-----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, AJoCk10b74McDAoRJs/sUxUE/COt/vwjGqmNVsDCxawlr5wpP8hkEge0Psjwd77b 3ZW0vCmLazPdXG7YBFioIA== 0000891618-98-003818.txt : 19980814 0000891618-98-003818.hdr.sgml : 19980814 ACCESSION NUMBER: 0000891618-98-003818 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 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: SEC FILE NUMBER: 000-21484 FILM NUMBER: 98684385 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 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, 1998 [ ] 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 (831) 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, 1998 was 35,284,352 ================================================================================ 2 THE SANTA CRUZ OPERATION, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE ---- a) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1998 AND 1997..............1 b) CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1998 AND SEPTEMBER 30, 1997..............................2 c) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997........................3 d) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...............................4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................................................6 PART II. OTHER INFORMATION ITEM 6. EXHIBITS...................................................................10 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, 1998 1997 1998 1997 (UNAUDITED) (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------ NET REVENUES $ 25,241 $ 31,166 $ 123,278 $ 141,861 COST OF REVENUES 10,126 12,826 35,425 41,515 - ------------------------------------------------------------------------------------------------------------------ GROSS MARGIN 15,115 18,340 87,853 100,346 - ------------------------------------------------------------------------------------------------------------------ OPERATING EXPENSES: Research and development 10,157 11,055 31,327 35,305 Sales and marketing 20,445 20,197 59,251 61,668 General and administrative 4,626 5,523 13,480 16,124 Non-recurring charges -- 8,373 -- 8,373 - ------------------------------------------------------------------------------------------------------------------ Total operating expenses 35,228 45,148 104,058 121,470 - ------------------------------------------------------------------------------------------------------------------ OPERATING LOSS (20,113) (26,808) (16,205) (21,124) OTHER INCOME (EXPENSE): Interest income, net 679 396 1,624 1,661 Other expense, net (53) (661) (4) (1,023) - ------------------------------------------------------------------------------------------------------------------ Loss before income taxes (19,487) (27,073) (14,585) (20,486) - ------------------------------------------------------------------------------------------------------------------ Income taxes 1,482 (2,444) 2,759 (797) - ------------------------------------------------------------------------------------------------------------------ NET LOSS $ (20,969) $ (24,629) $ (17,344) $ (19,689) - ------------------------------------------------------------------------------------------------------------------ NET LOSS PER SHARE: Basic $ (0.59) $ (0.67) $ (0.48) $ (0.54) Diluted $ (0.59) $ (0.67) $ (0.48) $ (0.54) - ------------------------------------------------------------------------------------------------------------------ SHARES USED IN LOSS PER SHARE CALCULATION: Basic 35,611 36,547 36,018 36,690 Diluted 35,611 36,547 36,018 36,690 - ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 1 4 THE SANTA CRUZ OPERATION, INC.
JUNE 30, CONSOLIDATED BALANCE SHEETS 1998 SEPTEMBER 30, (In thousands, except for share data) (UNAUDITED) 1997 - --------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 21,901 $ 23,225 Short-term investments 29,013 28,486 Receivables, net 14,028 36,546 Deferred tax asset 6,630 6,631 Other current assets 8,094 6,934 - --------------------------------------------------------------------------------------------- Total current assets 79,666 101,822 - --------------------------------------------------------------------------------------------- Property and equipment, net 12,943 13,666 Purchased software and technology licenses 13,551 16,523 Other assets 12,632 14,654 - --------------------------------------------------------------------------------------------- TOTAL ASSETS $ 118,792 $ 146,665 - --------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Royalties payable $ 7,198 $ 11,262 Trade accounts payable 8,601 8,600 Income taxes payable 2,738 1,101 Accrued expenses and other current liabilities 23,126 27,230 Deferred revenues 7,167 7,465 - --------------------------------------------------------------------------------------------- Total current liabilities 48,830 55,658 - --------------------------------------------------------------------------------------------- Other long-term liabilities 11,969 9,545 - --------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common stock, net, authorized 100,000,000 shares Issued and outstanding 35,284,352 and 34,450,115 shares 112,826 119,287 Cumulative translation adjustment 975 639 Accumulated deficit (55,808) (38,464) - --------------------------------------------------------------------------------------------- Total shareholders' equity 57,993 81,462 - --------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 118,792 $ 146,665 - ---------------------------------------------------------------------------------------------
