-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F7pg5JD6pWTGo/T6MxDKANdj0Hl+OVqWJ5vyP8OT61ztRRP/2/Og+t14ws6rRKMC 7T064JiLDibz0es9vG7Ihg== 0000891618-96-003164.txt : 19961225 0000891618-96-003164.hdr.sgml : 19961225 ACCESSION NUMBER: 0000891618-96-003164 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961224 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SANTA CRUZ OPERATION INC CENTRAL INDEX KEY: 0000851560 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942549086 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-21484 FILM NUMBER: 96685426 BUSINESS ADDRESS: STREET 1: 400 ENCINAL STREET STREET 2: PO BOX 1900 CITY: SANTA CRUZ STATE: CA ZIP: 95060 BUSINESS PHONE: 4084277172 10-K405 1 FORM 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K --- X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 --- 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 0-21484 THE SANTA CRUZ OPERATION, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 94-2549086 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 ENCINAL STREET, SANTA CRUZ, CALIFORNIA 95060 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 425-7222 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 Yes /X/ No / / days. Registrant became subject to such filing requirements on May 25, 1993 as a result of its initial public offering. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on December 16, 1996 as reported on the Nasdaq National Market was approximately $131,354,906. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of December 16, 1996, registrant had 36,405,225 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1996 Annual Report to Shareholders are incorporated by reference into Parts I, II and IV. Portions of the definitive Proxy Statement dated on or about January 24, 1997 to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held February 25, 1997 are incorporated by reference into Part III. 2 THE SANTA CRUZ OPERATION, INC. FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 TABLE OF CONTENTS
PART I PAGE NUMBER Item 1. Business 1 Item 2. Properties 13 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Executive Officers of the Registrant 14 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 17 Item 6. Selected Financial Data 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 8. Financial Statements and Supplementary Data 17 Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosures 17 PART III Item 10. Directors and Executive Officers of the Registrant 18 Item 11. Executive Compensation 18 Item 12. Security Ownership of Certain Beneficial Owners and Management 18 Item 13. Certain Relationships and Related Transactions 18 PART IV Item 14. Financial Statement Schedules and Reports on Form 8-K 19 Signatures 23
3 PART I ITEM 1. BUSINESS INTRODUCTION The Santa Cruz Operation, Inc. (SCO or the Company) was incorporated in California in 1979 and shipped its first product, SCO(R) XENIX(R) System V, a packaged version of the UNIX(R) operating system, in 1983. In 1985, the Company introduced its first operating system for the 32-bit Intel(R) microprocessor environment, SCO XENIX 286, and followed with its SCO XENIX 386 in 1987. The Company first shipped its UNIX trademarked commercial product, SCO UNIX System V/386, for the Intel CPU-based platforms in 1989 and followed with an integrated, graphical version of this product, SCO Open Desktop(R), in 1990. In 1993, the Company introduced two families of systems software -- SCO OpenServer(TM) products, a complete line of advanced server and SCO Open Desktop products, a complete line of advanced workstation (client) operating systems. In 1995, SCO integrated these products into a single line, called the SCO OpenServer family. SCO also introduced its SCO Vision family of client-integration products, which integrate Windows(R) PC's with UNIX Servers from all major UNIX vendors. SCO also created a Layered Server Products division which has the mission of providing middleware that enhances the capabilities of SCO OpenServer Systems, as well as UNIX Servers from other vendors. In fiscal year 1996, SCO acquired the UnixWare(R) and UNIX System V Release 4 source-license business from Novell, Inc. SCO's mission is to be the leading supplier of UNIX System software for business-critical environments. Business-critical servers built on Intel CPU-based hardware and controlled by SCO UNIX System software run the critical, day-to-day operations of large branch organizations in retail, finance, telecommunications and government, as well as corporate departments and small to medium-sized businesses of every kind. SCO products enable solutions providers and end-user customers to integrate technologies and products from different vendors to create these powerful, cost-effective servers. SCO has built an experienced, value-added worldwide distribution and support infrastructure to address the business needs of organizations implementing these solutions. SCO believes it is well positioned to capitalize on four key trends driving the information technology industry today: (1) the shift to the server-centric Internet Way of Computing(TM); (2) the improving price-performance characteristics of UNIX servers running on the Intel CPU-based platform; (3) the movement of business-critical applications from mainframes and minicomputers to Java(TM) system-based applets distributed across the Internet (and corporate intranets) via UNIX servers; and (4) the ongoing shift toward increased automation of business operations and use of information incorporating Internet technologies and UNIX servers to gain a competitive advantage. INDUSTRY BACKGROUND Traditionally, mainframes and minicomputers have formed the basis of enterprise computing in large, complex organizations. These organizations have generally used custom applications to perform business-critical tasks such as general accounting, inventory management, transaction processing, manufacturing control and branch management. These applications typically involve processing and managing large quantities of data and must provide continuous availability of data to many users, while ensuring data integrity and security. Despite their performance and functionality, these mainframe and minicomputer "legacy" systems are based on proprietary hardware and operating software architectures and are increasingly perceived to be difficult, time-consuming, and expensive to implement, maintain, and support. In addition, these systems provide limited interoperability with other information resources and systems commonly used in organizations today, provide limited user access to data maintained in these systems, and often use difficult, non-intuitive character-based user interfaces. In the past ten years, Intel CPU-based computers have proliferated in both large and small organizations primarily as a result of steadily improving price-performance and the development of local-area networking software. The most recent generations of Intel processors, the i486 and Pentium(R) processors, together with declining costs for both system memory and data storage, have for the first time given PCs the power to process large volumes of business-critical data. These developments have accelerated the emergence of a new computing paradigm in which central processing on mainframes or minicomputers is being replaced by processing distributed between desktop PC or workstation "clients," which handle user interface and application logic, and Business Critical Servers responsible for shared access to enterprise data, business-critical applications, database management, and data security. This approach, in principle, combines the efficiency of desktop processing with access to enterprise-wide data and applications. However, the leading operating system for Intel CPU-based client PCs (Microsoft(R) MS-DOS(R), often used with the Microsoft Windows user interface or the newer Windows NT(R) workstation and server operating systems) and the leading networking operating system for PC-based local-area networks (Novell(R) NetWare(R)) do 4 not offer the performance, stability, scalability, data security, network connectivity, or support for heterogeneous clients (not only PCs, but also Xterminals, character-based terminals, UNIX workstations, PDAs, and the emerging class of network computers or NCs) required by many organizations for Business Critical Servers. As a result, most PC-based networks offer only a limited version of client/server computing, in which the key functions of shared data access, database management, data security and business-critical applications are handled by mainframes and minicomputers acting as servers, or by microprocessor-based servers utilizing reduced-instruction set (RISC) architectures. Because of operating system and hardware limitations, as well as high hardware costs, these server strategies fail to capture the full price-performance benefits of client/server computing. One of the problems of the PC-centric client/server model is the high cost of system administration, maintenance, and software updates. When businesses move to a server-centric model of client/server computing, as in The Internet Way of Computing, they can administer and update client software from the server, saving inordinate amounts of time and money. This is why SCO supports the server-centric Internet Way of Computing. SCO bases its system software for Business Critical Servers on the UNIX System, which has been in use since the 1970s. The UNIX System is a 32-bit native multi-user, multitasking technology. Operating systems based on the UNIX System allow application programs to be separated from operating system tasks such as control of peripheral devices, communications, memory management and file management, thus providing a standardized protected environment in which the applications operate. The result is much higher reliability because multiple applications and users cannot interfere with each other and easier application development because many complex functions are handled by the operating system. SCO believes, however, that UNIX technology is only the beginning of the solution, and that considerable value must be added to the basic technology in order to create a family of products that solve complex customer requirements for Business Critical Servers. Business and government organizations are increasingly demanding adherence to standards-based open systems to protect their computing investment and avoid reliance on a single vendor's hardware or software. For such customers, the proprietary implementations of the UNIX System that dominate the technical and scientific workstation market are unacceptable. These proprietary versions of UNIX systems run on hardware architectures that are expensive relative to PCs, are tied to the proprietary hardware of particular vendors and have failed to meet the increasing demand for hardware-independent, Intel CPU-based systems. Business and government organizations also require broad availability of third-party applications software so that they can use predefined solutions and, to the extent possible, avoid having to develop custom applications. When custom applications are required, these customers need a development environment and tools which enable such applications to be easily produced and implemented and run across multiple hardware architectures. Lastly, these customers require a high level of customer support in the form of consulting and training, as well as continual product enhancements to incorporate new technology and industry standards. SCO has focused on Intel CPU-based computers because of their dominant position in the microprocessor-based computer market and their potential in the emerging client/server market. SCO's years of experience in supporting each successive generation of Intel processors has resulted in highly reliable and stable UNIX operating system products. The Company's extensive engineering capabilities and product enhancement programs support complex, networked Business Critical Servers across the full range of Intel microprocessors, including the Pentium and Pentium Pro processors. The Company's software is compatible with Intel CPU-based computers offered by virtually all of the major hardware vendors. Because SCO products support multiple processors and can execute several applications simultaneously, they are especially well suited for Business Critical Servers that provide data access and business-critical applications to users throughout the enterprise. THE SCO SOLUTION SCO brings the power of the UNIX System and the freedom of open systems to the Intel CPU-based server environment. Since introducing its first operating software in 1983, SCO has shipped over 2.1 million licenses to multi-user computer environments worldwide. The Company's innovations have included shipping a packaged version of the UNIX System in 1983, shipping a graphical, 32-bit UNIX operating system for Intel PCs in 1990 and shipping a packaged UNIX operating system for Intel CPU-based multiprocessing computers in 1993. The Company introduced a family of client-integration and layered server software in 1995. In 1996, the Company introduced its Internet family of server products. Based on its experience in the marketplace, the Company believes that its products support more Intel CPU-based computers, applications, networks, and peripherals than those of any other provider of UNIX System software. 2 5 Business Critical Servers running SCO software are especially designed to support networked applications running on traditional client/server architectures and on the new server-centric Internet/intranet architecture, enabling organizations ranging from small businesses to large corporations and government agencies to implement enterprise-wide computing solutions. SCO has developed significant expertise in implementing powerful and stable UNIX operating systems for Business Critical Servers, and has built a multi-tiered distribution channel of direct sales personnel, value-added resellers (VARs), original equipment manufacturers (OEMs) and distributors to reach and support thousands of end-user customers. SCO BUSINESS CRITICAL SERVERS Business Critical Servers running SCO system software combine the best qualities of standalone PCs (personal productivity, ease of use and price-performance value) with the traditional strengths of UNIX System servers (business-critical applications, data management, security, and network administration). SCO Business Critical Servers feature the following performance characteristics to meet customer requirements: 1) support for business-critical, transaction-based applications, 2) capabilities for providing a permanent, auditable history of operations, 3) top performance and scalability at the lowest cost, 4) support for multiple users performing multiple tasks, 5) high-level security, 6) reliability and manageability, 7) support for a wide range of client devices, including not only Microsoft Windows PC desktops and laptops, but also UNIX workstations, Xterminals, character-based terminals, PDAs, and the new network computers known as NCs, and 8) expert service and support. STRATEGY The Company's strategy is to continue providing the most reliable and robust system software for Business Critical Servers that run the critical day-to-day business operations of large and small organizations. The Company's future success will depend in large part on the continued growth of the UNIX System market for business and governmental organizations as well as the Company's ability to continue to license additional products and product enhancements to existing customers and to identify and market its products to new markets and customers. There can be no assurance that the Company will be able to sustain its revenue growth and profitability on a quarterly or annual basis. Key elements of SCO's strategy include: FOCUS ON TARGET MARKETS SCO focuses its products, industry relationships, distribution and support strategy on three key business opportunities: primary information systems for small and medium-sized businesses; replicated systems for use in distributed information systems in medium-sized and large organizations, including Fortune 1000 corporations; and business-critical enterprise systems for large and medium-sized businesses. Key targeted industries include retail, finance and banking, government, distribution, telecommunications, transportation and manufacturing. INTEGRATING WINDOWS PCS AND DIVERSE CLIENTS WITH UNIX SERVERS SCO intends to provide the best server for The Internet Way of Computing, which means providing the best server for a wide range of client devices, including not only Microsoft Windows PC desktops and laptops, but also UNIX workstations, Xterminals, character-based terminals, PDAs, and network computers or NCs. The goal of this strategy is to enable organizations to take full advantage of cost-effective client devices that can run the new Java-based applications and exchange information across the Internet and corporate intranets. SCO continues also to support its Windows Integration strategy, which is to make it as easy to connect a network of Windows PCs to all major UNIX servers as it is to connect a standard data terminal. The four cornerstones of this strategy are solutions for: connectivity between SCO servers and Windows desktops; manageability of Windows desktops from SCO servers; the ability to take advantage of users' Windows skills by making SCO UNIX System applications appear and behave like those on Windows; and interoperability between Windows and UNIX System applications. SCO provides a full line of Windows Integration Products, called the SCO Vision Family. 3 6 SUPPORT A WIDE RANGE OF APPLICATIONS Because purchase decisions are often driven by the availability of applications, SCO has positioned its products as a strategic platform for developers of business applications. Developers write software compatible with SCO's products because of SCO's leadership in the UNIX market for Intel CPU-based computers and its support for a wide range of hardware vendors. Applications written for the SCO environment run on over 2,700 computers and peripherals, and can be readily ported to proprietary UNIX systems, thus expanding the market opportunity for the developer. SCO places particular emphasis on ensuring that SCO Business Critical Servers provide optimal support for the leading client/server applications, the new Java system-based applications, and the leading relational database management systems. Major software vendors that offer application software for the SCO environment include Banyan, Borland, Computer Associates, Informix, Lotus, Microsoft, Oracle, Novell, Progress, and Sybase. In total, SCO UNIX Systems are supported by over 12,000 independent software vendors (ISVs), representing over 15,000 business-critical applications. DELIVER COMPREHENSIVE SUPPORT SERVICES SCO continues to expand its delivery of support services to meet the needs of customers using complex, multivendor computer systems. SCO also works closely with resellers and OEMs to offer channel-delivered support programs to meet the needs of customers in its target markets. SCO Services offerings include a range of telephone support options, a CD-based SCO Support Library, on-line services, and high-level consulting and engineering services. These flexible services give customers a choice of support plans and pricing models. SCO also offers comprehensive education and training programs for resellers and end users. SUPPLY MIDDLEWARE FOR MULTIPLE HARDWARE PLATFORMS Middleware products and technologies represent a class of system software that enhances the basic operating system. SCO's Layered Server Products division is tasked with providing middleware for SCO OpenServer Systems, as well as other UNIX servers. PROVIDE TRUE OPEN SYSTEMS PRODUCTS Because customers are increasingly reluctant to be restricted to a single computer vendor, the Company has designed its software products to support industry-accepted open systems standards. Open systems are those systems which conform to established industry standards such as XPG-4, Spec 1170, DCE and OSF/Motif(R) from The Open Group, POSIX(R) from IEEE, and Federal Information Processing Standard (FIPS) from the National Institute of Standards (NIST). SCO continuously works with standards organizations such as The Open Group to assure continued conformance to open systems standards. Industry standards may be established by organizations composed of vendors, by government agencies, by academic institutions, or by market acceptance. Industry standards typically are based on specifications which allow competing implementations. Because these standards are open, competitors can readily access the technology to include in their products. Industry standards offer the customer a cost-effective computing solution by providing a high degree of compatibility and interoperability among hardware, software, network and peripheral products. Based on published directories listing vendors and applications, the Company believes there are currently over 15,000 business critical software solutions compatible with SCO's products. LEVERAGED RESEARCH AND DEVELOPMENT SCO has developed extensive expertise in sourcing, enhancing and integrating third-party technologies to provide true open system software solutions. For example, the SCO Open Server Enterprise System seamlessly integrates open system technologies from over 15 different third-party software providers to produce a package that operates as one cohesive product. In this way, SCO leverages its engineering resources by building upon the technologies developed by the technical staffs at numerous other companies. 