-----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, F++grZUHpJBfrGyKsL2HKN7ygOrRXOp8q6p1VB+ycfrVfLpzslj7kSIsTabA08we 3s7FBtdTYoUp+XbOCQj7iA== 0000891618-97-002279.txt : 19970515 0000891618-97-002279.hdr.sgml : 19970515 ACCESSION NUMBER: 0000891618-97-002279 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21484 FILM NUMBER: 97604225 BUSINESS ADDRESS: STREET 1: 400 ENCINAL STREET STREET 2: PO BOX 1900 CITY: SANTA CRUZ STATE: CA ZIP: 95060 BUSINESS PHONE: 4084277172 10-Q 1 FORM 10-Q FOR PERIOD ENDING MARCH 31, 1997 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 [ ] 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 THIS 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 office) (Zip Code) Registrant's telephone number, including area code (408) 425-7222 Indicate by check mark whether the registrant (1) has filed all reports 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 days. Yes [ X ] No [ ] The number of shares outstanding of the registrant's common stock as of March 31, 1997 was 36,555,324. 2 THE SANTA CRUZ OPERATION, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PAGE A) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1997 AND 1996.........................1 B) CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1997 AND SEPTEMBER 30, 1996........................................2 C) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996...................................3 D) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..........................................4 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................................5 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS......................................................................9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................10 ITEM 6. EXHIBITS............................................................................. 12 SIGNATURES................................................................................................11
3 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) - -------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------------------------------- NET REVENUES: Licenses $ 48,918 $ 46,291 $ 100,764 $ 89,466 Services 5,169 4,444 9,931 9,183 - -------------------------------------------------------------------------------------------------------------------- NET REVENUES 54,087 50,735 110,695 98,649 - -------------------------------------------------------------------------------------------------------------------- COST OF REVENUES: Licenses 9,625 7,770 18,237 15,477 Services 4,642 4,374 8,993 8,945 - -------------------------------------------------------------------------------------------------------------------- Total cost of revenues 14,267 12,144 27,230 24,422 - -------------------------------------------------------------------------------------------------------------------- GROSS MARGIN 39,820 38,591 83,465 74,227 - -------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Research and development 12,284 9,376 24,250 17,321 Sales and marketing 20,695 19,676 41,471 39,398 General and administrative 6,125 6,044 12,060 10,974 Non-recurring charges -- -- -- 38,363 - -------------------------------------------------------------------------------------------------------------------- Total operating expenses 39,104 35,096 77,781 106,056 - -------------------------------------------------------------------------------------------------------------------- OPERATING EARNINGS (LOSS) 716 3,495 5,684 (31,829) OTHER INCOME (EXPENSE): Interest income, net 628 480 1,265 1,109 Other expense, net (45) (94) (362) (288) - -------------------------------------------------------------------------------------------------------------------- Profit (loss) before income taxes 1,299 3,881 6,587 (31,008) - -------------------------------------------------------------------------------------------------------------------- Income taxes (benefit) 325 970 1,647 (1,216) - -------------------------------------------------------------------------------------------------------------------- NET PROFIT (LOSS) $ 974 $ 2,911 $ 4,940 $ (29,792) - -------------------------------------------------------------------------------------------------------------------- NET PROFIT (LOSS) PER SHARE $ 0.03 $ 0.08 $ 0.13 $ (0.85) - -------------------------------------------------------------------------------------------------------------------- COMMON AND COMMON EQUIVALENT SHARES USED IN COMPUTING NET PROFIT (LOSS) PER SHARE 37,522 38,164 37,594 35,077 - --------------------------------------------------------------------------------------------------------------------
1 4 THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED BALANCE SHEETS MARCH 31, SEPTEMBER 30, (In thousands, except for share data) 1997 1996 - ------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 27,143 $ 32,065 Short-term investments 24,790 22,766 Receivables, net 51,335 47,176 Deferred tax asset 6,152 6,152 Other current assets 7,804 9,670 ---------------------------------------------------------------------------------------------------------- Total current assets 117,224 117,829 ---------------------------------------------------------------------------------------------------------- Property and equipment, net 15,709 15,546 Purchased software and technology licenses 18,558 19,908 Other assets 17,164 13,524 ---------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 168,655 $ 166,807 ---------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Royalties payable $ 7,751 $ 10,644 Trade accounts payable 9,906 12,755 Income taxes payable 1,303 3,369 Accrued expenses and other current liabilities 26,266 22,288 Deferred revenues 8,713 6,838 ---------------------------------------------------------------------------------------------------------- Total