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, 1998 1997 (UNAUDITED) - -------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(17,344) $(19,689) Adjustments to reconcile net income to net cash used for operating activities - Depreciation and amortization 9,855 12,949 Deferred tax assets (153) (187) Exchange gain (699) -- Stock option income tax benefit -- 244 Changes in operating assets and liabilities - Receivables 22,925 23,147 Other current assets (1,048) 1,549 Royalties payable (4,058) (1,601) Trade accounts payable (155) (2,245) Income taxes payable 1,580 (2,514) Accrued expense and other current liabilities (5,473) 7,885 Deferred revenue (163) 1,617 - -------------------------------------------------------------------------------------------- Net cash provided by operating activities 5,267 21,155 - -------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (602) (2,394) Purchases of software and technology licenses (1,807) (4,826) Sales of short-term investments 21,725 9,907 Purchases of short-term investments (22,252) (14,257) Changes in other assets 2,471 (543) - -------------------------------------------------------------------------------------------- Net cash used for investing activities (465) (12,113) - -------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on capital lease (1,912) (845) Net proceeds from sale of common stock 1,064 1,836 Payments on stock repurchases (7,525) (7,613) Other long-term liabilities 2,003 (2,357) - -------------------------------------------------------------------------------------------- Net cash used for financing activities (6,370) (8,979) - -------------------------------------------------------------------------------------------- Effects of exchange rate changes on cash and cash equivalents 244 1,358 - -------------------------------------------------------------------------------------------- Change in cash and cash equivalents (1,324) 1,421 Cash and cash equivalents at beginning of period 23,225 32,065 - -------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 21,901 $ 33,486 - -------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid- Income taxes $ 1,099 $ 1,646 Interest 635 460 Non-cash financing and investing activities- Assets recorded under capital leases $ 3,623 $ 3,129 Assets written off against restructuring reserve 568 125 - --------------------------------------------------------------------------------------------
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 unaudited, consolidated statements of operations, balance sheets and statements of cash flows have been prepared in accordance with generally accepted accounting principles and include all material adjustments (consisting of only normal recurring adjustments) necessary for their fair presentation. The financial statements include the accounts of the Company and its wholly owned subsidiaries after all material intercompany balances and transactions have been eliminated. The Notes to Consolidated Financial Statements contained in the fiscal year 1997 report on form 10K should be read in conjunction with these Consolidated Financial Statements. The consolidated interim results presented are not necessarily indicative of results to be expected for a full year. Certain reclassifications have been made for consistent presentation. The September 30, 1997 balance sheet was derived from audited financial statements, and is included for comparative purposes. 2. EARNINGS PER SHARE (EPS) DISCLOSURES The Company has adopted the provisions of Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings Per Share, effective December 31, 1997. SFAS 128 requires the presentation of basic and diluted earnings per share. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of stock options for all periods. All prior period earnings per share amounts have been restated to comply with SFAS 128. Basic and diluted earnings per share were calculated as follows during the three month and nine month periods ended June 30, 1998 and 1997:
(In thousands, except per share and option data) Three Months Ended Nine Months Ended June 30, June 30, 1998 1997 1998 1997 -------------------------- --------------------------- Basic: Weighted average shares 35,611 36,547 36,018 36,690 Net loss ($20,969) ($24,629) ($17,344) ($19,689) Net loss per share ($0.59) ($0.67) ($0.48) ($0.54) Diluted: Weighted average shares 35,611 36,547 36,018 36,690 Common equivalent shares from stock options and warrants 0 0 0 0 -------- -------- -------- -------- Shares used in per share calculation 35,611 36,547 36,018 36,690 -------- -------- -------- -------- Net loss ($20,969) ($24,629) ($17,344) ($19,689) Net loss per share ($0.59) ($0.67) ($0.48) ($0.54) Options outstanding at 6/30/98 and at 6/30/97 not included in computation of diluted EPS because the effect would be antidilutive 9,530,455 8,054,886 9,530,455 8,054,886 Price range of options not used in diluted EPS calculation $0.41 - 12.00 $0.41 - 13.94 $0.41 - 12.00 $0.41 - 13.94
4 7 3. RECENT ACCOUNTING PRONOUNCEMENTS In October 1997, the AICPA issued Statement of Position (SOP) 97-2, Software Revenue Recognition, which supersedes SOP 91-1. It provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. Different interpretations of a provision of SOP 97-2 have arisen with the result that the effective date of that provision of SOP 97-2 for certain transactions has been deferred for one year. The Company will be required to adopt SOP 97-2 prospectively for software transactions entered into beginning October 1, 1998. The Company's management is currently evaluating whether the adoption of SOP 97-2 will have a material impact on the Company's financial position or results of operations. In June 1997, the Financial Accounting Standards Board, (FASB), issued Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income. This statement establishes requirements for disclosure of comprehensive income and becomes effective for the Company for fiscal years beginning after December 15, 1997, with reclassification of earlier financial statements for comparative purposes. Comprehensive income generally represents all changes in stockholders' equity except those resulting from investments or