<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30,1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _______________
----------------
COMMISSION FILE NUMBER 0-21484
THE SANTA CRUZ OPERATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN THIS CHARTER)
CALIFORNIA 94-2549086
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 ENCINAL STREET, SANTA CRUZ, CALIFORNIA 95060
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (408) 425-7222
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ----
The number of shares outstanding of the registrant's common stock as of
June 30, 1997 was 36,434,538.
================================================================================
<PAGE> 2
THE SANTA CRUZ OPERATION, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
A) CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1997 AND 1996.......1
B) CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND SEPTEMBER 30, 1996.......................2
C) CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996.................3
D) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................5
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS......................................................9
ITEM 6. EXHIBITS..............................................................12
SIGNATURES..............................................................................11
</TABLE>
<PAGE> 3
Part I. Financial Information
Item I. Financial Statements
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET REVENUES:
Licenses $ 26,728 $ 49,404 $ 127,492 $ 138,870
Services 4,438 4,623 14,369 13,806
- -------------------------------------------------------------------------------------------------
NET REVENUES 31,166 54,027 141,861 152,676
- -------------------------------------------------------------------------------------------------
COST OF REVENUES:
Licenses 8,371 10,266 28,067 26,721
Services 4,455 4,491 13,448 13,436
- -------------------------------------------------------------------------------------------------
Total cost of revenues 12,826 14,757 41,515 40,157
- -------------------------------------------------------------------------------------------------
GROSS MARGIN 18,340 39,270 100,346 112,519
- -------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development 11,055 10,617 35,305 27,938
Sales and marketing 20,197 19,575 61,668 58,973
General and administrative 5,523 5,201 16,124 15,197
Non-recurring charges 8,373 -- 8,373 38,363
- -------------------------------------------------------------------------------------------------
Total operating expenses 45,148 35,393 121,470 140,471
- -------------------------------------------------------------------------------------------------
OPERATING EARNINGS (LOSS) (26,808) 3,877 (21,124) (27,952)
OTHER INCOME (EXPENSE):
Interest income, net 396 547 1,661 1,656
Other expense, net (661) (16) (1,023) (304)
- -------------------------------------------------------------------------------------------------
Profit (loss) before income taxes (27,073) 4,408 (20,486) (26,600)
- -------------------------------------------------------------------------------------------------
Income taxes (2,444) 1,102 (797) (114)
- -------------------------------------------------------------------------------------------------
NET PROFIT (LOSS) $ (24,629) $ 3,306 $ (19,689) $ (26,486)
- -------------------------------------------------------------------------------------------------
NET PROFIT (LOSS) PER SHARE $ (0.67) $ 0.09 $ (0.54) $ (0.74)
- -------------------------------------------------------------------------------------------------
COMMON AND COMMON EQUIVALENTS USED IN
COMPUTING NET PROFIT (LOSS) PER SHARE 36,547 38,502 36,690 35,801
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
(In thousands, except for share data) 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,486 $ 32,065
Short-term investments 27,116 22,766
Receivables, net 24,029 47,176
Deferred tax asset 6,152 6,152
Other current assets 8,121 9,670
- ----------------------------------------------------------------------------------------
Total current assets 98,904 117,829
- ----------------------------------------------------------------------------------------
Property and equipment, net 14,768 15,546
Purchased software and technology licenses 18,086 19,908
Other assets 14,101 13,524
- ----------------------------------------------------------------------------------------
TOTAL ASSETS $ 145,859 $ 166,807
- ----------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Royalties payable $ 9,043 $ 10,644
Trade accounts payable 10,510 12,755
Income taxes payable 855 3,369
Accrued expenses and other current liabilities 31,083 22,288
Deferred revenues 8,455 6,838
- ----------------------------------------------------------------------------------------
Total current liabilities 59,946 55,894
- ----------------------------------------------------------------------------------------
Other long-term liabilities 8,196 9,332
- ----------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, net, authorized 100,000,000 shares
Issued and outstanding 36,434,538 and 37,105,892 shares 119,639 125,172
Cumulative translation adjustment 1,061 (297)
Accumulated deficit (42,983) (23,294)