4 7 DISTRIBUTE PRODUCTS WORLDWIDE In contrast to operating system software for standalone PCs and small networks, system software for Business Critical Servers requires sophisticated distribution and support. Over the past 11 years, SCO has developed a highly trained, multi-tiered, value-added distribution and support infrastructure. This worldwide network includes over 15,000 resellers and systems integrators, 100 distributors, and 30 OEMs. These parties implement and support specific solutions for corporate, government and smaller business customers by integrating SCO's products with those of other vendors. SCO and its distribution network work together to provide comprehensive support services ranging from engineering and consulting services to technical support and training and education. EVANGELIZE TO DEVELOPERS AND EDUCATIONAL INSTITUTIONS SCO maintains developer and reseller programs to assist independent software developers (ISVs) and channel partners in both the development and marketing of SCO Business Critical Servers. In 1996, SCO launched a series of Authorized Development Centers to assist ISVs in porting their existing applications to the Internet Way of Computing. SCO developer and reseller programs include joint marketing campaigns, information exchange, and special access to product updates, enhancements, and new releases. The Company has established a program to focus on the use of SCO products at schools and universities, and in 1996 made free copies of its UNIX server licenses available to non-commercial organizations. EXECUTE GLOBAL STRATEGY The Company's products are designed to support customers throughout the world, with local language versions available for Europe, Asia, and Latin America. SCO maintains sales and distribution offices throughout the world including those in the U.K., France, Germany, Italy, Denmark, Australia, Singapore, Japan, Canada, Hong Kong, China, Mexico, and throughout the U.S. In addition, the Company has established design and development centers in the U.K. and the U.S. to meet company-wide and local product development requirements. About half of the Company's total revenues are derived from international operations. International operations are subject to certain risks, including staffing and managing foreign operations, fluctuations in foreign currency exchange rates and regulatory requirements. A substantial portion of the Company's international net revenues are priced in the U.K. pound sterling, and operating results can vary with changes in the U.S. dollar exchange rate for such currency. PRODUCTS AND PRODUCT ARCHITECTURE PRODUCT ARCHITECTURE SCO provides a family of products for Business Critical Servers, as well as for specialized business and development workstations used with Business Critical Servers in many client/server installations. These products are based on a UNIX System kernel to which SCO has added extensive capabilities. The Company's products include the following components: operating systems, networking, user interfaces, client integration software, middleware and development tools. Operating systems are the instructions which interact with the microprocessor in a computer, allowing it to perform basic functions such as displaying information, processing inputs and storing and retrieving data. Operating systems also provide a platform for running applications which perform useful functions for end users, including database access, communications services, spreadsheets, and various utilities. Networking systems support numerous third-party local and wide-area networking products to allow enterprise-wide distributed computing. SCO's user interfaces provide an easy-to-use graphical desktop environment that enables users to access an organization's entire computing environment. SCO's Client Integration software integrates client devices, such as Windows PCs and NCs, with UNIX servers. Middleware adds additional capabilities, such as networking, system and network management, software distribution and backups. Development tools enable developers and customers to develop and maintain applications on SCO systems. The Company has structured its product families to take advantage of the modular nature of the overall architecture. Depending on their requirements, customers can purchase packages ranging from a basic multi-user host system to a comprehensive enterprise server system, all of which operate with the Company's development tools. 5 8 PRODUCTS The Company offers four categories of products: (1) server products, (2) client-integration products, (3) layered server products, which include SCO's Internet Family of products, and (4) embedded software products, such as software for Point-of-Sale/Point-of-Service (POS) devices and computer telephony. SCO UNIXWARE PRODUCTS SCO UnixWare 2.1 Application Server provides multi-user application services to businesses that put high demands on system reliability, performance, security, and networking. Built on the latest release of System V UNIX (SVR4.2 MP), SCO UnixWare 2.1 is the most modern and advanced release of the UNIX operating system on the market. SCO UnixWare 2.1 Application Server was designed from the ground up to be a high-performance, multi-processing release of the UNIX operating system while maintaining compatibility with the millions of UNIX systems already deployed by SCO and other market leaders. As an applications server, SCO UnixWare 2.1 provides all of the facets of business critical computing -- including built-in security, reliability, and fault tolerance-- on a standard, cost-effective, and high-performance Intel single- or multi-processor hardware platform. It supports thousands of enterprise, commercial, and industrial-grade applications and has established performance records running leading database systems from Oracle, Sybase, and Informix. One of the striking things about the SCO UnixWare system's consistent record breaking performance is that these records were not established on proprietary hardware from a single supplier, but on standard technology components from several vendors. With Intel's establishment of its MP Spec, hardware vendors can compete in developing increasingly high-performance systems that will automatically support the SCO UnixWare system. With the SCO UnixWare 2.1 system providing an open, standards based operating platform, and numerous hardware manufacturers supporting an open SMP(TM) implementation, customers are assured of increasing performance, increasing value, and the luxury of choice. SCO OPENSERVER PRODUCTS The SCO OpenServer system is today's leading UNIX server operating system for Intel processor-based platforms. Businesses use SCO OpenServer systems to simplify and speed business operations, better understand and respond to their customers' needs, and achieve a competitive advantage. SCO OpenServer systems are exceptional at running multi-user, transaction-based DBMS and business applications, communications gateways, mail and messaging servers in both host and client/server environments. SCO OpenServer Release 5 combines minicomputer-level reliability and availability with the Intel platform's exceptional price/performance, value and flexibility. Unlike other advanced operating systems, SCO OpenServer Systems revolutionize business productivity without obsoleting existing business critical systems, applications or data. Designed expressly for business critical computing, SCO OpenServer systems deliver what today's organizations are seeking - exceptional value and price/performance, extensible networking with existing LANs and WANs, easy integration with Windows desktops, built-in Internet access and services, simplified administration and management, and outstanding scalability for long term growth. Base SCO OpenServer Operating Systems-- SCO OpenServer Enterprise System: The Enterprise System is a 32-bit, multi-user, multitasking X/Open(R) UNIX System-compliant operating system with integrated graphics, multi-protocol networking, Internet services, mail and messaging services, and remote systems administration and software management. SCO OpenServer Host System: The Host System is a 32-bit, multi-user, multitasking, X/Open UNIX System-compliant operating system with integrated graphics and simple PC connectivity and mail and messaging services. It can be easily upgraded to the Enterprise System when client/server or networking capabilities are required. SCO OpenServer Desktop System: The Desktop System is an advanced, single-user operating system that delivers secure workstation capabilities and performance on cost-effective Intel platforms. 6 9 SCO LAYERED SERVER PRODUCTS SCO Layered Server Products include The SCO Internet Family of products, plus SCO Advanced File and Print Server, SCO(R) ARCserve(R)/Open from Cheyenne(R), and SCO Doctor(TM). The SCO Internet Family, featuring SCO Internet FastStart. The SCO Internet Family provides Internet access for corporate LANs. By using SCO FastStart as an Internet gateway, organizations can provide users with access to the vast resources of the Internet while providing advanced security; publish information for internal and external audience; create corporate intranets, and conduct electronic commerce The cornerstone of the SCO Internet Family is SCO Internet FastStart. SCO FastStart has everything needed to get up and running on the web quickly. It includes a single-user version of the SCO OpenServer Enterprise System, multi-line PPP, multi-homing support, Netscape Navigator(TM), and Netscape Communications Server(TM). Installation and configuration are made simple via a HTML-based tool that guides the installer painlessly through the entire install process. SCO FastStart supports TCP/IP, IPX/SPX(TM), NFS(R), NIS, DNS, PPP, SMTP, POP networking protocols and includes network install capability. SCO Internet FastStart also includes SCO Doctor Lite, for enterprise-class performance monitoring and systems management, and the SCO ARCserve/Open Lite graphical backup system. For file and print services to Windows desktops, it includes a copy of SCO Advanced File and Print Server, which provides full Windows NT Server compatible file and print services. SCO FastStart, like all SCO servers, runs on the cost-effective and scalable Intel processor platform. Additional SCO Internet Family Product Options -- For customers with existing SCO servers, or those who wish to extend the functionality of the SCO FastStart package, the SCO Internet Family also has a number of layered products. These include Netscape Commerce Server(TM), Netscape Communications Server, The Netscape Proxy Server(TM), Netscape Navigator, SCO Internet to NetWare Gateway, SCO Internet Security Package, and SCO PPP from Morning Star, and Oracle(R) WebServer 2.0. SCO Advanced File and Print Server - Seamless Integration of UNIX Servers and Windows. The SCO Advanced File and Print Server, when used with SCO OpenServer Release 5, creates a UNIX system based network operating system that allows file and printer access to PC running Microsoft Windows 95, Windows NT, Windows 3.x, OS/2(R), and MS-DOS. Fully backward compatible with LAN Manager Release 2.2, SCO Advanced File and Print Server is based on the newest Microsoft NT networking technology and is peer-to-peer compatible with Microsoft NT. Because Advanced File and Print Server is actually based on NT technology, the server appears to the desktop clients exactly as if it were an NT server. SCO Advanced File and Print Server provides a highly integrated environment allowing PCs to access files and printers in the native Windows format while accessing mission-critical business applications running on the server. UNIX directories are accessed as Windows network drives and UNIX printers are accessed as if they were connected directly to the desktop PC. SCO ARCserve/Open -- Multi-platform Network Backup and Restore. SCO ARCserve/Open is an easy-to-use, high-performance, comprehensive data management tool for enterprise networks. Developed by Cheyenne Software, the industry leader in backup and restore technology, SCO ARCserve/Open delivers a business critical data management system. SCO ARCserve/Open brings a unique combination of ease-of-use, automation, high performance, and reliability to the SCO platform. It provides the robust feature set that administrators require and the simplicity necessary for end-users to do their own backups. Utilizing an intuitive Motif interface, SCO ARCserve/Open makes managing the backup of large servers and heterogeneous networks simple. Ease-of-use is enhanced by the Auto Pilot feature, which provides full automation of the data management process, including tape rotation. High throughput is provided by an efficient backup engine which optimizes performance of each tape drive, giving every ounce of performance your device can deliver. Even greater throughput is achieved with the Parallel Streaming feature, which supports simultaneous backup to multiple tape devices. SCO Doctor -- Pro-Active Remote Systems Management. The SCO Doctor advanced systems management tool is the first to address the many UNIX system configurations in use today. SCO Doctor incorporates advanced process monitoring, accurate diagnosis and automatic problem correction. Notification of alerts can be communicated to the administrator via pop-ups on the Doctor console, the built-in pager support, or by e-mail notices. Alerts, in turn, invoke intelligent action programs to automatically correct the problem or notify the system administrator that intervention is required. It supports diverse network protocols. The Doctor agent collects data 7 10 from a variety of sources including the UNIX kernel, operating system configuration, the file system, standard UNIX performance monitoring commands and local utilities, as well as third party applications. SCO Doctor can be customized to meet a wide range of customer requirements. Views, reports, action programs, alerts, data collection subagents and file transfer programs can easily be customized using Tcl scripting commands. SCO Doctor for Networks(TM) systems management tool is an enhanced version of Doctor that can manage small networks or large installations of several thousand systems over a LAN or WAN. If required, support staff can use the "connect-back" capability of Doctor for Networks for live monitoring of the remote system and perform further diagnosis of problems via the simultaneous log-in facility. SCO Doctor Agent supports SNMP traps and provides extensive system query information through the Doctor enterprise MIB. Doctor for Networks supports everything from low-speed async dial-up modems to TCP/IP, PPP, SLIP and e-mail-enabled transports. It provides uncompromised operation over low-speed phone lines to ensure that the widest range of UNIX systems can, at last, "afford" to be managed. It includes a full-featured set of facilities for file transfer, remote command execution and remote login facilities. By incorporating powerful remote communications features, the need to purchase a separate communications product is eliminated. SCO CLIENT-INTEGRATION PRODUCTS / THE SCO VISION FAMILY The SCO Vision family includes powerful and extensible Windows to UNIX Systems integration products, providing a "best of both worlds" solution - the reliability and scalability of UNIX Systems and the plug-and-play ease of Microsoft Windows. These products are available and optimized for all Windows platforms, including 3.1, NT, and Windows 95. SCO SuperVision - Remote Management of Windows Desktops SCO(R) SuperVision(TM) gives system administrators the power to remotely manage, configure and control SCO Vision Family desktops on the corporate network. By allowing updates to all desktops in a single stroke, SCO SuperVision can dramatically cut the cost of managing and supporting large groups of Windows users. SCO SuperVision will manage both PC's directly connected to the network and those connected remotely over a modem link. SCO VisionFS - Microsoft File and Print Services SCO VisionFS(TM) provides Microsoft file and print services from any UNIX server (HP, Sun, IBM, Digital, SCO etc.) to Windows PCs. It makes a UNIX server appear like any other Windows machine on the network. No software has to be installed on the PC to allow access to files and printers on the UNIX server. Using the SCO VisionFS smart server approach delivers dramatic cost savings in installation, administration and maintenance of PCs, compared to NFS client solutions. SCO TermVision - The Business Critical Terminal Emulator SCO(R) TermVision(TM) is a powerful 32-bit terminal emulation package which presents UNIX character-based applications, files and services in Windows terms for Windows users. SCO TermVision increases efficiencies, flattens the learning curve and reduces administration overhead with a combination of highly configurable emulators, secure and intelligent communications, and facilities for remote administration. SCO XVision - The Transparent PCX Server for Microsoft Windows SCO(R) XVision(R) is the world's first transparent PC X server - designed so that all users see is Microsoft Windows. Using a transparent interface, SCO XVision can reduce the cost and need for training and support. Users can use XVision and Windows applications side by side without even knowing it. SCO SQL-Retriever - ODBC Middleware for Simultaneous Access to Multiple Databases SCO(R) SQL-Retriever(TM) is an Open Database Connectivity (ODBC) middleware product designed to provide simultaneous access to a range of UNIX databases. SCO SQL-Retriever also supports the Java Database Base Connectivity (JDBC) protocol, for full access to databases across Internet/intranet networks. With SCO SQL-Retriever users can link Windows spreadsheets, development tools, report writers or Windows databases with all popular UNIX databases. PC users can take advantage of Windows productivity tools to present their text-based databases with all popular UNIX databases. PC users can take advantage of Windows productivity tools to present their text-based database information in a more flexible way. Developers can use SCO SQL-Retriever to create distributed applications working with multiple hosts and databases without needing to buy proprietary database tools for each. 8 11 Premier Motif - The Business Critical Motif Premier Motif is a complete service for Motif