 2002, we and other Linux vendors including Connectiva, SuSe and TurboLinuxannounced the organization of UnitedLinux, a new initiative that willstreamline Linux development and certification around a global, uniformdistribution of Linux for business.  InAugust 2002, we announced SCObiz, an e-business solution for creating, listing,maintaining supporting, and marketing web sites for small businesses.  This product is based on our exclusivelicense agreement with Vista.com to sell SCObiz to our channel of partners.  In addition, we have recently released newversions of our SCO OpenServer, SCO UNIXWare and SCO Linux operatingsystems.  If our resellers or customersdo not accept these initiatives or product enhancements, if the products failto perform as expected, or if revenue from these initiatives is below ourexpectations, our business may be adversely affected.

 

*Fluctuations in our operating results or the failure of our operatingresults to meet the expectations of public market analysts and investors maynegatively impact our stock price.*

 

Fluctuationsin our quarterly operating results or our failure to meet the expectations ofanalysts or investors, even in the short-term, could cause our stock price todecline.  You should not rely onquarter-to-quarter comparisons of our results of operations as an indication offuture performance.  Factors that mayaffect our quarterly results include:

 

•                  the interestlevel of resellers in recommending our Linux and UNIX business solutions to endusers;

 

•                  theintroduction, development, timing, competitive pricing and market acceptance ofour products and services and those of our competitors;

 

•                  changes ingeneral economic conditions, such as recessions, that could affect capitalexpenditures and recruiting efforts in the software industry; and

 

•                  changes in businessattitudes toward Linux and UNIX as viable operating systems compared to othercompeting systems.

 

We alsoexperience fluctuations in operating results in interim periods in Europe andthe Asia Pacific regions due to seasonal slowdowns and economic conditions inthese areas.  Seasonal slowdowns inthese regions typically occur during the summer months.

 

As a result ofthe factors listed above and elsewhere, it is possible that our results ofoperations may be below the expectations of public market analysts andinvestors in any particular period. This could cause our stock price to decline.  If revenue falls below our expectations and we are unable toquickly reduce our spending in response, our operating results would be lowerthan expected.  Our stock price may fallin response to these events.

* *

*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 salesof our products.*

 

We have atwo-tiered distribution channel.  Therelationships we have developed with resellers allow us to offer our Linux andUNIX products and services to a much larger customer base than we wouldotherwise be able to reach through our own direct sales and marketingefforts.  Some electronic solutionproviders also purchase solutions through our resellers, and we anticipate theywill continue to do so as we expand our product offerings.  Because we usually sell indirectly throughresellers, we cannot control the relationships through which solution providersor equipment integrators purchase our products.  In turn, we do not control the presentation of our products toend-users.  Therefore, our sales couldbe affected by disruptions in the relationships between us and our resellers,between our resellers and electronic solution providers, or between electronicsolution providers and end users.  Also,resellers and electronic solution providers may choose not to emphasize ourproducts to their customers.  Any ofthese

 

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occurrences could diminish theeffectiveness of our distribution channel and lead to decreased sales.

* *

*If the market for our Linux products does not grow as we anticipate orif the UNIX market continues to contract, we may not be able to grow ourbusiness.*

 

Our revenuefrom the sale of UNIX based products has declined since we acquired theseoperations from Tarantella.  Thisdecrease in revenue has been attributable to the worldwide economic slowdown aswell as from competitive pressures from alternative operating systems.  Sales of Linux based products are dependenton the development of certifiable, reliable products for business and theacceptance and adoption of Linux based operating systems by businesses.  If the demand for UNIX based productscontinues to decline, or if such demand is not replaced by new demand forLinux-based products, we may not be able to successfully implement our businessplan.