- ----------------------------------------------------------------------------------------
Total shareholders' equity 77,717 101,581
- ----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 145,859 $ 166,807
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 5
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Nine Months Ended
June 30,
1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(19,689) $(26,486)
Adjustments to reconcile net profit (loss) to net cash
used for operating activities -
Depreciation and amortization 12,949 11,386
Charge for purchased research and development -- 38,363
Stock option income tax benefit 244 175
Changes in assets and liabilities -
Receivables 23,147 1,964
Deferred tax assets (34) (3,055)
Other current assets 1,549 (3,351)
Royalties payable (1,601) 123
Trade accounts payable (2,245) 3,444
Income taxes payable (2,514) 1,621
Accrued expense and other current liabilities 7,885 (10,097)
Deferred revenue 1,617 (123)
Other accrued expense and other liabilities (2,510) 1,993
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 18,798 15,957
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,394) (3,523)
Purchases of software and technology licenses (4,826) (5,627)
Proceeds from short term investments 9,907 12,931
Purchases of short term investments (14,257) (18,295)
Changes in other assets (543) (3,788)
- ----------------------------------------------------------------------------------------------------------
Net cash used for investing activities (12,113) (18,302)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations, term loan and bank line of credit (845) (707)
Net proceeds from sale of common stock 1,839 2,551
Payments on stock repurchases (7,613) (2,094)
Payments on notes receivable from sale of common stock (3) (4)
- ----------------------------------------------------------------------------------------------------------
Net cash used for financing activities (6,622) (254)
- ----------------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents 1,358 (424)
- ----------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 1,421 (3,023)
Cash and cash equivalents at beginning of period 32,065 32,074
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 33,486 $ 29,051
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID:
Income tax payments $ 1,646 $ 1,479
Interest payments $ 460 $ 254
NON CASH TRANSACTIONS:
Capital lease agreement $ 3,129 $ 1,540
Networking technology buyout -- $ 5,596
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
THE SANTA CRUZ OPERATION,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying statements of operations,
balance sheets and statements of cash flows include all material
adjustments (consisting of only normal recurring adjustments) necessary for
their fair presentation. The interim results presented are not necessarily
indicative of results to be expected for a full year. Certain
reclassifications have been made for consistent presentation.
2. ACQUISITION
In December 1995, the Company acquired from Novell certain assets related
to UnixWare including the core intellectual property. The consideration
consisted of 6,127,500 shares of newly issued non-registered common stock.
Additionally, cash payments to Novell with a present value of $84 million
will be paid periodically by SCO to Novell provided certain unit volumes of
UNIX distribution is achieved. Such payments terminate at the end of
calendar year 2002. The acquisition has been accounted for using the
purchase method of accounting and, therefore, the accompanying financial
statements include the UnixWare operations since the date of the
acquisition. The Company incurred non-recurring charges including $38.4
million of purchased research and development for UnixWare product which
have not yet reached technological feasibility and other charges including
severance and acquisition related costs.
3. RESTRUCTURING CHARGE
A worldwide restructuring during the third quarter of fiscal 1997 resulted
in a one-time charge of $8.4 million. The charge includes a 10% reduction
in headcount, elimination of several non-essential facilities and a
write-off of certain acquired technologies. As a result of this
restructuring, the Company has realigned its product development
organization, eliminated some research and development programs and focused
product marketing. Additionally, some key manufacturing processes have been
outsourced and elements of general and administration functions have been
consolidated.
4. NET PROFIT (LOSS) PER SHARE
Net profit (loss) per share is computed based on weighted average number of
common shares outstanding and dilutive common equivalent shares from the
assumed exercise of stock options using the treasury stock method.
5. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No.128, "Earnings Per Share." SFAS No.128
requires the presentation of basic earnings per share ("EPS") and, for
companies with complex capital structures or potentially dilutive
securities, such as convertible debt, options and warrants, diluted EPS.
SFAS No.128 is effective for annual and interim periods ending after
December 15, 1997. The Company expects that basic EPS and diluted EPS will
not differ materially from earnings per share as presented in the
accompanying consolidated financial statements.