developers including software and support. SCO ensures that users invest their time in developing applications rather than debugging or developing Motif itself. Premier Motif has developed from over three years' experience as the world's leading third party Motif supplier. When Sun made the move to Motif it was Premier Motif they chose to license. Premier Motif focuses on providing the highest quality Motif libraries, refining and enhancing OSF/Motif and ensuring a robust and portable development base. SCO has taken OSF/Motif and added numerous bug fixes and enhancements, many not found in any other vendor's Motif implementation. SCO EMBEDDED PRODUCTS SCO's new Embedded Systems division is specifically dedicated to creating small-footprint operating systems and associated software for the point-of-sale/point-of-service (POS) markets, as well as a network-client operating systems for the emerging low-cost client devices (such as network computers or NCs) that will play an increasingly important role in The Internet Way of Computing. SCO's POS sales continue to grow. The SCO POS solution -- a small, low-cost version of the SCO OpenServer system for the POS devices -- has enabled many retail outlets to integrate their front-counter POS systems with their in-store platforms (ISPs) and their business-critical UNIX servers at their corporate headquarters and distribution centers. MARKETS The Company targets three major market segments: (1) primary information systems for small and medium-sized businesses, (2) replicated systems for use in distributed information systems in medium-sized and large organizations, including Fortune 1000 Corporations, and (3) business-critical enterprise servers for large and medium-sized businesses. The Company's products are used in a wide variety of applications, including commercial applications such as POS systems, customized computing systems for various vertical business areas and general business systems. Key targeted industries include retail, finance and banking, government, distribution, telecommunications, transportation and manufacturing. Sophisticated applications currently running on SCO Business Critical Servers include banking teller systems, reservation systems, customer service information systems and financial dealer trading systems. SALES AND DISTRIBUTION Over the past 10 years, SCO has developed a highly trained and diverse sales and distribution channel of over 6,600 resellers and systems integrators including 100 distributors and 30 OEMs. These channel partners are selected for their expertise and experience. Depending on the type of relationship with SCO, they may receive discounts off list prices. In some cases, the contractual arrangements require minimum purchases and are generally terminable by either party. The Company permits selected resellers to return products for stock balancing, provided a new equivalent order is received. In the event the Company reduced product prices, the Company's standard terms for these resellers provide credit for inventory ordered in the previous 60 days, which can be applied against future purchases. Customers may not return products for a refund. In the fourth fiscal quarter of 1995, the Company increased its provision for exchange of products in its international operations which adversely affected its operating results. Up to this point, stock balancing and exchanges had not created any material adverse impact on the Company's operating results. There can be no assurance, however, that stock balancing and exchanges in the future will not adversely affect the Company's operating results. The SCO sales and distribution channels focus on three major customer groups: Small and Medium-Sized Businesses. SCO works with VARs and authorized resellers which develop and/or sell business solutions to small and medium-sized businesses. Corporate Customers. In the U.S., and for selected customers across Europe, SCO has developed a major account team that builds and manages the relationships with customers in targeted industries as well as with the Company's channel partners who support these customers. In smaller markets this role is filled by major distributors. SCO provides direct support to major corporate customers. In addition, support is provided by OEMs who market SCO solutions on their hardware, systems integrators who develop project-specific solutions integrating SCO products with other vendors' products, and VARs who provide industry-specific, ready-to-use solutions. 9 12 Government Customers. In the U.S., SCO has a dedicated account team that manages the relationships with government agencies. Government sales outside the U.S. are managed by SCO regional management or by OEMs, major distributors or major resellers. SCO also works with federal system integrators who integrate products from various vendors and provide support services for complete projects. CUSTOMER SUPPORT AND SERVICE Because of the business-critical use of SCO's products, customer support and services have become essential to achieve a high level of customer satisfaction. The Company's services are designed to support its wide range of customers, from small and medium-sized businesses to large enterprises, both at the end user and reseller levels. The Company, through its worldwide customer support and service staff and its authorized third-party education, support and channel partners, offers a variety of support and services: * Technical Support includes a variety of support offerings including online support through the World Wide Web, a dial-up bulletin board and varying levels of telephone support for channel partners and corporate accounts; * Educational Services include courseware and instruction guides provided to approximately 140 Authorized Education Centers, which in turn provide training and education materials to both end users and resellers in local languages; * Consulting Services consist of direct assistance, including on-site technical personnel for extended assignment, and integration, implementation and deployment of applications on SCO platforms for branch automation and other large business environments; * Developer Services include technical advisory and support services as well as access to early product releases for application developers; and * Engineering Services consist of engineering personnel who assist OEMs to port and support SCO products on their hardware platforms. The Company sells support services to end users on an annual contract or as-needed basis. Options are available so that customers can tailor the support solution to meet their specific needs. Electronic access is available through the World Wide Web, remote or local bulletin boards and through discussion groups on CompuServe and the Internet. Software updates, enhancements, and bug fixes are also available electronically. SCO also supports end users via Authorized Support Centers and Premier Service Centers. The Company also provides its support services to distributors, VARs, OEMs and integrators. PRODUCT DEVELOPMENT Since its inception, the Company has focused considerable resources on the development and integration of UNIX systems and open systems software technologies and standards for Intel CPU-based computers. SCO has developed skills in operating systems, user interfaces, networking, porting and applications software support. The Company's development strategy is based upon utilizing and building upon technologies it owns, such as UNIX Systems technologies as well as products already available in the marketplace. In December of 1995, SCO purchased the UNIX Systems technologies and business from Novell Corporation and is now a primary driving force behind this open systems platform. SCO devotes considerable resources to ongoing product testing and quality assurance to support product reliability. The Company believes that its abilities to integrate product technologies, to incorporate a wide variety of standards into its products, and to continue to offer enhancements to its existing products are essential to maintaining its competitiveness in the marketplace. SCO has introduced development tools which allow developers to write applications which take advantage of the increased power of the ongoing Intel family of processors, including the Pentium and Pentium pro. In addition, the Company now offers localized versions of its core business critical servers, including SCO UnixWare products in English, French, Italian, German, Spanish, and Japanese, and SCO Open Server products in French, German, Chinese and Japanese. SCO product development is comprised of four distinct development organizations. Each development organization has a specific focus and charter which directly aligns with SCO's over-arching strategic directions. These development organizations have the following focus: 1. The Platform Products Division has responsibility for the core operating systems and services including SCO UnixWare, SCO OpenServer, Gemini I and Gemini-64 products. This organization is also responsible for additional OS services such as SCO(R) Merge(TM), Virtual Disk Manager and On Line Data Manager (RAID subsystems), Development Systems and new technology development that are UNIX kernel-related such as clustering and NUMA support. 10 13 2. The Layered Server Products Division has responsibility for many layered server functions that extend the capabilities of the core operating systems. These services include file and print services, system management and backup services, and, most important, Internet services. The Layered Server Products Division sells Internet services as add-on products and also offers a fully integrated Internet Server called SCO Internet FastStart. 3. The Client Integration Division has responsibility for SCO's "Windows integration" and "any-client integration" products and services. SCO's strategy is to integrate almost any client with almost any UNIX server. This organization builds the SCO Vision family of products which includes SCO XVision, SCO TermVision, SCO SuperVision, SCO SQL-Retriever, and SCO VisionFS. New activities underway include project name "Tarantella" which extends SCO's "any-client" proposition to SCO's Internet Way of Computing strategy. 4. The Embedded Systems Division has responsibility for developing products for embedded client and server environments. Created in 1996, this division focuses its efforts on developing the Network Client Operating System to support SCO's strategy for The Internet Way of Computing, and the SCO Point of Service (POS) toolkit. This group is also exploring and evaluating "thin-servers" to address the need for vertically integrated server environments. The market for the Company's products is characterized by rapidly changing technology, evolution of new industry standards, and frequent introductions of new products and product enhancements. The Company's success will depend upon its continued ability to enhance its existing products, to introduce new products on a timely and cost-effective basis to meet evolving customer requirements, to achieve market acceptance for new product offerings, and to respond to emerging industry standards and other technological changes. There can be no assurance that the Company will be successful in developing new products or enhancing its existing products or that such new or enhanced products will receive market acceptance. The Company's success also depends upon its ability to license from third parties and to incorporate into its products new technologies that become industry standards. There is no assurance that the Company will continue to obtain such licenses on favorable terms or that it will successfully incorporate such third-party technologies into its own products. The Company anticipates new releases of many of its products in the fiscal year ending September 30, 1997. There is no assurance that such new releases will not be affected by technical problems or "bugs", as is common in the software industry. Furthermore, there can be no assurance that these or other future product introductions will not be delayed. Delays in the availability, or a lack of market acceptance, of new or enhanced products could have an adverse effect on the Company's business. There can be no assurance that product introductions in the future will not disrupt product revenues and adversely affect operating results. COMPETITION The market for Intel operating systems is very competitive and rapidly changing. The Company currently encounters significant competition from a limited number of direct competitors including IBM, Microsoft, and Sun Microsystems, which offer hardware-independent multi-user operating systems for Intel platforms, and from OEMs such as AT&T, DEC, Hewlett-Packard, IBM, Olivetti, Sun Microsystems and Unisys, which offer their own versions of the UNIX System on a variety of RISC and Intel CPU-based hardware. Many of these hardware competitors also offer SCO's system software products, either through direct OEM agreements or indirectly through the various distribution channels used by the Company. In addition, to the extent the Company's products penetrate the markets for larger and multiprocessor servers, SCO will increasingly face competition from IBM's AS/400, DEC's Alpha-based servers, and Sequent servers. Competitive systems not based on Intel microprocessors are offered by DEC, Hewlett Packard, IBM, and Sun, among others. These systems are sold with operating system software which is based upon the UNIX System and offer many of the benefits of the Company's products. The Company also expects to receive increasing direct competition on the Intel platform from OEM versions of the UNIX System and from such hardware-independent operating systems as Microsoft Windows NT and SunSoft's Solaris for Intel. The Company expects Microsoft Windows NT (server and workstation) to continue to offer significant and increasing competition to UNIX System products, including SCO products. Many of these competitors and potential competitors have significantly greater financial resources, more technical personnel and more extensive marketing and distribution capabilities than the Company. The major factors that affect the competitive market for the Company's products include product reliability, availability of user applications, compliance with industry standards, ease of use, networking capability, breadth of hardware compatibility, quality of support and customer services, product performance and price. In addition, certain competitive products may have advantages compared to certain SCO products. Microsoft Windows NT has greater name recognition than the Company's products and is being designed to run on a greater range of processors. The Company's exclusive focus on operating systems may be a competitive disadvantage to 11 14 those competitors which offer a wider range of products. The Company may also be at a disadvantage relative to those competitors who have greater financial resources, larger technical staffs, and more extensive marketing and distribution capabilities. There can be no assurance that either existing or new competitors will not develop products that are superior to the Company's products for basic desktop and certain server applications for the UNIX System. If competition were to cause the Company to reduce its prices significantly, the Company's results of operations could be adversely affected. The Company's future success will depend in large part on the following conditions: the continued growth of the UNIX market for business and governmental organizations, the Company's ability to continue to license additional products and product enhancements to existing customers, and the ability to identify and market its products to new markets and customers. There can be no assurance that future competition will not have a material adverse effect on the Company's results of operations. The Company's strategy is to offer products that conform to industry standards. Industry standards may be established by organizations composed of vendors, by government agencies, by academic institutions, or by market acceptance. Industry standards typically are based on specifications for which there can be competing implementations. Because standards are open (not proprietary), competitors can readily access the technology to include in their products, and SCO does not believe that offering products conforming to industry standards will provide SCO with a competitive advantage. The Company's products are offered primarily for multi-user computer environments on Intel CPU-based computers. The market for MS-DOS and Windows on personal computers for personal productivity is substantially larger than the market for UNIX Systems on Intel CPU-based computers. Because the Company competes in a smaller market than the personal productivity market addressed by MS-DOS and Windows, the Company's potential for future growth will depend in part on the extent to which the UNIX market continues to grow. The existence of a number of different versions of UNIX operating systems may have adversely affected the growth of the UNIX market compared to alternative operating systems. However, the emergence of such technologies as the Internet, the World Wide Web, Java, network computers and the TCP/IP networking protocol as de facto industry standards has helped strengthen the position of UNIX system as an operating system that functions consistently across a broad range of hardware platforms and computing architectures such as HOST, Client/Server and now Internet Computing. In addition, SCO is working with The Open Group, a major international standards group, to support the implementation of standard application programming interfaces (APIs) that will support applications compatibility across different versions of UNIX system. To date, SCO and other major UNIX vendors have adopted varying schedules for compliance with these API specifications, and there can be no assurance this effort will be successful. PROPRIETARY RIGHTS The Company attempts to protect its software with a combination of copyright, trademark, and trade secret laws, employee and third-party nondisclosure agreements, license agreements, and other methods of protection. Despite these precautions, it may be possible for unauthorized third parties to copy certain portions of the Company's products or reverse engineer or obtain and use information the Company regards as proprietary. While the Company's competitive position may be affected by its ability to protect its intellectual property rights, the Company believes that trademark and copyright protections are less significant to the Company's success than other factors, such as the knowledge, ability, and experience of the Company's personnel, name recognition, and ongoing product development and support. The Company's software products are generally licensed to end users on a "right-to-use" basis pursuant to a perpetual license. The Company licenses its products to end users primarily under "shrink-wrap" license (i.e., licenses included as part of the product packaging). Shrink-wrap licenses, which are not negotiated with or signed by individual end-user licensees, are intended to take effect upon opening of the product package. Certain provisions of such licenses, including provisions protecting against unauthorized use, copying, transfer, and disclosure of the licensed product, may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries do not protect the Company's intellectual property rights to the same extent as do the laws of the U.S. As the number of software products in the industry increases and the functionality of these products further overlaps, the Company believes that software products will increasingly become subject to infringement claims. There can be no assurance that third parties will not assert infringement claims against the Company and/or against the Company's suppliers of technology. In general, the Company's suppliers have agreed to indemnify the Company in the event any such claim involves supplier-provided software or technology, but any such claim, whether or not involving a supplier, could require the Company to enter into royalty arrangements or result in costly litigation. 