current liabilities 53,939 55,894 ---------------------------------------------------------------------------------------------------------- Other long-term liabilities 12,813 9,332 ---------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common stock, net, authorized 100,000,000 shares Issued and outstanding 36,555,324 and 37,105,892 shares 120,462 125,172 Cumulative translation adjustment (205) (297) Accumulated deficit (18,354) (23,294) ---------------------------------------------------------------------------------------------------------- Total shareholders' equity 101,903 101,581 ---------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 168,655 $ 166,807 ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 2 5 THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) - ---------------------------------------------------------------------------------------------------------- Six Months Ended March 31, 1997 1996 - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net profit (loss) $ 4,940 $ (29,792) Adjustments to reconcile net profit (loss) to net cash used for operating activities - Depreciation and amortization 9,350 6,880 Charge for purchased research and development -- 38,363 Income tax benefit from stock options 229 175 Changes in assets and liabilities - Receivables (4,159) 4,999 Deferred tax assets -- (3,055) Other current assets 1,866 (4,196) Royalties payable (2,893) (881) Trade accounts payable (2,849) (322) Income taxes payable (2,066) 388 Accrued expense and other current liabilities 3,360 (2,690) Deferred revenue 1,875 474 Other accrued expense and other liabilities 2,302 2,898 ------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 11,955 13,241 ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (2,079) (3,251) Purchases of software and technology licenses (3,635) (3,703) Proceeds from short term investments 7,381 8,909 Purchases of short term investments (9,405) (13,745) Changes in other assets (3,640) (1,987) ------------------------------------------------------------------------------------------------------ Net cash used for investing activities (11,378) (13,777) ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payments on capital lease obligations, term loan and bank line of (652) (515) credit Net proceeds from sale of common stock 1,730 1,328 Repurchases of common stock (6,669) (2,096) ------------------------------------------------------------------------------------------------------ Net cash used for financing activities (5,591) (1,283) ------------------------------------------------------------------------------------------------------ Effects of exchange rate changes on cash and cash equivalents 92 (589) ------------------------------------------------------------------------------------------------------ Change in cash and cash equivalents (4,922) (2,408) Cash and cash equivalents at beginning of period 32,065 32,074 ------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 27,143 $ 29,666 ------------------------------------------------------------------------------------------------------ CASH PAID: Income taxes $ 3,636 $ 1,593 Interest $ 139 $ 153 ------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 3 6 THE SANTA CRUZ OPERATION,INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION In the opinion of management, the accompanying statements of operations, balance sheets and statements of cash flows include all material adjustments (consisting of only normal recurring adjustments) necessary for their fair presentation. The interim results presented are not necessarily indicative of results to be expected for a full year. Certain reclassifications have been made for consistent presentation. 2. ACQUISITION In December 1995, the Company acquired from Novell certain assets related to UnixWare including the core intellectual property. The consideration consisted of 6,127,500 shares of newly issued non-registered common stock. 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 distribution is achieved. Such payments terminate at the end of calendar year 2002. The acquisition has been accounted for using the purchase method of accounting and, therefore, the accompanying financial statements include the UnixWare operations since the date of the acquisition. The Company incurred non-recurring charges including $38.4 million of purchased research and development for UnixWare product which have not yet reached technological feasibility and other charges including severance and acquisition related costs. 3. NET PROFIT (LOSS) PER SHARE Net profit (loss) per share is computed based on weighted average number of common shares and dilutive common equivalent shares outstanding. 4. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No.128, "Earnings Per Share." SFAS No.128 requires the presentation of basic earnings per share ("EPS") and, for companies with complex capital structures or potentially dilutive securities, such as convertible debt, options and warrants, diluted EPS. SFAS No.128 is effective for annual and interim periods ending after December 15, 1997. The Company expects that basic EPS and diluted EPS will not differ materially from earnings per share as presented in the accompanying consolidated financial statements. 