4
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In addition to historical information contained herein, this Discussion and
Analysis may contain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly release the results of any revision to these
forward-looking statements, which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues for the three months ended June 30, 1997 decreased 42% to $31.2
million from $54.0 million in the same period in fiscal year 1996. For the nine
months ended June 30, 1997, net revenues were $141.9 million, a 7% reduction
from the $152.7 million for the corresponding period in 1996. This quarter's
decline resulted from significant planned reductions in channel inventories as
well as planned product sales reductions and increased reserves. No one customer
accounted for more that 10% of the total net revenues for the three and nine
month periods ending June 30, 1997 and June 30, 1996.
License revenues for the three months ended June 30, 1997 was $26.7 million
compared to $49.4 million in the same quarter of 1996. For the nine months ended
June 30, 1997, license revenue was $127.5 million compared to $138.9 million for
the same period in 1996. The channel inventory and planned product sales
reductions impacted all product lines.
Service revenues, consisting of support, software enhancement services,
consulting, engineering services, custom development and training, decreased to
$4.4 million for the three months ended June 30, 1997, from $4.6 million in the
same period in 1996, a decline of 4%. For the first nine months ended June 30,
1997, service revenue totaled $14.4 million compared to $13.8 million in the
same period in 1996, a 4% increase. Service revenue was 14% of the total revenue
for the third quarter, compared to 9% in the prior year.
International revenues continue to be a significant portion of total net
revenues, comprising 63% of the revenues for the third fiscal quarter of 1997,
and 48% for the same quarter in fiscal year 1996.
COST AND EXPENSES
Cost of revenues as a percentage of net revenues increased to 41% in the third
quarter of 1997 from 27% for the same period in 1996. Higher scrap and
obsolescence charges plus the impact of stable fixed costs over lower unit sales
volume accounted for the major portion of the increase. For the nine months
ended June 30, 1997 and 1996, the cost of revenues represented 29% and 26% of
net revenues, respectively.
Research and development expenses increased 4% to $11.0 million for the quarter
ended June 30, 1997 (35% of net revenues) compared to $10.6 million (20% of net
revenues) for the same quarter in 1996. For the nine months ended June 30, 1997,
research and development expenses amounted to $35.3 million or 25% of net
revenues, representing a 26% increase compared to $27.9 million or 18% of net
revenues for the comparable period of fiscal 1996. The spending increase as a
percent of sales is primarily attributable to personnel costs relating to
accelerated investment in development of next generation operating systems and
technology focused on Internet enabled products.
5
<PAGE> 8
Sales and marketing expenses increased by 3% to $20.2 million for the three
months ended June 30, 1997 from $19.6 million for the same period in 1996. For
the nine months ended June 30, 1997, sales and marketing expenses increased to
$61.7 million from $59.0 million for the same period of the prior fiscal year.
The increase was due to marketing efforts aimed at reseller training,
Independent software vendor recruitment and higher corporate brand awareness.
Sales and marketing expenses represented 43% of net revenues for the first nine
months of fiscal 1997 and 39% for the first nine months of fiscal 1996.
General and administrative expenses increased by 6% to $5.5 million for the
three months ended June 30, 1997 from $5.2 million for the same period in 1996.
For the nine months ended June 30, 1997, general and administrative expenses
increased by 6% to $16.1 million from $15.2 million for the same period of the
prior year. The increase was primarily due to a one-time charge for settlement
of litigation.
Non-recurring charges of $8.4 million were incurred in the third quarter of
fiscal 1997 related to a worldwide restructuring. The charge includes a 10%
reduction in headcount, elimination of several non-essential facilities and a
write-off of certain acquired technologies.
Other income consists of net interest income, foreign exchange gain and loss as
well as other miscellaneous income and expense items. For the third quarter of
fiscal 1997, other income was ($0.3) million, compared to $0.5 million for the
same quarter of fiscal 1996. The change in other income in the third quarter of
fiscal 1997 was due primarily to a foreign exchange loss of $0.6 million
associated with the settlement of an intercompany loan to the Company's UK
subsidiary. For the nine months ended June 30, 1997, other income was $0.6
million as compared to $1.4 million for the same nine months in 1996. This
decrease is attributable again to the foreign exchange loss associated with the
UK loan settlement.
