-----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, PwKyfbpYzuV95qi4ovJjWoDQhgoB6nHEMXHg8HRsn3zNtolW88uQadjY3vozovQx mf9o1r1LyjqH12mwaeytcA== 0000891618-97-003445.txt : 19970815 0000891618-97-003445.hdr.sgml : 19970815 ACCESSION NUMBER: 0000891618-97-003445 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97661187 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 QUARTERLY PERIOD ENDED JUNE 30, 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 JUNE 30,1997 [ ] 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 June 30, 1997 was 36,434,538. ================================================================================ 2 THE SANTA CRUZ OPERATION, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
PAGE ---- ITEM 1. FINANCIAL STATEMENTS A) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1997 AND 1996.......1 B) CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1997 AND SEPTEMBER 30, 1996.......................2 C) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 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 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 earnings per share)
- ------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------- NET REVENUES: Licenses $ 26,728 $ 49,404 $ 127,492 $ 138,870 Services 4,438 4,623 14,369 13,806 - ------------------------------------------------------------------------------------------------- NET REVENUES 31,166 54,027 141,861 152,676 - ------------------------------------------------------------------------------------------------- COST OF REVENUES: Licenses 8,371 10,266 28,067 26,721 Services 4,455 4,491 13,448 13,436 - ------------------------------------------------------------------------------------------------- Total cost of revenues 12,826 14,757 41,515 40,157 - ------------------------------------------------------------------------------------------------- GROSS MARGIN 18,340 39,270 100,346 112,519 - ------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Research and development 11,055 10,617 35,305 27,938 Sales and marketing 20,197 19,575 61,668 58,973 General and administrative 5,523 5,201 16,124 15,197 Non-recurring charges 8,373 -- 8,373 38,363 - ------------------------------------------------------------------------------------------------- Total operating expenses 45,148 35,393 121,470 140,471 - ------------------------------------------------------------------------------------------------- OPERATING EARNINGS (LOSS) (26,808) 3,877 (21,124) (27,952) OTHER INCOME (EXPENSE): Interest income, net 396 547 1,661 1,656 Other expense, net (661) (16) (1,023) (304) - ------------------------------------------------------------------------------------------------- Profit (loss) before income taxes (27,073) 4,408 (20,486) (26,600) - ------------------------------------------------------------------------------------------------- Income taxes (2,444) 1,102 (797) (114) - ------------------------------------------------------------------------------------------------- NET PROFIT (LOSS) $ (24,629) $ 3,306 $ (19,689) $ (26,486) - ------------------------------------------------------------------------------------------------- NET PROFIT (LOSS) PER SHARE $ (0.67) $ 0.09 $ (0.54) $ (0.74) - ------------------------------------------------------------------------------------------------- COMMON AND COMMON EQUIVALENTS USED IN COMPUTING NET PROFIT (LOSS) PER SHARE 36,547 38,502 36,690 35,801 - -------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 1 4 THE SANTA CRUZ OPERATION, INC. CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30, (In thousands, except for share data) 1997 1996 - ---------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 33,486 $ 32,065 Short-term investments 27,116 22,766 Receivables, net 24,029 47,176 Deferred tax asset 6,152 6,152 Other current assets 8,121 9,670 - ---------------------------------------------------------------------------------------- Total current assets 98,904 117,829 - ---------------------------------------------------------------------------------------- Property and equipment, net 14,768 15,546 Purchased software and technology licenses 18,086 19,908 Other assets 14,101 13,524 - ---------------------------------------------------------------------------------------- TOTAL ASSETS $ 145,859 $ 166,807 - ---------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Royalties payable $ 9,043 $ 10,644 Trade accounts payable 10,510 12,755 Income taxes payable 855 3,369 Accrued expenses and other current liabilities 31,083 22,288 Deferred revenues 8,455 6,838 - ---------------------------------------------------------------------------------------- Total current liabilities 59,946 55,894 - ---------------------------------------------------------------------------------------- Other long-term liabilities 8,196 9,332 - ---------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common stock, net, authorized 100,000,000 shares Issued and outstanding 36,434,538 and 37,105,892 shares 119,639 125,172 Cumulative translation adjustment 1,061 (297) Accumulated deficit (42,983) (23,294) - ---------------------------------------------------------------------------------------- Total shareholders' equity 77,717 101,581 - ---------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 145,859 $ 166,807 - ----------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 2 5 THE SANTA CRUZ OPERATION, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
- ---------------------------------------------------------------------------------------------------------- Nine Months Ended June 30, 1997 1996 - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(19,689) $(26,486) Adjustments to reconcile net profit (loss) to net cash used for operating activities - Depreciation and amortization 12,949 11,386 Charge for purchased research and development -- 38,363 Stock option income tax benefit 244 175 Changes in assets and liabilities - Receivables 23,147 1,964 Deferred tax assets (34) (3,055) Other current assets 1,549 (3,351) Royalties payable (1,601) 123 Trade accounts payable (2,245) 3,444 Income taxes payable (2,514) 1,621 Accrued expense and other current liabilities 7,885 (10,097) Deferred revenue 1,617 (123) Other accrued expense and other liabilities (2,510) 1,993 - ---------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 18,798 15,957 - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (2,394) (3,523) Purchases of software and technology licenses (4,826) (5,627) Proceeds from short term investments 9,907 12,931 Purchases of short term investments (14,257) (18,295) Changes in other assets (543) (3,788) - ---------------------------------------------------------------------------------------------------------- Net cash used for investing activities (12,113) (18,302) - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on capital lease obligations, term loan and bank line of credit (845) (707) Net proceeds from sale of common stock 1,839 2,551 Payments on stock repurchases (7,613) (2,094) Payments on notes receivable from sale of common stock (3) (4) - ---------------------------------------------------------------------------------------------------------- Net cash used for financing activities (6,622) (254) - ---------------------------------------------------------------------------------------------------------- Effects of exchange rate changes on cash and cash equivalents 1,358 (424) - ---------------------------------------------------------------------------------------------------------- Change in cash and cash equivalents 1,421 (3,023) Cash and cash equivalents at beginning of period 32,065 32,074 - ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 33,486 $ 29,051 - ---------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION CASH PAID: Income tax payments $ 1,646 $ 1,479 Interest payments $ 460 $ 254 NON CASH TRANSACTIONS: Capital lease agreement $ 3,129 $ 1,540 Networking technology buyout -- $ 5,596
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. RESTRUCTURING CHARGE A worldwide restructuring during the third quarter of fiscal 1997 resulted in a one-time charge of $8.4 million. The charge includes a 10% reduction in headcount, elimination of several non-essential facilities and a write-off of certain acquired technologies. As a result of this restructuring, the Company has realigned its product development organization, eliminated some research and development programs and focused product marketing. Additionally, some key manufacturing processes have been outsourced and elements of general and administration functions have been consolidated. 4. 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. 5. 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 June 30, 1997 decreased 42% to $31.2 million from $54.0 million in the same period in fiscal year 1996. For the nine months ended June 30, 1997, net revenues were $141.9 million, a 7% reduction from the $152.7 million for the corresponding period in 1996. This quarter's decline resulted from significant planned reductions in channel inventories as well as planned product sales reductions and increased reserves. No one customer accounted for more that 10% of the total net revenues for the three and nine month periods ending June 30, 1997 and June 30, 1996. License revenues for the three months ended June 30, 1997 was $26.7 million compared to $49.4 million in the same quarter of 1996. For the nine months ended June 30, 1997, license revenue was $127.5 million compared to $138.9 million for the same period in 1996. The channel inventory and planned product sales reductions impacted all product lines. Service revenues, consisting of support, software enhancement services, consulting, engineering services, custom development and training, decreased to $4.4 million for the three months ended June 30, 1997, from $4.6 million in the same period in 1996, a decline of 4%. For the first nine months ended June 30, 1997, service revenue totaled $14.4 million compared to $13.8 million in the same period in 1996, a 4% increase. Service revenue was 14% of the total revenue for the third quarter, compared to 9% in the prior year. International revenues continue to be a significant portion of total net revenues, comprising 63% of the revenues for the third fiscal quarter of 1997, and 48% for the same quarter in fiscal year 1996. COST AND EXPENSES Cost of revenues as a percentage of net revenues increased to 41% in the third quarter of 1997 from 27% for the same period in 1996. Higher scrap and obsolescence charges plus the impact of stable fixed costs over lower unit sales volume accounted for the major portion of the increase. For the nine months ended June 30, 1997 and 1996, the cost of revenues represented 29% and 26% of net revenues, respectively. Research and development expenses increased 4% to $11.0 million for the quarter ended June 30, 1997 (35% of net revenues) compared to $10.6 million (20% of net revenues) for the same quarter in 1996. For the nine months ended June 30, 1997, research and development expenses amounted to $35.3 million or 25% of net revenues, representing a 26% increase compared to $27.9 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 3% to $20.2 million for the three months ended June 30, 1997 from $19.6 million for the same period in 1996. For the nine months ended June 30, 1997, sales and marketing expenses increased to $61.7 million from $59.0 million for the same period of the prior fiscal year. The increase was due to marketing efforts aimed at reseller training, Independent software vendor recruitment and higher corporate brand awareness. Sales and marketing expenses represented 43% of net revenues for the first nine months of fiscal 1997 and 39% for the first nine months of fiscal 1996. General and administrative expenses increased by 6% to $5.5 million for the three months ended June 30, 1997 from $5.2 million for the same period in 1996. For the nine months ended June 30, 1997, general and administrative expenses increased by 6% to $16.1 million from $15.2 million for the same period of the prior year. The increase was primarily due to a one-time charge for settlement of litigation. Non-recurring charges of $8.4 million were incurred in the third quarter of fiscal 1997 related to a worldwide restructuring. The charge includes a 10% reduction in headcount, elimination of several non-essential facilities and a write-off of certain acquired technologies. Other income consists of net interest income, foreign exchange gain and loss as well as other miscellaneous income and expense items. For the third quarter of fiscal 1997, other income was ($0.3) million, compared to $0.5 million for the same quarter of fiscal 1996. The change in other income in the third quarter of fiscal 1997 was due primarily to a foreign exchange loss of $0.6 million associated with the settlement of an intercompany loan to the Company's UK subsidiary. For the nine months ended June 30, 1997, other income was $0.6 million as compared to $1.4 million for the same nine months in 1996. This decrease is attributable again to the foreign exchange loss associated with the