4 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 Net revenues for the three months ended March 31, 1997 were $54.1 million as compared to $50.7 million for the same period in fiscal year 1996. For the six months ended March 31, 1997, net revenues increased 12% to $110.7 million from $98.6 million in the six months ended March 31, 1996. No one customer accounted for more that 10% of the total net revenues for the three and six month periods ending March 31, 1997 and March 31, 1996. License revenues for the three months ended March 31, 1997 was $48.9 million compared to $46.3 million in the same quarter of 1996, representing a 6% increase. For the six months ended March 31, 1997, license revenue was $100.8 million compared to $89.5 million for the same period in 1996, representing a 13% increase. Sales of UNIX server products, specifically OpenServer 5 and UnixWare, accounted for the biggest increase, offset by lower volume of Client Integration products and Layered products. Service revenues, consisting of support, software enhancement services, consulting, engineering services, custom development and training, increased to $5.2 million for the three months ended March 31, 1997, up from $4.4 million in the same period in 1996, an increase of 16%. For the first six months ended March 31, 1997, service revenue totaled $9.9 million compared to $9.2 million in the same period in 1996, an 8% increase. Service revenue was 10% of the total revenue for the second quarter, compared to 9% in the prior year. These increases were primarily due to growth in software enhancement services as well as engineering services. International revenues continue to be a significant portion of total net revenues, comprising 50% of the revenues for the second fiscal quarter of 1997, and 53% for the same quarter in fiscal year 1996. COST AND EXPENSES Cost of revenues as a percentage of net revenues increased to 26% in the second quarter of 1997 from 24% for the same period in 1996. Higher technology costs plus one-time royalty cost adjustments accounted for the major portion of the increase. For the six months ended March 31, 1997 and 1996, the cost of revenues represented 25% of net revenues. Research and development expenses increased by 31% to $12.3 million for the quarter ended March 31, 1997 (23% of net revenues) compared to $9.4 million (19% of net revenues) for the same quarter in 1996. For the six months ended March 31, 1997, research and development expenses amounted to $24.3 million or 22% of net revenues, representing a 40% increase compared to $17.3 million or 18% of net revenues for the comparable period of fiscal 1996. The spending increase as a percent of sales is primarily attributable to personnel costs relating to accelerated investment in development of next generation operating systems and technology focused on Internet enabled products. 5 8 Sales and marketing expenses increased by 5% to $20.7 million for the three months ended March 31, 1997 from $19.7 million for the same period in 1996, but decreased as a percent of net revenues to 38% from 39% in the same quarter of 1996. For the six months ended March 31, 1997, sales and marketing expenses increased to $41.5 million from $39.4 million for the same period of the prior fiscal year. Sales and marketing expenses represented 37% of net revenues for the first six months of fiscal 1997 and 40% in fiscal 1996. Though down as a percentage of revenue, the growth in absolute dollars was driven by increased spending related to marketing efforts aimed at reseller training, Independent Software Vendor recruitment and higher corporate brand awareness. General and administrative expenses increased by 1% to $6.1 million for the three months ended March 31, 1997 from $6.0 million for the same period in 1996 and decreased as a percentage of net revenues to 11% from 12% in the prior year. For the six months ended March 31, 1997, general and administrative expenses increased by 10% to $12.1 million from $11.0 million for the same period of the prior year. The increase was primarily due to amortization of intangibles starting in the second quarter of 1996 as a result of the UnixWare purchase from Novell. Other income consists of net interest income, foreign exchange gain and loss as well as other miscellaneous income and expense items. For the second quarter of fiscal 1997, other income was $0.6 million, compared to $0.4 million for the same quarter of fiscal 1996. The increase in other income in the second quarter of fiscal 1997 was due primarily to increased efficiency on overnight investment of excess operational cash worldwide and additional interest earned on new investments. For the six months ended March 31, 1997, other income was $0.9 million as compared to $0.8 million for the same six months in 1996. This increase is attributable to an increase in interest income from investments. The provision for income taxes was $0.3 million for the second quarter of fiscal 1997 compared to $1.0 million for the same period of the prior fiscal year, and $1.6 million for the six months ended March 31, 1997 compared with a benefit of $1.2 million for the corresponding fiscal 1996 period. The tax provision for the second quarter of the current and prior fiscal years resulted from taxes provided on operations at an effective tax rate of 25%. The tax provision for the first six months of the current and prior fiscal years reflect taxes provided on operations at an effective tax rate of 25% offset by a one-time tax benefit in the first quarter of fiscal 1996 of approximately $3.1 million associated with non-recurring charges relating to the UnixWare product acquisition. The effective tax rate for fiscal years 1997 and 1996 reflect the realization of deferred tax assets for which a valuation allowance was previously established. Net profit for the three months ending March 31, 1997 was $1.0 million, a decrease of 67%, compared to a profit of $2.9 million in the same period of 1996. For the six months ended March 31,1997 net profit was $4.9 million, a decrease of 10%, compared to $5.5 million in the same period in 1996 excluding the non-recurring charge due to the UnixWare purchase. CERTAIN FACTORS BEARING ON 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 the Company's products. The process of developing new high technology products is complex and uncertain and requires accurate anticipation of customer needs and technological trends. The industry has become increasingly competitive and, accordingly, the Company's results may 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 6 9 increase the risk of quarter to quarter fluctuations and the uncertainty of quarterly operating results. The Company periodically may adjust the level of inventory held in its distribution channels which may also cause quarter-to-quarter fluctuations. 