contributions by stockholders. The Company is evaluating alternative formats for presenting this information, but does not expect this pronouncement to materially impact the Company's results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, (SFAS 131), Disclosures about Segments of an Enterprise and Related Information. This statement establishes standards for disclosure about operating segments in annual financial statements and selected information in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes Statement of Financial Accounting Standards No. 14, Financial Reporting for Segments of a Business Enterprise. The new standard becomes effective for fiscal years beginning after December 15, 1997, and requires that comparative information from earlier years be restated to conform to the requirements of this standard. The Company is evaluating the requirements of SFAS 131 and the effects, if any, on the Company's current reporting and disclosures. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognizes all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. Management has not yet evaluated the effects of this change on its operations. The Company will adopt SFAS 133 as required for its first quarterly filing of fiscal year 2000. 5 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to historical information contained herein, this Discussion and Analysis contains 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 update these forward-looking statements in response to events or circumstances occurring after the date hereof. RESULTS OF OPERATIONS NET REVENUES Net revenues for the three months ended June 30, 1998 decreased 19% to $25.2 million from $31.2 million for the same period in fiscal year 1997. For the nine months ended June 30, 1998, net revenues decreased 13% to $123.3 million from $141.9 million for the nine months ended June 30, 1997. During this quarter, the Company reduced channel inventories and recorded a reserve against remaining channel stock in connection with its preparations for electronic licensing and distribution. Revenues were also impacted by delayed business in India and Asia. No one customer accounted for more that 10% of net revenues for the three and nine month periods ending June 30, 1998 and June 30, 1997. International revenues continue to be a significant portion of net revenues, comprising 50% of the revenues for the third fiscal quarter of 1998 and 63% for the same quarter in fiscal year 1997. COST AND EXPENSES Cost of revenues as a percentage of net revenues decreased to 40% in the third quarter of 1998 from 41% for the same period in 1997. Significantly lower royalty and technology costs were offset by higher cost of service revenues and the impact of stable fixed costs over lower unit sales volume to net to the 1% decline. For each of the nine month periods ended June 30, 1998 and 1997, cost of revenues represented 29% of net revenues. Research and development expenses decreased 8% to $10.2 million (40% of net revenues), for the quarter ended June 30, 1998, compared to $11.1 million (35% of net revenues) for the same quarter in 1997. For the nine months ended June 30, 1998, research and development expenses decreased 11% to $31.3 million compared to $35.3 million for the same period in 1997. Both cases represented 25% of net revenues. The spending decrease is primarily attributable to reduced staffing levels initiated in conjunction with the restructuring of operations in the third quarter of fiscal 1997. Sales and marketing expenses increased 1% to $20.4 million for the third quarter of fiscal 1998 from $20.2 million for the comparable period in 1997. For the nine months ended June 30, 1998, sales and marketing expenses decreased to $59.3 million (48% of net revenues) from $61.7 million (43% of net revenues) for the same period of the prior fiscal year. This decrease resulted principally from reduced labor costs as a result of lower headcount. General and administrative expenses decreased 16% to $4.6 million for the three months ended June 30, 1998 from $5.5 million for the same period in 1997, representing 18% of net revenues in both periods. The decrease in absolute dollars was primarily due to a 1997 one-time charge for settlement of litigation. For the nine months ended June 30, 1998, general and administrative expenses decreased 16% to $13.5 million from $16.1 million for the same period of the prior year, representing 11% of net revenues in both periods. Reduced headcount, lower legal costs and lower discretionary spending resulted in the nine months decline. Non-recurring charges of $8.4 million were incurred in the third quarter of fiscal 1997 relating to a worldwide restructuring. 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 1998, other income was $0.6 million, compared to a loss of $0.3 million for the same quarter of fiscal 1997. This variance was attributable to decreased foreign exchange losses and decreased interest expense. For the nine months ended June 30, 1998, other income was $1.6 million as compared to 6 9 $0.6 million for the same period in 1997. This increase was due to a change in foreign exchange from a loss of $1.0 million in 1997 to a gain of $0.2 million in 1998. The provision for income taxes was $1.5 million for the third quarter of fiscal 1998 compared to a benefit of $2.4 million for the same period of the prior fiscal year. The provision was $2.8 million for the nine months ended June 30, 1998 compared with a benefit of $0.8 million for the corresponding fiscal 1997 period. The tax provision for the current fiscal year resulted from foreign taxes paid. The tax benefit for the first nine months of the prior fiscal year reflects a tax benefit on losses offset by a valuation allowance for the realization of deferred tax assets. Net loss for the three months ending June 30, 1998 was $21.0 million, compared to a loss of $24.6 million in the third quarter of fiscal 1997. For the nine months ended June 30, 1998, net loss was $17.3 million compared to $19.7 million in the same period in 1997. FACTORS THAT MAY AFFECT FUTURE RESULTS Various uncertain trends and factors that are beyond the Company's control may affect the Company's future operating results. 