* *

*We operate in a highly competitive market and face significantcompetition from a variety of current and potential sources: many of ourcurrent and potential competitors have greater financial and technicalresources than we do; thus, we may fail to compete effectively.*

 

In the UNIX operating system market, ourcompetitors include IBM, Microsoft, Hewlett Packard and Sun.  These competitors are aggressively pursuingthe current UNIX operating system market.  Many of these competitors have access togreater resources that we do.  Morerecently, the major competitive alternative to our UNIX and Linux products isMicrosoft’s NT.  While we believe thatour server products retain a competitive advantage in a number of targetedapplication areas, the expansion of Microsoft’s and our other competitors’offerings may restrict the overall market available for our server products,including some markets where we have been successful in the past.

 

Our principalcompetitors in the Linux market include Red Hat, Sun, IBM and SuSe.  In addition, due to the open source natureof Linux, anyone can freely download Linux and many Linux applications andmodify and re-distribute them with few restrictions.  For example, solution providers upon whom we depend for thedistribution of our products could instead create their own Linux solutions toprovide to their customers.  Also,established companies and other institutions could produce competing versionsof Linux software.

* *

*Unintended consequences of our lawsuit against IBM may adversely affectour business*.

 

On March 6, 2003, we filed a lawsuit against IBM allegingmisappropriation of trade secrets, tortious interference, unfair competition,and breach of contract.  The complaintcenters around IBM’s activities regarding the UNIX operating system thatunderlies both our UNIX-based operating systems and IBM’s AIX, its UNIX-basedoperating system.  The complaint allegesthat IBM obtained information concerning the UNIX source code from us andinappropriately used and distributed that information in connection with its effortsto promote the Linux operating system. The complaint seeks damages in excess of $1 billion dollars.

 

Pursuit of this litigation will be costly, and we expect our costs forlegal fees to increase substantially. In addition, we may experience a decrease in revenue as a result of theloss of initiatives previously undertaken jointly with IBM and othersaffiliated with IBM.  We anticipate thatIBM may seek to influence participants in the markets in which we sell ourproducts to reduce or eliminate the amount of our products and services that theypurchase.  There is also a risk that thelawsuit against IBM will be negatively viewed by participants in ourmarketplace, and in such event, we may lose support from such participants.  Any of the foregoing developments couldadversely affect our position in the marketplace and our results of operations.

 

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*Our foreign-based operations and sales create special problems,including the imposition of governmental controls and fluctuations in currencyexchange rates that could hurt our results.*

 

We haveforeign operations, including development facilities, sales personnel andcustomer support operations in Europe, Latin America and Southeast Asia.  These foreign operations are subject tocertain inherent risks, including:

 

•                  potential lossof developed technology through piracy, misappropriation, or more lenient lawsregarding intellectual property protection;

 

•                  imposition ofgovernmental controls, including trade restrictions and other tax requirements;

 

•                  fluctuations incurrency exchange rates and economic instability;

 

•                  longer paymentcycles for sales in foreign countries;

 

•                  seasonalreductions in business activity; and

 

•                  politicalunrest, particularly in areas in which we have facilities.

 

In addition,certain of our operating expenses are denominated in local currencies, creatingrisk of foreign currency translation losses that could harm our financialresults and cash flows.  When wegenerate profits in foreign countries, our effective income tax rate isincreased, even though we generate consolidated net losses.

 

In Latin America andSoutheast Asia in particular, several countries have suffered and may beespecially susceptible to recessions and economic instability which may lead toincreased governmental ownership or regulation of the economy, higher interestrates, increased barriers to entry such as higher tariffs and taxes, andreduced demand for goods manufactured in the United States, resulting in lowerrevenue.

* *

*Future changes in accounting standards, particularly changes affectingrevenue recognition, could cause unexpected fluctuations**in our revenue.*

 

Future changes in accountingstandards, particularly those affecting revenue recognition, could require usto change our accounting policies regarding how we record revenue on oursoftware arrangements.  These changescould cause deferment of revenue recognized in current periods to subsequentperiods or accelerate recognition of deferred revenue to current periods, eachof which could cause shortfalls in meeting securities analysts and investors’expectations.  Any of these shortfallscould cause a decline in our stock price.