The benefit for income taxes was $2.4 million for the third quarter of fiscal
1997 compared to a provision for income taxes of $1.1 million for the same
period of the prior fiscal year, and a benefit for income taxes of $0.8 million
for the nine months ended June 30, 1997 compared with a benefit of $0.1 million
for the corresponding fiscal 1996 period. The tax benefit for the third quarter
of the current fiscal year resulted from a tax benefit on losses offset by a
valuation allowance for the realization of deferred tax assets. The tax
provision for the third quarter of the prior fiscal year resulted from taxes
provided on operations at an effective tax rate of 25%. The tax benefit for the
first nine months of the current fiscal year reflects a tax benefit on losses
offset by a valuation allowance for the realization of deferred tax assets. The
tax benefit for the first nine months of the prior fiscal year reflects taxes
provided on operations at an effective tax rate of 25% offset by a one-time tax
benefit in the first quarter of fiscal 1996 of approximately $3.1 million
associated with non-recurring charges relating to the UnixWare product
acquisition. The effective tax rate for fiscal 1996 reflects the realization of
deferred tax assets for which a valuation allowance was previously established.
Net loss for the three months ending June 30, 1997 was $24.6 million. Excluding
the $8.4 million non-recurring charge, net loss for the third quarter would have
been $16.3 million compared to a profit of $3.3 million in the same period of
1996. For the nine months ended June 30,1997 net loss was $19.7 million. If the
non-recurring charges are similarily excluded from the nine month results of
1997 and 1996, the results would have been a loss of $11.3 million in 1997 and a
profit of $8.8 million in 1996.
CERTAIN FACTORS BEARING ON FUTURE RESULTS
The Company's future operating results may be affected by various uncertain
trends and factors which are beyond the Company's control. These include adverse
changes in general economic conditions and rapid or unexpected changes in the
technologies affecting the Company's products. The process of developing new
high technology products is complex and uncertain and requires accurate
anticipation of customer needs and technological trends. The industry has become
increasingly competitive and, accordingly, the Company's results may also be
adversely affected by the actions of existing or future competitors, including
the development of new technologies, the introduction of new products, and the
reduction of prices by such competitors to gain or retain market share. The
Company's results of operations could be adversely affected if it were required
to lower its prices significantly.
6
<PAGE> 9
The Company participates in a highly dynamic industry and future results could
be subject to significant volatility, particularly on a quarterly basis. The
Company's revenues and operating results may be unpredictable due to the
Company's shipment patterns. The Company operates with little backlog of orders
because its products are generally shipped as orders are received. In general, a
substantial portion of the Company's revenues has been booked and shipped in the
third month of the quarter, with a concentration of these revenues in the latter
half of that third month. In addition, the timing of closing of large license
contracts and the release of new products and product upgrades increase the risk
of quarter to quarter fluctuations and the uncertainty of quarterly operating
results. The Company periodically may adjust the level of inventory held in its
distribution channels which may also cause quarter-to-quarter fluctuations. The
Company's staffing and operating expense levels are based on an operating plan
and are relatively fixed throughout the quarter. As a result, if revenues are
not realized in the quarter as expected, the Company's expected operating
results could be adversely affected, and such effect could be substantial and
could result in an operating loss.
The Company experiences seasonality of revenues for both European and the U.S.
federal government markets. European revenues during the quarter ending June 30
are historically lower or relatively flat compared to the prior quarter. This
reflects a reduction of customer purchases in anticipation of reduced selling
activity during the summer months. Sales to the U.S. federal government
generally increase more than normal during the quarter ending September 30. This
seasonal increase is primarily attributable to increased purchasing activity by
the U.S. federal government prior to the close of its fiscal year. Additionally,
net revenues for the first quarter of the fiscal year are typically lower or
relatively flat compared to net revenues of the prior quarter.
The overall cost of revenues may be affected by changes in the mix of net
revenue contribution between licenses and services, product families,
geographical regions and channels of distribution, as the costs associated with
these revenues may have substantially different characteristics. The Company may
also experience a change in margin as net revenues increase or decrease since
technology costs, service costs and production costs are fixed within certain
volume ranges.
The Company's results of operations could be adversely affected if it were to
lower its prices significantly. In the event the Company reduced its prices, the
Company's standard terms for selected distributors provide credit for inventory
ordered in the previous 180 days, such credits to be applied against future
purchases. The Company, as a matter of policy, does not allow product returns
for refund. Product returns are generally allowances for stock balancing and are
accompanied by compensating and offsetting orders. Revenue is net of a provision
for estimated future stock balancing and excess quantities above levels the
Company deems appropriate in its distribution channels. The Company continues to
monitor the quantity and mix of its product sales.