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 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 have 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 is in the process of moving to electronic licensing and distribution of its products. There may be risks associated with this model including but not limited to the channel partners' willingness to adopt this method of distribution and the Company's ability to implement it. The Company experiences seasonality of revenues for both the 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 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 7 10 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 believes are appropriate in its distribution channels. The Company monitors the quantity and mix of its product sales. As the Company determines that it is more likely than not able to utilize its tax carryforwards and other deferred tax assets in the future and as new tax legislation is enacted, the Company's effective tax rate is subject to significant change. In the event that the Company does not show profitability in the subsequent fiscal quarters, the Company may be required to write off portions of the net deferred tax assets previously recognized up to the entire amount of $8 million. The Company depends on information received from external sources in evaluating the inventory levels at distribution partners in the determination of contingency reserves for the return of materials not sold, stock rotation and price protection. Significant effort has gone into developing systems and procedures for determining the appropriate reserve level. Substantial portions of the Company's revenues are derived from outside the United States. Trade sales to international customers represented 50% and 63% of total revenues for the third quarter of fiscal 1998 and 1997, 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. The Company may employ hedging instruments to offset uncovered exposure. The Company amortizes purchased software and technology licenses using the straight-line method over the remaining estimated economic life of the product, or on the ratio of current revenues to total projected product revenues, whichever is greater. 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. The Company continually evaluates potential acquisition candidates. 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. These include 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 that 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. Many computer systems experience problems handling dates beyond the year 1999. Therefore, some computer software will need to be modified prior to the year 2000 in order to remain functional. The Company has assessed 8 11 both the readiness of its internal computer systems and the compliance of its software sold to customers for handling the year 2000 issue. The Company has designed and tested the most current versions of its products to be year 2000 compliant. However, there can be no assurances that the Company's current products do not contain undetected errors or defects associated with year 2000 date functions that may result in material costs to the Company. The Company has also instituted a warranty program to support earlier product versions and provide corrections where necessary. The Company does not believe that the cost of such actions will have a material adverse effect on the Company's results of operations or financial condition. The Company expects to implement successfully the internal information systems changes necessary to address year 2000 issues by the end of fiscal 1998, however, there can be no assurances that such changes will be fully completed in a timely manner. Moreover, year 2000 issues faced by major distributors, suppliers, customers and financial service organizations with which the Company interacts, could adversely impact the Company. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and short-term investments totaled $50.9 million at June 30, 1998, representing 43% of total assets. At June 30, 1998, the Company had available lines of credit of approximately $17.0 million under which the Company had $0.6 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 1998. The Company's third quarter ended June 30, 1998 Days Sales Outstanding (DSO) was 50.0 days, a 17.8 day decrease from the second quarter ended March 31, 1998. The decrease was primarily attributable to decreased revenue and lower accounts receivable due to the inventory reduction. 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 6,000,000 additional shares. As of June 30, 1998, 1,443,350 shares had been repurchased and retired under this non-systematic program. 9 12 PART II. OTHER INFORMATION ITEM 6. EXHIBITS (a) Exhibits 27. Financial Data Schedule. ITEMS 1, 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 13, 1998 By: /s/ John W. Luhtala -------------------------------------- John W. Luhtala Senior Vice President, Operations, and Chief Financial Officer By: /s/ Randall Bresee -------------------------------------- Randall Bresee Vice President, Corporate Controller 11 14 INDEX TO EXHIBITS Exhibit Number Description - ------- ----------- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS SEP-30-1998 OCT-01-1997 JUN-30-1998 21,901 29,013 39,584 (25,556) 1,982 79,666 57,809 (44,865) 118,792 48,830 0 0 0 112,826 (54,833) 118,792 21,683 25,241 5,948 10,126 35,228 0 111 (19,487) 1,482 (20,969) 0 0 0 (20,969) (0.59) (0.59)
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