* *

*The impact of domestic and global economic conditions may adverselyimpact our operations.*

 

During thelast several quarters the U.S. and European economies have experienced aneconomic slowdown that has affected the purchasing habits of many consumersacross many industries and across many geographies.  This has caused the delay, or even cancellation of technologypurchases.  The ultimate impact of theslowdown in the United States and Europe is difficult to predict, but it hasresulted in decreased sales of our products, longer sales cycles and lowerprices.  If the current slowdowncontinues, our revenue and results of operations may continue to be lower thanexpected.  In addition, the slowdown mayalso affect the end-user market making it more difficult for our resellerchannel to sell our products.

 

Our operationsare vulnerable to fires, earthquakes, power loss, telecommunications failure,and other events outside our control. The occurrence of any one of these events may have a material adverseimpact on our results of operations.

 

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*Future sales of our common stock may negatively affect our stock price.*

 

Certain holders of ourcommon stock have demand and piggyback registration rights obligating us toregister their shares under the Securities Act for sale.  The market price of our common stock coulddecline as a result of sales of a large number of shares of our common stock inthe market, or the perception that such sales could occur.  This also might make it more difficult forus to sell equity securities in the future at a time and at a price that wedeem appropriate.

* *

*If we are unable to retain key personnel in an intensely competitiveenvironment, our operations could be adversely affected.*

 

We will needto retain our management, technical, and support personnel.  Competition for qualified professionals inthe software industry is intense, and departures of existing personnel could bedisruptive to our business and can result in the departure of other employees.

 

The loss ordeparture of any officers or key employees could harm our ability to implementour business plan and could adversely affect our operations.  Our future success depends to a significantextent on the continued service and coordination of our management team,particularly Darl McBride, our President and Chief Executive Officer.  We do not maintain key person insurance forany member of our management team.

 

PART II.                                                 OTHERINFORMATION

 

ITEM 6.                                                     EXHIBITSAND REPORTS ON FORM 8-K

 

(a)                                  Exhibits

 

99.1                           Certification of ChiefExecutive Officer and Chief Financial Officer

 

(b)                                 Reports on Form 8-K

 

None

 

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ITEM 7.                                           SIGNATURES

 

Pursuant tothe requirements of the Securities and Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| Date:  March 14, 2003 |   | CALDERA  INTERNATIONAL, INC.                                               |
|----------------------------|--------|----------------------------------------------------------------------------|
|                       |
|                       | By:    | /s/  Robert K. Bench                                                  |   |
|                       |   | Robert K.  Bench   Chief Financial Officer   (Principal Financial Officer) |
|                            |        |                                                                            |  |  |  |

 

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**CERTIFICATION PURSUANT TO RULE 13A-14OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,AS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

I, Darl McBride, certify that:

 

1.               I have reviewed this quarterly report onForm 10-Q of Caldera International, Inc.;

 

2.               Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading with respectto the period covered by this quarterly report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.               The registrant’s other certifyingofficer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

(a)                                  designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

(b)                                 evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)                                  presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifyingofficer and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

(a)                                  all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifyingofficer and I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent

 

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evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 
| Date:  March 14, 2003.            |
|----------------------------------------|
|                                   |
|                                   |
| /s/  Darl McBride                 |   |
| Darl McBride                           |
| President  and Chief Executive Officer |

 

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**CERTIFICATION PURSUANT TO RULE 13A-14OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,AS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

I, Robert K. Bench, certifythat:

 

1.               I have reviewed this quarterly report onForm 10-Q of Caldera International, Inc.;

 

2.               Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading with respectto the period covered by this quarterly report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.               The registrant’s other certifyingofficer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

(a)                                  designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

(b)                                 evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)                                  presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifyingofficer and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

(a)                                  all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifyingofficer and I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in

 

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other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date:  March 14, 2003. |
|-----------------------------|
|                        |
|                        |
| /s/  Robert K. Bench   |   |
| Robert K.  Bench            |
| Chief  Financial Officer    |

 

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