12 15 The Company depends on the availability of technology from third parties. Most of the software licensed by the Company is written to comply with industry standards and because the licensor is seeking to broaden its market it is made widely available on a non-exclusive basis by the licensor. As a result, this software is also readily available to competitors of the Company which want to incorporate such software into their products. SCO has several license agreements with Microsoft pursuant to which Microsoft has provided software technology to SCO, including XENIX. Microsoft has rights to terminate its licenses with SCO in the event of the acquisition of SCO by a competitor of Microsoft, which may affect any such acquisition. SCO believes that, if such an acquisition occurred and Microsoft canceled these licenses, SCO could obtain alternative technology from other sources and could incorporate such technology into SCO's products. However, the loss of any significant third-party license, including the Microsoft licenses, or the inability to license additional technology as required, could have a materially adverse effect on the Company's results of operations until such time as the Company could replace such technology. EMPLOYEES As of September 30, 1996, the Company had 1,188 employees, including 423 in product development, 524 in sales and marketing, 32 in customer support services, and 209 in finance, manufacturing and distribution services and administration. The Company's success depends in part on its executive officers, none of whom are subject to long-term employment contracts. The loss of any current executive officer could adversely affect the Company's business. The success of the Company also depends in part on its ability to attract and retain qualified technical, managerial, and marketing personnel. Competition for such personnel is intense in the software industry and there can be no assurance that the Company will be successful in attracting and retaining such personnel. ITEM 2. PROPERTIES The Company is headquartered in Santa Cruz, California, where it leases administrative, sales and marketing, product development, manufacturing and distribution facilities. The Company leases additional facilities for administration, sales and marketing and product development in Mountain Heights Center, New Jersey and Watford, England. The leases for the Company's facilities expire at various dates through 2020. The Company has renewal options, at fair market value, under many of these leases and believes that in any event additional or alternative space adequate to serve the Company's foreseeable needs would be available on commercially reasonable terms. The Company's field operations occupy leased facilities in 12 locations in the United States. In addition, the Company's subsidiaries and sales offices in France, Germany, Italy, Spain, Sweden, Denmark, Singapore, Australia, China and Mexico lease space for their operations. Worldwide, the Company leases property in 38 locations consisting of an aggregate of approximately 400,000 square feet. The Company believes that these facilities are adequate for its needs in the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The Company currently has four lawsuits pending. In August 1993, a securities class action lawsuit was filed in Superior Court of San Francisco, California and is now pending in the Superior Court of Santa Clara County, California against the Company, one current employee, three former employees and the Company's underwriters. The lawsuit alleges violations of the Securities Act of 1993, pertaining to alleged misrepresentations and omissions in the Company's Registration Statement and Prospectus in connection with its initial public offering. In May 1994, the case was dismissed at the pleading stage. The plaintiffs filed a notice of appeal in June 1994. The appellate court reversed the decision of the lower court. Further appellate review was not granted by the U.S. Supreme Court and the case has been remanded to the Superior court for further proceedings and discovery. In February 1995, Micro-Quick Systems, Inc., a software dealer, commenced legal action against the Company in the Superior Court of San Bernadino County, California seeking to recover unspecified damages in excess of $1million. Micro-Quick alleges the Company failed to deliver conforming product and failed to support said product. The Company filed a demurrer which was sustained by the court with leave to amend. An amended complaint was filed by the plaintiffs in June 1995 and a second demurrer was filed by the Company. In August 1995, the Court upheld Plaintiff's breach of contract claim, dismissing all other causes of action with leave to amend. An amended complaint was filed by the plaintiffs in September 1995 and a demurrer was filed by the Company in October 1995. The court overruled SCO's 13 16 demurrer with respect to the breach of express warranty, negligent misrepresentation and intentional misrepresentation. The court sustained the demurrer with leave to amend as to the remaining causes of action. Plaintiff failed to amend. In December 1995, an action was filed in the Superior Court of Santa Cruz County, California by a former employee against the Company alleging employment discrimination, wrongful termination and related claims. In September 1996, an action was filed in the Circuit Court of Cook County, Illinois by a former employee against the Company and one current employee alleging breach of contract regarding sales commission payments. While the Company does not believe any of these lawsuits are meritorious or that they will either individually or in the aggregate have a material adverse impact on the Company's results of operations or financial condition, the resolution of the securities class action could result in a significant non-recurring charge that could adversely impact the Company's earnings per share in the fiscal quarter in which such resolution occurred. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth fiscal quarter of 1996. EXECUTIVE OFFICERS AND OFFICERS OF THE REGISTRANT The executive officers and officers of the Company as of September 30, 1996 were as follows:
Name Age Position with the Company - ---- --- ------------------------- EXECUTIVE OFFICERS: Alok Mohan 48 President, Chief Executive Officer and acting Chief Financial Officer Douglas L. Michels 42 Executive Vice President, Chief Technical Officer Edwin Adams 52 Senior Vice President and General Manager, The Americas Ray Anderson 38 Senior Vice President, Client Integration Division Scott McGregor 40 Senior Vice President, Products Jack Moyer 47 Vice President, Human Resources Steve Sabbath 49 Vice President, Law and Corporate Affairs and Secretary Geoff Seabrook 48 Senior Vice President, EMEA OFFICERS: Gary Horning 43 Vice President, Strategic Marketing John Jarvis 52 Senior Vice President, International Planning and Business Development Helene Mann-Bouchard 36 Vice President, Worldwide Customer Delivery Systems David McCrabb 48 Vice President, Marketing and Channel Sales Michael Tilson 44 Chief Information Officer James Wilt 50 Vice President, Business Development
14 17 Mr. Mohan has served as President since December 1994 and as Chief Executive Officer since July 1995. In December 1994, he was elected as a director and assumed the position of President, Chief Operating Officer and Chief Financial Officer. Prior to this appointment, beginning in May 1994, Mr. Mohan served as Senior Vice President, Operations and Chief Financial Officer. Prior to joining the Company, Mr. Mohan was employed with NCR, where he served as Vice President and General Manager of the Workstation Products Division from January 1990 until July 1993 before assuming the position of Vice President of Strategic Planning and Controller, with responsibility for financial planning and analysis as well as worldwide reporting, from July 1993 to May 1994. Mr. Michels has served as Chief Technical Officer since February 1993 and as a director of the Company since 1979. Mr. Michels has served as the Company's Executive Vice President since he co-founded the Company in 1979. Mr. Michels is one of the founders of Uniforum, a UNIX user consortium, and served as its President from 1989 to 1990. Mr. Adams was named Senior Vice President and General Manager, The Americas in December 1994, from May 1993 to December 1994, he served as the Company's as Vice President, The Americas, Field Operations. Mr. Adams served as Senior Vice President of Sales and Marketing for Telebit from June 1992 until May 1993. From October 1988 to June 1992, he served as Vice President of Marketing and Vice President of Sales for Oracle. Mr. Anderson was named Senior Vice President and Managing Director, Client Integration Division in December 1994. Mr. Anderson was named Senior Vice President of SCO and Managing Director of IXI Limited when SCO acquired IXI Limited in February 1993. Mr. Anderson was a founder of IXI Limited and served as its Managing Director commencing in 1987. Mr. McGregor was named as Senior Vice President, Products in February 1992. Between 1990 and 1992, he served as Vice President, Product Strategy and later served as Vice President and General Manager of the Products Business Unit. Prior to joining SCO, he was employed as Director of the Western Software Laboratory for Digital Equipment Corporation between 1985 and 1990. Mr. Moyer was named Vice President, Human Resources in August 1995. Prior to joining the Company, Mr. Moyer served as Vice President, Human Resources for the following companies: Ore Ida Foods from 1992 to August 1995; Maspar Computer Corporation from November 1991 until November 1992; Businessland from January 1985 until November 1991. Mr. Moyer's senior human resources management experience also includes positions at National Micronetics, Inc. and National Semiconductor Corp. Mr. Sabbath was named Vice President, Law and Corporate Affairs and Secretary in February 1993. Between 1991 and 1993, he served as Vice President, Legal Affairs. Prior to joining the Company, between February 1988 and January 1991, Mr. Sabbath was the Deputy General Counsel for Sun Microsystems, Inc., a manufacturer of UNIX system-based hardware and software. Mr. Seabrook was named Senior Vice President, EMEA in January 1996. Since joining the Company in 1989, Mr. Seabrook has held a number of strategic positions. Prior to joining the Company, Mr. Seabrook served as Vice President International Operations at Century Data Inc. Mr. Horning was named Vice President, Strategic Marketing in October 1995. Prior to joining the Company, Mr. Horning served as Vice President, Partnership Marketing for AT&T/GIS between June 1993 and October 1995 where he gained experience in product management, sales and strategic planning. From June 1989 until June 1993 he served as Assistant Vice President Product Line Management for AT&T/GIS (NCR). Mr. Jarvis was named Senior Vice President, International Planning and Business Development in April 1996. Prior to this appointment, Mr. Jarvis served as Senior Vice President, Operations and Chief Financial Officer commencing in February 1995. He first joined SCO's subsidiary, The Santa Cruz Operation, Ltd., in April 1991. There he held the position of Vice President of Operations for the Company's European, Middle Eastern, and African regions. He was responsible for finance, manufacturing, information systems, and contract functions. In February 1993, Mr. Jarvis assumed the position of Vice President, Pacific Rim Field Operations, overseeing all sales and marketing support for the Company's business activities throughout Asia. Ms. Mann-Bouchard joined the Company in 1984 and held various positions until December 1994 when she became Vice President, Worldwide Manufacturing Distribution and Information Services. In July 1995, Ms. Mann-Bouchard was named Vice President, Worldwide Customer Delivery Systems. 15 18 Mr. McCrabb was named Vice President, Marketing and Channel Sales in January 1995. Prior to joining the Company, Mr. McCrabb served as Vice President and General Manager for Applied Digital Data Systems, a wholly owned subsidiary of NCR, since February 1994. From November 1989 to February 1992, he served as Vice President, Sales and Marketing for Primary Access Corporation. Mr. Tilson was named Chief Information Officer in July 1995. Previously, he served the Company as Senior Vice President, Services beginning in October 1991. From 1990 to 1991, he served as President, SCO Canada, Inc. Prior to joining SCO, he was President of HCR Corporation, a supplier of UNIX systems software and services. HCR was acquired by the Company in May 1990 and became SCO Canada, Inc. Mr. Wilt has served as the Company's Vice President of Business Development since August 1991. Since joining the Company in 1983, Mr. Wilt has held a number of strategic positions both in the US and in Europe including that of Vice President, International. Mr. Wilt formerly held management positions in sales, marketing, and planning at Xerox, Honeywell and Amdahl. 16 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The following required information is filed as a part of the report: The Company has not paid cash dividends on its common stock. The Company's common stock is traded over-the-counter and is quoted on the Nasdaq National Market under the symbol "SCOC". The following table sets forth the range of high and low closing sale prices for the Common Stock:
Low Sale Price High Sale Price -------------- --------------- Fiscal 1995: First Quarter 8-3/8 11-1/2 Second Quarter 9-1/4 15 Third Quarter 7-1/2 14-5/16 Fourth Quarter 5-1/2 12-1/8 Fiscal 1996: First Quarter 5-5/8 8-3/8 Second Quarter 5-5/8 7-1/2 Third Quarter 6-5/8 8-7/8 Fourth Quarter 5-5/8 7-1/4
On September 30, 1996, there were approximately 9,200 holders of record of the Company's Common Stock. ITEM 6. SELECTED FINANCIAL DATA The information set forth on page 16 of the 1996 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth on pages 17 through 21 of the 1996 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements and supplementary financial information for the Company and report of independent auditors set forth on pages 22 through 35 of the 1996 Annual Report to Shareholders are incorporated herein by reference. - Consolidated Statements of Operations for each of the three years in the period ended September 30, 1996 - Consolidated Balance Sheets as of September 30, 1996 and 1995 - Consolidated Statements of Shareholders' Equity for each of the three years in the period ended September 30, 1996 - Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1996 - Notes to Consolidated Financial Statements - Report of Independent Accountants - Quarterly Financial Information ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None 17 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to Directors may be found under the caption "Election of Directors" of the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held February 25, 1997 (the "Proxy Statement"). Such information is incorporated herein by reference. Information with respect to Executive Officers and Officers may be found on pages 14 through 16 hereof, under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Executive Compensation and Other Matters" of the Company's Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Record Date and Principal Share Ownership" of the Company's Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the captions "Certain Transactions with Management" and "Compensation Committee Interlocks and Insider Participation" of the Company's Proxy Statement is incorporated herein by reference. 18 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of Form 10-K 1. Financial Statements The financial statements of the Company as set forth under Item 8 of this report on Form 10-K are incorporated herein by reference. 2. Financial Statement Schedules
Schedule Page Number Description Number -------- ----------- ------ II Valuation and Qualifying Accounts 22
The independent auditors' report with respect to the above-listed financial statement schedules appears on page 21 of this report on Form 10-K. Financial statement schedules other than those listed above have been omitted since they are either not required, not applicable, or the information is shown in the financial statements or notes thereto. 3. Exhibit Listing
Exhibit Number Description ------- ----------- 2.0 Asset Purchase Agreement By and Between The Santa Cruz Operation, Inc. and Novell, Inc. (4) 3.1 Restated Articles of Incorporation of Registrant. (2) 3.2 Bylaws of Registrant, as amended. (5) 4.1 Specimen Common Stock Certificate of Registrant. (1) 10.1 Packaged Goods Product Agreement (contract #1292-8196) with Microsoft Corporation effective April 1, 1988 and amended December 19, 1989 and May 3, 1991. (1) 10.2 Binary Distribution Product Agreement (contract #1292-8195) with Microsoft Corporation effective April 1, 1988 and amended December 19, 1989 and May 3, 1991. (1) 10.3 License Agreement for MS-DOS (contract #1292-7352) with Microsoft Corporation effective August 1, 1987 and amended January 22, 1988, April 1, 1990 and November 12, 1991. (1) 10.4 License Agreement for Key Microsoft Products (contract #1292-8197) with Microsoft Corporation effective September 22, 1988 and amended September 10, 1990 and July 3, 1991. (1) 10.5 License Agreement for Microsoft C Compiler (contract #1292-6007) with Microsoft Corporation effective May 15, 1985 and amended July 24, 1986 and August 28, 1986. (1) 10.6 Microsoft-SCO Technology Schedule as of July 20, 1989. (1) 10.7 Software Agreement with AT&T Information Systems, Inc. effective May 6, 1987, as amended. (1) 10.8 Sublicensing Agreement with AT&T Information Systems, Inc. effective August 23, 1989, as amended. (1) 10.9 Letter Agreement between The Santa Cruz Operation, Inc. and UNIX System Laboratories dated as of September 30, 1992. (1) 10.10 Application Compatibility Cooperation Agreement with AT&T Information Systems, Inc. effective August 21, 1990. (1) 10.11 Software License Agreement with Locus Computing Corporation effective January 11, 1989. (1)
19 22 10.12 Lease with Encinal Partnership No. 1 commencing May 1, 1991 (100 Pioneer Street). (1) 10.13 Lease with Encinal Partnership No. 1 commencing January 1, 1989 (425 Encinal Street). (1) 10.14 Lease with Wave Crest Development, Inc. commencing August 1, 1987 (440 Encinal Street). (1) 10.15 Lease with Wave Crest Development, Inc. commencing June 1, 1988 (400 Encinal Street). (1) 10.16 Lease with Wave Crest Development, Inc. commencing July 1, 1988 (399 Encinal Street). (1) 10.17 Form of Indemnification Agreement. (1) 10.18 Master Registration Rights Agreement as amended. (1) 10.19 1993 Stock Purchase Plan and form of Stock Purchase Agreement. (3) 10.20 1994 Incentive Stock Option Plan and form of Incentive Stock Option Agreement. (3) 10.21 401(k) Plan, as amended. (1) 10.22 Series C Preferred Stock Purchase Agreement dated May 22, 1989, with Microsoft Corporation, as amended. (1) 10.23 Revised 1993 Employee Stock Purchase Plan. (5) 10.24 1993 Director Stock Option Plan. (1) 10.25 Proxies granted to Mr. Lawrence Michels by Lee Richard Kaplan, Barbara Michels, David Michels, Dia Michels, Geri Snyder, Robert Spector, Hugh Spector, Franklin Spector and Shereen Spector on April 8, 1985. (1) 10.26 Proxy granted to Douglas Michels on Aril 18, 1985. (1) 10.28 Proxy granted to Lawrence Michels by Jordan Michels. (1) 10.32 Form of Letter Agreement with Lars H. Turndal. (1) 10.33 Lease with Pinn Brothers Properties commencing May 19, 1992 (320, 324 and 300 Encinal). (1) 11.1 Statement regarding computation of net profit (loss) per share. 13 Annual Report to Shareholders. 21.1 Subsidiaries of Registrant. 23.1 Consent of Independent Auditors. 27.1 Financial Data Schedule.
