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