As the Company utilizes its tax carryforwards and as new tax legislation is
enacted, the Company's effective tax rate is subject to change.
A substantial portion of the Company's revenues are derived from outside the
United States. Trade sales to international customers represented 63% and 48% of
total revenues for the third quarter of fiscal 1997 and 1996, respectively. A
substantial portion of these international revenues are denominated in the U.K.
pound sterling and operating results can vary with changes in the U.S. dollar
exchange rate for such currency. The Company's revenues can also be affected by
general economic conditions in the United States, Europe and other international
markets. The Company's operating strategy and pricing take into account changes
in exchange rates over time. However, the Company's results of operations may be
significantly affected in the short term by fluctuations in foreign currency
exchange rates.
The Company has adopted a strategy of reviewing and forecasting all material
foreign denominated assets and liabilities to cover any potential transactional
gain or loss which may occur should exchange rates change significantly. Where
uncovered exposure may exist, the Company may employ hedging instruments to
offset such exposure.
7
<PAGE> 10
The Company's policy is to amortize purchased software and technology licenses
using the straight-line method over the remaining estimated economic life of the
product. Due to competitive pressures, it is reasonably possible that those
estimates of anticipated future gross revenues, the remaining estimated economic
life of the product, or both will be reduced significantly in the near future.
As a result, the carrying amount of the Company's purchased software and
technology licenses may be reduced materially in the near future and, therefore,
could create an adverse impact on the Company's future reported earnings.
The Company continually evaluates potential candidates for acquisitions. Such
candidates are selected based on products or markets which are complementary to
those of the Company's. Acquisitions involve a number of special risks,
including the successful combination of the companies in an efficient and timely
manner, the coordination of research and development and sales efforts, the
retention of key personnel, the integration of the acquired products, the
diversion of management's attention to assimilation of the operations and
personnel of the acquired companies, and the difficulty of presenting a unified
corporate image. The Company's operations and financial results could be
significantly affected by such an acquisition.
The Company's continued success depends to a significant extent on senior
management and other key employees. None of these individuals is subject to a
long-term employment contract or a non-competition agreement. Competition for
qualified people in the software industry is intense. The loss of one or more
key employees or the Company's inability to attract and retain other key
employees could have a material adverse effect on the Company.
The stock market in general, and the market for shares of technology companies
in particular, have experienced extreme price fluctuations, which have often
been unrelated to the operating performance of the affected companies. In
addition, factors such as new product introductions by the Company or its
competitors may have a significant impact on the market price of the Company's
Common Stock. Furthermore, quarter-to-quarter fluctuations in the Company's
results of operations caused by changes in customer demand may have a
significant impact on the market price of the Company's stock. These conditions,
as well as factors which generally affect the market for stocks of high
technology companies, could cause the price of the Company's stock to fluctuate
substantially over short periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short-term investments totaled $60.6 million at June 30,
1997, representing 42% of the Company's total assets. The nine month increase in
cash and short-term investments of $5.8 million was primarily attributable to
increased lease line utilization for capital acquisitions, tax refunds, and
improved collection of the Company's accounts receivable. At June 30, 1997, the
Company had available lines of credit of approximately $17.0 million under which
the Company had $0.5 million in outstanding borrowings. It is anticipated that
cash and short-term investments will decrease during the fourth fiscal quarter
of 1997 due to reduced sales in the quarter ended June 30, 1997. The Company
believes that its existing cash and short-term investments, funds generated from
operations and available borrowing capabilities will be sufficient to meet its
operating requirements through at least calendar 1997.
The Company's third quarter ended June 30, 1997 Days Sales Outstanding (DSO) was
69.4 days, a 16 day decrease from the second quarter ended March 31, 1997. The
decrease was primarily attributable to a reduction in the Company's third
quarter revenue due to channel inventory corrections accompanied by strong
collections, resulting in a substantially lower accounts receivable.
The Company is engaged in a systematic repurchase of the Company's common stock
for the funding of its employee programs. Additionally, the Company is
authorized to buy back up to 4,000,000 additional shares. As of June 30, 1997,
773,000 shares had been repurchased and retired under this program.