(1) Incorporated by reference to Registration Statement 33-60548 on Form S-1. (2) Incorporated by reference to the Form 10-K filed on December 24, 1993. (3) Incorporated by reference to the Form 10-K filed on December 23, 1994. (4) Incorporated by reference to the Form 8-K filed on December 20, 1995. (5) Incorporated by reference to the Form 10-K filed on December 22, 1995. - ------------------- (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of fiscal 1996. 20 23 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders of The Santa Cruz Operation, Inc.: Under date of October 25, 1996, we reported on the consolidated balance sheets of The Santa Cruz Operation, Inc. and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended September 30, 1996, as contained in the 1996 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick, LLP - ------------------------------- KPMG Peat Marwick, LLP San Jose, California October 25, 1996 21 24 THE SANTA CRUZ OPERATION, INC. SCHEDULE II/RULE 5-04 VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (In thousands)
BALANCE AT CHARGED TO BALANCE BEGINNING REVENUES OR AT END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OTHER (1) PERIOD --------- ----------- ---------- --------- --------- Year Ended September 30, 1996 Allowance for returns $11,110 $24,643 $26,508 -- $ 9,245 Allowance for doubtful accounts 2,285 635 1,035 -- 1,885 ------- ------- ------- ------- ------- Total allowance $13,395 $25,278 $27,543 -- $11,130 ======= ======= ======= ======= ======= Year Ended September 30, 1995 Allowance for returns $ 4,904 $27,015 $20,853 $ 44 $11,110 Allowance for doubtful accounts 1,924 701 493 153 2,285 ------- ------- ------- ------- ------- Total allowance $ 6,828 $27,716 $21,346 $ 197 $13,395 ======= ======= ======= ======= ======= Year Ended September 30, 1994 Allowance for returns $ 2,991 $13,194 $11,281 -- $ 4,904 Allowance for doubtful accounts 1,366 721 163 -- 1,924 ------- ------- ------- ------- ------- Total allowance $ 4,357 $13,915 $11,444 -- $ 6,828 ======= ======= ======= ======= =======
(1) Adjustment for purchase of Visionware Limited 22 25 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. THE SANTA CRUZ OPERATION, INC. By: /s/ Alok Mohan By: /s/ Steven M. Sabbath ----------------------------- ------------------------------------- Alok Mohan Steven M. Sabbath President, Chief Executive Officer Vice President, and Acting Chief Financial Officer Law and Corporate Affairs & Secretary Date: December 23, 1996 Date: December 23, 1996
KNOW ALL PERSONS BY THEIR PRESENCE, that each person whose signature appears below constitutes and appoints Steven M. Sabbath, his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: /s/ Alok Mohan - ------------------------------ Alok Mohan President, Chief Executive Officer and Director and Acting Chief Financial Officer Date: December 23, 1996 /s/ Douglas L. Michels /s/ Robert M. McClure - ------------------------------- ------------------------------ Douglas L. Michels Robert M. McClure Executive Vice President, Chief Technical Director Officer and Director Date: December 23, 1996 Date: December 23, 1996 /s/ Enzo Torresi /s/ Gilbert P. Williamson - ------------------------------- ------------------------------ Enzo Torresi Gilbert P. Williamson Director Director Date: December 23, 1996 Date: December 23, 1996 /s/ Ronald Lachman /s/ Jean-Francois Heitz - ------------------------------- ------------------------------ Ronald Lachman Jean-Francois Heitz Director Director Date: December 23, 1996 Date: December 23, 1996 /s/ Ninian Eadie /s/ R. Duff Thompson - ------------------------------- ------------------------------ Ninian Eadie R. Duff Thompson Director Director Date: December 23, 1996 Date: December 23, 1996
23 26 EXHIBIT INDEX
Exhibit Number Description - ------- ----------- 2.0 Asset Purchase Agreement By and Between The Santa Cruz Operation, Inc. and Novell, Inc. (4) 3.1 Restated Articles of Incorporation of Registrant. (2) 3.2 Bylaws of Registrant, as amended. (5) 4.1 Specimen Common Stock Certificate of Registrant. (1) 10.1 Packaged Goods Product Agreement (contract #1292-8196) with Microsoft Corporation effective April 1, 1988 and amended December 19, 1989 and May 3, 1991. (1) 10.2 Binary Distribution Product Agreement (contract #1292-8195) with Microsoft Corporation effective April 1, 1988 and amended December 19, 1989 and May 3, 1991. (1) 10.3 License Agreement for MS-DOS (contract #1292-7352) with Microsoft Corporation effective August 1, 1987 and amended January 22, 1988, April 1, 1990 and November 12, 1991. (1) 10.4 License Agreement for Key Microsoft Products (contract #1292-8197) with Microsoft Corporation effective September 22, 1988 and amended September 10, 1990 and July 3, 1991. (1) 10.5 License Agreement for Microsoft C Compiler (contract #1292-6007) with Microsoft Corporation effective May 15, 1985 and amended July 24, 1986 and August 28, 1986. (1) 10.6 Microsoft-SCO Technology Schedule as of July 20, 1989. (1) 10.7 Software Agreement with AT&T Information Systems, Inc. effective May 6, 1987, as amended. (1) 10.8 Sublicensing Agreement with AT&T Information Systems, Inc. effective August 23, 1989, as amended. (1) 10.9 Letter Agreement between The Santa Cruz Operation, Inc. and UNIX System Laboratories dated as of September 30, 1992. (1) 10.10 Application Compatibility Cooperation Agreement with AT&T Information Systems, Inc. effective August 21, 1990. (1) 10.11 Software License Agreement with Locus Computing Corporation effective January 11, 1989. (1) 10.12 Lease with Encinal Partnership No. 1 commencing May 1, 1991 (100 Pioneer Street). (1) 10.13 Lease with Encinal Partnership No. 1 commencing January 1, 1989 (425 Encinal Street). (1) 10.14 Lease with Wave Crest Development, Inc. commencing August 1, 1987 (440 Encinal Street). (1) 10.15 Lease with Wave Crest Development, Inc. commencing June 1, 1988 (400 Encinal Street). (1) 10.16 Lease with Wave Crest Development, Inc. commencing July 1, 1988 (399 Encinal Street). (1) 10.17 Form of Indemnification Agreement. (1) 10.18 Master Registration Rights Agreement as amended. (1) 10.19 1993 Stock Purchase Plan and form of Stock Purchase Agreement. (3) 10.20 1994 Incentive Stock Option Plan and form of Incentive Stock Option Agreement. (3) 10.21 401(k) Plan, as amended. (1) 10.22 Series C Preferred Stock Purchase Agreement dated May 22, 1989, with Microsoft Corporation, as amended. (1) 10.23 Revised 1993 Employee Stock Purchase Plan. (5) 10.24 1993 Director Stock Option Plan. (1) 10.25 Proxies granted to Mr. Lawrence Michels by Lee Richard Kaplan, Barbara Michels, David Michels, Dia Michels, Geri Snyder, Robert Spector, Hugh Spector, Franklin Spector and Shereen Spector on April 8, 1985. (1) 10.26 Proxy granted to Douglas Michels on Aril 18, 1985. (1) 10.28 Proxy granted to Lawrence Michels by Jordan Michels. (1) 10.32 Form of Letter Agreement with Lars H. Turndal. (1) 10.33 Lease with Pinn Brothers Properties commencing May 19, 1992 (320, 324 and 300 Encinal). (1) 11.1 Statement regarding computation of net profit (loss) per share. 13 Annual Report to Shareholders. 21.1 Subsidiaries of Registrant. 23.1 Consent of Independent Auditors. 27.1 Financial Data Schedule.
- --------------- (1) Incorporated by reference to Registration Statement 33-60548 on Form S-1. (2) Incorporated by reference to the Form 10-K filed on December 24, 1993. (3) Incorporated by reference to the Form 10-K filed on December 23, 1994. (4) Incorporated by reference to the Form 8-K filed on December 20, 1995. (5) Incorporated by reference to the Form 10-K filed on December 22, 1995.
EX-11.1 2 STATEMENT RE: COMPUTATION PROFIT/LOSS PER SHARE 1 Exhibit 11.1 THE SANTA CRUZ OPERATION, INC. STATEMENT REGARDING COMPUTATION OF NET PROFIT (LOSS) PER SHARE
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Net profit (loss) $(22,414,000) $ (6,108,000) $ 14,246,000 ============ ============ ============ Weighted average number of common shares outstanding 36,179,050 30,921,705 30,170,963 Number of common equivalents as a result of stock options outstanding using the treasury stock method -- -- 1,769,573 ------------ ------------ ------------ Total 36,179,050 30,921,705 31,940,536 ------------ ------------ ------------ Primary net profit (loss) per share $ (0.62) $ (0.20) $ 0.45 ============ ============ ============
EX-13 3 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 SELECTED FIVE YEAR FINANCIAL INFORMATION
Fiscal Year Ended September 30, (In thousands, except per share data) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------- Net revenues $207,890 $199,329 $184,068 $178,243 $163,720 Cost of revenues 51,904 53,479 51,953 52,292 61,300 ---------------------------------------------------- Gross margin 155,986 145,850 132,115 125,951 102,420 Operating expenses 179,567 152,342 113,490 108,559 91,042 ---------------------------------------------------- Operating earnings (loss) (23,581) (6,492) 18,625 17,392 11,378 ---------------------------------------------------- Other income (expense): Interest income (expense), net 2,302 2,703 1,829 381 (1,015) Other expense, net (394) (363) (561) (427) (1,169) ---------------------------------------------------- Profit (loss) before income taxes (21,673) (4,152) 19,893 17,346 9,194 ---------------------------------------------------- Income taxes 741 1,956 5,647 3,500 677 Net profit (loss) $(22,414) $ (6,108) $ 14,246 $ 13,846 $ 8,517 ---------------------------------------------------- Net profit (loss) per share $ (0.62) $ (0.20) $ 0.45 $ 0.47 $ 0.32 ---------------------------------------------------- Weighted average shares outstanding 36,179 30,922 31,941 29,527 26,307 ----------------------------------------------------
September 30, (In thousands 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------- Working capital $ 61,935 $ 60,539 $ 77,291 $ 60,072 $ 6,100 Total assets 166,807 131,870 138,574 111,276 60,009 Long-term obligations 9,332 7,521 1,084 1,898 2,073 Shareholders' equity 101,581 82,182 89,644 70,531 16,899 ----------------------------------------------------
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview SCO's mission is to be the leading supplier of UNIX System software for business-critical environments. SCO is the world's leading supplier of UNIX server and host systems, with a worldwide market share of over 37%, and a worldwide market share of over 78% of UNIX Systems on the Intel platform (source: IDC, 6/96). SCO sells and supports its products through a worldwide network of distributors, resellers, system integrators and OEMs. SCO is committed to bringing The Internet Way of Computing to business-critical environments, because it can dramatically lower the total cost of computing and is ideal for supporting heterogeneous systems and networks. The Internet Way of Computing was built on UNIX System Technologies, and as the leading provider of UNIX servers, SCO will continue to enhance its product line to support the new generation of network computers and Java based business-critical applications. In addition to historical information contained herein, this Discussion and Analysis may contain forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Results of Operations NET REVENUES
(in thousands) 1996 Change 1995 Change 1994 - -------------------------------------------------------------------------------- Net revenues $207,890 4% $199,329 8% $184,068 - --------------------------------------------------------------------------------
The Company's net revenues are derived from two primary sources, software licenses and fees for services which include engineering services, consulting, custom engineering, support and training. Net revenues were $207.9 million in fiscal 1996 as compared to $199.3 million in fiscal 1995 and $184.1 million in fiscal 1994, representing increases of 4% and 8% from fiscal 1995 to fiscal 1996 and from fiscal 1994 to fiscal 1995, respectively. Beginning in fiscal 1996, net revenues included revenues derived from UnixWare packaged product shipments and SVRX source license revenue related to the acquisition of the UNIX business from Novell, Inc. which occurred in December of 1995. Beginning in fiscal 1995, net revenues included revenues from Visionware Limited (Visionware) which was acquired in December of 1994 and complemented the Company's existing client integration product offerings. Revenue is net of a provision for estimated future returns for stock balancing and excess quantities above levels the Company deems appropriate in its distribution channel partners. LICENSE REVENUES License revenues were $189.0 million in fiscal 1996 as compared to $177.5 million in fiscal 1995 and $163.7 million in fiscal 1994, representing increases of 6% in fiscal 1996 over 1995 and 8% in fiscal 1995 over 1994. License revenues were approximately 91% of total net revenues for fiscal 1996 and 89% of total net revenues for both fiscal 1995 and 1994. The fiscal 1995 to 1996 license revenue increase was primarily attributable to unit volume increases (as opposed to price increases) of the Company's operating systems and layered products. The fiscal 1994 to 1995 license revenue increase was primarily attributable to unit volume increases of Visionware(R) products complementing the Company's client integration product offerings and, to a lesser extent, increased unit volume of operating systems. For the fiscal years ended September 30, 1996, 1995 and 1994, no single customer accounted for greater than 10% of the Company's license revenues. SERVICE REVENUES Revenues from services were $18.9 million in fiscal 1996 as compared to $21.8 million in fiscal 1995 and $20.3 million in fiscal 1994, and represented a decrease of 13% in fiscal 1996 over fiscal 1995 and an increase of 7% in fiscal 1995 over 1994. The decrease in service revenues in fiscal 1996 was primarily attributable to the Company's decision to transition responsibility for the support and training of its product offerings to its channel partners in the first half of fiscal 1996. As a result, support and training revenues recognized by the Company decreased in 1996. The increase in service revenues in fiscal 1995 was primarily attributable to increases in custom engineering revenues and an increase in support services related to the Company's installed base of products as well as the growth of this installed base. 17 3 MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) COST OF REVENUES
(In thousands) 1996 Change 1995 Change 1994 - -------------------------------------------------------------------------------- Cost of revenues $51,904 (3)% $53,479 3% $51,953 Percentage of net revenues 25% 27% 28% - --------------------------------------------------------------------------------
COST OF REVENUES The Company's overall cost of revenues as a percentage of net revenues can be affected by mix changes in net revenue contribution between licenses and services, mix changes in net revenue contribution between product families, mix changes in net revenue contribution between geographic regions and mix changes in net revenue contribution between channels of distribution, since both price and cost characteristics associated with these revenue streams can vary greatly. The Company can also experience fluctuations in cost of revenues as a percentage of revenues as net revenues increase or decrease since certain costs of revenues including technology, service, product assembly and distribution act as fixed costs within certain volume ranges. COST OF LICENSE REVENUES Cost of license revenues include royalties paid to certain software vendors, product packaging, documentation and all costs associated with the acquisition of components, assembling of finished products, warehousing and shipping. Cost of license revenues as a percentage of license revenues decreased to 18% for fiscal 1996 from 19% in fiscal 1995 and 20% in fiscal 1994. Reduced third party royalty payments associated with the purchase of the UNIX business from Novell and the purchase of TCP/IP networking technology (both of which occurred in the first half of fiscal 1996) were primary factors in the reduced license costs in fiscal 1996. The balance of this improvement, both in fiscal 1996 and fiscal 1995, resulted from improved manufacturing overhead expense controls and a product mix shift from packaged products to licensed products, which do not include the costs associated with packaging, documentation and assembly. COST OF SERVICE REVENUES Cost of service revenues include documentation, consulting, personnel related costs, including travel and lodging, associated with providing such services. Cost of service revenues as a percentage of service revenues increased to 94% in fiscal 1996 as compared to 91% in both fiscal 1995 and 1994. The fiscal 1996 increase in cost of services as a percentage of service revenues resulted primarily from incremental support costs for product offerings associated with the acquisition of the UNIX business from Novell. RESEARCH AND DEVELOPMENT
(in thousands) 1996 Change 1995 Change 1994 - -------------------------------------------------------------------------------- Research and development $39,009 21% $32,208 15% $28,046 Percentage of net revenues 19% 16% 15% - --------------------------------------------------------------------------------
The Company invests in research and development both for new products and to provide continuing enhancements to current products. Research and development expenses increased by 21% to $39.0 million in fiscal 1996 from $32.2 million in fiscal 1995. In fiscal 1995, research and development expenses increased 15% from the fiscal 1994 total expenditures of $28.0 million. Research and development expenses represented 19%, 16% and 15% of total net revenues in fiscal 1996, 1995 and 1994, respectively. The fiscal 1995 to 1996 increase in research and development spending was primarily attributable to increased personnel and facility costs associated with the acquisition of the UNIX business acquired from Novell. In addition, increased spending levels associated with the development and release of layered products (including SCO Doctor, SCO ARCserve/Open from Cheyenne and SCO Internet Family) also contributed to the fiscal 1996 increased product development spending. The fiscal 1994 to fiscal 1995 increase in research and development spending was primarily attributable to increased investment in new product releases including SCO OpenServer Release 5 and SCO XVision Version 6, increased spending to support the client integration products and localization efforts for the Company's current products. To date, the Company has expensed all of its software development costs, as incurred, in compliance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Software to be Sold, Leased or Otherwise Marketed." SALES AND MARKETING
(in thousands) 1996 Change 1995 Change 1994 - -------------------------------------------------------------------------------- Sales and marketing $79,359 (4)% $82,493 23% $66,855 Percentage of net revenues 38% 41% 36% - --------------------------------------------------------------------------------