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. 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 more than normal 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 or relatively flat compared to net revenues of the prior quarter. The overall cost of revenues may be affected by changes in the mix of net revenue contribution between licenses and services, product families, geographical regions and channels of distribution, as the costs associated with these revenues may have substantially different characteristics. The Company may also experience a change in margin as net revenues increase or decrease since technology costs, service costs and production costs are fixed within certain volume ranges. 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. The Company, as a matter of policy, does not allow product returns for refund. Product returns are generally allowances for stock balancing and are accompanied by compensating and offsetting orders. Revenue is net of a provision for estimated future stock balancing and excess quantities above levels the Company deems appropriate in its distribution channels. The Company continues to monitor the quantity and mix of products and no unusual activity is reflected in the reserve or revenue for the three and six month periods ended March 31, 1997 and 1996. As the Company continues to utilize its tax carryforwards and as new tax legislation is enacted, the Company's effective tax rate is subject to change. A substantial portion of the Company's revenues are derived from outside the United States. Trade sales to international customers represented 50% and 53% of total revenues for the second quarter of fiscal 1997 and 1996, 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'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 has adopted a strategy of reviewing and forecasting all material foreign denominated assets and liabilities to cover any potential transactional gain or loss which may occur should exchange rates change significantly. Where uncovered exposure may exist, the Company may employ hedging instruments to offset such exposure. 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. Due to competitive pressures, it is reasonably possible that those estimates of anticipated future gross revenues, the remaining estimated economic life of the product, or both 7 10 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. The Company recently has experienced growth in the scope of its operations due to the acquisition of UNIX technology resulting in increased responsibilities for its management. The Company continually evaluates potential candidates for acquisitions in the future. Such candidates are selected based on products or markets which are complementary to those of the Company's. Acquisitions involve a number of special risks, including the successful combination of the companies in an efficient and timely manner, the coordination of research and development and sales efforts, the retention of key personnel, the integration of the acquired products, the diversion of management's attention to assimilation of the operations and personnel of the acquired companies, and the difficulty of presenting a unified corporate image. The Company's operations and financial results could be significantly affected by such an acquisition. The Company's continued success depends to a significant extent on senior management and other key employees. None of these individuals is subject to a long-term employment contract or a non-competition agreement. Competition for qualified people in the software industry is intense. The loss of one or more key employees or the Company's inability to attract and retain other key employees could have a material adverse effect on the Company. The stock market in general, and the market for shares of technology companies in particular, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of the affected companies. In addition, factors such as new product introductions by the Company or its competitors may have a significant impact on the market price of the Company's Common Stock. Furthermore, quarter-to-quarter fluctuations in the Company's results of operations caused by changes in customer demand may have a significant impact on the market price of the Company's stock. These conditions, as well as factors which generally affect the market for stocks of high technology companies, could cause the price of the Company's stock to fluctuate substantially over short periods. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and short-term investments totaled $51.9 million at March 31, 1997, representing 31% of total assets. The six month decrease in cash and short-term investments of $2.9 million was primarily attributable to the repurchase of 885,000 shares of the Company's common stock during the first quarter of fiscal 1997. In addition to systematic repurchase of the Company's common stock for the funding of it's employee programs, the Company is authorized to buy back up to 2,000,000 additional shares. As of March 31, 1997, 773,000 shares had been repurchased and retired under this program. At March 31, 1997, the Company had available lines of credit of approximately $17.0 million under which the Company had $0.4 million in outstanding borrowings. The Company believes that its existing cash and short-term investments, funds generated from operations and available borrowing capabilities will be sufficient to meet its operating requirements through at least calendar 1997. The Company's second quarter ended March 31, 1997 Days Sales Outstanding (DSO) was 85.4 days, a 2.9 day increase from the first quarter ended December 31, 1996. The increase was primarily attributable to moderate growth of corporate revenue and a 3% increase in the percentage of revenue in the third month of the quarter as compared to total quarterly revenue, thus increasing ending accounts receivable. 