8
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company currently has two lawsuits pending.
In August 1993, a securities class action lawsuit was filed in Superior Court of
San Francisco, California and is now pending in the Superior Court of Santa
Clara County, California against the Company, one current employee, three former
employees and the Company's underwriters. The lawsuit alleges violations of the
Securities Act of 1993, pertaining to alleged misrepresentations and omissions
in the Company's Registration Statement and Prospectus in connection with its
initial public offering. In May 1994, the case was dismissed at the pleading
stage. The plaintiffs filed a notice of appeal in June 1994. The appellate court
reversed the decision of the lower court. Further appellate review was not
granted by the US Supreme Court and the case has been remanded to the Superior
court for further proceedings and discovery. The Company believes it reasonably
possible that the outcome of the securities class action lawsuit will result in
a loss either by way of settlement with the plaintiffs or by way of a judgment
in the plaintiffs' favor. The resolution of the securities class action could
result in a significant non-recurring charge that could adversely impact the
Company's earnings per share in the fiscal quarter in which such resolution
occurred. However, the Company does not believe that any such loss would result
in a material impact to the Company's annual financial results.
In September 1996, an action was filed in the Circuit Court of Cook County,
Illinois by a former employee against the Company and one current employee
alleging breach of contract regarding sales commissions. The Company believes
that the possibility that the outcome of the lawsuit will result in a material
impact to the Company's annual financial results is remote.
In February 1995, Micro-Quick Systems, Inc., a software dealer, commenced legal
action against the Company in the Superior Court of San Bernadino County,
alleging the Company failed to deliver conforming product and failed to support
said product. This matter was settled in June 1997 for an immaterial amount.
9
<PAGE> 12
ITEM 6. EXHIBITS
(a) Exhibits
11. Computation of Earnings (Loss) Per Share.
27. Financial Data Schedule.
ITEMS 2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
10
<PAGE> 13
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Santa Cruz Operation, Inc.
Date: August 12, 1997 By: /s/ John W. Luhtala
-----------------------------
John W. Luhtala
Senior Vice-President
and Chief Financial Officer
By: /s/ Randall Bresee
------------------------------
Randall Bresee
Corporate Controller
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------ --------
<S> <C>
11. Computation of Earnings (Loss) Per Share.
27. Financial Data Schedule.
</TABLE>
<PAGE> 1
THE SANTA CRUZ OPERATION, INC. EXHIBIT 11
COMPUTATION OF NET PROFIT (LOSS) PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 36,547 37,248 36,690 35,801
Common equivalent shares from outstanding stock options (1) -- 1,254 -- --
- ------------------------------------------------------------------------------------------------------------------
Average common and common equivalent shares outstanding 36,547 38,502 36,690 35,801
==================================================================================================================
Net profit (loss) $(24,629) $ 3,306 $(19,689) $(26,486)
==================================================================================================================
Net profit (loss) per share (2) $ (0.67) $ 0.09 $ (0.54) $ (0.74)
==================================================================================================================
</TABLE>
(1) Common equivalent shares from outstanding stock options are not included in
three months 1997 and nine months 1997 and 1996 calculations as they are
antidilutive.
(2) Fully diluted earnings per share have not been presented because the effects
are not material.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 33,486
<SECURITIES> 27,116
<RECEIVABLES> 47,068
<ALLOWANCES> (23,039)
<INVENTORY> 1,634
<CURRENT-ASSETS> 98,904
<PP&E> 53,771
<DEPRECIATION> (39,003)
<TOTAL-ASSETS> 145,859
<CURRENT-LIABILITIES> 59,946
<BONDS> 0
0
0
<COMMON> 119,639
<OTHER-SE> (42,983)
<TOTAL-LIABILITY-AND-EQUITY> 145,859
<SALES> 26,728
<TOTAL-REVENUES> 31,166
<CGS> 8,371
<TOTAL-COSTS> 12,826
<OTHER-EXPENSES> 45,148
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (265)
<INCOME-PRETAX> (27,073)
<INCOME-TAX> (2,444)
<INCOME-CONTINUING> (24,629)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,629)
<EPS-PRIMARY> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