Sales and marketing expenses decreased by 4% to $79.4 million in fiscal 1996 from $82.5 million in fiscal 1995 and increased by 23% in fiscal 1995 from fiscal 1994 expenses of $66.9 million. Sales and marketing expenses represented 18 4 MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) 38%, 41% and 36% of total net revenues in fiscal 1996, 1995 and 1994, respectively. The fiscal 1995 to fiscal 1996 decrease was primarily attributable to decreased project spending in both corporate and channel marketing as well as decreased sales personnel related costs in the United States and Europe. These decreases were partially offset by increased cooperative advertising expenses and by increased spending levels in Japan in order to support new products associated with the acquisition of the UNIX business from Novell. The fiscal 1994 to fiscal 1995 increase was primarily attributable to increased sales and marketing spending in support of the client integration product offerings and incremental marketing spending in support of the Company's release of OpenServer Release 5. GENERAL AND ADMINISTRATIVE
(in thousands) 1996 Change 1995 Change 1994 - -------------------------------------------------------------------------------- General and administrative $22,836 17% $19,547 5% $18,589 Percentage of net revenues 11% 10% 10% - --------------------------------------------------------------------------------
General and administrative expenses increased by 17% to $22.8 million in fiscal 1996 from $19.5 million in fiscal 1995 and by 5% in fiscal 1995 from $18.6 million in fiscal 1994. General and administrative expenses represented 11% of total net revenues for fiscal 1996 and 10% for both fiscal 1995 and 1994. The increased spending in fiscal 1996 was primarily attributable to intangible assets amortization and personnel related costs associated with the purchase and assimilation of the UNIX business from Novell. See Note 13 of Notes to Consolidated Financial Statements. The spending increase in fiscal 1995 compared to fiscal 1994 was primarily attributable to increased personnel related costs to support the client integration product offerings and intangible assets amortization associated with the purchase of Visionware. See Note 13 of Notes to Consolidated Financial Statements. NON-RECURRING CHARGES
(in thousands) 1996 Change 1995 Change 1994 - -------------------------------------------------------------------------------- Non-recurring charges $38,363 112% $18,094 - - Percentage of net revenues 18% 9% - - --------------------------------------------------------------------------------
Non-recurring charges were $38.4 million representing 18% of total revenues in fiscal 1996. The charges, which primarily related to UnixWare products which had not yet reached technological feasibility, were incurred in the first fiscal quarter of 1996. Non-recurring charges of $14.1 million, which primarily related to Visionware products which had not yet reached technological feasibility, were incurred in the first fiscal quarter of 1995. Additional non-recurring costs of $4.0 million were incurred in the fourth fiscal quarter of 1995 related to severance and other personnel costs associated with the Company's restructuring of certain segments of its business operations. This restructuring resulted in a worldwide workforce reduction of approximately 8%. OTHER INCOME (EXPENSE)
(In thousands) 1996 Change 1995 Change 1994 - -------------------------------------------------------------------------------- Interest income, net $2,302 $2,703 $ 1,829 Other expense, net (394) (363) (561) - -------------------------------------------------------------------------------- Total other income $1,908 (18)% $2,340 85% $1,268 Percentage of net revenues 1% 1% 1% - --------------------------------------------------------------------------------
Other income and expense consists of interest income net of interest expense, foreign exchange gains and losses and other miscellaneous items. Net interest income was $2.3 million, $2.7 million and $1.8 million for fiscal 1996, 1995 and 1994, respectively. The net interest income decrease in fiscal 1996 was primarily attributable to a decrease in the weighted average interest bearing balances maintained throughout the year. The net interest income increase in fiscal 1995 was primarily attributable to an increase in the weighted average interest bearing balances maintained throughout the year. Other expense was $.4 million for fiscal 1996 and 1995, and $.6 million for fiscal 1994. The fluctuation from period to period resulted primarily from intercompany transactions settled with the Company's U.K. subsidiary resulting in recognition of foreign exchange gains and losses. INCOME TAXES
(in thousands) 1996 Change 1995 Change 1994 - -------------------------------------------------------------------------------- Income taxes $741 (62)% $1,956 (65)% $5,647 Percentage of net revenues 1% 3% Effective income tax rate (3)% (47)% 28% - --------------------------------------------------------------------------------
19 5 MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) In fiscal 1996, 1995 and 1994, the Company's effective income tax rates were (3)%, (47)% and 28%, respectively. The fiscal 1996 rate reflects non-deductible, non-recurring charges related to the acquisition of the UNIX business and a change in the valuation allowance for deferred tax assets. The fiscal 1995 rate reflects non-deductible, non-recurring charges related to the acquisition of Visionware, while the fiscal 1994 effective income tax rate includes the change in the valuation allowance for deferred tax assets. For an analysis of income taxes, see Note 12 of Notes to Consolidated Financial Statements. NET PROFIT (LOSS)
(in thousands) 1996 Change 1995 Change 1994 - -------------------------------------------------------------------------------- Net profit (loss) $(22,414) (267)% $ (6,108) (143)% $ 14,246 Percentage of net revenues (11)% (3)% 8% - --------------------------------------------------------------------------------
The Company reported a net loss of $22.4 million and $6.1 million in fiscal 1996 and 1995, respectively, and a net profit of $14.2 million or 8% of total net revenues in fiscal 1994. The fiscal 1996 and fiscal 1995 net losses were primarily attributable to absolute increases in operating expenses and non-recurring charges which more than offset the increased gross margin levels as compared to fiscal 1994. Factors That May Affect Future Results The Company's future operating results may be affected by various uncertain trends and factors which are beyond the Company's control. These include adverse changes in general economic conditions and rapid or unexpected changes in the technologies affecting UNIX operating systems. The industry has become increasingly competitive and, accordingly, the Company's results any also be adversely affected by the actions of existing or future competitors, including the development of new technologies, the introduction of new products, and the reduction of prices by such competitors to gain or retain market share. The Company's results of operations could be adversely affected if it were required to lower its prices significantly. The Company participates in a highly dynamic industry and future results could be subject to significant volatility, particularly on a quarterly basis. The Company's revenues and operating results may be unpredictable due to the Company's shipment patterns. The Company operates with little backlog of orders because its products are generally shipped as orders are received. In general, a substantial portion of the Company's revenues has been booked and shipped in the third month of the quarter, with a concentration of these revenues in the latter half of that third month. In addition, the timing of closing of large license contracts and the release of new products and product upgrades increase the risk of quarter to quarter fluctuations and the uncertainty of quarterly operating results. The Company's staffing and operating expense levels are based on an operating plan and are relatively fixed throughout the quarter. As a result, if revenues are not realized in the quarter as expected, the Company's expected operating results could be adversely affected, and such effect could be substantial and could result in an operating loss. A substantial portion of the Company's revenues are derived from outside the United States. Trade sales to international customers represented 53%, 60% and 56% of total revenues for fiscal 1996, 1995 and 1994, respectively. A substantial portion of these international revenues are denominated in the U.K. pound sterling, and operating results can vary with changes in the U.S. dollar exchange rate for such currency. The Company's revenues can also be affected by general economic conditions in the United States, Europe and other international markets. The Company experiences seasonality of revenues for both European and the U.S. federal government markets. European revenues during the quarter ending June 30 are historically lower or relatively flat compared to the prior quarter. This reflects a reduction of customer purchases in anticipation of reduced selling activity during the summer months. Sales to the U.S. federal government generally increase during the quarter ending September 30. This seasonal increase is primarily attributable to increased purchasing activity by the U.S. federal government prior to the close of its fiscal budget year. Additionally, net revenues for the first quarter of the fiscal year are typically lower than net revenues of the prior quarter. The Company's results of operations could be adversely affected if it were to lower its prices significantly. In the event the Company reduced its prices, the Company's standard terms for selected distributors provide credit for inventory ordered in the previous 60 days, such credits to be applied against future purchases. Distributors may not return products for a refund. 20 6 MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) The Company's effective tax rate is subject to change based on the Company's ability to realize deferred tax assets and as new tax legislation is enacted. The Company continually evaluates potential candidates for acquisition. Such candidates are selected based on products or markets which are complementary to those of the Company's. The Company's operations and financial results could be significantly affected by such an acquisition. The Company's operations and financial results could be significantly affected by international factors such as changes in foreign currency exchange rates. The Company's operating strategy and pricing take into account changes in exchange rates over time. However, the Company's results of operations may be significantly affected in the short term by fluctuations in foreign currency exchange rates. The Company's policy is to amortize purchased software and technology licenses using the straight-line method over the remaining estimated economic life of the product including the period being reported on. Due to competitive pressures, it is possible that those estimates of anticipated future gross revenues, the remaining estimated economic life of the product, or both will be reduced significantly in the near future. As a result, the carrying amount of the Company's purchased software and technology licenses may be reduced materially in the near future and, therefore, could create an adverse impact on the Company's future reported earnings. Liquidity and Capital Resources The Company has financed its operations through combinations of net proceeds from the Company's initial public offering, bank borrowings, equipment lease lines and cash flow generated from operations. As of September 30, 1996, the Company's principal sources of liquidity included cash and short-term investments of $54.8 million and an available $15 million bank line of credit under which the Company had no outstanding borrowings. The Company does not believe it will require borrowing capacity greater than the amount available under this line of credit for at least the next twelve months. See Notes 2, 3 and 7 of Notes to Consolidated Financial Statements. Working capital has been used to acquire capital equipment, products and technology, and to make facilities improvements. The Company's operating activities provided cash of $27.6 million for fiscal 1996, $3.3 million in fiscal 1995 and $27.9 million in fiscal 1994. Cash provided by (used for) investing activity during fiscal 1996, 1995 and 1994 was $(21.4) million, $6.4 million and $(58.5) million, respectively. In fiscal 1996, cash provided by operations was used to fund purchases of technology, property and equipment, and short-term investments. In fiscal 1995, proceeds from short-term investments were used to fund the purchase of Visionware, as well as the purchase of property and equipment. In fiscal 1994, proceeds from the Company's 1993 initial public offering and cash provided by operating activities funded short-term investments and the purchase of property and equipment. Cash provided by (used for) financing activities was $(5.9) million, $(5.6) million and $.7 million for fiscal 1996, 1995 and 1994, respectively. In fiscal 1996 and fiscal 1995, proceeds from the sale of Common Stock were more than offset by the Company's stock repurchases and payments on capital lease obligations. In fiscal 1994, proceeds from the sale of Common Stock exceeded payments on capital lease obligations and its bank line of credit. The Company believes that its existing cash and cash equivalents, short-term investments, funds generated from operations and available borrowing capabilities will be sufficient to meet its operating requirements through at least fiscal 1997. 21 7 CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30, (In thousands, except per share data) 1996 1995 1994 - --------------------------------------------------------------------------------------------------- Net revenues: Licenses $ 189,032 $ 177,534 $ 163,744 Services 18,858 21,795 20,324 ----------------------------------------- Net revenues 207,890 199,329 184,068 ----------------------------------------- Cost of revenues: Licenses 34,135 33,688 33,542 Services 17,769 19,791 18,411 ----------------------------------------- Total cost of revenues 51,904 53,479 51,953 ----------------------------------------- Gross margin 155,986 145,850 132,115 ----------------------------------------- Operating expenses: Research and development 39,009 32,208 28,046 Sales and marketing 79,359 82,493 66,855 General and administrative 22,836 19,547 18,589 Non-recurring charges 38,363 18,094 - ----------------------------------------- Total operating expenses 179,567 152,342 113,490 ----------------------------------------- Operating earnings (loss) (23,581) (6,492) 18,625 Other income (expense): Interest income, net 2,302 2,703 1,829 Other expense, net (394) (363) (561) ----------------------------------------- Profit (loss) before income taxes (21,673) (4,152) 19,893 ----------------------------------------- Income taxes 741 1,956 5,647 ----------------------------------------- Net profit (loss) $ (22,414) $ (6,108) $ 14,246 ----------------------------------------- Net profit (loss) per share $ (0.62) $ (0.20) $ 0.45 ----------------------------------------- Common and common equivalents used in computing net profit (loss) per share 36,179 30,922 31,941 -----------------------------------------
See accompanying notes to consolidated financial statements. 22 8 CONSOLIDATED BALANCE SHEETS
September 30, (In thousands, except for share data) 1996 1995 - ----------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 32,065 $ 32,074 Short-term investments 22,766 14,816 Receivables, net 47,176 45,009 Deferred tax assets 6,152 3,896 Other current assets 9,670 6,911 --------- --------- Total current assets 117,829 102,706 --------- --------- Property and equipment, net 15,546 14,991 Purchased software and technology licenses 19,908 5,640 Other assets 13,524 8,533 --------- --------- Total assets $ 166,807 $ 131,870 --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Royalties payable $ 10,644 $ 6,852 Trade accounts payable 12,755 10,207 Income taxes payable 3,369 31 Accrued expenses and other current liabilities 22,288 18,991 Deferred revenues 6,838 6,086 --------- --------- Total current liabilities 55,894 42,167 --------- --------- Other long-term liabilities 9,332 7,521 --------- --------- Shareholders' equity: Common stock, net of notes receivable, authorized 100,000,000 shares Issued and outstanding 37,105,892 and 30,844,003 shares 125,172 83,146 Cumulative translation adjustment (297) (84) Accumulated deficit (23,294) (880) --------- --------- Total shareholders' equity 101,581 82,182 --------- --------- Total liabilities and shareholders' equity $ 166,807 $ 131,870 --------- ---------