8 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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 US Supreme Court and the case has been remanded to the Superior court for further proceedings and discovery. The Company believes it reasonably possible that the outcome of the securities class action lawsuit could result in a loss either by way of settlement with the plaintiffs or by way of a judgment in the plaintiffs' favor. 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. However, the Company does not believe that any such loss would result in a material impact to the Company's annual financial results or financial position. 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 $1,000,000. 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 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. The Company believes it reasonably possible that the outcome of the lawsuit filed by Micro-Quick Systems could result in a loss either by way of settlement with the plaintiff or by way of a judgment in the plaintiff's favor. However, the Company does not believe that any such loss would result in a material impact to the Company's annual financial results. 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 commissions. The Company believes it remotely possible that the outcome of the lawsuit filed by a former employee alleging breach of contract regarding sales commission payments will result in a material impact to the Company's annual financial results. 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. This matter was settled in February 1997 for an immaterial amount. 9 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Santa Cruz Operation, Inc. held an annual meeting of shareholders on February 25, 1997. The following matters were approved by the shareholders by the votes indicated:
MATTER NUMBER OF SHARES ------ ---------------- FOR WITHHELD --- -------- ELECTION OF DIRECTORS: Ninian Eadie 30,280,039 413,795 Jean-Francois Heitz 30,232,375 461,459 Ronald Lachman 30,280,799 413,035 Robert M. McClure 30,272,109 421,725 Douglas L. Michels 30,215,480 478,354 Alok Mohan 30,269,081 424,753 R. Duff Thompson 30,267,209 426,625 Enzo Torresi 30,272,708 421,126 Gilbert Williamson 30,269,853 423,981
BROKER OTHER MATTERS: FOR AGAINST ABSTAIN NON-VOTES Amendment of the Company's 1994 17,349,501 98,244 4,037,106 9,208,983 Incentive Stock Option Plan to increase the number of shares reserved for issuance under such Plan by 3,000,000 shares. Amendment of the Company's 1993 21,220,401 1,111,138 74,390 8,287,905 Director Option Plan to increase the number of shares reserved for issuance under such Plan by 200,000 shares. Amendment of the Company's 1993 21,549,278 794,645 62,006 8,287,905 Employee Stock Purchase Plan to increase the number of shares reserved for issuance under such Plan by 750,000 shares. Ratification of KPMG Peat Marwick, 30,585,817 37,569 70,448 -0- LLP as independent certified public accountants of the Company.
ITEM 6. EXHIBITS (a) Exhibits 11. Computation of Earnings (Loss) Per Share. 27. Financial Data Schedule. ITEMS 2, 3, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 10 13 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Santa Cruz Operation, Inc. Date: May 12, 1997 By: /s/ John Luhtala --------------------------------- John Luhtala Senior Vice-President and Chief Financial Officer By: /s/ Randy Bresee --------------------------------- Randy Bresee Corporate Controller 11 14 EXHIBIT INDEX
Exhibit No. Description - -------- ----------- 11 Computation of Net Profit (Loss) Per Share 27 Financial Data Schedule
EX-11 2 COMPUTATION OF NET PROFIT (LOSS) PER SHARE 1 THE SANTA CRUZ OPERATION, INC. EXHIBIT 11
COMPUTATION OF NET PROFIT (LOSS) PER SHARE (In thousands, except per share data) - -------------------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended March 31, March 31, 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding 36,611 37,186 36,762 35,077 Common equivalent shares from outstanding stock options (1) 911 978 832 -- - -------------------------------------------------------------------------------------------------------------------------------- Average common and common equivalent shares outstanding 37,522 38,164 37,594 35,077 - -------------------------------------------------------------------------------------------------------------------------------- Net profit $974 $2,911 $4,940 $(29,792) (loss) - -------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share (2) $0.03 $0.08 $0.13 $(0.85) - --------------------------------------------------------------------------------------------------------------------------------
(1) Common equivalent shares from outstanding stock options are not included in six months 1996 calculations as they are antidilutive (2) Fully diluted earnings per share have not been presented because the effects are not material. 12 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS SEP-30-1997 OCT-01-1997 MAR-31-1997 27,143 24,790 61,402 (10,067) 1,889 117,224 52,776 (37,067) 168,655 53,939 0 0 0 120,462 (18,559) 101,903 48,918 54,087 9,625 14,267 39,104 0 583 1,299 325 974 0 0 0 974 .03 .03
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