UK loan settlement. The benefit for income taxes was $2.4 million for the third quarter of fiscal 1997 compared to a provision for income taxes of $1.1 million for the same period of the prior fiscal year, and a benefit for income taxes of $0.8 million for the nine months ended June 30, 1997 compared with a benefit of $0.1 million for the corresponding fiscal 1996 period. The tax benefit for the third quarter of the current fiscal year resulted from a tax benefit on losses offset by a valuation allowance for the realization of deferred tax assets. The tax provision for the third quarter of the prior fiscal year resulted from taxes provided on operations at an effective tax rate of 25%. The tax benefit for the first nine months of the current fiscal year reflects a tax benefit on losses offset by a valuation allowance for the realization of deferred tax assets. The tax benefit for the first nine months of the prior fiscal year reflects 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 1996 reflects the realization of deferred tax assets for which a valuation allowance was previously established. Net loss for the three months ending June 30, 1997 was $24.6 million. Excluding the $8.4 million non-recurring charge, net loss for the third quarter would have been $16.3 million compared to a profit of $3.3 million in the same period of 1996. For the nine months ended June 30,1997 net loss was $19.7 million. If the non-recurring charges are similarily excluded from the nine month results of 1997 and 1996, the results would have been a loss of $11.3 million in 1997 and a profit of $8.8 million in 1996. 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. 6 9 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 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 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 180 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 its product sales. As the Company utilizes 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 63% and 48% of total revenues for the third 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. 7 10 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 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 continually evaluates potential candidates for acquisitions. 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 $60.6 million at June 30, 1997, representing 42% of the Company's total assets. The nine month increase in cash and short-term investments of $5.8 million was primarily attributable to increased lease line utilization for capital acquisitions, tax refunds, and improved collection of the Company's accounts receivable. At June 30, 1997, the Company had available lines of credit of approximately $17.0 million under which the Company had $0.5 million in outstanding borrowings. It is anticipated that cash and short-term investments will decrease during the fourth fiscal quarter of 1997 due to reduced sales in the quarter ended June 30, 1997. 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 third quarter ended June 30, 1997 Days Sales Outstanding (DSO) was 69.4 days, a 16 day decrease from the second quarter ended March 31, 1997. The decrease was primarily attributable to a reduction in the Company's third quarter revenue due to channel inventory corrections accompanied by strong collections, resulting in a substantially lower accounts receivable. The Company is engaged in a systematic repurchase of the Company's common stock for the funding of its employee programs. Additionally, the Company is authorized to buy back up to 4,000,000 additional shares. As of June 30, 1997, 773,000 shares had been repurchased and retired under this program. 8 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company currently has two 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 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 will 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. 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 that the possibility that the outcome of the lawsuit will result in a material impact to the Company's annual financial results is remote. In February 1995, Micro-Quick Systems, Inc., a software dealer, commenced legal action against the Company in the Superior Court of San Bernadino County, alleging the Company failed to deliver conforming product and failed to support said product. This matter was settled in June 1997 for an immaterial amount. 9 12 ITEM 6. EXHIBITS (a) Exhibits 11. Computation of Earnings (Loss) Per Share. 27. Financial Data Schedule. ITEMS 2, 3, 4, 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: August 12, 1997 By: /s/ John W. Luhtala ----------------------------- John W. Luhtala Senior Vice-President and Chief Financial Officer By: /s/ Randall Bresee ------------------------------ Randall Bresee Corporate Controller 14 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBITS ------ -------- 11. Computation of Earnings (Loss) Per Share. 27. Financial Data Schedule.
EX-11 2 COMPUTATION OF EARNINGS (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 Nine Months Ended June 30, June 30, 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Weighted average number of common shares outstanding 36,547 37,248 36,690 35,801 Common equivalent shares from outstanding stock options (1) -- 1,254 -- -- - ------------------------------------------------------------------------------------------------------------------ Average common and common equivalent shares outstanding 36,547 38,502 36,690 35,801 ================================================================================================================== Net profit (loss) $(24,629) $ 3,306 $(19,689) $(26,486) ================================================================================================================== Net profit (loss) per share (2) $ (0.67) $ 0.09 $ (0.54) $ (0.74) ==================================================================================================================
(1) Common equivalent shares from outstanding stock options are not included in three months 1997 and nine months 1997 and 1996 calculations as they are antidilutive. (2) Fully diluted earnings per share have not been presented because the effects are not material. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS SEP-30-1997 OCT-01-1996 JUN-30-1997 33,486 27,116 47,068 (23,039) 1,634 98,904 53,771 (39,003) 145,859 59,946 0 0 0 119,639 (42,983) 145,859 26,728 31,166 8,371 12,826 45,148 0 (265) (27,073) (2,444) (24,629) 0 0 0 (24,629) (0.67) (0.67)
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