See accompanying notes to consolidated financial statements. 23 9 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Cumulative Retained Total --------------------- Translation Earnings Shareholders' (In thousands) Shares Amount Adjustment (Deficit) Equity - ---------------------------------------------------------------------------------------------------------------- BALANCES, SEPTEMBER 30, 1993 29,457 $ 81,388 $ (1,839) $ (9,018) $ 70,531 Issuance under stock option and purchase plans 1,129 2,876 - - 2,876 Stock option income tax benefit - 500 - - 500 Translation adjustment - - 1,491 - 1,491 Net profit - - - 14,246 14,246 - -------------------------------------------------------------------------------------------------------------- BALANCES, SEPTEMBER 30, 1994 30,586 $ 84,764 $ (348) $ 5,228 $ 89,644 Issuance under stock option and purchase plans 904 3,263 - - 3,263 Common stock repurchases (760) (7,489) - - (7,489) Visionware purchase 114 1,075 - - 1,075 Stock option income tax benefit - 1,533 - - 1,533 Translation adjustment - - 264 -- 264 Net loss - - - (6,108) (6,108) - -------------------------------------------------------------------------------------------------------------- BALANCES, SEPTEMBER 30, 1995 30,844 $ 83,146 $ (84) $ (880) $ 82,182 Issuance under stock option and purchase plans 823 2,734 - - 2,734 Common stock repurchases (689) (4,744) - - (4,744) UNIX business purchase 6,128 43,773 - - 43,773 Stock option income tax benefit - 263 - - 263 Translation adjustment - - (213) - (213) Net loss - - - (22,414) (22,414) - -------------------------------------------------------------------------------------------------------------- BALANCES, SEPTEMBER 30, 1996 37,106 $ 125,172 $ (297) $ (23,294) $ 101,581 - --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 24 10 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, (in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net profit (loss) $ (22,414) $ (6,108) $ 14,246 Adjustments to reconcile net profit (loss) to net cash provided by operating activities - Depreciation and amortization 16,151 10,369 6,485 Fixed assets received in lieu of payment - (467) (145) Charge for purchased research and development 38,363 11,177 - Changes in operating assets and liabilities, net of acquisitions - Receivables (2,167) (5,176) (522) Deferred tax assets (1,842) (4,673) (1,650) Other current assets (336) (226) (795) Royalties payable 5,002 (543) 976 Trade accounts payable 2,548 176 543 Income taxes payable 423 (4,350) 5,241 Accrued expenses and other current liabilities (7,333) 1,318 1,969 Deferred revenue (1,673) (272) 839 Other long-term liabilities 588 575 233 Stock option income tax benefit 263 1,533 500 ----------------------------------------- Net cash provided by operating activities 27,573 3,333 27,920 ----------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (4,874) (9,940) (4,998) Purchases of software and technology licenses (5,953) (4,868) (584) Proceeds from short-term investments 15,514 57,647 89,300 Purchases of short-term investments (23,464) (20,851) (140,913) Purchase of Visionware - (13,675) - Changes in other assets (2,658) (1,960) (1,314) ----------------------------------------- Net cash provided by (used for) investing activities (21,435) 6,353 (58,509) ----------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on capital leases, notes payable, and line of credit obligations (3,924) (1,353) (2,141) Net proceeds from sale of common stock 2,742 3,263 2,876 Repurchases of common stock (4,752) (7,489) - ----------------------------------------- Net cash provided by (used for) financing activities (5,934) (5,579) 735 ----------------------------------------- Effects of exchange rate changes on cash and cash equivalents (213) 264 1,491 ----------------------------------------- Change in cash and cash equivalents (9) 4,371 (28,363) Cash and cash equivalents at beginning of year 32,074 27,703 56,066 ----------------------------------------- Cash and cash equivalents at end of year $ 32,065 $ 32,074 $ 27,703 ----------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period: Income tax payments $ 1,955 $ 8,545 $ 1,200 Interest payments 147 254 452 Non-cash transactions: Capital lease agreement $ 2,676 $ 29 $ 525 Networking technology buyout 8,205 - - Purchase of UNIX business 43,773 - - - ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 25 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary Of Significant Accounting Policies THE COMPANY SCO is a leading provider of UNIX system-based, open system software and has the largest installed base of such software for Intel processor-based computer systems. The Company's range of products enables business and government organizations of all sizes to integrate technologies and products from different vendors to create cost-effective, powerful networked information systems that perform highly complex, mission-critical business functions. SCO has built an experienced value-added distribution and development infrastructure to address and support the business needs of organizations implementing these solutions. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the Company and its wholly and majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Investments in companies less than 20% owned are carried at cost. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made for consistent presentation. CASH EQUIVALENTS AND INVESTMENTS The Company considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. Short-term investments include instruments with lives ranging from 91 days to three years. Until fiscal 1995, short-term investments were stated at cost which approximates market. In 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under the provision of SFAS No. 115, the Company classified its investments in certain debt and equity securities as available-for-sale. Such investments are recorded at fair market value, and unrealized gains and losses are reported as a separate component of shareholders' equity. As of September 30, 1996, unrealized gains or losses on such investments were not significant. CONCENTRATIONS OF CREDIT RISK The Company generates a significant portion of its revenues through distributors of personal computer software in North America, Europe and the Pacific Rim. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses. For the fiscal year ended September 30, 1996, no one customer's balance exceeded 10% of trade receivables. INVENTORIES Inventories consist primarily of software documentation and storage media, which are stated at the lower of cost (first-in, first-out) or market. Inventories are included in other assets in the accompanying consolidated balance sheets. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and, except for capital lease and leasehold improvements, are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to five years. Leasehold improvements and assets under capitalized leases are amortized using the straight-line method over the lesser of the remaining term of the lease or the estimated economic life of the asset. PURCHASED SOFTWARE AND TECHNOLOGY LICENSES Purchased software consists of core intellectual property rights which the Company owns. Amounts capitalized are amortized using the straight-line method over the estimated lives of the products into which the software was incorporated. The estimated lives range from three to six years. Technology licenses represent payment streams for the rights to use and integrate third party technology into the Company's product offerings. Amounts capitalized are amortized pro ratably over the term of the contractual rights for the use of this technology, not exceeding five years. 26 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) SOFTWARE DEVELOPMENT COSTS Statement of Financial Accounting Standard No. 86 provides for the capitalization of certain software development costs once technological feasibility is established. Capitalized costs are then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever is greater. Through September 30, 1996, the Company believes its process for developing software was essentially completed concurrent with the establishment of technological feasibility, and accordingly, no software development costs have been capitalized to date. REVENUE RECOGNITION Revenue from sales of software and software documentation products is generally recognized upon product shipment provided that no significant vendor obligations remain and collection of the resulting receivable is deemed probable. For those agreements which provide the customer the right to multiple copies in exchange for a non-refundable fixed fee, revenue is recognized at delivery of the product master of the first copy. Revenue is deferred for estimated future returns for stock balancing and excess quantities above levels the Company deems appropriate in the distribution channels. Revenue from support contracts, including support bundled with software licenses, is recognized ratably over the term of the contract. The Company has entered into agreements whereby it licenses products to original equipment manufacturers. These agreements generally provide for nonrefundable commitment fees which are recognized upon contract signing and product acceptance. Such commitment fees received prior to product acceptance are deferred The Company also provides contract engineering services, including the porting of system software, consulting, design and product review. Revenues from these services are recognized on the percentage-of-completion method unless refundable. If payments we refundable, revenues are deferred until customer acceptance. The Company's existing revenue recognition policies comply with the provisions of the American Institute of Certified Public Accountants Statement of Position 91-1, "Software Revenue Recognition." COOPERATIVE ADVERTISING The Company reimburses certain qualified customers for a portion of the advertising costs related to their promotion of the Company's products. The Company's liability for reimbursement is accrued at the time revenue is recognized as a percentage of the qualified customer's net revenue derived from the Company's products. INCOME TAXES The Company records income taxes using an asset and liability approach that results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's consolidated financial statements or tax returns. In estimating future tax consequences, all expected future events other than enactment of changes in tax laws or rates are considered. NET PROFIT (LOSS) PER SHARE Net profit (loss) per share is computed based on weighted average number of common shares outstanding and dilutive common equivalent shares from the assumed exercise of stock options using the treasury stock method. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of." SFAS No. 121 will be effective for fiscal years beginning after December 15, 1995, and requires long-lived assets to be evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company will adopt SFAS No. 121 in fiscal 1997 and does not expect its adoption to have a material impact on the Company's financial condition or on its consolidated statements of operations. TRANSLATION ADJUSTMENTS All assets and liabilities denominated in foreign currencies are translated at the exchange rate on the balance sheet date. Revenues, cons and expenses are translated at average rates of exchange prevailing during the period. Translation adjustments are accumulated as a separate component of shareholders' equity. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations. 27 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 2 - CASH AND CASH EQUIVALENTS
September 30, ----------------- (in thousands) 1996 1995 - ------------------------------------------------------- Bank demand deposits $ 4,160 $ 6,044 Certificates of deposit 676 2,091 Money market accounts 23,652 16,257 U.S. Treasury bills - 496 Government agency bonds - 1,738 Corporate bonds 3,577 5,448 - ------------------------------------------------------- $32,065 $32,074 =======================================================
Note 3 - SHORT-TERM INVESTMENTS
September 30, ----------------- (in thousands) 1996 1995 - ------------------------------------------------------- U.S. Treasury bills $ 119 $ 734 U.S. Treasury notes 3,462 1,899 Certificates of deposit 1,136 - Government agency bonds 10,450 7,514 Corporate bonds 7,599 4,669 - ------------------------------------------------------- $22,766 $14,816 =======================================================
At September 30, 1996, investments with maturity dates ranging from 91 days to 1 year totaled $5.8 million, and investments with maturity dates ranging from 1 year to 3 years totaled $16.9 million. Note 4 - RECEIVABLES
September 30, ---------------------- (in thousands) 1996 1995 - ------------------------------------------------------------- Trade accounts receivable $ 58,306 $ 58,404 Less allowance for returns and doubtful accounts (11,130) (13,395) - ------------------------------------------------------------- $ 47,176 $ 45,009 =============================================================
Note 5 - PROPERTY AND EQUIPMENT
September 30, ------------------- (In thousands) 1996 1995 - -------------------------------------------------------- Computer and office equipment $ 34,284 $31,478 Furniture and fixtures 7,245 6,883 Leasehold improvements 6,719 6,322 - -------------------------------------------------------- $ 48,248 $ 44,683 Less accumulated depreciation and amortization (32,702) (29,692) - -------------------------------------------------------- $ 15,546 $14,991 ========================================================
Note 6 - PURCHASED SOFTWARE
September 30, --------------------- 1996 1995 - ------------------------------------------------------------ (In thousands) Purchased software and technology licenses, at cost $ 23,128 $ 7,792 Less accumulated amortization (3,220) (2,152) - ------------------------------------------------------------ $ 19,908 $ 5,640 ============================================================
In March of 1996, the Company purchased a fully paid up license enabling it to integrate and distribute certain networking technology in perpetuity. Under the terms of the purchase agreement, consideration of $9.0 million is due in three equal installments with the final payment due in March of 1998. One installment payment of $3 million was made during fiscal 1996. The net present value of the remaining payments is included in purchased software and technology licenses in the Company's consolidated balance sheets and is being amortized over five years. Amortization expense of $1.0 million is included in cost of license revenues in the Company's Consolidated Statements of Operations. Note 7 - BANK LINE OF CREDIT At September 30, 1996, the Company had $15 million available under a domestic bank line of credit. The credit agreement provides that the Company may borrow an amount equal to 75% of eligible accounts receivable, subject to a total of $15 million. The interest rate on the line of credit is the prime rate and borrowings against the line of credit are unsecured. The line of credit requires that the Company maintain certain financial ratios, all of which the Company was in compliance with as of September 30, 1996. The weighted average interest rate on borrowings made against the line of credit during fiscal 1996 was 8.5%. Note 8 - ROYALTIES PAYABLE Royalties payable represent obligations to pay authors of certain software products under licensing agreements. In 1996, two corporate shareholders accounted for $7.6 million of the royalties payable balance and $4.1 million of royalty expense. One of the aforementioned shareholders accounted for $2.9 million of 28 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) the royalties payable balance as of September 30, 1995 and $7.4 million and $7.5 million of royalty expense for fiscal 1995 and fiscal 1994, respectively. Note 9 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
September 30, ------------------ (in thousands) 1996 1995 - -------------------------------------------------------- Accrued wages, commission, bonuses $ 6,211 $ 6,166 Accrued advertising 4,030 2,944 Accrued fringe benefits 2,075 1,947 Other accrued expenses 9,972 7,934 - -------------------------------------------------------- $22,288 $18,991 ========================================================
Note 10 - COMMITMENTS OPERATING LEASES The Company leases its facilities and certain equipment under non-cancelable operating leases that expire on various dates through fiscal 2020. The future minimum lease payments under operating leases are summarized as follows (in thousands):
Fiscal Year As of September 30, 1996 - ------------------------------------------------------ 1997 $ 8,123 1998 6,506 1999 5,496 2000 5,377 2001 5,203 Thereafter 34,275 - ------------------------------------------------------ $64,980 - ------------------------------------------------------
Rent expense amounted to approximately $8.2 million, $7.4 million and $6.9 million in fiscal 1996, 1995 and 1994, respectively. Included in the Company's operating lease commitments are facilities leased from Encinal Partners, a partnership which includes both a Company Executive Vice President and a principal stockholder. The Company's Board of Directors has reviewed and approved the lease agreements and determined that the lease agreements entered into by the Company are conducted on an "arms-length" basis. The lease term of these facilities is between two and nine years. Rent expense for these facilities amounted to approximately $1.4 million in both fiscal 1996 and 1995, and $1.5 million in fiscal 1994. CAPITAL LEASES The Company leases certain equipment under agreements which have been classified as capital leases. At September 30, 1996, the cost of such leased equipment was $3.6 million and the accumulated amortization was $1.4 million. The present value of the minimum lease payments as of September 30, 1996 was $2.6 million, of which $1.0 million represents a current liability and $1.6 million represents a long-term liability. Future minimum lease payments, including interest of $.2 million, are $1.1 million, $.9 million, and $.8 million for the fiscal years ending September 30, 1997, 1998 and 1999, respectively. SAVINGS PLANS The Company has a savings plan, which qualifies under section 401(k) of the Internal Revenue Code. Under the plan, participating U.S. employees may defer up to 25% of their pre-tax salary, but not more than the statutory limits. Beginning January 1995, the Company began a contribution matching program which is to be phased-in over the next three years. Under the terms of this program, the Company will match 50% of employee's contribution up to $1,000 or 2% of employee's annual salary for 1995; up to $2,000 or 4% of employee's annual salary for 1996; and up to $3,000 or 6% of employee's annual salary for 1997 and thereafter. For the year ended September 30, 1996, the Company's total contribution towards the 401(k) plan amounted to $.5 million. The Company also has a non-qualified executive deferred compensation plan which started in October of 1995. Under the terms of the plan, eligible officers and directors are permitted to defer a portion of their compensation. The liability for executive deferred compensation at September 30, 1996 was $.2 million. In December 1995, the Company agreed to take responsibility for an employee pension plan as part of their UNIX business acquisition. Under the terms of the acquisition, the Company agreed to assume the liability associated with the pension plan for employees they retained. At September 30, 1996, the Company's liability under the pension plan was $.4 million. 29 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 11 - SHAREHOLDER'S EQUITY PREFERRED STOCK The Company is authorized to issue 20,000,000 shares of Preferred Stock, of which 930,000, 1,950,000, 5,500,000 and 850,000 were designated Series A, Series B, Series C and Series C-1 Preferred Stock, respectively. As of September 30, 1996, there were no shares of Preferred Series stock either issued or outstanding. 1993 EMPLOYEE STOCK PURCHASE PLAN The Company has an Employee Stock Purchase Plan (ESPP) for all eligible employees which is administered by the Board of Directors. Under the ESPP, shares of the Company's ESPP stock may be purchased at six-month intervals at 85% of the fair market value on the first or last day of each six-month period whichever is lower. Employees may purchase shares through payroll deductions of up to 10% of gross compensation during an offering period. During 1996, 1995 and 1994, employees purchased 317,722, 376,047 and 351,116 shares at an average per share price of $5.47, $5.67 and $5.28, respectively. The number of shares reserved for issuance under the Purchase Plan increased by 500,000 shares in February 1996. As of September 30, 1996, 699,115 shares were reserved for future issuance. 1994 INCENTIVE STOCK OPTION PLAN As of September 30, 1996 and 1995, the Company had authorized 10,013,665 shares of Common Stock for issuance under the 1994 Incentive Stock Option Plan (the "Option Plan"), respectively. The Company's Board of Directors administers the Option Plan and determines the terms of the options granted under the Option Plan, including the exercise price, number of shares subject to each option and the exercisability thereof. In addition, the Company's stock committee is authorized to grant up to 20,000 shares to an individual employee or consultant under the terms of the Option Plan. The exercise price of all incentive options granted under the Option Plan must be at least equal to the fair market value. Options granted under the Option Plan prior to January 31, 1996 generally become exercisable over a five-year period. Effective January 31, 1996, the vesting period for subsequent grants was changed to four years. The term of each option is ten years. As of September 30, 1996 and 1995, 2,322,538 and 1,923,144 options were exercisable, respectively, under the Option Plan. The activity under the Option Plan for fiscal 1994, 1995 and 1996 is as follows:
Shares (In thousands Available except per Options Per Share for Future share price) Outstanding Price Grants - -------------------------------------------------------------------------- OUTSTANDING AS OF SEPTEMBER 30, 1993 4,340 $ .04 - $12.00 872 Additional shares authorized - 1,000 Granted 2,525 5.12 - 9.12 (2,525) Exercised (772) .04 - 4.92 - Cancelled (1,819) 1.25 - 12.00 1,819 - -------------------------------------------------------------------------- OUTSTANDING AS OF SEPTEMBER 30, 1994 4,274 $ .04 - $12.00 1,166 Additional shares authorized - 3,000 Granted 2,700 6.19 - 13.94 (2,700) Exercised (527) .04 - 12.00 - Cancelled (432) 1.25 - 13.63 432 - -------------------------------------------------------------------------- OUTSTANDING AS OF SEPTEMBER 30, 1995 6,015 $ .04 - $13.94 1,898 Additional shares authorized - Granted 1,235 5.63 - 8.25 (1,235) Exercised (500) .04 - 6.63 - Cancelled (719) 1.25 - 13.63 719 - -------------------------------------------------------------------------- OUTSTANDING AS OF SEPTEMBER 30, 1996 6,031 $ .04 - $13.94 1,382 ==========================================================================
1993 DIRECTOR OPTION PLAN The Company's 1993 Director Option Plan (the "Director Plan") provides for the granting of nonstatutory stock options to nonemployee directors of the Company and is administered by the Board of Directors. In February of 1996, the number of shares available for issuance under the Director Plan was increased by 150,000 shares from 400,000 shares to 550,000 shares. As of September 30, 1996, there were 188,000 shares available for grant under the plan and options outstanding were 356,000 of which 145,000 were vested. During the fiscal year ended September 30, 1996, 6,000 options were exercised at a price of $5.50. No options were exercised in prior periods. 30 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) COMMON STOCK REPURCHASES The Company repurchases its common stock on the open market, both systematically and non-systematically. Under the systematic stock repurchase plan, shares of common stock are repurchased to help negate the dilutive effects of the Incentive Stock Option Plan and the Employee Stock Purchase Plan. For the fiscal years ended September 30, 1996 and 1995, the purchase and retirement of common stock under the systematic plan was 601,000 shares and 760,000 shares, respectively. Under the non-systematic repurchase plan, the Company may repurchase up to 2,000,000 shares of its common stock. During the fiscal year ended September 30, 1996, 88,000 shares were repurchased and retired under the non-systematic plan. Both the systematic and non-systematic plans have been approved for continuance into fiscal 1997. Note 12 - INCOME TAXES Profit (loss) before income taxes for fiscal 1996, 1995 and 1994 include foreign pretax profit (loss) of approximately $2.2 million, $(.9) million and $9.5 million, respectively. The components of income taxes are as follows:
Fiscal Year Ended September 30, ----------------------------------- (in thousands) 1996 1995 1994 - ----------------------------------------------------------------- Current: Federal $ 301 $ 4,352 $ 1,972 State 814 (390) 687 Foreign 1,205 1,134 4,138 - ----------------------------------------------------------------- Total current 2,320 5,096 6,797 - ----------------------------------------------------------------- Deferred: Federal (1,684) (3,751) (1,000) State (568) (928) - Foreign 410 6 (650) - ----------------------------------------------------------------- Total deferred (1,842) (4,673) (1,650) - ----------------------------------------------------------------- Charge in lieu of income tax expense related to employee stock options 263 1,533 500 - ----------------------------------------------------------------- $ 741 $ 1,956 $ 5,647 =================================================================
Income taxes differ from the amount computed by applying the statutory federal income tax rate to profit (loss) before income taxes as follows:
Fiscal Year Ended September 30, ----------------------------------- (In thousands) 1996 1995 1994 - --------------------------------------------------------------------- Statutory federal income tax (benefit) at 34% $(7,369) $(1,412) $ 6,764 State income tax (benefit), net of federal effect 162 (870) 794 Non-deductible purchased research and development 2,239 4,022 - Foreign income taxed at different rates 577 778 938 Research credit (258) (400) - FSC benefit (150) (84) - Non-deductible expenses 121 96 - Change in the total valuation allowance 5,398 (173) (2,880) Other, net 21 (1) 31 - --------------------------------------------------------------------- $ 741 $ 1,956 $ 5,647 =====================================================================
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented as follows:
Fiscal Year Ended September 30, -------------------------------------- (In thousands) 1996 1995 1994 - --------------------------------------------------------------------------- Deferred tax assets: Accruals and reserve accounts $ 7,685 $ 4,822 $ 4,186 Property and equipment 142 988 - Purchased software 8,117 - - Research credit 1,481 4,030 1,882 Other credits - 683 287 - --------------------------------------------------------------------------- Total gross deferred tax assets 17,425 10,523 6,355 Less valuation allowance (9,598) (4,200) (4,373) - --------------------------------------------------------------------------- Net deferred tax assets 7,827 6,323 1,982 - --------------------------------------------------------------------------- Deferred tax liabilities: Property and equipment - - 332 Purchased software 815 1,153 - - --------------------------------------------------------------------------- Total deferred tax liabilities 815 1,153 332 - --------------------------------------------------------------------------- Net tax assets and liabilities $ 7,012 $ 5,170 $ 1,650 ==========================================================================
The net change in the total valuation allowance for the years ended September 30, 1996, 1995 and 1994 was an increase (decrease) of approximately $5.4 million, $(.2) million and $(2.9) million, respectively. 31 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company's management believes the uncertainty regarding the timing of the realization of net deferred tax assets requires a valuation allowance. The Company has unused research credit carry-forwards of approximately $1.5 million for federal tax purposes as of September 30, 1996, which expire in fiscal years 2008 through 2011. At September 30, 1996, the foreign subsidiaries of the Company had cumulative unremitted foreign earnings of approximately $7.8 million. Had these earnings been repatriated during fiscal 1996, the incremental U.S. tax liability would not have been material after taking into account underlying foreign taxes and tax credit carry-forwards. The management intends to reinvest these earnings indefinitely. Note 13 - ACQUISITIONS VISIONWARE LIMITED In December 1994, the Company completed the acquisition of Visionware Limited ("Visionware") for $13.7 million in cash and 114,342 shares of common stock. Non-recurring charges of $14.1 million were incurred in fiscal 1995 for costs associated with the acquisition. Of the nonrecurring charges, $11.2 million was related to non-tax deductible purchased research and development for Visionware products which had not yet reached technological feasibility, The remaining $2.9 million related to redundant facilities and other one-time acquisition related charges. Intangibles of $5.2 million, arising from the business acquisition, are amortized on the straight-line basis over estimated useful lives ranging from three to seven years. Amortization expense amounted to $.9 million in fiscal 1996 and $.7 million in fiscal 1995 and is included in general and administrative expenses in the Company's Consolidated Statements of Operations. The results of operations of Visionware have been included in the consolidated financial statements since December 1994. Visionware is engaged in the business of the development and distribution of PC connectivity software integrating PCs running Microsoft Windows with servers running UNIX applications. UNIX BUSINESS In December 1995, the Company acquired certain assets related to the UNIX business including the core intellectual property from Novell. The consideration consisted of 6,127,500 newly issued shares of non-registered common stock and assumed liabilities totaling approximately $9.3 million. Additionally, cash payments to Novell with a present value of $84 million will be paid periodically by SCO to Novell provided certain unit volumes of UNIX system distribution is achieved. To date, distribution unit volume of UNIX systems has not reached levels which have required the Company to make cash payments to Novell. Such payments terminate at the end of the calendar year 2002. The acquisition has been accounted for using the purchase method of accounting and, therefore, the accompanying financial statements include the UNIX 32 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) business since the date of the acquisition. Non-recurring charges of $38.4 million were incurred in fiscal 1996 for costs associated with the acquisition. The Company also purchased core intellectual property totaling $5.8 million, software technology licenses totaling $5.5 million and intangibles of $1.7 million. Software technology licenses and intangibles are amortized as general and administrative expenses on the straight-line basis over their estimated useful lives, generally five years. Note 14 - RELATED PARTY In January 1995, the Company purchased 10% of one of its domestic distribution channel partner's preferred series stock in exchange for cash, product and equipment valued at $1.0 million. In addition, the Company has loaned $1.0 million to this partner. The loan matures on July 1, 1998, but may be converted at any time prior to maturity for an additional 10% of either the partner's preferred series stock or common stock. Interest on the outstanding borrowing is due and payable at the loan's maturity. At September 30, 1996 and 1995, the Company had accounts receivable outstanding with the related party of $1.6 million and $1.7 million, respectively. Sales to the related party for fiscal years 1996 and 1995 were $7.7 million and $4.6 million, respectively. Note 15 - INFORMATION BY GEOGRAPHIC AREA
Fiscal Year Ended September 30, ----------------------------------------- (in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------- NET REVENUES: United States $ 125,759 $ 111,530 $ 109,542 Europe 80,603 87,799 74,526 Other international operations 1,528 - - - ---------------------------------------------------------------------------------- Total net revenues $ 207,890 $ 199,329 $ 184,068 ================================================================================== TRANSFERS BETWEEN GEOGRAPHIC AREAS: United States $ 16,894 $ 23,807 $ 18,772 Europe 916 945 5,798 - ---------------------------------------------------------------------------------- Total transfers $ 17,810 $ 24,752 $ 24,570 ================================================================================== OPERATING EARNINGS (LOSS): United States $ (29,017) $ (5,111) $ 8,119 Europe 2,864 121 8,360 Other international operations 120 (1,052) 1,977 Eliminations 2,452 (450) 169 - ---------------------------------------------------------------------------------- Operating earnings (loss) $ (23,581) $ (6,492) $ 18,625 ================================================================================== IDENTIFIABLE ASSETS: United States $ 135,040 $ 108,078 $ 107,163 Europe 31,930 33,280 34,689 Other international operations 3,860 5,310 4,499 Eliminations (4,023) (14,798) (7,777) - ---------------------------------------------------------------------------------- Total assets $ 166,807 $ 131,870 $ 138,574 ==================================================================================
Intercompany sales between geographic areas are accounted for at prices representative of unaffiliated party transactions. "Other international operations" includes the Company's subsidiary in Japan. 33 19 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders of The Santa Cruz Operation, Inc. We have audited the accompanying consolidated balance sheets of The Santa Cruz Operation, Inc. and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended September 30 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Santa Cruz Operation, Inc. and subsidiaries as of September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick, LLP San Jose, California October 25, 1996 34 20 QUARTERLY FINANCIAL INFORMATION
THREE MONTHS ENDED ---------------------------------------------------------------------------------------- Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, (In thousands, except per share data) 1996 1996 1996 1995 1995 1995 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Net revenues: Licenses $50,162 $49,404 $46,291 $ 43,175 $41,935 $45,856 $47,115 $42,628 Services 5,052 4,623 4,444 4,739 5,217 5,065 6,159 5,354 ------- ------- ------- -------- ------- ------- ------- ------- Net revenues 55,214 54,027 50,735 47,914 47,152 50,921 53,274 47,982 ------- ------- ------- -------- ------- ------- ------- ------- Cost of revenues: Licenses 9,152 9,506 7,770 7,707 8,318 9,300 8,106 7,964 Services 4,333 4,491 4,374 4,571 5,006 4,819 5,137 4,829 ------- ------- ------- -------- ------- ------- ------- ------- Total cost of revenues 13,485 13,997 12,144 12,278 13,324 14,119 13,243 12,793 ------- ------- ------- -------- ------- ------- ------- ------- Gross margin 41,729 40,030 38,591 35,636 33,828 36,802 40,031 35,189 ------- ------- ------- -------- ------- ------- ------- ------- Operating expenses: Research and development 11,071 10,617 9,376 7,945 8,051 8,406 8,300 7,451 Sales and marketing 20,386 19,575 19,676 19,722 20,609 22,386 20,665 18,833 General and administrative 5,901 5,961 6,044 4,930 5,097 4,915 5,168 4,367 Non-recurring charges -- -- -- 38,363 3,999 -- -- 14,095 ------- ------- ------- -------- ------- ------- ------- ------- Total operating expenses 37,358 36,153 35,096 70,960 37,756 35,707 34,133 44,746 ------- ------- ------- -------- ------- ------- ------- ------- Operating earnings (loss) 4,371 3,877 3,495 (35,324) (3,928) 1,095 5,898 (9,557) Other income (expense): Interest income, net 646 547 480 629 527 673 604 899 Other income (expense), net (90) (16) (94) (194) (207) (82) (143) 69 ------- ------- ------- -------- ------- ------- ------- ------- Profit (loss) before income taxes 4,927 4,408 3,881 (34,889) (3,608) 1,686 6,359 (8,589) ------- ------- ------- -------- ------- ------- ------- ------- Income taxes 855 1,102 970 (2,186) (1,028) 481 1,764 739 ------- ------- ------- -------- ------- ------- ------- ------- Net profit (loss) $ 4,072 $ 3,306 $ 2,911 $(32,703) $(2,580) $ 1,205 $ 4,595 $(9,328) ------- ------- ------- -------- ------- ------- ------- ------- Net profit (loss) per share $ 0.11 $ 0.09 $ 0.08 $ (0.99) $ (0.08) $ (0.04) $ 0.14 $ (0.30) ------- ------- ------- -------- ------- ------- ------- ------- Weighted average shares outstanding 38,150 38,502 38,164 32,968 30,896 33,489 33,744 30,754 ------- ------- ------- -------- ------- ------- ------- ------- ------------------------------------------
21 DIRECTORS AND OFFICERS
Directors Corporate Officers Divisional Officers Ninian Eadie Alok Mohan*+ Mick Adamson President, Chief Executive Officer and acting Regional Vice President, Pacific Rim Jean-Francois Heitz Chief Financial Officer Jeff Ait Ronald Lachman Ed Adams+ Vice President, Volume Solutions Business Senior Vice President and General Manager, Robert McClure The Americas Sheila Baker Vice President, Segment Marketing Doug Michels Ray Anderson+ Senior Vice President, Client Integration Division Edmundo Costa Alok Mohan Vice President, Channel Sales Jim Clark+ R. Duff Thompson Senior Vice President, Asia/Pacific Operations Gary Daniels Vice President, Platform Products Division Enzo Torresi Gary Horning Vice President, Strategic Marketing Chris Flynn Gil Williamson Regional Vice President, International and UK John Jarvis Senior Vice President, International Planning Nimer Maabadi and Business Development Vice President, The Americas, Western Area Helene Mann-Bouchard Mark Overgaard Vice President, Worldwide Customer Delivery Vice President, Embedded Systems Division Systems Antonio Privitera David McCrabb Regional Vice President, Italy Vice President, Marketing and Channel Sales Charlie Sciorra Scott McGregor+ Vice President, The Americas, Eastern Area Senior Vice President, Products Craig Scobie Doug Michels*+ Vice President, Project Region Executive Vice President and Chief Technical Officer Mike Shelton Vice President, Enterprise Solutions Business Jack Moyer+ Vice President, Human Resources Stefan Sjostrom Regional Vice President, Central & Southern Steve Sabbath*+ Europe and France Vice President, Law and Corporate Affairs and Secretary Richard Treadway Vice President, Layered Server Products Geoff Seabrook+ Senior Vice President, EMEA Mike Tilson Chief Information Officer James Wilt Vice President, Business Development
*Elected by Board of Directors +Executive Officer subject to the provisions of Section 16(b) of the Securities Exchange Act of 1934 36
EX-21.1 4 SUBSIDIARIES OF REGISTRANT 1 Exhibit 21.1 THE SANTA CRUZ OPERATION, INC. (A CALIFORNIA CORPORATION) SUBSIDIARIES
NAME OF SUBSIDIARY PLACE OF INCORPORATION The Santa Cruz Operation Pty. Limited New South Wales SCO Canada, Inc. Ontario The Santa Cruz Operation (France) SARL France The Santa Cruz Operation (Deutschland) GmbH Germany The Santa Cruz Operation (Italia) Srl Italy The Santa Cruz Operation Limited UK The Santa Cruz Operation de Mexico, S. DE R.L. DE C.V. Mexico The Santa Cruz Operation (Asia) Ltd. Delaware SCO Foreign Sales Corporation U.S. Virgin Islands SCO, Kabushiki Kaisha Japan The Santa Cruz Operation Latin America, Inc. Delaware Nihon SCO Limited Japan
EX-23.1 5 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders The Santa Cruz Operation, Inc.: We consent to incorporation by reference in the registration statement (No. 33-71794) on Form S-8 of The Santa Cruz Operation, Inc. of our reports dated October 25, 1996, relating to the consolidated balance sheets of The Santa Cruz Operation, Inc. and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended September 30, 1996, and the related schedule, which reports appear or are incorporated by reference in the September 30, 1996 annual report on Form 10-K of The Santa Cruz Operation, Inc. /s/ KPMG Peat Marwick, LLP - ------------------------------ KPMG Peat Marwick, LLP San Jose, California December 18, 1996 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 12-MOS SEP-30-1996 OCT-01-1995 SEP-30-1996 1 32,065 22,766 49,061 1,885 1,917 117,829 48,248 32,702 166,807 55,894 0 0 0 125,172 (23,591) 166,807 189,032 207,890 34,135 51,904 179,567 0 1,908 (21,673) 741 (22,414) 0 0 0 (22,414) (.62) (.62)
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